MKS Inc: Form 10-Q for the period ended Mar 31, 2024

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 did not have previous 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; legal, reputational, financial and contractual risks resulting from the ransomware event we identified in February 2023, 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, including through growth of the Atotech business and growth of the Electro Scientific Industries, Inc. business, 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; the impact of a pandemic or other widespread health crisis; risks associated with doing business internationally, including geopolitical conflicts, such as the conflict in the Middle East, 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; 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 global 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, 2023 filed with the U.S. Securities and Exchange Commission on February 27, 2024 (“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, cash flows 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, and is intended to better allow investors to view the Company from management’s perspective. This section focuses on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of our future operating results or our future financial condition. This section provides an analysis of our financial results for the three months ended March 31, 2024 compared to the three months ended December 31, 2023 and the three months ended March 31, 2023.

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.

Segments

We have three divisions which are our reportable segments, Vacuum Solutions Division (“VSD”), Photonics Solutions Division (“PSD”) and Materials Solutions Division (“MSD”).

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, temperature sensing and vacuum technology.

PSD provides a full range of solutions including lasers, beam measurement and profiling, precision motion control, vibration isolation systems, photonics instruments, 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. During the quarter ended March 31, 2024, we moved our Optical Sensing Products (“OSP”) product line from the PSD segment to the VSD segment. The purpose of this realignment was to better align the OSP products with semiconductor related products within the VSD segment. Prior periods have been recast to reflect this change.

MSD develops leading process and manufacturing technologies for advanced surface modification, electroless and electrolytic plating, and surface finishing. 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)

Semiconductor Market

MKS is a critical solutions provider for semiconductor manufacturing. Our products are used in major semiconductor processing steps, such as deposition, 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 (“WFE”) ecosystem and address over 85% of the market. We have characterized our broad and unique offering as Surround the Wafer® to reflect the technology enablement we provide across almost every major process in semiconductor manufacturing today.

The semiconductor market 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 softening in the semiconductor capital equipment industry. In addition to these rapid demand shifts, the semiconductor capital equipment industry is subject to significant trade restrictions, especially in China.

For the three months ended March 31, 2024, net revenues in our semiconductor market decreased by $11 million, or 3%, compared to the prior quarter primarily due to softened demand for semiconductor capital equipment. Net revenues in our semiconductor market increased by $42 million, or 14%, compared to the same period in the prior year primarily due to lower net revenues in the prior year period as a result of lower order fulfillment due to the ransomware event. This incident had a material impact on our ability to process orders, ship products and provide service to our VSD and PSD customers in the first quarter of 2023.

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, and critical to 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. In addition, the electronics and packaging market also includes sales of our vacuum and photonics solutions for display manufacturing applications. 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.

For the three months ended March 31, 2024, net revenues in our electronics and packaging market decreased by $18 million, or 8%, compared to the prior quarter and decreased by $14 million, or 6%, compared to the same period in the prior year. These decreases were primarily the result of continued softness in the consumer electronics market and lower demand in the PCB business. In addition, the decrease compared to the prior quarter was also due to seasonality related to a slowdown in production in China as a result of the Lunar New Year.

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 encompasses 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 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 March 31, 2024, net revenues in our specialty industrial market increased by $4 million, or 1%, compared to the prior quarter.

For the three months ended March 31, 2024, net revenues in our specialty industrial market increased by $46 million, or 17%, compared to the same period in the prior year mainly due to lower revenue in the prior year period as a result of lower order fulfillment due to the ransomware event.

International Markets

A significant portion of our net revenues is from sales to customers in international markets. For the three months ended March 31, 2024 and 2023 and the three months ended December 31, 2023, international net revenues accounted for approximately 65%, 68%, and 67%, respectively, of our total net revenues. A significant portion of our international net revenues was from China, Germany, South Korea and Japan. 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 58% of our total long-lived assets as of both March 31, 2024 and December 31, 2023. Long-lived assets include property, plant and equipment, net, right-of-use assets, net and certain other assets.

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, 2023.

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.”

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

(dollars in millions)

For the three months ended March 31, 2024, net product revenues decreased $31 million compared to the prior quarter. This decrease was primarily due to continued softness in demand in our electronics and packaging and our semiconductor markets.

For the three months ended March 31, 2024, net product revenues increased $42 million compared to the same period in the prior year mainly due to lower net revenues in the prior year period as a result of lower order fulfillment in VSD and PSD due to the ransomware event. 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, substantially all of which was recovered in the second and third quarters of 2023, as we shipped orders that were delayed during the first quarter.

