# MKS Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [MKS Inc](/companies/mksi.md) (CIK 1049502)
- Form: 10-Q
- Filed: 2023-11-08
- Accepted by EDGAR: Nov 8, 2023, 20:39 ET
- Period: 2023-09-30
- Accession: 0000950170-23-061045
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1049502/000095017023061045/mksi-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1049502/000095017023061045/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $932.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $2.73bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $506.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.50bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $426.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $1.23bn | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $71.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $218.0m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $167.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $514.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $118.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$1.58bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $93.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $266.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$17.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | −$76.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $39.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$1.77bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.58 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$26.53 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.59 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$26.53 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 67,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 66,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $138.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $53.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $44.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Current assets | at 2023-09-30 | $2.77bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $9.14bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $838.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $6.66bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $4.79bn | us-gaap:LongTermDebt |
| Short-term borrowings | at 2023-09-30 | $87.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-09-30 | $2.48bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 64,913 characters.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding the future financial performance, business prospects and growth of MKS Instruments, Inc. (“MKS”, the “Company,” “our,” or “we”). These statements are only predictions based on current assumptions and expectations. Any statements that are not statements of historical fact (including statements containing the words “will,” “projects,” “intends,” “believes,” “plans,” “anticipates,” “expects,” “estimates,” “forecasts,” “continues” and similar expressions) should be considered to be forward-looking statements. Actual events or results may differ materially from those in the forward-looking statements set forth herein.

Among the important factors that could cause actual events to differ materially from those in the forward-looking statements that we make are the need to generate sufficient cash flows to service and repay the substantial indebtedness we incurred in connection with our acquisition of Atotech Limited (“Atotech” and such transaction, the “Atotech Acquisition”), which we completed in August 2022; the terms of our existing credit facilities under which we incurred such debt; our entry into the chemicals technology business through the Atotech Acquisition, in which we do not have experience and which may expose us to significant additional liabilities; the risk that we are unable to integrate the Atotech Acquisition successfully or realize the anticipated synergies, cost savings and other benefits of the Atotech Acquisition; the ongoing assessment of the ransomware event we identified on February 3, 2023, including legal, reputational, financial and contractual risks resulting from the incident, and other risks related to cybersecurity, data privacy and intellectual property; competition from larger, more advanced or more established companies in our markets; the ability to successfully grow our business and the businesses of Atotech and Electro Scientific Industries, Inc., which we acquired in February 2019 and financial risks associated with those and potential future acquisitions, including goodwill and intangible asset impairments; manufacturing and sourcing risks, including those associated with limited and sole source suppliers and the impact and duration of supply chain disruptions, component shortages, and price increases; changes in global demand and the impact of COVID-19 or any other pandemic, including with respect to such supply chain disruptions, component shortages and price increases; risks associated with doing business internationally, including geopolitical conflicts, trade compliance, regulatory restrictions on our products, components or markets, particularly the semiconductor market, and unfavorable currency exchange and tax rate fluctuations, which risks become more significant as we grow our business internationally and in China specifically; conditions affecting the markets in which we operate, including fluctuations in capital spending in the semiconductor, electronics manufacturing and automotive industries, and fluctuations in sales to our major customers or disruptions or delays from third-party service providers upon which our operations may rely; the ability to anticipate and meet customer demand; the challenges, risks and costs involved with integrating or transitioning local and international operations of the companies we have acquired; risks associated with the attraction and retention of key personnel; potential fluctuations in quarterly results; dependence on new product development; rapid technological and market change; acquisition strategy; volatility of stock price; risks associated with chemical manufacturing and environmental regulation compliance; risks related to defective products; financial and legal risk management; and the other important factors described under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission on March 14, 2023 (“Annual Report”). We are under no obligation to, and expressly disclaim any obligation to, update or alter these forward-looking statements, whether as a result of new information, future events or otherwise, even if subsequent events cause our views to change.

The Management’s Discussion and Analysis of Financial Condition and Results of Operations describes principal factors affecting the results of operations, financial condition and liquidity, as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on our condensed consolidated financial statements. This section provides an analysis of our financial results for the three months ended September 30, 2023 compared to the three months ended June 30, 2023, and the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

### Overview

We enable technologies that transform our world. We deliver foundational technology solutions to leading edge semiconductor manufacturing, electronics and packaging, and specialty industrial applications. We apply our broad science and engineering capabilities to create instruments, subsystems, systems, process control solutions and specialty chemicals technology that improve process performance, optimize productivity and enable unique innovations for many of the world's leading technology and industrial companies. Our solutions are critical to addressing the challenges of miniaturization and complexity in advanced device manufacturing by enabling increased power, speed, feature enhancement and optimized connectivity. Our solutions are also critical to addressing ever-increasing performance requirements across a wide array of specialty industrial applications.

### Ransomware Event

On February 3, 2023, we identified that we had become subject to a ransomware event. We took immediate action to activate our incident response and business continuity protocols to contain the incident, including engaging appropriate incident response professionals and notifying law enforcement authorities. We then initiated the recovery phase, contained the incident, and have since reopened our affected manufacturing and service operations and completed restoration of virtually all of our information technology (“IT”) systems, including our enterprise resource planning systems.

Based on our investigation, we concluded ransomware actors encrypted certain of our systems by deploying malware. This incident required us to temporarily suspend operations at certain of our facilities and had a material impact in the first quarter of 2023 on our ability to process orders, ship products and provide service to our Vacuum Solutions Division (“VSD”) and Photonics Solutions Division (“PSD”) customers. As a result of our inability to fulfill orders, we estimated the ransomware event negatively impacted our revenue in the first quarter of 2023 by approximately $160 million. We recovered approximately $120 million of that amount in the second quarter of 2023 and approximately $30 million of that amount in the third quarter of 2023, as we shipped orders that were delayed during the first quarter. Please see “—Markets—Semiconductor Market,” “—Markets—Electronics and Packaging Market” and “—Markets—Specialty Industrial Market” for a discussion of the estimated impact of the ransomware event on our revenue by end market. As we have already shipped most of the orders that were delayed as a result of the ransomware event, we do not expect the ransomware event to have a material impact on our revenue in the fourth quarter of 2023. The incident did not impact the operations of our Materials Solutions Division (“MSD”).

