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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________
FORM 10-Q
________________________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2019
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)
 _______________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, $0.01 par value per share
 
ENTG
 
The Nasdaq Stock Market LLC
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 every Interactive Data File required to be submitted 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 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
 
¨
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the 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
As of October 21, 2019, there were 134,874,386 shares of the registrant’s common stock outstanding.
 


Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 28, 2019
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,” “intend,” “estimate,” “forecast,” “project,” “should,” “may,” “will,” “would” or the negative thereof and similar expressions are intended to identify such forward-looking statements. These forward-looking statements may include statements about future period guidance or projections; the Company’s performance relative to its markets; market and technology trends, including the duration and drivers of any growth trends; the development of new products and the success of their introductions; the focus of the Company’s engineering, research and development projects; the Company’s ability to execute on its business strategies; the Company’s capital allocation strategy, which may be modified at any time for any reason, including share repurchases, dividends, debt repayments and potential acquisitions; the effect of the Tax Cuts and Jobs Act; the impact of the acquisitions the Company has made and commercial partnerships the Company has established; future capital and other expenditures, including estimates thereof; the Company’s expected tax rate; the impact, financial or otherwise, of any organizational changes; the impact of accounting pronouncements; quantitative and qualitative disclosures about market risk; and other matters. These forward-looking statements are based on current management expectations and assumptions only as of the date of this 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 the Company’s products and solutions; the Company’s ability to meet rapid demand shifts; the Company’s ability to continue technological innovation and introduce new products to meet customers’ rapidly changing requirements; the Company’s concentrated customer base; the Company’s dependence on sole source and limited source suppliers; raw material shortages, supply constraints and price increases; the Company’s ability to identify, effect and integrate acquisitions, joint ventures or other transactions; the Company’s ability to effectively implement any organizational changes; the Company’s ability to protect and enforce intellectual property rights; operational, political and legal risks of the Company’s international operations; the increasing complexity of certain manufacturing processes; changes in governmental regulations of the countries in which the Company operates; fluctuations in currency exchange rates; fluctuations in the market price of the Company’s stock; the level of, and obligations associated with, the Company’s indebtedness; and other risk factors and additional information described in the Company’s filings with the Securities and

2

Table of Contents

Exchange Commission, including under the heading “Risks Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 11, 2019, and in the Company’s other periodic filings. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, the Company undertakes no obligation to update publicly any forward-looking statements or information contained herein, which speak as of their respective dates.

3

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 28, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
282,748

 
$
482,062

Trade accounts and notes receivable, net of allowance for doubtful accounts of $1,247 and $893
261,306

 
222,055

Inventories, net
290,270

 
268,140

Deferred tax charges and refundable income taxes
21,825

 
17,393

Other current assets
28,091

 
39,688

Total current assets
884,240

 
1,029,338

Property, plant and equipment, net of accumulated depreciation of $510,316 and $461,222
470,005

 
419,529

Other assets:
 
 
 
Right-of-use assets
48,684

 

Goodwill
659,840

 
550,202

Intangible assets, net of accumulated amortization of $392,262 and $343,088
367,558

 
295,687

Deferred tax assets and other noncurrent tax assets
23,191

 
10,162

Other
14,166

 
12,723

Total assets
$
2,467,684

 
$
2,317,641

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Long-term debt, current maturities
$
4,000

 
$
4,000

Accounts payable
73,071

 
93,055

Accrued payroll and related benefits
58,646

 
78,288

Other accrued liabilities
74,528

 
62,732

Income taxes payable
2,835

 
31,593

Total current liabilities
213,080

 
269,668

Long-term debt, excluding current maturities, net of unamortized discount and debt issuance costs of $9,920 and $11,137
934,080

 
934,863

Pension benefit obligations and other liabilities
52,906

 
31,795

Deferred tax liabilities and other noncurrent tax liabilities
103,326

 
69,290

Long-term lease liability
44,375

 

Commitments and contingent liabilities

 

Equity:
 
 
 
Preferred stock, par value $.01; 5,000,000 shares authorized; none issued and outstanding as of September 28, 2019 and December 31, 2018

 

Common stock, par value $.01; 400,000,000 shares authorized; issued and outstanding shares as of September 28, 2019: 135,141,486 and 134,939,086, respectively; issued and outstanding shares as of December 31, 2018: 136,179,381 and 135,976,981, respectively
1,351

 
1,362

Treasury stock, at cost: 202,400 shares held as of September 28, 2019 and December 31, 2018
(7,112
)
 
(7,112
)
Additional paid-in capital
837,212

 
837,658

Retained earnings
332,579

 
213,753

Accumulated other comprehensive loss
(44,113
)
 
(33,636
)
Total equity
1,119,917

 
1,012,025

Total liabilities and equity
$
2,467,684

 
$
2,317,641

See the accompanying notes to condensed consolidated financial statements.

