Entegris Inc: Form 10-Q for the period ended Sep 28, 2024

The following discussion and analysis of the Company’s condensed consolidated financial condition and results of operations should be read along with the condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). The information, except for historical information, contained in this discussion and analysis or set forth elsewhere in this Quarterly Report includes forward-looking statements that involve risks and uncertainties. You should review the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report”) as well as in our other U.S. Securities and Exchange Commission (“SEC”) filings for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis or set forth elsewhere in this Quarterly Report. The Company assumes no obligation to publicly release the results of any revisions or updates to these forward-looking statements to reflect future events or unanticipated occurrences.

Overview

The Company is a leading supplier of mission-critical advanced materials and process solutions for the semiconductor and other high-technology industries. We leverage our unique breadth of capabilities to help our customers improve their productivity, performance and technology in the most advanced manufacturing environments.

Our business is organized and operated in three operating segments.

• Materials Solutions: MS provides materials-based solutions, such as chemical mechanical planarization (“CMP”) slurries and pads, deposition materials, process chemistries and gases, formulated cleans, etchants and other specialty materials that enable our customers to achieve better device performance and faster time to yield, while providing for lower total cost of ownership.
• Microcontamination Control: MC offers advanced solutions that improve customers’ yield, device reliability and cost by filtering and purifying critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries.
• Advanced Materials Handling: AMH develops solutions that improve customers’ yields by protecting critical materials during manufacturing, transportation, and storage, including products that monitor, protect, transport and deliver critical liquid chemistries, wafers, and other substrates for a broad set of applications in the semiconductor, life sciences and other high-technology industries.

These segments share common business systems and processes, technology centers and technology roadmaps. With the complementary capabilities within and across these segments, we believe we are uniquely positioned to create new, co-optimized and increasingly integrated solutions for our customers. For example, we offer complementary solutions for our customers consisting of advanced deposition materials products, CMP slurries, pads and post-CMP cleaning chemistries from our MS segment, CMP slurry filters from our MC segment, and CMP slurry high-purity packaging and fluid monitoring systems from our AMH segment.

The Company’s fiscal year is the calendar period ending each December 31. The Company’s fiscal quarters consist of 13-week or 14-week periods that end on a Saturday. The Company’s fiscal quarters in 2024 end on March 30, 2024, June 29, 2024, September 28, 2024 and December 31, 2024.

Impact of Conflict Between Israel and Hamas

The military conflict between Israel and militant groups led by Hamas and other tensions and conflicts in the Middle East have caused uncertainty in the global markets, including, but not limited to, disruptions to shipping routes and risks of further escalations. Revenue relating to products manufactured from raw materials or components sourced from or through this region does not constitute a material portion of our business and historically we have not had significant revenue in this region. There continues to be uncertainty regarding the ultimate impact these conflicts may have on the global economy, supply chains, logistics, fuel prices, raw material pricing and our business.

Recent Events

On March 1, 2024, the Company completed the sale of its PIM business. The Company received cash proceeds of $263.2 million, or net proceeds of $256.2 million. See Note 4 to our condensed consolidated financial statements for further discussion.

On March 28, 2024, the Company and certain of its subsidiaries entered into Amendment No. 3 (the “Third Amendment”), with the lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, which amended the Credit and Guaranty Agreement, dated as of November 6, 2018 (as amended and restated as of July 6, 2022 and as subsequently amended on each of March 10, 2023 and September 11, 2023, the “Existing Credit Agreement”), by and among the Company, as borrower, certain subsidiaries of the Company party thereto, as guarantors, the lenders party thereto, and Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent. See Note 7 to our condensed consolidated financial statements for additional information.

On June 26, 2024, the Company and the U.S. Department of Commerce announced entry into a non-binding Preliminary Memorandum of Terms, which provides for up to $75 million in proposed direct funding to the Company under the CHIPS and Science Act of 2022. This funding would support the development of a facility in Colorado Springs, Colorado, which will support the Company’s AMH and MC divisions.

Effective October 30, 2024, the Company realigned its segments in order to align its segment financial reporting with a change in its business structure. Following the operating segment realignment, the Company’s two reportable segments are as follows: (1) Materials Solutions and (2) a new division that combines MC and AMH. The succeeding interim and annual periods will disclose the reportable segments with prior periods recast to reflect the change.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company’s condensed consolidated financial statements are described in Item 7 of our Annual Report. On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to business acquisitions. There have been no material changes in these critical accounting policies and estimates.