We engaged security specialists to assist in the review, assessment and remediation of our IT controls and strengthened access requirements and unauthorized access detection. We are also implementing procedures to facilitate more timely restoration of our financial reporting systems.

As a result of the ransomware event, we incurred approximately $2 million and $14 million of net costs for the three and nine months ended September 30, 2023, respectively. These costs were primarily comprised of various third-party consulting services, including forensic experts, restoration experts, legal counsel, and other IT and accounting professional expenses, enhancements to our cybersecurity measures, costs to restore our systems and access our data, and employee-related expenses, including with respect to increased overtime. We expect to continue to incur these and other costs related to this incident in the future. As a result of the incident, we have been and may be subject to subsequent investigations, claims or actions, in addition to other costs, fines, penalties, or other obligations related to impacted data, whether or not such data is misused. In addition, we are currently subject to a class action lawsuit arising from this ransomware event. We are unable to predict at this time the potential timing and outcome of these claims and whether we may be subject to further private litigation or inquiries and proceedings by various government agencies, law enforcement and other governmental authorities. For additional information on the risks we face related to this incident and other cybersecurity incidents, refer to “Risk Factors—Risks Related to Cybersecurity, Data Privacy and Intellectual Property Protection” and “Risk Factors—Legal, Tax, Regulatory and Compliance Risks” in Part I, Item 1A of our Annual Report.

### Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. There have been no material changes in our critical accounting policies since December 31, 2022.

For further information about our critical accounting policies, please see the discussion of critical accounting policies in our Annual Report in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting — Policies and Estimates.”

### Segments

VSD delivers foundational technology solutions to leading edge semiconductor manufacturing, electronics and packaging and specialty industrial applications. VSD products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, and vacuum technology.

PSD provides a full range of solutions including lasers, beam measurement and profiling, precision motion control, vibration isolation systems, photonics instruments, temperature sensing, opto-mechanical components, optical elements, laser-based systems for flexible printed circuit board (“PCB”) processing, and laser-based systems for high density interconnect PCB and package substrate manufacturing.

MSD develops leading process and manufacturing technologies for advanced surface modification, electroless and electrolytic plating, and surface finishing. Atotech is a brand within MSD. Applying a comprehensive systems-and-solutions approach,

MSD’s portfolio includes chemistry, equipment, software, and services for innovative and high-technology applications in a wide variety of end markets.

### Markets

#### Net Revenues by End Market

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | % Total | June 30, 2023 | % Total | Nine Months Ended September 30, 2023 | % Total | September 30, 2022 | % Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Semiconductor | $367 | 39% | $441 | 44% | $1,117 | 41% | $1,538 | 63% |
| Electronics and Packaging | 243 | 26% | 225 | 22% | 691 | 25% | 275 | 11% |
| Specialty Industrial | 322 | 35% | 337 | 34% | 922 | 34% | 648 | 26% |
| Total net revenues | $932 | 100% | $1,003 | 100% | $2,730 | 100% | $2,461 | 100% |

### Semiconductor Market

MKS is a critical solutions provider for semiconductor manufacturing. Our products are used in major semiconductor processing steps, such as depositing thin films of material onto silicon wafer substrates, etching, cleaning, lithography, metrology, and inspection. The semiconductor industry continually faces new challenges, as products become smaller, more powerful and highly mobile. Ultra-thin layers, smaller critical dimensions, new materials, 3D structures, and the ongoing need for higher yield and productivity drive the need for tighter process measurement and control, all of which MKS supports. We believe we are the broadest critical subsystem provider in the wafer fabrication equipment ecosystem and address over 85% of the market. We have characterized our broad and unique offering as Surround the WaferSM to reflect the technology enablement we provide across almost every major process in semiconductor manufacturing today.

A significant portion of our sales is derived from products sold to semiconductor capital equipment manufacturers and semiconductor device manufacturers. While the semiconductor device manufacturing market is global, major semiconductor manufacturers are concentrated in China, Japan, South Korea, Taiwan and the United States. The semiconductor industry is subject to rapid demand shifts, which are difficult to predict, and we cannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor industry. Currently, we are experiencing softened demand in our semiconductor market consistent with a decline in industry-wide wafer fabrication equipment spending.

For the three months ended September 30, 2023, net revenues in our semiconductor market decreased by $74 million or 17%, compared to the prior quarter. We estimate that orders delayed by the ransomware event positively impacted our semiconductor revenue by approximately $20 million for the three months ended September 30, 2023 compared to approximately $90 million for the three months ended June 30, 2023, accounting for nearly all of the decrease in net revenues for the current quarter. We estimate that we have recovered all of the revenue from orders delayed by the ransomware event from the three months ended March 31, 2023, amounting to $110 million.

For the nine months ended September 30, 2023, net revenues in our semiconductor market decreased $421 million, or 27%, compared to the same period in the prior year primarily due to softened demand for semiconductor capital equipment, partially the result of negative macroeconomic conditions.

In October 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) published regulations that introduce new and novel restrictions related to end-uses in semiconductor, semiconductor manufacturing, supercomputer, and advanced computing, along with certain equipment used to develop and produce them (the “New BIS Rules”). The New BIS Rules restrict our direct and indirect sales to China and primarily impact our semiconductor market. As a result of the New BIS Rules, we initially expected an overall annualized reduction of net revenues in the range of $250 million to $350 million. We currently expect an annualized reduction of net revenues on the lower end of that range. While we continue to adjust our policies and practices to ensure compliance with these regulations, and we will seek to mitigate their impact, there can be no assurances that the New BIS Rules will not have an effect on our business that exceeds our expectations.

### Electronics and Packaging Market

MKS is a foundational solutions provider for the electronics and packaging market. Our portfolio includes photonics components, laser drilling systems, electronics chemistries and plating equipment that are critical for the manufacturing of PCBs and package substrates, as well as in wafer level packaging (“WLP”) applications. Similar to the semiconductor industry, the PCB, package substrate and WLP industries demand smaller features, greater density, and better performance. We characterize our complementary offering of laser systems and chemistry solutions as Optimize the Interconnect, to reflect the unique technology enablement we provide at the Interconnect level within PCBs, package substrates and WLPs. This end market also includes our vacuum and photonics solutions for display manufacturing applications.

