Entegris Inc

ENTG
Delayed Nasdaq - 02/19 10:00:00 pm
34.36USD
+0.53%

ENTEGRIS : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

Envoyer par e-mail
02/11/2019 | 07:16 pm


The following discussion and analysis of the Company's consolidated financial
condition and results of operations should be read along with the consolidated
financial statements and the accompanying notes to the consolidated financial
information included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements that involve numerous risks and
uncertainties, including, but not limited to, those described in the "Cautionary
Statements" sections of this Item 7 below. The Company's actual results may
differ materially from those contained in any forward-looking statements. You
should review the Item 1A "Risk Factors" of this Annual Report on Form 10-K for
a discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis.
Cautionary Statements
This Annual Report on Form 10-K and the documents incorporated by reference in
this Annual Report on Form 10-K contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believe," "expect," "anticipate," "intends," "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 include those about future period guidance; projected sales, net
income, net income per diluted share, non-GAAP EPS, non-GAAP net income and
other financial metrics; our performance relative to our markets; market and
technology trends, including the duration and drivers of any growth trends; the
development of new products and the success of their introductions; the focus of
our engineering, research and development projects; our ability to execute on
our business strategies; our capital allocation strategy, which may be modified
at any time for any reason, including share repurchases, dividends, debt
repayments and potential acquisitions; the effect of the Tax Cuts and Jobs
Act; future capital and other expenditures; the Company's expected tax rate; the
impact of accounting pronouncements; and other matters. These forward-looking
statements are based on current management expectations and assumptions only as
of the date of this Annual Report on Form 10-K, 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, the risk factors and
additional information described in this Annual Report on Form 10-K under the
caption "Risk Factors," elsewhere in this Annual Report on Form 10-K and in our
other periodic filings. Except as required under the federal securities laws and
the rules and regulations of the SEC, we undertake no obligation to update
publicly any forward-looking statements contained herein.
Overview
This overview is not a complete discussion of the Company's financial condition,
changes in financial condition and results of operations; it is intended merely
to facilitate an understanding of the most salient aspects of its financial
condition and operating performance and to provide a context for the detailed
discussion and analysis that follows, and must be read in its entirety in order
to fully understand the Company's financial condition and results of operations.
The Company is a leading global developer, manufacturer and supplier of
microcontamination control products, specialty chemicals and advanced materials
handling solutions for manufacturing processes in the semiconductor and other
high-technology industries. Our mission is to leverage our unique breadth of
capabilities to create value for our customers by developing mission-critical
solutions to maximize manufacturing yields, reduce manufacturing costs and
enable higher device performance.
Our technology portfolio includes approximately 21,000 standard and customized
products and solutions to achieve the highest levels of purity and performance
that are essential to the manufacture of semiconductors, flat panel displays,
light emitting diodes, or LEDs, high-purity chemicals, solar cells, gas lasers,
optical and magnetic storage devices, and critical components for aerospace,
glass manufacturing and biomedical applications. The majority of our products
are consumed at various times throughout the manufacturing process, with demand
driven in part by the level of semiconductor and other manufacturing activity.
The Company's customers consist primarily of semiconductor manufacturers,
semiconductor equipment and materials suppliers as well as thin film
transistor-liquid crystal display (TFT-LCD) and hard disk manufacturers, which
are served through direct sales efforts, as well as sales and distribution
relationships, in the United States, Asia, Europe and the Middle East.
Our business is organized and operated in three operating segments which align
with the key elements of the advanced semiconductor manufacturing ecosystem. The
Specialty Chemicals and Engineered Materials, or SCEM, segment provides
high-performance and high-purity process chemistries, gases, and materials, and
safe and efficient delivery systems to support semiconductor and other advanced
manufacturing processes. The Microcontamination Control, or MC, segment offers
solutions to filter and purify critical liquid chemistries and gases used in
semiconductor manufacturing processes and other high-technology industries. The
Advanced Materials Handling, or AMH, segment develops solutions to monitor,
protect, transport, and deliver critical liquid chemistries, wafers and other
substrates for a broad set of applications in the semiconductor

29



--------------------------------------------------------------------------------



Table of Contents




industry and other high-technology industries. While these segments have
separate products and technical know-how, they share a global generalist sales
force, common business systems and processes, technology centers, and strategic
and technology roadmaps. We leverage our expertise from these three segments to
create new and increasingly integrated solutions for our customers. See note 16
to the consolidated financial statements for additional information on the
Company's three segments.
Key operating factors Key factors, which management believes have the largest
impact on the overall results of operations of the Company, include:
• Level of sales Since a significant portion of the Company's product costs


(except for raw materials, purchased components and direct labor) are



largely fixed in the short-to-medium term, an increase or decrease in sales



affects gross profits and overall profitability significantly. Also,



increases or decreases in sales and operating profitability affect certain



costs such as incentive compensation and commissions, which are highly



variable in nature. The Company's sales are subject to the effects of
industry cyclicality, technological change, substantial competition,
pricing pressures and foreign currency fluctuation.


• Variable margin on sales The Company's variable margin on sales is
determined by selling prices and the costs of manufacturing and raw
materials. This is affected by a number of factors, which include the



Company's sales mix, purchase prices of raw material (especially polymers,



membranes, stainless steel and purchased components), domestic and
international competition, direct labor costs, and the efficiency of the
Company's production operations, among others.



• Fixed cost structure The Company's operations include a number of large



fixed or semi-fixed cost components, which include salaries, indirect labor



and benefits, facility costs, lease expenses, and depreciation and
amortization. It is not possible to vary these costs easily in the
short-term as volumes fluctuate. Accordingly, increases or decreases in



sales volume can have a large effect on the usage and productivity of these



cost components, resulting in a large impact on the Company's



profitability.





Overall Summary of Financial Results for the Year Ended December 31, 2018
Total net sales for the year ended December 31, 2018 were $1,550.5 million, up
$208.0 million, or 15%, from sales of $1,342.5 million for the year ended
December 31, 2017.
Exclusive of sales associated with acquisitions of $80.0 million and favorable
foreign currency translation effects of $8.2 million, the Company's sales
increased 9%, reflecting an increase in overall demand for the Company's
products from semiconductor industry customers, particularly in the sale of
fluid handling products, liquid chemistry filtration solutions and certain
specialty materials products. The sales increase in 2018 was driven primarily by
higher volume and the effect of selling price erosion was nominal. Semiconductor
industry demand in 2018 was driven by improved demand from device makers, as
wafer starts and semiconductor unit production increased, higher industry fab
utilization rates, and node transitions. The Company believes sales of its
products in 2018 exceeded the overall semiconductor industry growth rate.
The Company's gross profit rose by $110.8 million for the year ended
December 31, 2018, to $719.8 million, up from $609.0 million for the year ended
December 31, 2017. Accordingly, the Company reported a 46.4% gross margin rate
compared to 45.4% in 2017. The gross profit and gross margin figures for 2018
include an incremental cost of sales charge of $6.9 million associated with the
sale of inventory acquired in the SAES Pure Gas business (SPG) and $0.4 million
severance related to organization realignment charges. In addition, the gross
profit and gross margin figures for 2017 included impairment charges of $6.1
million
related to certain equipment-related impairment and severance related to
organizational realignment charges. Excluding those charges, the Company's gross
margin for 2018 was 46.9% and for 2017 was 45.8%.
The Company's selling, general and administrative (SG&A) and engineering,
research and development (ER&D) expenses increased moderately in 2018, mainly
reflecting higher compensation costs and the inclusion in SG&A and ER&D expenses
of SPG's infrastructure, deal costs and the cost of integration activities.
The Company's income tax expense decreased significantly in 2018, primarily due
to the reduction of the U.S. corporate tax rate from 35% in 2017 to 21% in 2018,
a $34.5 million tax benefit associated with legal entity restructuring and the
absence of a one-time charge of $66.7 million related to the impact of the Tax
Cuts and Jobs Act incurred in 2017.
As a result of the aforementioned and other factors discussed below, net income
for 2018 was $240.8 million, or $1.69 per diluted share, compared to net income
of $85.1 million, or $0.59 per diluted share, in 2017.
On January 22, 2018, the Company acquired Particle Sizing Systems, LLC, or PSS,
which provides particle sizing instrumentation for liquid applications to the
semiconductor and life science industries. The total purchase price of the
acquisition was approximately $37.3 million in cash. The acquisition of PSS does
not constitute a material business combination.