Three and Nine Months Ended September 28, 2024 Compared to Three and Nine Months Ended September 30, 2023

The following table compares operating results for the three and nine months ended September 28, 2024 and September 30, 2023, both in dollars and as a percentage of net sales, for each caption.

(Dollars in thousands)

Net sales For the three months ended September 28, 2024, net sales decreased by 9.1% to $807.7 million, compared to $888.2 million for the three months ended September 30, 2023. An analysis of the factors underlying the decrease in net sales is presented in the following table:

(In thousands)

As described in the table above, the decrease in net sales was primarily attributable to (i) the absence of sales totaling $132.3 million associated with divested businesses and (ii) a reduction of $1.3 million of sales attributable to unfavorable foreign currency translations, primarily related to the weakening of the Japanese yen relative to the U.S. dollar compared to the quarter ended September 30, 2023. These sales declines were partially offset by $53.0 million of sales due to increased semiconductor market demand.

On a geographic basis, sales percentage by customers’ country or region for the three months ended September 28, 2024 and September 30, 2023 and the percentage increase (decrease) in sales for the three months ended September 28, 2024 compared to the sales for the three months ended September 30, 2023 were as follows:

The decreases in sales to customers in North America primarily relate to the absence of sales from divested businesses. The increase in sales to customers in Taiwan primarily relates to increased demand of our MC and AMH products. The increase in sales to customers in China primarily relates to increased demand of our MS and AMH products. The increase in sales to customers in South Korea primarily relates to increased demand of our MS and MC products, partially offset by decreased demand of our AMH products. The decrease in sales to customers in Japan primarily relates to decreased demand of our MC products, partially offset by increased demand of our MS products. The decreases in sales to customers in Europe primarily relate to the absence of sales from divested businesses. The decrease in sales to customers in Southeast Asia primarily relates to the absence of sales from divested businesses.

Net sales for the nine months ended September 28, 2024 were $2,391.4 million, compared to $2,711.6 million for the nine months ended September 30, 2023. An analysis of the factors underlying the decrease in net sales is presented in the following table:

(In thousands)

As described in the table above, the decrease in net sales was primarily attributable to (i) the absence of sales totaling $387.4 million associated with divested businesses and (ii) a reduction of $19.4 million of sales attributable to unfavorable foreign currency translation effects, primarily due to the weakening of the Japanese yen relative to the U.S. dollar compared to the nine-month period ended September 30, 2023. These sales were partially offset by $86.6 million of sales due to increased semiconductor market demand.

On a geographic basis, sales percentage by customers’ country or region for the nine months ended September 28, 2024 and September 30, 2023 and the percentage increase (decrease) in sales for the nine months ended September 28, 2024 compared to the sales for the nine months ended September 30, 2023 were as follows:

The decreases in sales to customers in North America primarily relate to the absence of sales from divested businesses. The increase in sales to customers in Taiwan primarily relates to increased demand of our MC products. The increase in sales to customers in China primarily relates to increased demand for products from each of our segments. The decrease in sales to customers in South Korea primarily relates to decreased demand of our AMH and MS products. The decrease in sales to customers in Japan primarily relates to decreased demand of our MC products. The decrease in sales to customers in Europe primarily relates to the absence of sales from divested businesses and lower sales demand of our AMH products. The decrease in sales to customers in Southeast Asia primarily relates to the absence of sales from divested businesses, partially offset by increased demand of our MS products.

Gross margin The following table sets forth gross margin (gross profit as a percentage of net revenues):

Gross margin increased by 4.7 percentage points for the three months ended September 28, 2024, compared to the same period in the prior year. Gross margin increased primarily due to positive impact of the divested businesses and improved plant performance.

Gross margin increased by 3.5 percentage points for the nine months ended September 28, 2024, compared to the same period in the prior year. Gross margin increased primarily due to positive impact of the divested businesses and improved plant performance.