For the three months ended September 30, 2023, net revenues in our electronics and packaging market increased by $18 million, or 8%, compared to the prior quarter. Net revenues grew sequentially due to higher chemistry sales as a result of normal seasonality associated with the consumer electronics market, as well as slightly higher PCB and package substrate production ahead of the Golden Week holidays in Asia in the beginning of the fourth quarter, all of which we report in MSD. Net revenues of laser drilling solutions, which we report in PSD, also increased.

For the nine months ended September 30, 2023, net revenues in our electronics and packaging market increased by $416 million, or 151%, compared to the same period in the prior year. This increase was mainly driven by the Atotech Acquisition, which we completed on August 17, 2022. We estimate the impact of the ransomware event on our electronics and packaging market was nominal.

### Specialty Industrial Market

MKS’ strategy in the specialty industrial market is to leverage our domain expertise and proprietary technologies across a broad array of applications in industrial technologies, life and health sciences, and research and defense markets.

#### Industrial Technologies

Industrial technologies encompass a wide range of diverse applications, including chemistries for functional coatings, surface finishing and wear resistance in the automobile industry, vacuum solutions for synthetic diamond manufacturing and photonics for solar manufacturing. Other applications include, but are not limited to, vacuum and photonics solutions for light emitting diode and laser diode manufacturing.

#### Life and Health Sciences

Our products for life and health sciences are used in a diverse array of applications, including bioimaging, medical instrument sterilization, medical device manufacturing, analytical, diagnostic and surgical instrumentation, consumable medical supply manufacturing and pharmaceutical production.

#### Research and Defense

Our products for research and defense are sold to government, university and industrial laboratories for applications involving research and development in materials science, physical chemistry, photonics, optics and electronics materials. Our products are also sold for monitoring and defense applications, including surveillance, imaging and infrastructure protection.

For the three months ended September 30, 2023, net revenues in our specialty industrial market decreased by $15 million, or 4%, compared to the prior quarter. We estimate that orders delayed by the ransomware event positively impacted our specialty industrial market revenue by approximately $10 million for the three months ended September 30, 2023 compared to approximately $30 million for the three months ended June 30, 2023, accounting for the decrease in net revenues for the current quarter. We estimate that we have recovered approximately $40 million of the approximate $45 million of delayed orders from the three months ended March 31, 2023.

For the nine months ended September 30, 2023, net revenues in our specialty industrial market increased by $274 million, or 42%, compared to the same period in the prior year. This increase was driven by an increase in net revenues from the Atotech Acquisition, which we completed on August 17, 2022.

### International Markets

A significant portion of our net revenues is from sales to customers in international markets. For the nine months ended September 30, 2023 and 2022, international revenues accounted for approximately 66% and 56%, respectively, of our total net revenues. The increase in the percentage of international revenues is attributable to the Atotech Acquisition. A significant portion of our international net revenues was from China, South Korea, Japan and Germany. We expect international net revenues will continue to account for a significant percentage of total net revenues for the foreseeable future.

Long-lived assets located outside of the United States accounted for approximately 54% and 57% of our total long-lived assets as of September 30, 2023 and December 31, 2022, respectively. Long-lived assets include property, plant and equipment, net, right-of-use assets, net and certain other assets and exclude goodwill, intangible assets and long-term tax-related accounts.

### Results of Operations

The following table sets forth, for the periods indicated, the percentage of total net revenues of certain line items included in our condensed consolidated statements of operations and comprehensive (loss) income data:

| Net revenues: | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Products | 87.8% | 88.2% | 88.5% | 87.5% |
| Services | 12.2 | 11.8 | 11.5 | 12.5 |
| Total net revenues | 100.0 | 100.0 | 100.0 | 100.0 |
| Cost of revenues: |  |  |  |  |
| Cost of product revenues | 47.9 | 46.9 | 48.6 | 50.5 |
| Cost of service revenues | 6.4 | 6.3 | 6.3 | 6.3 |
| Total cost of revenues (exclusive of amortization shown separately below) | 54.3 | 53.1 | 54.9 | 56.8 |
| Gross profit | 45.7 | 46.9 | 45.1 | 43.2 |
| Research and development | 7.6 | 7.5 | 8.0 | 6.8 |
| Selling, general and administrative | 17.9 | 17.1 | 18.8 | 13.0 |
| Acquisition and integration costs | 0.3 | 0.5 | 0.5 | 1.7 |
| Restructuring | 0.1 | 1.1 | 0.5 | 0.4 |
| Amortization of intangible assets | 7.3 | 7.6 | 8.2 | 3.1 |
| Goodwill and intangible asset impairments | — | 182.2 | 66.9 | — |
| Gain on sale of long-lived assets | (0.2) | — | (0.1) | (0.3) |
| Income (loss) from operations | 12.7 | (169.1) | (57.8) | 18.5 |
| Interest income | (0.4) | (0.4) | (0.4) | (0.1) |
| Interest expense | 10.0 | 8.8 | 9.7 | 3.8 |
| Other expense (income), net | 0.8 | 1.1 | 0.5 | (0.2) |
| Income (loss) before income taxes | 2.4 | (178.6) | (67.7) | 15.0 |
| (Benefit) provision for income taxes | (1.8) | (2.2) | (2.8) | 3.6 |
| Net income (loss) | 4.2% | (176.4%) | (64.9%) | 11.4% |

#### Net revenues

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Products | $818 | $885 | $2,416 | $2,153 |
| Services | 114 | 118 | 314 | 308 |
| Total net revenues | $932 | $1,003 | $2,730 | $2,461 |

For the three months ended September 30, 2023, net product revenues decreased $67 million compared to the prior quarter. This decrease was primarily due to the effects of the ransomware event, as we recovered approximately $17 million in product revenues during the three months ended September 30, 2023 compared to approximately $105 million during the three months ended June 30, 2023.

For the nine months ended September 30, 2023, net product revenues increased $263 million compared to the same period in the prior year. This increase was mainly driven by the Atotech Acquisition, with MSD net product revenues increasing by $710 million for the nine months ended September 30, 2023 compared to the same period in the prior year, partially offset by decreases in net product revenues of $408 million and $39 million in VSD and PSD, respectively. VSD and PSD net product revenues were negatively impacted by volume decreases as a result of softening demand in our semiconductor and electronics and packaging markets.

