DRS/A
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CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO 17 C.F.R. SECTION 200.83

As confidentially submitted to the Securities and Exchange Commission on July 29, 2019. This draft registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein

remains strictly confidential.

Registration No. 333-            

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT No. 1

to

FORM F-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

Atotech Limited

(Exact name of registrant as specified in its charter)

Not Applicable

(Translation of registrant’s name into English)

 

Bailiwick of Jersey   2890   Not applicable
(State or other jurisdiction of incorporation or
organization)
  (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer Identification No.)

William Street, West Bromwich

West Midlands, B70 0BG

United Kingdom

(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)

 

 

Alpha US Bidco, Inc.

c/o The Corporation Trust Company

Corporation Trust Center

1209 Orange Street

Wilmington, Delaware 19801

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Patrick H. Shannon

Jason M. Licht

Latham & Watkins LLP

555 Eleventh Street, NW

Washington, DC 20004

(202) 637-2200

 

Rod Miller

Benjamin J. Miles
Milbank LLP

55 Hudson Yards

New York, New York 10001

(212) 530-5000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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 7(a)(2)(B) of the Securities Act.  ☐

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of Securities to be registered   Proposed maximum aggregate
offering price(a)(b)
  Amount of registration fee(c)

  Common Shares, $0.01 par value per share

 

$                                     

 

$                                     

 

 

 

(a)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act of 1933, as amended.
(b)   Includes additional common shares that may be purchased by the underwriters.
(c)   Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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CONFIDENTIAL TREATMENT REQUESTED BY ATOTECH LIMITED PURSUANT TO 17 CFR 200.83

 

The information in this preliminary prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED                    , 2019

PROSPECTUS

                 Common Shares

 

 

LOGO

Atotech Limited

Common Shares

 

 

This is Atotech Limited’s initial public offering. Atotech Limited is offering                  common shares in this offering. The selling shareholders are offering                  common shares in this offering. We will not receive any proceeds from the sale of common shares held by the selling shareholders. The selling shareholders named in this offering include affiliates of The Carlyle Group L.P.

We expect the public offering price to be between $         and $             per share. Currently, no public market exists for our common shares. We intend to apply for listing of our common shares on the                      under the symbol “            .”

 

 

Investing in the common shares involves risks that are described in the “Risk Factors” section beginning on page 24 of this prospectus.

Upon completion of this offering, the common shares beneficially owned by The Carlyle Group and its affiliates will represent     % of the total voting power of our outstanding common shares. Accordingly, we expect to be a “controlled company” under the corporate governance rules of                 .

We are a “foreign private issuer” under the applicable Securities and Exchange Commission rules and will be eligible for reduced public company disclosure requirements. See “Management—Foreign Private Issuer Exemption.”

 

 

 

     Per Share      Total  

Public offering price

   $                  $              

Underwriters’ discounts and commissions(1)

   $                  $              

Proceeds, before expenses, to Atotech Limited

   $                  $              

Proceeds, before expenses, to the selling shareholders

   $                  $              

 

(1)   We refer you to “Underwriting” for additional information regarding underwriting compensation.

The underwriters may also purchase up to an additional                 common shares from the selling shareholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The common shares will be ready for delivery on or about                 , 2019 through the book-entry facilities of The Depository Trust Company.

 

 

 

Citigroup   Credit Suisse
BofA Merrill Lynch   J.P. Morgan

 

 

The date of this prospectus is                     , 2019.

 


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CONFIDENTIAL TREATMENT REQUESTED BY ATOTECH LIMITED PURSUANT TO 17 CFR 200.83

 

TABLE OF CONTENTS

 

Prospectus Summary

     1  

Risk Factors

     24  

Forward-Looking Statements

     60  

Use of Proceeds

     62  

Dividend Policy

     63  

Capitalization

     64  

Dilution

     65  

Selected Historical Financial Information

     66  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     68  

Our Industry and End-Markets

     94  

Business

     99  

Management

     119  

Certain Relationships and Related Party Transactions

     129  

Principal and Selling Shareholders

     131  

Description of Capital Stock

     134  

Common Shares Eligible For Future Sale

     145  

Taxation

     147  

Enforceability of Civil Liabilities

     157  

Underwriting

     158  

Expenses Related to the Offering

     165  

Validity of Common Shares

     166  

Experts

     166  

Where You Can Find Additional Information

     167  

Index to Audited Financial Statements

     F-1  

 

 

For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction other than the United States where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our common shares and the distribution of this prospectus outside the United States.

We are incorporated in the Bailiwick of Jersey, and many of our outstanding voting securities are owned by non-U.S. residents. Under the rules of the U.S. Securities and Exchange Commission, or SEC, we are currently eligible for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

We are responsible for the information contained in this prospectus and in any related free-writing prospectus we prepare or authorize and you should only rely on such information. We and the underwriters have not authorized anyone to give you any other information, and we and the underwriters take no responsibility for any other information that others may give you. The selling shareholders are offering to sell, and seeking offers to buy, our common shares only in jurisdictions where offers and sales are permitted. The information in this document may only be accurate on the date of this document, regardless of its time of delivery or of any sales of our common shares. Our business, financial condition, results of operations, or cash flows may have changed since such date.

Certain monetary amounts, percentages, and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic

 

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aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

BASIS OF PRESENTATION

On October 6, 2016, Alpha 3 B.V., a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands with its corporate seat in De Meern and registered with the Dutch chamber of commerce under number 66940532 (“Opco”) entered into the share purchase agreement with Total Holdings Europe, a French société par actions simplifiée and Total Gestion USA, a French société à responsabilité limitée (collectively, “TOTAL”) pursuant to which Atotech UK Topco Limited indirectly acquired all the outstanding equity interests of Atotech B.V., a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands (“Predecessor”) on January 31, 2017 (the “Acquisition”). In connection with the Acquisition, we entered into (a) a senior secured first lien term loan facility (the “term loan facility”) in an aggregate principal amount of $1,400.0 million and (b) a senior secured first lien multi-currency revolving credit facility with commitments, when taken together, of $250.0 million (the “revolving credit facility” and, together with the term loan facility, the “senior secured credit facilities”). The Acquisition was funded in part by (i) proceeds from borrowings under the term loan facility and (ii) proceeds totaling $425.0 million from the issuance of the 6.250% Senior Notes due 2025 (the “Opco Notes”) issued by Opco and Alpha US Bidco, Inc., a Delaware corporation, on January 31, 2017. The consummation of the Acquisition, the borrowing of $1,400.0 million under our senior secured credit facilities and the issuance of the Opco Notes are referred to herein as the “Acquisition Transactions.”

Following the consummation of the Acquisition, $500.0 million of indebtedness outstanding under the term loan facility was redenominated from U.S. dollars to RMB (the “RMB Term Loan Facility”) with the balance remaining denominated in U.S. dollars (the “USD Term Loan Facility” and, together with the RMB Term Loan Facility, the “term loan facilities”). On May 30, 2018, Opco entered into an amendment to the senior secured credit facilities to borrow $200.0 million under the USD Term Loan Facility in incremental Term B-1 loans (the “Incremental Borrowings”), and Alpha 2 B.V., a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands with its corporate seat in De Meern and registered with the Dutch chamber of commerce under number 66937442 (“Holdco”), and the direct owner of the outstanding equity interests of Opco, issued $300.0 million of 8.75%/9.50% Senior PIK Toggle Notes at an issue price of 99.010% (the “Holdco Notes” and, together with the Incremental Borrowings, the “2018 Recapitalization Borrowings”). Proceeds from the 2018 Recapitalization Borrowings were distributed to Atotech UK Topco Limited and used by it to pay accrued interest on, and redeem certain of, its preferred shares (such distribution, together with the 2018 Recapitalization Borrowings, the “2018 Recapitalization Transactions”).

Atotech Limited, the registrant, is a Bailiwick of Jersey company incorporated on December 12, 2018 for purposes of becoming the new holding company of Holdco and its subsidiaries. As of the date hereof, Atotech Limited has no subsidiaries or operations. For the year ended December 31, 2018, Atotech Limited had no operations, assets, or liabilities. In connection with the consummation of the offering and prior to effectiveness of the Registration Statement, we will undertake the following transactions (collectively, the “Reorganization Transactions”):

 

   

all outstanding preferred shares of Atotech UK Topco Limited will be converted to common shares resulting in all outstanding equity interests of Atotech UK Topco Limited consisting of                 common shares;

 

   

Atotech UK Topco Limited will consummate a                 -for-1 stock split; and

 

   

The Carlyle Group L.P. and its affiliates (“Carlyle”) and all other shareholders of Atotech UK Topco Limited will contribute all outstanding equity interests of Atotech UK Topco Limited to Atotech Limited in exchange for an equal number of common shares of Atotech Limited.

 

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Following the consummation of the offering, Atotech UK Topco Limited will be dissolved and Atotech Limited will directly own all outstanding equity interests of Holdco and will indirectly own all outstanding equity interests of Holdco’s operating subsidiaries, including Opco. Prior to the Reorganization Transactions, Atotech Limited will have no operations and no material assets or liabilities. As a result of the Reorganization Transactions, Atotech Limited will succeed to the business and operations of Atotech UK Topco Limited and Atotech Limited’s historical financial statements will be substantially identical to those of Atotech UK Topco Limited. Accordingly, the financial statements of Atotech Limited are not meaningful to an understanding of our business and are not included in this prospectus. However, the financial statements of Predecessor have been included for periods prior to the Acquisition and the financial statements of Atotech UK Topco Limited (“Successor”) have been included for periods following the Acquisition.

We have omitted selected financial data as of and for the years ended December 31, 2014 and 2015, as such financial data was audited by KPMG Audit, a department of KPMG S.A. (France), on a basis that is not consistent with the financial statements audited by KPMG AG Wirtschaftsprüfungsgesellschaft (Germany) for the years ended December 31, 2016, 2017 and 2018, and cannot be provided on a consistent basis without unreasonable effort and expense.

 

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MARKET AND INDUSTRY DATA

This prospectus includes market, economic, and industry data as well as certain statistics and information relating to our business, markets, and other industry data, which we obtained or extrapolated from industry publications, generated through internal estimates, our review and analysis of market conditions, surveys, customer feedback, and reports provided by various statistics providers, market research organizations, and others, including the IMF, Forbes, and The Boston Consulting Group. Industry publications and other third-party surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. While we believe that such data is reliable, neither we nor the underwriters have independently verified such data and cannot guarantee the accuracy or completeness thereof. Additionally, we cannot assure you that any of the assumptions underlying these statements are accurate or correctly reflect our position in the industry, and not all of our internal estimates have been verified by any independent sources, including the underwriters. Furthermore, we cannot assure you that a third-party using different methods to assemble, analyze, or compute market data would obtain the same results. There is no precise definition for what constitutes the Electronics (“EL”) and General Metal Finishing (“GMF”) plating chemistry markets. We have defined the markets in this prospectus consistent with the presentation we use for our internal segment reporting purposes. However, third-party reports may define the EL and GMF chemistry markets differently and our competitors may do the same. Most market position or market share, statistical, industry, or other market information presented in this prospectus is based on information or sources for the year ended December 31, 2017. Management believes such information presented represents the most recent data available to us. We do not intend, and do not assume any obligations, to update industry or market data set forth in this prospectus. Finally, behavior, preferences, and trends in the marketplace tend to change. As a result, investors and prospective investors should be aware that data in this prospectus and estimates based on such data may not be reliable indicators of future results.

References to “market share,” “market position,” and “market leader” are based on global revenues in the referenced market, and unless otherwise specified herein, are based on certain of the materials referenced above. When we discuss our EL plating chemistry market, we refer to the $2.3 billion wet chemicals market that we currently target within the broader $25 billion global electrochemical market, which consists of electroplating and non-electroplating chemicals. When we discuss our GMF plating chemistry market, we refer to the $2.1 billion wet chemicals market that we currently target within the broader $10 billion global surface finishing chemistry market.

The website URLs included in this prospectus are for inactive textual reference only. The information on the referenced websites is not incorporated herein and does not form a part of this prospectus.

TRADEMARKS

We own or have rights to trademarks, service marks, or trade names that we use in connection with the operation of our business. In addition, we have trademark and service mark rights to our names, logos, and website names and addresses. Other trademarks, service marks, and trade names appearing in this prospectus are the property of their respective owners. The trademarks and service marks we own or have the right to use include, among others, Atotech, Adhemax, BluCr, BondFilm, DynaChrome, DynaPlus, Inpulse, Multiplate, Neoganth, Printoganth, Stannatech, TriChrome, Uniplate, Zinni, and Zintek. Solely for convenience, in some cases, the trademarks, service marks, and trade names referred to in this prospectus are listed without the applicable ® and symbols, but we will assert, to the fullest extent under applicable law, our rights to these trademarks, service marks, and trade names. Other trademarks and service marks referenced in this prospectus are, to our knowledge, the property of their respective owners.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all the information that may be important to you. You should read this entire prospectus and should consider, among other things, the matters set forth under “Risk Factors,” “Selected Historical Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited financial statements and related notes thereto appearing elsewhere in this prospectus before making your investment decision. The information contained in this prospectus assumes (i) the Reorganization Transactions have been consummated and (ii) the underwriters have not exercised their option to purchase additional shares. References to the financial measures “EBITDA” and “Adjusted EBITDA” refer to financial measures that do not comply with International Financial Reporting Standards (“IFRS”). For information about how we calculate EBITDA and Adjusted EBITDA, see Note 3 to the table under the heading “—Summary Historical and Pro Forma Financial Information.”

References in this prospectus to “Atotech,” “we,” “us,” “our,” “its,” and the “Company” refer to the registrant and its consolidated subsidiaries after giving effect to the Reorganization Transactions.

Our Company

We are the leading global provider of specialty electroplating solutions delivering chemistry, equipment, and service for high-growth technology applications. We are #1 in the global electronics (“EL”) plating chemistry market, #1 in the global general metal finishing (“GMF”) plating chemistry market, and the #1 global manufacturer of horizontal plating equipment for printed circuit board (“PCB”) production. Our solutions are used in a wide variety of attractive end-markets, including smartphones, communication infrastructure, cloud computing infrastructure, computing and consumer electronics, automotive electronics, and automotive surface finishing, as well as in numerous industrial and consumer applications such as heavy machinery and household appliances. We benefit from various secular growth trends such as digitalization, increasing data volumes and processing speed requirements, the growth of the consumer class in emerging markets, increasing environmental regulations, and rising product quality and durability standards. We expect these trends to not only increase demand for our customers’ end-products that use our plating chemistry, but also increase the amount and value of plating chemistry used in each end-product, allowing our growth to outpace underlying end-market volume growth.

We are the only major company in our industry that provides both chemistry and equipment, which we sell through both our EL and GMF segments. Our comprehensive systems and solutions approach leverages our unique offering of chemistry, equipment, and service. We believe this business model creates a sustainable competitive advantage that helps us achieve deep customer intimacy and allows us to continue to grow our market share and capitalize on positive market growth trends. This approach is supported by our 17 state-of-the-art global technology centers, which allow us to provide local service around the world and to respond in real-time to customer needs. The combination of our comprehensive systems and solutions approach, expansive global manufacturing and sales footprint, customer-driven investments in research and development (“R&D”), and superior technical expertise makes us an ideal electroplating and surface finishing solutions partner for our diverse customer base. This drives long-lasting relationships and an industry-leading financial profile, with fiscal 2018 EL and GMF Segment Adjusted EBITDA margins of 33.9% and 27.0%, respectively.

Our solutions are mission-critical for the PCB, semiconductor (“SC”), and surface finishing industries, but typically account for less than 1% of total end-product cost. Our customers rely on these solutions to increase processing speeds, further miniaturize devices, transform product appearance, and increase product durability. Our direct customers are among the most important suppliers to the world’s leading original equipment manufacturers (“OEMs”) in our key end-markets. In order to satisfy demanding OEM specifications, we often

 

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partner with OEMs and our direct customers to develop comprehensive solutions that embed, or “design-in” our offerings. The “designed-in” nature of our solutions and the associated testing and certification processes, which can last up to five years, lead to high switching costs for our direct customers and OEMs. Our solutions create significant value for our customers by consistently and reliably enabling superior product performance. Our ability to consistently deliver a compelling customer value proposition has led to long-standing customer relationships, with an average relationship length of 24 years among our top 25 customers, and underpins our sustainable competitive advantage.

Our business is defined by an unwavering commitment to R&D with a focus on high-growth applications, close customer collaboration, and market-led innovation. We believe that we consistently invest more in R&D than our competitors with our fiscal 2018 R&D expense representing 4.8% of revenue for the same period. Approximately 90% of our annual R&D investments support our existing customers’ product improvement and short-term R&D needs. This close collaboration enables us to pioneer new high-value solutions with reduced commercial risk, while the remainder of our R&D investment is focused on developing next-generation technologies, often in partnership with leading OEMs, customers, and universities. Our historical and continued investment in R&D allows us to solve complex technical problems associated with cutting-edge product innovations, such as organic light-emitting diode (“OLED”) displays, flexible screens, and advanced driver-assistance systems (“ADAS”).

Our well-invested global footprint is comprised of our 17 state-of-the-art global technology centers, 15 chemistry production facilities, and two equipment production facilities. We believe we have the largest EL and GMF plating presence in Asia, with seven production facilities and nine technology centers, a distinct and crucial element of our business that enables us to capture growth throughout this key region. We serve customers locally in over 40 countries with approximately 3,800 employees, of whom 1,900 are directly engaged in customer support, leveraging their technical expertise in sales, marketing and service to enhance our customers’ operations, improve existing practices, and enable the rapid commercialization of new products. Of these approximately 1,900 technical experts, several hundred work directly with our customers at their facilities. Our scale and strong local presence are key competitive differentiators, allowing us to leverage our technology portfolio to address our customers’ current and future requirements, while simultaneously providing localized, high-touch customer service.

We sell our chemistry and equipment to a diverse mix of customers who are typically manufacturers serving global markets, ultimately mitigating our exposure to any individual geography. For fiscal 2018, our top ten customers accounted for approximately 25% of our total chemistry revenue.

 

Revenues By End-Market(1)     Revenues By Geography(3)       End User Demand by Geography(4) 

 

 

LOGO

    LOGO    LOGO   LOGO

 

(1)   Represents 2017 chemistry revenues.
(2)   Includes over 20 additional end-markets that utilize our offerings, including medical & industrial, energy, decorative hardware, and others.

 

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(3)   Represents 2018 chemistry revenues.
(4)   End user demand by geography represents the estimated geographic breakdown of our 2017 revenues by ultimate end users of products with our chemistry.

During fiscal 2018, we generated revenues, consolidated net loss, and Adjusted EBITDA of $1,212.8 million, $23.7 million, and $391.7 million, respectively, representing a 32.3% Adjusted EBITDA margin. As of December 31, 2018, we had cash of $386.2 million and outstanding indebtedness of $2,292.6 million, which may limit the availability of financial resources to pursue our growth initiatives.

Our Business Segments

Our business operates in two business segments, Electronics and General Metal Finishing, with both offering chemistry, equipment, and service globally.

 

 

LOGO

 

(1)   See “Prospectus Summary—Summary Historical and Pro Forma Financial Information.”
(2)   Segment Adjusted EBITDA does not reflect the impact of the adjustment regarding IFRS 16 “Leases” as discussed in footnote 3(h) in “Summary Historical and Pro Forma Financial Information.”
(3)   Other end-markets include aerospace & military, medical & industrial, decorative hardware, and others.

Although these segments each have distinct end-markets and customers, they both benefit from our centralized functions and global scale. In addition, we leverage our significant R&D spend and resulting innovations, as well as our shared technology centers and production facilities, to benefit from technologies, innovations, best practices, and other key learnings across our product portfolio and segments. This R&D coordination, along with our centralized functions, results in better commercial focus and increased productivity and profitability.

 

   

Electronics Segment: Our comprehensive systems and solutions approach provides chemistry, equipment, and service, which are integral to manufacturing PCBs, SCs and connectors. We are #1 in the global EL plating chemistry market, with a market share of approximately 23% based on our fiscal 2017 EL plating chemistry revenue. We are also the #1 global manufacturer of horizontal plating equipment for PCB production. Our expansive footprint allows us to serve the global electronics supply chain, as demonstrated by our longstanding relationships with 28 of the top 30 global PCB manufacturers. We believe the combination of our chemistry and equipment provides our customers with enhanced production yields, higher-quality results, and improved manufacturing efficiency. In addition, our services and solutions facilitate and enable end-product innovation, such as flexible screens, higher processing

 

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speeds, and further device miniaturization. As a result of this systems approach, we have increased the proportion of our PCB chemistry sold for use in our proprietary EL equipment from approximately 51% to 57% during the period from 2010 to 2018. We believe that this trend increases our value to our customers, grows our share of more profitable “cutting edge” and complex applications, and enhances our competitive advantage.

EL segment demand is expected to be driven by various secular trends, including the build-out of 5G infrastructure, digitalization and exponentially increasing data volumes and processing speed requirements associated with increasing electronics content in cars, the adoption of next-generation mobile devices, the adoption of big data-related analytics and cloud computing, and the “Internet of Things” (“IoT”). The worldwide annual creation of data associated with many of these trends is expected to increase from less than 33 trillion gigabytes in 2018 to more than 175 trillion gigabytes in 2025. We believe we will continue to gain market share as a result of our portfolio’s focus on attractive growth segments of the EL plating chemistry market that involve technologically advanced production processes. These high-value technology segments include complex applications such as High Density Interconnectors (“HDIs”), Integrated Circuit (“IC”) substrates, and flex or rigid-flex PCBs to facilitate ongoing technological innovations.

EL Applications in High-end Smartphone

 

 

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General Metal Finishing Segment: We supply chemistry, equipment, and service as a comprehensive process solution for functional and decorative surface finishing applications across a diverse set of end-markets, including automotive, heavy machinery, household appliances, fixtures, and construction. We are #1 in the global GMF plating chemistry market, with a market share of approximately 21% based on our fiscal 2017 GMF plating chemistry revenue, supplying specialty-plating chemistry to approximately 7,000 customer sites globally. We are also the #3 global manufacturer of GMF plating equipment. Our comprehensive systems and solutions generally add the most value for our larger GMF customers who have complex technical requirements. For our other customers, who are often smaller, we provide value by being a one-stop shop for all their plating needs, supplying chemistry, auxiliary equipment, and high-touch local service. Our solutions not only transform the aesthetics of plastics and

 

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metals to create a higher value appearance, but also improve corrosion- and wear-resistance and environmental sustainability. We believe our comprehensive approach strengthens our ability to win business, providing our customers with enhanced production yields, higher quality results, and improved end-product performance, while reducing their manufacturing and warranty costs. For high-end applications where our combined chemistry and equipment solution provides the greatest value, we have increased the proportion of our chemistry sold for use in our GMF equipment. For example, for our DynaChrome offering, we have increased the proportion of chemistry sold for use in our equipment from approximately 8% to 23% during the period from 2010 to 2018. We believe that by growing our chemistry sales for use in our equipment, we are able to increase our customer intimacy and competitive differentiation.

GMF segment demand is expected to be driven by increased automotive production and further penetration of our products in automotive and construction applications, as well as demand for household appliances and fixtures. We expect the growth of the consumer class in emerging markets will drive demand growth for our products in such markets in-excess of developed markets. For example, consumer purchases in China and India are expected to grow from approximately $6.1 trillion in 2015 to approximately $25.0 trillion in 2030. Growth is also expected to be bolstered by increased chemistry penetration due to trends towards increasing quality requirements, premiumization, environmental regulations, and lightweighting. We believe we will continue to gain market share as a result of our positioning in environmentally sustainable solutions, product quality, R&D leadership, and customer proximity.

GMF Applications in Automotive

 

 

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Transformational Initiatives

Since the Acquisition, we have made significant investments designed to maximize the benefits of being a standalone company, positioning the business for current and future commercial success. Although additional opportunities remain, to date, we have implemented several initiatives, which are unlocking significant value, including:

 

   

Enhanced Senior Leadership Team: We have augmented our existing long-term business leaders, technical experts, and customer relationship managers with additional world-class managers to lead our organizational realignment and increase focus on commercial excellence and our customers. To accomplish this transition, we have hired a new Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Vice President of R&D, Vice President and Group General Counsel, and Vice President of Human Resources.

 

   

Globalized Management Structure: We have reorganized the business from a decentralized, locally-focused structure, to a centralized, global/regional structure organized around our two segments. This has allowed us to build strong centralized and regional functional teams, ensuring best practices are implemented across all regions. Within each segment, we have redesigned our management structure to expand the accountability of business unit leaders to include full P&L responsibility.

 

   

Customer-Focused Approach: We have realigned our sales, service, marketing, and R&D functions to be more coordinated, effectively anticipate and meet the demands of our customers, and increase sales force efficiency. As part of this initiative, we identified global key accounts for which we assign dedicated managers to provide a single point of contact to more effectively serve these customers.

 

   

Optimized R&D: We have focused on increasing R&D productivity by improving our stage-gate processes to ensure more efficient use of resources and enable faster introduction of new products. Additionally, we are further improving the cost-efficiency of our R&D process by relocating certain standardized R&D activities to lower cost geographies.

 

   

Operational Improvements: We have introduced a culture of continuous cost management, launching several efficiency initiatives, including lean manufacturing and optimization of our procurement spend. We anticipate new opportunities, along with our existing value-creation program, will generate cost savings, which are expected to more than offset inflation in our underlying costs, resulting in approximately 100 basis points of additional Adjusted EBITDA margin improvement by 2021.

 

   

Aligned Incentives: We have developed a performance-based compensation structure that closely aligns individual incentives with our overall strategic and financial objectives.

Collectively, these initiatives helped grow our revenues from $1,124.2 million to $1,212.8 million from fiscal 2016 to fiscal 2018. Adjusted EBITDA grew from $309.4 million to $391.7 million, while Adjusted EBITDA margin improved by 480 basis points during this same period. We expect to realize additional benefits from these initiatives going forward.