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 March 31, 2024, net service revenues increased $6 million compared to the prior quarter mainly related to increased sales to customers in the semiconductor and electronics and packaging markets.

For the three months ended March 31, 2024, net service revenues increased $32 million compared to the same period in the prior year mainly due to lower net revenues in the prior year period as a result of lower service order fulfillment due to the ransomware event.

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

(dollars in millions)

For the three months ended March 31, 2024, net revenues from VSD decreased $15 million compared to the prior quarter, primarily due to volume decreases in the semiconductor market. For the three months ended March 31, 2024, net revenues from VSD increased $28 million compared to the same period in the prior year mainly due to lower net revenues in the prior year period as a result of lower order fulfillment due to the ransomware event. The increase was mainly in the semiconductor and specialty industrial markets.

For the three months ended March 31, 2024, net revenues from PSD were flat compared to the prior quarter. For the three months ended March 31, 2024, net revenues from PSD increased $68 million compared to the same period in the prior year mainly due to lower net revenues in the prior year period as a result of lower order fulfillment due to the ransomware event. The increase was mainly in the semiconductor and specialty industrial markets.

For the three months ended March 31, 2024, net revenues from MSD decreased $11 million compared to the prior quarter, primarily due to a decrease in chemistry sales due to seasonality related to a slowdown in production in China as a result of the Lunar New Year. For the three months ended March 31, 2024, revenues from MSD decreased $22 million compared to the same period in the prior year primarily due to lower palladium prices and the negative impact of foreign currency.

Gross margin

Gross margin for our products increased for the three months ended March 31, 2024, compared to the prior quarter as a result of favorable product mix, lower material costs and lower scrap expense, partially offset by lower revenue volumes and higher warranty costs.

Gross margin for our products increased for the three months ended March 31, 2024 compared to the same period in the prior year, primarily due to higher revenue volumes, higher factory utilization, favorable product mix, lower material costs and lower excess and obsolete inventory charges, partially offset by higher scrap costs.

Gross margin for our services increased for the three months ended March 31, 2024 compared to the prior quarter mainly as a result of favorable product mix, lower excess and obsolete charges and favorable direct labor and overhead absorption.

Gross margin for our services increased for the three months ended March 31, 2024 compared to the same period in the prior year primarily due to favorable product mix, higher revenue volumes, and lower direct labor and overhead costs.

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

Gross margin for VSD increased for the three months ended March 31, 2024, compared to the prior quarter, primarily due to higher factory utilization, lower material costs and lower freight and duty costs, partially offset by lower revenue volumes and unfavorable foreign exchange rates. Gross margin for VSD increased for the three months ended March 31, 2024, compared to the same period in the prior year, primarily due to higher revenue volumes, higher factory utilization, lower material costs and lower excess and obsolete inventory charges, partially offset by unfavorable product mix.

Gross margin for PSD increased for the three months ended March 31, 2024, compared to the prior quarter, primarily due to favorable product mix and lower freight and duty costs, partially offset by unfavorable factory utilization. Gross margin for PSD increased for the three months ended March 31, 2024, compared to the same period in the prior year, primarily due to higher revenue volumes, higher factory utilization, lower freight and duty costs and lower excess and obsolete inventory charges, partially offset by unfavorable product mix and higher scrap costs.

Gross margin for MSD increased for the three months ended March 31, 2024, compared to the prior quarter, primarily due to favorable product mix, lower palladium prices, favorable foreign exchange rates and lower excess and obsolete inventory charges, partially offset by higher warranty costs. Gross margin for MSD increased for the three months ended March 31, 2024, compared to the same period in the prior year, primarily due to lower palladium prices, favorable product mix and lower excess and obsolete inventory charges, partially offset by higher freight and duty charges.

Research and development

(dollars in millions)

For the three months ended March 31, 2024, research and development expenses were flat compared to the prior quarter, and decreased by $2 million, compared to the same period in the prior year, mainly due to lower test equipment costs.

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 three to thirty-six months but may be extended for development of new products.

We continue to make product advancements designed to meet our customers’ evolving needs. We have developed, and continue to develop, new products designed 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 seek to 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)

For the three months ended March 31, 2024, selling, general and administrative expenses increased $10 million, compared to the prior quarter, primarily due to increases of $8 million in compensation-related costs and $2 million in information technology costs.

For the three months ended March 31, 2024, selling, general and administrative expenses decreased $4 million, compared to the same period in the prior year, mainly as a result of a decrease of $7 million of net costs incurred as a result of the ransomware event and a decrease of $4 million in compensation related costs, partially offset by an increase of $3 million in consulting and professional fees and $3 million in information technology costs.

