Entegris, Inc.
ENTEGRIS INC (Form: 10-Q, Received: 10/26/2017 16:15:02)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________
FORM 10-Q
________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-32598
 _______________________________________
  Entegris, Inc.
(Exact name of registrant as specified in its charter)
 _______________________________________
Delaware
 
41-1941551
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
129 Concord Road, Billerica, Massachusetts
 
01821
(Address of principal executive offices)
 
(Zip Code)
(978) 436-6500
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
 _______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý


Table of Contents

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 23, 2017
Common Stock, $0.01 par value per share
 
141,396,733 shares
 


Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2017
 
Description
Page
 
 
 
 
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Cautionary Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “should,” “may,” “will,” “would” or the negative thereof and similar expressions are intended to identify such forward-looking statements. These forward-looking statements include those about our capital allocation strategy, which may be modified at any time for any reason, including share repurchases, dividends, debt repurchases and potential mergers and acquisitions; our liquidity; future capital and other expenditures; the Company's expected tax rate; the impact of accounting pronouncements; and other matters. These forward-looking statements are based on current management expectations and assumptions only as of the date of this Quarterly Report, 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, weakening of global and/or regional economic conditions, generally or specifically in the semiconductor industry, which could decrease the demand for our products and solutions; our ability to meet rapid demand shifts; our ability to continue technological innovation and introduce new products to meet our customers' rapidly changing requirements; our concentrated customer base; our ability to identify, effect and integrate acquisitions, joint ventures or other transactions; our ability to protect and enforce intellectual property rights; operational, political and legal risks of our international operations; our dependence on sole source and limited source suppliers; the increasing complexity of certain manufacturing processes; raw material shortages and price increases; changes in government regulations of the countries in which we operate; fluctuation of currency exchange rates; fluctuations in the market price of Entegris’ stock; the level of, and obligations associated with, our indebtedness; and other risk factors and additional information described in our filings with the Securities and Exchange Commission, including under the heading “Risks Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 , filed on February 17, 2017, and in our other periodic filings. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, we undertake no obligation to update publicly any forward-looking statements contained herein.

2

Table of Contents

PART 1.
FINANCIAL INFORMATION
Item 1. Financial Statements
ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(In thousands, except share and per share data)
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
435,197

 
$
406,389

Trade accounts and notes receivable, net of allowance for doubtful accounts of $2,253 and $2,474
183,417

 
165,675

Inventories
193,302

 
183,529

Deferred tax charges and refundable income taxes
15,720

 
20,140

Other current assets
20,865

 
24,398

Total current assets
848,501

 
800,131

Property, plant and equipment, net of accumulated depreciation of $419,277 and $387,523
346,660

 
321,562

Other assets:
 
 
 
Goodwill
355,855

 
345,269

Intangible assets, net of accumulated amortization of $274,787 and $237,207
190,754

 
217,548

Deferred tax assets and other noncurrent tax assets
9,247

 
8,022

Other
6,732

 
7,000

Total assets
$
1,757,749

 
$
1,699,532

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Long-term debt, current maturities
$
100,000

 
$
100,000

Accounts payable
60,328

 
61,617

Accrued payroll and related benefits
53,543

 
54,317

Other accrued liabilities
41,618

 
29,213

Income taxes payable
14,390

 
16,424

Total current liabilities
269,879

 
261,571

Long-term debt, excluding current maturities, net of unamortized discount and debt issuance costs of $7,385 and $9,173
411,465

 
484,677

Pension benefit obligations and other liabilities
31,135

 
27,220

Deferred tax liabilities and other noncurrent tax liabilities
26,905

 
26,846

Commitments and contingent liabilities

 

Equity:
 
 
 
Preferred stock, par value $.01; 5,000,000 shares authorized; none issued and outstanding as of September 30, 2017 and December 31, 2016

 

Common stock, par value $.01; 400,000,000 shares authorized; issued and outstanding shares as of September 30, 2017 and December 31, 2016: 141,473,733 and 141,319,964
1,415

 
1,413

Additional paid-in capital
864,340

 
859,778

Retained earnings
193,658

 
92,303

Accumulated other comprehensive loss
(41,048
)
 
(54,276
)
Total equity
1,018,365

 
899,218

Total liabilities and equity
$
1,757,749

 
$
1,699,532

See the accompanying notes to condensed consolidated financial statements.

3


ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended
 
Nine months ended
(In thousands, except per share data)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net sales
$
345,591

 
$
296,692

 
$
991,970

 
$
866,768

Cost of sales
190,184

 
173,712

 
546,664

 
489,877

Gross profit
155,407

 
122,980

 
445,306

 
376,891

Selling, general and administrative expenses
57,699

 
51,614

 
161,176

 
153,167

Engineering, research and development expenses
26,002

 
25,720

 
80,462

 
79,768

Amortization of intangible assets
11,051

 
10,974

 
33,003

 
33,325

Operating income
60,655

 
34,672

 
170,665

 
110,631

Interest expense
7,749

 
9,468

 
24,418

 
27,778

Interest income
(150
)
 
(123
)
 
(323
)
 
(233
)
Other expense (income), net
2,906

 
(565
)
 
3,762

 
(2,294
)
Income before income tax expense
50,150

 
25,892

 
142,808

 
85,380

Income tax expense
9,248

 
3,945

 
29,401

 
14,331

Net income
$
40,902

 
$
21,947

 
$
113,407

 
$
71,049

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.29

 
$
0.16

 
$
0.80

 
$
0.50

Diluted net income per common share
$
0.28

 
$
0.15

 
$
0.79

 
$
0.50

Weighted shares outstanding:
 
 
 
 
 
 
 
Basic
141,684

 
141,324

 
141,627

 
141,019

Diluted
143,594

 
142,473

 
143,472

 
141,856

See the accompanying notes to condensed consolidated financial statements.


4


ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended
 
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net income
$
40,902

 
$
21,947

 
$
113,407

 
$
71,049

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(279
)
 
10,512

 
11,805

 
17,276

Reclassification of cumulative translation adjustment associated with planned sale of subsidiary
1,400

 

 
1,400

 

Unrealized loss on available-for-sale securities

 

 

 
(611
)
Pension liability adjustments
16

 
16

 
23

 
47

Other comprehensive income
1,137

 
10,528

 
13,228

 
16,712

Comprehensive income
$
42,039

 
$
32,475

 
$
126,635

 
$
87,761

See the accompanying notes to condensed consolidated financial statements.


5


ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
Operating activities:
 
 
 
Net income
$
113,407

 
$
71,049

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
43,173

 
41,320

Amortization
33,003

 
33,325

Share-based compensation expense
11,457

 
10,063

Provision for deferred income taxes
254

 
(334
)
Other
24,028

 
19,667

Changes in operating assets and liabilities:
 
 
 
Trade accounts and notes receivable
(15,345
)
 
(22,252
)
Inventories
(14,884
)
 
(17,296
)
Accounts payable and accrued liabilities
7,598

 
26,517

Other current assets
3,883

 
7,387

Income taxes payable and refundable income taxes
1,664

 
(11,364
)
Other
(606
)
 
(7,606
)
Net cash provided by operating activities
207,632

 
150,476

Investing activities:
 
 
 
Acquisition of property, plant and equipment
(67,939
)
 
(45,268
)
Acquisition of business, net of cash acquired
(20,000
)
 

Proceeds from sale and maturities of short-term investments

 
1,726

Other
1,074

 
(3,246
)
Net cash used in investing activities
(86,865
)
 
(46,788
)
Financing activities:
 
 
 
Payments of long-term debt
(75,000
)
 
(50,000
)
Issuance of common stock
3,582

 
2,892

Repurchase and retirement of common stock
(18,000
)
 
(3,573
)
Taxes paid related to net share settlement of equity awards
(5,407
)
 
(3,316
)
Other
(1,270
)
 
493

Net cash used in financing activities
(96,095
)
 
(53,504
)
Effect of exchange rate changes on cash and cash equivalents
4,136

 
11,768

Increase in cash and cash equivalents
28,808

 
61,952

Cash and cash equivalents at beginning of period
406,389

 
349,825

Cash and cash equivalents at end of period
$
435,197

 
$
411,777


Supplemental Cash Flow Information
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
Non-cash transactions:
 
 
 
Capital lease obligations incurred
$
4,768

 
$

Schedule of interest and income taxes paid:
 
 
 
Interest paid
$
16,167

 
$
18,995

Income taxes paid, net of refunds received
$
27,826

 
$
24,254

See the accompanying notes to condensed consolidated financial statements.