Net service revenues consisted mainly of fees for services related to the maintenance and repair of our products, sales of spare parts, and installation and training. For the three months ended September 30, 2023, net service revenues decreased $4 million compared to the prior quarter and were down slightly in VSD, PSD and MSD.

For the nine months ended September 30, 2023, net service revenues increased $6 million compared to the same period in the prior year. This increase was mainly driven by the Atotech Acquisition, with MSD net services revenues increasing by $26 million for the nine months ended September 30, 2023, partially offset by decreases in net service revenues of $18 million and $2 million in VSD and PSD, respectively. VSD net service revenues were negatively impacted by volume decreases as a result of softening demand in our semiconductor market.

The following table sets forth our net revenues by reportable segment:

*(dollars in millions)*

| Net revenues: | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Vacuum Solutions Division | $345 | $426 | $1,065 | $1,491 |
| Photonics Solutions Division | 276 | 279 | 751 | 793 |
| Materials Solutions Division | 311 | 298 | 914 | 177 |
| Total net revenues | $932 | $1,003 | $2,730 | $2,461 |

For the three months ended September 30, 2023, net revenues from VSD decreased $81 million compared to the prior quarter, primarily due to the effects of the ransomware event, as we recovered approximately $6 million in net revenues during the three months ended September 30, 2023 compared to $87 million during the three months ended June 30, 2023. For the three months ended September 30, 2023, net revenues from MSD increased $13 million compared to the prior quarter, primarily due to higher chemistry sales to customers of our electronics and general metal finishing reporting units.

For the nine months ended September 30, 2023, net revenues from VSD decreased $426 million compared to the same period in the prior year, which was largely reflective of volume decreases in the semiconductor market.

For the nine months ended September 30, 2023, net revenues from PSD decreased $42 million compared to the same period in the prior year, partially due to decreased industry demand for flexible PCB via drilling equipment as a result of softened demand for electronics, such as personal computers and smartphones, and partially due to decreased demand in the specialty industrial market and volume decreases in the semiconductor market.

For the nine months ended September 30, 2023, revenues from MSD increased $737 million compared to the prior year, as MSD was established in connection with the closing of the Atotech Acquisition in the third quarter of 2022.

#### Gross margin

| Gross margin as a percentage of net revenues: | Three Months Ended September 30, 2023 | June 30, 2023 | % Points Change | Nine Months Ended September 30, 2023 | September 30, 2022 | % Points Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Products | 45.4% | 46.9% | (1.5)% | 45.1% | 42.3% | 2.8% |
| Services | 48.0% | 46.3% | 1.7% | 44.9% | 49.2% | (4.3)% |
| Total gross margin | 45.7% | 46.9% | (1.2)% | 45.1% | 43.1% | 2.0% |

Gross margin for our products decreased for the three months ended September 30, 2023, compared to the three months ended June 30, 2023, as a result of lower revenue volumes and higher excess and obsolete inventory charges, mainly related to the discontinuation of a product line. These decreases were partially offset by favorable product mix.

Gross margin for our products increased for the nine months ended September 30, 2023 compared to the same period in the prior year, primarily due to higher revenue volumes related to MSD, which had higher gross margins than VSD and PSD, and favorable product mix, including contributions from MSD. These increases in gross margin were partially offset by lower factory absorption at VSD and higher excess and obsolete inventory charges, mainly related to the discontinuation of a product line.

Gross margin for our services increased for the three months ended September 30, 2023 compared to the prior quarter. The increase in gross margin for our services for the three months ended September 30, 2023 was mainly the result of favorable product mix, partially offset by unfavorable direct labor and overhead absorption.

Gross margin for our services decreased for the nine months ended September 30, 2023 compared to the same period in the prior year. The decrease in gross margin for our services for the nine months ended September 30, 2023 was primarily due to unfavorable product mix and unfavorable overhead absorption.

The following table sets forth gross margin as a percentage of net revenues by reportable segment:

| Gross margin as a percentage of net revenues: | Three Months Ended September 30, 2023 | June 30, 2023 | % Points Change | Nine Months Ended September 30, 2023 | September 30, 2022 | % Points Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Vacuum Solutions Division | 41.3% | 45.2% | (3.9)% | 41.6% | 43.3% | (1.7)% |
| Photonics Solutions Division | 41.7% | 46.0% | (4.3)% | 43.1% | 46.9% | (3.8)% |
| Materials Solutions Division | 54.1% | 50.0% | 4.1% | 50.9% | 25.1% | 25.8% |
| Total gross margin | 45.7% | 46.9% | (1.2)% | 45.1% | 43.1% | 2.0% |

Gross margin for VSD decreased for the three months ended September 30, 2023, compared to the prior quarter, primarily due to lower revenue volumes and unfavorable product mix. Gross margin for VSD decreased for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to lower revenue volumes and unfavorable overhead absorption as a result of softening demand in our semiconductor market, and higher excess and obsolete inventory charges, partially offset by favorable product mix.

Gross margin for PSD decreased for the three months ended September 30, 2023, compared to the prior quarter, primarily due to higher excess and obsolete inventory charges, mainly related to the discontinuation of a product line. Gross margin for PSD decreased for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to higher excess and obsolete inventory charges, mainly related to the discontinuation of a product line, and lower revenue volumes.

Gross margin for MSD increased for the three months ended September 30, 2023, compared to the prior quarter, primarily due to favorable product mix and lower overhead costs. Gross margin for MSD increased for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to higher revenue volumes and favorable product mix. There were lower net revenues from MSD for the nine months ended September 30, 2022 as MSD was established in connection with the closing of the Atotech Acquisition in the third quarter of 2022.

#### Research and development

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Research and development | $71 | $75 | $218 | $168 |

For the three months ended September 30, 2023, research and development expenses decreased by $4 million, compared to the prior quarter, primarily due to decreases in compensation-related costs. For the nine months ended September 30, 2023, research and development expenses increased by $50 million, compared to the same period in the prior year, primarily due to the Atotech Acquisition.

