# ENTEGRIS INC (ENTG) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ENTEGRIS INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1101302/000110130222000010/entg-20211231.htm
Accession: 0001101302-22-000010
Filing date: 2022-02-04
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ENTG/
All MD&A years: /company/ENTG/mda/
Next year: /company/ENTG/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the Company’s consolidated financial condition and results of operations should be read along with the consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve numerous risks and uncertainties, including, but not limited to, those described in Item 1A, “Risk Factors” and the “Cautionary Statements” section of this Item 7 below. You should review Item 1A “Risk Factors” of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The Company has elected to omit discussion of the earliest of the three years covered by the consolidated financial statements presented. Information pertaining to fiscal year 2019 results of operations and the year-over-year comparison of changes in our Financial Condition and Results of Operations as of and for the year ended December 31, 2020 and 2019 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed on February 4, 2021.

Cautionary Statements

This Annual Report on Form 10-K and the portions of the Company’s Definitive Proxy Statement incorporated by reference in this Annual Report on Form 10-K contain “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should,” “may,” “will,” “would” or the negative thereof and similar expressions are intended to identify such forward-looking statements. These forward-looking statements may include statements about the impact of the Company’s pending merger with CMC; the COVID-19 pandemic on the Company’s operations and markets, including supply chain issues related thereto; future period guidance or projections; the Company’s performance relative to its markets, including the drivers of such performance; market and technology trends, including the duration and drivers of any growth trends and the impact of the COVID-19 pandemic on such trends; the development of new products or new applications for existing products and the success of their introductions; the focus of the Company’s engineering, research and development projects and levels of spending related thereto; the Company’s ability to execute on its business strategies, including with respect to the Company’s expansion of its manufacturing presence in Taiwan; the Company’s capital allocation strategy, which may be modified at any time for any reason, including share repurchases, dividends, debt repayments and potential acquisitions; the impact of the acquisitions the Company has made and commercial partnerships the Company has established; future capital and other expenditures, including estimates thereof; the Company’s expected tax rate; the impact, financial or otherwise, of any organizational changes; the impact of accounting pronouncements; quantitative and qualitative disclosures about market risk; and other matters. These forward-looking statements are based on current management expectations and assumptions only as of the date of this Annual Report on Form 10-K, are not guarantees of future performance and involve substantial risks and uncertainties that are difficult to predict and that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These risks and uncertainties include, but are not limited to, the risk factors and additional information described in this Annual Report on Form 10-K under the caption “Risk Factors,” elsewhere in this Annual Report on Form 10-K and in the Company’s other periodic filings. Except as required under the federal securities laws and the rules and regulations of the SEC, the Company undertakes no obligation to update publicly any forward-looking statements or information contained herein, which speak as of their respective dates.

Overview

This overview is not a complete discussion of the Company’s financial condition, changes in financial condition and results of operations; it is intended merely to facilitate an understanding of the most salient aspects of its financial condition and operating performance and to provide a context for the detailed discussion and analysis that follows, and must be read in its entirety in order to fully understand the Company’s financial condition and results of operations.

The Company is a leading supplier of advanced materials and process solutions for the semiconductor and other high-technology industries. Our mission is to help our customers improve their productivity, performance and technology by providing enhanced materials and process solutions for the most advanced manufacturing environments. We leverage our unique breadth of capabilities to create mission-critical microcontamination control products, specialty chemicals and advanced materials handling solutions that maximize manufacturing yields, reduce manufacturing costs and enable higher device performance for our customers.

Our customized materials solutions enable the highest levels of performance essential to the manufacture of semiconductors. As our customers introduce more complex architectures and search for new materials with better electrical and structural properties to improve the performance of their devices, they rely on Entegris as a trusted partner to address these challenges. We understand these challenges and have solutions to address them, such as our advanced deposition materials, implant gases, formulated cleaning chemistries and selective etch chemistries. Our customers also require greater end-to-end materials purity and integrity in their manufacturing process that, when combined with smaller dimensions and more complex architectures, can be challenging to achieve. To enable the use of new metals and the further miniaturization of chips, and to maximize yield and

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increase long-term device reliability, we provide products such as our advanced liquid and gas filtration and purification products that help to selectively remove new classes of contaminants throughout the semiconductor supply chain. In addition, to ensure purity levels are maintained across the entire supply chain, from bulk manufacturing, to transportation to and delivery through a fab, to application onto the wafer, we provide high-purity packaging and materials handling products.

Our business is organized and operated in three operating segments, which align with the key elements of the advanced semiconductor manufacturing ecosystem. The Specialty Chemicals and Engineered Materials, or SCEM, segment provides high-performance and high-purity process chemistries, gases, and materials, and safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes. The Microcontamination Control, or MC, segment offers solutions to filter and purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries. The Advanced Materials Handling, or AMH, segment develops solutions to monitor, protect, transport, and deliver critical liquid chemistries, wafers and other substrates for a broad set of applications in the semiconductor industry, life sciences and other high-technology industries. While these segments have separate products and technical know-how, they share common business systems and processes, technology centers, and strategic and technology roadmaps. With the technology, capabilities and complementary product portfolios from these three segments, we are uniquely positioned to collaborate across divisions to create new, co-optimized and increasingly integrated solutions for our customers. For example, our SCEM segment offers a highly selective nitride etch chemistry, our MC segment provides a liquid filter that is specifically matched to that formulation and our AMH segment ensures the integrity of the product as it is moved to and through the fab environment.