30



--------------------------------------------------------------------------------



Table of Contents




On June 25, 2018, the Company acquired the SAES Pure Gas business, or SPG, a
leading provider of high-capacity gas purification systems used in semiconductor
manufacturing and adjacent markets. The total purchase price of the acquisition
was approximately $352.7 million in cash, or $341.5 million net of cash
acquired, subject to revision for customary working capital adjustments. The
acquisition of SPG does not constitute a material business combination.
During 2018, the Company's operating activities provided cash flow of $312.6
million
. Cash and cash equivalents, and short-term investments were $482.1
million
at December 31, 2018 compared with $625.4 million at December 31, 2017.
The Company had long-term borrowings, including current maturities, of $938.9
million
at December 31, 2018 compared with $674.4 million at December 31, 2017.
On November 6, 2018, the Company obtained a new senior secured credit facility
consisting of a term loan facility of $400.0 million and a revolving credit
facility of $300.0 million. The term loans were fully drawn at closing. The
Company used approximately $109 million of the proceeds of the new term loans to
repay and terminate its previous senior secured revolving and term loan credit
facilities.
Subsequent Event
On January 28, 2019, the Company and Versum Materials, Inc., a leading specialty
materials supplier to the semiconductor industry, announced that they had
entered into an Agreement and Plan of Merger, dated as of January 27, 2019,
pursuant to which they agreed to combine in a merger of equals. Under the terms
of the agreement, Versum will merge with and into Entegris, with Entegris
surviving and continuing as the surviving corporation, and Versum stockholders
will receive 1.120 shares of Company common stock for each existing Versum
share. The transaction is subject to certain conditions, including a majority of
the outstanding shares of common stock of both Entegris and Versum approving the
Merger Agreement and the receipt of approvals under U.S. and certain foreign
antitrust and competition laws. We have agreed to operate our business in the
ordinary course during the period between the execution of the Merger Agreement
and the effective time of the Proposed Merger, subject to specific exceptions
set forth in the Merger Agreement, and have agreed to certain other customary
restrictions on operations, as set forth in the Merger Agreement.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these 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. At each balance sheet date,
management evaluates its estimates, including, but not limited to, those related
to long-lived assets (property, plant and equipment, and identified
intangibles), goodwill, income taxes and business combinations. The Company
bases its estimates on historical experience and various other assumptions that
are believed to be reasonable under the circumstances. If management made
different judgments or utilized different estimates, this could result in
material differences in the amount and timing of the Company's results of
operations for any period. In addition, actual results could be different from
the Company's current estimates, possibly resulting in increased future charges
to earnings.
The critical accounting policies affected most significantly by estimates,
assumptions and judgments used in the preparation of the Company's consolidated
financial statements are discussed below.
Impairment of Long-Lived Assets As of December 31, 2018, the Company had $419.5
million
of net property, plant and equipment and $295.7 million of net
intangible assets. The Company routinely considers whether indicators of
impairment of the value of its long-lived assets, particularly its manufacturing
equipment, and its intangible assets, are present. A long-lived asset (asset
group) shall be tested for recoverability whenever events or changes in
circumstances (triggering events) indicate that its carrying amount may not be
recoverable. The following are examples of such events or changes in
circumstances:
a. A significant decrease in the market price of a long-lived asset (asset


group);



b. A significant adverse change in the extent or manner in which a long-lived



asset (asset group) is being used or in its physical condition;



c. A significant adverse change in legal factors or in the business climate



that could affect the value of a long-lived asset (asset group), including



an adverse action or assessment by a regulator;



d. An accumulation of costs significantly in excess of the amount originally



expected for the acquisition or construction of a long-lived asset (asset



group);


e. A current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that



demonstrates continuing losses associated with the use of a long-lived



asset (asset group); and


f. A current expectation that, more likely than not, a long-lived asset



(asset group) will be sold or otherwise disposed of significantly before



the end of its previously estimated useful life.



31



--------------------------------------------------------------------------------



Table of Contents




If such indicators are present, it is determined whether the sum of the
estimated undiscounted cash flows attributable to the asset group in question is
less than its carrying value. If less, an impairment loss is recognized based on
the excess of the carrying amount of the assets in the group over its respective
fair value. Fair value is determined by discounting estimated future cash flows,
appraisals or other methods deemed appropriate. If the asset groups determined
to be impaired are to be held and used, the Company recognizes an impairment
charge to the extent the fair value attributable to the asset group is less than
the assets' carrying value. The fair value of the assets then becomes the
assets' new carrying value, which is depreciated or amortized over the remaining
estimated useful life of the assets.
The Company's long-lived assets are grouped with other assets and liabilities at
the lowest level (asset groups) for which the identifiable cash flows are
largely independent of the cash flows of other assets and liabilities. As
described above, the evaluation of the recoverability of long-lived assets
requires the Company to make significant estimates and assumptions. These
estimates and assumptions primarily include, but are not limited to, the
identification of the asset group at the lowest level of independent cash flows,
the primary asset of the group and long-range forecasts of revenue and costs,
reflecting management's assessment of general economic and industry conditions,
operating income, depreciation and amortization and working capital
requirements.
Due to the inherent uncertainty involved in making estimates, actual results
could differ from those estimates. In addition, changes in the underlying
assumptions would have a significant impact on the conclusion that an asset
group's carrying value is recoverable, or the determination of any impairment
charge if it was determined that the asset values were indeed impaired. The
Company continually monitors circumstances and events to determine whether asset
impairment testing is warranted. It is possible that in the future the Company
may conclude that there is impairment of certain of its long-lived assets, and
that significant impairment charges of long-lived assets may occur in future
periods.
Goodwill Goodwill is not subject to amortization and is tested for impairment
annually and whenever events or changes in circumstances indicate that
impairment may have occurred. The Company performs its annual impairment test as
of August 31. The Company first assesses qualitative factors to determine
whether it is more likely than not (that is, a likelihood of more than 50%) that
the fair value of a reporting unit is less than its carrying amount, including
goodwill. If, after assessing qualitative factors, the Company determines that
it is more likely than not that the fair value of a reporting unit is less than
its carrying amount, then a two-step impairment test is performed to identify
potential goodwill impairment and measure the amount of goodwill impairment loss
to be recognized, if any.
As of August 31, 2018, the Company's assessment of qualitative factors informed
its conclusion that it was more likely than not that a goodwill impairment did
not occur. The significant qualitative factors considered include a significant
increase in the Company's share price, increasing revenues and operating cash
flow for each of the Company's reporting units combined with solid demand in the
semiconductor industry driven by the Internet of Things, virtual reality,
autonomous car and artificial intelligence/machine learning applications. The
Company noted that a significant number of its very largest customers purchase
from all of the Company's reporting units. For example, approximately 25
customers, accounting for approximately 59% of net sales, purchase from all of
the Company's reporting units.
Income Taxes In the preparation of the Company's consolidated financial
statements, the income tax expense, deferred tax assets and liabilities, and
reserves for unrecognized tax benefits reflect management's best assessment of
estimated current and future taxes to be paid. The Company is subject to income
taxes in both the United States and numerous foreign jurisdictions. Significant
judgments and estimates are required in determining consolidated income tax
expense.
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial
statements, which will result in taxable or deductible amounts in the future. In
evaluating the Company's ability to recover its deferred tax assets within the
jurisdiction from which they arise, management considers all available positive
and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax-planning strategies, and
results of recent operations. In projecting future taxable income, the Company
begins with historical results adjusted for the results of discontinued
operations and incorporates assumptions about the amount of future state,
federal and foreign pretax operating income adjusted for items that do not have
tax consequences. The assumptions about future taxable income require
significant judgment and are consistent with the plans and estimates management
is using to manage the underlying business. In evaluating the objective evidence
that historical results provide, the Company considers three years of cumulative
operating income.
The Company has deferred tax assets related to certain federal and state credit
carryforwards, and foreign net operating loss carryforwards of $18.8 million and
$18.0 million as of December 31, 2018 and 2017, respectively. Management
believes it is more likely than not that the benefit from a portion of these
carryforwards will not be realized. In recognition of this risk, the Company
provided a valuation allowance of $18.1 million and $17.5 million as of
December 31, 2018 and 2017, respectively, relating to these carryforwards. If
the Company's assumptions change and it determines it will be able to realize
these carryforwards, the tax benefits relating to any reversal of the valuation
allowance on the deferred tax assets will be recognized as a reduction of income
tax expense.