Our Competitive Strengths

Global market leader in well-structured markets with positive long-term secular growth trends

We are the global market leader in both of our primary markets—#1 in EL plating chemistry with a 23% market share and #1 in GMF plating chemistry with a 21% market share. Each market is well structured, with the three largest players in the EL and GMF plating chemistry markets representing a combined 64% and 46% market share, respectively. We are a recognized leader in plating processes for applications such as HDI for smartphones, IC substrates, decorative coatings (“DECO”), plating on plastics (“POP”), as well as functional chrome plating and have long-standing relationships with our customers.

 

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We expect our market leadership will allow us to leverage and capitalize on favorable secular trends in the EL and GMF plating chemistry markets, which are forecast to grow at compound annual growth rates (“CAGR”) of approximately 3.7% and 3.4%, respectively, from 2017 through 2021. Within the EL plating chemistry market, growth is expected to be driven by expanding communications infrastructure (ongoing 5G network build-out), increasing device complexity (HDI and flex or rigid-flex PCBs), digitalization (IoT), adoption of big data-related analytics and cloud computing, increasing automotive electronics content and vehicle electrification as well as autonomous driving. We also expect demand for our chemistry products to be driven by increased chemistry penetration per device. As technological innovation creates devices with greater computing power, speed, and capabilities, while simultaneously shrinking the product size more advanced plating chemistry solutions are needed to address growing device complexity. This complexity, coupled with increasing OEM technical specifications, is driving greater PCB density and an increasing number of PCB layers per device. More complex plating chemistries and processes can enable increased speed and further device miniaturization by reducing the distance and line size connecting components, reducing latencies between components, and increasing PCB line density. See illustrative example below:

 

 

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Within the GMF plating chemistry market, growth is expected to be driven by evolving consumption patterns of a growing consumer class in emerging markets, increasing automotive production, vehicle lightweighting, increased warranty requirements, product premiumization, and stricter environmental regulations. However, we can make no assurances that our assumptions about market growth will be correct. Historically, we have been able to increase our market share and we believe we are well-positioned to continue to do so in the future as a result of our comprehensive systems and solutions approach, strong customer integration, innovative R&D, and global footprint.

Comprehensive systems and solutions approach drives sustainable competitive advantage and unmatched customer intimacy

We offer a differentiated systems- and solutions-based approach that combines chemistry, equipment, and service across both of our segments.

 

   

Chemistry: Our chemistry solutions are designed to address the specific process needs of our customers, reflecting iterative collaboration with OEMs and direct customers alike to solve for complex technological requirements such as further device miniaturization and increasing processing speeds through greater conductor line sophistication. We design these proprietary processes in close collaboration with our customers and OEMs, making our chemistry difficult to substitute and fostering deep and lasting customer relationships.

 

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Equipment: We believe that utilizing our equipment in connection with our tailored chemistry provides our customers with significant value. Our more than 1,600 installed systems help many of our customers engage in more complex plating processes that demand our higher value-added chemistry and provide another point of customer contact, further driving customer integration. Once installed, our equipment is a source of recurring revenue and an important growth driver for our chemistry, spare parts/wear parts, service, line upgrades, retrofits, and technical support. In addition, the installation of our equipment tends to drive increased customer intimacy and create higher switching costs for our customers. We believe this approach is a key driver of our growth and customer loyalty, delivering enhanced production yields, higher-quality results, and improved end-product performance to our customers, while improving manufacturing efficiency. From 2010 to 2018, we have increased the percentage of our chemistry sold for use in our EL equipment from approximately 51% to 57%. For chemistry sold for use in our GMF DynaChrome equipment, which is used in high-value GMF applications, the percentage has increased from approximately 8% to 23%.

 

   

Service: We also provide world-class service to our customers. This service includes on-site support and training, embedded employees engaged in manufacturing process oversight, and the benefits of a global network of 17 technology centers. Our facilities are strategically located in close proximity to key customers to facilitate application development, testing, analytical measurements, chemical and physical characterization, technical support, and training. Approximately 1,900 employees worldwide are dedicated to customer support, with several hundred working on-site at our customers’ manufacturing facilities. Our regional and global product teams support our front-line staff and our customers with their deep product expertise to help ensure that optimal results are achieved through utilization of our chemistry and equipment, furthering our customer intimacy. In addition, our several hundred on-site personnel provide crucial feedback regarding upcoming customer needs to our R&D team, further enabling us to be a first mover on new technologies and to increase our portion of sales to those customers.

Our comprehensive systems and solutions approach is supported by our dedicated sales force and local presence and reflects our holistic view of the electroplating process. This combination allows us to respond in real-time to technological challenges, helping to develop solutions alongside our customers as we support them in their need to address constantly changing market dynamics. Our close customer relationships, with sales to 28 of the top 30 PCB manufacturers and joint development projects with 13 of these manufacturers, have allowed us to develop solutions alongside our customers. This collaboration helps our customers innovate and reduce their time-to-market, while allowing us to be the market leader on the newest high-tech and value-added solutions, which underpins our industry-leading financial profile.

Market leading R&D investment and technological innovation

We are a global technology leader in the electroplating chemistry market due to our market-leading R&D and track record of innovation. We believe our $206.0 million in R&D investment during the three years ended December 31, 2018, with fiscal 2018 expense representing 4.8% of total revenue, significantly exceeds that of our competition. For fiscal 2018, we estimate our R&D spend represented approximately 34% of the combined R&D spend of all plating chemical companies and 51% of the combined R&D spend of the four largest plating chemical companies by market share. As a result, we believe we have developed one of the most advanced R&D organizations in our industry, evidenced by our over 1,500 patents, 500 pending patent applications, and more than 100 employees with Ph.D.s. This central R&D function is bolstered by our 17 state-of-the-art global technology centers, providing local support to our customers through testing, analysis, and pilot production. While we can provide no assurance that our investment in R&D will continue to provide competitive advantages, we believe we are well-equipped to continue our technological leadership to meet the future product needs of our customers and OEMs.

Our investments in R&D have allowed us to solve complex technical problems associated with cutting-edge end-product innovations such as OLED displays, flexible screens, ADAS, and the build-out of 5G infrastructure.

 

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We believe we are particularly well-positioned to capitalize on future transformative technologies, including artificial intelligence, next-generation devices enabled by 5G, continuing developments in ADAS, and complex composite anti-corrosion coatings. We also have the capability to develop and produce unique chemistry in-house, which we use to produce custom additives differentiating our chemistry from that of our competitors. As part of our investment in future technologies, we have invested heavily in environmentally sustainable solutions. For example, we were the first company to introduce the trivalent chromium hard chrome plating process, allowing our customers to phase out hexavalent chromium (“Chrome VI”). Our investments in these areas and the products we develop allow our customers to drive higher value product sales, reduce waste, and maximize operating efficiency in the face of evolving consumer demands and more stringent regulatory regimes. We expect the benefits associated with our R&D platform will persist as we continue to enhance our R&D productivity and focus on customer-driven innovation. We believe this sustainable competitive advantage will allow us to increase our market share going forward.

Mission-critical nature of our solutions drives customer stickiness

Our solutions are vital to our direct customers’ product performance and enable end-product innovation, while typically accounting for less than 1% of total end-product cost. OEMs and our direct customers generally demand the highest quality and performance specifications in plated components, which they generally verify through extensive testing and certification processes that can last up to five years. The long OEM testing and certification process reduces the likelihood that our customers will switch suppliers once our chemistry has been approved. Consequently, we have a close relationship with many OEMs and partner with them during the product development process to ensure that our solutions are certified. Our customer stickiness is evidenced by an average relationship length of 24 years among our top 25 customers. Further, our deep collaboration with OEMs provides greater customer insight, driving development of new products and processes to capture incremental growth from new end-product innovations.

Diverse revenue base by end-market, customer, and geography

The diverse nature of our global operations limits our financial exposure to any single end-market, customer, or region. For fiscal 2018, we generated approximately 12% of our chemistry revenues in the Americas, 19% in Europe, 38% in China, 9% in Taiwan, and 22% in the rest of Asia. The majority of our chemistry revenues are generated by sales to manufacturers in Asia that serve global end-markets with the estimated geographic breakdown of our revenues by ultimate end users of products with our chemistry across the Americas, Europe, China, Taiwan, and the rest of Asia representing approximately 27%, 34%, 24%, 3%, and 11% of our fiscal 2017 chemistry revenues, respectively. Additionally, our customers are located in over 40 countries, with no single customer representing more than approximately 5% of our chemistry revenue for fiscal 2018 and with our top ten customers representing approximately 25% of chemistry revenue for fiscal 2018. This diversified base includes customers serving a broad variety of end-markets, including smartphones, communication infrastructure, cloud computing infrastructure, automotive electronics, and consumer electronics for our EL offerings and automotive surface finishing, heavy machinery, household appliances, fixtures, and construction for our GMF offerings.

 

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Compelling financial profile with consistently strong margins and cash flow

We have an attractive financial profile highlighted by our strong and stable margins. Our EL and GMF segments generated Segment Adjusted EBITDA margins of 33.9% and 27.0%, respectively, for fiscal 2018. We have implemented numerous initiatives that have reduced our fixed and variable costs and improved working capital productivity. We expect that these initiatives will generate additional cost savings and cash flows as many have only recently begun to contribute to our financial results, although we cannot make any assurances regarding the amount or timing of additional cost savings and cash flows these initiatives may generate.

 

 

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(1)   Segment Adjusted EBITDA does not reflect the impact of the adjustment regarding IFRS 16 “Leases” as discussed in footnote 3(h) in “Summary Historical and Pro Forma Financial Information.”
(2)   Successor Pro Forma results.

Our track record of operating profitability and low capital intensity, including maintenance capital expenditures of approximately 1% of revenues over the past three years, has allowed us to consistently generate strong cash flows. Our global footprint and operational flexibility allow us to be more nimble and shift production to meet our customers’ needs. Our efficient and well-invested asset base supports our ability to meet demand growth and innovation requirements with limited capital expenditures.

Experienced management team and strong equity sponsor

Our company is led by a highly experienced and talented management team with an average tenure in the specialty chemicals industry of more than 19 years. Our management team, led by Chief Executive Officer Geoff Wild, is strategically positioned around the globe and is focused on improving company performance by consistently driving commercial and operational excellence. Mr. Wild has over 39 years of industry experience and previously served as Chief Executive Officer of AZ Electronic Materials, a former Carlyle portfolio company, where he was instrumental in the IPO process, successfully driving a total shareholder return of 68% from IPO in October 2010 to Merck KGaA’s acquisition of the business in May 2014. Our Chief Financial Officer Peter Frauenknecht has over 34 years of experience in global industrial manufacturing businesses, serving as Chief Financial Officer and member of the Executive Board at Constantia Flexibles, a leading, global flexible packaging company, where he was instrumental in driving efficiency gains, integrating acquisitions, supporting revenue growth from €1.6 billion in 2013 to €1.9 billion in 2015, and improving profitability. Our sponsor, Carlyle, is a leading global alternative asset management firm with extensive experience in successfully completing corporate carve-out transactions in the industrial sector and a track record of successful IPOs and transitioning companies from private to public.

Our Business Strategies

Increase penetration of our comprehensive systems and solutions approach

We believe our comprehensive systems and solutions approach, which includes selling chemistry, equipment, and service, is the best way to maximize our all-in value to customers. We have realigned our

 

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resources to better implement this market- and solutions-based approach, including by embedding our equipment business within our EL and GMF segments. As applications become more complex, we believe the efficiency and value proposition of our systems-based solution will become more evident, which we intend to capitalize on to drive market share gains. We intend to expand this systems-based approach to new customers, as well as existing customers, who currently only use our chemistry, through our marketing efforts and a continued focus on the customer value proposition. We are expanding our equipment manufacturing in China to lower production costs, growing our addressable market opportunities and penetration with local Chinese customers and other Asian customers. In addition, we continue to invest in technologies to further broaden our portfolio and enable us to increase the penetration of our comprehensive systems and solutions approach. Most recently, we invested in vertical conveyorized plating (“VCP”) technology, which substantially increases our addressable market for plating equipment, and in turn provides us the opportunity to pull through more of our chemistry. We intend to leverage our broad network of technology centers, production facilities, and regional support teams to locally serve our global customer base and facilitate further integration into our customers’ operations as we help optimize their production efficiency and quality. We believe the continued proliferation of our comprehensive systems and solutions will drive better informed R&D decisions, increasing the value of our approach to our customers.

Leverage market leadership in existing technologies to expand to new applications and geographies

Over our 150-year history, we have cultivated a strong platform of innovative and high-tech solutions, resulting in #1 global market shares in EL plating and GMF plating chemistry. We intend to continue to leverage our scale, relationships, and existing solutions to expand our penetration into new applications in high-growth market segments and geographies.

In the EL plating chemistry market, we are focused on leveraging our expertise and technology leadership in high-density electronics for smartphones to capture incremental demand for new applications such as PCBs for the 5G infrastructure build-out and increase in automotive electronic content per vehicle. For example, our market leading expertise in interconnects for high-density PCBs can be leveraged to address high-growth automotive electronic applications, such as light detection and ranging (“LIDAR”) and radio detection and ranging (“RADAR”) applications. In addition to our expertise, our strong relationships with automotive OEMs and PCB and SC manufacturers position us to capitalize on these growth opportunities. From a geographic perspective, we expect our clients in the global electronics supply chain to continue to move their production supply chains to lower-cost regions. We continue to adapt to this shift by replicating our successful China market entry strategy in these target countries by building up local sales force teams, technical support, and leveraging coordinated key account management.

In the GMF plating chemistry market, we are seeking to expand our market share in high-growth applications. We are applying our existing corrosion protection technologies to satisfy increasing durability requirements in applications such as fasteners and brake systems. The trend towards automotive lightweighting also provides incremental opportunities to deploy our technologies to capture a greater share of plating content per vehicle. In particular, as electric vehicles (“EVs”) require lighter-weight materials to improve battery range, we believe we can also use our DECO and POP solutions to capture incremental demand. From a geographic perspective, we are targeting select OEMs in North America to obtain certifications for products that we have already successfully introduced to Europe- and Asia-based OEMs.

Capitalize on attractive secular growth trends through R&D and continued technology leadership

We believe our substantial prior and future investments in R&D, our strong product pipeline, and our long-standing relationships with most leading OEMs will allow us to continue to be the leader in technological innovation. For example, the number of patents and pending patent applications related to our offerings increased from 1,138 in fiscal 2005 to 2,152 in fiscal 2018. We believe expanding our already strong position at the cutting

 

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edge of new chemistry, equipment, and service will allow us to continue to benefit from secular growth trends that are driving new and complex applications. Our strong customer intimacy and customer-driven innovation through our systems and solutions approach helps provide early insight into customer trends, allowing us to invest intelligently in disruptive, next-generation innovations. We will continue to address the needs of our customers by complementing our existing technology portfolio, both through organic R&D and through strategic bolt-on acquisitions of new technologies where possible.

In the GMF plating chemistry market, we see the largest growth potential in innovative sustainable solutions for the automotive industry. We believe we are currently at the forefront of sustainable technological innovation. For example, our DynaChrome offering utilizes 70% less water and 42% less energy versus standard vertical plating lines, and we were the first company to offer the trivalent chromium hard chrome plating process, which is an environmentally safer alternative to Chrome VI plating. Furthermore, we believe that the increasing requirements on vehicle life will drive demand for higher performing, more efficient and more environmentally friendly surface finishing solutions. Increasing environmental awareness, in combination with our sustainable solutions for Paint Support Technologies, allows us to serve markets that were previously difficult to access. In addition, we are a leading supplier of auxiliary equipment which helps reduce wastewater and extend chemistry bath life, reducing costs, improving quality, and diminishing the overall environmental impact of our customers’ plating operations. We continue to bolster our sustainable solutions and are well-positioned to support our customers’ efforts to adapt to increasingly stringent environmental laws and regulations for their manufacturing processes.

In the EL plating chemistry market, we believe that we are particularly well-positioned to capture growth from the introduction of 5G networks and IoT, driving volumes and enabling a new wave of technological innovation, including the next generation of automotive electronics and high-frequency electronic devices. These new electronic devices are expected to include significantly more sophisticated and compact electronic components and circuitry, which we expect will drive demand for our new high-end plating chemical products, as evidenced by the evolution of PCBs in smartphones. The increase in speed, power, and corresponding battery size, reduce the available space for PCBs in mobile and other devices. Miniaturization requires greater line density and the layering of PCBs, both of which require more complex chemistry plating solutions.

Execute on operational improvement opportunities to drive earnings growth, expand margins, and increase cash flow

In addition to our growing topline, our financial performance has also benefited from capitalizing on operational improvement initiatives and we believe there are still significant value-creation opportunities available to us going forward. We anticipate these new opportunities, along with our existing value-creation program, will generate cost savings, which are expected to more than offset inflation in our underlying costs, resulting in approximately 100 basis points of additional Adjusted EBITDA margin improvement by 2021. Key initiatives that we expect to contribute to these cost savings include leveraging the strength of our centralized business unit structure to increase commercial focus in the local regions, optimizing our purchasing function, increasing coordination in our operations, and reducing general and administrative costs. In addition, we continue to implement a more effective R&D portfolio review process, and to relocate certain standardized R&D, back-office, and equipment manufacturing activities to lower cost geographies. We expect these initiatives to help improve margins going forward, reinforced by the implementation of management incentive programs tied to the initiatives’ performance.

Our Industry and End-Markets

We are #1 in the global EL plating chemistry market and #1 in the global GMF plating chemistry market, with the top three players in each market collectively holding a significant portion of those markets. The remaining share of each market is generally held by small, local suppliers focused on specific technologies or geographies. Within our EL segment, we currently focus on a $2.3 billion portion of the broader $25 billion

 

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global electrochemical market. Within our GMF segment, we currently focus on a $2.1 billion portion of the broader $10 billion global surface finishing chemistry market.

We expect our markets to grow at a CAGR of approximately 3.6% from 2017 to 2021 driven by various secular growth trends such as digitalization, further device miniaturization, increased data volumes and processing speed requirements, the growth of the consumer class in emerging markets, increasing environmental regulations, and rising product quality and durability standards. We believe our unique business model, characterized by consistent and significant investment in R&D, a focus on high-tech growth applications, customer intimacy and integration, and chemistry-equipment solutions approach, positions us to continue to increase our market share. Over time, we expect our innovation, organic growth strategy, and potential bolt-on M&A will expand our market opportunity.

EL Industry and Trends

The EL plating chemistry market is a $2.3 billion industry and is expected to grow at a 3.7% CAGR from 2017 to 2021. We are #1 in the global EL plating chemistry market with a 23% market share. EL plating chemistry is used in electronic applications such as PCBs embedded in smartphones, automotive electronics, communication infrastructure, cloud computing infrastructure, and consumer electronics.

The EL market benefits from broad digitalization and proliferation of PCBs and SCs, driven by prominent secular trends, including:

 

   

5G Infrastructure: The rollout of 5G wireless infrastructure is expected to require approximately twice the number of high-frequency base stations compared to those needed for 4G in order to support the higher data traffic volumes, speeds, and frequency capabilities. This increased infrastructure need will drive incremental demand for advanced PCBs and SCs. 5G is also expected to enable new applications that consume larger amounts of data, at higher speeds, and on higher frequencies, which is expected to increase the requirements for plating technology in devices transmitting, receiving, and processing such data.

 

   

Next-Generation Smartphones: The smartphone market is a highly innovation-intensive market characterized by constant technological advancements such as OLED displays, flexible screens, additional sensing features, and increased processing speeds. In addition, the new generation of smartphones will be 5G compatible. These advancements, along with increased battery life, require constant PCB miniaturization and greater line density, which drive demand for advanced plating solutions, such as modified semi-additive processes (“mSAPs”), to meet technical requirements.

 

   

Increasing Electronics Content in Automotive: The automotive industry is undergoing a fundamental and transformational change with an evolution towards electrification of powertrains (EVs and hybrid electric vehicles (“HEVs”)) and ADAS/autonomous vehicles. These trends will drive increasing electronic content per vehicle, with the value of electronic systems within a car expected to grow to 40% of total automotive manufacturing costs by 2030, creating significant additional demand for higher value PCBs and SCs.

 

   

Cloud Computing Infrastructure Growth: Adoption of big data-related analytics is expected to drive increased need for cloud computing infrastructure for data storage and IoT devices for data creation. There is significant industry investment in this area, with approximately 60 million servers estimated to be shipped globally from 2018 to 2022, compared to 44 million shipped globally from 2014 to 2018. Additionally, utilizing this data will call for increases in processing speed. Together, these factors are expected to drive adoption of, and demand for, advanced PCBs and SCs.

 

   

Adoption of Consumer and Industrial “Internet of Things” Devices: The growth of IoT results in increasing proliferation of connected sensors and devices in various consumer electronics (“smart” homes) and industrial (machine learning) applications. By 2022, there are expected to be 15.8 billion

 

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connected IoT devices, compared to 5.3 billion in 2018. As the capability of IoT devices increases, so will demand, driving higher volumes, device miniaturization, and state-of-the-art PCBs, HDIs, and SCs.

We are well-positioned to take advantage of these trends and the resulting complexity given our advanced chemistry capabilities, equipment integration, and reputation for quality and high-touch customer service.

GMF Industry and Trends

The GMF plating chemistry market is a $2.1 billion industry and is expected to grow at a 3.4% CAGR from 2017 to 2021. We are #1 in the global GMF plating chemistry market, with a 21% market share. GMF plating chemistry is predominantly used in automotive surface finishing and other industrial applications such as heavy machinery, household appliances, fixtures, and construction.

The GMF market benefits from growing industrial- and consumer-driven demand, driven by prominent secular trends, including:

 

   

Increasing Quality Requirements: The trend towards improving product quality to meet longer warranty standards requires greater useful lives of parts and components, driving demand for high-performance GMF plating processes. These processes increase wear- and corrosion-resistance of our customers’ end-products.

 

   

Premiumization: The growth of the consumer class in emerging markets such as China and India has led to increased demand for light and premium vehicles, household appliances, and heavy machinery. This increased “premiumization” of products and demand for new products has led to more and higher-value chrome surfaces (e.g., satin finishes) and growing per-unit plating content. Consumer purchases in China and India are expected to grow from approximately $6.1 trillion in 2015 to approximately $25.0 trillion in 2030 and, as purchasing power in these markets continues to rise, these demand patterns should continue driving increased volumes of our products.

 

   

Increasing Environmental Regulation: New environmental requirements regulating specific substances used in certain chemical processes, water and waste disposal, and tightening emissions standards, such as Euro 6d-TEMP and China 6 among other measures, have led OEMs and our customers to emphasize sustainable products and systems. These new regulations are expected to increase demand for our market-leading environmentally sustainable solutions and technology.

 

   

Lightweighting: Increasingly stringent emissions standards, environmental regulations, and an emphasis on range for EVs and HEVs have increased demand for automotive weight-efficiency. This increase in lightweighting drives demand for GMF plating applications, particularly our POP and DECO products, which can enable substitution of metal for plastics with metallic finishes. Lightweighting also leads to new innovations because, as new lighter-weight materials are utilized, they will require tailored chemistry solutions to address new challenges, such as advanced corrosion protection requirements.

We are well-positioned to take advantage of these trends and the resulting complexity given our advanced chemistry capabilities, equipment integration, and reputation for quality and high-touch customer service.

Equipment Industry and Trends

In addition to the chemistry markets, we also compete within the equipment markets for EL and GMF plating chemistry applications where we have the #1 global market share in EL horizontal plating equipment and the #3 market share in GMF plating equipment. We have also recently invested in VCP technology, which substantially increases our addressable market for plating equipment and will provide us with the opportunity to increase our market share and chemistry sales. We view our equipment offering as critical in supporting our chemistry sales, as well as in providing our comprehensive systems and solutions approach. We expect the equipment market to benefit from the same drivers as the underlying chemical markets. Consequently, we

 

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estimate the value of the EL equipment market to grow at a CAGR of approximately 3.7% from 2017 to 2021 and we expect the GMF equipment market to grow at a CAGR of approximately 3.4% from 2017 to 2021. As equipment represents a substantial upfront investment for our customers, procurement decisions for equipment products typically follow the characteristics of the capital and technological investment cycles. Once installed, our equipment is a source of recurring revenue and an important growth driver for our chemistry, spare parts/wear parts, service, line upgrades, retrofits, and technical support.