Key operating factors Key factors which management believes have the largest impact on the overall results of operations of the Company include:

•Level of sales Since a significant portion of the Company’s product costs (except for raw materials, purchased components and direct labor) are largely fixed in the short-to-medium term, an increase or decrease in sales affects gross profits and overall profitability significantly. Also, increases or decreases in sales and operating profitability affect certain costs such as incentive compensation and commissions, which are highly variable in nature. The Company’s sales are subject to the effects of industry cyclicality, technological change, substantial competition, pricing pressures and foreign currency fluctuation.

•Variable margin on sales The Company’s variable margin on sales is determined by selling prices and the costs of manufacturing and raw materials. This is affected by a number of factors, which include the Company’s sales mix, purchase prices of raw material (especially polymers, membranes, stainless steel and purchased components), domestic and international competition, direct labor costs, and the efficiency of the Company’s production operations, among others.

•Fixed cost structure The Company’s operations include a number of large fixed or semi-fixed cost components, which include salaries, indirect labor and benefits, facility costs, lease expenses, and depreciation and amortization. It is not possible to vary these costs easily in the short term as volumes fluctuate. Accordingly, increases or decreases in sales volume can have a large effect on the usage and productivity of these cost components, resulting in a large impact on the Company’s profitability.

Impact of COVID-19 on our Business

The COVID-19 pandemic continues to impact the global economy and cause significant macroeconomic uncertainty. Infection rates vary across the countries in which we operate. Governmental authorities have continued to implement numerous and constantly evolving measures to try to contain the virus, such as travel bans and restrictions, masking recommendations and mandates, vaccine recommendations and mandates, limits on gatherings, quarantines, shelter-in-place orders and business shutdowns. We have taken proactive, aggressive action to protect the health and safety of our employees, customers, partners and suppliers, consistent with the latest and evolving governmental guidelines. We expect to continue to implement appropriate measures until the COVID-19 pandemic is adequately contained. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations and requirements or as we otherwise see fit to protect the health and safety of our employees, customers, partners and suppliers.

While certain of our operations have from time-to-time been temporarily affected by government-mandated restrictions, to date we have not experienced significant adverse impacts to our global operations as a result of the COVID-19 pandemic. Broader impacts of the pandemic have included a more dynamic supply chain and global logistics environment, and we have experienced instances of raw material constraints, higher freight costs and delivery delays in both inbound shipments of raw materials and outgoing shipments of finished products to customers. While we continue to focus on mitigating risks to our operations and supply chain in the current industry environment, we expect some of the foregoing challenges to linger. From a

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demand perspective, during 2021 we continued to see strong demand for our leading-edge products, largely driven by accelerated digitalization, 5G applications and high-performance computing.

In the current circumstances, given the dynamic nature of the situation, any impact on our financial condition, results of operations or cash flows in the future continues to be difficult to estimate and predict, as it depends on future events that are highly uncertain and cannot be predicted with accuracy, including, but not limited to, the duration and continued spread of the outbreak, its severity, potential additional waves of infection, the emergence of more virulent or more dangerous strains of the virus, the actions taken to mitigate the virus or its impact, the development, distribution, efficacy and acceptance of vaccines worldwide, how quickly and to what extent normal economic and operating conditions can resume, the broader impact that the pandemic is having on the economy and our industry and specific implications the pandemic may have on our suppliers and on global logistics. See Item 1A, “Risk Factors,” for additional information regarding risks associated with the COVID-19 pandemic, including under the caption “The COVID-19 pandemic and continuing governmental responses could materially adversely affect our financial condition and results of operations.”

Overall Summary of Financial Results for the Year Ended December 31, 2021

Total net sales for 2021 were $2,298.9 million, up $439.6 million, or 24%, from sales of $1,859.3 million for 2020.

Total net sales increased primarily as a result of an increase in overall demand for the Company’s products from semiconductor industry customers, particularly in the sale of liquid filtration, advanced deposition materials, selective etch and other areas of increasing importance to our customers. Total net sales also reflected net sales associated with acquisitions of $8.6 million and favorable foreign currency translation effects of $2.7 million.

The Company’s gross profit increased by $209.9 million for 2021 to $1,059.7 million, up from $849.7 million for 2020. Accordingly, the Company reported a 46.1% gross margin rate compared to 45.7% in 2020. The increases in gross profit and gross margin primarily reflect higher factory utilization associated with stronger sales levels.

The Company’s selling, general and administrative, or SG&A, expenses increased in 2021 by $27.3 million, mainly reflecting higher employee costs.

The Company’s engineering, research and development, or ER&D, expenses increased in 2021 by $31.6 million, mainly reflecting higher employee costs of $17.3 million and project related costs of $10.8 million.

As a result of the aforementioned and other factors discussed below, net income for 2021 was $409.1 million, or $3.00 per diluted share, compared to net income of $295.0 million, or $2.16 per diluted share, in 2020.

In 2021, the Company acquired BASF’s Precision Microchemicals business for $89.7 million in cash, net of cash acquired. The transaction is described in further detail in note 3 to the Company’s consolidated financial statements.