Our research and development efforts are primarily focused on developing and improving our instruments, components, chemistry, subsystems, systems and process control solutions to improve process performance and productivity. We have thousands of products, and our research and development efforts primarily consist of a large number of projects related to these products, none of which is individually material to us. Projects typically have a duration of 3 to 36 months but may be extended for development of new products.

We continue to make product advancements to meet our customers’ evolving needs. We have developed, and continue to develop, new products to address industry trends, such as the shrinking of integrated circuit critical dimensions and technology inflections, and, in the flat panel display and solar markets, the transition to larger substrate sizes, which require more advanced processing and process control technology, the continuing drive toward more complex and accurate components and devices within the handset and tablet market, the transition to 5G for both devices and infrastructure, the growth in units and via counts in the high density interconnect PCB drilling market, and the transition from internal combustion to electric vehicles. In addition, we have developed, and continue to develop, products that support the migration to new classes of materials, ultra-thin layers, and 3D structures that are used in small geometry manufacturing. In our chemistry and equipment plating businesses, a majority of our research and development investment supports existing customers' product improvement needs and their short-term research and development goals, which enables us to pioneer new high-value solutions while limiting commercial risk. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, fees paid to consultants, material costs for prototypes and other expenses related to the design, development, testing and enhancement of our products.

We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets. We expect to continue to make significant investment in research and development activities. We are subject to risks from products not being developed in a timely manner, as well as from rapidly changing customer requirements and competitive threats from other companies and technologies. Our success primarily depends on our products being designed into new generations of equipment for the semiconductor, electronics and packaging, and specialty industrial markets. We develop products that are technologically advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital equipment and advanced markets applications. If our products are not chosen to be designed into our customers’ products, our net revenues may be reduced during the lifespan of those products.

#### Selling, general and administrative

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative | $167 | $172 | $514 | $319 |

For the three months ended September 30, 2023, selling, general and administrative expenses decreased $5 million, compared to the prior quarter, primarily due to a decrease of $3 million in compensation-related costs and a decrease of $2 million in travel-related costs.

For the nine months ended September 30, 2023, selling, general and administrative expenses increased $195 million, compared to the same period in the prior year, mainly driven by $173 million from the Atotech Acquisition, as well as increases from VSD and PSD of $22 million. The increases in VSD and PSD were the result of $14 million in net costs incurred as a result of the ransomware event, an increase of $5 million in compensation-related costs and an increase of $5 million in consulting and professional fees, partially offset by a decrease of $2 million in bad debt expense.

#### Acquisition and integration costs

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Acquisition and integration costs | $3 | $5 | $14 | $41 |

Acquisition and integration costs incurred during the three months ended September 30, 2023 and June 30, 2023 and the nine months ended September 30, 2023 and 2022 were primarily related to consulting and professional fees related to the Atotech Acquisition.

#### Restructuring

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Restructuring | $1 | $11 | $13 | $10 |

Restructuring charges during the three and nine months ended September 30, 2023 and the three months ended June 30, 2023 were related to severance costs as a result of global cost saving initiatives implemented in each of the first and second quarters of 2023. Restructuring charges during the nine months ended September 30, 2022 were primarily related to severance costs due to a global cost-saving initiative and the closure of two facilities in Europe as well as executive payments related to the Atotech Acquisition.

#### Amortization of intangible assets

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Amortization of intangible assets | $68 | $76 | $225 | $77 |

For the three months ended September 30, 2023, amortization of intangible assets decreased by $8 million, compared to the prior quarter, primarily due to the write-off of completed technology at our equipment solutions business (“ESB”) in the second quarter of 2023. For the nine months ended September 30, 2023, amortization of intangible assets increased $148 million, compared to the same period in the prior year, primarily due to amortization of intangible assets as a result of the Atotech Acquisition.

#### Goodwill and intangible asset impairments

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Goodwill and intangible asset impairments | $— | $1,827 | $1,827 | $— |

During the quarter ended June 30, 2023, as a result of softer industry demand, particularly in the personal computer and smartphone markets, we concluded there was a triggering event at our Electronics (“EL”) and General Metal Finishing (“GMF”) reporting units, which together constitute MSD, and our ESB reporting unit of PSD. We concluded there was no triggering event at our other reporting units within VSD and PSD.

For the EL, GMF and ESB reporting units, we performed a quantitative assessment of goodwill using a combination of market approach and the income approach. Fair value estimates are based on complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations.

This quantitative assessment resulted in a non-cash goodwill impairment of $826 million for the EL reporting unit, $428 million for the GMF reporting unit and $372 million for the ESB reporting unit. In addition, we recorded a $49 million impairment of in-process research and development allocated to the EL reporting unit and a $152 million impairment related to completed technology allocated to the ESB reporting unit.

We will continue to monitor and evaluate the carrying value of goodwill and intangible assets. If market and economic conditions or business performance deteriorate, the likelihood that we would record an impairment charge would increase, which could materially and adversely affect our financial condition and operating results. There were no impairment charges in the third quarter of 2023.

#### Gain on sale of long-lived assets

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Gain on sale of long-lived assets | $(2) | $— | $(2) | $(7) |

In the three and nine months ended September 30, 2023 and the nine months ended September 30, 2022, we recorded gains as a result of receiving cash from the sale of a minority interest investment in a private company.

#### Interest expense

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | $93 | $88 | $266 | $93 |

For the three months ended September 30, 2023, interest expense increased $5 million, compared to the prior quarter, primarily due to higher interest rates related to the outstanding borrowings on the New Term Loan Facility we entered into in connection with the Atotech Acquisition. For the nine months ended September 30, 2023, interest expense increased $173 million, compared to the same period in the prior year, primarily due to borrowings on the New Term Loan Facility we entered into in connection with the Atotech Acquisition.

#### Other expense (income), net

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Other expense (income), net | $7 | $11 | $14 | $(4) |

Other expense (income), net, for the three and nine months ended September 30, 2023, three months ended June 30, 2023 and nine months ended September 30, 2022 consisted primarily of net foreign exchange and fair value gains and losses.