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Table of Contents


ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended
 
Nine months ended
(In thousands, except per share data)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net sales
$
394,147

 
$
398,597

 
$
1,164,068

 
$
1,148,855

Cost of sales
223,797

 
216,881

 
650,051

 
608,764

Gross profit
170,350

 
181,716

 
514,017

 
540,091

Selling, general and administrative expenses
71,232

 
62,358

 
217,636

 
185,827

Engineering, research and development expenses
31,173

 
29,964

 
90,788

 
87,781

Amortization of intangible assets
15,152

 
21,419

 
50,400

 
45,102

Operating income
52,793

 
67,975

 
155,193

 
221,381

Interest expense
11,388

 
7,987

 
33,587

 
24,442

Interest income
(1,172
)
 
(309
)
 
(4,020
)
 
(2,613
)
Other expense (income), net
934

 
810

 
(121,329
)
 
4,826

Income before income tax expense
41,643

 
59,487

 
246,955

 
194,726

Income tax expense
876

 
11,427

 
49,533

 
34,755

Net income
$
40,767

 
$
48,060

 
$
197,422

 
$
159,971

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.30

 
$
0.34

 
$
1.46

 
$
1.13

Diluted net income per common share
$
0.30

 
$
0.34

 
$
1.45

 
$
1.12

 
 
 
 
 
 
 
 
Weighted shares outstanding:
 
 
 
 
 
 
 
Basic
135,092

 
141,556

 
135,256

 
141,613

Diluted
136,530

 
143,033

 
136,601

 
143,308

See the accompanying notes to condensed consolidated financial statements.


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Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income
$
40,767

 
$
48,060

 
$
197,422

 
$
159,971

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(6,005
)
 
(1,432
)
 
(10,504
)
 
(10,223
)
Pension liability adjustments
17

 
17

 
27

 
70

Other comprehensive loss
(5,988
)
 
(1,415
)
 
(10,477
)
 
(10,153
)
Comprehensive income
$
34,779

 
$
46,645

 
$
186,945

 
$
149,818

See the accompanying notes to condensed consolidated financial statements.


6

Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
Common
shares
outstanding
 
Common
stock
 
Treasury shares
 
Treasury stock
 
Additional
paid-in
capital
 
Retained earnings
(deficit)
 
Foreign currency translation adjustments
 
Defined benefit pension adjustments
 
Total
Balance at December 31, 2017
141,283

 
$
1,413

 

 
$

 
$
867,699

 
$
147,418

 
$
(22,593
)
 
$
(919
)
 
$
993,018

Shares issued under stock plans
815

 
8

 

 

 
(13,658
)
 

 

 

 
(13,650
)
Share-based compensation expense

 

 

 

 
4,128

 

 

 

 
4,128

Repurchase and retirement of common stock
(296
)
 
(3
)
 

 

 
(1,809
)
 
(8,187
)
 

 

 
(9,999
)
Dividends declared ($0.07 per share)

 

 

 

 
13

 
(9,926
)
 

 

 
(9,913
)
Pension liability adjustment

 

 

 

 

 

 

 
4

 
4

Foreign currency translation

 

 

 

 

 

 
3,835

 

 
3,835

Cumulative effect of change in accounting principle

 

 

 

 

 
(591
)
 

 

 
(591
)
Net income

 

 

 

 

 
57,562

 

 

 
57,562

Balance at March 31, 2018
141,802

 
$
1,418

 

 
$

 
$
856,373

 
$
186,276

 
$
(18,758
)
 
$
(915
)
 
$
1,024,394

Shares issued under stock plans
171

 
1

 

 

 
2,263

 

 

 

 
2,264

Share-based compensation expense

 

 

 

 
4,429

 

 

 

 
4,429

Repurchase and retirement of common stock
(282
)
 
(2
)
 

 

 
(1,708
)
 
(8,291
)
 

 

 
(10,001
)
Dividends declared ($0.07 per share)

 

 

 

 

 
(9,953
)
 