Risks Related to our Business

Investing in our common shares involves substantial risk. You should carefully consider all the information in this prospectus prior to investing in our common shares. There are several risks related to our business and our ability to leverage our strengths and execute our strategies described elsewhere in this prospectus that are described under “Risk Factors” elsewhere in this prospectus. Among these important risks are risks associated with the following:

 

   

uncertainty, downturns, and changes in our target markets;

 

   

foreign currency exchange rate fluctuations;

 

   

reduced market acceptance and inability to keep pace with evolving technology and trends;

 

   

loss of customers;

 

   

the impact that our substantial indebtedness may have on our business, results of operations, financial condition, and growth prospects;

 

   

increases in costs or reductions in the supplies of raw materials that may materially adversely affect our business, financial condition, and results of operations;

 

   

our ability to provide products and services in light of changing environmental, health and safety, product liability, financial, and other legislation and regulation;

 

   

our failure to compete successfully in product development;

 

   

our ability to successfully execute our growth initiatives, business strategies, and operating plans, and to leverage our strengths;

 

   

whether the secular trends we expect to drive growth in our business materialize to the degree we expect them to, or at all;

 

   

material costs relating to environmental and health and safety requirements or liabilities;

 

   

underfunded defined benefit pension plans;

 

   

risk that the insurance we maintain may not fully cover all potential exposures;

 

   

failure to comply with the anti-corruption laws of the United States and various international jurisdictions;

 

   

tariffs, border adjustment taxes, or other adverse trade restrictions and impacts on our customers’ value chains;

 

   

political, economic, and legal uncertainties in China, the Chinese government’s control of currency conversion and expatriation of funds, and the Chinese government’s policy on foreign investment in China;

 

   

regulations around the production and use of chemical substances that affect our products;

 

   

United Kingdom’s referendum on withdrawal from the European Union;

 

   

weak intellectual property rights in jurisdictions outside the United States;

 

   

intellectual property infringement and product liability claims;

 

   

our ability to obtain additional capital on commercially reasonable terms may be limited;

 

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risks related to our derivative instruments;

 

   

ability to attract, motivate, and retain senior management and qualified employees;

 

   

increased risks to our global operations including, but not limited to, political instability, acts of terrorism, and unexpected regulatory and economic sanctions changes, among other things;

 

   

natural disasters that may materially adversely affect our business, financial condition, and results of operations;

 

   

the inherently hazardous nature of chemical manufacturing that could result in accidents that disrupt our operations and expose us to losses or liabilities;

 

   

damage to our brand reputation;

 

   

the amount of the costs, fees, expenses, and charges related to this offering and the related costs of being a public company;

 

   

Carlyle’s ability to control our common shares;

 

   

any statements of belief and any statements of assumptions underlying any of the foregoing;

 

   

other factors disclosed in this prospectus; and

 

   

other factors beyond our control.

Organizational Structure

The following chart summarizes our corporate structure and principal indebtedness after giving effect to the Transactions. This chart is provided for illustrative purposes only and does not represent all legal entities affiliated with, or all obligations of, the Company:

 

LOGO

 

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Our Sponsor

Our principal shareholders are certain investment funds affiliated with Carlyle.

Founded in 1987, Carlyle is a global investment firm with $222 billion of assets under management as of March 31, 2019. Carlyle invests across four segments – Corporate Private Equity, Real Assets, Global Credit and Investment Solutions – in Africa, Asia, Australia, Europe, the Middle East, North America and South America. Carlyle has expertise in various industries, including: technology and business services, media and telecommunications, aerospace, defense and government services, consumer and retail, energy and power, financial services, healthcare, industrial, real estate, and transportation. Carlyle employs more than 1,725 people in 33 offices across six continents. Carlyle has significant experience completing corporate carve-out transactions and transitioning them to successful public companies including Axalta Coatings Systems (formerly known as DuPont Performance Coatings) from E. I. du Pont de Nemours and Company, AZ Electronic Materials from Clariant, the Hertz Corporation from Ford, and Allison Transmission, Inc. from General Motors.

Company Information

Atotech Limited was incorporated on December 12, 2018 for purposes of becoming the new holding company of Holdco and its subsidiaries.

The headquarters for the Atotech business is located at Erasmusstrasse 20, 10553 Berlin, Germany. The Atotech telephone number is +49 30 349 85 703 and website is www.atotech.com. Information on, or accessible through, such website is not part of this prospectus, nor is such content incorporated by reference herein. You should rely only on the information contained in this prospectus when making a decision as to whether to invest in the common shares.

Corporate Reorganization

Atotech Limited, the registrant, is a Bailiwick of Jersey company incorporated on December 12, 2018 for purposes of becoming the new holding company of Holdco and its subsidiaries. As of the date hereof, Atotech Limited has no subsidiaries or operations. For the year ended December 31, 2018, Atotech Limited had no operations, assets, or liabilities. In connection with the consummation of the offering and prior to effectiveness of the Registration Statement, we will undertake the following Reorganization Transactions:

 

   

all outstanding preferred shares of Atotech UK Topco Limited will be converted to common shares resulting in all the outstanding equity interests of Atotech UK Topco Limited consisting of                common shares;

 

   

Atotech UK Topco Limited will consummate a         -to-1 stock split; and

 

   

Carlyle and all other shareholders of Atotech UK Topco Limited will contribute all outstanding equity interests of Atotech UK Topco Limited to Atotech Limited in exchange for an equal number of common shares of Atotech Limited.

Following the consummation of the Reorganization Transactions, Atotech Limited will indirectly own all outstanding equity interests of Holdco and all the Company’s operating subsidiaries, including Opco. Following the consummation of the offering, Atotech UK Topco Limited will be dissolved and Atotech Limited will directly own all outstanding equity interests of Holdco.

 

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THE OFFERING

 

Common shares offered by us

                 common shares

 

Common shares offered by the selling shareholders

                 common shares

 

Common shares outstanding after this offering

                 common shares

 

Option to purchase additional common shares

The selling shareholders have granted the underwriters a 30-day option from the date of this prospectus to purchase up to an additional                  common shares at the initial public offering price, less underwriting discounts and commissions.

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $        million, assuming the common shares are offered at $        per share (the midpoint of the price range set forth on the cover page of this prospectus). We intend to use our net proceeds from this offering, plus cash on hand, for the repayment of indebtedness and to pay fees and expenses. We will not receive any proceeds from the sale of common shares by the selling shareholders. See “Use of Proceeds.”

 

Proposed stock exchange symbol

“             ”

 

Risk factors

See “Risk Factors” beginning on page 24 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common shares.

The number of common shares to be outstanding after completion of this offering is based on common shares outstanding as of                 , 2019, which excludes:

 

   

            common shares issuable upon the exercise of options outstanding at a weighted average exercise price of $        per share; and

 

   

            common shares reserved for issuance under our 2019 Incentive Award Plan, which we plan to adopt in connection with this offering.

Unless we specifically state otherwise, all information in this prospectus assumes:

 

   

no exercise of the option to purchase additional common shares by the underwriters;

 

   

an initial offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus; and

 

   

the consummation of the Reorganization Transactions.

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The following table sets forth our summary historical and pro forma financial information for the following reporting periods:

 

   

The year ended December 31, 2016 and the period from January 1, 2017 through January 31, 2017, which reflect the results of operations of Atotech B.V. (“Predecessor”).

 

   

The years ended December 31, 2017 and December 31, 2018, which reflect the results of operations of Atotech UK Topco Limited (“Successor”) and includes the effects of acquisition accounting and the financing of the Acquisition in each case commencing on January 31, 2017. From December 20, 2016 (inception) through January 31, 2017, Atotech UK Topco Limited had no operations or activity.

 

   

The pro forma year ended December 31, 2017, which reflects the historical results of operations of Atotech B.V. for the period from January 1, 2017 through January 31, 2017 and Atotech UK Topco Limited for the year ended December 31, 2017, as adjusted for the effects of the Acquisition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Basis of Presentation—Pro Forma Financial Information.”

The historical financial data for the years ended December 31, 2017 and 2018 and the historical balance sheet data as of December 31, 2017 and December 31, 2018 presented below were derived from our audited financial statements and the related notes thereto included elsewhere in this prospectus. The historical financial data for the year ended December 31, 2016 and the period from January 1, 2017 through January 31, 2017 presented below have been derived from the audited financial statements and the related notes thereto included elsewhere in this prospectus. The historical balance sheet data as of December 31, 2016 presented below has been derived from the financial statements of Predecessor not included in this prospectus. See “Basis of Presentation.”

Our historical financial data is not necessarily indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as an independent publicly traded company during the periods shown.

The unaudited pro forma financial data presented below was derived from the audited financial statements and the related notes thereto of the Predecessor and Successor included elsewhere in this prospectus. Our unaudited pro forma statements of operations data are presented for the year ended December 31, 2017 assuming that the Acquisition was completed on January 1, 2017.

The unaudited pro forma information set forth below is based upon available information and assumptions that we believe are reasonable. The unaudited pro forma information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had the above transactions occurred on the dates indicated. The unaudited pro forma financial information should not be considered representative of our future financial condition or results of operations. You should read the information contained in this table in conjunction with “Selected Historical Financial Information,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited financial statements and the related notes thereto included elsewhere in this prospectus.

 

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    Predecessor      Successor      Successor
Pro Forma
    Successor  

($ in millions, except for share data)

  Year ended
December 31,
2016
    January 1
through
January 31,
2017
     Year ended
December 31,
2017(1)
     Year ended
December 31,
2017
    Year ended
December 31,
2018
 

Statement of Operations Data:

               

EL Segment revenues

  $ 593.0     $ 45.8      $ 603.0      $ 648.8     $ 669.4  

GMF Segment revenues

    531.2       45.5        490.6        536.1       543.4  

Revenues

    1,124.2       91.3        1,093.6        1,184.9       1,212.8  

Cost of sales, excluding depreciation and amortization

    (470.4     (40.7      (513.7      (500.4     (504.2

Depreciation and amortization

    (51.9     (4.0      (141.1      (153.7     (171.6

Selling, general, and administrative expenses

    (266.4     (19.8      (250.7      (268.5     (295.6

Research and development expenses

    (79.1     (6.3      (62.6      (68.9     (58.0

Restructuring expenses

    (5.3     (0.4      (10.8      (11.2     (14.8

Operating profit

    251.1       20.1        114.7        182.2       168.6  

Interest expense

    (4.5     (0.1      (94.1      (102.7     (134.7

Other expense, net

    (9.3     (0.8      (23.7      (24.5     (5.2

Acquisition related expenses

    —         —          (67.0      —         —    

Income (loss) before income taxes

    237.3       19.2        (70.1      55.0       28.7  

Income tax expense

    (64.3     (6.0      (16.7      (45.9     (52.4

Consolidated net income (loss)

  $ 173.0     $ 13.2      $ (86.8    $ 9.1     $ (23.7
 

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Per share data

               

Earnings (loss) per common share:

               

Basic

               

Diluted

               

Weighted average common shares outstanding:

               

Basic

               

Diluted

               
   

Balance Sheet Data (at end of period):

               

Non-current assets

  $ 446.3          $ 3,279.5        $ 3,024.1  

Current assets:

               

Inventories, net

    105.3            112.8          121.5  

Accounts receivable, net

    259.8            297.2          278.8  

Current tax assets

    22.6            22.5          23.7  

Cash and cash equivalents

    332.5            325.8          386.2  

Other financial assets

    —              —            1.6  

Total current assets

    720.2            758.3          811.8  

Total assets

    1,166.5            4,037.8          3,835.9  

Total liabilities

    517.6            2,725.8          3,131.2  

Total shareholders’ equity

    648.9            1,312.0          704.7  
   

Cash Flow Data:

               

Net cash provided by (used in):

               

Operating activities

  $ 229.6     $ (8.7    $ 107.2        $ 166.7  

Investing activities

    (83.2     (3.3      (2,736.3        (53.9

Financing activities

    (199.0     (140.3      2,933.6          (37.7
   

Other Financial and Operating Data:

               

Capital expenditures(2)

  $ 84.0     $ 3.6      $ 47.8        $ 56.6  

Adjusted EBITDA(3)

  $ 309.4     $ 26.6      $ 337.7      $ 364.3     $ 391.7  

Adjusted EBITDA margin(4)

    27.5     29.1      30.9      30.7     32.3

R&D expense as a percentage of revenues(5)

    7.0     6.9      5.7      5.8     4.8

 

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(1)   Reflects 11 months of operations of Atotech UK Topco Limited following the Acquisition.
(2)   Represents cash used in the acquisition of “intangible assets and property, plant, and equipment” as reflected in the relevant statement of cash flows.
(3)   To supplement our financial information presented in accordance with IFRS, we use the following additional non-IFRS financial measures to clarify and enhance our understanding of past performance: EBITDA, Adjusted EBITDA and Adjusted EBITDA margin. We believe that the presentation of these financial measures enhances an investor’s understanding of our financial performance and allows investors to better assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business and including certain items that reflect current and future operating performance. We use certain of these financial measures for business planning purposes and for measuring our performance relative to that of our competitors. We utilize Adjusted EBITDA as the primary measure of consolidated financial performance.

 

     EBITDA consists of consolidated net income (loss) before interest expense, net, income taxes, and depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted for (i) non-operating income or expense, (ii) the impact of certain non-cash, or other items that are included in net income and EBITDA that we do not consider indicative of our ongoing operating performance, and (iii) adjustments to reflect the adoption of IFRS 16 “Leases.”

 

     We believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the terms EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin may vary from that of others in our industry. These financial measures should not be considered as alternatives to operating profit, operating profit margin, consolidated net income (loss), earnings per share, or any other performance measures derived in accordance with IFRS as measures of operating performance.

 

     EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under IFRS. Some of these limitations are that EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin:

 

   

do not reflect the significant interest expense on our debt, including the senior secured credit facilities, the Opco Notes, and Holdco Notes;

 

   

eliminate the impact of income taxes on our results of operations;

 

   

contain estimates of what the impact of adoption of IFRS 16 “Leases” in periods prior to our adoption of it on January 1, 2019 would have been;

 

   

exclude depreciation and amortization, which are non-cash charges, and assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin do not reflect any expenditures for such replacements; and

 

   

may be calculated differently by other companies, which limits their usefulness as comparative measures.

 

     We compensate for these limitations by using EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin along with other comparative tools, together with IFRS measurements, to assist in the evaluation of operating performance. Such IFRS measurements include operating profit, operating profit margin, net income (loss), earnings per share, and other performance measures.

 

     In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin should also not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

 

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The following table reconciles consolidated net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:

 

    Predecessor     Successor     Successor
Pro Forma
    Successor  

($ in millions)

  Year ended
December 31,
2016
    January 1
through
January 31,
2017
    Year ended
December 31,
2017(a)
    Year ended
December 31,
2017
    Year ended
December 31,
2018
 

Consolidated net income (loss)

  $ 173.0     $ 13.2     $ (86.8   $ 9.1     $ (23.7

Interest expense, net

    1.3       —         93.3       101.8       133.3  

Income taxes

    64.3       6.0       16.7       45.9       52.4  

Depreciation and amortization (excluding impairment charges)

    50.0       4.0       138.4       151.0       161.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    288.6       23.2       161.6       307.8       323.7  

Non-cash adjustments(b)

    3.9       —         14.6       14.6       16.9  

Foreign exchange loss, net(c)

    3.0       1.7       7.0       8.7       (0.2

Restructuring(d)

    5.3       0.4       10.8       11.2       14.8  

Eliminated product categories(e)

    (6.8     (0.2     (1.0     (1.2     (0.1

Transaction related costs(f)

    —         —         126.2       5.2       16.4  

Management fee(g)

    —         —         2.0       —         2.2  

Adoption of IFRS 16 “Leases”(h)

    15.4       1.5       16.5       18.0       18.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 309.4     $ 26.6     $ 337.7     $ 364.3     $ 391.7  

 

  (a)   Reflects 11 months of operations of Atotech UK Topco Limited following the Acquisition.
  (b)   Eliminates the non-cash impact of (1) share-based compensation, (2) gains or losses on the sale of fixed assets, (3) impairment charges, and (4) mark-to-market adjustments related to our foreign currency derivative and bifurcated embedded derivatives related to certain redemption features of the Opco Notes and Holdco Notes. The dollar value of these non-cash adjustments for each period presented above is set forth below:

 

    Predecessor     Successor     Successor
Pro Forma
    Successor  

($ in millions)

  Year ended
December 31,
2016
    January 1
through
January 31,
2017
    Year ended
December 31,
2017(a)
    Year ended
December 31,
2017
    Year ended
December 31,
2018
 

Share-based compensation

  $ 2.0     $ —       $ 0.1     $ 0.1     $ 0.1  

Gains/Losses on the sale of fixed assets

    —         —         1.1       1.1       0.7  

Impairment charges

    1.9       —         2.7       2.7       10.4  

Mark-to-market adjustments

    —         —         10.7       10.7       5.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-cash adjustments

  $ 3.9     $        $ 14.6     $ 14.6     $ 16.9  

 

  (c)   Eliminates net foreign currency transactional gains and losses.
  (d)   Eliminates charges resulting from restructuring activities principally from our cost reduction efforts.
  (e)   In 2016, we determined to discontinue the sale of products containing Chrome VI and to exit our product lines for soldermasks and resists for secondary imaging technology, which we refer to as our “EM” product line. Accordingly, this adjustment eliminates the EBITDA generated by sales of products containing Chrome VI and sales of products in our EM product line during the periods presented.
  (f)  

Reflects an adjustment to eliminate (1) purchase accounting and transaction fees incurred as part of the Acquisition (2) fees associated with the foreign currency exchange derivatives entered into in conjunction with the Acquisition, and (3) professional fees paid to third-party advisors in connection with the implementation of strategic initiatives.

 

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  (g)   Reflects an adjustment to eliminate fees paid to Carlyle. These fees will cease to be paid after the consummation of this offering. See “Certain Relationships and Related Party Transactions.”
  (h)   We adopted IFRS 16 “Leases” on January 1, 2019, which has resulted in (i) our operating leases being treated as right-of-use assets and lease liabilities on our balance sheets as of any date after January 1, 2019; (ii) the removal of expenses associated with our operating leases from our cost of sales and selling, general, and administrative expenses in our statements of income for any period ending after January 1, 2019; and (iii) an increase in our depreciation and interest expense in our statements of income for any period ending after January 1, 2019. As a result of these effects, the adoption of IFRS 16 “Leases” increases our EBITDA in an amount equal to the increase in our depreciation and interest expense for each period ending after January 1, 2019 relative to periods ending prior to that date. In order to enhance the comparability of our results presented herein, we have made adjustments to reflect the estimated impact on our EBITDA that the adoption of IFRS 16 “Leases” would have had in each of the periods prior to January 1, 2019 presented had the standard had been retroactively applied. This adjustment is also consistent with the calculation of measures similar to Adjusted EBITDA under our senior secured credit facilities, the Holdco Notes Indenture, and the Opco Notes Indenture. The adjustments presented above are based on an analysis of our historical operating lease expense and other currently available information including a review of our material operating leases, as well as an estimate of effective interest rates by country, and are subject to significant estimates that do not constitute retroactive application of the new standard. We estimate that the adoption of IFRS 16 “Leases” would have affected our balance sheet by increasing our fixed assets and our capital lease obligations by approximately $90.0 million as of December 31, 2016 and January 31, 2017, approximately $107.0 million as of December 31, 2017, and approximately $84.5 million as of December 31, 2018. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Accounting Guidance.”
(4)   Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenues for the applicable period.
(5)   R&D expense as a percentage of revenues is calculated by dividing R&D expenses by revenues.

 

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RISK FACTORS

An investment in our common shares involves a high degree of risk. You should consider carefully the following risks, together with the other information contained in this prospectus, before you decide whether to buy our common shares. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations, financial condition, and cash flows could suffer significantly. As a result, the market price of our common shares could decline, and you may lose all or part of the money you paid to buy our common shares.

Risks Related to Our Business

We face intense competition and our failure to compete successfully in product development may have an adverse effect on our business, financial condition, and results of operations.

Our industry is highly competitive and most of our product lines compete against product lines from at least two competitors. We encounter competition from numerous and varied competitors in all areas of our business. Further, our products compete not only with similar products manufactured by our competitors, but also against a variety of other alternatives provided by our competitors. Industry consolidation may result in larger, more homogeneous, and potentially stronger competitors in the markets in which we compete.

We compete primarily on the basis of quality, technology, performance, reliability, brand, reputation, range of products, and service and support. We expect our competitors to continue to develop and introduce new products and to enhance their existing products, which could cause a decline in market acceptance of our products. Our competitors may also improve their manufacturing processes or expand their manufacturing capacity, which could make it more difficult or expensive for us to compete successfully. In addition, our competitors could enter into exclusive arrangements with our existing or potential customers or suppliers, which could limit our ability, or make it significantly more expensive, to acquire necessary raw materials or to generate sales.

Some of our competitors may have greater financial, technical, and marketing resources than we do and may be able to devote greater resources to promoting and selling certain products. Unlike many of our competitors who specialize in a single or limited number of product lines, we have a portfolio of businesses and must allocate resources across those businesses. As a result, we may invest less in certain areas of our business than our competitors invest in competing businesses, and our competitors may therefore have greater financial, technical, and marketing resources available to them with respect to those businesses.

Some of our competitors may also incur fewer expenses than we do in creating, marketing, and selling certain products and may face fewer risks in introducing new products to the market. This circumstance results from the nature of our business model, which is based on providing innovative and high-quality products and therefore may require that we spend a proportionately greater amount on R&D than some of our competitors. If our pricing and other factors are not sufficiently competitive, or if there is an adverse reaction to our product decisions, we may lose market share in certain areas, which could adversely affect our business, financial condition, and results of operations.

Additionally, competitors could benefit from favorable tax regimes or additional governmental grants and subsidies. Certain of our competitors in various countries in which we do business, including China, may be owned by or affiliated with members of local governments and political entities. These competitors may receive special treatment with respect to regulatory compliance and product registration, while certain of our products, including those based on new technologies, may be delayed or even prevented from entering into the local market. Further, because many of our competitors are small divisions of large, international businesses, these competitors may have access to greater resources than we do and may therefore be better able to withstand a change in conditions within our industry and throughout the economy as a whole.

 

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Our profitability could suffer if our cost management strategies are unsuccessful or our competitors develop an advantageous cost structure that we cannot match.

Our ability to improve or maintain our profitability is dependent on our ability to successfully manage our costs. Our cost management strategies include maintaining appropriate alignment between the demand for our offerings and our resource capacity and maintaining or improving our sales and marketing and general and administrative costs as a percentage of revenues. If our cost management efforts are not successful, our efficiency may suffer and we may not achieve desired levels of profitability. In addition, we may not be able to implement our cost management efforts in a manner that permits us to realize the cost savings we anticipate in the time, manner, or amount we currently expect, or at all due to a variety of risks, including, but not limited to, difficulties in integrating shared services within our business, higher than expected employee severance or retention costs, higher than expected overhead expenses, delays in the anticipated timing of activities related to our cost savings plans, and other unexpected costs associated with operating our business. If we are not effective in managing our operating costs in response to changes in demand or pricing, or if we are unable to absorb or pass on increases in the compensation of our employees or costs of raw materials, we may not be able to invest in our business in an amount necessary to achieve our planned rates of growth, and our business, financial condition, and results of operations could be materially adversely affected.

It may be possible for our current or future competitors to gain an advantage in product technology, manufacturing technology, or process technology, which may allow them to offer products or services that have a significant advantage over our offerings. Advantages could be in price, capacity, performance, reliability, serviceability, industry standards or formats, brand and marketing, or other attributes. If we do not compete successfully by developing and deploying new cost-effective products, processes, and technologies on a timely basis and by adapting to changes in our industry and the global economy, there could be a material adverse effect on our business, financial condition, and results of operations. Similarly, our chemicals are used by manufacturers of component parts for a variety of industries. To the extent these industries become more sensitive to input costs, we may face price pressure. Our ability to respond to such pressures depends on the strength and viability of our internal cost management and pricing programs. Any failure of these programs could have a material adverse effect on our business, financial condition, and results of operations.

Increases in costs or reductions in the supplies of our specialty and commodity chemicals or precious metals or our manufacturing, testing, and operations processes could materially and adversely affect our business, financial condition, and results of operations.

We use a variety of specialty and commodity chemicals and precious metals in our manufacturing processes, and our most significant raw material input by value is palladium. Our manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. We purchase our major raw materials on a contract or as-needed basis from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, the financial stability of our suppliers, suppliers’ allocations to other purchasers, interruptions in production by suppliers, new laws or regulations, changes in foreign currency exchange rates, and worldwide price levels. In addition, many of our raw materials and intermediate products are available in the quantities we require from a limited number of suppliers, which makes it more difficult to replace suppliers in the event of any supply disruption. Further, in some cases, we are limited in our ability to purchase certain raw materials from other suppliers by supply agreements that contain certain minimum purchase requirements. Additionally, we can provide no assurance that, as our supply contracts expire, we will be able to renew them or, if they are terminated, that we will be able to obtain replacement supply agreements on terms favorable to us. In particular, we rely on a local basis on single principal suppliers of palladium, with whom we have long-standing relationships. While we believe there are other suppliers of palladium in each of the regions in which we operate that may meet our needs, we may face difficulty or delays in finding a new supplier should that need arise. Our business, financial condition, and results of operations could be materially adversely affected if we are unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increase significantly.

 

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From time to time, suppliers may extend lead times, limit supplies, or increase prices due to capacity constraints, environmental limitations, or other factors. In addition, some of the raw materials that we use are derived from petrochemical based feedstocks, and there have been historical periods of rapid and significant upward and downward movements in the prices of these feedstocks. We may not always be able to pass on these price increases, and price increases by our other suppliers, to our customers due to competitive pricing pressure, and, even when we are able to do so, there may be a time delay between increased raw material prices and our ability to increase the prices of our products. Any limitation on, or delay in, our ability to pass on any price increases could have a material adverse effect on our business, financial condition, and results of operations.

In addition to specialty and commodity chemicals and precious metals, our manufacturing, testing, and operations processes, in particular the control software for our own equipment, require specialized software which is available only from a limited number of suppliers. Should the access to software and services from these suppliers be restricted or contracts be terminated, we can provide no assurance that we would be able to immediately replace these services, which could adversely affect our business and operations.

The reputation of our brand is an important company asset and is key to our ability to remain a trusted supplier of specialty chemistry, equipment, and service.

The reputation of our brand is an important company asset and is key to our ability to remain a trusted supplier of specialty chemistry, equipment, and service and to attract and retain customers. Negative publicity regarding our company or actual, alleged, or perceived issues regarding one of our products or services, particularly given the high cost-of-failure nature of our products and services, could harm our relationship with customers. Failure to protect the reputation of our brand may adversely impact our credibility. In addition, in certain jurisdictions we may engage sales agents in connection with the sale of certain of our products and services. It is difficult to monitor whether such agents’ representations of our products and services are accurate. Poor representation of our products and services by agents, or entities acting without our permission, could have a material adverse effect on our reputation and our business, financial condition, and results of operations.

If our products and services do not maintain and/or achieve broad market acceptance, or if we are unable to keep pace with or adapt to rapidly changing technology or trends, our business, financial condition, and results of operations could be materially adversely affected.