Acquisition and integration costs

(dollars in millions)

Acquisition and integration costs incurred during the three months ended March 31, 2024, December 31, 2023 and March 31, 2023 were related to consulting and professional fees related to the Atotech Acquisition.

Restructuring

(dollars in millions)

Restructuring charges during the three months ended March 31, 2024 and December 31, 2023, primarily related to severance costs as a result of global cost saving initiatives implemented in the fourth quarter of 2023. Restructuring charges during the three months ended March 31, 2023 primarily related to severance costs as a result of a global cost saving initiative implemented in the first quarter of 2023.

Fees and expenses related to amendments to the Term Loan Facility

(dollars in millions)

During the three months ended March 31, 2024, we recorded fees and expenses related to the Incremental Tranche B Loans incurred pursuant to the Second Amendment and, during the three months ended December 31, 2023, we recorded fees and expenses related to the refinancing of the USD Tranche B pursuant to the First Amendment, each as defined and described further below under “Credit Facilities.”

Amortization of intangible assets

(dollars in millions)

31

For the three months ended March 31, 2024, amortization of intangible assets decreased by $8 million, compared to the prior quarter, primarily due to backlog related to MSD being fully amortized in the three months ended December 31, 2023. For the three months ended March 31, 2024, amortization of intangible assets decreased by $19 million, compared to the same period in the prior year, primarily due to backlog related to MSD being fully amortized in the three months ended December 31, 2023 and the write-off of completed technology at our Equipment Solutions Business (“ESB”) reporting unit of PSD in the second quarter of 2023.

Goodwill and intangible asset impairments

(dollars in millions)

On October 31, 2023, we performed our annual goodwill and intangible asset impairment assessment. As a result of a higher weighted average cost of capital, mainly caused by overall higher market interest rates, we recorded non-cash goodwill impairment charges of $48 million at our Electronics (“EL”) reporting unit of MSD and $13 million at our ESB reporting unit. In addition, we recorded a $14 million impairment of in-process research and development allocated to the EL reporting unit. There were no impairments at any of our other reporting units.

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.

Interest expense, net

(dollars in millions)

Interest expense for three months ended March 31, 2024 related to borrowings on the Term Loan Facility, as defined and described further below under “Credit Facilities.” Amounts were comparable in each period reported.

Loss on extinguishment of debt

(dollars in millions)

In connection with the amendments to our Credit Facilities, as defined and described further below under “Credit Facilities,” we recorded losses on extinguishment of debt.

Other (income) expense, net

(dollars in millions)

Other (income) expense, net, for the three months ended March 31, 2024, December 31, 2023, and March 31, 2023 consisted primarily of net foreign exchange and fair value gains and losses.

Provision (benefit) for income taxes

(dollars in millions)

Our effective tax rates for the three months ended March 31, 2024, December 31, 2023, and March 31, 2023 were 23.1%, 14.2%, and 46.6%, respectively. Our effective tax rate for the three months ended March 31, 2024 was higher than the U.S. statutory tax rate, mainly due to an expected increase in foreign withholding taxes and U.S. base erosion and anti-abuse tax, partially offset by the U.S. deduction for foreign derived intangible income (“FDII”) and research and development credits. Our effective tax rate for the three months ended December 31, 2023 was lower than the U.S. statutory tax rate primarily due to the impairment of goodwill and intangible assets. Our effective tax rate for the three months ended March 31, 2023 was higher than the U.S. statutory tax rate mainly due to the geographic mix of income earned by our international subsidiaries being taxed at higher rates than the U.S. statutory tax rate, offset by the U.S. foreign tax credit and the U.S. deduction for FDII.

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 investments at March 31, 2024 and December 31, 2023 totaled $846 million and $875 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 income (loss), 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 $67 million for the three months ended March 31, 2024, resulting from a net income of $15 million, which included non-cash charges of $100 million, mainly the result of a $88 million of depreciation and amortization expense, offset by a net increase in working capital of $48 million. The net increase in working capital was primarily due to a decrease in accounts payable of $32 million, a decrease of $30 million in accrued compensation and a decrease of $12 million in other current and non-current liabilities. This net increase in working capital was partially offset by an increase in income taxes payable of $16 million and an increase in accounts receivable of $16 million.

Net cash used in investing activities was $18 million for the three months ended March 31, 2024, and consisted of $18 million in capital expenditures.