32



--------------------------------------------------------------------------------



Table of Contents




The calculation of tax liabilities involves dealing with uncertainties in the
application of complex tax laws and regulations in a multitude of jurisdictions
across our global operations. A tax benefit from an uncertain tax position may
be recognized when it is more likely than not that the position will be
sustained upon examination, including resolutions of any related appeals or
litigation processes, on the basis of the technical merits. Resolution of these
uncertainties in a manner inconsistent with management's expectations could have
a material impact on the Company's financial condition and operating results.
U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Cuts and Jobs
Act") was signed into law making significant changes to the Internal Revenue
Code. Changes include, but are not limited to, a corporate tax rate decrease
from 35 percent to 21 percent effective for tax years beginning after
December 31, 2017, the transition of U.S international taxation from a worldwide
tax system to a territorial system, and a one-time transition tax on the
mandatory deemed repatriation of cumulative foreign earnings as of December 31,
2017
. The Company recognized the income tax effects of the Tax Cuts and Jobs Act
in the financial statements included in its 2017 Annual Report on Form 10-K in
accordance with Staff Accounting Bulletin No. 118, which provides SEC staff
guidance for the application of ASC Topic 740, Income Taxes, in the reporting
period in which the 2017 Tax Cuts and Jobs Act was signed into law. During the
period ended December 31, 2018, the company finalized its accounting for the
income tax effects of the Tax Cuts and Jobs Act in accordance with management's
understanding of the Tax Cuts and Jobs Act and guidance available as of the date
of this filing. The Company recognized an additional measurement period
adjustment increase to income tax expense of $0.7 million, an increase to income
tax payable of $0.8 million and a decrease to deferred tax liability of $0.1
million
, in the fourth quarter of 2018, the period in which the SAB 118
measurement period ceased.
Business Acquisitions
The Company accounts for acquired businesses using the acquisition method of
accounting which requires that the assets acquired and liabilities assumed be
recorded at the date of acquisition at their respective fair values. The
judgments made in determining the estimated fair value assigned to each class of
assets acquired and liabilities assumed, as well as asset lives, can materially
impact net income. Accordingly, for significant items, the Company typically
obtains assistance from a third-party valuation firm.
There are several methods that can be used to determine the fair value of assets
acquired and liabilities assumed in a business combination. For intangible
assets, the Company normally utilizes the "income method." This method 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. Some of the more significant estimates and
assumptions inherent in the income method (or other methods) include the
projected future cash flows (including timing) and the discount rate reflecting
the risks inherent in the future cash flows.
Estimating the useful life of an intangible asset also requires judgment. For
example, different types of intangible assets will have different useful lives,
influenced by the nature of the asset, competitive environment, and rate of
change in the industry. Certain assets may even be considered to have indefinite
useful lives. All of these judgments and estimates can significantly impact the
determination of the amortization period of the intangible asset, and thus net
income.

33



--------------------------------------------------------------------------------



Table of Contents




Results of Operations
Year ended December 31, 2018 compared to year ended December 31, 2017
The following table sets forth the results of operations and the relationship
between various components of operations, stated as a percent of net sales, for
the years ended December 31, 2018 and 2017. The Company's historical financial
data was derived from its consolidated financial statements and related notes
included elsewhere in this annual report.
2018 2017
(Dollars in thousands) % of net sales % of net sales
Net sales $ 1,550,497 100.0 % $ 1,342,532 100.0 %
Cost of sales 830,666 53.6 733,547 54.6
Gross profit 719,831 46.4 608,985 45.4
Selling, general and administrative
expenses 246,534 15.9 216,194 16.1
Engineering, research and development
expenses 118,456 7.6 106,951 8.0
Amortization of intangible assets 62,152 4.0 44,023 3.3
Operating income 292,689 18.9 241,817 18.0
Interest expense 34,094 2.2 32,343 2.4
Interest income (3,839 ) (0.2 ) (715 ) (0.1 )
Other expense, net 8,002 0.5 25,458 1.9
Income before income taxes 254,432 16.4 184,731 13.8
Income tax expense 13,677 0.9 99,665 7.4
Net income $ 240,755 15.5 $ 85,066 6.3


Net sales For the year ended December 31, 2018, net sales were $1,550.5 million,
up $208.0 million, or 15%, from sales for the year ended December 31, 2017. An
analysis of the factors underlying the increase in net sales is presented in the
following table:
(In thousands)
Net sales in 2017 $ 1,342,532
Organic growth associated with volume and pricing 119,820
Increase associated with acquired businesses 79,980


Increase associated with effect of foreign currency translation 8,165
Net sales in 2018


$ 1,550,497


The Company's sales increase was due to strong across-the-board demand for the
Company's products from semiconductor industry customers, reflecting both higher
industry fab utilization and semiconductor industry capital spending compared to
the year-ago period. This sales increase reflected improved sales of fluid
handling products, liquid chemistry filtration solutions and certain specialty
materials products. Exclusive of the sales of the acquired businesses of $80.0
million
of revenue for 2018 and the favorable currency translation effects of
$8.2 million for the year, mainly due to the strengthening of the Japanese yen,
Korean won and Euro relative to the U.S. dollar, the Company's sales grew 9% in
2018 when compared to 2017.
On a geographic basis, in 2018, total sales to Taiwan were 19%, to North America
were 22%, to South Korea were 16%, to Japan were 14%, to China were 13%, to
Europe were 9% and to Southeast Asia were 7%. In 2017, total sales to Taiwan
were 22%, to North America were 21%, to South Korea were 16%, to Japan were 13%,
to China were 11%, to Europe were 9%, and to Southeast Asia were 8%. From 2017
to 2018, net sales to customers in South Korea, China, Europe, North America,
Japan and Southeast Asia increased 12%, 37%, 15%, 21%, 24%, and 7%,
respectively, while net sales to customers in Taiwan were flat.
Demand drivers for the Company's business primarily consist of semiconductor fab
utilization and production (unit-driven) as well as capital spending for new or
upgraded semiconductor fabrication equipment and facilities (capital-driven).
The Company analyzes sales of its products by these two key drivers. Sales of
unit-driven products represented 70% of total sales and sales of capital-driven
products represented 30% of total sales in 2018. This compares to a unit-driven
to capital-driven ratio of 74%:26% for 2017 as a result of the Pure Gas
business.
Gross profit Gross profit for 2018 increased by $110.8 million, to $719.8
million
, an increase of 18% from $609.0 million for 2017. The gross margin rate
for 2018 was 46.4% versus 45.4% for 2017. The gross profit and gross margin
improvements reflect the improved factory utilization associated with strong
sales levels and a slightly favorable sales mix. These factors were partly
offset by an incremental cost of sales charge of $6.9 million associated with
the sale of inventory acquired in the SAES

34



--------------------------------------------------------------------------------



Table of Contents




Pure Gas business acquisition and price erosion for certain products in response
to normal competitive pressures. In addition, the gross profit and gross margin
figures include impairment charges of $0.4 million and $6.1 million for the year
ended December 31, 2018 and 2017, respectively, related to equipment-related and
severance related to organization realignment charges.
Selling, general and administrative expenses
Selling, general and administrative expense (SG&A) consists primarily of payroll
and related expenses for the sales and administrative staff, professional fees
(including accounting, legal and technology costs and expenses), and sales and
marketing costs. SG&A expenses for 2018 increased $30.3 million, or 14%, to
$246.5 million from $216.2 million in 2017. SG&A expenses, as a percent of net
sales, decreased to 15.9% from 16.1% a year earlier, reflecting the increase in
net sales.
An analysis of the factors underlying the increase in SG&A is presented in the
following table:
(In thousands)
Selling, general and administrative expenses in 2017 $ 216,194
Deal costs 5,121
Integration costs 3,237
Employee costs 15,181
Professional fees 2,842
Travel costs 2,164