 

 
(9,953
)
Pension liability adjustment

 

 

 

 

 

 

 
49

 
49

Foreign currency translation

 

 

 

 

 

 
(12,626
)
 

 
(12,626
)
Net income

 

 

 

 

 
54,349

 

 

 
54,349

Balance at June 30, 2018
141,691

 
$
1,417

 

 
$

 
$
861,357

 
$
222,381

 
$
(31,384
)
 
$
(866
)
 
$
1,052,905

Shares issued under stock plans
11

 

 
 
 

 
(137
)
 

 

 

 
(137
)
Share-based compensation expense

 

 

 

 
4,170

 

 

 

 
4,170

Repurchase of common stock
(95
)
 
(1
)
 
(202
)
 
(7,112
)
 
(581
)
 
(2,306
)
 

 

 
(10,000
)
Dividends declared ($0.07 per share)

 

 

 

 

 
(9,912
)
 

 

 
(9,912
)
Pension liability adjustment

 

 

 

 

 

 

 
17

 
17

Foreign currency translation

 

 

 

 

 

 
(1,432
)
 

 
(1,432
)
Net income

 

 

 

 

 
48,060

 

 

 
48,060

Balance at September 29, 2018
141,607

 
$
1,416

 
(202
)
 
$
(7,112
)
 
$
864,809

 
$
258,223

 
$
(32,816
)
 
$
(849
)
 
$
1,083,671



7

Table of Contents

(In thousands)
Common
shares
outstanding
 
Common
stock
 
Treasury shares
 
Treasury stock
 
Additional
paid-in
capital
 
Retained earnings
(deficit)
 
Foreign currency translation adjustments
 
Defined benefit pension adjustments
 
Total
Balance at December 31, 2018
136,179

 
$
1,362

 
(202
)
 
$
(7,112
)
 
$
837,658

 
$
213,753

 
$
(32,776
)
 
$
(860
)
 
$
1,012,025

Shares issued under stock plans
572

 
5

 
 
 

 
(6,817
)
 

 

 

 
(6,812
)
Share-based compensation expense

 

 

 

 
4,653

 

 

 

 
4,653

Repurchase and retirement of common stock
(1,035
)
 
(10
)
 

 

 
(6,364
)
 
(23,413
)
 

 

 
(29,787
)
Dividends declared ($0.07 per share)

 

 

 

 
7

 
(9,517
)
 

 

 
(9,510
)
Pension liability adjustment

 

 

 

 

 

 

 
24

 
24

Foreign currency translation

 

 

 

 

 

 
(2,787
)
 

 
(2,787
)
Net income

 

 

 

 

 
32,658

 

 

 
32,658

Balance at March 30, 2019
135,716

 
$
1,357

 
(202
)
 
$
(7,112
)
 
$
829,137

 
$
213,481

 
$
(35,563
)
 
$
(836
)
 
$
1,000,464

Shares issued under stock plans
49

 

 
 
 

 
(572
)
 

 

 

 
(572
)
Share-based compensation expense

 

 

 

 
4,936

 

 

 

 
4,936

Repurchase and retirement of common stock
(422
)
 
(4
)
 

 

 
(2,579
)
 
(12,417
)
 

 

 
(15,000
)
Dividends declared ($0.07 per share)

 

 

 

 

 
(9,550
)
 

 

 
(9,550
)
Pension liability adjustment

 

 

 

 

 

 

 
(14
)
 
(14
)
Foreign currency translation

 

 

 

 

 

 
(1,712
)
 

 
(1,712
)
Net income

 

 

 

 

 
123,997

 

 

 
123,997

Balance at June 29, 2019
135,343

 
$
1,353

 
(202
)
 
$
(7,112
)
 
$
830,922

 
$
315,511

 
$
(37,275
)
 
$
(850
)
 
$
1,102,549

Shares issued under stock plans
156

 
2

 
 
 

 
3,156

 

 

 

 
3,158

Share-based compensation expense

 

 

 

 
5,326

 

 

 

 
5,326

Repurchase and retirement of common stock
(358
)
 
(4
)
 

 

 
(2,206
)
 
(12,790
)
 

 

 
(15,000
)
Dividends declared ($0.08 per share)

 

 

 

 
14

 
(10,909
)
 

 

 
(10,895
)
Pension liability adjustment

 

 

 

 

 

 

 
17

 
17

Foreign currency translation

 

 

 

 

 

 
(6,005
)
 

 
(6,005
)
Net income

 

 

 

 

 
40,767

 

 

 
40,767

Balance at September 28, 2019
135,141

 
$
1,351

 
(202
)
 
$
(7,112
)
 
$
837,212

 
$
332,579

 
$
(43,280
)
 
$
(833
)
 
$
1,119,917



See the accompanying notes to condensed consolidated financial statements.