Selling, general and administrative expenses Selling, general and administrative (“SG&A”) expenses were $108.5 million in the three months ended September 28, 2024, compared to $116.1 million in the year-ago period. The factors underlying the change in SG&A expenses are presented in the following table:

(In thousands)

SG&A expenses were $337.0 million in the nine months ended September 28, 2024, compared to $431.5 million in the year-ago period. The factors underlying the change in SG&A expenses are presented in the following table:

(In thousands)

Engineering, research and development expenses The Company’s engineering, research and development (“ER&D”) efforts focus on the support or extension of current product lines and the development of new products and manufacturing technologies. ER&D expenses were $80.9 million in the three months ended September 28, 2024 compared to $66.8 million in the year-ago period. The factors underlying ER&D expenses are presented in the following table:

(In thousands)

ER&D expenses were at $234.7 million in the nine months ended September 28, 2024 compared to $209.7 million in the year-ago period. The factors underlying ER&D expenses are presented in the following table:

(In thousands)

Amortization expenses Amortization of intangible assets was $46.2 million in the three months ended September 28, 2024, compared to $51.2 million for the three months ended September 30, 2023. The decrease primarily reflects the absence of amortization for certain identifiable intangible assets acquired in previous acquisitions that became fully amortized.

Amortization of intangible assets was $143.9 million in the nine months ended September 28, 2024, compared to $163.5 million for the nine months ended September 30, 2023. The decrease primarily reflects the absence of amortization for certain identifiable intangible assets acquired in previous acquisitions that became fully amortized and the intangible assets disposed of as part of the EC disposition.

Goodwill impairment The Company recorded a goodwill impairment charge of $15.9 million and $104.8 million in the three and nine months ended September 30, 2023, respectively. See Note 3 to our condensed consolidated financial statements for further discussion.

Gain on termination of alliance agreement On June 5, 2023, the Company announced the termination of an alliance agreement between the Company and MacDermid Enthone. The Company recognized a pre-tax gain, net of $154.8 million in the nine months ended September 30, 2023.

Interest expense Interest expense includes interest associated with debt outstanding and the amortization of debt issuance costs and original issuance discounts associated with such borrowings. Interest expense was $51.7 million in the three months ended September 28, 2024, compared to $77.8 million in the three months ended September 30, 2023. The decrease primarily reflects lower interest expense related to lower average debt balances for the period due to repayments on the Company’s outstanding debt.

Interest expense was $162.7 million in the nine months ended September 28, 2024, compared to $244.9 million in the nine months ended September 30, 2023. The decrease primarily reflects lower interest expense related to lower average debt balances for the period due to repayments on the Company’s outstanding debt.

Other (income) expense, net Other income, net was $0.2 million in the three months ended September 28, 2024 and consisted mainly of foreign currency transaction gains of $2.1 million, partially offset by other expenses of $1.9 million. Other expense, net was $10.2 million in the three months ended September 30, 2023 and consisted mainly of a loss of extinguishment of debt of $4.5 million associated with the repayments on the senior secured term loan facility and foreign currency transaction losses of $4.9 million.

Other expense, net was $17.1 million in the nine months ended September 28, 2024 and consisted mainly of a loss of extinguishment and modification of debt of $12.3 million associated with debt prepayments and the Third Amendment (see Note 7 to the Company’s condensed consolidated financial statements), foreign currency transaction losses of $2.2 million and other expenses of $2.5 million. Other expense, net was $13.3 million in the nine months ended September 30, 2023 and consisted mainly of loss of extinguishment and modification of debt of $12.9 million associated with the repayments on the Company’s bridge credit facility and senior secured term loan facility and the amendment of the Company’s Existing Credit Agreement and foreign currency transaction losses of $11.2 million, partially offset by net proceeds received of $10.9 million resulting from the termination of the definitive agreement with Infineum.

Income tax expense Income tax expense was $8.2 million and $18.3 million in the three and nine months ended September 28, 2024, respectively, compared to income tax (benefit) expense of $(2.1) million and $2.9 million in the three and nine months ended September 30, 2023, respectively. The Company’s effective income tax rate was 9.5% and 8.7% for the three and nine months ended September 28, 2024, respectively, compared to (6.8)% and 2.0% for the three and nine months ended September 30, 2023, respectively.