Our business is dependent on the continued acceptance by our customers of our existing products and services and the value placed on them. If these products and services do not maintain market acceptance, our revenues may decrease. We are also continually investing in new product development to expand our offerings beyond our traditional products and services. Market acceptance of any new products or services may be affected by customer confusion surrounding our introduction of new products and services. Our expansion into new offerings may present increased risks and efforts to expand beyond our traditional products and services may not succeed.

In addition, our business is subject to constant and rapid technological change, product obsolescence, price erosion, evolving standards, short product lifecycles, raw material price fluctuations, and changes in product supply and demand. The specialty chemistry industry is currently affected by localization and a shift in customers’ businesses. The trends and characteristics in these industries may cause significant fluctuations in our results of operations and cash flows and have a material adverse effect on our financial condition. Our growth and success depend upon our ability to enhance our existing products and services and to develop and introduce new products and services to keep pace with such changes and developments and to meet changing customer needs and preferences. However, newer products or services may not achieve market acceptance if current or potential customers do not value the benefits of using our products, do not achieve favorable results using our products, use their budgets for different products, experience difficulties in using our products, or believe that our products are not cutting edge or do not add as much value as our competition’s products. If these newer products and services do not achieve market acceptance, there could be a material adverse effect on our business, financial

 

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condition, and results of operations and our profitability could decline. Additionally, changes, including technological changes, in our customers’ products or processes may make our specialty chemistry unnecessary or reduce the quantity of our specialty chemistry needed for a given product, which would reduce the demand for those chemicals. We have had, and may continue to have, customers who find alternative materials or processes and therefore no longer require our products, which would have a material adverse effect on our business, financial condition, and results of operations.

In addition, we may fail to anticipate the impact of new and emerging technology or changes in trends, fail to accurately determine market demand for new products and services, experience cost overruns, delays in delivery or performance problems, and create market confusion by making changes to our existing products and services. If we are not successful in obtaining any required regulatory approval or acceptance for new products or services, demand for our products and services may decline and/or we may not be able to grow our business or growth may occur more slowly than we anticipate. Some of our current or future products or services could also be rendered obsolete as a result of competitive offerings. Furthermore, if our customers deviate from the expected timeline for the introduction of new technology, the sales of our newer products could be adversely affected. Failure to anticipate changes in our customers’ product introduction timelines could have a material adverse effect on our business, financial condition, and results of operations.

Our direct customers and their direct and indirect customers face numerous competitive challenges, which may materially adversely affect their business and ours.

Factors adversely affecting our direct customers and their direct and indirect customers may also adversely affect us. These factors include:

 

   

recessionary periods in their markets;

 

   

their inability to adapt to rapidly changing technology and evolving industry standards, which may contribute to short product lifecycles or shifts in their strategies;

 

   

their inability to develop, market, or gain commercial acceptance of their products, some of which are new and untested;

 

   

their products becoming commoditized or obsolete;

 

   

loss of business or a reduction in pricing power experienced by our customers and their direct and indirect customers;

 

   

the emergence of new business models or more popular products and shifting patterns of demand;

 

   

a highly competitive consumer products industry, which is often subject to shorter product lifecycles, shifting end-user preferences, and higher revenue volatility; and

 

   

the loss of manufacturing capacity due to tightening environmental legislation and its enforcement.

If our customers or our customers’ direct and indirect customers in the ultimate end-markets we serve, including the markets for smartphones, communication infrastructure, cloud computing infrastructure, automotive surface finishing, and automotive electronics, are unsuccessful in addressing these competitive challenges, their businesses may be materially adversely affected, reducing the demand for our offerings, decreasing our revenues, or altering our production cycles and inventory management, each of which could have a material adverse effect on our business, financial condition, and results of operations.

Our revenue, earnings, and other operating results have fluctuated in the past and may fluctuate in the future.

Our revenue, earnings, and other operating results have fluctuated in the past and may fluctuate in the future. If demand for our products fluctuates as a result of economic conditions or for other reasons, our revenue

 

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and profitability could be impacted. Our future operating results will depend on many factors, including the following:

 

   

business, political, and macroeconomic changes, including trade disputes and downturns in the EL and GMF plating markets and the overall global economy;

 

   

seasonality in both our segments, which generally experience their strongest revenue in the second half of each fiscal year, mostly driven by consumption trends during the holiday season, and their lowest revenue in the first quarter of each fiscal year, mostly driven by the slowdown in production in China as a result of the Chinese New Year, which can result in a sequential decline in our revenues in the first quarter of a fiscal year relative to the fourth quarter of the prior fiscal year;

 

   

changes in consumer confidence caused by many factors, including changes in interest rates, credit markets, expectations for inflation, unemployment levels, and energy or other commodity prices;

 

   

fluctuations in demand for our customers’ and their customers’ products;

 

   

our ability to forecast our customers’ demand for our products accurately;

 

   

our ability to anticipate secular trends that affect demand for our products and the degree to which those trends materialize;

 

   

our customers’ ability to manage the inventory that they hold and to forecast accurately their demand for our products;

 

   

our ability to achieve cost savings and improve yields and margins on our new and existing products; and

 

   

our ability to utilize our capacity efficiently or acquire additional capacity in response to customer demand.

It is likely that our future operating results could be adversely affected by one or more of the factors set forth above or other similar factors. If our future operating results are below the expectations of stock market analysts or our investors, our stock price may decline.

We may be unable to successfully execute on our growth initiatives, business strategies, or operating plans.

We are continually executing on several growth initiatives, strategies, and operating plans designed to enhance our business. In our EL segment, this strategy includes using existing technology to address the build-out of 5G infrastructure and leveraging R&D to address new technologies, including next-generation smartphones, automotive electronics, cloud computing infrastructure growth, and adoption of IoT devices. In our GMF segment, this strategy includes obtaining approvals for our chemistry to be used in more corrosion protection applications and leveraging R&D to address tightening environmental regulation.

In addition to these growth strategies, our business plan incorporates certain transformational initiatives, including our enhanced senior leadership team, globalized management structure, renewed focus on customers, optimized R&D, cost management initiatives, and a new incentive structure and may include potential acquisitions.

The anticipated benefits from these strategies and initiatives are based on several assumptions that may prove to be inaccurate, including assumptions as to the key trends that will drive growth in our business. Moreover, we may not be able to successfully complete these growth initiatives, strategies, and operating plans without making additional expenditures or at all. If we are unable to complete these initiatives, strategies, and operating plans, we may not realize all the benefits we currently anticipate, including the growth targets and cost savings, we expect to achieve. The anticipated cost savings disclosed elsewhere in this prospectus are presented on a gross basis and do not reflect any expenses that may be required to achieve such cost savings.

 

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A variety of risks could cause us not to realize some or all the expected benefits. These risks include, among others, delays in the anticipated timing of activities related to such growth initiatives, strategies, and operating plans; the secular trends on which many of our strategies and initiatives are based not materializing or not materializing to the degree expected; increased difficulty and cost in implementing our growth efforts; and the incurrence of other unexpected costs associated with operating the business. Moreover, our continued implementation of these programs may disrupt our operations and performance. Similarly, we may not realize the benefits we currently expect from our comprehensive systems and solutions approach.

If any of the assumptions underlying our growth initiatives prove to be inaccurate or any of the foregoing risks materialize, we may not realize the expected benefits of our initiatives and we may be adversely affected, including as the result of the costs associated with these initiatives. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives, strategies, and operating plans adversely affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions, including our assumptions with respect to growth of our end-markets, prove inaccurate, our business, financial condition, and results of operations may be materially adversely affected.

We may be adversely affected by uncertainty, downturns, and changes in the markets that we serve.

Our performance depends on the financial health and strength of our customers, which in turn is dependent on the economic conditions of the markets in which we and our customers operate. Declines or uncertainties in the United States and global economies may lead customers to delay or reduce purchases of our products and services as they take measures to reduce their operating costs, including by delaying the development or launch of new products and brands and/or reducing R&D spending generally.

We are also sensitive to general trends and changes in the key markets we serve. Some of these markets, including the markets for smartphones, communication infrastructure, cloud computing infrastructure, automotive surface finishing, and automotive electronics, exhibit a high degree of cyclicality. Decisions to purchase our chemistry and equipment are largely the result of the performance of these and other end-markets. If demand for output in these end-markets decreases, demand for our offerings will decrease as well. Demand for the products produced by customers in our end-markets is impacted by numerous factors including macroeconomic conditions, prices of commodities, rates of infrastructure spending, consumer confidence and spending, labor conditions, and fuel costs, among others. Increases or decreases in these variables globally may significantly impact the demand for our offerings and could have a material adverse effect on our business, financial condition, and results of operations. If we are unable to accurately predict demand in our end-markets or of the customers we serve, we may be unable to meet our customers’ needs, resulting in the loss of potential sales. Alternatively, we may manufacture excess products, resulting in increased inventories and overcapacity in our manufacturing facilities, increasing our incremental production costs and decreasing our operating margins.

In addition, mergers or consolidations among our customers or OEMs could reduce the number of our customers and potential customers. For example, in recent years there has been consolidation in certain industries that we serve, and this has led to decreased levels of growth in certain product lines. Continued consolidation could adversely affect our revenues even if these events do not reduce the activities of the consolidated entities. When entities consolidate, overlapping services previously purchased separately are usually purchased only once by the consolidated entity, leading to loss of revenues. In addition, consolidated entities can better negotiate pricing terms while reducing spending on other services that were previously purchased by one of the merged or consolidated entities which may be deemed unnecessary or cancelled. Any such developments among our customers could have a material adverse effect on our business, financial condition, and results of operations.

We may acquire other businesses which could require significant management attention, disrupt our business, dilute shareholder value, and adversely affect our results of operations.

As part of our business strategy, we may acquire or make investments in complementary companies, products, or technologies. The identification of suitable acquisition candidates is difficult, and we may not be

 

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able to complete such acquisitions on favorable terms, if at all. If we do complete future acquisitions, we may not ultimately strengthen our competitive position or achieve our goals and business strategy; we may be subject to claims or liabilities assumed from an acquired company, product, or technology; and any acquisitions we complete could be viewed negatively by our customers, investors, and securities analysts. In addition, if we are unsuccessful at integrating future acquisitions, or the technologies associated with such acquisitions, into our company, the revenue and results of operations of the combined company could be adversely affected. Any integration process may require significant time and resources, which may disrupt our ongoing business and divert management’s attention, and we may not be able to manage the integration process successfully. We may not successfully evaluate or utilize the acquired technology or personnel, realize anticipated synergies from the acquisition, or accurately forecast the financial impact of an acquisition transaction and integration of such acquisition, including accounting charges. We may have to pay cash, incur debt, or issue equity or equity-linked securities to pay for any future acquisitions, each of which could adversely affect our financial condition or the market price of our common shares. The sale of equity or issuance of equity-linked debt to finance any future acquisitions could result in dilution to our shareholders. The incurrence of indebtedness would result in increased liabilities and could also include covenants or other restrictions that would impede our ability to manage our operations. The occurrence of any of these risks could harm our business, results of operations, and financial condition.

If we do not continue to attract, motivate, and retain members of our senior management team and qualified employees, we may not be able to support our operations.

The completion and execution of our strategies depend on the continued service and performance of our senior management team. If we lose key members of our senior management team, we may not be able to effectively manage our transition to a public company or our current and future operations.

In addition, our business depends on our ability to continue to attract, motivate, and retain many skilled employees across all of our business lines. There is a limited pool of employees who have the requisite skills, training, and education. We compete with many businesses and organizations that are seeking skilled individuals, particularly those with experience in technology and the sciences and those with Ph.D.s in technical fields. Competition for professionals across our entire business can be intense, as other companies seek to enhance their positions in the markets we serve. In addition, competition for experienced talent in our faster growing geographic areas outside of Europe continues to intensify, requiring us to increase our focus on attracting and developing highly skilled employees in our most strategically important locations in those areas of the world. As competition for experienced talent grows, we may be forced to increase spending on employee salaries which could have a material adverse effect on our business, financial condition, and results of operations.

Future organizational changes and the implementation of our cost savings initiatives could also cause our employee attrition rate to increase and may result in significant costs to us in connection with implementing such initiatives. If we are unable to continue to identify or be successful in attracting, motivating, and retaining appropriately qualified personnel, there could be a material adverse effect on our business, financial condition, and results of operations.

We may be subject to work stoppages, union negotiations, labor disputes, and other matters associated with our labor force, which may adversely impact our operations and cause us to incur incremental costs.

Many of our employees globally are in unions or otherwise covered by labor agreements, including works councils. As of December 31, 2018, approximately 26% of our workforce, excluding employees in China and Mexico, was unionized or otherwise covered by labor agreements. Consequently, we may be subject to potential union campaigns, work stoppages, union negotiations, and other potential labor disputes. Additionally, negotiations with unions or works councils in connection with existing labor agreements may result in significant increases in our cost of labor, divert management’s attention away from operating our business, or break down and result in the disruption of our operations. The occurrence of any of the preceding outcomes could impair our

 

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ability to manufacture our products and result in increased costs and/or decreased operating results. Further, we may be impacted by work stoppages at our suppliers or customers that are beyond our control.

Our global operations subject us to increased risks.

We have global operations and, accordingly, our business is subject to risks resulting from differing legal and regulatory requirements, political, social, and economic conditions, and unforeseeable developments in a variety of jurisdictions. We have a significant presence in several major regions, including certain emerging markets such as India and China, and we plan to continue such expansion. Our global operations are subject to the following risks, among others:

 

   

political instability;

 

   

acts of terrorism and military actions in response to such acts;

 

   

unexpected changes in regulatory environments and government interference in the economy;

 

   

changes to economic sanctions laws and regulations, including regulatory exemptions that currently authorize certain of our limited dealings involving sanctioned countries;

 

   

increasingly stringent laws related to privacy and consumer and data protection, including the E.U. General Data Protection Regulation and U.S. State privacy and security breach notification laws;

 

   

international trade disputes that could result in tariffs or other protectionist measures;

 

   

varying tax regimes, including with respect to the imposition of withholding taxes on remittances and other payments by our partnerships or subsidiaries;

 

   

the impact of changes in the U.S. federal tax code as a result of recent U.S. federal tax legislation and uncertainty as to how some of those changes may be applied;

 

   

differing labor regulations, particularly in Germany and China where we have a significant number of employees;

 

   

rising wages;

 

   

foreign exchange controls and restrictions on repatriation of funds;

 

   

fluctuations in foreign currency exchange rates;

 

   

inability to collect payments or seek recourse under or comply with ambiguous or vague commercial or other laws;

 

   

difficulty in obtaining, or denial of, export licenses or delay or interruption of the transportation of our products;

 

   

differing protections for intellectual property rights;

 

   

increased risk of cybersecurity incidents and cyberattacks from third-party and state actors and privacy violations;

 

   

difficulties in attracting and retaining qualified management and employees, or rationalizing our workforce;

 

   

increased credit risk and different financial conditions of customers and distributors may necessitate longer payment cycles of accounts receivable or result in increased bad debt write-offs (including due to bankruptcy) or additions to reserves;

 

   

differing business practices, which may require us to enter into agreements that include non-standard terms; and

 

   

difficulties in penetrating new markets due to entrenched competitors, lack of recognition of our brand, and lack of local acceptance of our products and services.

 

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Our overall success as a global business depends, in part, on our ability to anticipate and effectively manage these risks but there can be no assurance that we will be able to do so without incurring unexpected costs. If we are not able to manage the risks related to our international operations, our business, financial condition, and results of operations may be materially adversely affected.

Our business in emerging markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, upon our ability to succeed in different legal, regulatory, economic, social, and political conditions. We may not succeed in developing and implementing policies and strategies which will be effective in each location where we do business. Furthermore, any of the foregoing factors or any combination thereof could have a material adverse effect on our business, financial condition, and results of operations.

We may also face difficulties managing and administering an internationally dispersed business. In particular, the management of our personnel across several countries can present logistical and managerial challenges. Additionally, international operations present challenges related to operating under different business cultures and languages. We may have to comply with unexpected changes in foreign laws and regulatory requirements, which could negatively impact our operations and ability to manage our global financial resources. Export controls or other regulatory restrictions could prevent us from shipping our products into and from some markets. Moreover, we may not be able to adequately protect our trademarks and other intellectual property overseas due to uncertainty of laws and enforcement in several countries relating to the protection and enforcement of intellectual property rights. See “—Our efforts to protect our intellectual property may be less effective in some countries where intellectual property rights are not as well protected as in the United States.” Changes in tax regulations in the United States and other jurisdictions, including under and with respect to bilateral and multilateral tax treaties, or the interpretation thereof, could significantly reduce the financial performance of our foreign operations or the magnitude of their contributions to our overall financial performance. In addition, the interpretation and application of consumer and data protection laws in the United States, Europe, and elsewhere are often uncertain, contradictory, and in flux. For example, the European Union enacted stricter data protection laws in 2018. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, this could result in government-imposed fines or orders requiring that we change our data practices, which could have an adverse effect on our business. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

Our products and our customers are subject to numerous laws regulating the production and use of chemical substances, and some of our products may need to be reformulated or discontinued to comply with these laws and regulations.

As a specialty chemistry manufacturer, we are subject to chemicals approvals, registrations, and regulations around the world, including the European Union Registration, Evaluation, Authorisation, and Restriction of Chemicals (“EU REACH”) regulation and, in particular, its Substances of Very High Concern (“SVHC”) program, the Toxic Substances Control Act (“TSCA”) in the United States, and similar requirements in China, Korea, Taiwan, Australia, the Philippines, Canada, and other countries. Some of the laws and regulations applicable to us have changed in recent years to impose new obligations that could also force us to reformulate or discontinue certain of our products.

We are generally in compliance and do not expect additional material compliance costs in connection with the June 2016 amendments to TSCA. The U.S. Environmental Protection Agency (“EPA”) published the final rule establishing the process for the TSCA “Inventory Reset” on August 11, 2017. The EPA must now designate “high priority” chemicals and perform a risk evaluation. If that evaluation results in an “unreasonable risk” finding, then the EPA must promulgate new regulations to address such risk. EPA must make a no “unreasonable risk” finding before a new chemical can be fully commercialized. These new mandates create uncertainty about whether existing chemicals of importance to our business may be designated for restriction and whether the new

 

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chemical approval process may become more difficult and costly. Additionally, we have complied with the deadline to submit registrations for all chemicals manufactured or imported exceeding 1 t/a under EU REACH, which has since passed. We do not expect additional material compliance costs. The cost of a registration varied greatly (ranging from €30,000 to €300,000) and depended upon several factors, such as the amount and quality of existing data and the availability of other companies to share costs of generating new data. The EU REACH registration process may affect our ability to manufacture and sell certain products in the future. If a registration was, or in the future is, not submitted by any applicable deadline, our ability to sell those products may be negatively impacted until the registration process has been completed. However, we believe that we have minimized our registration obligations and the risk associated with supplier-related registrations by clarifying registration requirements and willingness of suppliers early. We have also submitted an Authorisation Application for one SVHC—chromium trioxide. The decision of the European Union Commission on the application is still pending. Because of our strong sales in Asia and our current efforts to develop alternative formulations, it is unlikely our business will be materially affected if the application is not granted. Finally, we have in the past used mist suppressants containing perfluorooctanesulfonic acid (“PFOS”) and perfluorooctanoic acid (“PFOA”), sold products containing PFOS and PFOA and may have previously processed other long-chain fluorochemicals. PFOS, PFOA, and other long-chain fluorochemicals have been targeted for risk assessment, restriction, and high-priority remediation and have been the subject of ongoing and substantial litigation in the both the United States and European Union. We have not received any claims or enforcement actions from governments or third parties relating to PFOS or PFOA.

International chemicals regulation requirements, and enforcement of these requirements, may become more stringent in the future and could result in material costs relating to regulatory compliance, liabilities, or litigation proceedings or other impacts, such as restrictions or prohibitions on our products. Future regulatory or other developments could also restrict or eliminate the use of, or require us to make modifications to, our products, packaging, manufacturing processes, and technology, which could have a material adverse effect on our business, financial condition, and results of operations. Our production facilities require permits, such as environmental, operating, and product-related permits and import/export permits, which are subject to renewal and, in some circumstances, revocation. We may not obtain the necessary permits, existing permits may be discontinued, and any newly issued permits may contain significant and costly new requirements. If a permit for a production facility would not be renewed or would be revoked, the facility may need to be closed temporarily or permanently, which may have a material adverse effect on our business, financial condition, and results of operations. Failure to obtain or maintain permits for our facilities or other failure to comply with applicable environmental regulations could result in the shutdown of, or suspension of operations at, our plants.

Furthermore, changes or tightening of environmental protection laws and regulations in China may also have adverse effects on our business, including by adversely impacting operations efficiency, restricting the scope of our operations, increasing costs associated with the transportation of chemicals, and resulting in higher costs for environmental protection taxes and other expenditures.

Many of our customers are subject to the same or similar environmental regulations. The impact of these regulations on our customers and our customers’ ability to comply with these regulations is outside of our control. However, noncompliance by our customers could have an indirect negative effect on our business. We are monitoring relevant chemical regulatory developments in order to limit the associated risks of new developments by being able to trigger countermeasures such as alternative products, and phase-outs, among others, at the right time.

Our financial results may be affected by tariffs or border adjustment taxes or other adverse trade restrictions.

We have global operations, including a significant presence in several major regions, including markets such as India and China. We cannot predict whether the countries in which we operate, or may operate in the future, could become subject to new or additional trade restrictions imposed by the United States or other

 

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governments, including the likelihood, type or effect of any such restrictions. The U.S. government imposed various actions regarding trade with China, including levying various tariffs on imports from China, and is contemplating imposing additional actions in the future. In addition, President Trump recently issued an executive order designed to secure the information and communications technology and services supply chain, which would restrict the acquisition or use in the United States of information and communications technology or services designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries. Further, the U.S. Commerce Department has implemented additional restrictions and may implement further restrictions that would affect conducting business with certain Chinese companies. The impact on us from these tariffs and trade restrictions is largely indirect, as our customers who import or export products to and from the United States are subject to the tariffs and trade restrictions and pass on the cost to us. However, we can provide no assurance that we will not be subject to direct tariffs and trade restrictions in the future. Similarly, the impact of these trade restrictions on the global value chains we serve may cause customers to seek other suppliers for our products in different countries, and we may be unable to recapture or replace such customers. Moreover, depending on the duration and implementation of the tariffs, the executive order and other regulatory actions, these trade restrictions may also adversely affect the development of new technologies and the rollout of next-generation networks, including 5G.

There is increased uncertainty with respect to trade relations, including as a result of potential retaliatory tariffs, between the United States and other countries, particularly China and Mexico. The focus on policy reforms that discourage U.S. corporations from outsourcing manufacturing and production activities to foreign jurisdictions, including increased customs restrictions and tariffs or quotas or the imposition of additional duties and other charges on imports and exports, could change the way we and our customers conduct business, increase our costs, or impede the timely delivery of our products and have a material adverse effect on our business, financial condition, and results of operations.

Our operations and assets in China are subject to significant political and economic uncertainties.

Changes in Chinese laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency, or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, financial condition, and results of operations of our subsidiaries organized under the laws of China. Under its current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

Additionally, if we repatriate funds from our Chinese operations in order to fund our working capital requirements in jurisdictions outside of China, to pay dividends, or otherwise, we will be required to comply with the procedures and regulations of applicable Chinese law, which may significantly limit our ability to extract cash from our Chinese operations. Furthermore, under the Enterprise Income Tax Law and the regulation on the implementation of the Enterprise Income Tax Law, absent application of a relevant treaty, withholding tax at 10% will normally apply to dividends payable to non-Chinese investors which are derived from sources within China. Any changes to these procedures and regulations, or our failure or inability to comply with these procedures and regulations, could prevent us from repatriating funds from our Chinese operations, which could have a material adverse effect on our business, financial condition, and results of operations. Failure to comply with applicable laws, regulations and/or rules in relation to foreign exchange control, including but not limited to the Administrative Regulations on Foreign Exchange of China, could subject us to administrative penalties (such as warnings and/or fines) as well as potential criminal liabilities in severe situations.

The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. While the Chinese economy has experienced significant growth in the past 30 years,

 

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growth has been uneven, both geographically and among various sectors of the economy. The Chinese economy may not continue to grow and if there is growth, such growth may not be steady and uniform. If there is a slowdown, such slowdown may have a negative effect on our Chinese business and our business in general. We can provide no assurance that the various macroeconomic measures and monetary policies adopted by the Chinese government to guide economic growth and the allocation of resources will be effective in sustaining the growth rate of the Chinese economy. If Chinese growth stagnates or there is an economic downturn in China, our business, financial condition, and results of operations may be materially adversely affected.

The Chinese government’s control of currency conversion and expatriation of funds may affect our liquidity.

The Chinese government imposes controls on the convertibility of the currency of China (the “RMB”) into foreign currencies and, in certain cases, the remittance of currency out of China. Substantially all revenues of our subsidiaries organized under the laws of China are denominated in RMB. Shortages in the availability of foreign currency in China may restrict the ability of our Chinese subsidiaries to remit sufficient foreign currency to pay dividends or to make other payments to us, or otherwise to satisfy their foreign currency-denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and trade-related payments, can be made in foreign currencies without prior approval from China’s State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements, including, among others, submission of relevant documentary evidence of such transactions to designated foreign exchange banks in China for processing of relevant payments. We are required to present relevant documentary evidence of such transactions and conduct such transactions at designated foreign exchange banks in China. However, for any Chinese company, dividends can be declared and paid only out of the retained earnings of that company under Chinese law and may be subject to taxation. In accordance with relevant Chinese laws and provisions in their articles of association, each of our Chinese subsidiaries is required to set aside 10% of its after tax profits based on Chinese accounting standards as statutory reserve until such reserve reaches 50% of its registered capital. As a result, our Chinese subsidiaries may be restricted in their ability to transfer cash outside of China whether in the form of dividends, loans, and advances. These restrictions and requirements could reduce the amount of distributions that we receive from our subsidiaries, which would restrict our ability to fund our operations, generate income, pay dividends, and service our indebtedness.