8

Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
Operating activities:
 
 
 
Net income
$
197,422

 
$
159,971

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
54,623

 
48,236

Amortization
50,400

 
45,102

Share-based compensation expense
14,915

 
12,727

Provision for deferred income taxes
(2,123
)
 
(1,066
)
Other
14,251

 
10,584

Changes in operating assets and liabilities:
 
 
 
Trade accounts and notes receivable
(30,405
)
 
(8,713
)
Inventories
(5,689
)
 
(28,788
)
Accounts payable and accrued liabilities
(31,911
)
 
(9,440
)
Other current assets
11,284

 
1,390

Income taxes payable and refundable income taxes
(20,574
)
 
(9,193
)
Other
1,461

 
439

Net cash provided by operating activities
253,654

 
221,249

Investing activities:
 
 
 
Acquisition of property, plant and equipment
(86,423
)
 
(75,337
)
Acquisition of businesses, net of cash acquired
(266,373
)
 
(380,268
)
Other
2,815

 
5,014

Net cash used in investing activities
(349,981
)
 
(450,591
)
Financing activities:
 
 
 
Payments of long-term debt
(2,000
)
 
(27,000
)
Payments for dividends
(29,779
)
 
(29,701
)
Issuance of common stock
4,351

 
3,029

Repurchase of common stock
(65,321
)
 
(30,000
)
Taxes paid related to net share settlement of equity awards
(8,577
)
 
(14,552
)
Other
(502
)
 
1,254

Net cash used in financing activities
(101,828
)
 
(96,970
)
Effect of exchange rate changes on cash and cash equivalents
(1,159
)
 
(4,203
)
Decrease in cash and cash equivalents
(199,314
)
 
(330,515
)
Cash and cash equivalents at beginning of period
482,062

 
625,408

Cash and cash equivalents at end of period
$
282,748

 
$
294,893

Supplemental Cash Flow Information
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
Non-cash transactions:
 
 
 
Deferred acquisition payments
$
32,462

 
$

Contingent consideration obligation
$
686

 
$

Equipment purchases in accounts payable
$
3,431

 
$
9,464

Dividends payable
$
307

 
$
77

Schedule of interest and income taxes paid:
 
 
 
Interest paid
$
37,366

 
$
23,070

Income taxes paid, net of refunds received
$
66,474

 
$
44,249

See the accompanying notes to condensed consolidated financial statements.

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Table of Contents

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, right-of-use assets, goodwill, intangibles, accrued expenses, short-term and long-term lease liability, 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 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 28, 2019 and December 31, 2018, and the results of operations and comprehensive income for the three and nine months ended September 28, 2019 and September 29, 2018, the equity statements as of and for the three and nine months ended September 28, 2019 and September 29, 2018, and cash flows for the nine months ended September 28, 2019 and September 29, 2018.
The condensed consolidated financial statements and accompanying 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, 2018. The results of operations for the three and nine months ended September 28, 2019 are not necessarily indicative of the results to be expected for the full year.
Leases The Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets include operating leases. Lease liabilities for operating leases are classified in “Other accrued liabilities” and “Long-term lease liabilities” in our condensed consolidated balance sheet. We do not have material financing leases.
Operating assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU assets includes prepaid lease payments and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Lease and non-lease components are generally accounted for separately for real estate leases. For non-real estate leases, we account for the lease and non-lease components as a single lease component.
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 $959.1 million at September 28, 2019, compared to the carrying amount of long-term debt, including current maturities, of $938.1 million at September 28, 2019.
Recent Accounting Pronouncements Adopted in 2019 In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement.
The Company adopted ASU No. 2016-02 using the modified retrospective method. See Note 9 Leases to the condensed consolidated financial statements for further details.