The changes in the effective tax rate for the three and nine months ended September 28, 2024 compared to the prior year primarily relate to discrete divestiture activity recorded during the three and nine months ended September 30, 2023 and the integration of the CMC Materials acquisition.

Net income Due to the factors noted above, the Company recorded net income of $77.6 million, or $0.51 per diluted share, in the three months ended September 28, 2024, compared to net income of $33.2 million, or $0.22 per diluted share, in the three months ended September 30, 2023.

In the nine months ended September 28, 2024, the Company recorded net income of $190.5 million, or $1.26 per diluted share, compared to net income of $142.7 million, or $0.95 per diluted share, in the nine months ended September 30, 2023.

Non-GAAP Financial Measures The Company’s condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. See the section entitled “Non-GAAP Information” below for additional detail, including the definition of certain non-GAAP financial measures and the reconciliation of these non-GAAP measures to the Company’s GAAP measures.

The Company’s principal non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and non-GAAP earnings per share (“Non-GAAP EPS”).

The following table compares non-GAAP financial measures for the three and nine months ended September 28, 2024 and September 30, 2023, both in dollars and as a percentage of net sales, for each caption.

(In thousands)

28

The decrease in Adjusted Operating Income and Adjusted EBITDA for the three months ended September 28, 2024 compared to the year-ago period is generally attributable to higher ER&D expenses. The decrease in Adjusted Operating Income and Adjusted EBITDA for the nine months ended September 28, 2024 compared to the year-ago period is generally attributable to the decreases in sales and higher ER&D expenses, partially offset by lower SG&A expenses. The increase in Non-GAAP EPS for the three months ended September 28, 2024 compared to the year-ago period is primarily attributable to lower interest expense, partially offset by higher ER&D expenses. The increase in Non-GAAP EPS for the nine months ended September 28, 2024 compared to the year-ago period is primarily attributable to lower interest expense and SG&A expenses, partially offset by a decrease in sales and higher ER&D expenses.

Segment Analysis

The Company currently reports its financial performance based on three reporting segments. The following is a discussion of the results of operations of these three business segments. See Note 13 to the condensed consolidated financial statements for additional information on the Company’s three segments.

The following table presents selected net sales and segment profit data for the Company’s three reportable segments, along with unallocated general and administrative expenses, for the three and nine months ended September 28, 2024 and September 30, 2023.

(In thousands)

Materials Solutions (MS)

For the third quarter of 2024, MS net sales decreased to $346.6 million, down 20% compared to $435.5 million in the comparable period last year. The sales decrease was driven primarily by the absence of $132.3 million in sales associated with divested businesses included in the prior year sales, partially offset by increased sales from polishing solution products. MS reported a segment profit of $71.7 million in the third quarter of 2024, up 26% from $57.0 million segment profit in the year-ago period. The segment profit increase was primarily associated with the absence of a goodwill impairment charge of $15.9 million related to the EC reporting unit in the year-ago period (see Note 3 to our condensed consolidated financial statements for further discussion).

For the nine months ended September 28, 2024, MS net sales decreased to $1,039.0 million, down 22% compared to $1,324.5 million in the comparable period last year. The sales decrease was driven primarily by the absence of $387.4 million in sales associated with divested businesses included in the prior year sales, partially offset by increased sales from polishing solution products. MS reported a segment profit of $209.1 million for the nine months ended September 28, 2024, a decrease of 14.0% from $243.2 million segment profit in the year-ago period. The segment profit decrease was primarily associated with (1) the absence of a $154.8 million gain resulting from the termination of the alliance agreement with MacDermid Enthone in the year-ago period and (2) a $13.0 million long-lived asset impairment charge in the first quarter of 2024 related to the long-lived assets of a small, industrial specialty chemicals business, partially offset with (3) the absence of a goodwill impairment charge of $104.8 million related to the EC reporting unit in the year-ago period, (4) the absence of $28.6 million loss on sale of business and held-for-sale in the year-ago period, (5) the absence of $7.6 million related to restructuring charges, (6) $4.3 million gain associated with sale of the PIM business, and (7) improved plant performance and volume leverage.