6


ENTEGRIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations Entegris, Inc. (“Entegris”, “the Company”, “us”, “we”, or “our”) is a leading global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries.
Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany profits, transactions and balances have been eliminated in consolidation.
Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, particularly receivables, inventories, property, plant and equipment, goodwill, intangibles, accrued expenses, and income taxes and related accounts, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and contain all adjustments considered necessary, and are of a normal recurring nature, to present fairly the financial position as of September 30, 2017 and December 31, 2016 , the results of operations, comprehensive income, and cash flows for the three and nine months ended September 30, 2017 and October 1, 2016 , and cash flows for the nine months ended September 30, 2017 and October 1, 2016 .
The condensed consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2016 . The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.
Fair Value of Financial Instruments The carrying value of cash equivalents, accounts receivable, accounts payable, accrued payroll and related benefits, and other accrued liabilities approximates fair value due to the short maturity of those items. The fair value of long-term debt, including current maturities, was $529.0 million at September 30, 2017 , compared to the carrying amount of long-term debt, including current maturities, of $511.5 million at September 30, 2017.
Recent Accounting Pronouncements Adopted in 2017 In April 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for tax effects related to share-based payments, forfeitures, and statutory tax withholding requirements, as well as the classification of tax-related cash flows in the statement of cash flows. The update eliminates the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. ASU No. 2016-09 became effective for the Company on January 1, 2017. The Company adopted ASU No. 2016-09 using the modified retrospective approach. In connection with the adoption of ASU No. 2016-09, the Company elected as an accounting policy to record forfeitures as they occur and recorded a cumulative-effect adjustment of $0.4 million to retained earnings as of January 1, 2017. The Company also recorded a cumulative-effect adjustment of $1.0 million to retained earnings as of January 1, 2017 with respect to previously unrecognized excess tax benefits. Under ASU No. 2016-09, excess tax benefits or deficiencies related to stock option exercises and restricted stock unit vesting are recognized in the condensed statement of operations. Accordingly, for the nine months ended September 30, 2017, the Company recorded a tax benefit of $3.4 million in the condensed statement of operations. Also related to the adoption of ASU No. 2016-09, the Company elected to present the cash flow statement using the prospective transition method. No prior periods have been adjusted.
Recent Accounting Pronouncements Yet to be Adopted In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. As such, revenue for an entity's contracts will generally be recognized as control of the product transfers to the customer, which is consistent with the revenue recognition model currently used for the majority of the

7


Company's contracts. ASU No. 2014-09 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers. ASU No. 2014-09 is effective for the Company beginning January 1, 2018. During 2017, the Company is assessing the impact that the adoption of ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. To assist in this assessment, and to oversee the eventual adoption of ASU No. 2014-09, the Company established a cross-functional steering committee. The analysis of identifying revenue streams and potential effects of the new guidance is substantially complete, and the Company is now analyzing the potential magnitude of impact to the consolidated financial statements and related disclosures. Based on its preliminary evaluation of ASU No. 2014-09, the Company does not currently expect it to have a material impact on its results of operations or cash flows in the periods after adoption. ASU No. 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company will adopt the standard using the modified retrospective method. The Company will complete its assessment of the estimated cumulative effect of adopting ASU No. 2014-09 during the fourth quarter. The evaluation of ASU No. 2014-09 will continue through the date of adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . ASU No. 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve-month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU No. 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases, and amortization and interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU No. 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU No. 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. ASU No. 2016-02 is effective for the Company beginning January 1, 2019. The Company is currently assessing the impact that the adoption of ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.
2. ACQUISITION

On April 24, 2017, the Company acquired the microelectronic water and chemical filtration product line of W.L. Gore & Associates, Inc. (Gore). The acquired assets became part of the Company’s Microcontamination Control (MC) segment. The transaction was accounted for under the acquisition method of accounting and the results of operations of the product line are included in the Company's consolidated financial statements as of and since April 24, 2017. The acquisition of the product line’s assets and liabilities does not constitute a material business combination.

The purchase price for the product line was cash consideration of $20.0 million , funded from the Company's existing cash on hand. Costs associated with the acquisition of the product line were not significant and were expensed as incurred.

The purchase price of the product line exceeds the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $8.0 million . Cash flows used to determine the purchase price included strategic and synergistic benefits (investment value) specific to the Company, which resulted in a purchase price in excess of the fair value of identifiable net assets. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.

The following table summarizes the final allocation of the purchase price to the fair values assigned to the assets and liabilities assumed at the date of acquisition:
(In thousands)
Amount
Other current assets
$
726

Property, plant and equipment
2,447

Identifiable intangible assets
8,820

       Net assets acquired
11,993

Goodwill
8,007

Total purchase price
$
20,000


Intangible assets, consisting mostly of technology-related intellectual property, generally will be amortized on a straight-line basis over an estimated useful life of approximately 7 years.


8


As part of the accounting for this transaction, the Company allocated the purchase price of the acquired product line based on the fair value of all the assets acquired. The valuation of the assets acquired was based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by the Company's management.

In performing these valuations, the Company used independent appraisals, discounted cash flows and other other factors, as the best evidence of fair value. The key underlying assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. There are inherent uncertainties and management judgment required in these determinations. No assurance can be given that the underlying assumptions will occur as projected. The fair value measurement of the assets acquired and liabilities assumed were based on valuation involving significant unobservable inputs, or Level 3 in the fair value hierarchy.

The final valuation of assets acquired and liabilities assumed was completed in the third quarter of 2017.
3. INVENTORIES
Inventories consist of the following:
 
(In thousands)
September 30, 2017
 
December 31, 2016
Raw materials
$
57,336

 
$
53,109

Work-in process
17,996

 
15,976

Finished goods
117,970

 
114,444

Total inventories
$
193,302

 
$
183,529

 
4. GOODWILL AND INTANGIBLE ASSETS

Goodwill activity for each period was as follows:
(In thousands)
Specialty Chemicals and Engineered Materials
 
Microcontamination Control
 
Advanced Materials Handling
 
Total
December 31, 2016
$
297,858

 
$

 
$
47,411

 
$
345,269

Addition due to acquisition

 
8,007

 

 
8,007

Foreign currency translation
2,579

 

 

 
2,579

September 30, 2017
$
300,437

 
$
8,007

 
$
47,411

 
$
355,855

Identifiable intangible assets at September 30, 2017 and December 31, 2016 consist of the following:
September 30, 2017
(In thousands)
Gross  carrying
Amount
 
Accumulated
amortization
 
Net  carrying
value
Developed technology
$
210,352

 
$
147,349

 
$
63,003

Trademarks and trade names
16,676

 
13,483

 
3,193

Customer relationships
219,080

 
105,581

 
113,499

Other
19,433

 
8,374

 
11,059

 
$
465,541

 
$
274,787

 
$
190,754


9


December 31, 2016
(In thousands)
Gross  carrying
amount
 
Accumulated
amortization
 
Net  carrying
value
Developed technology
$
202,591

 
$
126,077

 
$
76,514

Trademarks and trade names
16,661

 
12,617

 
4,044

Customer relationships
216,918

 
90,581

 
126,337

Other
18,585

 
7,932

 
10,653

 
$
454,755

 
$
237,207

 
$
217,548

Future amortization expense for each of the five succeeding years and thereafter relating to intangible assets currently recorded in the Company's consolidated balance sheets is estimated at September 30, 2017 to be the following:
 
 
Fiscal year ending December 31
(In thousands)
2017
$
10,996

2018
43,659

2019
41,381

2020
26,718

2021
20,086

Thereafter
47,914

 
$
190,754



5. EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per common share (EPS):  
 
Three months ended
 
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Basic—weighted common shares outstanding
141,684

 
141,324

 
141,627

 
141,019

Weighted common shares assumed upon exercise of stock options and vesting of restricted common stock
1,910

 
1,149

 
1,845

 
837

Diluted—weighted common shares and common shares equivalent outstanding
143,594

 
142,473

 
143,472

 
141,856

The Company excluded the following shares underlying stock-based awards from the calculations of diluted EPS because their inclusion would have been anti-dilutive for the three and nine months ended September 30, 2017 and October 1, 2016 :
 
 
Three months ended
 
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Shares excluded from calculations of diluted EPS
355

 
23

 
293

 
831

6. FAIR VALUE
Financial Assets Measured at Fair Value on a Recurring Basis

The following table presents the Company’s financial assets that are measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016 . Level 1 inputs are based on quoted prices in active markets accessible at the reporting date for identical assets and liabilities. Level 2 inputs are based on quoted prices for similar instruments in active markets and quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in a market. Level 3 inputs are based on prices or valuations that require inputs that are significant to the valuation and are unobservable.