10

Table of Contents

2. REVENUES
Revenue Recognition Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less.
When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. Such deferred revenue typically results from advance payments received on sales of the Company’s products. The Company makes the required disclosures below.
The Company does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Nature of goods and services The following is a description of principal activities from which the Company generates its revenues. The Company has three reportable segments. For more detailed information about reportable segments, see note 10 to the condensed consolidated financial statements. For each of the three reportable segments, the recognition of revenue regarding the nature of goods and services provided by the segments are similar and described below. The Company recognizes revenue for product sales at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment or delivery, depending on the terms of the underlying contracts. For product sales contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognizes the related revenue as control of each individual product is transferred to the customer, in satisfaction of the corresponding performance obligations.
The Company generally recognizes revenue for sales of services when the Company has satisfied the performance obligation.
The Company also enters into arrangements to license its intellectual property. These arrangements typically permit the customer to use a specialized manufacturing process and in return the Company receives a royalty fee. If applicable, the Company recognizes revenue when the subsequent sale or usage occurs.
The Company offers certain customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized in an amount estimated based on historical experience and contractual obligations. The Company periodically reviews the assumptions underlying its estimates of discounts and volume rebates and adjusts its revenues accordingly.
In addition, the Company offers free product rebates to certain customers. The Company utilizes an adjusted market approach to estimate the stand-alone selling price of the loyalty program and allocates a portion of the consideration received to the free product offering. The free product offering is redeemable upon future purchases of the Company’s products. The amount associated with free product rebates is deferred in the balance sheet and is recognized as revenue when the free product is redeemed or when the likelihood of redemption is remote. The Company deems the amount immaterial for disclosure.
The Company provides for the estimated costs of fulfilling our obligations under product warranties at the time the related revenue is recognized. The Company estimates the costs based on historical failure rates, projected repair costs, and knowledge of specific product failures (if any). The specific warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to one year. The Company regularly reevaluates its estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
The Company’s contracts are generally short-term in nature. Most contracts do not exceed twelve months. Payment terms vary by the type and location of the Company’s customers and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer. Those customers that prepay are represented by the contract liabilities below until the performance obligations are satisfied.
The following table provides information about contract liabilities from contracts with customers. The contract liabilities are included in other accrued liabilities balance in the condensed consolidated balance sheet.

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Table of Contents

(In thousands)
September 28, 2019
 
December 31, 2018
Contract liabilities - current
$
10,734

 
$
15,364


Significant changes in the contract liabilities balances during the period are as follows:
 
Nine months ended
(In thousands)
September 28, 2019
Revenue recognized that was included in the contract liability balance at the beginning of the period
$
(14,565
)
Increases due to cash received, excluding amounts recognized as revenue during the period
9,936


3. ACQUISITIONS
Hangzhou Anow Microfiltration Co., Ltd.
On September 17, 2019, the Company acquired Hangzhou Anow Microfiltration Co., Ltd. (Anow), a filtration company for diverse industries including semiconductor, pharmaceutical, and medical. Anow reports into the Microcontamination Control division of the Company. The acquisition was accounted for under the acquisition method of accounting and the results of Anow are included in the Company’s condensed consolidated financial statements as of and since September 17, 2019. Costs associated with the acquisition of Anow were $2.0 million and $2.3 million for the three and nine months ended September 28, 2019, respectively, and were expensed as incurred. These costs are included in selling, general and administrative expenses in the Company’s condensed consolidated statement of operations. The acquisition does not constitute a material business combination.
The purchase price for Anow is $73.0 million, net of cash acquired. The purchase price includes (1) cash consideration of $62.8 million, or $59.1 million net of cash acquired (subject to revision for certain adjustments), which was funded from the Company’s existing cash on hand, (2) deferred payments due to the seller of $10.2 million that are due within one year, and (3) $3.7 million deferred payments due to the seller at the earliest date of September 18, 2021.
The purchase price of Anow exceeds the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $25.2 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 non-deductible for income tax purposes.
The following table summarizes the provisional allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed at the date of the acquisition date:
(In thousands):
As of September 17, 2019
Trade accounts and note receivable, net
$
3,455

Inventories, net
4,242

Other current assets
202

Property, plant and equipment
8,863

Identifiable intangible assets
42,179

Other noncurrent assets
1,565

Accounts payable and accrued liabilities
(1,814
)
Noncurrent deferred tax liabilities
(10,890
)
       Net assets acquired
47,802

Goodwill
25,212

Total purchase price, net of cash acquired
$
73,014




12


The Company recognized the following finite-lived intangible assets as part of the acquisition of Anow:
(In thousands)
Amount
 
Weighted
average life in
years
Developed technology
$
2,430