Microcontamination Control (MC)

For the third quarter of 2024, MC net sales increased to $287.0 million compared to $286.2 million in the comparable period last year. The sales increase was mainly due to increased sales primarily from gas purification products, partially offset by lower sales of our liquid filtration products. MC reported a segment profit of $96.7 million in the third quarter of 2024, down 4% from $101.1 million in the year-ago period. The segment profit decrease was primarily due to higher ER&D costs and increased costs associated with the ramp up of our new facility in Taiwan.

For the nine months ended September 28, 2024, MC net sales increased to $848.6 million, up 1% compared to $839.1 million in the comparable period last year. The sales increase was mainly due to increased sales primarily from gas purification products, partially offset by lower sales of our liquid filtration and gas filtration products. MC reported a segment profit of $277.0 million in the nine months ended September 28, 2024, down 7% from $297.8 million in the year-ago period. The segment profit decrease was primarily due to higher ER&D costs and increased costs associated with the ramp up of our new facility in Taiwan.

Advanced Materials Handling (AMH)

For the third quarter of 2024, AMH net sales increased to $182.2 million, up 1% compared to $180.2 million in the comparable period last year. The sales increase was due to higher sales of our microenvironment solution products, partially offset by lower sales of our fluid handling products. AMH reported a segment profit of $30.6 million in the third quarter of 2024, down 3% from $31.6 million in the year-ago period. The segment profit decrease was primarily due to higher employee costs.

For the nine months ended September 28, 2024, AMH net sales decreased to $533.3 million, down 10% compared to $589.5 million in the comparable period last year. The sales decrease was due to lower sales across most product lines related to lower semiconductor market demand. AMH reported a segment profit of $84.2 million in the nine months ended September 28, 2024, down 27% from $115.6 million in the year-ago period. The segment profit decrease was primarily due to lower sales volume and increased costs associated with the ramp up of our new facility in Taiwan.

Unallocated general and administrative expenses

Unallocated general and administrative expenses totaled $16.6 million in the third quarter of 2024, compared to $21.4 million in the comparable period last year. The $4.9 million decrease is primarily due to a $9.9 million decrease in integration, deal and transaction costs related to the acquisition of CMC Materials, partially offset by a $2.6 million increase in employee costs, primarily due to the timing of the annual equity award grant and $3.0 million increase in non-income tax expense.

Unallocated general and administrative expenses totaled $42.4 million in the nine months ended September 28, 2024, compared to $95.0 million in the comparable period last year. The $52.5 million decrease is primarily due to a $45.3 million decrease in integration, deal and transaction costs related to the acquisition of CMC Materials and a decrease of $6.7 million in employee costs, primarily due to the timing of the annual equity award grant.

Liquidity and Capital Resources

We consider the following when assessing our liquidity and capital resources:

In thousands

The Company has historically financed its operations and capital requirements through cash flow from its operating activities, long-term debt, lease financing, revolving credit facility and borrowings under domestic and international short-term lines of credit.

Based on our analysis, we believe our existing balances of domestic cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months and for the longer term.

We may seek to take advantage of opportunities to raise additional capital through debt financing or through public or private sales of securities. If in the future our available liquidity is not sufficient to meet the Company’s operating and debt service obligations as they come due, management would need to pursue alternative arrangements through additional equity or debt financing in order to meet the Company’s cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. To date, in fiscal year 2024, we have not experienced difficulty accessing capital and credit markets, but future volatility in the capital and credit markets may increase costs associated with issuing debt instruments or affect our ability to access those markets. In addition, it is possible that our ability to access the capital and credit markets could be limited at a time when we would like, or need, to do so, which could have an adverse impact on our ability to refinance maturing debt and/or react to changing economic and business conditions.

In summary, our cash flows for each period were as follows:

(in thousands)

Operating activities Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities totaled $455.6 million in the nine months ended September 28, 2024, compared to $486.4 million in the nine months ended September 30, 2023. This decrease was driven by a $123.5 million change in operating assets and liabilities, partially offset by a $92.8 million increase of net income adjusted for non-cash reconciling items.

Changes in operating assets and liabilities for the nine months ended September 28, 2024 were driven by changes in trade accounts receivable, inventories, and accounts payable and accrued liabilities. The change in trade accounts receivables was mainly due to increased sales at the end of the period. The change in inventories was mainly due to an increase in business activity. The change in accounts payable and accrued liabilities was primarily driven by timing of payments to vendors.