On December 14, 2021, the Company entered into the merger agreement with merger sub and CMC. Pursuant and subject to the terms and conditions of the merger agreement, upon completion of the transaction, merger sub will merge with and into CMC, with CMC surviving and continuing as a wholly-owned subsidiary of the Company. At the effective time of the proposed merger, each outstanding share of common stock of CMC (with certain exceptions set forth in the merger agreement) will be converted into the right to receive $133.00 in cash and 0.4506 shares of common stock of Entegris, plus cash in lieu of any fractional shares. The transaction is subject to certain conditions, including the affirmative vote of holders of a majority of the outstanding shares of common stock of CMC approving the adoption of the merger agreement and the receipt of approvals under United States and certain foreign antitrust and competition laws. The Company has agreed to operate its business in the ordinary course during the period between the execution of the merger agreement and the effective time of the proposed merger, subject to specific exceptions set forth in the merger agreement, and has agreed to certain other customary restrictions on operations, as set forth in the merger agreement. The Company has obtained fully committed debt financing from Morgan Stanley Senior Funding, Inc. and certain other financial institutions.

During 2021, the Company’s operating activities provided cash flow of $400.5 million. Cash and cash equivalents were $402.6 million at December 31, 2021 compared with $580.9 million at December 31, 2020. The Company had long-term borrowings, including current maturities, of $937.0 million at December 31, 2021 compared with $1,085.8 million at December 31, 2020.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. At each balance sheet date, management evaluates its estimates, including, but not limited to, those related to long-lived assets (property, plant and equipment, and identified intangible assets), goodwill and income taxes. The Company bases its estimates on historical experience and various other assumptions that management believes to be

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reasonable under the circumstances. Management’s utilization of different judgments or estimates could result in material differences in the amount and timing of the Company’s results of operations for any period. In addition, actual results could be different from the Company’s current estimates, possibly resulting in increased future charges to earnings.

Our critical accounting policies that are most significantly affected by estimates, assumptions and judgments used in the preparation of the Company's consolidated financial statements relate to business acquisitions and are discussed below. See note 1 to the Company’s consolidated financial statements for additional information about the Company’s other significant accounting policies.

Business Acquisitions

The Company accounts for acquired businesses using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income. Accordingly, for significant items the Company typically obtains assistance from a third-party valuation firm.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed in a business combination. For intangible assets, the Company normally utilizes the “income method,” which starts with a forecast of all of the expected future net cash flows attributable to the subject intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Depending on the asset valued, the key assumptions included one or more of the following: (1) future revenue growth rates, (2) future gross margin, (3) future selling, general and administrative expenses, (4) royalty rates, and (5) discount rates.

Estimating the useful life of an intangible asset also requires judgment. For example, different types of intangible assets will have different useful lives, influenced by the nature of the asset, competitive environment, and rate of change in the industry. Certain assets may even be considered to have indefinite useful lives. All of these judgments and estimates can significantly impact the determination of the amortization period of the intangible asset, and thus net income.

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Results of Operations

Year ended December 31, 2021 compared to year ended December 31, 2020

The following table sets forth the results of operations and the relationship between various components of operations, stated as a percent of net sales, for 2021 and 2020.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2021","","2020"],["","","% of net sales","","","","% of net sales"],["Net sales","$","2,298,893","","","100.0","%","","$","1,859,313","","","100.0","%"],["Cost of sales","1,239,229","","","53.9","","","1,009,591","","","54.3"],["Gross profit","1,059,664","","","46.1","","","849,722","","","45.7"],["Selling, general and administrative expenses","292,408","","","12.7","","","265,128","","","14.3"],["Engineering, research and development expenses","167,632","","","7.3","","","136,057","","","7.3"],["Amortization of intangible assets","47,856","","","2.1","","","53,092","","","2.9"],["Operating income","551,768","","","24.0","","","395,445","","","21.3"],["Interest expense","41,240","","","1.8","","","48,600","","","2.6"],["Interest income","(243)","","","\u2014","","","(786)","","","\u2014"],["Other expense (income), net","31,695","","","1.4","","","(6,656)","","","(0.4)"],["Income before income taxes","479,076","","","20.8","","","354,287","","","19.1"],["Income tax expense","69,950","","","3.0","","","59,318","","","3.2"],["Net income","$","409,126","","","17.8","","","$","294,969","","","15.9"]]
[[/GREPCENT_TABLE]]

Net sales For 2021, net sales were $2,298.9 million, up $439.6 million, or 24%, from 2020. An analysis of the factors underlying the increase in net sales is presented in the following table:

[[GREPCENT_TABLE]]
[["(In thousands)"],["Net sales in 2020","$","1,859,313"],["Increase mainly associated with customer demand","428,258"],["Increase associated with acquired businesses","8,591"],["Increase associated with effect of foreign currency translation","2,731"],["Net sales in 2021","$","2,298,893"]]
[[/GREPCENT_TABLE]]

The Company’s net sales reflected an increase in overall demand for the Company’s products from semiconductor industry customers, particularly in the sale of liquid filtration, advanced deposition materials, selective etch and other areas of increasing importance to our customers. Total net sales also reflected net sales associated with acquisitions of $8.6 million and favorable foreign currency translation effects of $2.7 million.

In addition to our semiconductor focused products, during 2021 we reached over $50 million of sales of Aramus “high purity bags”, used for COVID-19 vaccines. We will seek to expand the use of these solutions into non-COVID biologics.