Impairment charge related to acquired intangible assets recorded in
prior year


(3,866 )
Other increases, net


5,661



Selling, general and administrative expenses in 2018 $


246,534





Engineering, research and development expenses
Engineering, research and development (ER&D) expenses related to the support of
current product lines and the development of new products and manufacturing
technologies was $118.5 million and $107.0 million in 2018 and 2017,
respectively. ER&D expenses as a percent of net sales were 7.6% compared to 8.0%
a year ago, reflecting the increase in net sales, offset by the increase in ER&D
expenditures levels, primarily due to higher employee costs of $7.8 million and
project costs of $3.5 million.
The Company's overall ER&D efforts will continue to focus on the support or
extension of current product lines, the development of its technologies to
create differentiated and high-value products for the most advanced and
demanding semiconductor applications and leveraging its unique and diverse
technology portfolio to develop innovative, integrated solutions for unmet
customer needs. The Company expects ER&D costs to stay relatively stable as a
percentage of net sales.
Amortization of intangible assets Amortization of intangible assets was $62.2
million
in 2018 compared to $44.0 million for 2017. The increase reflects the
the additional amortization expense associated with the PSS acquisition
completed in the first quarter of 2018 and the SPG acquisition completed in the
second quarter of 2018.
Interest expense Interest expense was $34.1 million and $32.3 million in the
years ended December 31, 2018 and 2017, respectively. Interest expense includes
interest associated with debt outstanding and the amortization of debt issuance
costs associated with such borrowings. The increase in 2018 reflects higher
average debt levels.
Interest income Interest income was $3.8 million and $0.7 million in the years
ended December 31, 2018 and 2017, respectively. The increase reflects higher
average U.S. cash levels earning a higher rate of interest.
Other expense, net Other expense, net, was $8.0 million in 2018 compared to
other expense, net, of $25.5 million in 2017.
In 2018, other expense, net, included a loss of extinguishment of debt of $2.3
million
associated with the redemption of the Company's senior secured term loan
facility due 2021 and asset-based revolving credit facility (see note 8 to the
Company's consolidated financial statements), foreign currency transaction
losses of $4.4 million and penalty charges of $1.1 million.
In 2017, other expense, net, included an impairment charge of $2.8 million, a
loss of extinguishment of debt of $20.7 million associated with the redemption
of the Company's 2022 Notes (see note 8 to the Company's consolidated financial
statements), and foreign currency transaction losses of $2.3 million.
Income tax expense The Company recorded income tax expense of $13.7 million in
2018 compared to income tax expense of $99.7 million in 2017. The Company's
effective tax expense rate was 5.4% in 2018, compared to an effective tax rate
of 54.0% in 2017.
The decrease in the effective tax rate in 2018 from 2017 reflects several
factors. The decrease in the effective rate is primarily due to the reduction in
the U.S. corporate tax rate from 35% in 2017 to 21% in 2018. Additionally, in
2018, the Company recorded a $25.1 million benefit related to foreign tax credit
generation and a $9.4 million benefit related to a dividend received

35



--------------------------------------------------------------------------------



Table of Contents




deduction based on a restructuring to simplify its legal entity structure. In
2017, the effective tax rate increased due to the recognition of the one-time
mandatory repatriation transition tax of $73.0 million on the net accumulated
earnings and profits of the Company's foreign subsidiaries and $4.0 million of
incremental tax related to no longer asserting that a significant portion of the
Company's undistributed earnings are considered indefinitely invested overseas.
The increase was partially offset by the remeasurement of the U.S. deferred
taxes of $10.3 million to reflect the lower U.S. federal tax rate.

The $9.4 million tax benefit for the dividends received deduction was based on
the Company's assessment of the treatment under the provisions of the Tax Cuts
and Jobs Act. Congress or the Department of Treasury may provide legislative or
regulatory updates which would change the Company's assessment. If legislative
or regulatory updates are issued related to this item, the timing of which is
uncertain, the Company may be required to recognize additional tax expense up to
the full amount of the $9.4 million in the period such updates are issued.
Net income Net income was $240.8 million, or $1.69 per diluted share, in 2018
compared to net income of $85.1 million, or $0.59 per diluted share, in 2017.
The decrease reflects the Company's aforementioned operating results described
in greater detail above.
Non-GAAP Measures Information The Company's consolidated financial statements
are prepared in conformity with accounting principles generally accepted in the
United States
(GAAP). The Company also utilizes certain non-GAAP financial
measures as a complement to financial measures provided in accordance with GAAP
in order to better assess and reflect trends affecting the Company's business
and results of operations. See "Non-GAAP Information" included below in this
section for additional detail, including the reconciliation of GAAP measures to
the Company's non-GAAP measures.
The Company's non-GAAP financial measures are Adjusted EBITDA and Adjusted
Operating Income, together with related measures thereof, and non-GAAP Earnings
Per Share (EPS).
Adjusted EBITDA increased 22% to $436.1 million in 2018, compared to $357.1
million
in 2017. Adjusted EBITDA, as a percent of net sales, was 28.1% in 2018
compared to 26.6% in 2017. Adjusted Operating Income increased 24% to $371.0
million
in 2018, compared to $298.9 million in 2017. Adjusted Operating Income,
as a percent of net sales, was 23.9% in 2018 compared to 22.3% in 2017. Non-GAAP
Earnings Per Share increased 31% to $1.89 in 2018, compared to $1.44 in 2017.
The improvement in the Adjusted EBITDA and Adjusted Operating Income reflect the
increase in net sales and related increase in gross profit. In addition,
Non-GAAP Earnings Per Share was positively affected by a lower adjusted
effective tax rate.
Segment Analysis
The Company reports its financial performance based on three reporting segments.
See note 16 to the consolidated financial statements for additional information
on the Company's three segments.
The following table and discussion concern the results of operations of the
Company's three reportable segments for the years ended December 31, 2018 and
2017.
(In thousands) 2018 2017
Specialty Chemicals and Engineered Materials
Net sales $ 530,241 $ 485,470
Segment profit 129,754 111,802
Microcontamination Control
Net sales $ 552,844 $ 436,225
Segment profit 173,964 141,413
Advanced Materials Handling
Net sales $ 467,412 $ 420,837
Segment profit 82,541 59,838


Specialty Chemicals and Engineered Materials (SCEM)
For the year ended December 31, 2018, SCEM net sales increased to $530.2
million
, up 9%, from $485.5 million in the comparable period last year. The
sales increase primarily reflects strong product sales for specialty gases and
specialty materials.
SCEM reported a segment profit of $129.8 million for the year ended December 31,
2018
, up 16%, compared to a $111.8 million segment profit in the year-ago
period. The increase in the SCEM's profit in 2018 was primarily due to increased
sales, partially offset by higher operating expenses of 8% mainly due to higher
employee costs and R&D spending.
Microcontamination Control (MC)
For the year ended December 31, 2018, MC net sales increased to $552.8 million,
up 27%, from $436.2 million in the comparable period last year. The sales
increase primarily reflects strength in photolithography applications, liquid
chemistry

36



--------------------------------------------------------------------------------



Table of Contents




filters for wet, etch and clean driven by strong industry tool shipments, and
the acquisition of SPG in the second quarter of 2018, which contributed $62.4
million
of sales.
MC reported a segment profit of $174.0 million for the year ended December 31,
2018
, up 23%, compared to a $141.4 million segment profit in the year-ago
period. The increase in MC's profit in 2018 reflects increased sales, partially
offset by higher operating expenses of 21%, primarily due to higher employee
costs, increased R&D spending and SPG operating infrastructure.
Advanced Materials Handling (AMH)
For the year ended December 31, 2018, AMH net sales increased 11% to $467.4
million
, from $420.8 million in 2017. The increase primarily reflects strong
sales of fluid handling products and liquid packaging and dispense products, and
the acquisition of PSS in the first quarter of 2018, which contributed $16.0
million
of sales.
AMH reported a segment profit of $82.5 million for the year ended December 31,
2018
, up 38% compared to a $59.8 million segment profit in the year-ago period.
The increase in the AMH's profit in 2018 was due to higher sales, partially
offset by a 9% increase in operating expenses primarily related to higher
employee costs and the absence of $7.1 million of impairment and severance
related to organizational realignment from 2017.
Unallocated general and administrative expenses
Unallocated general and administrative expenses for the year ended December 31,
2018
totaled $31.4 million compared to $27.2 million for the year ended
December 31, 2017. The $4.2 million increase mainly reflects the deal and
integration costs of $8.4 million in the discussion of SG&A above, partially
offset by $3.9 million impairment charges related to certain acquired intangible
assets recorded in 2017.