Furthermore, approval from SAFE or its local branch is required where RMB are to be converted into foreign currencies and remitted out of China for payments of capital account items, such as the repayment of loans denominated in foreign currencies. Without a prior approval from SAFE or its local branch, cash generated from the operations of our Chinese subsidiaries may not be used to repay debt in a currency other than the RMB owed by such subsidiaries to entities outside China, or make other payments of capital account items outside China in a currency other than the RMB. The Chinese government may also at its discretion, restrict access in the future to foreign currencies for current account transactions. In the current regime of stringent regulation of outflow of capital, RMB outflow may face the same level of scrutiny by the Chinese government as the outflow of foreign currencies.

Additionally, because repatriation of funds of our Chinese subsidiaries requires the prior approval of SAFE and/or its authorized bank and/or compliance with certain procedural requirements, such repatriation could be delayed, restricted, or limited. There can be no assurance that the rules and regulations pursuant to which SAFE grants or denies such approval or stipulates the procedural requirements will not change in a way that adversely affects the ability of our Chinese subsidiaries to expatriate funds out of China. Future measures, including any additional requirements to repatriate profits earned in China, may increase our regulatory compliance burden.

 

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Uncertainties presented by the Chinese legal system could limit the legal protections available to us and subject us to legal risks, which could have a material adverse effect on our business, financial condition, and results of operations.

Our operations in China are subject to applicable Chinese laws, rules, and regulations. The Chinese legal system is based on written statutes. Prior court decisions may be cited for reference but have little value as precedents, although the judicial interpretations issued by the Supreme Court of China have binding effect. Additionally, Chinese statutes are often principle-oriented and require detailed interpretations by the enforcement bodies to further apply and enforce such laws.

Since 1979, the Chinese government has been developing a comprehensive system of commercial laws, and progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation, and trade. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because some of these laws and regulations are relatively new, and because of the limited volume of published court of arbitration decisions and their nonbinding nature (except for the judicial interpretations issued by the Supreme Court of China), the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the Chinese legal system is based in part on government policies and internal rules, some of which may not be published on a timely basis or at all, and some of which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection in China than in more developed legal systems. These uncertainties may also impede our ability to enforce the contracts we have entered into in China. As a result, these uncertainties could have a material adverse effect on our business, financial condition, and results of operations.

Material increases in labor costs in China could have an adverse impact on our business and operating results.

We operate several manufacturing facilities in China. In past years, we have experienced increases in labor costs in our Chinese facilities. We expect increases in the cost of labor in our manufacturing facilities in China will continue to occur in the future. To the extent we are unable to pass on increases in labor costs to our customers by increasing the prices for our products and services, minimum wage increases or increases in other labor costs could have a material adverse effect on our business, financial condition, and results of operations.

If our land use rights in China are revoked, we would have no operational capabilities in the country.

Under Chinese law, land is owned by the state or rural collective economic organizations. The state issues to the land users the land use right certificate. Land use rights can be revoked and the land users forced to vacate at any time when redevelopment of the land is in the public interest. The public interest rationale is interpreted quite broadly and the process of land appropriation may not be transparent. We have one technology center in Shanghai and another in Guangzhou. We also have one production facility in Guangzhou and are developing a second production facility in Yangzhou, which we believe will be operational in 2020. These facilities are operated independently from each other and the loss of land use rights at any one facility would not necessarily impact the operations at any other site. However, we rely on these land use rights, and the loss of such rights would have a material adverse effect on our business, financial condition, and results of operations.

Changes in the Chinese government’s policy on foreign investment in China may adversely affect our business and results of operations.

The Foreign Investment Access Special Management Measures (Negative List) (2018 Version) (“Negative List”), which became effective on July 28, 2018, has identified the industrial areas that are restricted or

 

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prohibited for foreign investors. The business of our Chinese subsidiaries does not fall within any of such restricted or prohibited areas and their business scope was duly approved by the Chinese foreign investment regulatory authority upon their establishment.

The Negative List may be updated from time to time, and there can be no assurance that the Chinese government will not change its policies in a manner that would render part or all of our business to fall within the restricted or prohibited categories. If we cannot obtain approval from the relevant approval authorities to engage in a business that becomes prohibited or restricted for foreign investors pursuant to any applicable updates under the Negative List, we may be forced to sell or restructure our business in China. If we are forced to adjust our corporate structure or business as a result of changes in government policy on foreign investment, it could adversely affect our reputation, business, financial condition, and results of operations.

The Foreign Investment Law of China (“Foreign Investment Law”) was formally adopted by the National People’s Congress of China on March 15, 2019 and will come into effect on January 1, 2020 to replace the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Invested Enterprise Law with a single unified law aimed at promoting foreign investment by better protecting the rights and interests of foreign investors and standardizing management of foreign investment. The Foreign Investment Law is formulated to establish regulatory principles governing foreign investment in China, with detailed implementing regulations and rules to be enacted by relevant regulatory authorities. As such, there exist uncertainties regarding the interpretation and implementation of the Foreign Investment Law and the evolution of the regulatory landscape of foreign investment. The proposed Foreign Investment Law imposes enhanced information reporting requirements on foreign investors and the applicable foreign invested entities and requires reorganization of foreign-invested enterprises’ corporate governance for conformity with the Company Law of China. Once enacted, the Foreign Investment Law may have a material impact on certain aspects of our current corporate governance practices and business operations and may result in an increase in our compliance costs. In addition, and depending on the seriousness of the circumstances, noncompliance with information reporting obligations, concealment of information, and providing misleading or false information could result in monetary fines or criminal charges.

Foreign currency exchange rate fluctuations and volatility in global currency markets could have a material adverse effect on our business, financial condition, and results of operations.

Our international sales and operations expose us to fluctuations in foreign currency exchange rates. Foreign currency exchange rate movements in our currency exposures may cause fluctuations in our financial results due to transactional and translational effects. While a significant majority of our costs are denominated in Euros, our revenues are generally denominated in RMB, U.S. dollars, and Euros, with the significant majority of our non-U.S. dollar denominated revenues denominated in RMB. Although $489.9 million of our indebtedness is denominated in RMB, as of December 31, 2018, 69% of our debt under the senior secured credit facilities, and 100% of our debt under the Opco Notes and the Holdco Notes is denominated in U.S. dollars. Because a majority of our revenues and costs are denominated in currencies other than the U.S. dollar, changes in foreign currency exchange rates, and in particular changes in the value of RMB and the Euro, could reduce our ability to service our debt.

Moreover, movements in exchange rates may cause our revenues and expenses to fluctuate, impacting our profitability and cash flows and our results generally. Consequently, our business, financial condition, and results of operations may be materially adversely affected. These risks related to exchange rate fluctuations and currency volatility may increase in future periods as our operations outside of the United States and Europe continue to expand.

We regularly evaluate whether to enter into foreign currency hedging transactions from time to time. For example, effective January 21, 2019, we entered into a foreign currency forward with an amount of $200.0 million with a maturity of two years. There can be no assurance that such currency hedging activities

 

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would be successful, and any such currency hedging activities themselves would be subject to risk, including risks related to counterparty performance.

The international scope of our operations and our corporate and financing structure may expose us to potentially adverse tax consequences.

We are subject to taxation in, and to the tax laws and regulations of, multiple jurisdictions as a result of the international scope of our operations and our corporate and financing structure. We are also subject to intercompany pricing laws, including those relating to the flow of funds between our companies pursuant to, for example, purchase agreements, licensing agreements, or other arrangements. Adverse developments in these laws or regulations, or any change in position regarding the application, administration, or interpretation of these laws or regulations in any applicable jurisdiction, could have a material adverse effect on our business, financial condition, and results of operations. In addition, the tax authorities in any applicable jurisdiction may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions, including the tax treatment or characterization of our indebtedness. If any applicable tax authorities were to successfully challenge the tax treatment or characterization of any of our transactions, it could result in the disallowance of deductions, the imposition of withholding taxes on internal deemed transfers, the reallocation of income, or other consequences that could have a material adverse effect on our business, financial condition, and results of operations.

Recent U.S. tax legislation may adversely affect net income and cash flows.

Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate, limiting interest deductions, adopting elements of a territorial tax system, limiting net operating loss carry forwards and introducing new anti-base erosion provisions. Many of these changes are effective for tax years beginning after December 31, 2017, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service, any of which could lessen or increase certain adverse impacts of the legislation. Further, it is reasonable to expect that non-U.S. taxing authorities will be reviewing current law for potential modifications in reaction to the implementation of the new U.S. tax legislation. While some of the changes made by the U.S. tax legislation, and any future U.S. or non-U.S. legislative changes, may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the recent U.S. tax legislation as a whole will have on us.

Our failure to comply with trade restrictions such as economic sanctions and export controls could negatively impact our reputation and results of operations.

We are subject to trade restrictions, including economic sanctions and export controls, imposed by governments around the world with jurisdiction over our operations, which prohibit or restrict transactions involving certain designated persons and certain designated countries or territories, including Cuba, Iran, Syria, North Korea, and the Crimea Region of Ukraine. Our failure to successfully comply with these laws and regulations may expose us to reputational harm as well as significant sanctions, including criminal fines, imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts, and other remedial measures. Investigations of alleged violations can be expensive and disruptive. We maintain policies and procedures designed to comply with these laws and regulations. As part of our business, we may, from time to time, engage in limited sales and transactions involving certain countries that are targets of economic sanctions, provided that such sales and transactions are authorized pursuant to applicable economic sanctions laws and regulations. However, we cannot predict the nature, scope, or effect of future regulatory requirements, including changes that may affect existing regulatory authorizations, and we cannot predict the manner in which existing laws and regulations might be administered or interpreted.

 

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In addition, any perceived or actual breach of compliance by us with respect to applicable laws, rules, and regulations could have a significant impact on our reputation and could cause us to lose existing customers, prevent us from obtaining new customers, negatively impact investor sentiment about our company, require us to expend significant funds to remedy problems caused by violations and to avert further violations, and expose us to legal risk and potential liability, all of which may have a material adverse effect on our reputation, business, financial condition, and results of operations.

Our failure to comply with the anti-corruption laws of the United States and various international jurisdictions could negatively impact our reputation and results of operations.

Doing business on a worldwide basis requires us to comply with anti-corruption laws and regulations imposed by governments around the world with jurisdiction over our operations, which includes the U.S. Foreign Corrupt Practices Act (“FCPA”) and the U.K. Bribery Act 2010 (“UK Bribery Act”), as well as the laws of the countries where we do business. These laws and regulations may restrict our operations, trade practices, investment decisions, and partnering activities. The FCPA and the UK Bribery Act prohibit us and our officers, directors, employees, and business partners acting on our behalf, including agents (“representatives”), from corruptly offering, promising, authorizing, or providing anything of value to foreign government officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The UK Bribery Act also prohibits non-governmental commercial bribery, soliciting or accepting bribes, and “facilitation payments,” or small payments to low-level government officials to expedite routine approvals. We also are subject to the jurisdiction of various governments and regulatory agencies around the world, which may bring our personnel and representatives into contact with foreign government officials responsible for issuing or renewing permits, licenses, or approvals or for enforcing other governmental regulations. In addition, some of the international locations in which we operate lack a developed legal system, and others are perceived to have elevated levels of public corruption. Our global operations expose us to the risk of violating, or being accused of violating, anti-corruption laws and regulations.

Other companies, including some that may compete with us, may not be subject to the prohibitions listed above, and therefore may have a competitive advantage over us. We maintain policies and procedures reasonably designed to comply with applicable anti-corruption laws and regulations. However, there can be no guarantee that our policies and procedures will effectively prevent violations by our employees or representatives for which we may be held responsible, and any such violation could adversely affect our reputation, business, financial condition, and results of operations. Our failure to successfully comply with these laws and regulations may expose us to reputational harm as well as significant sanctions, including criminal fines, imprisonment, civil penalties, disgorgement of profits, injunctions, and debarment from government contracts, as well as other remedial measures. Investigations of alleged violations can be expensive and disruptive.

The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets, and our business.

We have material business operations in Europe. Following a national referendum in which a majority of voters in the United Kingdom elected to withdraw from the European Union, the government of the United Kingdom formally initiated the process for withdrawal pursuant to Article 50 of the Lisbon Treaty on March 29, 2017. The United Kingdom is due to leave the European Union on October 31, 2019, although the United Kingdom could leave the European Union sooner than this if agreement is reached on the terms of its withdrawal. Negotiations between the United Kingdom and the European Union remain ongoing and are complex, and there can be no assurance regarding the terms (if any) or timing of any resulting agreement. The withdrawal process has created significant uncertainty about the future relationship between the United Kingdom and the European Union, and this may have political consequences not only in the United Kingdom but also in the remaining European member states.

These developments and the potential consequences of them, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and could significantly

 

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reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, foreign currency exchange rates, including the valuation of the Euro and British pound in particular, and credit ratings have been and may continue to be subject to increased market volatility. Lack of clarity about future United Kingdom laws and regulations as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal could depress economic activity and restrict our access to capital before, during and after the period of negotiation or have a significant impact on our customers. The impact of the withdrawal, if any, will depend, in part, on the outcome of tariff, tax, trade, regulatory, immigration, and other negotiations between the United Kingdom and the European Union. If the United Kingdom and the European Union are unable to negotiate acceptable withdrawal terms or if other European Union member states pursue withdrawal, barrier-free access between the United Kingdom and other European Union member states or among the European Economic Area overall could be diminished or eliminated. Any of these factors could have a material adverse effect on our business, financial condition, and results of operations.

We may be adversely affected by changes in legislation and regulation, which may impact how we provide products and services.

We are subject to extensive laws, regulations, and industry standards in the various jurisdictions where we operate, market, and distribute our products, including environmental, health and safety, product regulatory, financial, accounting, and tax laws and regulations, which vary from jurisdiction to jurisdiction. Legislative and regulatory changes that impact us and our customers’ industries may impact how we provide products and services to our customers. It is difficult to predict in what form laws and regulations will be adopted or how they will be construed by the relevant courts, or the extent to which any changes might adversely affect us. Delays in adapting our products and services to legislative and regulatory changes could harm our reputation. Also, we may not be as well-equipped to respond to changes in legislation or regulation as some of our competitors or we may become subject to new legislation or regulation with regard to the products and services we offer which could cause us to be prohibited from providing certain services or make provision of affected services more expensive.

Although we have implemented policies and procedures that are designed to ensure compliance with applicable laws, rules, and regulations, there is no guarantee that we will remain in compliance. Any noncompliance could result in civil, criminal and administrative fees, fines, penalties, interruptions in our operations, and reputational harm for the company, which may have a material adverse effect on our business, financial condition, and results of operations.

Our know-how and innovations may not be adequately protected.

We believe that our product development, brand recognition and reputation, and the technological and innovative skills of our personnel are essential to establishing and maintaining our leadership position. We rely on a combination of patent, copyright, trademark, trade secrets, confidentiality procedures, technical measures, and contractual agreements with our customers, suppliers, and employees to establish and protect our know-how and innovations according to our products and services. If we fail to protect our know-how and innovations, our competitive position could suffer, which could adversely affect our business, financial condition, and results of operations.

We may be forced to initiate litigation or other enforcement actions against third parties to protect our know-how and innovations as well as defend and enforce our intellectual property rights. Litigating claims related to the enforcement of intellectual property rights is very expensive and can be burdensome in terms of management time and resources, which could adversely affect our business, financial condition, and results of operations. Moreover, the scope of our intellectual property rights may not prevent competitors from designing around such rights.

In some cases, we rely upon unpatented proprietary manufacturing expertise, continuing technological innovation, and other trade secrets to develop and maintain our competitive position. While we generally will

 

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enter into confidentiality agreements with our employees and third parties to protect our intellectual property, our confidentiality agreements could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. In addition, adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets or manufacturing expertise. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition.

In addition, we rely on both registered and unregistered trademarks to protect our name and brands. We can provide no assurance that our pending trademark applications will be approved. Failure by us to adequately maintain the quality of our products and services associated with our trademarks or any loss to the distinctiveness of our trademarks may cause us to lose certain trademark protection, which could result in the loss of goodwill and brand recognition in relation to our name and products. In addition, successful third-party challenges to the use of any of our trademarks may require us to rebrand our business or certain products or services associated therewith.

The failure of our patents, applicable intellectual property law, or our confidentiality agreements to protect our intellectual property and other proprietary information, including our know-how and innovations relating to processes, apparatuses, technology, trade secrets, trade names and proprietary manufacturing expertise, methods, and compounds, or if we are unsuccessful in our judicial enforcement proceedings, could have a material adverse effect on our competitive advantages, business, financial condition, and results of operations, and could require us to devote resources advertising and marketing these new brands. Further, we can provide no assurance that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks.

From time to time, competitors challenge the validity of our patents and trademarks, and we challenge the validity of their patents and trademarks. Further, our competitors may circumvent our patents or our patents may not be of sufficient scope or strength to provide us with meaningful protection or commercial advantage. We cannot be certain either of successfully defending the validity of our patents and trademarks or of invalidating patents and trademarks of our competitors. Additionally, our patents will all eventually expire, after which we will not be able to prevent our competitors from using our previously patented technologies, which could materially adversely affect any competitive advantage we have stemming from those products and technologies. We also cannot assure that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents.

Our efforts to protect our intellectual property may be less effective in some countries where intellectual property rights are not as well protected as in the United States.

The laws of some countries regarding trademark, patent, copyright, and other intellectual property rights do not protect proprietary rights to the same degree as the laws of the United States and there is a risk that our ability to protect our proprietary rights may not be adequate in these countries. Many companies have encountered significant problems in protecting their proprietary rights against copying or infringement in such countries, some of which are countries in which we intend to operate or to sell our products. In particular, the application of laws governing intellectual property rights in China has historically been less effective than those in other jurisdictions, mainly due to the lack of procedural rules for discovery of evidence, low damage awards, and low rates of criminal penalties against intellectual rights infringements. Accordingly, protection of intellectual property rights in China may not be as effective as other countries. Furthermore, the policing of unauthorized use of proprietary technology is difficult and expensive, and we may need to commence and become involved in expensive and lengthy proceedings to enforce or defend patents issued to us or determine the enforceability, scope, and validity of our proprietary rights or those of others. The experience and capabilities of different courts in handling intellectual property related matters vary, and outcomes are unpredictable. Therefore, it could involve substantial risks to us. If we are unable to adequately protect our intellectual property rights in China or elsewhere, our business, financial condition, and results of operations could be materially adversely affected. In addition, our competitors in China and these other countries may independently develop similar technology or

 

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duplicate our products, even if unauthorized, which could potentially reduce our sales in these countries and have a material adverse effect on our business, financial condition, and results of operations.

We have applied for patent protection relating to certain existing and proposed products, processes, and services in certain jurisdictions. While we generally consider applying for patents in those countries where we intend to make, have made, use or sell patented products, we may not accurately assess all the countries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country, we may be precluded from doing so at a later date. Furthermore, we cannot assure you that our pending patent applications will not be challenged by third parties or that such applications will eventually be issued by the applicable patent offices as patents. We also cannot assure you that the patents issued as a result of our foreign patent applications will have the same scope of coverage as our U.S. patents. It is possible that only a limited number of the pending patent applications will result in issued patents, which may have a material adverse effect on our business, financial condition, and results of operations.

We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rights.

From time to time, we may receive notices from third parties claiming infringement by our products and services of third-party patent and other intellectual property rights. As the number of products and services in our markets increases and the functionality of these products and services further overlaps, we may become increasingly subject to claims by a third party that our products and services infringe such party’s intellectual property rights. In addition, there is a growing occurrence of patent suits being brought by organizations that use patents to generate revenues without manufacturing, promoting or marketing products, or investing in R&D in bringing products to markets. These organizations continue to be active and target whole industries as defendants. We may not prevail in any such litigation given the complex technical issues and inherent uncertainties in intellectual property litigation.

If an infringement suit against us is successful, we may be required to compensate the third-party bringing the suit either by paying a lump sum or ongoing license fees to be able to continue selling a particular product or service. This type of compensation could be significant. We might also be prevented or enjoined by a court from continuing to provide the affected product or service and may be forced to significantly increase our development efforts and resources to redesign such product or service. We may also be required to defend or indemnify any customers who have been sued for allegedly infringing a third-party’s patent in connection with using one of our products or services. Responding to intellectual property claims, regardless of the validity, can be time-consuming for our personnel and management, result in costly litigation, cause product shipment delays, and harm our reputation, any of which could have a material adverse effect on our business, financial condition, and results of operations.

We operate in a litigious environment, which may adversely affect our business, financial condition, and results of operations.

We may become involved in legal actions and claims arising in the ordinary course of business, including litigation regarding employment matters, breach of contract, and other commercial matters. Due to the inherent uncertainty in the litigation process, the resolution of any particular legal proceeding could result in changes to our products and business practices and could have a material adverse effect on our business, financial condition, and results of operations.

We may be liable for damages based on product liability claims brought against our customers in our end-markets or from our customers and their employees, and any successful claim for damages could have a material adverse effect on our business, financial condition, and results of operations.

We produce and use hazardous chemicals, the handling and use of which require appropriate procedures and care. As a result of the hazardous nature of some of the products we produce and use, we may face claims relating to incidents that involve our customers’ improper handling, storage, and use of our products.

 

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In addition, many of our products provide critical performance attributes to our customers’ products that are sold to consumers who could potentially bring product liability suits related to such products. Our sale of these products therefore involves the risk of product liability claims, including class action lawsuits that claim liability for death, injury, or property damage caused by products that we manufacture or that contain our components. If a person were to bring a product liability suit against one of our customers, this customer may attempt to seek contribution from us. A person may also bring a product liability claim directly against us. A successful product liability claim or series of claims against us in excess of our insurance coverage for payments, for which we are not otherwise indemnified, could have a material adverse effect on our business, financial condition, and results of operations. While we endeavor to protect ourselves from such claims and exposures in our contractual negotiations, we can provide no assurance that our efforts in this regard will ultimately protect us from any such claims.

We depend upon our information technology systems, which are subject to interruption and failure.

Our business operations could be disrupted if our information technology systems fail to perform adequately. The efficient operation of our business depends on our information technology systems, some of which are managed by third-party service providers. We rely on our information technology systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, cyber-attacks, and viruses. Any such damage or interruption could have a material adverse effect on our business, financial condition, and results of operations.

Further, our information technology systems, including those managed by third-party service providers, may be subject to computer viruses, malicious software, attacks by hackers, and other forms of cyber intrusions or unauthorized access, any of which can create system disruptions, shutdowns, or unauthorized disclosure of sensitive data. In addition, a security breach that leads to disclosure of information protected by privacy laws could compel us to comply with breach notification requirements under state, national, and federal laws and regulations, potentially resulting in litigation or regulatory action, or otherwise subjecting us to liability under laws that protect personal data.

We attempt to mitigate the above risks by employing several measures, including monitoring and testing of our security controls, employee training, maintenance of protective systems and contingency plans, and contracting with service providers to address third-party cybersecurity risks. Nonetheless, it is impossible to eliminate all cybersecurity risk and thus we remain potentially vulnerable to known or unknown threats. Information security risks have generally increased in recent years because of the increased proliferation, sophistication, and availability of complex malware and hacking tools to carry out cyber-attacks. As cyber threats continue to evolve, we may be required to expend additional resources to mitigate new and emerging threats while continuing to enhance our information security capabilities or to investigate and remediate security vulnerabilities.

Natural disasters, catastrophes, fire, or other unexpected events could have a material adverse effect on our business, financial condition, and results of operations.

Many of our business activities involve substantial investments in manufacturing facilities. These facilities could be materially damaged by natural disasters, such as floods, tornadoes, hurricanes, and earthquakes, or by fire or other unexpected events such as adverse weather conditions or other disruptions to our facilities, supply chain, or our customer’s facilities. We could incur uninsured losses and liabilities arising from such events, including damage to our reputation, and/or suffer material losses in operational capacity, which could have a material adverse impact on our business, financial condition, and results of operations.

 

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Any natural disaster, catastrophe, fire, or other unexpected event could result in personal injury and loss of life, damage to property, and contamination of the environment, which may result in a shutdown of our facilities, suspension of operations, and the imposition of civil or criminal fines, penalties and other sanctions, cleanup costs, and claims by governmental entities or third parties. We are dependent on the continued operation of our production facilities, and the loss or shutdown of operations over an extended period at any of our other major operating facilities could have a material adverse effect on our business, financial condition, and results of operations.

Our revenues and profitability have varied depending on our product, customer, and geographic mix for any given period, which makes it difficult to forecast future operating results.

Our revenues vary among our products and customer groups and markets, and therefore may be different in future periods from historic or current periods. Overall profitability in any given period is dependent in large part on the product, customer, and geographic mix reflected in that period’s revenue. Market trends, competitive pressures, commoditization of products, increased component or shipping costs, foreign currency exchange rates, regulatory conditions, and other factors may result in reductions in our revenues and/or pressure on our profitability in a given period. Given the nature of our business, the impact of these factors on our business and results of operations will likely vary from period to period and from product to product. For example, a change in market trends that results in a decline in demand for high-margin products will have a disproportionately greater adverse effect on our profits for that period. Additionally, our equipment sales are subject to greater fluctuation than sales of our chemistry. Because of the varying nature of our product, customer, and geographic mix from period to period, and the corresponding variations in our revenue and profitability, we may experience difficulties in measuring the potential impact of market, regulatory, and other factors on our business. As a result, we may be challenged in our ability to forecast our future operating results. Further, potential future business acquisitions can compound the difficulty in making comparisons between prior, current, and future periods because acquisitions and divestitures, which are not ordinary course events, also affect our profitability and our overall operating results.