Sales percentage on a geographic basis for 2021 and 2020 and the percentage increase in sales for 2021 compared to sales for 2020 were as follows:

[[GREPCENT_TABLE]]
[["","Year ended"],["","December 31, 2021","","December 31, 2020","","Percentage increase in sales"],["North America","23","%","","25","%","","13","%"],["Taiwan","20","%","","20","%","","22","%"],["China","16","%","","13","%","","47","%"],["South Korea","14","%","","15","%","","16","%"],["Japan","13","%","","13","%","","25","%"],["Europe","9","%","","8","%","","36","%"],["Southeast Asia","5","%","","5","%","","23","%"]]
[[/GREPCENT_TABLE]]

The increase in sales for all geographic areas was primarily driven by a general increase in demand for products in all three of the Company’s segments.

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Gross margin

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

[[GREPCENT_TABLE]]
[["","2021","","2020","","Percentage point change"],["Gross margin as a percentage of net revenues:","46.1","%","","45.7","%","","0.4"]]
[[/GREPCENT_TABLE]]

Gross margin increased by 0.4 percentage points for 2021 compared to 2020, primarily due to higher factory utilization associated with stronger sales levels.

Selling, general and administrative expenses

Selling, general and administrative expenses consist primarily of payroll and related expenses for the sales and administrative staff, professional fees (including accounting, legal and technology costs and expenses), and sales and marketing costs. SG&A expenses for 2021 increased $27.3 million, or 10%, to $292.4 million from $265.1 million in 2020. SG&A expenses, as a percent of net sales, decreased to 12.7% from 14.3% a year earlier, primarily reflecting the increase in sales.

An analysis of the factors underlying the increase in SG&A expenses is presented in the following table:

[[GREPCENT_TABLE]]
[["(In thousands)"],["Selling, general and administrative expenses in 2020","$","265,128"],["Employee costs","30,858"],["Other decreases, net","(3,578)"],["Selling, general and administrative expenses in 2021","$","292,408"]]
[[/GREPCENT_TABLE]]

Engineering, research and development expenses

Engineering, research and development expenses consist of expenses for the support of current product lines and the development of new products and manufacturing technologies. These expenses were $167.6 million in 2021 and $136.1 million in 2020. ER&D expenses as a percent of net sales remained flat at 7.3% compared to a year earlier.

An analysis of the factors underlying the increase in ER&D expenses is presented in the following table:

[[GREPCENT_TABLE]]
[["(In thousands)"],["Engineering, research and development expense in 2020","$","136,057"],["Employee costs","17,324"],["Project related costs","10,811"],["Professional fees","1,240"],["Other increases, net","2,200"],["Engineering, research and development expense in 2021","$","167,632"]]
[[/GREPCENT_TABLE]]

The Company’s overall ER&D efforts will continue to focus on developing and improving its technology platforms for semiconductor and advanced processing applications and identifying and developing products for new applications, and the Company often works directly with its customers to address their particular needs. As a percentage of revenue, the Company expects to increase ER&D expenses in the coming years.

Amortization of intangible assets Amortization of intangible assets was $47.9 million in 2021 compared to $53.1 million for 2020. The decrease primarily reflects the elimination of amortization expense of $6.8 million for identifiable intangible assets acquired in acquisitions that became fully amortized in previous periods, partially offset by additional amortization expense of $1.7 million associated with recent acquisitions as discussed in note 3 to the consolidated financial statements.

Interest expense Interest expense was $41.2 million in 2021 and $48.6 million in 2020. Interest expense includes interest associated with debt outstanding and the amortization of debt issuance costs associated with such borrowings. The decrease primarily reflects lower average debt levels and interest rates in 2021.

Interest income Interest income was $0.2 million in 2021 and $0.8 million in 2020. The decrease reflects lower average interest rates and cash balances.

Other expense (income), net Other expense, net, was $31.7 million in 2021 compared to other income, net, of $6.7 million in 2020.

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In 2021, other expense, net consisted mainly of a loss on extinguishment of debt of $23.1 million associated with the redemption of the Company’s $550 million aggregate principal amount of senior unsecured notes due 2026, or the 2026 Notes (see note 8 to the Company’s consolidated financial statements), and foreign currency transaction losses of $7.9 million.

In 2020, other income, net consisted mainly of foreign currency transaction gains of $9.8 million, partially offset by loss on debt extinguishment costs of $2.4 million associated with payments on the Term Loan Facility.

Income tax expense The Company recorded income tax expense of $70.0 million in 2021 compared to income tax expense of $59.3 million in 2020. The Company’s effective tax rate was 14.6% in 2021 compared to an effective tax rate of 16.7% in 2020.

The decrease in the effective tax rate from 2020 to 2021 is primarily due to a benefit related to the reversal of a valuation allowance on federal foreign credits generated in 2020 of $6.2 million. Additionally, the Company recognized a net capital loss tax benefit of $5.1 million during the tax year ended December 31, 2021. These benefits were partially offset by tax recorded on the sale of intangible property of $3.5 million in 2021. The 2020 tax rate included a benefit of $1.5 million related to additional R&D tax credits, an increase in discrete benefits related to share-based compensation of $8.8 million, and lower accrued withholding taxes on foreign earnings. These decreases were partially offset by a valuation allowance on federal foreign tax credits generated during the year of $6.2 million.