#### (Benefit) provision for income taxes

*(dollars in millions)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| (Benefit) provision for income taxes | $(17) | $(22) | $(76) | $88 |

Our effective tax rate for the three months ended September 30, 2023 and June 30, 2023 was (75.3)% and 1.2%, respectively. Our effective tax rate for the three months ended September 30, 2023 was lower than the U.S. statutory tax rate, primarily due to the deduction for foreign derived intangible income and various tax credits. Our effective tax rate for the three months ended June 30, 2023 was lower than the U.S. statutory tax rate primarily due to the tax benefit related to impairment of intangible assets discretely recorded during the three-month period.

Our effective tax rate for the nine months ended September 30, 2023 and September 30, 2022 was 4.1% and 24.1%, respectively. Our effective tax rate for the nine months ended September 30, 2023 was lower than the U.S. statutory tax rate primarily due to the tax benefit related to the impairment of intangible assets and various tax credits. Our effective tax rate for the nine months ended September 30, 2022 was higher than the U.S. statutory rate mainly due to additional estimated accrued withholding taxes related to our change in indefinite reinvestment assertion, non-deductibility of certain costs associated with the Atotech Acquisition, and the U.S. global intangible low-taxed income inclusion.

On a quarterly basis, we evaluate both positive and negative evidence that affects the realizability of net deferred tax assets and assess the need for a valuation allowance. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income in each jurisdiction of the right type to realize the assets.

Our future effective tax rate depends on various factors, including the impact of tax legislation, further interpretations and guidance from U.S. federal and state governments on the impact of proposed regulations issued by the Internal Revenue Service, further interpretations and guidance from foreign governments, the geographic composition of our pre-tax income, and changes in income tax reserves for unrecognized tax benefits. We monitor these factors and timely adjust our estimates of the effective tax rate accordingly. We expect the Atotech Acquisition will continue to have an unfavorable impact on our effective tax rate as MSD operates primarily in jurisdictions with tax rates higher than the U.S. statutory tax rate. However, the geographic mix of pre-tax income can change based on multiple factors, resulting in changes to the effective tax rate in future periods. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax law and regulations. Additionally, the recognition and measurement of certain tax benefits includes estimates and requires judgment by management. Accordingly, we may record additional provisions or benefits for U.S. federal, state, and foreign tax matters in future periods as new information becomes available.

### Liquidity and Capital Resources

Cash and cash equivalents and short-term marketable investments at September 30, 2023 and December 31, 2022 totaled $860 million and $910 million, respectively. The primary driver in our current and anticipated future cash flows is, and we expect will continue to be, cash generated from operations, consisting primarily of our net (loss) income, excluding non-cash charges and changes in operating assets and liabilities. In periods when our sales are growing, higher sales to customers will result in increased trade receivables, and inventories will generally increase as we build products for future sales. This may result in lower cash generated from operations. Conversely, in periods when our sales are declining, our accounts receivable and inventory balances will generally decrease, resulting in increased cash from operations. We believe that our current cash and investments position and available borrowing capacity, together with the cash anticipated to be generated from our operations will be sufficient to satisfy our estimated working capital, planned capital expenditure requirements, payments of debt, and any future cash dividends declared by our Board of Directors or share repurchases through at least the next 12 months and the foreseeable future.

Net cash provided by operating activities was $138 million for the nine months ended September 30, 2023, resulting from a net loss of $1,772 million, which included non-cash charges of $2,100 million, mainly the result of a $1,827 million non-cash impairment of goodwill and intangible assets, offset by a net increase in working capital of $190 million. The net increase in working capital was primarily due to a decrease in accounts payable of $110 million, a decrease in income taxes payable of $75 million, a decrease of $11 million in accrued compensation, and an increase in inventory of $99 million. This net increase in working capital was partially offset by a decrease in accounts receivable of $85 million, a decrease in other current and non-current assets of $12 million and an increase of $8 million in other current and non-current liabilities.

Net cash used in investing activities was $50 million for the nine months ended September 30, 2023, consisting primarily of $53 million in capital expenditures.

Net cash used in financing activities was $116 million for the nine months ended September 30, 2023, primarily due to $67 million of payments on our New Term Loan Facility and $44 million of dividend payments.

Holders of our common stock are entitled to receive dividends when they are declared by our Board of Directors. During each of the first three quarters of 2023 and 2022, our Board of Directors declared a cash dividend of $0.22 per share. The cash dividends totaled $44 million and $37 million for the nine months ended September 30, 2023 and 2022, respectively. Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our Board of Directors. In addition, under the New Credit Facilities as defined and described further below, we may be restricted from paying dividends under certain circumstances.

#### Atotech Acquisition and New Credit Facilities

On August 17, 2022, we completed the Atotech Acquisition. The total net purchase price, including cash consideration, net of cash acquired, value of MKS shares issued, repayment of Atotech debt and settlement of share-based awards totaled $5.7 billion. We funded the payment of the aggregate cash consideration with a combination of cash on hand and the proceeds from the New Term Loan Facility, as defined below. As a result of the Atotech Acquisition, we issued an aggregate of 10.7 million shares of our common stock to the former Atotech shareholders. Additional information regarding the funding of the Atotech Acquisition, the entry into the New Term Loan Facility and the New Revolving Facility and the replacement of the Prior Term Loan Facility and the Prior ABL Credit Facility, is discussed below.

In connection with the completion of the Atotech Acquisition, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, Barclays Bank PLC, and the lenders from time to time party thereto (the “New Credit Agreement”). The New Credit Agreement provides for (i) a senior secured term loan facility (the “New Term Loan Facility”) comprised of three tranches: a USD 1 billion loan (the “USD Tranche A”), a USD 3.6 billion loan (the “USD Tranche B”) and a EUR 600 million loan (the “Euro Tranche B”), each of which were borrowed in full on the Effective Date, and (ii) a senior secured revolving credit facility of USD 500 million (the “New Revolving Facility” and, together with the New Term Loan Facility, the “New Credit Facilities”), with the commitments under each of the foregoing facilities subject to increase from time to time subject to certain conditions.