The loss of certain customers could adversely affect our overall sales and profitability.

The loss of any one of our most significant customers could have a material adverse effect on our business, financial condition, and results of operations for the affected earnings periods. The principal products purchased by such customers are EL chemistry products used in connection with the manufacturing of electronics components, including PCBs and SCs, and GMF chemistry products used in the manufacturing of products for the automotive surface finishing, construction equipment, household appliances, fixtures, and heavy machinery industries.

For fiscal 2018, our top ten customers represented approximately 25% of our chemistry revenues although no single customer represented more than 5% of our chemistry revenue. Loss of any such customer or any disruption in our relationship with such customers, could result in a reduction of revenue generated by such customers. If we are unable to replace revenue generated by one or more of our major customers, our revenue may significantly decrease which would have a material adverse effect on our business, financial condition, and results of operations.

We may be required to record an impairment charge on our accounts receivable if we are unable to collect the outstanding balances from our customers.

We frequently sell products and services to customers on credit. We estimate the collectability of our accounts receivable based on our analysis of the accounts receivable, historical bad debts, customer creditworthiness, and current economic trends. We continuously monitor collections from our customers and maintain adequate impairment allowance for doubtful accounts. However, if the bad debts significantly exceed our impairment allowance, we may be required to record an impairment charge and our business, financial condition, and results of operations could be materially adversely affected.

 

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Our business, financial condition, and results of operations could be adversely affected by decreases in the average selling prices of products in the specialty chemistry industry.

Decreases in the average selling prices of our products may have a material adverse effect on our business, financial condition, and results of operations. Our ability to maintain or increase our profitability will continue to be dependent, in large part, upon our ability to offset decreases in average selling prices by improving production efficiency or by shifting to higher margin chemical products. In the past, we have elected to discontinue selling certain products as a result of sustained material decreases in the selling price of such products and our inability to effectively offset such decrease through shifts in operations. If we are unable to respond effectively to decreases in the average selling prices of our products in the future, our business, financial condition, and results of operations could be materially adversely affected. Further, while we may elect to discontinue products that are significantly affected by such price decreases, we can provide no assurance that any such discontinuation will mitigate the related declines in our financial condition.

Underfunded defined benefit pension plans could have a material adverse effect on our business, financial condition, and results of operations.

We maintain defined benefit pension plans, including in Germany. Various factors, such as changes in actuarial estimates and assumptions (including in relation to life expectancy and rate of return on assets) as well as actual return on assets, can increase the expenses and liabilities of the defined benefit pension plans. The assets and liabilities of the plans must be valued from time to time under applicable funding rules, and as a result we may be required to increase the cash payments in relation to these defined benefit pension plans. To the extent any of these plans are or become in the future underfunded or unfunded, the liabilities in relation to these plans will need to be satisfied from our operating reserves as they mature.

We may incur material costs relating to environmental and health and safety requirements or liabilities, which could have a negative impact on our business, financial condition, and results of operations.

As an international manufacturer and distributor of specialty chemistry and solutions, we are subject to extensive federal, state, local, and foreign environmental, health and safety laws and regulations concerning, among other things, emissions to the air, discharges to land, surface, subsurface strata, wastewater, and storm water discharges, and the generation, use, handling, storage, transportation, treatment, and disposal of hazardous waste and other materials. We are also required to hold numerous environmental permits related to our operations in various jurisdictions. Our operations bear the risk of violations of those laws and permits, and sanctions for violations such as capital expenditure obligations, clean up and removal costs, long-term monitoring and maintenance costs, costs of waste disposal, natural resource damages, and payments for property damage and personal injury. Although it is our policy to comply with such laws, permits, and regulations, it is possible that we have not been or may not be at all times in compliance with all these requirements. Many of our products are inherently hazardous. Moreover, our R&D, manufacturing, formulation, and packaging activities involve the use of hazardous materials and the generation of hazardous waste. Furthermore, we cannot eliminate the risk of accidental contamination, discharge, or injury resulting from these materials. As a result, we could in the future incur significant liabilities, including cleanup costs, fines and sanctions, and third-party claims for property or natural resource damages or personal injuries, any of which could be material.

Liability under some environmental laws relating to contaminated sites can be joint and several and imposed retroactively, regardless of fault or the legality of the activities that gave rise to the contamination. Some of our current manufacturing facilities and former facilities have an extended history of chemical manufacturing operations or other industrial activities, and contaminants have been detected at some of our sites. We or our predecessors have in the past been, and are currently, required to remediate contamination at several of our current and former sites. In particular, we have conducted soil remediation at the Erandio site in a former Chrome VI production area. Excavation work has been completed with final measurements and report pending. Further investigations and measurements are requested by authorities and depend also on measurement-results after the

 

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current remediation is finished, and there remains some risk that further remediation might be necessary. We also have received notices regarding potential responsibility for certain costs relating to offsite disposal locations, none of which we believe are material.

Chemical manufacturing is inherently hazardous and could result in accidents that disrupt our operations or expose us to significant losses or liabilities.

The hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products, and wastes are inherent in our operations. These hazards could lead to an interruption or suspension of operations and have a material adverse effect on the productivity and profitability of a particular manufacturing facility or on our business as a whole. Potential risks include:

 

   

storage tank leaks and ruptures;

 

   

explosions and fires;

 

   

inclement weather and natural disasters;

 

   

terrorist attacks;

 

   

cybersecurity breaches;

 

   

mechanical failure;

 

   

unscheduled downtime;

 

   

labor difficulties;

 

   

transportation interruptions; and

 

   

chemical spills and other discharges or releases of toxic or hazardous substances or gases.

These hazards may result in personal injury and loss of life, damage to property, and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal fines, penalties and other sanctions, cleanup costs, and claims by governmental entities or third parties. We are dependent on the continued operation of our production facilities, and the loss or shutdown of operations over an extended period at any of our major operating facilities could have a material adverse effect on our business, financial condition, and results of operations.

Global climate change legislation could negatively impact our results of operations or limit our ability to operate our business.

We operate production facilities in several countries. In many of the countries in which we operate, legislation has been passed or proposed, or legislation is being considered, to limit greenhouse gases through various means, including the capping and trading of emissions credits. Greenhouse gas regulation in the jurisdictions in which we operate could negatively impact our future results from operations through increased costs of production. We may be unable to pass such increased costs on to our customers, which may decrease our revenues and net income and have a material adverse effect on our business, financial condition, and results of operations. In addition, the potential impact of climate change regulation on our customers is highly uncertain and may also materially adversely affect our business, financial condition, and results of operations.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, internal codes of conduct, and insider trading prohibition.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with applicable regulations, to provide accurate information to the United States or other regulators, to comply with manufacturing standards we have established, to comply with federal and state fraud and abuse laws and regulations in the United States and other countries or jurisdictions, to report financial information or data accurately, or to disclose unauthorized activities to us.

 

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It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations, including applicable environmental laws and regulations. For example, in 2017, we conducted an investigation regarding certain of our employees in India and concluded that improper payments or expense reimbursements had been made, which were inconsistent with our anti-corruption compliance policies. Based on our investigation, we believe that such improper payments or reimbursements did not involve personnel outside of India and amounted to less than $10,000 total. While we implemented remedial measures including, but not limited to, disciplinary actions, terminations, and enhanced oversight of our operations in India and throughout the business that may limit the risk, we can provide no assurance that such remedial measures will prevent similar inappropriate business practices in the future. If any such misconduct occurs or any related actions are instituted against us (and we are not successful in defending ourselves or asserting our rights) such misconduct or actions could have a material adverse effect on our business, financial condition, and results of operations.

We are not insured against all potential risks.

To the extent available, we maintain insurance coverage that we believe is customary in our industry. Such insurance does not, however, provide coverage for all liabilities, including certain hazards incidental to our business, and we can provide no assurance that our insurance coverage will be adequate to cover claims that may arise or that we will be able to maintain adequate insurance at rates we consider reasonable. For example, the occurrence of a significant business interruption in the operation of one or more of our key facilities, countries, partners, or systems could result in liability to us that is not insured and therefore could have a material adverse effect on our business, financial condition, and results of operations. In addition, our products are used in or integrated with many high-risk end-products and therefore if such products were involved in a disaster or catastrophic accident, we could be involved in litigation arising out of such incidents and susceptible to significant expenses or losses.

Our ability to use and operate certain portions of our facilities may be limited by the validity of, or a default or termination under, our real property leases.

Certain portions of our facilities are leased from third-party landlords, and we expect to lease facilities in the future. The invalidity of, or default or termination under, any of our leases may interfere with our ability to use and operate all or a portion of certain of our facilities, which may have material adverse effect on our business, financial condition, and results of operations.

Our real property is subject to casualty risks, which may have a material adverse effect on our business, financial condition, and results of operations.

We maintain insurance covering our respective properties, operations, personnel, and businesses as is customary in our industry and as required under our senior secured debt facilities. However, there are certain losses, including losses resulting from terrorist acts, that may be either uninsurable or not economically insurable, in whole or in part. As a result, we cannot assure you that the insurance proceeds will compensate us fully for our losses.

In the event of a total or partial loss affecting any of the real property, certain items of equipment and inventory may not be easily replaced. Accordingly, even though there may be insurance coverage, the extended period needed to obtain replacement units or inventory may cause significant delays, which may have a material adverse effect on our business, financial condition, and results of operations. In addition, certain zoning laws and regulations may prevent rebuilding substantially the same facilities in the event of a casualty, which may have a material adverse effect on our business, financial condition, and results of operations.

 

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Our real property is subject to condemnation risks, which may have a material adverse effect on our business, financial condition, and results of operations.

It is possible that all or a portion of the real property may become subject to a condemnation proceeding. In such event, we may be compensated for any total or partial loss of property but it is possible that such compensation will be insufficient to fully compensate us for our losses. In addition, a total or partial condemnation may interfere with our ability to use and operate all or a portion of the affected facility, which may have a material adverse effect on our business, financial condition, and results of operations.

We face risks related to our derivative instruments.

From time to time, we may utilize derivative instruments to manage fluctuations in interest rates and foreign currency exchange rates. These derivative instruments manage our risk in the form of interest rate swaps and caps, forward hedges, and cross-currency and foreign exchange contracts. Periodically, we are required to determine the change in fair value, called the “mark-to-market,” of some of these derivative instruments, which could expose us to substantial mark-to-market losses or gains if such rates or prices fluctuate materially from the time the derivatives were entered into. Accordingly, volatility in rates or prices may adversely impact our business, financial condition, and results of operations and could impact the cost and effectiveness of our derivative instruments in managing our risks.

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy and our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations with respect to our indebtedness.

As of December 31, 2018, we had $2,285.9 million of indebtedness (excluding $6.7 million of local lines of credit), including $425.0 million of our Opco Notes, $1,071.0 million of the USD Term Loan Facility, and $489.9 million of the RMB Term Loan Facility. On May 30, 2018, Holdco issued $300.0 million aggregate principal amount of our Holdco Notes. In addition, we had no outstanding borrowings under our revolving credit facility (as defined herein) and approximately $227.5 million in borrowing capacity available under our revolving credit facility, after giving effect to $22.5 million of guarantee obligations. As of December 31, 2018, we were in compliance with all the covenants under our outstanding debt instruments.

Our substantial indebtedness could have important consequences for you. For example, it could:

 

   

limit our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions, general corporate purposes, or other purposes;

 

   

require us to devote a substantial portion of our annual cash flow to the payment of interest on our indebtedness;

 

   

expose us to the risk of increased interest rates as, over the term of our debt, the interest cost on a significant portion of our indebtedness is subject to changes in interest rates;

 

   

hinder our ability to adjust rapidly to changing market conditions;

 

   

limit our ability to secure adequate bank financing in the future with reasonable terms and conditions or at all; and

 

   

increase our vulnerability to and limit our flexibility in planning for, or reacting to, a potential downturn in general economic conditions or in one or more of our businesses.

We are more leveraged than some of our competitors, which could adversely affect our business plans. A relatively greater portion of our cash flow is used to service debt and other financial obligations. This reduces the funds we have available for working capital, capital expenditures, acquisitions, and other purposes and, given

 

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current credit constriction, may make it more difficult for us to make borrowings in the future. Similarly, our relatively greater leverage increases our vulnerability to, and limits our flexibility in planning for, adverse economic and industry conditions and creates other competitive disadvantages compared with other companies with relatively less leverage.

In addition, the indentures governing the Opco Notes and the Holdco Notes and the agreements governing our senior secured credit facilities contain affirmative and negative covenants that limit our and certain of our subsidiaries’ ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our indebtedness.

To service all of our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.

Our operations are conducted through our subsidiaries and our ability to make cash payments on our indebtedness will depend on the earnings and the distribution of funds from our subsidiaries. None of our subsidiaries, however, is obligated to make funds available to us for payment on our indebtedness. Further, the terms of the instruments governing our indebtedness significantly restrict our subsidiaries from paying dividends and otherwise transferring assets to us. Our ability to make cash payments on and refinance our debt obligations, to fund planned capital expenditures, and to meet other cash requirements will depend on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory, and other factors beyond our control. We might not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

Our business may not generate sufficient cash flow from operations and future borrowings may not be available under our senior secured credit facilities in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs, including planned capital expenditures. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity, or reducing or delaying capital expenditures, strategic acquisitions, investments, and alliances. Such actions, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness restrict our ability to sell assets and our use of the proceeds from such sales, and we may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our revolving credit facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under the credit agreement governing our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities or we are in default thereunder and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the credit agreement governing our senior secured credit facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation, which would also result in an event of default under our Opco Notes Indenture and Holdco Notes Indenture.

 

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Despite our current level of indebtedness and restrictive covenants, we and our subsidiaries may incur additional indebtedness or we may pay dividends in the future. This could further exacerbate the risks associated with our substantial financial leverage.

We and our subsidiaries may incur significant additional indebtedness under the agreements governing our indebtedness. Although the indentures governing the Opco Notes and the Holdco Notes and the credit agreement governing our senior secured credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to several thresholds, qualifications, and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. Additionally, these restrictions also will not prevent us from incurring obligations that, although preferential to our common shares in terms of payment, do not constitute indebtedness.

In addition, if new debt is added to our and/or our subsidiaries’ debt levels, the related risks that we now face as a result of our leverage would intensify. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Agreements.”

We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable or unwilling to fund borrowings under their credit commitments or we are unable to borrow, it could have a material adverse effect on our business, financial condition, and results of operations.

We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable to fund borrowings under their credit commitments or we are unable to borrow from them for any reason, there could be a material adverse effect on our business, financial condition, and results of operations. During periods of volatile credit markets, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including, but not limited to, extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. If our lenders are unable or unwilling to fund borrowings under their revolving credit commitments or we are unable to borrow from them, it could be difficult in such environments to obtain sufficient liquidity to meet our operational needs.

Our ability to obtain additional capital on commercially reasonable terms may be limited.

Although we believe our cash and cash equivalents, together with cash we expect to generate from operations and unused capacity available under our revolving credit facility, provide adequate resources to fund ongoing operating requirements, we may need to seek additional financing to compete effectively.

If we are unable to obtain capital on commercially reasonable terms, it could:

 

   

reduce funds available to us for purposes such as working capital, capital expenditures, research and development, strategic acquisitions, and other general corporate purposes;

 

   

restrict our ability to introduce new products or exploit business opportunities;

 

   

increase our vulnerability to economic downturns and competitive pressures in the markets in which we operate; and

 

   

place us at a competitive disadvantage.

In addition, in July 2017, the United Kingdom’s Financial Conduct Authority which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. If LIBOR ceases to exist, we may need to renegotiate any borrowing under the USD Term Loan Facility extending beyond 2021 using LIBOR as a factor to determine the interest rate. The replacement for LIBOR is uncertain at this time and as a result it is not possible to predict the effect of a LIBOR phase out on our cost of capital.

 

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Difficult and volatile conditions in the capital, credit and commodities markets and in the overall economy could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Difficult global economic conditions, including concerns about sovereign debt and significant volatility in the capital, credit, and commodities markets, could have a material adverse effect on our business, financial condition, results of operations, and cash flows. These global economic factors, combined with low levels of business and consumer confidence and high levels of unemployment, precipitated a slow recovery from the global recession and from time to time create a concern about a return to recessionary conditions. These difficult conditions and the overall economy can affect our business in several ways. For example:

 

   

as a result of the volatility in commodity prices, we may encounter difficulty in achieving sustained market acceptance of past or future price increases, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows;

 

   

under difficult market conditions, there can be no assurance that borrowings under our revolving credit facility would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on reasonable terms, or at all;

 

   

in order to respond to market conditions, we may need to seek waivers from various provisions in the credit agreement governing our senior secured credit facilities, and in such case, there can be no assurance that we can obtain such waivers at a reasonable cost, if at all;

 

   

market conditions could cause the counterparties to the derivative financial instruments we may use to hedge our exposure to interest rate, commodity, or currency fluctuations to experience financial difficulties and, as a result, our efforts to hedge these exposures could prove unsuccessful and, furthermore, our ability to engage in additional hedging activities may decrease or become more costly; and

 

   

market conditions could result in our key customers experiencing financial difficulties and/or electing to limit spending, which in turn could result in decreased sales and earnings for us.

In general, downturns in economic conditions can cause fluctuations in demand for our and our customers’ products, product prices, volumes, and margins. Future economic conditions may not be favorable to our industry and future growth in demand for our products, if any, may not be sufficient to alleviate any existing or future conditions of excess industry capacity. A decline in the demand for our products or a shift to lower margin products due to deteriorating economic conditions could have a material adverse effect on our business, financial condition, and results of operations and could also result in impairments of certain of our assets. We do not know if market conditions or the state of the overall economy will maintain its current course, improve, or decline in the near future. We cannot provide assurance that any decline in economic conditions or economic downturn in one or more of the geographic regions in which we sell our products would not have a material adverse effect on our business, financial condition, and results of operations.

Our debt obligations may limit our flexibility in managing our business.

The indentures governing our Holdco Notes and Opco Notes and the credit agreement governing our senior secured credit facilities require us to comply with several customary financial and other restrictive covenants, such as maintaining leverage ratios in certain situations, maintaining insurance coverage, and restricting our ability to make certain investments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Agreements.” These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment obligations. If we were to default on the indentures governing our Holdco Notes or Opco Notes, the credit agreement governing our senior secured credit facilities, or other debt instruments, our business, financial condition, and results of operations would be materially adversely affected.

 

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Risks Related to this Offering and Ownership of our Common Shares

Because a significant portion of our operations is conducted through our subsidiaries, we are largely dependent on our receipt of distributions or other payments from our subsidiaries for cash to fund all of our operations and expenses, including to make future dividend payments, if any.

A significant portion of our operations is conducted through our subsidiaries. As a result, our ability to service our debt or to make future dividend payments, if any, is largely dependent on the earnings of our subsidiaries and the payment of those earnings to us in the form of dividends, loans, or advances and through repayment of loans or advances from us. Payments to us by our subsidiaries will be contingent upon our subsidiaries’ earnings and other business considerations and may be subject to statutory or contractual restrictions. We do not currently expect to declare or pay dividends on our common shares for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our common shares, the credit agreement governing our senior secured credit facilities and the indentures governing the Holdco Notes and the Opco Notes significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. Further, there may be significant tax and other legal restrictions on the ability of foreign subsidiaries to remit money to us.

There is no existing market for our common shares, and we do not know if one will develop to provide you with adequate liquidity to sell our common shares at prices equal to or greater than the price you paid in this offering.

Prior to this offering, there has not been a public market for our common shares. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market on the stock exchange on which we intend to list our common shares or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common shares that you buy. The initial public offering price for the common shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common shares at prices equal to or greater than the price you paid in this offering, or at all.

We will incur increased costs as a result of operating as a publicly traded company, and our management will be required to devote substantial time to new compliance initiatives.

As a publicly traded company, we will incur additional legal, accounting, and other expenses that we did not previously incur. Although we are currently unable to estimate these costs with any degree of certainty, they may be material in amount. In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules of the SEC and the stock exchange on which our common shares are listed, have imposed various requirements on public companies. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives as well as investor relations. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur additional costs to maintain the same or similar coverage.

Furthermore, if we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our common shares could decline and we could be subject to potential delisting by the stock exchange on which our common shares are listed and review by such exchange, the SEC or other regulatory authorities, which would require the expenditure by us of additional financial and management resources. As a result, our shareholders could lose confidence in our financial reporting, which would harm our business and the market price of our common shares.

 

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The price of our common shares may fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our common shares may prevent you from being able to sell your common shares at or above the price you paid for your common shares. The market price of our common shares could fluctuate significantly for various reasons, including:

 

   

our operating and financial performance and prospects;

 

   

our quarterly or annual earnings or those of other companies in our industries;

 

   

the public’s reaction to our press releases, our other public announcements, and our filings with the SEC;

 

   

changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common shares or the stock of other companies in our industries;

 

   

the failure of research analysts to cover our common shares;

 

   

strategic actions by us, our customers, or our competitors, such as acquisitions or restructurings;

 

   

increased competition;

 

   

new laws or regulations or new interpretations of existing laws or regulations applicable to us;

 

   

changes in accounting standards, policies, guidance, interpretations, or principles;

 

   

material litigation or government investigations;

 

   

default on our indebtedness;

 

   

changes in general conditions in the U.S. and global economies or financial markets, including those resulting from war, incidents of terrorism, natural disasters, severe weather, or responses to such events;

 

   

reactions to changes in the markets for the raw materials or key inputs that impact our production or our industries generally;

 

   

changes in key personnel;

 

   

sales of common shares by us, Carlyle, or members of our management team;

 

   

termination or expiration of lock-up agreements with our management team and principal shareholders;

 

   

the granting or exercise of employee stock options;

 

   

volume of trading in our common shares; and

 

   

the realization of any risks described under this “Risk Factors” section.

In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in the end-markets we serve. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common shares could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price and cause you to lose all or part of your investment. Further, in the past, market fluctuations and price declines in a company’s stock have led to securities class action litigations. If such a suit were to arise, it could have a substantial cost and divert our resources regardless of the outcome.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our common shares and trading volume could decline.

The trading market for our common shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate

 

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research coverage or if one or more of the analysts who cover us downgrade our common shares or publish inaccurate or unfavorable research about our business, the market price for our common shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our common shares to decline.

The pro forma and non-IFRS financial measures included in this prospectus are presented for informational purposes only and may not be an indication of our financial condition or results of operations in the future.

The unaudited pro forma financial information included in this prospectus was derived from the audited financial statements and the related notes thereto of the Predecessor and Successor and is presented for information purposes only and is not necessarily indicative of what our actual financial condition or results of operations would have been had the Acquisition been completed on the date indicated. The assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect our financial condition or results of operations. Accordingly, our financial condition and results of operations in the future may not be consistent with, or evident from, such pro forma financial information. The non-IFRS financial measures included in this prospectus, including Adjusted EBITDA, include information that we use to evaluate our past performance, but you should not consider such information in isolation or as an alternative to measures of our performance determined under IFRS. For further information regarding such limitations, see “Prospectus Summary—Summary Historical and Pro Forma Financial Information.

If we fail to maintain proper and effective internal controls over financial reporting, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, with auditor attestation of the effectiveness of our internal controls, beginning with our annual report on Form 20-F for the fiscal year ending December 31, 2020. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our common shares could decline and we could be subject to sanctions or investigations by the stock exchange on which we intend to list our common shares, the SEC, or other regulatory authorities, which would require additional financial and management resources.

Our ability to successfully implement our business plan and comply with Section 404 of the Sarbanes-Oxley Act requires us to be able to prepare timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures, or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on trading prices for our common shares, and could adversely affect our ability to access the capital markets.

 

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We are controlled by Carlyle, whose interests in our business may be different than yours.

As of the date hereof, Carlyle owned     % of Atotech UK Topco Limited’s common shares on a fully diluted basis and all the outstanding common shares of Atotech Limited, and is able to control our affairs in all cases. Following this offering, Carlyle will continue to own approximately     % of Atotech Limited’s common shares (or     % if the underwriters exercise their option to purchase additional common shares in full). Pursuant to a shareholders agreement, a majority of our board of directors (the “Board”) will be designated by Carlyle, and Carlyle will continue to have the ability to designate a majority of our directors until it owns less than     % of the outstanding common shares. See “Certain Relationships and Related Party Transactions.” As a result, Carlyle or its respective designees to our Board will have the ability to control the appointment of our management, the entering into of mergers, sales of substantially all or all of our assets, and other extraordinary transactions and influence amendments to our memorandum of association and articles of association. So long as Carlyle continues to own a majority of our common shares, they will have the ability to control the vote in any election of directors and will have the ability to prevent any transaction that requires shareholder approval regardless of whether other shareholders believe the transaction is in our best interests.

In any of these matters, the interests of Carlyle may differ from or conflict with your interests. Moreover, this concentration of share ownership may also adversely affect the trading price for our common shares to the extent investors perceive disadvantages in owning shares of a company with a controlling shareholder. In addition, since Carlyle will continue to own approximately     % of our common shares (or     % if the underwriters exercise their option to purchase additional common shares in full), the price of our common shares may be volatile due to a smaller public float. Carlyle is in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are our existing or potential suppliers or customers. Carlyle may acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue.

We have no plans to pay regular dividends on our common shares, so you may not receive funds without selling your common shares.

We have no plans to pay regular dividends on our common shares. We generally intend to utilize our future earnings, if any, to fund our growth and reduce our indebtedness. Any payment of future dividends will be at the discretion of our Board (subject to, and in accordance with, our articles of association) and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations that our Board deems relevant. The senior secured credit facilities and the indentures governing the Holdco Notes and the Opco Notes also effectively limit our ability to pay dividends. Accordingly, you may have to sell some or all of your common shares after price appreciation in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell your common shares and you may lose the entire amount of the investment.