Net income Net income was $409.1 million, or $3.00 per diluted share, in 2021 compared to net income of $295.0 million, or $2.16 per diluted share, in 2020. The increase reflects the Company’s aforementioned operating results described in greater detail above.

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

The Company’s non-GAAP financial measures include adjusted EBITDA and adjusted operating income, together with related percentage changes, and non-GAAP earnings per share, or EPS.

Adjusted EBITDA increased to $699.4 million in 2021, compared to $542.5 million in 2020. Adjusted EBITDA as a percent of net sales was 30.4% in 2021 compared to 29.2% in 2020. Adjusted operating income increased 32.7% to $609.1 million in 2021, compared to $459.0 million in 2020. Adjusted operating income as a percent of net sales was 26.5% in 2021 compared to 24.7% in 2020. Non-GAAP EPS increased 35.4% to $3.44 in 2021, compared to $2.54 in 2020. The increases in adjusted EBITDA and adjusted operating income as a percentage of net sales reflect the increases in sales and gross profit.

Segment Analysis

The Company reports its financial performance based on three reporting segments. See note 16 to the consolidated financial statements for additional information on the Company’s three segments.

The following table and discussion concern the results of operations of the Company’s three reportable segments for the years ended December 31, 2021 and 2020.

[[GREPCENT_TABLE]]
[["(In thousands)","2021","","2020"],["Specialty Chemicals and Engineered Materials"],["Net sales","$","711,291","","","$","609,532"],["Segment profit","167,807","","","127,969"],["Microcontamination Control"],["Net sales","$","919,363","","","$","742,186"],["Segment profit","321,300","","","248,910"],["Advanced Materials Handling"],["Net sales","$","704,946","","","$","538,682"],["Segment profit","159,995","","","111,028"],["Unallocated general and administrative expenses","$","49,478","","","$","39,370"]]
[[/GREPCENT_TABLE]]

Specialty Chemicals and Engineered Materials (SCEM)

For 2021, SCEM net sales increased to $711.3 million, up 17% from $609.5 million in 2020. The sales increase was mainly due to increased sales of specialty gases and advanced deposition materials, formulated cleaning chemistries and advanced coatings,

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as well as additional sales of $1.2 million attributable to the acquisition of BASF’s Precision Microchemicals business in the fourth quarter of 2021.

SCEM reported a segment profit of $167.8 million for 2021, up 31% compared to $128.0 million in 2020. The increase in SCEM’s profit in 2021 was primarily due to higher sales levels and a gain on a sale of non-core intangibles, partially offset by higher operating expenses of 11% mainly due to higher compensation costs.

Microcontamination Control (MC)

For 2021, MC net sales increased to $919.4 million, up 24% from $742.2 million in 2020. The sales increase was due to improved performance across substantially all platforms, with growth especially strong in liquid filtration and gas filtration products.

MC reported a segment profit of $321.3 million for 2021, up 29% compared to $248.9 million in 2020. The increase in MC’s profit in 2021 was primarily due to higher gross profit related to the increased sales volume, partially offset by higher operating expenses of 13%, primarily due to higher compensation costs.

Advanced Materials Handling (AMH)

For 2021, AMH net sales increased 31% to $704.9 million from $538.7 million in 2020. The sales increase was mainly due to improved sales from wafer handling, fluid handling and measurement products and sales of our Aramus high purity bags, as well as additional sales of $6.8 million attributable to the acquisition of Global Measurement Technologies, Inc. and its manufacturing partner Clean Room Plastics, Inc., which are referred to collectively herein as GMTI.

AMH reported a segment profit of $160.0 million for 2021, up 44% compared to $111.0 million in 2020. The increase in AMH’s profit in 2021 was primarily due to higher sales volume, favorable product mix, partially offset by a 16% increase in operating expenses, primarily due to higher compensation costs.

Unallocated general and administrative expenses

Unallocated general and administrative expenses for 2021 totaled $49.5 million compared to $39.4 million for 2020. The $10.1 million increase mainly reflects the increase in compensation costs of $8.2 million and deal and integration costs of $2.1 million.

Liquidity and Capital Resources

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

[[GREPCENT_TABLE]]
[["In thousands","December 31, 2021","","December 31, 2020"],["Cash and cash equivalents","$","402,565","","","$","580,893"],["Working capital","934,369","","","931,631"],["Total debt","937,027","","","1,085,783"]]
[[/GREPCENT_TABLE]]

The Company has historically financed its operations and capital requirements through cash flow from its operating activities,

long-term loans, lease financing and borrowings under domestic and international short-term lines of credit. On April 30, 2021,

the Company issued $400.0 million aggregate principal amount of 3.625% senior unsecured notes due May 1, 2029, or the 2029

Notes. The Company used the net proceeds of the offering, together with cash on hand and borrowings under the Revolving Facility, to redeem all of the 2026 Notes. The redemption of the 2026 Notes resulted in a loss on extinguishment of debt of $23.1 million. In connection with our issuance of the 2029 Notes, we amended the Revolving Facility to provide for, among other things, lending commitments in an aggregate principal amount of up to $400.0 million (up from $300.0 million) and to extend the maturity date to April 30, 2026.