Investing activities Cash flows provided by investing activities totaled $40.8 million in the nine months ended September 28, 2024, compared to cash flows used in investing activities of $22.7 million in the nine months ended September 30, 2023. The increase resulted primarily from an increase in proceeds from divestitures of $116.5 million and a reduction of cash paid for acquisition of property, plant and equipment of $120.1 million, partially offset by the absence of net proceeds from termination of the alliance agreement with MacDermid Enthone of $169.3 million.

Financing activities Cash used in financing activities totaled $523.6 million during the nine months ended September 28, 2024, compared to cash used in financing activities of $417.5 million during the nine months ended September 30, 2023. The increase was primarily due to the net debt activity, which was a use of cash of $473.8 million during the nine months ended September 28, 2024 compared to $390.0 million during the nine months ended September 30, 2023 and lower proceeds from the issuance of common stock of $16.6 million compared to the previous period.

Our total dividend payments were $45.5 million in the nine months ended September 28, 2024 compared to $45.2 million in the nine months ended September 30, 2023. We have paid a cash dividend in each quarter since the fourth quarter of 2017. On October 16, 2024, the Company’s board of directors declared a quarterly cash dividend of $0.10 per share to be paid on November 20, 2024 to shareholders of record on the close of business on October 30, 2024.

Other Liquidity and Capital Resources Considerations

Debt

(In thousands)

On March 28, 2024, the Company amended its Existing Credit Agreement. The Third Amendment provides for, among other things, the refinancing of the Company’s outstanding term loans B under the Term Loan Facility in an aggregate principal amount of $955.0 million with a new tranche of term loans B in an aggregate principal amount of $955.0 million. The amended loans bear interest at a rate per annum equal to, at the Company’s option, either (i) the SOFR plus an applicable margin of 1.75%, which is a reduction from the applicable margin of 2.50% prior to the amendment, or (ii) a base rate plus an applicable margin of 0.75%, which is a reduction from the applicable margin of 1.50% prior to the amendment. In connection with the Third Amendment, the Company made a payment of $354.5 million on the term loans B. See Note 7 to our condensed consolidated financial statements for further discussion.

During the nine months ended September 28, 2024, the Company repaid $473.8 million, net of borrowings under the term loans B under the Term Loan Facility.

Through September 28, 2024, the Company was in compliance with the financial covenants under its debt arrangements.

The Company has commitments under our senior secured revolving credit facility due 2027 (the “Revolving Facility”) of $575.0 million. The Revolving Facility bears interest at a rate per annum equal to, at the Company’s option, either a base rate (such as prime rate) or SOFR, plus, in each case, an applicable margin. During the nine months ended September 28, 2024, the Company borrowed and repaid $30.0 million under this Revolving Facility and no balance was outstanding at September 28, 2024.

The Company also has a line of credit with one bank that provides for borrowings in Japanese yen for the Company’s Japanese subsidiaries, equivalent to an aggregate of approximately $7.0 million. During the nine months ended September 28, 2024, there were no borrowings under this line of credit and no balance was outstanding at September 28, 2024.

Cash and cash equivalents and cash requirements

(In thousands)

Our cash and cash equivalents include cash on hand and highly liquid debt securities with original maturities of three months or less, which are valued at cost and approximate fair value. We utilize a variety of funding strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We have accrued taxes on any earnings that are not indefinitely reinvested.

Cash requirements

We have cash requirements to support working capital needs, capital expenditures, business acquisitions, contractual obligations, commitments, principal and interest payments on debt and other liquidity requirements associated with our operations. We generally intend to use available cash and funds generated from our operations to meet these cash requirements, but in the event that additional liquidity is required we may also borrow under our Revolving Facility.

There were no material changes to the cash requirements from our Annual Report that were outside the ordinary course of business, except for the principal repayments of $473.8 million made on the Term Loan Facility as discussed above.

Recently adopted accounting pronouncements Refer to Note 1 to the Company’s condensed consolidated financial statements for a discussion of recently adopted accounting pronouncements.

Recently issued accounting pronouncements Refer to Note 1 to the Company’s condensed consolidated financial statements for a discussion of recently issued but not yet adopted accounting pronouncements.