You may suffer immediate and substantial dilution.

The initial public offering price per share of our common shares is substantially higher than our net tangible book value per common share immediately after the offering. As a result, you may pay a price per share that substantially exceeds the tangible book value of our assets after subtracting our liabilities. At an offering price of $                    per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, you may incur immediate and substantial dilution in the amount of $                per share. We also had                common shares issuable upon the exercise of options outstanding as of                 at a weighted average exercise price of $                per share. To the extent these options are exercised, there may be further dilution. See “Dilution.”

 

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The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.

We are incorporated under Jersey law. The rights of holders of common shares are governed by Jersey law, including the provisions of the Companies (Jersey) Law 1991, as amended (the “Jersey Companies Law”), and by our articles of association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations. See “Description of Capital Stock—Differences in Corporate Law” in this prospectus for a description of the principal differences between the provisions of the Jersey Companies Law applicable to us and the Delaware General Corporation Law relating to shareholders’ rights and protections.

Future sales of our common shares in the public market could lower our share price, and any additional capital raised by us through the sale of equity or convertible debt securities may dilute your ownership in us and may adversely affect the market price of our common shares.

We and substantially all of our current shareholders may sell additional common shares in subsequent public offerings. We may also issue additional common shares or convertible debt securities, for a variety of reasons, including to finance future acquisitions. After the consummation of this offering, we will be authorized to issue an unlimited number of common shares and have                common shares outstanding. This number includes                common shares sold by us and         common shares that the selling shareholders are selling in this offering, which may be resold immediately in the public market. Of the remaining common shares,         , or         % of our total outstanding common shares, are restricted from immediate resale under the lock-up agreements between our current shareholders and the underwriters described in “Underwriting,” but may be sold into the market in the near future. These common shares and any common shares which may be issued upon exercise of outstanding options will become available for sale following the expiration of the lock-up agreements, which, without the prior consent of two of the four representatives of the underwriters, is 180 days after the date of this prospectus, subject to compliance with the applicable requirements under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”).

We cannot predict the size of future issuances of our common shares or the effect, if any, that future issuances and sales of our common shares will have on the market price of our common shares. Sales of substantial amounts of our common shares (including sales pursuant to Carlyle’s registration rights and common shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common shares. See “Certain Relationships and Related Party Transactions” and “Common Shares Eligible For Future Sale.”

If a U.S. person is treated as owning at least 10% of our common shares, such holder may be subject to adverse U.S. federal income tax consequences.

As a result of the comprehensive U.S. tax reform bill signed into law on December 22, 2017, many of our non-U.S. subsidiaries will be classified as “controlled foreign corporations” for U.S. federal income tax purposes due to the expanded application of certain ownership attribution rules within a multinational corporate group. If a U.S. person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our common shares, such person may be treated as a “United States shareholder” with respect to one or more of our controlled foreign corporation subsidiaries. In addition, if our common shares are treated as owned more than 50% by United States shareholders, we would be treated as a controlled foreign corporation. Certain United States shareholders of a controlled foreign corporation may be required to annually report and include in its U.S. taxable income, as ordinary income, its pro rata share of “Subpart F income,” “global intangible low-taxed income” and investments in U.S. property by controlled foreign corporations, whether or not we make any distributions to such United States shareholder. An individual United States shareholder generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a corporate United States shareholder with respect to a controlled foreign corporation. A failure by a United States shareholder to comply with its reporting obligations may subject the United States shareholder to significant monetary penalties, loss of

 

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foreign tax credits, and may extend the statute of limitations with respect to the United States shareholder’s U.S. federal income tax return for the year for which such reporting was due. We cannot provide any assurances that we will assist investors in determining whether we or any of our non-U.S. subsidiaries are controlled foreign corporations or whether any investor is a United States shareholder with respect to any such controlled foreign corporations. We also cannot guarantee that we will furnish to United States shareholders information that may be necessary for them to comply with the aforementioned obligations. United States investors should consult their own advisors regarding the potential application of these rules to their investments in us. The risk of being subject to increased taxation may deter our current shareholders from increasing their investment in us and others from investing in us, which could impact the demand for, and value of, our common shares.

We are a “foreign private issuer” and a “controlled company” within the meaning of the rules of the stock exchange on which we intend to list our common shares and, as a result, expect to qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

The corporate governance rules of the stock exchange on which we intend to list our common shares require listed companies to have, among other things, a majority of independent board members and independent director oversight of executive compensation, nomination of directors and corporate governance matters. However, as a foreign private issuer, we are permitted to, and we may, follow home country practice in lieu of the above requirements, subject to certain exceptions. As long as we rely on the foreign private issuer exemption for certain of these corporate governance standards, a majority of our Board are not required to be independent directors and our Compensation Committee and Nominating and Corporate Governance Committee are not required to be composed entirely of independent directors. Therefore, our Board’s approach to governance may be different from that of a board of directors consisting of a majority of independent directors, and, as a result, management oversight may be more limited than if we were subject to all the corporate governance standards of the stock exchange on which we intend to list our common shares.

Following the consummation of this offering, Carlyle will continue to control a majority of the voting power of our outstanding common shares. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the stock exchange on which we intend to list our common shares. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of the Board consist of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance committee and compensation committee.

In the event we no longer qualify as a foreign private issuer, we may utilize these exemptions if we continue to qualify as a “controlled company.” If we do utilize the controlled company exemption, we will not have a majority of independent directors and our Nominating and Corporate Governance and Compensation Committees will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all the corporate governance requirements of the stock exchange on which we list our common shares.

 

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As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than a U.S. company. This may limit the information available to holders of the common shares.

As a “foreign private issuer,” we are not subject to all the disclosure requirements applicable to public companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act, including the U.S. proxy rules under Section 14 of the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, while we expect to submit quarterly interim consolidated financial data to the SEC under cover of the SEC’s Form 6-K, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies and will not be required to file quarterly reports on Form 10-Q or current reports on Form 8-K under the Exchange Act. Furthermore, our common shares are not listed and we do not currently intend to list our common shares on any market in the Bailiwick of Jersey, our home country. As a result, we are not subject to the reporting and other requirements of companies listed in the Bailiwick of Jersey. For instance, we are not required to publish quarterly or semi-annual financial statements. Accordingly, there may be less publicly available information concerning our Company than there would be if we were a U.S. public company.

We may lose our foreign private issuer status in the future, which could result in significant additional cost and expense.

We are a “foreign private issuer,” as such term is defined in Rule 405 under the Securities Act, however, under Rule 405, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 28, 2020.

In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. For example, the annual report on Form 10-K requires domestic issuers to disclose executive compensation information on an individual basis with specific disclosure regarding the domestic compensation philosophy, objectives, annual total compensation (base salary, bonus, and equity compensation) and potential payments in connection with change in control, retirement, death or disability, while the annual report on Form 20-F permits foreign private issuers to disclose compensation information on an aggregate basis. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors, and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

We may not meet the continued listing standards of                 .

                requires companies to fulfill specific requirements in order for their shares to continue to be listed. If our common shares are delisted from         at some later date, our shareholders could find it difficult to sell our common shares. In addition, if our common shares are delisted from         at some later date, we may have our

 

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common shares quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally considered to be less efficient markets than                 . In addition, if our common shares are not so listed or are delisted at some later date, our common shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our common shares might decline. If our common shares are delisted from         at some later date or become subject to the penny stock regulations, it is likely that the price of our common shares would decline and that our shareholders would find it difficult to sell their shares.

It may be difficult to enforce a U.S. judgment against us or our directors and officers outside the United States, or to assert U.S. securities law claims outside of the United States.

Several of our directors and executive officers are not residents of the United States, and the majority of our assets and the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for investors to effect service of process upon us within the United States or other jurisdictions, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States. See “Enforceability of Civil Liabilities.” Additionally, it may be difficult to assert U.S. securities law claims in actions originally instituted outside of the United States. Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim. Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would still be governed by the law of the jurisdiction in which the foreign court resides.

In particular, investors should be aware that there is uncertainty as to whether the courts of the Bailiwick of Jersey would recognize and enforce judgments of U.S. courts obtained against us or our directors or management as well as against the selling shareholder predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or entertain original actions brought in courts of the Bailiwick of Jersey against us or our directors or officers as well as against the selling shareholder predicated upon the securities laws of the United States or any state in the United States. As a result of the difficulty associated with enforcing a judgment against us, you may not be able to collect any damages awarded by either a U.S. or foreign court.

 

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FORWARD-LOOKING STATEMENTS

Many statements made in this prospectus that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies and trends we expect to affect our business. These statements often include words such as “anticipate,” “expect,” “suggests,” “plan,” “believe,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast,” and other similar expressions. These forward-looking statements are contained throughout this prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” We base these forward-looking statements or projections on our current expectations, plans, and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this prospectus, you should understand that these statements are not guarantees of future performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties, and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:

 

   

uncertainty, downturns, and changes in our target markets;

 

   

foreign currency exchange rate fluctuations;

 

   

reduced market acceptance and inability to keep pace with evolving technology and trends;

 

   

loss of customers;

 

   

increases in costs or reductions in the supplies of raw materials that may materially adversely affect our business, financial condition, and results of operations;

 

   

our ability to provide products and services in light of changing environmental, health and safety, product liability, financial, and other legislation and regulation;

 

   

our failure to compete successfully in product development;

 

   

our ability to successfully execute our growth initiatives, business strategies, and operating plans;

 

   

whether the secular trends we expect to drive growth in our business materialize to the degree we expect them to, or at all;

 

   

material costs relating to environmental and health and safety requirements or liabilities;

 

   

underfunded defined benefit pension plans;

 

   

risk that the insurance we maintain may not fully cover all potential exposures;

 

   

failure to comply with the anti-corruption laws of the United States and various international jurisdictions;

 

   

tariffs, border adjustment taxes, or other adverse trade restrictions and impacts on our customers’ value chains;

 

   

political, economic, and legal uncertainties in China, the Chinese government’s control of currency conversion and expatriation of funds, and the Chinese government’s policy on foreign investment in China;

 

   

regulations around the production and use of chemical substances that affect our products;

 

   

United Kingdom’s referendum on withdrawal from the European Union;

 

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weak intellectual property rights in jurisdictions outside the United States;

 

   

intellectual property infringement and product liability claims;

 

   

our substantial indebtedness;

 

   

our ability to obtain additional capital on commercially reasonable terms may be limited;

 

   

risks related to our derivative instruments;

 

   

ability to attract, motivate, and retain senior management and qualified employees;

 

   

increased risks to our global operations including, but not limited to, political instability, acts of terrorism, and unexpected regulatory and economic sanctions changes, among other things;

 

   

natural disasters that may materially adversely affect our business, financial condition, and results of operations;

 

   

the inherently hazardous nature of chemical manufacturing that could result in accidents that disrupt our operations and expose us to losses or liabilities;

 

   

damage to our brand reputation;

 

   

the amount of the costs, fees, expenses, and charges related to this offering and the related costs of being a public company;

 

   

Carlyle’s ability to control our common shares;

 

   

any statements of belief and any statements of assumptions underlying any of the foregoing;

 

   

other factors disclosed in this prospectus; and

 

   

other factors beyond our control.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $                    million, assuming the common shares are offered at $                per share (the midpoint of the price range set forth on the cover page of this prospectus). We intend to use our net proceeds from this offering, along with cash on hand, for the repayment of indebtedness, and to pay fees and expenses. We will not receive any proceeds from the sale of common shares by the selling shareholders. Any increase or decrease in the number of common shares sold (or increase or decrease in the price from the midpoint of the price range set forth on the cover page of the prospectus) will correspondingly increase or decrease the amount of indebtedness that we will repay.

 

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DIVIDEND POLICY

We do not intend to pay any cash dividends for the foreseeable future. We intend to retain earnings, if any, for the future operation and expansion of our business and the repayment of debt. Any determination to pay dividends in the future will be at the discretion of our Board (in accordance with our articles of association and subject to the Jersey Companies Law) and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by the senior secured credit facilities and the indentures governing the Holdco Notes and the Opco Notes or applicable laws and other factors that our Board may deem relevant. Our existing indebtedness effectively limits our ability to pay dividends and make distributions to our shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of December 31, 2018:

 

   

on an actual basis; and

 

   

on an as adjusted to give effect to (i) our issuance and sale of                common shares in this offering at an assumed initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the application of the proceeds from this offering, and (iii) the consummation of the Reorganization Transactions.

The information in this table should be read in conjunction with “Selected Historical Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto included elsewhere in this prospectus.

 

     As of December 31, 2018  

($ in millions)

   Actual            As adjusted  

Cash and cash equivalents

   $ 386.2          $            
  

 

 

        

 

 

 

Debt:

         

Senior secured credit facilities(1):

         

Revolving credit facility

     —                

Term loan facilities

     1,560.9         

Opco Notes

     425.0         

Holdco Notes

     300.0         

Local lines of credit(2)

     6.7         

Total debt(3)

     2,292.6         

Total shareholders’ equity

     704.7         
  

 

 

        

 

 

 

Total capitalization

   $ 2,997.3          $    

 

(1)   Our senior secured credit facilities consist of (a) our USD Term Loan Facility, (b) our RMB Term Loan Facility, and (c) our multicurrency revolving credit facility with commitments of $250.0 million (as of December 31, 2018, we had $227.5 million of availability under our revolving credit facility after giving effect to $22.5 million of guarantee obligations).
(2)   Represents amounts outstanding under various local currency revolving lines of credit.
(3)   We adopted IFRS 16 “Leases” on January 1, 2019, which we anticipate will result in an increase in our capital lease obligations. We estimate that capital lease obligations would increase by approximately $84.5 million as of December 31, 2018 after giving effect to IFRS 16 “Leases.” See footnote 3(h) in “Summary Historical and Pro Forma Financial Information.

 

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DILUTION

If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share after this offering and the use of proceeds therefrom.

As of                 , 2019, we had net tangible book value of approximately $                    million, or $                per share. Net tangible book value per share represents total tangible assets less total liabilities divided by the number of common shares outstanding. After deducting estimated offering expenses payable by us in connection with this offering, our net tangible book value as of                 , 2019 would have been approximately $                million, or $                per share. This represents an immediate decrease in net tangible book value of $                per share to existing shareholders and an immediate dilution of $                per share to new investors purchasing common shares in this offering. The following table illustrates this dilution on a per share basis:

 

     Per Share  

Assumed initial public offering price per share

      $                

Net tangible book value per share as of                 , 2019

   $                   

Increase/decrease in net tangible book value per share attributable to the exercise of stock options and estimated offering costs

     

As adjusted net tangible book value per share after this offering

     

Dilution per share to new investors

      $                
  

 

 

    

 

 

 

The following table sets forth, as of                 , 2019, the total number of common shares owned by existing shareholders and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing shareholders and to be paid by new investors purchasing common shares in this offering. The calculation below is based on an assumed initial public offering price of $                    per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the assumed underwriting discounts and commissions and other estimated offering expenses payable by us.

 

     Common Shares
Purchased
    Total Consideration     Average
Price Per
Share
 

(in thousands, other than common shares and  percentages)

   Number      Percent     Amount      Percent  

Existing shareholders

                                $                             $                

New investors

            

Total

        100   $                      100   $                

A $1.00 increase (decrease) in the assumed initial offering price would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and average price per share paid by all shareholders by $                    million, $                million and $                per share, respectively. An increase (decrease) of 1.0 million in the number of common shares offered by the selling shareholders would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and average price per share paid by all shareholders by $                million, $                million and $                per share, respectively.

The tables and calculations above assume no exercise of outstanding options and no exercise of the option to purchase additional common shares by the underwriter. As of                 , there were                common shares issuable upon exercise of outstanding options at a weighted average exercise price of approximately $                per share. To the extent that the                 outstanding options are exercised, there will be further dilution to new investors purchasing common shares in the offering. See “Description of Capital Stock.”

 

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SELECTED HISTORICAL FINANCIAL INFORMATION

The following table sets forth our selected historical financial information for the following reporting periods:

 

   

The “Predecessor” periods, which reflect the results of operations of Atotech B.V.

 

   

The “Successor” period, which reflects the results of operations of the Successor.

From December 20, 2016 (inception) through January 31, 2017, Atotech UK Topco Limited had no operations or activity. See “Basis of Presentation.”

The historical results of operations data and cash flow data for the years ended December 31, 2017 and 2018 and the historical balance sheet data as of December 31, 2017 and December 31, 2018 presented below were derived from our audited financial statements and the related notes thereto included elsewhere in this prospectus. The historical financial data for the year ended December 31, 2016 and the period from January 1, 2017 through January 31, 2017 presented below have been derived from the financial statements and the related notes thereto included elsewhere in this prospectus. The historical balance sheet data as of December 31, 2016 presented below has been derived from the financial statements of Predecessor not included in this prospectus.

Our historical financial data is not necessarily indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as an independent publicly traded company during the periods shown.

We have omitted the selected financial data as of and for the years ended December 31, 2014 and 2015, as such financial information was audited by KPMG Audit, a department of KPMG S.A. (France), on a basis that is not consistent with the financial statements audited by KPMG AG Wirtschaftsprüfungsgesellschaft (Germany) for the years ended December 31, 2016, 2017 and 2018, and cannot be provided on a consistent basis without unreasonable effort and expense.

 

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     Predecessor                 Successor  

($ in millions, except for share data)

   Year ended
December 31,
2016
    January 1
through
January 31,
2017
                Year ended
December 31,
2017(1)
    Year ended
December 31,
2018
 

Statement of Operations Data:

              

EL Segment revenues

   $ 593.0     $ 45.8           $ 603.0     $ 669.4  

GMF Segment revenues

     531.2       45.5             490.6       543.4  
  

 

 

   

 

 

         

 

 

   

 

 

 

Revenues

     1,124.2       91.3             1,093.6       1,212.8  

Cost of sales, excluding depreciation and amortization

     (470.4     (40.7           (513.7     (504.2

Depreciation and amortization

     (51.9     (4.0           (141.1     (171.6

Selling, general, and administrative expenses

     (266.4     (19.8           (250.7     (295.6

Research and development expenses

     (79.1     (6.3           (62.6     (58.0

Restructuring expenses

     (5.3     (0.4           (10.8     (14.8
  

 

 

   

 

 

         

 

 

   

 

 

 

Operating profit

     251.1       20.1             114.7       168.6  

Interest expense

     (4.5     (0.1           (94.1     (134.7

Other expense, net

     (9.3     (0.8           (23.7     (5.2

Acquisition related expenses

     —         —               (67.0     —    
  

 

 

   

 

 

         

 

 

   

 

 

 

Income (loss) before income taxes

     237.3       19.2                         (70.1     28.7  

Income tax expense

     (64.3     (6.0           (16.7     (52.4
  

 

 

   

 

 

         

 

 

   

 

 

 

Consolidated net income (loss)

   $ 173.0     $ 13.2           $ (86.8   $ (23.7
  

 

 

   

 

 

         

 

 

   

 

 

 

Per share data

              

Earnings (loss) per common share:

              

Basic

              

Diluted

              

Weighted average common shares outstanding:

              

Basic

              

Diluted

              
 

Balance Sheet Data (at end of period):

              

Non-current assets

   $ 446.3             $ 3,279.5     $ 3,024.1  

Current assets:

              

Inventories, net

     105.3               112.8       121.5  

Accounts receivable, net

     259.8               297.2       278.8  

Current tax assets

     22.6               22.5       23.7  

Cash and cash equivalents

     332.5               325.8       386.2  

Other financial assets

     —                 —         1.6  

Total current assets

     720.2               758.3       811.8  

Total assets

     1,166.5               4,037.8       3,835.9  

Total liabilities

     517.6               2,725.8       3,131.2  

Total shareholders’ equity

   $ 648.9             $ 1,312.0     $ 704.7  
  

 

 

           

 

 

   

 

 

 
 

Cash Flow Data:

              

Net cash provided by (used in):

              

Operating activities

   $ 229.6     $ (8.7         $ 107.2     $ 166.7  

Investing activities

     (83.2     (3.3           (2,736.3     (53.9

Financing activities

     (199.0     (140.3           2,933.6       (37.7

 

 

(1)   Reflects 11 months of operations of Atotech UK Topco Limited following the Acquisition.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion summarizes the significant factors affecting our operating results, financial condition, liquidity, and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with “Prospectus Summary—Summary Historical and Pro Forma Financial Information,” “Selected Historical Financial Information” and the audited financial statements and related notes thereto of Atotech B.V. and Atotech UK Topco Limited included elsewhere in this prospectus. Except where noted, statements in the following discussion and analysis of financial condition and results of operations related to periods prior to the consummation of the Acquisition reflect the operations of Atotech B.V., the predecessor entity of Atotech UK Topco Limited, and statements in the following discussion and analysis of financial condition and results of operations related to periods following the consummation of the Acquisition reflect the operations of Atotech UK Topco Limited.

Certain financial measures for the year ended December 31, 2017 are presented on a pro forma basis to give effect to the Acquisition as though the Acquisition had occurred on January 1, 2017.

Our estimated results contained in this prospectus are forward-looking statements based solely on information available to us as of the date of this prospectus and may materially differ from actual results. Please see “Forward-Looking Statements,” and “Prospectus Summary—Summary Historical and Pro Forma Financial Information.”

Overview

We are the leading global provider of specialty electroplating solutions delivering chemistry, equipment, and service for high-growth technology applications. We are #1 in the global EL plating chemistry market, #1 in the global GMF plating chemistry market, and the #1 global manufacturer of horizontal plating equipment for PCB production. Our solutions are used in a wide variety of attractive end-markets, including smartphones, communication infrastructure, cloud computing infrastructure, computing and consumer electronics, automotive electronics, and automotive surface finishing, as well as in numerous industrial and consumer applications such as heavy machinery and household appliances. We benefit from various secular growth trends such as digitalization, increasing data volumes and processing speed requirements, the growth of the consumer class in emerging markets, increasing environmental regulations, and rising product quality and durability standards. We expect these trends to not only increase demand for our customers’ end-products that use our plating chemistry, but also increase the amount and value of plating chemistry used in each end-product, allowing our growth to outpace underlying end-market volume growth.

We are the only major company in our industry that provides both chemistry and equipment, which we sell through both our EL and GMF segments. Our comprehensive systems and solutions approach leverages our unique offering of chemistry, equipment, and service. We believe this business model creates a sustainable competitive advantage that helps us achieve deep customer intimacy and allows us to continue to grow our market share and capitalize on positive market growth trends. This approach is supported by our 17 state-of-the-art global technology centers, which allow us to provide local service around the world and to respond in real-time to customer needs. The combination of our comprehensive systems and solutions approach, expansive global manufacturing and sales footprint, customer-driven investments in R&D, and superior technical expertise makes us an ideal electroplating and surface finishing solutions partner for our diverse customer base. This drives long-lasting relationships and an industry-leading financial profile, with fiscal 2018 EL and GMF Segment Adjusted EBITDA margins of 33.9% and 27.0%, respectively.

Basis of Presentation

Atotech UK Topco Limited is the holding company of Holdco, Opco, and Alpha US Bidco, Inc. and their subsidiaries, and was incorporated on December 20, 2016 for the purpose of consummating the Acquisition.

 

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In this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (i) the “Successor” refers to Atotech UK Topco Limited and its subsidiaries for the period beginning on February 1, 2017 and thereafter following the Acquisition and (ii) “Predecessor” refers to Atotech B.V., on a carve-out basis for periods prior to February 1, 2017.

Atotech Limited, the registrant, is a Jersey company incorporated on December 12, 2018 for purposes of becoming the new holding company of Holdco and its subsidiaries. Substantially concurrently with the closing of this offering, all equity interests of the Successor will be contributed to Atotech Limited and the Successor will be dissolved thereafter with Atotech Limited directly or indirectly, respectively, owning all outstanding equity interests of Holdco and Opco. Prior to the Reorganization Transactions, Atotech Limited will have no operations and no material assets or liabilities. After the Reorganization Transactions, Atotech Limited will succeed to the business and operations of Successor and Atotech Limited’s historical financial statements will be substantially identical to those of the Successor. As a result, the financial statements of Atotech Limited are not meaningful to an understanding of our business and are not included in this prospectus.

On October 6, 2016, Opco entered into a share purchase agreement with TOTAL pursuant to which Atotech UK Topco Limited indirectly acquired all the outstanding equity interests of Atotech B.V. on January 31, 2017. The Acquisition purchase price was funded in part by (i) proceeds from borrowings under our senior secured credit facilities totaling $1,400.0 million and (ii) proceeds from the issuance of the Opco Notes totaling $425.0 million. The senior secured credit facilities, the Opco Notes, and the Acquisition are more fully described in Notes 5 and 12 to the financial statements for the year ended December 31, 2018 included elsewhere in this prospectus and under the caption “—Liquidity and Capital Resources—Debt Agreements.”

Acquisition Accounting

As a result of the Acquisition, and after the application of acquisition accounting to our balance sheet on January 31, 2017, our assets and liabilities were adjusted to their estimated fair market values as of the Acquisition closing date. These adjusted valuations have resulted in an increase in our operating expenses due to the depreciation and amortization expense related to the increased carrying value of our fixed assets and identifiable definite-lived intangible assets. The excess value of the total purchase price over the estimated fair value of our assets and liabilities on the Acquisition closing date has been allocated to goodwill. Any identifiable indefinite-lived assets, including goodwill, are subject to annual impairment testing. As of December 31, 2017, we had completed the accounting for the Acquisition. There were no measurement period adjustments recorded after December 31, 2017. See “—Critical Accounting Policies and Estimates—Impairment of Goodwill.”

2018 Recapitalization Transactions

On May 30, 2018, Opco entered into an amendment to the senior secured credit facilities to borrow $200.0 million in incremental Term B-1 loans, and Holdco issued $300.0 million of 8.75%/9.50% Senior PIK Toggle Notes at an issue price of 99.010%. Proceeds from such borrowings were distributed to Atotech UK Topco Limited and used by it to pay accrued interest on, and redeem certain of, its preferred shares.