37



--------------------------------------------------------------------------------



Table of Contents




Results of Operations
Year ended December 31, 2017 compared to year ended December 31, 2016
The following table sets forth the results of operations and the relationship
between various components of operations, stated as a percent of net sales, for
the years ended December 31, 2017 and 2016. The Company's historical financial
data was derived from its consolidated financial statements and related notes
included elsewhere in this annual report.
2017 2016
(Dollars in thousands) % of net sales % of net sales
Net sales $ 1,342,532 100.0 % $ 1,175,270 100.0 %
Cost of sales 733,547 54.6 666,579 56.7
Gross profit 608,985 45.4 508,691 43.3
Selling, general and administrative
expenses 216,194 16.1 201,901 17.2
Engineering, research and development
expenses 106,951 8.0 106,991 9.1
Amortization of intangible assets 44,023 3.3 44,263 3.8
Operating income 241,817 18.0 155,536 13.2
Interest expense 32,343 2.4 36,846 3.1
Interest income (715 ) (0.1 ) (318 ) -
Other expense (income), net 25,458 1.9 (991 ) (0.1 )
Income before income taxes and equity
in net loss of affiliate 184,731 13.8 119,999 10.2
Income tax expense 99,665 7.4 22,852 1.9
Net income $ 85,066 6.3 $ 97,147 8.3


Net sales For the year ended December 31, 2017, net sales were $1,342.5 million,
up $167.3 million, or 14%, from sales for the year ended December 31, 2016. An
analysis of the factors underlying the increase in net sales is presented in the
following table:
(In thousands)
Net sales in 2016 $ 1,175,270
Organic growth associated with volume and pricing


164,505



Increase associated with liquid filtration product line acquisition 3,643
Decrease associated with effect of foreign currency translation



(886 )
Net sales in 2017 $ 1,342,532


The Company's sales increase was due to strong across-the-board demand for the
Company's products from semiconductor industry customers, reflecting both higher
industry fab utilization and semiconductor industry capital spending compared to
the year-ago period. This sales increase reflected improved sales of gas
microcontamination filters, liquid chemistry filtration solutions and certain
specialty materials products. Exclusive of the sales of the acquired liquid
filtration product line of $3.6 million of revenue for 2017 and the unfavorable
currency translation effects of $0.9 million for the year, mainly due to the
weakening of the Japanese yen relative to the U.S. dollar, the Company's sales
grew 14% in 2017 when compared to 2016.
On a geographic basis, in 2017, total sales to Taiwan were 22%, to North America
were 21%, to South Korea were 16%, to Japan were 13%, to China were 11%, to
Europe were 9% and to Southeast Asia were 8%. In 2016, total sales to Taiwan
were 25%, to North America were 22%, to Japan were 13%, to South Korea were 12%,
to China were 10%, to Europe were 9%, and to Southeast Asia were 9%. From 2016
to 2017, net sales to customers in South Korea, China, Europe, North America,
Japan and Southeast Asia increased 49%, 26%, 14%, 13%, 9%, and 6%, respectively,
while net sales to customers in Taiwan were down 1%.
Demand drivers for the Company's business primarily consist of semiconductor fab
utilization and production (unit-driven) as well as capital spending for new or
upgraded semiconductor fabrication equipment and facilities (capital-driven).
The Company analyzes sales of its products by these two key drivers. Sales of
unit-driven products represented 74% of total sales and sales of capital-driven
products represented 26% of total sales in 2017. This compares to a unit-driven
to capital-driven ratio of 76%:24% for 2016.


38



--------------------------------------------------------------------------------



Table of Contents




Gross profit Gross profit for 2017 increased by $100.3 million, to $609.0
million
, an increase of 20% from $508.7 million for 2016. The gross margin rate
for 2017 was 45.4% versus 43.3% for 2016. The gross profit and gross margin
improvements reflect the improved factory utilization associated with strong
sales levels, a slightly favorable sales mix and the absence of the
qualification and start-up costs incurred at the Company's i2M center in the
prior year period. These factors were partly offset by modest price erosion for
certain products in response to normal competitive pressures. In addition, the
gross profit and gross margin figures include impairment charges of $6.1 million
and $6.3 million for the years ended December 31, 2017 and 2016, respectively,
related to equipment-related and severance charges.
Selling, general and administrative expenses
Selling, general and administrative expense (SG&A) consists primarily of payroll
and related expenses for the sales and administrative staff, professional fees
(including accounting, legal and technology costs and expenses), and sales and
marketing costs. SG&A expenses for 2017 increased $14.3 million, or 7%, to
$216.2 million from $201.9 million in 2016. SG&A expenses, as a percent of net
sales, decreased to 16.1% from 17.2% a year earlier, reflecting the increase in
net sales.
An analysis of the factors underlying the increase in SG&A is presented in the
following table:
(In thousands)
Selling, general and administrative expenses in 2016 $ 201,901
Employee costs 7,455


Impairment charge related to acquired intangible assets 3,866
Other increases, net


2,972


Selling, general and administrative expenses in 2017 $ 216,194





Engineering, research and development expenses
Engineering, research and development (ER&D) expenses related to the support of
current product lines and the development of new products and manufacturing
technologies was $107.0 million in both 2017 and 2016. ER&D expenses as a
percent of net sales were 8.0% compared to 9.1% a year ago, reflecting the
increase in net sales.
The Company's overall ER&D efforts will continue to focus on the support or
extension of current product lines, the development of its technologies to
create differentiated and high-value products for the most advanced and
demanding semiconductor applications and leveraging its unique and diverse
technology portfolio to develop innovative, integrated solutions for unmet
customer needs. The Company expects ER&D costs to stay relatively stable as a
percentage of net sales.
Amortization of intangible assets Amortization of intangible assets was $44.0
million
in 2017 compared to $44.3 million for 2016. The decline reflects the
absence of amortization expense for certain identifiable trademark intangible
assets acquired in the ATMI merger that became fully amortized in early 2017,
offset by additional amortization expense from the liquid filtration product
line acquisition in 2017.
Interest expense Interest expense was $32.3 million and $36.8 million in the
years ended December 31, 2017 and 2016, respectively. Interest expense includes
interest associated with debt outstanding and the amortization of debt issuance
costs associated with such borrowings. The decrease in 2017 reflects lower
average outstanding borrowings due to the Company's payments on the Term Loan in
2017.
Other expense (income), net Other expense, net, was $25.5 million in 2017
compared to other income, net, of $1.0 million in 2016.
In 2017, other expense, net, included an impairment charge of $2.8 million, a
loss of extinguishment of debt of $20.7 million associated with the redemption
of the Company's 2022 Notes (see note 7 to the Company's consolidated financial
statements), and foreign currency transaction losses of $2.3 million.
In 2016, other income, net, included foreign currency transaction gains of $0.6
million
and other gains of $0.4 million.
Income tax expense The Company recorded income tax expense of $99.7 million in
2017 compared to income tax expense of $22.9 million in 2016. The Company's
effective tax expense rate was 54.0% in 2017, compared to an effective tax rate
of 19.0% in 2016.
The increase in the effective tax rate in 2017 from 2016 and the variance in
both years from the U.S. statutory rate of 35% reflects several factors. The
increase in the effective rate is primarily due to the recognition of the
one-time mandatory repatriation transition tax of $73.0 million on the net
accumulated earnings and profits of the Company's foreign subsidiaries and $4.0
million
of incremental tax related to no longer asserting that a significant
portion of the Company's undistributed earnings are considered indefinitely
invested overseas. This increase was partially offset by the remeasurement of
the U.S. deferred taxes for $10.2 million to reflect the lower U.S. federal tax
rate and an increase in the federal research and