10


 
September 30, 2017
 
December 31, 2016
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts (a)
$

 
$

 
$

 
$

 
$

 
$
4,784

 
$

 
$
4,784

Total assets measured and recorded at fair value
$

 
$

 
$

 
$

 
$

 
$
4,784

 
$

 
$
4,784

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other accrued liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts (a)
$

 
$
132

 
$

 
$
132

 
$

 
$

 
$

 
$

Total liabilities measured and recorded at fair value
$

 
$
132

 
$

 
$
132

 
$

 
$

 
$

 
$


(a)
Based on observable market transactions of spot currency rates and forward currency rates on equivalently-termed instruments.

A reconciliation of the net fair value of foreign currency contract assets and liabilities subject to master netting arrangements that are recorded in the September 30, 2017 and December 31, 2016 condensed consolidated balance sheets to the net fair value that could have been reported in the respective condensed consolidated balance sheets is as follows:
 
September 30, 2017
 
December 31, 2016
(In thousands)
Gross
amounts
of
recognized
liabilities
 
Gross
amounts
offset in the
condensed
consolidated
balance
sheet
 
Net amount of
liabilities in the
condensed
consolidated
balance sheet
 
Gross
amounts
of
recognized
assets
 
Gross
amounts
offset in the
condensed
consolidated
balance
sheet
 
Net amount of
assets in the
condensed
consolidated
balance sheet
Foreign currency contracts
$
132

 
$

 
$
132

 
$
4,784

 
$

 
$
4,784


Losses associated with derivatives are recorded in other income, net, in the condensed consolidated statements of operations. Losses associated with derivative instruments not designated as hedging instruments were as follows:
 
Three months ended
 
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Losses on foreign currency contracts
$
(132
)
 
$
(267
)
 
$
(2,245
)
 
$
(6,432
)
7. SEGMENT REPORTING
The Company reports its financial performance based on three reportable segments, which reflects an organizational alignment intended to leverage its unique portfolio of capabilities to create value for its customers by developing mission-critical solutions to maximize manufacturing yields and enable higher performance of devices. While these segments have unique products, solutions, and technical know-how, they share a single, global sales force, unified core systems and processes, global technology centers, strategic and technology roadmaps, and a focus on a common set of customers. The Company's business is reported in the following segments:
Specialty Chemicals and Engineered Materials (SCEM):  SCEM provides high-performance and high-purity process chemistries, gases and materials, as well as safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes.
Microcontamination Control (MC):  MC solutions purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries.
Advanced Materials Handling (AMH):  AMH develops solutions to monitor, protect, transport, and deliver critical liquid chemistries and substrates for a broad set of applications in the semiconductor industry and other high-technology industries.


11


Intersegment sales are not significant. Segment profit is defined as net sales less direct segment operating expenses, excluding certain unallocated expenses, consisting mainly of general and administrative costs for the Company’s human resources, corporate, finance and information technology functions as well as interest expense, amortization of intangible assets and income taxes.
Summarized financial information for the Company’s reportable segments is shown in the following tables.
 
 
Three months ended
 
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net sales
 
 
 
 
 
 
 
SCEM
$
124,522

 
$
104,494

 
$
360,131

 
$
317,383

MC
116,113

 
94,738

 
320,575

 
263,941

AMH
104,956

 
97,460

 
311,264

 
285,444

Total net sales
$
345,591

 
$
296,692

 
$
991,970

 
$
866,768

 
 
Three months ended
 
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Segment profit
 
 
 
 
 
 
 
SCEM
$
34,647

 
$
18,811

 
$
96,961

 
$
70,141

MC
43,984

 
31,617

 
116,049

 
78,323

AMH
16,882

 
15,378

 
54,731

 
56,808

Total segment profit
$
95,513

 
$
65,806

 
$
267,741

 
$
205,272

The following table reconciles total segment profit to income before income taxes:
 
 
Three months ended
 
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Total segment profit
$
95,513

 
$
65,806

 
$
267,741

 
$
205,272

Less:
 
 
 
 
 
 
 
Amortization of intangible assets
11,051

 
10,974

 
33,003

 
33,325

Unallocated general and administrative expenses
23,807

 
20,160

 
64,073

 
61,316

Operating income
60,655

 
34,672

 
170,665

 
110,631

Interest expense
7,749

 
9,468

 
24,418

 
27,778

Interest income
(150
)
 
(123
)
 
(323
)
 
(233
)
Other expense (income), net
2,906

 
(565
)
 
3,762

 
(2,294
)
Income before income tax expense
$
50,150

 
$
25,892

 
$
142,808

 
$
85,380



8. SUBSEQUENT EVENT

On October 18, 2017 , the Company's Board of Directors declared an initial quarterly cash dividend of $0.07 per share to be paid on November 22, 2017 to shareholders of record on the close of business on November 1, 2017 . Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of the Company’s Board of Directors.


12


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The information, except for historical information, contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. These forward-looking statements could differ materially from actual results. You should review the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-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 assumes no obligation to publicly release the results of any revision or updates to these forward-looking statements to reflect future events or unanticipated occurrences.

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 the Company's financial condition and operating performance and to provide a context for the detailed discussion and analysis that follows and must be read in its entirety in order to fully understand the Company’s financial condition and results of operations.
The Company is a leading global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries. Entegris seeks to leverage its unique breadth of capabilities to create value for its customers by developing mission-critical solutions to maximize manufacturing yields and enable higher device performance.
The Company's technology portfolio includes approximately 20,000 standard and customized products and solutions to achieve the highest levels of purity and performance that are essential to the manufacture of semiconductors, flat panel displays, light emitting diodes, or LEDs, high-purity chemicals, solar cells, gas lasers, optical and magnetic storage devices, and critical components for aerospace, glass manufacturing and biomedical applications. The majority of our products are consumed at various times throughout the manufacturing process, with demand driven in part by the level of semiconductor and other manufacturing activity. The Company’s customers consist primarily of semiconductor manufacturers, semiconductor equipment and materials suppliers as well as thin film transistor-liquid crystal display (TFT-LCD) and hard disk manufacturers. The Company serves its customers through direct sales efforts, as well as sales and distribution relationships, in the United States, Asia, Europe and the Middle East.
The Company's 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 (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 (MC) segment offers solutions to purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries. The Advanced Materials Handling (AMH) segment develops solutions to monitor, protect, transport, and deliver critical liquid chemistries and substrates for a broad set of applications in the semiconductor industry and other high-technology industries. While these segments have separate products, solutions, and technical know-how, they each share a single, global sales force, unified core systems and processes, global technology centers, strategic and technology roadmaps, and a focus on a common set of customers. The Company leverages its expertise and technologies from these three segments to create new and increasingly integrated solutions for its customers.
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 Saturday. The Company’s fiscal quarters in 2017 end April 1, 2017, July 1, 2017, September 30, 2017 and December 31, 2017. Unaudited information for the three and nine months ended September 30, 2017 and October 1, 2016 and the financial position as of September 30, 2017 and December 31, 2016 are included in this Quarterly Report on Form 10-Q.
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.