Net cash used in financing activities was $72 million for the three months ended March 31, 2024, primarily due to net proceeds from the Incremental Tranche B Loans in an aggregate principal amount of $761 million which were used in part to prepay the USD Tranche A in full in an aggregate principal amount of $744 million. In addition, there were normal quarterly debt payments and a voluntary prepayment that totaled $62 million and $15 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 quarters of 2024 and 2023, our Board of Directors declared a cash dividend of $0.22 per share, which totaled $15 million in each period, respectively. On May 7, 2024, our Board of Directors declared a quarterly cash dividend of $0.22 per share to be paid on June 7, 2024 to stockholders of record as of May 28, 2024. 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.

Credit Facilities

In connection with the completion of the Atotech Acquisition, on August 17, 2022 (the “Effective Date”) 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 “Credit Agreement”). The Credit Agreement provided for (i) a senior secured term loan facility comprised of three tranches: a $1.0 billion loan (the “USD Tranche A”), a $3.6 billion loan (as further increased, refinanced and otherwise modified as described herein, the “USD Tranche B”) and a €600 million loan (as further increased and otherwise modified as described herein, the “Euro Tranche B” and together with the USD Tranche A and the USD Tranche B, the “Term Loan Facility”), each of which were borrowed in full on the Effective Date, and (ii) a senior secured revolving credit facility of $500 million (as further increased and otherwise modified as described herein, the “Revolving Facility” and, together with the Term Loan Facility, the “Credit Facilities”), with the commitments under each of the foregoing facilities subject to increase from time to time subject to certain conditions. The proceeds of the 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 our existing term loan and revolving credit facilities and certain indebtedness of Atotech.

Initially, borrowings under the Credit Facilities bore 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 Revolving Facility and the USD Tranche B, (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 Term SOFR (plus an applicable credit spread adjustment) for an interest period of one month, plus 1.00%; and (y) a Term SOFR rate (plus an applicable credit spread adjustment) for the interest period relevant to such borrowing, subject 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 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%. Initially, the applicable margins for borrowings under the Credit Facilities were (i) under the USD Tranche A, 1.50% with respect to base rate borrowings and 2.50% with respect to Term SOFR borrowings, (ii) under the USD Tranche B, 1.75% with respect to base rate borrowings and 2.75% with respect to Term SOFR borrowings, (iii) under the Euro Tranche B, 3.00% and (iv) under the Revolving Facility, 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 Credit Facilities, we are required to pay a commitment fee in respect of the unutilized commitments under the Revolving Facility. The commitment fee is 0.375% per annum. The commitment fee is subject to downward adjustment based on our first lien net leverage ratio as of the end of the preceding fiscal quarter. We must also pay customary letter of credit fees and agency fees.

On October 3, 2023 (the “First Amendment Effective Date”), we entered into the First Amendment to Credit Agreement (the “First Amendment”), which refinanced all of the $3.56 billion outstanding USD Tranche B to (i) decrease the applicable margin for the USD Tranche B to 1.50% with respect to base rate borrowings and 2.50% with respect to Term SOFR borrowings and (ii) remove the credit spread adjustment applicable to Term SOFR borrowings of the USD Tranche B.

On January 22, 2024 (the “Second Amendment Effective Date”), we entered into the Second Amendment to Credit Agreement (the “Second Amendment”), pursuant to which we (i) borrowed additional USD Tranche B loans in an aggregate principal amount of $490 million and additional Euro Tranche B loans in an aggregate principal amount of €250 million (collectively, the “Incremental Tranche B Loans”) and (ii) used a portion of the proceeds of the Incremental Tranche B Loans to prepay the USD Tranche A in full in an aggregate principal amount of $744 million.

On February 13, 2024, we entered into the Third Amendment to Credit Agreement (the “Third Amendment”), pursuant to which we increased the available borrowing capacity under the Revolving Facility by $175 million (the “Incremental Revolving Commitments”).

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 on the Effective Date with original issue discount of 2.00% of the principal amounts thereof. The USD Tranche B was issued on the First Amendment Effective Date with original issue discount of 0.25% of the principal amount thereof. The Incremental Tranche B Loans were issued with original issue discount of 0.25% of the principal amount thereof.

We incurred $242 million of deferred financing fees and original issue discount related to the term loans under the Term Loan Facility funded on the Effective Date, which are included in long-term debt, net in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.

We incurred $11 million of deferred financing fees and original issue discount related to the USD Tranche B funded on the First Amendment Effective Date, of which $9 million is included in long-term debt, net in the accompanying consolidated balance sheets and is being amortized to interest expense over the estimated life of the term loans using the effective interest method. We recorded an $8 million loss on extinguishment of debt in connection with the First Amendment.