39



--------------------------------------------------------------------------------



Table of Contents




development tax credit. The effective tax rates in both years reflect a greater
concentration in the Company's geographic composition of income toward
jurisdictions with lower tax rates than in the U.S.
Net income Net income was $85.1 million, or $0.59 per diluted share, in 2017
compared to net income of $97.1 million, or $0.68 per diluted share, in 2016.
The decrease reflects the Company's aforementioned operating results described
in greater detail above.
Non-GAAP Measures Information The Company's consolidated financial statements
are prepared in conformity with accounting principles generally accepted in the
United States
(GAAP). The Company also utilizes certain non-GAAP financial
measures as a complement to financial measures provided in accordance with GAAP
in order to better assess and reflect trends affecting the Company's business
and results of operations. See "Non-GAAP Information" included below in this
section for additional detail, including the reconciliation of GAAP measures to
the Company's non-GAAP measures.
The Company's non-GAAP financial measures are Adjusted EBITDA and Adjusted
Operating Income, together with related measures thereof, and non-GAAP Earnings
Per Share (EPS).
Adjusted EBITDA increased 35% to $357.1 million in 2017, compared to $263.7
million
in 2016. Adjusted EBITDA, as a percent of net sales, was 26.6% in 2017
compared to 22.4% in 2016. Adjusted Operating Income increased 44% to $298.9
million
in 2017, compared to $208.0 million in 2016. Adjusted Operating Income,
as a percent of net sales, was 22.3% in 2017 compared to 17.7% in 2016. Non-GAAP
Earnings Per Share increased 53% to $1.44 in 2017, compared to $0.94 in 2016.
The improvement in the Adjusted EBITDA and Adjusted Operating Income reflect the
increase in net sales and related increase in gross profit. In addition,
Non-GAAP Earnings Per Share was positively affected by a lower adjusted
effective tax rate.
Segment Analysis
The following table and discussion concern the results of operations of the
Company's three reportable segments for the years ended December 31, 2017 and
2016.
(In thousands) 2017 2016
Specialty Chemicals and Engineered Materials
Net sales $ 485,470 $ 428,328
Segment profit 111,802 77,328
Microcontamination Control
Net sales $ 436,225 $ 362,658
Segment profit 141,413 93,911
Advanced Materials Handling
Net sales $ 420,837 $ 384,284
Segment profit 59,838 56,282


Specialty Chemicals and Engineered Materials (SCEM)
For the year ended December 31, 2017, SCEM net sales increased to $485.5
million
, up 13%, from $428.3 million in the comparable period last year. The
sales increase primarily reflects strong product sales for specialty gases,
glass forming products and advanced deposition materials.
SCEM reported a segment profit of $111.8 million for the year ended December 31,
2017
compared to a $77.3 million segment profit in the year-ago period. The
increase in the SCEM's profit in 2017 was primarily due to increased sales,
partially offset by higher operating expenses of 5%.
Microcontamination Control (MC)
For the year ended December 31, 2017, MC net sales increased to $436.2 million,
up 20%, from $362.7 million in the comparable period last year. The sales
increase primarily reflects strength in photolithography applications, gas
filter products, and liquid chemistry filters for wet, etch and clean driven by
strong industry tool shipments.
MC reported a segment profit of $141.4 million for the year ended December 31,
2017
compared to a $93.9 million segment profit in the year-ago period. The
increase in the MC's profit in 2017 reflects increased sales and the absence of
the qualification and start-up costs incurred at the Company's i2M center in the
year-ago period, partially offset by higher operating expenses of 5%.
Advanced Materials Handling (AMH)
For the year ended December 31, 2017, AMH net sales increased 10% to $420.8
million
, from $384.3 million in 2016. The increase primarily reflects strong
sales of wafer and reticle handling, wafter shipping and fluid handling
products.

40



--------------------------------------------------------------------------------



Table of Contents




AMH reported a segment profit of $59.8 million in 2017, up 6% from $56.2 million
in 2016. The increase in the AMH's profit in 2017 was due to higher sales,
partially offset by a 6% increase in operating expenses. Results in 2017 include
impairment and severance charges of $7.5 million compared to $6.8 million a year
ago.
Unallocated general and administrative expenses
Unallocated general and administrative expenses for the year ended December 31,
2017
totaled $27.2 million compared to $27.7 million for the year ended
December 31, 2016. Results in 2017 include a $3.9 million impairment charge
related to certain acquired intangible assets.

41



--------------------------------------------------------------------------------



Table of Contents




Quarterly Results of Operations
The following table presents selected data from the Company's consolidated
statements of operations for the eight quarters ended December 31, 2018. This
unaudited information has been prepared on the same basis as the audited
consolidated financial statements appearing elsewhere in this annual report. All
adjustments that management considers necessary for the fair presentation of the
unaudited information have been included in the quarters presented.
QUARTERLY STATEMENTS OF OPERATIONS DATA
2017 2018
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
(In thousands)
Net sales $ 317,377 $ 329,002 $ 345,591 $ 350,562 $ 367,199 $ 383,059 $ 398,597 $ 401,642
Gross profit 139,596 150,303 155,407 163,679 175,997 182,378 181,716 179,740
Selling, general and
administrative expenses 50,492 52,985 57,699 55,018 58,269 65,200 62,358 60,707
Engineering, research and
development expenses 27,239 27,221 26,002 26,489 27,586 30,231 29,964 30,675
Amortization of intangible
assets 10,945 11,007 11,051 11,020 11,669 12,014 21,419 17,050
Operating income 50,920 59,090 60,655 71,152 78,473 74,933 67,975 71,308
Net income (loss) 32,514 39,991 40,902 (28,341 ) 57,562 54,349 48,060 80,784

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
(Percent of net sales)
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 44.0 45.7 45.0 46.7 47.9 47.6 45.6 44.8
Selling, general and
administrative expenses 15.9 16.1 16.7 15.7 15.9 17.0 15.6 15.1
Engineering, research and
development expenses 8.6 8.3 7.5 7.6 7.5 7.9 7.5 7.6
Amortization of intangibles 3.4 3.3 3.2 3.1 3.2 3.1 5.4 4.2
Operating income 16.0 18.0 17.6 20.3 21.4 19.6 17.1 17.8
Net income (loss) 10.2 12.2 11.8 (8.1 ) 15.7 14.2 12.1 20.1


The Company's quarterly results of operations have been, and will likely
continue to be, subject to significant fluctuations due to a myriad of factors,
many of which are beyond the Company's control. The variability in sales, and
its corresponding effect on gross profit, are generally the most important
factors underlying the changes in the Company's operating income and net income
over the past eight quarters.
Liquidity and Capital Resources
The Company has historically financed its operations and capital requirements
through cash flow from its operating activities, long-term loans, lease
financing and borrowings under domestic and international short-term lines of
credit. In fiscal 2000 and 2009, the Company raised capital via public offerings
of its common stock.
Operating activities
Net cash flow provided by operating activities totaled $312.6 million for the
year ended December 31, 2018. Cash generated by the Company's operations
included net income of $240.8 million, as adjusted for the impact of various
non-cash charges, most notably depreciation and amortization of $127.3 million,
and share-based compensation expense of $17.1 million. These operating cash
flows were partly offset by changes in operating assets and liabilities, mainly
due to an increase in accounts receivables and inventories, an increase in
accounts payable and accrued liabilities, and an offset in income taxes payable
and refundable income taxes.
Working capital was $759.7 million at December 31, 2018, which included $482.1
million
in cash and cash equivalents, a decrease from $766.6 million as of
December 31, 2017, which included $625.4 million in cash and cash equivalents.
Accounts receivable increased by $38.6 million during 2018, or $17.5 million
after accounting for the effect of foreign currency translation and
acquisitions. The net increase reflects the year-over-year increase in fourth
quarter sales of the Company's products. The Company's days sales outstanding
measure (DSO) stood at 50 days at December 31, 2018 compared to 48 days at the
beginning of the year.
Inventories at December 31, 2018 increased by $70.1 million from a year earlier,
or $38.1 million after accounting for foreign currency translation, acquisitions
and the provision for excess and obsolete inventory. The net increase reflects
higher levels of all categories of inventory, due to higher sales and production
activity.