13


Variable margin on sales The Company’s variable margin on sales is determined by selling prices and the costs of manufacturing and raw materials. This is affected by a number of factors, which include the Company’s sales mix, purchase prices of raw material (especially polymers, membranes, stainless steel and purchased components), domestic and international competition, direct labor costs, and the efficiency of the Company’s production operations, among others.
Fixed cost structure The Company’s operations include a number of large fixed or semi-fixed cost components, which include salaries, indirect labor and benefits, facility costs, lease expenses, and depreciation and amortization. It is not possible to vary these costs easily in the short-term as volumes fluctuate. Accordingly, increases or decreases in sales volume can have a large effect on the usage and productivity of these cost components, resulting in a large impact on the Company’s profitability.
Overall Summary of Financial Results

For the three months ended September 30, 2017 , net sales increased 16% to $345.6 million , compared to $296.7 million for the three months ended October 1, 2016 . The sales increase was due to strong across-the-board demand for the Company's products, in particular from semiconductor industry customers, reflecting both high industry fab utilization rates and increased capital spending compared to the year-ago period. Unfavorable foreign currency translation effects were $2.9 million for the quarter. Sales of the acquired liquid filtration product line described below contributed $0.7 million of revenue for the quarter. Exclusive of these effects, the Company's sales increased 17% .

Sales were up 5% on a sequential basis over the second quarter of 2017, including a $1.2 million favorable foreign currency translation effect. The increase in revenue resulted from modest improvements across the Company's product lines.

The Company's gross profit for the three months ended September 30, 2017 rose to $155.4 million , up from $123.0 million for the three months ended October 1, 2016 , mainly reflecting the increase in sales. The Company experienced a 45.0% gross margin rate for the three months ended September 30, 2017 , compared to 41.5% in the comparable year-ago period.

The Company's selling, general and administrative (SG&A) expenses increased by $6.1 million for the three months ended September 30, 2017 compared to the year-ago quarter, mainly reflecting an increase in higher compensation costs of $1.9 million and impairment charges related to certain acquired intangible assets of $3.9 million.

As a result of the aforementioned factors, the Company reported net income of $40.9 million , or $0.28 per diluted share, for the quarter ended September 30, 2017 , compared to net income of $21.9 million , or $0.15 per diluted share, a year ago.

On April 24, 2017, the Company acquired the microelectronic water and chemical filtration product line of W.L. Gore & Associates, Inc. for $20.0 million in cash as described in Note 2 to the condensed consolidated financial statements. The acquisition of these products complements our portfolio of advanced liquid filtration solutions. It also reflects our strategy to grow our served markets through the deployment of capital for strategic accretive acquisitions that augment our internal development initiatives.

On October 18, 2017, the Company's Board of Directors declared an initial quarterly cash dividend of $0.07 per share to be paid on November 22, 2017 to shareholders of record on the close of business on November 1, 2017. Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of the Company’s Board of Directors.

During the nine -month period ended September 30, 2017 , the Company’s operating activities provided cash flow of $207.6 million , while cash used for capital expenditures was $67.9 million and cash used for the payment of long-term debt was $75.0 million . Cash and cash equivalents were $435.2 million at September 30, 2017 , compared with cash and cash equivalents of $406.4 million at December 31, 2016 . The Company had outstanding long-term debt of $511.5 million at September 30, 2017 , compared to $584.7 million at December 31, 2016 .

Critical Accounting Policies
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.


14


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 its Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission. 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 inventory valuation, impairment of long-lived assets, goodwill, income taxes and business acquisitions. There have been no material changes in these aforementioned critical accounting policies.
Three and Nine Months Ended September 30, 2017 Compared to Three and Nine Months Ended October 1, 2016 and Three Months Ended July 1, 2017
The following table compares operating results for the three and nine months ended September 30, 2017 with results for the three and nine months ended October 1, 2016 and the three months ended July 1, 2017, both in dollars and as a percentage of net sales, for each caption.
 
Three months ended
 
Nine months ended
(Dollars in thousands)
September 30, 2017
 
October 1, 2016
 
July 1, 2017
 
September 30, 2017
 
October 1, 2016
Net sales
$
345,591

 
100.0
 %
 
$
296,692

 
100.0
 %
 
$
329,002

 
100.0
 %
 
$
991,970

 
100.0
 %
 
$
866,768

 
100.0
 %
Cost of sales
190,184

 
55.0

 
173,712

 
58.5

 
178,699

 
54.3

 
546,664

 
55.1

 
489,877

 
56.5

Gross profit
155,407

 
45.0

 
122,980

 
41.5

 
150,303

 
45.7

 
445,306

 
44.9

 
376,891

 
43.5

Selling, general and administrative expenses
57,699

 
16.7

 
51,614

 
17.4

 
52,985

 
16.1

 
161,176

 
16.2

 
153,167

 
17.7

Engineering, research and development expenses
26,002

 
7.5

 
25,720

 
8.7

 
27,221

 
8.3

 
80,462

 
8.1

 
79,768

 
9.2

Amortization of intangible assets
11,051

 
3.2

 
10,974

 
3.7

 
11,007

 
3.3

 
33,003

 
3.3

 
33,325

 
3.8

Operating income
60,655

 
17.6

 
34,672

 
11.7

 
59,090

 
18.0

 
170,665

 
17.2

 
110,631

 
12.8

Interest expense
7,749

 
2.2

 
9,468

 
3.2

 
8,196

 
2.5

 
24,418

 
2.5

 
27,778

 
3.2

Interest income
(150
)
 

 
(123
)
 

 
(93
)
 

 
(323
)
 

 
(233
)
 

Other expense (income), net
2,906

 
0.8

 
(565
)
 
(0.2
)
 
(46
)
 

 
3,762

 
0.4

 
(2,294
)
 
(0.3
)
Income before income taxes
50,150

 
14.5

 
25,892

 
8.7

 
51,033

 
15.5

 
142,808

 
14.4

 
85,380

 
9.9

Income tax expense
9,248

 
2.7

 
3,945

 
1.3

 
11,042

 
3.4

 
29,401

 
3.0

 
14,331

 
1.7

Net income
$
40,902

 
11.8
 %
 
$
21,947

 
7.4
 %
 
$
39,991

 
12.2
 %
 
$
113,407

 
11.4
 %
 
$
71,049

 
8.2
 %

Net sales For the three months ended September 30, 2017 , net sales increased by 16% to $345.6 million , compared to $296.7 million for the three months ended October 1, 2016 . An analysis of the factors underlying the increase in net sales is presented in the following table:
(In thousands)
 
Net sales in the quarter ended October 1, 2016
$
296,692

Growth associated with volume and pricing
51,055

Increase associated with liquid filtration product line acquisition
722

Decrease associated with effect of foreign currency translation
(2,878
)
Net sales in the quarter ended September 30, 2017
$
345,591


The sales increase was due to strong across-the-board demand for the Company's products, in particular from semiconductor industry customers, reflecting both high industry fab utilization rates and increased capital spending compared to the year-ago period. As described below, each of the Company's segments experienced improved sales. Sales of the acquired liquid filtration product line, described in note 2 to the Company's condensed consolidated financial statements, contributed revenue of $0.7 million for the quarter. Unfavorable foreign currency translation effects were $2.9 million for the quarter, mainly due to the weakening of the Japanese yen relative to the U.S. dollar. Exclusive of these factors, the Company's sales increased 17% .

On a geographic basis, in the third quarter of 2017 , total sales to Asia (excluding Japan) were 57% , to North America were 22% , to Japan were 13% and to Europe were 8% , compared to prior year third quarter sales to Asia (excluding Japan) of 57% , to North

15


America of 20% , to Japan of 14% and to Europe of 9% . Sales increased by 15% , 27% , 8% and 14% in Asia (excluding Japan), North America, Japan, and Europe respectively, in the third quarter of 2017 compared to the prior year's third quarter.