Non-GAAP Information The Company’s condensed consolidated financial statements are prepared in conformity with GAAP.

The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. These non-GAAP financial measures include Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and Non-GAAP EPS, as well as certain other supplemental non-GAAP financial measures included in the discussion of the Company’s financial results.

Adjusted EBITDA is defined by the Company as net income before, as applicable, (1) equity in net loss of affiliate, (2) income tax expense, (3) interest expense, (4) interest income, (5) other (income) expense, net, (6) goodwill impairment, (7) deal and transaction costs, (8) integration costs, (9) restructuring costs, (10) acquired tax equalization asset reduction, (11) (gain) loss on sale of certain businesses and held-for-sale, net, (12) gain on termination of alliance agreement, (13) impairment of long-lived assets, (14) amortization of intangible assets and (15) depreciation. Adjusted Operating Income is defined by the Company as Adjusted EBITDA exclusive of the depreciation addback noted above. The Company also utilizes non-GAAP financial measures whereby Adjusted EBITDA and Adjusted Operating Income are each divided by the Company’s net sales to derive Adjusted EBITDA Margin and Adjusted Operating Margin, respectively.

Non-GAAP Net Income is defined by the Company as net income before, as applicable, (1) goodwill impairment, (2) deal and transaction costs, (3) integration costs, (4) restructuring costs, (5) acquired tax equalization asset reduction, (6) loss on extinguishment of debt and modification, (7) (gain) loss on sale of certain businesses and held-for-sale, net, (8) gain on termination of alliance agreement, (9) Infineum termination fee, net, (10) impairment of long-lived assets, (11) amortization of intangible assets, and (12) the tax effect of the foregoing adjustments to net income. Non-GAAP EPS is defined as our Non-GAAP Net Income divided by our diluted weighted-average shares outstanding.

The Company provides supplemental non-GAAP financial measures to help management and investors to better understand our business and believes these measures provide investors and analysts additional meaningful information for the assessment of the Company’s ongoing results. Management also uses these non-GAAP measures to assist in the evaluation of the performance of the Company’s business segments and to make operating decisions.

Management believes the Company’s non-GAAP measures help indicate the Company’s baseline performance before certain gains, losses or other charges that may not be indicative of the Company’s business or future outlook and offer a useful view of business performance in that the measures provide a more consistent means of comparing performance. The Company believes the non-GAAP measures aid investors’ overall understanding of the Company’s results by providing a higher degree of transparency for such items and providing a level of disclosure that will help investors understand how management plans, measures and evaluates the Company’s business performance. Management believes that the inclusion of non-GAAP measures provides greater consistency in its financial reporting and facilitates investors’ understanding of the Company’s historical operating trends by providing an additional basis for comparisons to prior periods.

Management uses Adjusted EBITDA and Adjusted Operating Income to assist it in evaluations of the Company’s operating performance by excluding items that management does not consider as relevant in the results of its ongoing operations. Internally, these non-GAAP measures are used by management for planning and forecasting purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; for evaluating the effectiveness of operational strategies; and for evaluating the Company’s capacity to fund capital expenditures, secure financing and expand our business.

In addition, and as a consequence of the importance of these non-GAAP financial measures in managing our business, the Company’s board of directors uses non-GAAP financial measures in the evaluation process to determine management compensation.

The Company believes that certain analysts and investors use Adjusted EBITDA, Adjusted Operating Income and Non-GAAP EPS as supplemental measures to evaluate the overall operating performance of firms in the Company’s industry. Additionally, lenders or potential lenders use Adjusted EBITDA measures to evaluate the Company’s creditworthiness.

The presentation of non-GAAP financial measures is not meant to be considered in isolation, as a substitute for, or superior to, financial measures or information provided in accordance with GAAP. Management strongly encourages investors to review the Company’s condensed consolidated financial statements in their entirety and to not rely on any single financial measure.

Management notes that the use of non-GAAP measures has limitations, including but not limited to:

First, non-GAAP financial measures are not standardized. Accordingly, the methodology used to produce the Company’s non-GAAP financial measures may differ notably from the methodology used by other companies and may not be directly comparable to non-GAAP measures reported by other companies.