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

We may seek to take advantage of opportunities to raise additional capital through additional debt financing or through public

or private sales of securities. If in the future our available liquidity is not sufficient to meet the Company’s operating and debt

service obligations as they come due, management would need to pursue alternative arrangements through additional equity or

debt financing in order to meet the Company’s cash requirements. There can be no assurance that any such financing would be

available on commercially acceptable terms, or at all. In 2021, we did not experience difficulty accessing the 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

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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:

[[GREPCENT_TABLE]]
[["(in thousands)","Year ended December 31, 2021","","Year ended December 31, 2020"],["Net cash provided by operating activities","$","400,454","","","$","446,674"],["Net cash used in investing activities","(298,118)","","","(243,326)"],["Net cash (used in) provided by financing activities","(276,497)","","","22,149"],["(Decrease) increase in cash and cash equivalents","(178,328)","","","228,982"]]
[[/GREPCENT_TABLE]]

Operating activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.

Compared to 2020, the $46.2 million decrease in cash provided by operating activities in 2021 was primarily due to changes in working capital, partially offset by higher net income. Changes in working capital for 2021 were driven by higher trade accounts receivables and notes receivables, inventory and lower income taxes payable. The change for trade accounts receivables and notes receivables was primarily due to increased sales activity compared to the prior year. The change for inventory is due to an increase in raw material purchases to mitigate potential supply chain issues related to COVID-19 and increased business activity. The change for taxes was primarily driven by higher tax payments compared to the prior year.

Investing activities

Investing cash flows consist primarily of capital expenditures, cash used for acquisitions and proceeds from sales of property and equipment.

The increase in cash used in investing activities in 2021 compared to 2020 was primarily due to higher cash paid for acquisitions of property, plant and equipment. This was partially offset by decreased cash paid for acquisitions.

Acquisition of property and equipment totaled $210.6 million in 2021, which primarily reflected investments in facilities, equipment and tooling, compared to $131.8 million in 2020, which primarily reflected investments in equipment and tooling. Capital expenditures in 2021 generally reflected more spending related to growth capacity investments and the investment in our previously announced investment in our new facility in Taiwan.

In 2021, the Company acquired BASF’s Precision Microchemicals business and certain assets of another company in an immaterial transaction. The cash used to acquire these assets was $91.9 million, net of cash acquired. The transactions are described in further detail in note 3 to the Company’s consolidated financial statements.

In 2020, the Company acquired Sinmat and GMTI. The cash used to acquire Sinmat and GMTI was $111.9 million, net of cash acquired. The transactions are described in further detail in note 3 to the Company’s consolidated financial statements.

Financing activities

Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans.

In 2021, there was $276.5 million of cash used in financing activities compared to $22.1 million cash provided by financing activities in 2020. The change was primarily due to a $318.1 million increase in payments on long-term debt and debt extinguishment and a $22.5 million increase in repurchase and retirement of common stock. The Company made a payment of $569.1 million related to the redemption of the $550.0 million aggregate principal amount of 2026 Notes during 2021, compared to a payment of $251.0 million of outstanding borrowings under the Term Loan Facility in 2020. The increase in cash flows used in financing activities was offset in part by the absence of a $16.1 million deferred acquisition payment related to our acquisition of Digital Specialty Chemicals in 2020, a $16.0 million increase in proceeds from the issuance of common stock from employee stock plans and a $8.7 million decrease in taxes paid related to net share settlement of equity awards.

The Company’s total dividend payments were $43.5 million in 2021 compared to $43.2 million in 2020. The Company has paid a cash dividend in each of the past 17 quarters. On January 19, 2022, the Company’s board of directors declared a quarterly cash dividend of $0.10 per share to be paid on February 23, 2022 to shareholders of record as of February 2, 2022.

Other Liquidity and Capital Resources Considerations

Debt

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[[GREPCENT_TABLE]]
[["(In thousands)","December 31, 2021","","December 31, 2020"],["Total debt (par value)","$","945,000","","","$","1,095,000"]]
[[/GREPCENT_TABLE]]

In connection with the proposed merger, on December 31, 2021, Entegris entered into an amended and restated commitment letter, which amended and restated the commitment letter with Morgan Stanley Senior Funding, Inc. and certain other financial institutions, which are referred to collectively herein as the financing sources, dated as of December 14, 2021, among Entegris and the financing sources. Such commitment letter as amended and restated is referred to herein as the commitment letter. Pursuant to the commitment letter, the financing sources (a) committed to provide to Entegris (i) a senior secured first lien term loan B facility in an aggregate principal amount of up to $4.0 billion, which is referred to herein as the term loan B facility and (ii) a senior unsecured bridge term loan facility in an aggregate principal amount of up to $895.0 million, which is referred to as the bridge facility and, together with the term loan B facility, the facilities and (b) to the extent that such financing sources are revolving lenders under Entegris’ existing credit agreement, (i) consented to the merger and certain amendments to the terms the Revolving Facility and (ii) committed to provide to Entegris, additional revolving credit commitments in an aggregate principal amount of $175.0 million. See note 8 to the Company’s consolidated financial statements for additional discussion.

On April 30, 2021, the Company issued $400.0 million aggregate principal amount of the 2029 Notes. The Company used the

net proceeds of the offering, together with cash on hand and borrowings under the Revolving Facility, to redeem all of the 2026

Notes. We capitalized $4.1 million of third-party expenses related to the issuance of the 2029 Notes as debt issuance costs. At

December 31, 2021, we had $400.0 million aggregate principal amount of 3.625% senior unsecured notes outstanding on the 2029 Notes.