Net sales for the nine months ended September 30, 2017 were $992.0 million , up 14% from $866.8 million in the comparable year-ago period. An analysis of the factors underlying the increase in net sales is present in the following table:
(In thousands)
 
Net sales in the nine months ended October 1, 2016
$
866,768

Growth associated with volume and pricing
125,164

Increase associated with liquid filtration product line acquisition
2,196

Decrease associated with effect of foreign currency translation
(2,158
)
Net sales in the nine months ended September 30, 2017
$
991,970


The sales increase was due to strong across-the-board demand for the Company's products, in particular from semiconductor industry customers, reflecting both high industry fab utilization rates and increased capital spending compared to the year-ago period. As described below, each of the Company's segments experienced improved sales. Sales of the acquired liquid filtration product line contributed $2.2 million of revenue for the nine months ended September 30, 2017. Unfavorable foreign currency translation effects were $2.2 million for the nine months, mainly due to the weakening of the Japanese yen and the Korean Won relative to the U.S. dollar. Exclusive of these factors, the Company's sales increased 14% .

Sales were up 5% on a sequential basis over the second quarter of 2017, including a $1.2 million favorable foreign currency translation effect. The increase in revenue resulted from modest improvements across the Company's product lines.

Gross profit Due mainly to the sales increase, the Company's gross profit rose 26% for the three months ended September 30, 2017 to $155.4 million , compared to $123.0 million for the three months ended October 1, 2016 . The Company experienced a 45.0% gross margin rate for the three months ended September 30, 2017 , compared to 41.5% in the comparable year-ago period. The gross profit and gross margin improvements reflect the improved factory utilization associated with strong sales levels, a slightly favorable sales mix and the absence of the qualification and start-up costs incurred at the Company's i2M center in the third quarter a year ago. These factors were partly offset by modest price erosion for certain products in response to normal competitive pressures. In addition, the gross profit and gross margin figures for the three months ended September 30, 2017 include impairment charges of $3.4 million related to certain equipment related impairment charges.

For the nine months ended September 30, 2017 , the Company's gross profit rose 18% to $445.3 million , compared to $376.9 million for the nine months ended October 1, 2016 . The Company experienced a 44.9% gross margin rate for the nine months ended September 30, 2017 , compared to 43.5% in the comparable year-ago period. Similar to the quarter-over-quarter comparison, the gross profit and gross margin improvements on a year-to-date basis reflect the improved factory utilization associated with strong sales levels and the absence of the qualification and start-up costs incurred at the Company's i2M center in the first nine months of 2016. These factors were also partly offset by the price erosion noted in the preceding paragraph. In addition, the gross profit and gross margin figures for the nine months ended September 30, 2017 include impairment charges of $5.3 million related to certain equipment-related impairment charges.

Selling, general and administrative expenses Selling, general and administrative (SG&A) expenses were $57.7 million for the three months ended September 30, 2017 , up $6.1 million , or 12% , from the comparable three-month period a year earlier. An analysis of the factors underlying the increase in SG&A is presented in the following table:
(In thousands)
 
Selling, general and administrative expenses in the quarter ended October 1, 2016
$
51,614

Employee costs
1,878

Impairment charge related to acquired intangible assets
3,866

Other increases, net
341

Selling, general and administrative expenses in the quarter ended September 30, 2017
$
57,699


SG&A expenses were $161.2 million for the first nine months of 2017 , up 5% , compared to SG&A expenses of $153.2 million in the year-ago period. An analysis of the factors underlying changes in SG&A is presented in the following table:

16


(In thousands)
 
Selling, general and administrative expenses in the nine months ended October 1, 2016
$
153,167

Employee costs
4,639

Impairment charge related to acquired intangible assets
3,866

Other decreases, net
(496
)
Selling, general and administrative expenses in the nine months ended September 30, 2017
$
161,176


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 $26.0 million in the three months ended September 30, 2017 , compared to $25.7 million in the year-ago period, a $0.3 million increase. The increase for the quarter was mainly due to higher employee costs and an equipment impairment charge of $0.9 million, offset partially by lower project costs.

ER&D expenses increased nominally to $80.5 million in the first nine months of 2017 , compared to $79.8 million in the year ago period, primarily due to higher employee costs, offset partially by lower project costs.
Interest expense Interest expense includes interest associated with debt outstanding issued to help fund the 2014 acquisition of ATMI, Inc. and the amortization of debt issuance costs associated with such borrowings. Interest expense was $7.7 million in the three months ended September 30, 2017 , compared to $9.5 million in the three-month period ended October 1, 2016 . The decrease reflects lower average outstanding borrowings due to the Company's payments on its senior secured term loan.
Interest expense was $24.4 million in the nine-month period ended September 30, 2017 , compared to $27.8 million in the nine-month period ended October 1, 2016 , also reflecting lower average outstanding borrowings under its senior secured term loan.
Other expense (income), net Other expense, net was $2.9 million in the three months ended September 30, 2017 and consisted mainly of an impairment charge of $2.8 million. Other expense, net was $3.8 million in the nine months ended September 30, 2017 and consisted mainly of foreign currency transaction losses and the aforementioned impairment charge of $2.8 million.
Other income, net was $0.6 million and $2.3 million in the three and nine months ended October 1, 2016 , respectively, and consisted mainly of foreign currency transaction gains.

Income tax expense The Company recorded income tax expense of $9.2 million and $29.4 million in the three and nine months ended September 30, 2017 , compared to income tax expense of $3.9 million and $14.3 million in the three and nine months ended October 1, 2016 . The Company’s year-to-date effective tax rate was 20.6% in 2017 , compared to 16.8% in 2016 . The tax rate in both years reflect the benefit of foreign source income being taxed at lower rates than the U.S. statutory rate. Year-to-date income tax expense in 2017 includes a discrete benefit of $3.4 million recorded in connection with share-based compensation. Upon the adoption of ASU No. 2016-09 (see Note 1 to the condensed consolidated financial statements), excess tax benefits are recorded in the statement of operations as they occur. Also included in income tax expense in 2017 is a discrete charge of $3.6 million to correct an error related to the tax effects of intercompany sales and the related intercompany profit. Year-to-date income tax expense in 2016 included a discrete benefit of $1.1 million recorded in the second quarter of 2016 related to the consolidation of certain of the Company's Taiwan entities.

Net income Reflecting the factors noted above, the Company recorded net income of $40.9 million , or $0.28 per diluted share, in the three-month period ended September 30, 2017 , compared to net income of $21.9 million , or $0.15 per diluted share, in the three-month period ended October 1, 2016 . In the nine-month period ended September 30, 2017 , the Company recorded net income of $113.4 million , or $0.79 per diluted share, compared to net income of $71.0 million , or $0.50 per diluted share, in the nine-month period ended October 1, 2016 .

Non-GAAP 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 "Non-GAAP Information" included below in this section for additional detail, including the definition of non-GAAP financial measures and the reconciliation of GAAP measures to the Company’s non-GAAP measures.

The Company’s non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and non-GAAP Earnings Per Share.


17


Adjusted Operating Income increased 50% to $81.1 million in the three-month period ended September 30, 2017 , compared to $53.9 million in the three-month period ended October 1, 2016 . Adjusted Operating Income, as a percent of net sales, increased to 23.5% from 18.2% in the year-ago period. Adjusted Operating Income increased 42% to $216.8 million in the nine-month period ended September 30, 2017 , compared to $152.2 million in the nine-month period ended October 1, 2016 . In the nine-month period ended September 30, 2017 , Adjusted Operating Income, as a percent of net sales, increased to 21.9% from 17.6% in the year-ago period.

Adjusted EBITDA increased 42% to $95.9 million in the three-month period ended September 30, 2017 , compared to $67.7 million in the three-month period ended October 1, 2016 . Adjusted EBITDA, as a percent of net sales, increased to 27.7% from 22.8% in the year-ago period. Adjusted EBITDA increased 34% to $259.9 million in the nine-month period ended September 30, 2017 , compared to $193.5 million in the nine-month period ended October 1, 2016 . In the nine-month period ended September 30, 2017 , Adjusted EBITDA, as a percent of net sales, increased to 26.2% from 22.3% in the year-ago period.