Borrowings under the New Credit Facilities bear interest at a rate per annum equal to, at our option, any of the following, plus, in each case, an applicable margin: (a) with respect to the USD Tranche A, the USD Tranche B and the New Revolving Facility, (x) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the prime rate quoted in *The Wall Street Journal*, or (3) a forward-looking term rate based on the variable secured overnight financing rate (“Term SOFR”) (plus, except as described further below with respect to the USD Tranche B, an applicable credit spread adjustment) for an interest period of one month, plus 1.00%; and (y) a Term SOFR rate (plus, except as described further below with respect to the USD Tranche B, an applicable credit spread adjustment) for the interest period relevant to such borrowing, subject to a rate floor of (I) with respect to the USD Tranche B, 0.50% and (II) with respect to the USD Tranche A and the New Revolving Facility, 0.0%; and (b) with respect to the Euro Tranche B, a Euro Interbank Offered Rate (“EURIBOR”) rate determined by reference to the costs of funds for Euro deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a EURIBOR rate floor of 0.0%. The USD Tranche A was issued with original issue discount of 0.25% of the principal amount thereof. The USD Tranche B and the Euro Tranche B were issued with original issue discount of 2.00% of the principal amount thereof. The applicable margin for borrowings under the USD Tranche A is 1.50% with respect to base rate borrowings and 2.50% with respect to Term SOFR borrowings. As of September 30, 2023, the applicable margin for borrowings under the USD Tranche B was 1.75% with respect to base rate borrowings and 2.75% with respect to Term SOFR borrowings. The applicable margin for borrowings under the Euro Tranche B is 3.00%. The applicable margin for borrowings under the New Revolving Facility is 1.50% with respect to base rate borrowings and 2.50% with respect to Term SOFR borrowings.

In addition to paying interest on outstanding principal under the New Credit Facilities, we are required to pay a commitment fee in respect of the unutilized commitments under the New Revolving Facility. The initial commitment fee is 0.375% per annum. Commencing with the delivery of financial statements with respect to the first quarter ending after the closing of the New Credit Agreement, the commitment fee is subject to downward adjustment based on our first lien net leverage ratio as of the end of the preceding quarter. We must also pay customary letter of credit fees and agency fees.

We incurred $242 million of deferred financing fees and original issue discount related to the term loans under the New Term Loan Facility, which are included in long-term debt, net in the accompanying condensed consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. A portion of the deferred financing fees and original issue discount was accelerated in connection with the debt prepayment and extinguishment of the Prior Term Loan Facility (as defined below).

Under the New Credit Agreement, we are required to prepay outstanding term loans, subject to certain exceptions, with portions of our annual excess cash flow as well as with the net cash proceeds of certain of our asset sales, certain casualty and condemnation events and the incurrences or issuances of certain debt.

If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the New Revolving Facility exceeds the aggregate commitments under the New Revolving Facility, we are required to repay outstanding loans and/or cash collateralize letters of credit, with no reduction of the commitment amount.

We may voluntarily prepay outstanding loans under the New Credit Facilities from time to time, subject to certain conditions, without premium or penalty other than customary “breakage” costs with respect to Term SOFR or EURIBOR loans; provided, however, that subject to certain exceptions, if on or prior to the date that is twelve months after the closing date of the New Term Loan Facility, we prepaid any loans under the USD Tranche B or the Euro Tranche B in connection with a repricing transaction, we would have been required to pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid. Additionally, we may voluntarily reduce the unutilized portion of the commitment amount under the New Revolving Facility.

We are required to make scheduled quarterly payments each equal to 1.25% of the original principal amount of the USD Tranche A (increasing to 1.875% in years 3 and 4 and 2.50% in year 5) and 0.25% of the original principal amount of the USD Tranche B and the Euro Tranche B, beginning with the fiscal quarter ending December 31, 2022, with the balance due thereunder on the fifth anniversary of the closing date in the case of the USD Tranche A and the seventh anniversary of the closing date in the case of the USD Tranche B and the Euro Tranche B.

There is no scheduled amortization under the New Revolving Facility. Any principal amount outstanding under the New Revolving Facility is due and payable in full on the fifth anniversary of the closing date.

We incurred $7 million of costs in connection with the New Revolving Facility, which were capitalized and included in other assets in the accompanying condensed consolidated balance sheet and are being amortized to interest expense over the estimated life of four years. As a result of our Prior ABL Credit Facility (as defined below) being terminated concurrently with our entry into the New Revolving Facility, we wrote off an immaterial amount of previously capitalized debt issuance costs.

All obligations under the New Credit Facilities are guaranteed by certain of our wholly-owned domestic subsidiaries and are required to be guaranteed by certain of our future wholly-owned domestic subsidiaries and are secured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.

Under the New Credit Agreement, we have the ability to incur additional incremental debt facilities in an amount up to (x) the greater of (1) $1.01 billion and (2) 75% of consolidated EBITDA, plus (y) an amount equal to the sum of all voluntary prepayments of term loans under the New Term Loan Facility, plus (z) an additional unlimited amount subject to pro forma compliance with certain leverage ratio tests (based on the security and priority of such incremental debt).

Under the USD Tranche A and the New Revolving Facility, so long as any USD Tranche A loans (or commitments in respect thereof) are outstanding as of the end of any fiscal quarter, we may not allow our total net leverage ratio as of the end of such fiscal quarter to be greater than 5.50 to 1.00, with an annual step-down of 0.25:1.00 and subject to a step-up of 0.50:1.00 for the four full fiscal quarter period following any material acquisition, not to exceed 5.50 to 1.00.

In addition, in the event there are no loans outstanding under the USD Tranche A, as of the end of any fiscal quarter of ours when the aggregate amount of loans outstanding under the New Revolving Facility (net of (a) all letters of credit (whether cash collateralized or not) and (b) unrestricted cash of ours and our restricted subsidiaries) exceeds 35% of the aggregate amount of all commitments under the New Revolving Facility in; effect as of such date, we may not allow our first lien net leverage ratio as of the end of each such fiscal quarter to be greater than 6.00 to 1.00.

The USD Tranche B and the Euro Tranche B are not subject to financial maintenance covenants.

The New Credit Agreement contains a number of negative covenants that, among other things and subject to certain exceptions, restrict our ability and each of our subsidiaries to incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or our subordinated indebtedness; make investments, loans and acquisitions; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries or restrictions on the ability of our restricted subsidiaries to incur liens; engage in transactions with our affiliates; sell assets, including capital stock of our subsidiaries; materially alter the business it conducts; consolidate or merge; incur liens; and engage in sale-leaseback transactions.