42



--------------------------------------------------------------------------------



Table of Contents




Accounts payable and accrued liabilities were $65.9 million higher than a year
ago, or $20.0 million higher after accounting for the effect of foreign currency
translation and acquisitions. The increase reflects higher accounts payable
associated with increased levels of business activity and higher accrued bonuses
in 2018.
Investing activities Cash flow used in investing activities totaled $485.9
million
in 2018.
Acquisition of property and equipment totaled $110.2 million, which primarily
reflected investments in equipment and tooling. Capital expenditures in 2018
generally reflected more normalized capital spending levels. The Company expects
its capital expenditures in 2019 to be approximately $110 million.
On January 22, 2018, the Company acquired PSS, which provides particle sizing
instrumentation for liquid applications to the semiconductor and life science
industries. The total purchase price of the acquisition was approximately $37.3
million
in cash, funded from the Company's existing cash on hand. The
transaction is described in further detail in note 3 to the Company's
consolidated financial statements.
On June 25, 2018, the Company acquired the SPG business. SPG is a leading
provider of high-capacity gas purification systems used in semiconductor
manufacturing and adjacent markets. The total purchase price of the acquisition
was approximately $352.7 million in cash or $341.5 million net of cash received,
subject to revision for customary working capital adjustments. The transaction
is described in further detail in note 3 to the Company's consolidated financial
statements.
Financing activities Cash flow provided by financing activities totaled $34.4
million
during 2018.
The Company previously had (a) a senior secured term loan facility maturing
April 30, 2021 (the "Previous Term Loan Facility") that provided financing of
$460 million and (b) a senior secured asset-based revolving credit facility
maturing April 30, 2019 (the "ABL Facility" and together with the Previous Term
Loan Facility, the "Previous Credit Facilities") that provided financing of $75
million
, subject to a borrowing base.

On November 6, 2018, the Company obtained a new $700 million senior secured
credit facility, consisting initially of (a) term loans in an aggregate
principal amount of $400 million (the "New Term Loan Facility") and (b)
revolving commitments in an aggregate amount of $300 million (the "New Revolving
Facility", and together with the New Term Loan Facility, the "New Credit
Facilities"). The New Term Loan Facility matures November 6, 2025 and the New
Revolving Facility matures November 6, 2023. Borrowings under the New Credit
Facilities bear interest at a rate per annum equal to, at the Company's option,
a base rate (such as prime rate or LIBOR) plus, an applicable margin. The
Company may voluntarily prepay outstanding term loans under the New Term Loan
Facility at any time without premium or penalty other than customary "breakage"
costs with respect to LIBOR loans, provided, however, that if on or prior to May
6, 2019
the Company prepays any term loan in connection with a repricing
transaction, the Company must pay a prepayment premium of 1.00% of the aggregate
principal amount of the term loans so prepaid. The Company may voluntarily
reduce the unutilized portion of the New
Revolving Facility and repay outstanding revolving loans under the New Revolving
Facility at any time without premium or penalty other than customary "breakage"
costs with respect to LIBOR loans. The Company used approximately $109 million
of the proceeds of the term loans under the New Term Loan Facility to repay and
terminate its Previous Credit Facilities. As of December 31, 2018, the New Term
Loan Facility was fully drawn at closing and the Company had no outstanding
borrowings and $0.2 million undrawn outstanding letters of credit under the New
Revolving Facility.
Through December 31, 2018, the Company was in compliance with all applicable
financial covenants included in the terms of its credit facilities.
The Company also has lines of credit with two banks that provide for borrowings
of Japanese yen for the Company's Japanese subsidiary equivalent to an aggregate
of approximately $10.9 million. There were no outstanding borrowings under these
lines of credit at December 31, 2018.
In addition, the Company repurchased shares of the Company's common stock during
2018 at a total cost of $173.8 million under the stock repurchase program
authorized by the Company's Board of Directors. During 2018, the Company's Board
of Directors declared a cash dividend of $0.07 per share during the first,
second, third and fourth quarters of 2018, which totaled $39.8 million. The
Company paid $14.7 million for taxes related to the net share settlement of
equity awards, offset by proceeds received of $5.6 million in connection with
common shares issued under the Company's stock plans.
At December 31, 2018, the Company's shareholders' equity stood at $1,012.0
million
, up 2% from $993.0 million at the beginning of the year. The 2018
increase reflects net income of $240.8 million, additional paid-in capital of
$17.1 million associated with the Company's share-based compensation expense and
these increases to shareholders' equity were partly offset by cash dividends
paid of $39.8 million, the repurchase and retirement of the Company's stock of
$179.3 million and favorable foreign currency translation effects of $10.2
million
mainly associated with the strengthening of the U.S. dollar versus the
Korean won.

43



--------------------------------------------------------------------------------



Table of Contents




As of December 31, 2018, the Company's sources of available funds were its cash
and cash equivalents of $482.1 million, funds available under the New Revolving
Facility and international credit facilities and cash flow generated from
operations. As of December 31, 2018, the amount of cash and cash equivalents
held in certain of our foreign operations totaled approximately $180.1 million.
As of December 31, 2018, we had not repatriated any of these funds to the U.S.
However, to the extent we repatriate these funds to the U.S., we will be
required to pay income taxes in certain U.S. states and applicable foreign
withholding taxes on those amounts during the period when such repatriation
occurs. We have accrued taxes for the tax effect of repatriating the funds to
the U.S.
The Company believes its existing balances of domestic cash and cash equivalents
and operating cash flows will be sufficient to meet the Company's domestic cash
needs arising in the ordinary course of business for the next twelve months. If
available liquidity is not sufficient to meet the Company's operating and debt
service obligations as they come due, management would need to pursue
alternative arrangements through additional equity or debt financing in order to
meet the Company's cash requirements. There can be no assurance that any such
financing would be available on commercially acceptable terms, or at all.
New Accounting Pronouncements
Recently adopted accounting pronouncements Refer to note 1 to the Company's
consolidated financial statements for a discussion of accounting pronouncements
implemented in 2018. Other than the adoption of ASU 2014-09, there were no
recently issued accounting pronouncements adopted in 2018.
Recently issued accounting pronouncements Refer to note 1 of the Company's
consolidated financial statements for a discussion of accounting pronouncements
recently issued but not yet adopted.
Contractual Obligations
The following table summarizes the maturities of the Company's significant
financial obligations as of December 31, 2018:
(In thousands) Total 2019 2020 2021 2022 2023 Thereafter
Long-term debt1 $ 950,000 $ 4,000 $ 4,000 $ 4,000 $ 4,000 $ 4,000 $ 930,000
Interest2 302,267 43,518 43,337 43,156 42,975 42,794 86,487
Pension obligations 6,473 36 33 217 201 251 5,735
Capital lease
obligations 5,250 1,000 1,000 1,000 1,000 1,000 250
Capital purchase
obligations3 30,668 30,668 - - - - -
Operating leases 64,894 11,360 8,906 6,836 5,431 5,208 27,153
Total $ 1,359,552 $ 90,582 $ 57,276 $ 55,209 $ 53,607 $ 53,253 $ 1,049,625

Unrecognized tax
benefits4



1Debt obligations are classified based on their stated maturity date, regardless
of their classification on the Company's consolidated balance sheets.
2Interest projections on both variable and fixed rate long-term debt are based
on interest rates effective as of December 31, 2018 and do not include $11.1
million
for net unamortized discounts and debt issuance costs.
3Capital purchase obligations represent commitments for the construction or
purchase of property, plant and equipment. They were not recorded as liabilities
on the Company's consolidated balance sheet as of December 31, 2018, as the
Company had not yet received the related goods or taken title to the property.
4The Company had $12.3 million of total gross unrecognized tax benefits at
December 31, 2018. The timing of any payments associated with these unrecognized
tax benefits will depend on a number of factors. Accordingly, the Company cannot
make reasonably reliable estimates of the amount and period of potential cash
settlements, if any, with taxing authorities and are not included in the table
above.