Non-GAAP Earnings Per Share increased 67% to $0.40 in the three-month period ended September 30, 2017 , compared to $0.24 in the three-month period ended October 1, 2016 . Non-GAAP Earnings Per Share increased 48% to $1.02 in the nine-month period ended September 30, 2017 , compared to $0.69 in the nine-month period ended October 1, 2016 .


Segment Analysis
The Company reports its financial performance based on three reporting segments. The following is a discussion on the results of operations of these three business segments. See Note 7 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 for the three months ended September 30, 2017 , October 1, 2016 and July 1, 2017 and nine months ended September 30, 2017 and October 1, 2016 .
 
Three months ended
 
Nine months ended
(In thousands)
September 30, 2017
October 1, 2016
July 1, 2017
 
September 30, 2017
October 1, 2016
Specialty Chemicals and Engineered Materials
 
 
 
 
 
 
Net sales
$
124,522

$
104,494

$
121,174

 
$
360,131

$
317,383

Segment profit
34,647

18,811

34,174

 
96,961

70,141

Microcontamination Control
 
 
 
 
 
 
Net sales
116,113

94,738

104,407

 
320,575

263,941

Segment profit
43,984

31,617

36,484

 
116,049

78,323

Advanced Materials Handling
 
 
 
 
 
 
Net sales
104,956

97,460

103,421

 
311,264

285,444

Segment profit
16,882

15,378

19,573

 
54,731

56,808

Specialty Chemicals and Engineered Materials (SCEM)
For the third quarter of 2017 , SCEM net sales increased to $124.5 million , compared to $104.5 million in the comparable period last year. The sales increase was due to improved sales of specialty gases and glass forming materials products. SCEM reported a segment profit of $34.6 million in the third quarter of 2017 , up 84% from $18.8 million in the year-ago period. The segment profit improvement was primarily due to higher gross profit related to the increased sales, partially offset by a 4% increase in operating expenses.

For the nine months ended September 30, 2017 , SCEM net sales increased to $360.1 million , compared to $317.4 million in the comparable period last year. Similar to the period described above, this increase also reflects improved sales of specialty gases and specialty materials products. SCEM reported a segment profit of $97.0 million in the nine months ended September 30, 2017, up 38% from $70.1 million in the year-ago period period also due to higher sales levels. Operating expenses were flat compared to the year-ago period.

Microcontamination Control (MC)
For the third quarter of 2017 , MC net sales increased to $116.1 million , compared to $94.7 million in the comparable period last year. The sales increase was due to strength in liquid chemistry filters for wet, etch and clean and photolithography applications, and gas filtration products. In addition, the liquid filtration product line acquisition described in Note 2 to the condensed consolidated financial statements contributed sales of $0.7 million. MC reported a segment profit of $44.0 million in

18


the third quarter of 2017 , up 39% from $31.6 million in the year-ago period. The segment profit improvement was primarily due to higher gross profit related to the increased sales, the absence of the qualification and start-up costs incurred at the Company's i2M center in the year-ago period and an 1% decrease in operating expenses compared to the year-ago period.

For the nine months ended September 30, 2017 , MC net sales increased to $320.6 million , compared to $263.9 million in the comparable period last year. Similar to the period described above, this increase also reflects improved sales of wet, etch and clean, photolithography applications, and gas filtration products. In addition, the liquid filtration product line acquisition contributed sales of $2.2 million as noted above. MC reported a segment profit of $116.0 million in the nine months ended September 30, 2017 , up 48% from $78.3 million in the year-ago period period. The segment profit improvement was primarily due to higher gross profit related to the increased sales and the absence of the qualification and start-up costs incurred at the Company's i2M center in the year-ago period. Operating expenses were flat compared to the year-ago period.
Advanced Materials Handling (AMH)
For the third quarter of 2017 , AMH net sales increased to $105.0 million , compared to $97.5 million in the comparable period last year. The sales increase was due to improved sales of wafter shipping and wafer and reticle handling products. AMH reported a segment profit of $16.9 million in the third quarter of 2017 , up 10% from $15.4 million in the year-ago period. The segment profit improvement was primarily due to increased sales, partially offset by impairment and severance charges of $5.2 million, the latter item accounting for most of the 13% increase in operating expenses.

For the nine months ended September 30, 2017 , AMH net sales increased to $311.3 million , compared to $285.4 million in the comparable period last year. This increase reflects improved sales of fluid handling products, wafer and reticle handling products, and wafter shipping products, offset by a decrease in liquid packaging product sales. AMH reported a segment profit of $54.7 million in the nine months ended September 30, 2017, down 4% from $56.8 million in the year-ago period despite higher sales levels, due to an unfavorable sales mix, the effect of modest selling price erosion on legacy products, impairment and severance charges of $7.5 million, the latter item accounting for most of the 11% increase in operating expenses.

Unallocated general and administrative expenses
Unallocated general and administrative expenses totaled $23.8 million in the third quarter of 2017 , compared to $20.2 million in the third quarter of 2016 . The $3.6 million increase includes a $3.9 million impairment charge related to certain acquired intangible assets.

Unallocated general and administrative expenses for the nine months ended September 30, 2017 totaled $64.1 million , down from $61.3 million in the nine months ended October 1, 2016. The $2.8 million increase includes the $3.9 million impairment charge noted above.

Liquidity and Capital Resources
Operating activities Cash flows provided by operating activities totaled $207.6 million in the nine months ended September 30, 2017 . Operating cash flows reflecting net income adjusted for non-cash expenses (such as depreciation, amortization and share-based compensation) was offset by changes in operating assets and liabilities of $17.7 million , mainly reflecting increases in accounts receivable and inventories, offset by increases in other accrued liabilities.
Accounts receivable increased by $17.7 million during the nine months ended September 30, 2017 , or $15.3 million after accounting for foreign currency translation, mainly reflecting the increase in sales, offset partly by an improvement in the Company’s days sales outstanding (DSO). The Company’s DSO was 48 days at September 30, 2017 , compared to 49 days at the beginning of the year.
Inventories increased by $9.8 million during the nine months ended September 30, 2017 , or $14.9 million after accounting for foreign currency translation and the provision for excess and obsolete inventory. The increase reflects higher amounts of all inventory categories due to the increased business activity associated with higher sales and bookings levels.
Accounts payable and accrued liabilities increased $10.3 million during the nine months ended September 30, 2017 , or $7.6 million after accounting for foreign currency translation. A key component of the increase is higher accrued interest payable than at December 31, 2016.

Working capital at September 30, 2017 was $578.6 million , compared to $538.6 million as of December 31, 2016 , and included $435.2 million in cash and cash equivalents, compared to cash and cash equivalents of $406.4 million as of December 31, 2016 .


19


Investing activities Cash flows used in investing activities totaled $86.9 million in the nine -month period ended September 30, 2017 .

Acquisition of property and equipment totaled $67.9 million , which primarily reflected investments in equipment and tooling.
As of September 30, 2017 , the Company expects its full-year capital expenditures in 2017 to be approximately $90 million to $100 million . As of September 30, 2017 , the Company had outstanding capital purchase obligations of $17.8 million for the construction or purchase of plant and equipment not yet recorded in the Company’s condensed consolidated financial statements as the Company had not yet received the related goods or property.

On April 24, 2017, the Company acquired the microelectronic water and chemical filtration product line of W.L. Gore & Associates, Inc. The purchase price for the product line included cash consideration of $20.0 million, funded from the Company's existing cash on hand. The transaction is described in further detail in note 2 to the Company's condensed consolidated financial statements.
Financing activities Cash flows used in financing activities totaled $96.1 million during the nine -month period ended September 30, 2017 . This primarily reflects the Company's payments of $75.0 million on its senior secured term loan described below. In addition, the Company repurchased shares of the Company’s common stock during the first nine months of 2017 at a total cost of $18.0 million under the stock repurchase program authorized by the Company’s Board of Directors. The Company received proceeds of $3.6 million in connection with common shares issued under the Company's stock plans, while expending $5.4 million for taxes related to the net share settlement of equity awards under those plans.