We incurred $5 million of deferred financing fees and original issue discount related to the Incremental Tranche B Loans funded on the Second Amendment Effective Date, of which $2 million is included in long-term debt, net in the accompanying consolidated balance sheets and is being amortized to interest expense over the estimated life of the term loans using the effective interest method. We recorded a $9 million loss on extinguishment of debt in connection with the Second Amendment.

Under the 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 incurrence 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 Revolving Facility exceeds the aggregate commitments under the 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 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 six months after the Second Amendment Effective Date, we prepay any loans under the USD Tranche B or the Euro Tranche B in connection with a repricing transaction, we must pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid. Additionally, we may voluntarily reduce the unutilized portion of the commitment amount under the Revolving Facility.

Prior to the repayment in full of the USD Tranche A, we were required to make scheduled quarterly payments each equal to 1.25% of the original principal amount of the USD Tranche A. We are required to make scheduled quarterly payments each equal to approximately 0.25% of the aggregate principal amount of each of the Euro Tranche B and the USD Tranche B as of the Second Amendment Effective Date, in each case with the balance due thereunder on the seventh anniversary of the Effective Date.

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

All obligations under the 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 Credit Agreement, we have the ability to incur additional incremental debt facilities in an amount up to (x) the greater of (1) $1,011 million and (2) 75% of consolidated EBITDA, plus (y) an amount equal to the sum of all voluntary prepayments of term loans under the 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 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 5.25 to 1.00 for the fiscal quarters ending December 31, 2023 through September 30, 2024, 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 periods 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 when our aggregate amount of loans outstanding under the Revolving Facility (net of (a) all letters of credit (whether cash collateralized or not) and (b) unrestricted cash of us and our restricted subsidiaries) exceeds 35% of the aggregate amount of all commitments under the 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 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 ourselves 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 we conduct; consolidate or merge; incur liens; and engage in sale-leaseback transactions.

The 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 Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the Credit Facilities and all actions permitted to be taken by a secured creditor. As of March 31, 2024, we were in compliance with all covenants under the Credit Agreement.

We paid certain customary fees to and expenses of (i) JPMorgan Chase Bank, N.A., Barclays Bank PLC, BofA Securities, Inc., Citibank, N.A., HSBC Securities (USA) Inc. and Mizuho Bank, Ltd. in their respective capacities as lead arrangers and bookrunners in connection with the Credit Facilities on the Effective Date, (ii) JPMorgan Chase Bank, N.A. in its capacity as lead arranger in connection with each of the First Amendment, the Second Amendment and the Third Amendment and (iii) the lenders providing the Incremental Revolving Commitments pursuant to the Third Amendment.

As of March 31, 2024, the outstanding principal of the Term Loan Facility was $4.89 billion and the weighted average interest rate was 7.6%. The Revolving Facility has a maturity date in August 2027 while the Incremental Tranche B Loans have a maturity in August 2029. As of March 31, 2024, there were no borrowings under the Revolving Facility.

Lines of Credit and Borrowing Arrangements

Certain of our Japanese subsidiaries have lines of credit and a financing facility with various financial institutions, many of which generally expire and are renewed at three-month intervals with the remaining having no expiration date. These lines of credit and financing facility provided for aggregate borrowings as of March 31, 2024 and December 31, 2023 of up to an equivalent of $20 million and $14 million, respectively. There were no borrowings under these arrangements at March 31, 2024 and December 31, 2023.

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 5 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 Term Loan Facility.

Contractual Obligations

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

Recent Accounting Pronouncements

Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires a public entity to disclose significant segment expenses and other segment items on an annual and interim basis and provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Additionally, it requires a public entity to disclose the title and position of the Chief Operating Decision Maker. The ASU does not change how a public entity identifies its operating segments, aggregates them, or applies the quantitative thresholds to determine its reportable segments. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. A public entity should apply the amendments in this ASU retrospectively to all prior periods presented in the financial statements. We are currently evaluating the impact of this ASU on our disclosures within the consolidated financial statements.

Income Taxes (Topic 740): Improvements to Income Tax Disclosures

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on the rate reconciliation and income taxes paid. ASU No. 2023-09 requires a public business entity (“PBE”) to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. For PBEs, the new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all period presented. We are currently evaluating the impact of this ASU on our consolidated financial statements and related disclosures.

Information concerning market risk is contained in the section entitled “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report. As of March 31, 2024, there were no material changes in our exposure to market risk from December 31, 2023.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (who serves as both our principal executive officer and principal financial officer), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2024. 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 (“SEC”) 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 concluded that, as of March 31, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

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 March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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, 2023 filed with the U.S. Securities and Exchange Commission on February 27, 2024.