The Company voluntarily redeemed its $550.0 million aggregate principal amount of 2026 Notes at a redemption price of

103.469% (expressed as percentage of principal amount), plus accrued and unpaid interest of $5.6 million. The redemption of

the 2026 Notes resulted in a loss on extinguishment of debt of $23.1 million.

In connection with our issuance of the 2029 Notes, we amended the Revolving Facility to provide for, among other things,

lending commitments in an aggregate principal amount of up to $400.0 million (up from $300.0 million) and to extend the

maturity date to April 30, 2026. 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 LIBOR, plus, in each case, an applicable margin. At December 31, 2021, there was no

balance outstanding under the Revolving Facility and we had undrawn outstanding letters of credit of $0.2 million.

The Company’s Term Loan Facility matures on November 6, 2025 and bears an interest rate of 2.10% at December 31, 2021. As of December 31, 2021, the aggregate principal amount outstanding under the Term Loan Facility was $145.0 million.

As of December 31, 2021, we had $400 million aggregate principal amount of 4.375% senior unsecured notes due April 15, 2028 outstanding.

Through December 31, 2021, the Company was in compliance with all applicable financial covenants included in the terms of its credit facilities.

The Company also has lines of credit with one bank that provide for borrowings of Japanese yen for the Company’s Japanese subsidiary equivalent to an aggregate of approximately $8.7 million. There were no outstanding borrowings under these lines of credit at December 31, 2021.

Cash and cash requirements

[[GREPCENT_TABLE]]
[["(In thousands)","December 31, 2021","","December 31, 2020"],["Cash and cash equivalents","$","402,565","","","$","580,893"],["U.S.","107,814","","","268,135"],["Non-U.S.","294,751","","","312,758"]]
[[/GREPCENT_TABLE]]

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. We estimate that no material withholding taxes would be incurred if any indefinitely reinvested earnings were distributed.

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 credit facility.

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The following table summarizes our short and long-term cash requirements as of December 31, 2021:

[[GREPCENT_TABLE]]
[["(In thousands)","Total","","Due within one year of December 31, 2021","","Due later than one year from December 31, 2021"],["Long-term debt","$","945,000","","","$","\u2014","","","$","945,000"],["Interest payments on long-term debt","229,059","","","35,051","","","194,008"],["Capital purchase obligations","307,685","","","274,144","","","33,541"],["Supply purchase obligations","18,600","","","9,300","","","9,300"],["Operating leases","86,449","","","13,340","","","73,109"],["Other liabilities reflected on our consolidated balance sheet","464,276","","","362,290","","","101,986"],["Total","$","2,051,069","","","$","694,125","","","$","1,356,944"]]
[[/GREPCENT_TABLE]]

Long-term debt and interest payments on long-term debt. We have contractual obligations for principal and interest payments on our long-term debt. See note 8 of the consolidated financials for additional information. Debt obligations are classified based on their stated maturity date, regardless of their classification on the Company’s consolidated balance sheets. Interest projections on both variable and fixed rate long-term debt are based on interest rates effective as of December 31, 2021 and do not include $8.0 million for net unamortized discounts and debt issuance costs.

Capital purchase obligations. We have capital purchase obligations that represent commitments for the construction or purchase of property, plant and equipment. They were not recorded as liabilities on the Company’s consolidated balance sheet as of December 31, 2021, as the Company had not yet received the related goods or taken title to the property.

We expect capital expenditure spending to be approximately $500.0 million in 2022 for growth capacity investments and the construction of our new manufacturing and enhanced technology facility in Taiwan. Of this amount, approximately $225 million will be spent for the new facility in Taiwan. This new facility will ultimately support all three of our divisions.

Supply purchase obligations. We have commitments, including take-or-pay contracts, that are not presented as capital purchase

commitments above. They were not recorded as liabilities on the Company’s consolidated balance sheet as of December 31, 2021, as the Company had not yet received the related goods or taken title to the property.

Operating lease commitments. Commitments under operating leases primarily relate to leasehold properties. See note 10 of the consolidated financials for additional information.

Other liabilities. Other liabilities primarily includes employee compensation and benefits, contract liabilities, pension liabilities, net tax liabilities, and other accrued liabilities. The timing of cash flows associated with these obligations is based upon management’s estimates over the terms of these arrangements and is largely based upon historical experience. Included in our other liabilities due within one year is our employee incentive payout of $86.5 million, which will be paid in the first quarter of 2022.

Of the tax liabilities included in the table above, $23.8 million relates to uncertain tax positions. We are unable to accurately predict when these amounts will be realized or released. However, it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to a tax audit settlement or some other unforeseeable event. See note 12 of the consolidated financials for additional information.