As of September 30, 2017 , the Company had outstanding long-term debt, including the current portion thereof, of $511.5 million , related to debt issued by the Company, as discussed in more detail below.

At September 30, 2017 , the Company had an outstanding $360 million aggregate principal amount of 6% senior unsecured notes due April 1, 2022.

On April 30, 2014, the Company entered into a term loan facility that provided senior secured financing of $460 million. Borrowings under the term loan facility bear interest at a rate per annum equal to, at the Company’s option, a base rate (such as prime rate or LIBOR) plus, an applicable margin. The Company may voluntarily prepay outstanding loans under the term loan facility at any time.  During the first quarter of 2017, the Company and its lenders agreed to an amendment of the term loan agreement that decreases the applicable margin for the Company’s term loan from 2.75% to 2.25% per annum for LIBOR borrowings, with a LIBOR floor of 0.0%, and from 1.75% to 1.25% per annum for base rate borrowings, with a base rate floor of 1.00%. The principal amount outstanding under the term loan facility at September 30, 2017 was $158.9 million. Based on management's plans and intent, the Company reflects $100 million of the term loan as current maturities of long-term debt in its condensed consolidated balance sheet as of September 30, 2017 .
The Company also has a senior secured asset-based revolving credit facility maturing April 30, 2019 that provides financing of $75 million , subject to a borrowing base.  The senior secured asset-based revolving credit facility bears interest at a rate per annum equal to at the Company's option, a base rate (prime rate or LIBOR), plus an applicable margin. As of September 30, 2017 , the Company had no outstanding borrowings and $0.2 million undrawn on outstanding letters of credit under the senior secured asset-based revolving credit facility.
Through September 30, 2017 , the Company was in compliance with all applicable financial covenants included in the terms of its senior unsecured notes, senior secured term loan facility and senior secured asset-based revolving credit facility.
The Company also has lines of credit with two banks that provide for borrowings of Japanese yen for the Company’s Japanese subsidiary, equivalent to an aggregate of approximately $10.7 million . There were no outstanding borrowings under these lines of credit at September 30, 2017 .

On October 18, 2017, the Company's Board of Directors declared an initial quarterly cash dividend of $0.07 per share to be paid on November 22, 2017 to shareholders of record on the close of business on November 1, 2017. Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of the Company’s Board of Directors.
The Company believes that its cash and cash equivalents, funds available under its senior secured asset-based revolving credit facility and international credit facilities and cash flow generated from operations will be sufficient to meet its working capital and investment requirements for at least the next twelve months. If available liquidity is not sufficient to meet the Company’s operating and debt service obligations as they come due, management would need to pursue alternative arrangements through

20


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.
At September 30, 2017 , the Company’s shareholders’ equity was $1,018.4 million , up from $899.2 million at the beginning of the year. The increase mainly reflected net income of $113.4 million , an increase to additional paid-in capital of $11.5 million associated with the Company’s share-based compensation expense, proceeds of $3.6 million in connection with common shares issued under the Company's stock plans, and favorable foreign currency translation effects of $11.8 million , mainly associated with the weakening of the U.S. dollar versus the Korean won and Japanese yen. These increases were offset partly by the repurchase of the Company’s common stock at a total cost of $18.0 million and the payment of $5.4 million for taxes related to the net share settlement of equity awards under the Company’s stock plans.
As of September 30, 2017 , the Company’s resources included cash and cash equivalents of $435.2 million , funds available under its senior secured asset-based revolving credit facility and international credit facilities, and cash flow generated from operations. As of September 30, 2017 , the amount of cash and cash equivalents held by foreign subsidiaries was $323.0 million . These amounts held by foreign subsidiaries, certain of which are associated with indefinitely reinvested foreign earnings, may be subject to U.S. income taxation on repatriation to the United States. The Company does not anticipate the need to repatriate funds associated with indefinitely reinvested foreign earnings to the United States to satisfy domestic liquidity needs arising in the ordinary course of business. The Company believes its existing balances of domestic cash and cash equivalents, available cash and cash equivalents held by foreign subsidiaries not associated with indefinitely reinvested foreign earnings and operating cash flows will be sufficient to meet the Company’s domestic cash needs arising in the ordinary course of business for the next twelve months.
Recently adopted accounting pronouncements Refer to Note 1 to the Company's condensed consolidated financial statements for a discussion of accounting pronouncements recently adopted.
Recently issued accounting pronouncements Refer to Note 1 to the Company's condensed consolidated financial statements for a discussion of accounting pronouncements recently issued by not yet adopted.
Non-GAAP Information The Company’s condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP).

The Company also provides certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. Regulation G, “ Conditions for Use of Non-GAAP Financial Measures ,” and other regulations under the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. The Company provides non-GAAP financial measures of Adjusted EBITDA and Adjusted Operating Income together with related measures thereof, and non-GAAP Earnings Per Share (EPS).

Adjusted EBITDA, a non-GAAP term, is defined by the Company as net income before (1) income tax expense, (2) interest expense, (3) interest income, (4) other expense (income), net, (5) severance, (6) impairment of equipment and intangibles, (7) amortization of intangible assets and (8) depreciation. Adjusted Operating Income, another non-GAAP term, is defined by the Company as Adjusted EBITDA exclusive of the depreciation addback noted above. The Company also utilizes non-GAAP measures whereby Adjusted EBITDA and Adjusted Operating Income are each divided by the Company’s net sales to derive Adjusted EBITDA Margin and Adjusted Operating Margin, respectively.

Non-GAAP EPS, a non-GAAP term, is defined by the Company as net income before (1) severance, (2) impairment of equipment and intangibles, (3) gain on sale of equity investment, (4) amortization of intangible assets and (5) the tax effect of those adjustments to net income and discrete items, stated on a per share basis.
The Company provides supplemental non-GAAP financial measures 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. As described below, 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

21


provides consistency in its financial reporting and facilitates investors’ understanding of the Company’s historical operating trends by providing an additional basis for comparisons to prior periods.
Management uses Adjusted EBITDA and Adjusted Operating Income to assist it in evaluations of the Company’s operating performance by excluding items that management does not consider as relevant in the results of its ongoing operations. Internally, these non-GAAP measures are used by management for planning and forecasting purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; for evaluating the effectiveness of operational strategies; and for evaluating the Company’s capacity to fund capital expenditures, secure financing and expand its business.
In addition, and as a consequence of the importance of these non-GAAP financial measures in managing its business, the Company’s Board of Directors uses non-GAAP financial measures in the evaluation process to determine management compensation.
The Company believes that certain analysts and investors use Adjusted EBITDA, Adjusted Operating Income and non-GAAP EPS as supplemental measures to evaluate the overall operating performance of firms in the Company’s industry. Additionally, lenders or potential lenders use Adjusted EBITDA measures to evaluate the Company’s creditworthiness.
The presentation of non-GAAP financial measures is not meant to be considered in isolation, as a substitute for, or superior to, financial measures or information provided in accordance with GAAP. Management strongly encourages investors to review the Company’s consolidated financial statements in their entirety and to not rely on any single financial measure.
Management notes that the use of non-GAAP measures has limitations:
First, non-GAAP financial measures are not standardized. Accordingly, the methodology used to produce the Company’s non-GAAP financial measures is not computed under GAAP and may differ notably from the methodology used by other companies. For example, the Company’s non-GAAP measure of Adjusted EBITDA may not be directly comparable to EBITDA or an adjusted EBITDA measure reported by other companies.
Second, the Company’s non-GAAP financial measures exclude items such as amortization and depreciation that are recurring. Amortization of intangibles and depreciation have been, and will continue to be for the foreseeable future, a significant recurring expense with an impact upon the Company’s results of operations, notwithstanding the lack of immediate impact upon cash flows.
Third, there is no assurance the Company will not have future restructuring activities, translation-related costs, gains or losses on sale of equity investments, or similar items and, therefore, may need to record additional charges (or credits) associated with such items, including the tax effects thereon. The exclusion of these items from the Company’s non-GAAP measures should not be construed as an implication that these costs are unusual, infrequent or non-recurring.