The New Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the New Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the New Credit Facilities and all actions permitted to be taken by a secured creditor. As of September 30, 2023, we were in compliance with all covenants under the New Credit Agreement.

The proceeds of the New Term Loan Facility were used on the Effective Date, among other things, to fund a portion of the consideration payable in connection with the Atotech Acquisition and to refinance the Prior Term Loan Facility, the Prior ABL Credit Facility and certain indebtedness of Atotech. We also paid certain customary fees and expenses of JPMorgan Chase Bank, N.A., Barclays Bank PLC, BofA Securities Inc., Citigroup Global Markets Inc., HSBC Securities (USA) Inc. and Mizuho Bank, Ltd. in their respective capacities as lead arrangers and bookrunners in connection with the New Credit Facilities.

On the Effective Date, in connection with the entry into the New Credit Agreement described above, we terminated and prepaid the prior term loan credit facility under that certain Term Loan Credit Agreement, dated as of April 29, 2016, by and among us, Barclays Bank PLC and the other financial institutions from time to time party thereto (as amended, the “Prior Term Loan Credit Agreement” and the term loan credit facility thereunder, the “Prior Term Loan Facility”) and terminated the prior revolving credit facility under that certain ABL Credit Agreement, dated as of February 1, 2019, by and among the us, Barclays

Bank PLC and the other financial institutions from time to time party thereto (as amended, the “Prior ABL Credit Agreement” and the revolving credit facility thereunder, the “Prior ABL Credit Facility”).

As of September 30, 2023, the outstanding principal amount of the New Term Loan Facility was $5.0 billion and the weighted average interest rate was 7.9%. As of September 30, 2023, there were no borrowings under the New Revolving Facility.

On October 3, 2023 (the “Repricing Effective Date”), we entered into the First Amendment to our Credit Agreement (the “Repricing Amendment”), which amended our New Credit Agreement. The Repricing Amendment (i) decreased the applicable margin for our USD Tranche B from 2.75% to 2.50% with respect to Term SOFR borrowings and from 1.75% to 1.50% with respect to base rate borrowings, (ii) removed the credit spread adjustments applicable to Term SOFR borrowings of the USD Tranche B and (iii) extended the period during which a 1.00% prepayment premium may be required if we prepay any loans under the USD Tranche B in connection with a repricing transaction until the date that is six months following the Repricing Effective Date. The repriced loans were issued with original issue discount of 0.25%. In connection with the execution of the Repricing Amendment, we paid customary fees and expenses to JPMorgan Chase Bank, N.A.

On October 31, 2023, we made a voluntary prepayment of $100 million aggregate principal amount on our USD Tranche A.

#### Lines of Credit and Borrowing Arrangements

Certain of our Japanese subsidiaries have lines of credit and a financing facility with various financial institutions, many of which generally expire and are renewed at three-month intervals with the remaining having no expiration date. These lines of credit and financing facility provided for aggregate borrowings as of September 30, 2023 of up to an equivalent of $13 million. There were no borrowings under these arrangements at September 30, 2023 and December 31, 2022.

#### Derivatives

We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments and those utilized as economic hedges. We operate internationally, and in the normal course of business, are exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, such as foreign exchange forward contracts and options, to manage certain foreign currency exposure, and interest rate swaps and caps to manage interest rate exposure.

By nature, all financial instruments involve market and credit risks. We enter into derivative instruments with major investment grade financial institutions and no collateral is required. We have policies to monitor the credit risk of these counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.

#### Interest Rate Agreements

We have various interest rate swap agreements as described further in Note 4 to the Notes to the Condensed Consolidated Financial Statements that exchange the variable Term SOFR rate to a fixed rate in order to manage the exposure to interest rate fluctuations associated with the variable Term SOFR rate paid on the outstanding balance of the New Term Loan Facility. We acquired USD London Interbank Offered Rate (“LIBOR”) interest rate cap agreements as a result of the Atotech Acquisition and we utilized these agreements to offset the Term SOFR rate on our New Term Loan Facility. Effective June 30, 2023, our USD LIBOR based interest rate caps were converted to Term SOFR. We also had two USD LIBOR based swaps that were converted to Term SOFR, effective June 30, 2023. The conversions from USD LIBOR to Term SOFR did not have a material impact on our results of operations.

### Contractual Obligations

There have been no changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report.

## Market risk

As filed, 276 characters.

Information concerning market risk is contained in the section entitled “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report. As of September 30, 2023, there were no material changes in our exposure to market risk from December 31, 2022.

## Controls and procedures

As filed, 4,366 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer 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 Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions 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 that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, the Company’s disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting as described below and in “Controls and Procedures” contained in our Annual Report.

Based on its assessment, our management concluded that a material weakness existed as of December 31, 2022 which has not been remediated as of September 30, 2023. We did not maintain sufficient information technology (“IT”) controls to prevent or detect, on a timely basis, unauthorized access to the Company’s financial reporting systems. Specifically, we did not design and maintain effective controls with regard to our financial reporting systems related to access authentication, intrusion detection and response capability, and backup and restoration such that recovery from a cybersecurity incident could be performed in a more timely manner. This material weakness did not result in a misstatement to the annual or interim consolidated financial statements previously filed or included in this Quarterly Report on Form 10-Q. However, this material weakness could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

### Remediation Plan for Material Weakness in Internal Control over Financial Reporting

We have been actively addressing the identified material weakness. Several remediation measures have been completed and actions with regard to our remediation plan are ongoing and include the following:

- engaging security specialists to assist in the review, assessment and remediation of our IT controls;
- strengthening access requirements and unauthorized access detection to our financial reporting systems; and
- implementing procedures to facilitate more timely restoration of our financial reporting systems.

Though the remediation plan is subject to continual review, we expect the remediation plan described above will address the identified material weakness. The remediation plan is subject to oversight by the Audit Committee of our Board of Directors and the identified material weakness will not be considered remediated until the remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded that newly implemented controls are operating effectively.

### Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 254 characters.

Information regarding risk factors affecting our business is discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission on March 14, 2023.

Filed Nov 8, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-061045. Last ingested by Listed: Oct 24, 2026, 15:03 ET. No prices; not investment advice.