Second, the Company’s non-GAAP financial measures exclude items such as amortization and depreciation that are recurring. Amortization of intangibles and depreciation have been, and will continue to be for the foreseeable future, a significant recurring expense with an impact upon the Company’s results of operations, notwithstanding the lack of immediate impact upon cash flows.

Third, there is no assurance that the Company will not have future charges for goodwill impairment, restructuring activities, deal costs, integration costs, or similar items and, therefore, may need to record additional charges (or credits) associated with such items, including the tax effects thereon. The exclusion of these items in the Company’s non-GAAP measures should not be construed as an implication that these costs are unusual, infrequent or non-recurring.

Management considers these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP financial measures and evaluating these non-GAAP financial measures together with their most directly comparable financial measures calculated in accordance with GAAP. The calculations of Adjusted EBITDA, Adjusted Operating Income, Non-GAAP Net Income and Non-GAAP EPS, and reconciliations between these financial measures and their most directly comparable GAAP equivalents, are presented below in the accompanying tables.

Reconciliation of GAAP Net Income to Adjusted Operating Income and Adjusted EBITDA

(In thousands)

1 Non-cash impairment charges associated with goodwill.

2 Deal and transaction costs associated with the CMC Materials acquisition and completed divestitures.

3 Represents professional and vendor fees recorded in connection with services provided by consultants, accountants, lawyers and other third-party service providers to assist us in integrating CMC Materials into our operations.

4 Represents severance charges related to the integration of the CMC Materials acquisition.

5 Represents retention charges related directly to the CMC Materials acquisition and completed divestitures, and are not part of our normal, recurring cash operating expenses.

6 Represents other employee-related costs and other costs incurred relating to the CMC Materials acquisition and the completed divestitures. These costs arise outside of the ordinary course of our continuing operations.

7 Restructuring charges resulting from cost saving initiatives.

8 Represents an asset reduction of an acquired tax equalization asset from the CMC Materials acquisition.

9 (Gain) loss from the sale of certain businesses and held-for-sale assets, net.

10 Gain on termination of the alliance agreement with MacDermid Enthone.

11 Impairment of long-lived assets.

12 Non-cash amortization expense associated with intangibles acquired in acquisitions.

Reconciliation of GAAP Net Income and Earnings per Share to Non-GAAP Net Income and EPS

(In thousands, except per share data)

1 Non-cash impairment charges associated with goodwill.

2 Deal and transaction costs associated with the CMC Materials acquisition and completed divestitures.

3 Represents professional and vendor fees recorded in connection with services provided by consultants, accountants, lawyers and other third-party service providers to assist us in integrating CMC Materials into our operations.

4 Represents severance charges related to the integration of the CMC Materials acquisition.

5 Represents retention charges related directly to the CMC Materials acquisition and completed divestitures, and are not part of our normal, recurring cash operating expenses.

6 Represents other employee related costs and other costs incurred relating to the CMC Materials acquisition and the completed divestitures. These costs arise outside of the ordinary course of our continuing operations.

7 Restructuring charges resulting from cost saving initiatives.

8 Represents an asset reduction of an acquired tax equalization asset from the CMC Materials acquisition.

9 Non-recurring loss on extinguishment of debt and modification of our Existing Credit Agreement.

10 (Gain) loss from the sale of certain businesses and held-for-sale assets, net.

11 Gain on termination of the alliance agreement with MacDermid Enthone.

12 Non-recurring gain from Infineum termination fee.

13 Impairment of long-lived assets.

14 Non-cash amortization expense associated with intangibles acquired in acquisitions.

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

We are exposed to financial market risks, including fluctuations in interest rate and foreign currency exchange rates. For information about our exposure to market risks, see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report. There have been no material changes to the market risk disclosures contained therein.

(a) Evaluation of disclosure controls and procedures.

The Company’s management, including the Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or the Exchange Act) as of September 28, 2024. The term “disclosure controls and procedures” means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on management’s evaluation (with the participation of the Company’s CEO and CFO), as of September 28, 2024, the Company’s CEO and CFO have concluded that the disclosure controls and procedures used by the Company were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

There have been no significant changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the foregoing evaluation of disclosure controls and procedures that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described in Part I, Item 1A. “Risk Factors” in our Annual Report, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or future results. There have been no material changes in the risk factors described in our Annual Report.