22



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.

Reconciliation of GAAP Net Income to Adjusted Operating Income and Adjusted EBITDA
 
 
Three months ended
 
Nine months ended
(In thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net sales
$
345,591

 
$
296,692

 
$
991,970

 
$
866,768

Net income
$
40,902

 
$
21,947

 
$
113,407

 
$
71,049

Adjustments to net income
 
 
 
 
 
 
 
Income tax expense
9,248

 
3,945

 
29,401

 
14,331

Interest expense
7,749

 
9,468

 
24,418

 
27,778

Interest income
(150
)
 
(123
)
 
(323
)
 
(233
)
Other expense income), net
2,906

 
(565
)
 
3,762

 
(2,294
)
GAAP – Operating income
60,655

 
34,672

 
170,665

 
110,631

Severance
2,141

 
2,405

 
2,700

 
2,405

Impairment of equipment and intangibles 1

7,230

 
5,826

 
10,400

 
5,826

Amortization of intangible assets
11,051

 
10,974

 
33,003

 
33,325

Adjusted operating income
81,077

 
53,877

 
216,768

 
152,187

Depreciation
14,785

 
13,795

 
43,173

 
41,320

Adjusted EBITDA
$
95,862

 
$
67,672

 
$
259,941

 
$
193,507

 
 
 
 
 
 
 
 
Adjusted operating income – as a % of net sales
23.5
%
 
18.2
%
 
21.9
%
 
17.6
%
Adjusted EBITDA – as a % of net sales
27.7
%
 
22.8
%
 
26.2
%
 
22.3
%

1 Includes product line impairment charges of $3,364 and $5,826 classified as cost of sales for the three months ended September 30, 2017 and October 1, 2016, respectively. Includes product line impairment charges of $5,330 and $5,826 classified as cost of sales for the nine months ended September 30, 2017 and October 1, 2016, respectively.

Includes intangible impairment charge of $3,866 classified as selling general and administrative expense for both the three and nine months ended September 30, 2017. 

Includes product line impairment charge of $320 classified as selling general and administrative expense for both the three and nine months ended September 30, 2017.

Includes product line impairment charge of $884 classified as engineering, research and development expense for the nine months ended September 30, 2017.
Reconciliation of GAAP Earnings per Share to Non-GAAP Earnings per Share
 

23


 
Three months ended
 
Nine months ended
(In thousands, except per share data)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net income
$
40,902

 
$
21,947

 
$
113,407

 
$
71,049

Adjustments to net income
 
 
 
 
 
 
 
Severance
2,141

 
2,405

 
2,700

 
2,405

Impairment of equipment and intangibles 1
10,030

 
5,826

 
13,200

 
5,826

Gain on sale of equity investment

 

 

 
(156
)
Amortization of intangible assets
11,051

 
10,974

 
33,003

 
33,325

Tax effect of adjustments to net income and discrete tax items
(7,135
)
 
(6,505
)
 
(15,661
)
 
(13,895
)
Non-GAAP net income
$
56,989

 
$
34,647

 
$
146,649

 
$
98,554

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.28

 
$
0.15

 
$
0.79

 
$
0.50

Effect of adjustments to net income
0.11

 
0.09

 
0.23

 
0.19

Diluted non-GAAP earnings per common share
$
0.40

 
$
0.24

 
$
1.02

 
$
0.69


1 Includes product line impairment charges of $3,364 and $5,826 classified as cost of sales for the three months ended September 30, 2017 and October 1, 2016, respectively. Includes product line impairment charges of $5,330 and $5,826 classified as cost of sales for the nine months ended September 30, 2017 and October 1, 2016, respectively.

Includes intangible impairment charge of $3,866 classified as selling general and administrative expense for both the three and nine months ended September 30, 2017. 

Includes product line impairment charge of $320 classified as selling general and administrative expense for the nine months ended September 30, 2017.

Includes product line impairment charge of $884 classified as engineering, research and development expense for the nine months ended September 30, 2017.

Includes product line impairment charge of $2,800 classified as other expense for both the three and nine months ended September 30, 2017.


24


Item 3. Quantitative and Qualitative Disclosures About Market Risk
Entegris’ principal financial market risks are sensitivities to interest rates and foreign currency exchange rates. The Company’s interest-bearing cash equivalents and senior secured financing obligation are subject to interest rate fluctuations. The Company’s cash equivalents are instruments with maturities of three months or less. A 100 basis point change in interest rates would potentially increase or decrease annual net income by approximately $1.8 million annually.
The cash flows and results of operations of the Company’s foreign-based operations are subject to fluctuations in foreign exchange rates. The Company occasionally uses derivative financial instruments to manage the foreign currency exchange rate risks associated with its foreign-based operations. At September 30, 2017 , the Company had no net exposure to any foreign currency forward contracts.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has conducted an evaluation of the effectiveness of the design and operation 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 (the 1934 Act)) as of September 30, 2017 . The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 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 a company in the reports that it files or submits under the 1934 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 our CEO and CFO), as of September 30, 2017 , 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 1934 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 has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.



25


PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 2017 , the Company is subject to various claims, legal actions, and complaints arising in the ordinary course of business. The Company believes the final outcome of these matters will not have a material adverse effect on its condensed consolidated financial statements. The Company expenses legal costs as incurred.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information concerning shares of the Company’s Common Stock $0.01 par value purchased during the three months ended September 30, 2017.
Period




(a)
Total Number of Shares Purchased (1)


(b)
Average Price Paid per Share

(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
July 2 - August 5, 2017
94,500
$24.89
94,500
$82,075,293
August 6 - September 2, 2017
150,000
$24.57
150,000
$78,390,572
September 3 - September 30, 2017
145,210
$27.29
145,210
$74,427,330
Total
389,710
$25.66
389,710
$74,427,330

(1) On February 15, 2017, the Company’s Board of Directors authorized a repurchase program covering up to an aggregate of $100 million of the Company’s common stock in open market transactions and in accordance with one or more pre-arranged stock trading plans to be established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. This authorization expires on February 15, 2018. This repurchase program represents a renewal and replacement of the $100 million repurchase program originally authorized by the Board of Directors on February 5, 2016, which expired February 15, 2017.

Item 6. Exhibits

31.1
  
31.2
  
32.1
  
101.INS
  
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

26



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
ENTEGRIS, INC.
 
 
 
Date: October 26, 2017
 
/s/ Gregory B. Graves
 
 
Gregory B. Graves
 
 
Executive Vice President and Chief Financial
 
 
Officer (on behalf of the registrant and as
 
 
principal financial officer)


27

Table of Contents

EXHIBIT INDEX
31.1
  
31.2
  
32.1
  
101.INS
  
XBRL Instance Document
101.SCH
  
XBRL Taxonomy Extension Schema Document
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document
 


28


Exhibit 31.1
CERTIFICATIONS
I, Bertrand Loy, certify that:
1.
I have reviewed this Report on Form 10-Q of Entegris, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: October 26, 2017
/s/ Bertrand Loy
 
Bertrand Loy
 
Chief Executive Officer
 
(Principal Executive Officer)





Exhibit 31.2
CERTIFICATIONS
I, Gregory B. Graves, certify that:
1.
I have reviewed this Report on Form 10-Q of Entegris, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: October 26, 2017
/s/ Gregory B. Graves
 
Gregory B. Graves
 
Chief Financial Officer
 
(Principal Financial Officer)





EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q (the “Report”) of Entegris, Inc, a Delaware corporation (the “Company”), for the period ended September 30, 2017 as filed with the Securities and Exchange Commission on the date hereof, Bertrand Loy, President and Chief Executive Officer of the Company, and Gregory B. Graves, Chief Financial Officer of the Company, each hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: October 26, 2017
/s/ Bertrand Loy
 
Bertrand Loy
 
Chief Executive Officer
 
 
 
/s/ Gregory B. Graves
 
Gregory B. Graves
 
Chief Financial Officer