Other Planned Uses of Capital. On December 14, 2021, we entered into the merger agreement, with merger sub and CMC. Pursuant and subject to the terms and conditions of the merger agreement, upon completion of the transaction, merger sub will merge with and into CMC, with CMC surviving and continuing as a wholly-owned subsidiary of Entegris. At the effective time of the proposed merger, each outstanding share of common stock of CMC (with certain exceptions set forth in the merger agreement) will be converted into the right to receive $133.00 in cash and 0.4506 shares of common stock of Entegris, plus cash in lieu of any fractional shares. The transaction is subject to certain conditions, including the affirmative vote of holders of a majority of the outstanding shares of common stock of CMC approving the adoption of the merger agreement and the receipt of approvals under United States and certain foreign antitrust and competition laws. We have agreed to operate our business in the ordinary course during the period between the execution of the merger agreement and the effective time of the proposed merger, subject to specific exceptions set forth in the merger agreement, and have agreed to certain other customary restrictions on operations, as set forth in the merger agreement. Entegris has obtained fully committed debt financing from Morgan Stanley Senior Funding, Inc. and certain other financial institutions.

As of December 31, 2021, we believe our cash and cash equivalents, cash generated from operations, and our ability to access capital markets will satisfy our cash needs for the foreseeable future both globally and domestically.

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New Accounting Pronouncements

Recently adopted accounting pronouncements Refer to note 1 to the Company’s consolidated financial statements for a discussion of accounting pronouncements implemented in 2021. Other than the adoption of ASU No. 2019-12, “Simplifying the Accounting for Income Taxes”, there were no recently issued accounting pronouncements adopted in 2021.

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

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

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

Adjusted EBITDA is defined by the Company as net income before (1) income tax expense, (2) interest expense, (3) interest income, (4) other expense (income), net, (5) charge for fair value write-up of acquired inventory sold, (6) deal and transaction costs, (7) integration costs, (8) severance and restructuring costs, (9) amortization of intangible assets and (10) 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 EPS is defined by the Company as net income before, as applicable, (1) charge for fair value write-up of acquired inventory sold, (2) deal and transaction costs, (3) integration costs, (4) severance and restructuring costs, (5) loss on extinguishment of debt and modification, (6) amortization of intangible assets and (7) the tax effect of the foregoing adjustments to net income, stated on a per share basis, divided by diluted weighted average shares outstanding.

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

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

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

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

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

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

First, non-GAAP financial measures are not standardized. Accordingly, the methodology used to produce the Company’s non-GAAP financial measures is not computed under GAAP and may differ notably from the methodology used by other

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companies. For example, the Company’s non-GAAP measure of adjusted EBITDA may not be directly comparable to EBITDA or an adjusted EBITDA measure reported by other companies.

Second, the Company’s non-GAAP financial measures exclude items such as amortization and depreciation that are recurring. Amortization of intangibles and depreciation have been, and will continue to be for the foreseeable future, significant recurring expenses 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 fair value write-up of acquired inventory, restructuring activities, deal and transaction costs, integration costs or similar items and, therefore, may need to record additional charges (or credits) associated with such items, including the tax effects thereon. The exclusion of these items in the Company’s non-GAAP measures should not be construed as an implication that these costs are unusual, infrequent or non-recurring.

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

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The reconciliation of GAAP measures to adjusted operating income and adjusted EBITDA for the years ended December 31, 2021 and 2020 are presented below:

[[GREPCENT_TABLE]]
[["In thousands","2021","","2020"],["Net sales","$","2,298,893","","","$","1,859,313"],["Net income","$","409,126","","","$","294,969"],["Net income - as a % of net sales","17.8","%","","15.9","%"],["Adjustments to net income"],["Income tax expense","69,950","","","59,318"],["Interest expense","41,240","","","48,600"],["Interest income","(243)","","","(786)"],["Other expense (income), net","31,695","","","(6,656)"],["GAAP \u2013 Operating income","551,768","","","395,445"],["Operating margin - as a % of net sales","24.0","%","","21.3","%"],["Charge for fair value write-up of acquired inventory sold","428","","","590"],["Deal and transaction costs","4,744","","","2,576"],["Integration costs","3,780","","","2,963"],["Severance and restructuring costs","529","","","4,364"],["Amortization of intangible assets","47,856","","","53,092"],["Adjusted operating income","609,105","","","459,030"],["Adjusted operating margin","26.5","%","","24.7","%"],["Depreciation","90,311","","","83,430"],["Adjusted EBITDA","$","699,416","","","$","542,460"],["Adjusted EBITDA \u2013 as a % of net sales","30.4","%","","29.2","%"]]
[[/GREPCENT_TABLE]]

The reconciliation of GAAP measures to non-GAAP earnings per share for the years ended December 31, 2021 and 2020 are presented below:

[[GREPCENT_TABLE]]
[["In thousands, except per share data","2021","","2020"],["Net income","$","409,126","","","$","294,969"],["Adjustments to net income:"],["Charge for fair value write-up of acquired inventory sold","428","","","590"],["Deal and transaction costs","4,744","","","2,576"],["Integration costs","3,780","","","2,963"],["Severance and restructuring costs","529","","","4,364"],["Loss on debt extinguishment and modification","23,338","","","2,378"],["Amortization of intangible assets","47,856","","","53,092"],["Tax effect of adjustments to net income and discrete tax items(1)","(20,411)","","","(15,197)"],["Non-GAAP net income","$","469,390","","","$","345,735"],["Diluted earnings per common share","$","3.00","","","$","2.16"],["Effect of adjustments to net income","$","0.44","","","$","0.37"],["Diluted non-GAAP earnings per common share","$","3.44","","","$","2.54"]]
[[/GREPCENT_TABLE]]

1The tax effect of pre-tax adjustments to net income was calculated using the applicable marginal tax rate for each respective year.