44



--------------------------------------------------------------------------------



Table of Contents




Non-GAAP Information The Company's consolidated financial statements are
prepared in conformity with accounting principles generally accepted in the
United States
(GAAP).
The Company also provides certain non-GAAP financial measures as a complement to
financial measures provided in accordance with GAAP in order to better assess
and reflect trends affecting the Company's business and results of operations.
Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other
regulations under the Securities Exchange Act of 1934, as amended, define and
prescribe the conditions for use of certain non-GAAP financial information. The
Company provides non-GAAP financial measures of Adjusted EBITDA and Adjusted
Operating Income together with related measures thereof, and non-GAAP Earnings
Per Share (EPS).
Adjusted EBITDA, a non-GAAP term, is defined by the Company as net income before
(1) income tax expense, (2) interest expense (3) interest income (4) other
expense (income), net, (5) charge for fair value write-up of acquired inventory
sold, (6) deal costs, (7) integration costs, (8) severance related to
organization realignment (9) impairment of equipment and intangibles, (10) loss
on sale of subsidiary, (11) amortization of intangible assets and
(12) depreciation. Adjusted Operating Income, another non-GAAP term, is defined
by the Company as Adjusted EBITDA exclusive of the depreciation addback noted
above. The Company also utilizes non-GAAP measures whereby Adjusted EBITDA and
Adjusted Operating Income are each divided by the Company's net sales to derive
Adjusted EBITDA Margin and Adjusted Operating Margin, respectively.
Non-GAAP EPS, a non-GAAP term, is defined by the Company as net income before
(1) charge for fair value write-up of inventory sold (2) deal costs (3)
integration costs, (4) severance related to organizational realignment, (5)
impairment of equipment and intangibles, (6) loss on debt extinguishment (7)
loss on sale of subsidiary, (8) gain on sale of short-term investment (9)
amortization of intangible assets, (10) the tax effect of those adjustments to
net income and discrete tax items (11) the tax effect of legal entity
restructuring and (12) the Tax Cuts and Jobs Act.
The Company provides supplemental non-GAAP financial measures to better
understand and manage its business and believes these measures provide investors
and analysts additional and meaningful information for the assessment of the
Company's ongoing results. Management also uses these non-GAAP measures to
assist in the evaluation of the performance of its business segments and to make
operating decisions.
Management believes the Company's non-GAAP measures help indicate the Company's
baseline performance before certain gains, losses or other charges that may not
be indicative of the Company's business or future outlook and offer a useful
view of business performance in that the measures provide a more consistent
means of comparing performance. The Company believes the non-GAAP measures aid
investors' overall understanding of the Company's results by providing a higher
degree of transparency for such items and providing a level of disclosure that
will help investors understand how management plans, measures and evaluates the
Company's business performance. Management believes that the inclusion of
non-GAAP measures provides 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 its
business.
In addition, and as a consequence of the importance of these non-GAAP financial
measures in managing its business, the Company's Board of Directors uses
non-GAAP financial measures in the evaluation process to determine management
compensation.
The Company believes that certain analysts and investors use Adjusted EBITDA,
Adjusted Operating Income and non-GAAP EPS as supplemental measures to evaluate
the overall operating performance of firms in the Company's industry.
Additionally, lenders or potential lenders use Adjusted EBITDA measures to
evaluate the Company's creditworthiness.
The presentation of non-GAAP financial measures is not meant to be considered in
isolation, as a substitute for, or superior to, financial measures or
information provided in accordance with GAAP. Management strongly encourages
investors to review the Company's consolidated financial statements in their
entirety and to not rely on any single financial measure.
Management notes that the use of non-GAAP measures has limitations:
First, non-GAAP financial measures are not standardized. Accordingly, the
methodology used to produce the Company's non-GAAP financial measures is not
computed under GAAP and may differ notably from the methodology used by other
companies. For example, the Company's non-GAAP measure of Adjusted EBITDA may
not be directly comparable to EBITDA or an adjusted EBITDA measure reported by
other companies.
Second, the Company's non-GAAP financial measures exclude items such as
amortization and depreciation that are recurring. Amortization of intangibles
and depreciation have been, and will continue to be for the foreseeable future,
a significant

45



--------------------------------------------------------------------------------



Table of Contents




recurring expense with an impact upon the Company's results of operations,
notwithstanding the lack of immediate impact upon cash flows.
Third, there is no assurance the Company will not have future restructuring
activities, gains or losses on sale of equity investments, contingent
consideration fair value adjustments 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 from 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.
The reconciliation of GAAP measures to Adjusted Operating Income and Adjusted
EBITDA for the years ended December 31, 2018, 2017 and 2016 are presented below:
In thousands 2018 2017 2016
Net sales $ 1,550,497 $ 1,342,532 $ 1,175,270
Net income $ 240,755 $ 85,066 $ 97,147
Adjustments to net income
Income tax expense 13,677 99,665 22,852
Interest expense 34,094 32,343 36,846
Interest income (3,839 ) (715 ) (318 )
Other expense (income), net 8,002 25,458 (991 )
GAAP - Operating income 292,689 241,817 155,536
Charge for fair value write-up of acquired
inventory sold 6,868 - -
Deal costs 5,121 - -
Integration costs 3,237 - -
Severance related to organizational realignment 460 2,700 2,405
Impairment of equipment and intangibles 1 - 10,400 5,826
Loss on sale of subsidiary 466 - -
Amortization of intangible assets 62,152 44,023 44,263
Adjusted operating income 370,993 298,940 208,030
Depreciation 65,116 58,208 55,623
Adjusted EBITDA $ 436,109 $ 357,148 $ 263,653
Adjusted operating margin 23.9 % 22.3 % 17.7 %
Adjusted EBITDA - as a % of net sales 28.1 %


26.6 % 22.4 %





1Includes product line impairment charges of $5,330 and $5,826 classified as
cost of sales for the years ended December 31, 2017 and 2016, respectively.
Includes intangible impairment charge of $3,866 classified as selling, general
and administrative expense for the year ended December 31, 2017.
Includes product line impairment charge of $320 classified as selling, general
and administrative expense for the year ended December 31, 2017.
Includes product line impairment charge of $884 classified as engineering,
research and development expense for the year ended December 31, 2017.

46



--------------------------------------------------------------------------------



Table of Contents



The reconciliation of GAAP measures to Non-GAAP Earnings per share for the years
ended December 31, 2018, 2017 and 2016 are presented below:
In thousands, except per share data


2018 2017


2016



Net income $ 240,755 $ 85,066 $ 97,147
Adjustments to net income:
Charge for fair value write-up of acquired
inventory sold 6,868 - -
Deal costs 5,121 - -
Integration costs 3,237 - -
Severance related to organizational realignment 460 2,700


2,405



Impairment of equipment and intangibles1 - 13,200 5,826
Loss on debt extinguishment 2,319 20,687 -
Loss on sale of subsidiary 466 - -
Gain on sale of short-term investment - - (156 )
Amortization of intangible assets 62,152 44,023


44,263



Tax effect of adjustments to net income and
discrete tax items 2 (17,812 ) (26,046 ) (16,637 )
Tax effect of legal entity restructuring (34,478 ) - -
Tax effect of Tax Cuts and Jobs Act 683 66,713 -
Non-GAAP net income $ 269,771 $ 206,343 $ 132,848
Diluted earnings per common share $ 1.69 $ 0.59 $ 0.68
Effect of adjustments to net income $ 0.20 $ 0.85 $ 0.25
Diluted non-GAAP earnings per common share $ 1.89 $ 1.44


$ 0.94





1Includes product line impairment charges of $5,330 and $5,826 classified as
cost of sales for the years ended December 31, 2017 and 2016, respectively.
Includes intangible impairment charge of $3,866 classified as selling, general
and administrative expense for the year ended December 31, 2017.
Includes product line impairment charge of $320 classified as selling, general
and administrative expense for the year ended December 31, 2017.
Includes product line impairment charge of $884 classified as engineering,
research and development expense for the year ended December 31, 2017.
Includes product line impairment charge of $2,800 classified as other expense
for the year ended December 31, 2017.
2The tax effect of the non-GAAP adjustments was calculated using the applicable
marginal tax rate during the respective years.
Item 7A. Quantitative and Qualitative Disclosure About Market Risks
Entegris' principal financial market risks are sensitivities to interest rates
and foreign currency exchange rates. The Company's interest-bearing cash
equivalents and short-term investments 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 $0.7 million
annually.
The cash flows and results of operations of the Company's foreign-based
operations are subject to fluctuations in foreign exchange rates. The Company
occasionally uses derivative financial instruments to manage the foreign
currency exchange rate risks associated with its foreign-based operations. At
December 31, 2018, the Company had no net exposure to any foreign currency
forward contracts.
Item 8. Financial Statements and Supplementary Data.
The information called for by this item is set forth in the Consolidated
Financial Statements covered by the Report of Independent Registered Public
Accounting Firm at the end of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
This item is not applicable.

47



--------------------------------------------------------------------------------



Table of Contents

© Edgar Online, source Glimpses

Acquiremedia 2019
Envoyer par e-mail