Eliminated Product Categories

We continually review our product portfolio in an effort to optimize our offerings to our customers and determine to discontinue certain products from time to time. For example, in 2016, we began the phase out of products containing Chrome VI due to increasingly strict environmental requirements imposed by recently implemented REACH regulations. This phase out is largely complete other than de minimis sales to a limited number of customers. In addition, in 2016, we began to phase out our EM product line for strategic reasons and completed this exit during 2018. As a result of these decisions, the product portfolio of the businesses reflected in our audited financial statements has changed, particularly impacting our revenue growth rates in 2017, the year in which revenues generated from these eliminated product categories were most significantly impacted.

 

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Pro Forma Financial Information

In addition to the historical analysis of results of operations, we have prepared unaudited supplemental pro forma results of operations of Successor for the year ended December 31, 2017. We believe this supplemental presentation provides additional information that enables a more meaningful comparison of our results in the periods presented herein.

The pro forma results for the year ended December 31, 2017 represent the addition of the period from January 1, 2017 through January 31, 2017 and Successor fiscal 2017, as well as pro forma adjustments to reflect the Acquisition as if it had occurred on January 1, 2017. The pro forma results do not reflect the actual results we would have achieved had the Acquisition been completed as of January 1, 2017 and are not indicative of our future results of operations.

 

    Predecessor                 Successor     Combined
Predecessor
and
Successor for
the year
ended
December 31,
2017
                            Successor Pro
Forma year
ended
December 31,
2017
 
    January 1
through
January 31,
2017
                Year ended
December 31,
2017(a)
    Acquisition
Adjustments
          Offering
Adjustments
       

EL Segment revenues

  $ 45.8           $ 603.0     $ 648.8     $ —         $ —         $ 648.8  

GMF Segment revenues

    45.5             490.6       536.1       —           —           536.1  
 

 

 

         

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Revenues

    91.3             1,093.6       1,184.9       —           —           1,184.9  

Cost of sales, excluding depreciation and amortization

    (40.7           (513.7     (554.4     54.0       (b     —           (500.4

Depreciation and amortization

    (4.0           (141.1     (145.1     (8.6     (c     —           (153.7

Selling, general, and administrative expenses

    (19.8           (250.7     (270.5     —           2.0       (d     (268.5

Research and development expenses

    (6.3           (62.6     (68.9     —           —           (68.9

Restructuring expenses

    (0.4           (10.8     (11.2     —           —           (11.2
 

 

 

         

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Operating profit

    20.1             114.7       134.8       45.4         2.0         182.2  

Interest expense

    (0.1           (94.1     (94.2     (8.5     (e         (102.7

Other expense, net

    (0.8           (23.7     (24.5     —           —           (24.5

Acquisition related expenses

    —               (67.0     (67.0     67.0       (f     —           —    
 

 

 

         

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Income (loss) before income taxes

    19.2             (70.1     (50.9     103.9         2.0         55.0  

Income tax expense

    (6.0           (16.7     (22.7     (22.8     (g     (0.4     (g     (45.9
 

 

 

         

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Consolidated net income (loss)

  $ 13.2           $ (86.8   $ (73.6   $ 81.1       $ 1.6       $ 9.1  
 

 

 

         

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

 

(a)   Reflects 11 months of operations of Atotech UK Topco Limited following the Acquisition.
(b)   As a result of the Acquisition, Atotech UK Topco Limited adjusted the book value of inventory to its fair value in accordance with IFRS 3 “Business Combinations.” Accordingly, Atotech UK Topco Limited recorded a charge of $54.0 million for the year ended December 31, 2017. This adjustment reflects the removal of this charge as this adjustment is one-time in nature with no recurring impact. The tax benefit related to this adjustment was $16.2 million and has been also removed.
(c)   Reflects the impact to depreciation and amortization for the period from January 1, 2017 through January 31, 2017 not included in Atotech UK Topco Limited’s historical results of operations for the year ended December 31, 2017 as a result of the Acquisition. See Note 5 in the financial statements of Atotech UK Topco Limited for the year ended December 31, 2017. There was no tax benefit related to this adjustment.

 

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(d)   Upon the consummation of the offering, we expect to make a one-time payment of approximately $8.5 million to Carlyle in connection with the termination of its consulting services agreement, pursuant to its terms. As a result of the termination, Carlyle and its affiliates will have no further obligation to provide services to us, and we will have no further obligation to make annual payments of $1.8 million. This adjustment reflects the removal of the $2.0 million of management fee and expense reimbursement paid to Carlyle by Atotech UK Topco Limited during the year ended December 31, 2017. See “Certain Relationships and Related Person Transactions—Consulting Agreement.” The tax benefit related to this adjustment was estimated to be $0.4 million.
(e)   Reflects the estimated impact to interest expense for the period from January 1, 2017 through January 31, 2017 not included in Atotech UK Topco Limited’s historical results of operations for the year ended December 31, 2017, estimated to be $8.5 million, as a result of the Acquisition, based on $1,400.0 million of borrowings under the senior secured credit facility at an assumed interest rate of approximately 5.4%, the average interest rate in effect during the eleven months ended December 31, 2017, and $425.0 million of borrowings under the Opco Notes at a rate of 6.250%, the actual interest rate on the Opco Notes. Each one-eighth point change in interest rates on our USD Term Loan Facility (and to the extent that LIBOR is in excess of the 1.00% floor) and our RMB Term Loan Facility would result in a change in annual interest expense of $1.1 million and $0.6 million, respectively. There was no tax benefit related to this adjustment.
(f)   As a result of the Acquisition, Atotech UK Topco Limited recorded transaction costs of $67.0 million for the year ended December 31, 2017. This adjustment reflects the removal of this charge as these transaction costs are one-time in nature with no recurring impact. The tax benefit related to this adjustment was $6.6 million and has been also removed.
(g)   This adjustment reflects the estimated tax effect of the pro forma adjustments described in footnotes (b), (d), and (f) above. Because the tax rate used for the pro forma financial information is an estimate, it will likely vary from the actual effective rate in periods subsequent to the consummation of this offering.

Key Factors Affecting the Components of Our Results of Operations

The following discussion sets forth certain components of our statement of operations and certain factors that impact those items:

Revenues

We generate revenues from the sale of chemistry and equipment across all major geographic areas. Revenues exclude sales taxes and are presented net of discounts, rebates, and reductions. Our revenues are impacted by the following key factors and trends:

 

   

broad macroeconomic trends and factors, including general economic conditions, economic conditions in the markets in which we operate, consumer preferences, and rising costs of labor;

 

   

technological advancements in our EL end-markets, including the rollout of 5G infrastructure, the adoption of next-generation mobile devices and EVs, the proliferation of big data and cloud computing, and the increasing use of IoT connected devices;

 

   

secular trends in our GMF end-markets, including increased plating content per unit as a result of vehicle lightweighting, increasing quality requirements, and premiumization;

 

   

increasingly stringent environmental regulations;

 

   

our ability to pass through changes in the price of raw materials, in particular, palladium, to our customers;

 

   

our ability to successfully develop and launch new solutions;

 

   

the discontinuance of any of our products in the future in an effort to optimize our offering to our customers;

 

   

seasonality in both our segments, which generally experience their strongest revenue in the second half of each fiscal year, mostly driven by consumption trends during the holiday season, and their lowest revenue

 

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in the first quarter of each fiscal year, mostly driven by the slowdown in production in China as a result of the Chinese New Year, which can result in a sequential decline in our revenues in the first quarter of a fiscal year relative to the fourth quarter of the prior fiscal year; and

 

   

fluctuations in foreign currency exchange rates.

Cost of sales, exclusive of depreciation and amortization (“Cost of sales”)

Cost of sales principally consists of the price paid for raw materials, unfinished and finished products, compensation and benefit costs for employees involved in our manufacturing operations, and other cost of sales. Raw materials are valued at their respective purchase prices, net of discounts and rebates, including transportation costs and ancillary expenses.

The key factors that impact our cost of sales as a percentage of our revenues include:

 

   

changes in the price of raw materials, in particular, palladium;

 

   

the impact of wage inflation;

 

   

the mix of products sold during any period; in particular the mix of our revenues between chemistry and equipment; and

 

   

the impact of our operational improvement initiatives.

Depreciation and amortization

Depreciation and amortization consists of capitalized costs incurred in connection with the ownership and operation of all tangible assets, including the depreciation and amortization expense related to the increased carrying value of our fixed assets and identifiable definite-lived intangible assets related to the Acquisition. The main tangible items that are depreciated over their useful lives are our recently completed technology centers, our R&D equipment, and our new and existing fully depreciated production facilities. The principal intangible items that are amortized over their useful lives include our developed technology, customer relationships, and trade name portfolio.

Selling, general, and administrative expenses (“SG&A”)

SG&A expense consists principally of expenditures incurred in connection with the sales and marketing of our products, third-party logistics, as well as administrative costs for support functions such as finance, information technology, human resources, and legal. Following the Acquisition, we have built up additional corporate functions in order to operate as a standalone company. We expect we will incur additional expenses as a result of being a public company.

Research and development expenses (“R&D”)

R&D expenses principally consist of costs incurred to develop new products and equipment, processes, and technologies, or to generate improvements to existing products, equipment, or processes.

Restructuring expenses

Restructuring expenses mainly consist of expenditures in relation to organizational changes and severance payments.

Interest expense

Interest expense consists of interest on our financial obligations as well as the amortization of debt issuance costs and debt discounts associated with our senior secured credit facilities, Opco Notes, and Holdco Notes.

 

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Other expense, net

Other expense, net principally consists of gains or losses from foreign currency fluctuations; gains or losses on disposal of property, plant, and equipment; and mark-to-market adjustments of our derivatives.

Income taxes

Income taxes include (a) deferred tax, consisting of amounts of income taxes payable or recoverable during future fiscal years for taxable or deductible timing differences and carry-forward of unused tax losses, and tax credits and (b) the payable amount of corporate tax, estimated on the basis of the tax rules in force in applicable jurisdictions, and distribution tax on dividends received, or withholding tax, as applicable, including provisions for tax litigations and disputes. We and our subsidiaries are subject to income tax in the various jurisdictions in which we operate. Changes to the debt and equity capitalization of our subsidiaries, and the realignment of the functions performed and risks assumed by the various subsidiaries are among the factors that will determine the future book and taxable income of the respective subsidiary and the Company as a whole.

 

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Results of Operations

The following discussion should be read in conjunction with the information contained in the accompanying audited financial statements and related footnotes included elsewhere in this prospectus. Our results of operations set forth below may not necessarily reflect what would have occurred if we had been a standalone entity prior to the Acquisition or what will occur in the future.

The following table was derived from the Successor’s consolidated statements of operations for fiscal 2017 and fiscal 2018 and from the Predecessor’s combined statements of operations for fiscal 2016 and the period from January 1, 2017 through January 31, 2017 included elsewhere in this prospectus. It should be noted that the results of operations for Successor fiscal 2017 only include the results of Atotech B.V. from the date of the Acquisition. Prior to the Acquisition, Atotech UK Topco Limited generated no revenue or expenses. We have also presented pro forma financial results for Successor fiscal 2017 as if the Acquisition Transactions had occurred on January 1, 2017. See “—Basis of Presentation.” This information and the related comparison to the operating results for Predecessor fiscal 2016 is provided for a more meaningful comparison between years.

 

     Predecessor                 Successor                 Successor
Pro Forma
    Successor  

($ in millions)

   Year ended
December 31,
2016
    January 1
through
January 31,
2017
                Year ended
December 31,
2017(1)
                Year ended
December 31,
2017(2)
    Year ended
December 31,
2018
 

EL Chemistry revenues

   $ 481.0     $ 39.0           $ 488.9           $ 527.9     $ 568.5  

EL Equipment revenues

     112.0       6.8             114.1             120.9       100.9  
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

Total EL Segment revenues

     593.0       45.8             603.0             648.8       669.4  

GMF Chemistry revenues

     471.6       37.9             449.6             487.5       498.0  

GMF Equipment revenues

     59.6       7.6             41.0             48.6       45.4  
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

Total GMF Segment revenues

     531.2       45.5             490.6             536.1       543.4  
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

Revenues

     1,124.2       91.3             1,093.6             1,184.9       1,212.8  

Cost of sales, excluding depreciation and amortization

     (470.4     (40.7           (513.7           (500.4     (504.2

Depreciation and amortization

     (51.9     (4.0           (141.1           (153.7     (171.6

Selling, general, and administrative expenses

     (266.4     (19.8           (250.7           (268.5     (295.6

Research and development expenses

     (79.1     (6.3           (62.6           (68.9     (58.0

Restructuring expenses

     (5.3     (0.4           (10.8           (11.2     (14.8
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

Operating profit

     251.1       20.1             114.7             182.2       168.6  
                      

Interest expense

     (4.5     (0.1           (94.1           (102.7     (134.7

Other expense, net

     (9.3     (0.8           (23.7           (24.5     (5.2

Acquisition related expenses

     —         —               (67.0           —         —    
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

Income (loss) before income taxes

     237.3       19.2             (70.1           55.0       28.7  

Income tax expense

     (64.3     (6.0           (16.7           (45.9     (52.4
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

Consolidated net income (loss)

   $ 173.0     $ 13.2           $ (86.8         $ 9.1     $ (23.7
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

 

(1)   Reflects 11 months of operations of Atotech UK Topco Limited following the Acquisition.
(2)   See “—Pro Forma Financial Information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.

 

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Successor fiscal 2018 compared to Successor fiscal 2017 and Pro Forma Successor fiscal 2017

Revenues

Historical: Revenues were $1,212.8 million for Successor fiscal 2018 compared to $1,093.6 million and $91.3 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

Pro Forma: Revenues increased $27.9 million, or 2.4%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018 primarily as a result of increased chemistry revenues, which grew $51.1 million, or 5.0%, over such period, and were partially offset by decreases in equipment revenues of $23.2 million. This change in chemistry revenues was largely attributed to strong demand for our chemistry products in both of our EL and GMF segments and successfully implemented projects at our customers. EL chemistry growth was driven by increased demand in high-end smartphone and automotive applications. GMF benefitted from higher customer demand in the global automotive markets, particularly outside of Asia, as well as the fixtures and heavy machinery markets. In addition, chemistry revenues were impacted by a decrease in revenues due to the discontinuance of our Chrome VI and EM product lines ($4.6 million), an increase in revenues due to fluctuations in palladium prices ($20.3 million), and an increase in revenues as a result of a positive impact of currency fluctuations ($16.2 million). Excluding the impact of these items, our chemistry revenues grew by $19.2 million, or 1.9%, for Successor fiscal 2018 compared to Pro Forma Successor fiscal 2017. For additional information on the key factors driving the growth in our chemistry revenues within our segments, see “—Selected Segment Information.”

Cost of sales

Historical: Cost of sales were $504.2 million for Successor fiscal 2018 compared to $513.7 million and $40.7 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively. This decrease was mainly driven by adjustments of $54.0 million to the book value of inventory in 2017 in accordance with IFRS 3 “Business Combinations” due to the Acquisition. The $54.0 million step-up in fair value of inventory was expensed as the acquired inventory was sold over the subsequent twelve months, leading to increased cost of sales in fiscal 2017 as compared to fiscal 2018. As a percentage of sales, cost of sales remained stable.

Pro Forma: Cost of sales increased $3.8 million, or 0.8%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. This slight increase was primarily attributable to higher palladium prices, which we pass through to our customers, and the impact of currency fluctuations offset by a product mix effect. Cost of sales as a percentage of revenue decreased from 42.2% for Pro Forma Successor fiscal 2017 compared to 41.6% for Successor fiscal 2018.

Depreciation and amortization

Historical: Depreciation and amortization was $171.6 million for Successor fiscal 2018 compared to $141.1 million and $4.0 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

Pro Forma: Depreciation and amortization increased $17.9 million, or 11.6%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. This increase was primarily due to higher investments in tangible and intangible assets in 2018.

Selling, general, and administrative expenses

Historical: Selling, general, and administrative expenses were $295.6 million for Successor fiscal 2018 compared to $250.7 million and $19.8 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

 

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Pro Forma: Selling, general, and administrative expenses increased $27.1 million, or 10.1%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. This increase is primarily due to expenses of $15.8 million for certain strategic initiatives and the enhancement of capabilities for being a standalone company. In addition, costs for internal functions in our headquarters rose due to unfavorable exchange rate translations and more extensive reporting, tax and compliance requirements demanding an increase in headcount which only fully impacted our costs in fiscal 2018.

Research and development expenses

Historical: R&D expenses were $58.0 million for Successor fiscal 2018 compared to $62.6 million and $6.3 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

Pro Forma: R&D expenses decreased $10.9 million, or 15.8%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. This decrease is attributable to cost efficiency measures in R&D which became fully effective in fiscal 2018 as well as a higher R&D efficiency overall.

Restructuring expenses

Historical: Restructuring expenses were $14.8 million for Successor fiscal 2018 compared to $10.8 million and $0.4 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

Pro Forma: Restructuring expenses increased $3.6 million, or 32.1%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. This increase is primarily attributable to the relocation of production facilities in Europe and South-East Asia.

Interest expense

Historical: Interest expense was $134.7 million for Successor fiscal 2018 compared to $94.1 million and $0.1 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

Pro Forma: Interest expense increased $32.0 million or 31.2% from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. This increase was attributable to the new borrowings under the Incremental Term B-1 loans and the Holdco Notes totaling $500.0 million.

Other expense, net

Historical: Other expense, net was $5.2 million for Successor fiscal 2018 compared to $23.7 million and $0.8 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

Pro Forma: Other expense, net decreased $19.3 million, or 78.8%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. This decrease is primarily related to fair value adjustments to derivatives of $9.5 million, most of them embedded into our notes as part of certain redemption features as well as hedging premiums. Furthermore, foreign currency gains declined by $7.2 million from Pro Forma Successor fiscal 2017 to Successor fiscal 2018.

Acquisition related expenses

Historical: Acquisition related expenses were $67.0 million in Successor fiscal 2017. These expenses consisted primarily of investment banking, legal, and other professional advisory services costs related to the Acquisition. There were no Acquisition related expenses during fiscal 2018.

 

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Pro Forma: There were no Acquisition related expenses on a pro forma basis, as these expenses were eliminated in Pro Forma Successor fiscal 2017.

Income tax expense

Historical: Income tax expense was $52.4 million for Successor fiscal 2018 compared to $16.7 million and $6.0 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

In Predecessor period from January 1, 2017 through January 31, 2017, the effective tax rate was 31% while the statutory tax rate in the Netherlands was 25% for the same period; the difference in these two tax rates primarily resulted from valuation allowances on deferred tax assets and tax rate differences at the subsidiary level.

In Successor fiscal 2018, the effective tax rate was 183%, compared to negative 24% in Successor fiscal 2017, while the statutory tax rate was 19% for each period. For each period, the difference to the statutory tax rate is primarily due to financing expenses incurred in our holding companies which were not offset against taxable profits, leading to a difference for unrecognized deferred taxes of $24.7 million in Successor fiscal 2018 and $21.1 million in Successor fiscal 2017. Additionally, statutory tax rates in our key regions are different than the statutory rate in the United Kingdom for each period, leading to differences between the statutory tax rate and the overall effective tax rate and a resulting increase in tax expenses of $8.8 million in Successor fiscal 2018 and a resulting decrease of $12.5 million in Successor fiscal 2017. Furthermore, on December 22, 2017, the United States government enacted comprehensive tax legislation (“2017 U.S. Tax Legislation”), which changed the Federal tax rate to 21% from January 1, 2018 and led to a non-cash income tax benefit of approximately $11 million in Successor fiscal 2017. Lastly, the relative tax rates as between Successor fiscal 2018 and Successor fiscal 2017 were impacted by other permanent differences, in particular from transaction costs incurred, which are non-deductible for tax purposes, and from repatriation of profits and international transfer pricing regulations, which led to an increase in tax expenses of $14.7 million in Successor fiscal 2018 and $33.8 million in Successor fiscal 2017.

Pro Forma: Income tax expense increased $6.5 million, or 14.2%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. The effective tax rate grew from 84% in Pro Forma Successor fiscal 2017 to 183% in Successor fiscal 2018. This increase in tax expense is due to the following factors: an increase of $12.3 million mainly due to 2017 U.S. Tax Legislation, which led to a positive non-cash income tax benefit in Pro Forma Successor fiscal 2017; an increase of $2.2 million due to an increase in financing expenses which cannot be offset against taxable profits; and an increase of $18.3 million driven by differences between statutory rates in key regions as compared to the statutory rate in the United Kingdom. These movements are partially offset by a year over year reduction in tax expenses of $19.1 million of permanent differences from transaction costs incurred which are non-deductible for tax purposes, the repatriation of profits, international transfer pricing regulations and a decrease of $5.9 million due to a decrease of taxable income.

Successor fiscal 2017 and Predecessor period January 1, 2017 through January 31, 2017 compared to Predecessor fiscal 2016 and Pro Forma Successor fiscal 2017 compared to Predecessor fiscal 2016

Revenues

Historical: Revenues were $1,093.6 million and $91.3 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $1,124.2 million for Predecessor fiscal 2016.

Pro Forma: Revenues increased $60.7 million, or 5.4%, from Predecessor 2016 to Pro Forma Successor fiscal 2017 primarily as a result of increased chemistry revenues, which grew $62.8 million, or 6.6%, over such

 

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period. This change in chemistry revenues was largely attributed to strong demand for our chemistry products in both of our EL and GMF segments and wallet share gains at certain of our key customers. In addition, chemistry revenues were impacted by a decrease in revenues due to the discontinuance of our Chrome VI and EM product lines ($30.0 million), an increase in revenues due to fluctuations in palladium prices ($25.8 million), and an increase in revenues as a result of a positive impact of currency fluctuations ($2.8 million). Excluding the impact of these items, our chemistry revenues grew by $64.2 million, or 6.7%, for Pro Forma Successor fiscal 2017 compared to Predecessor fiscal 2016. For additional information on the key factors driving the growth in our chemistry revenues within our segments, see “—Selected Segment Information.”

Cost of sales

Historical: Cost of sales were $513.7 million and $40.7 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $470.4 million for Predecessor fiscal 2016. This increase was mainly driven by adjustments of $54.0 million to the book value of inventory in 2017 in accordance with IFRS 3 “Business Combinations” due to the Acquisition (and a less favorable product mix in Successor fiscal 2017). The $54.0 million step-up in fair value of inventory was expensed as the acquired inventory was sold over the subsequent twelve months, leading to increased cost of sales in Successor fiscal 2017 as compared to Predecessor fiscal 2016.

Pro Forma: Cost of sales increased $30.0 million, or 6.4%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. This increase is primarily attributable to increased sales volume and higher raw material costs for palladium, which is ultimately passed through to our customers. Cost of sales as a percentage of revenue increased from 41.8% for Predecessor fiscal 2016 to 42.2% for Pro Forma Successor fiscal 2017.

Depreciation and amortization

Historical: Depreciation and amortization was $141.1 million and $4.0 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $51.9 million for Predecessor fiscal 2016.

Pro Forma: Depreciation and amortization increased $101.8 million, or 196.1%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. This increase is primarily attributable to higher amortization expense resulting from acquired intangibles as a result of the application of acquisition accounting in connection with the Acquisition.

Selling, general, and administrative expenses

Historical: Selling, general, and administrative expenses were $250.7 million and $19.8 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $266.4 million for Predecessor fiscal 2016.

Pro Forma: Selling, general, and administrative expenses increased $2.1 million, or 0.8%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. The increase is primarily attributable to additional administrative expenses associated with becoming a standalone company, partially offset by certain cost-saving measures since the Acquisition.

Research and development expenses

Historical: R&D expenses were $62.6 million and $6.3 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $79.1 million for Predecessor fiscal 2016.

 

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Pro Forma: R&D expenses decreased $10.2 million, or 12.9%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. This decrease is primarily attributable to the restructuring of our R&D function to improve efficiency and return on investment.

Restructuring expenses

Historical: Restructuring expenses were $10.8 million and $0.4 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $5.3 million for Predecessor fiscal 2016.

Pro Forma: Restructuring expenses increased $5.9 million, or 111.3%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. This increase is mainly attributable to severance packages resulting from the restructuring of certain R&D and SG&A functions primarily in Germany.

Interest expense

Historical: Interest expense was $94.1 million and $0.1 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $4.5 million for Predecessor fiscal 2016.

Pro Forma: Interest expense increased $98.2 million from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. This increase is attributable to the borrowings under our senior secured credit facilities and the Opco Notes used to finance the Acquisition.

Other expense, net

Historical: Other expense, net was $23.7 million and $0.8 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $9.3 million for Predecessor fiscal 2016.

Pro Forma: Other expense, net increased $15.2 million, or 163.4%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. This increase is primarily attributable to a $15.2 million of mark-to-market adjustment of our foreign currency derivatives and bifurcated embedded derivatives related to certain redemption features of the Opco Notes as well as hedging premiums that were not in existence in the prior year and a $5.7 million increase in foreign currency exchange losses, partially offset by a decrease of $5.2 million resulting from a payment for long-term service made in fiscal 2016 in connection with the retirement of an executive.

Acquisition related expenses

Historical: Acquisition related expenses were $67.0 million in Successor fiscal 2017. These expenses consisted primarily of investment banking, legal, and other professional advisory services costs related to the Acquisition.

Pro Forma: There were no Acquisition related expenses on a pro forma basis, as these expenses were eliminated in Pro Forma Successor fiscal 2017.

Income tax expense

Historical: Income tax expense was $16.7 million and $6.0 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $64.3 million for Predecessor fiscal 2016.

 

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In Predecessor fiscal 2016, the effective tax rate was negative 27% while the statutory tax in the Netherlands was 25% for the same period; the difference in these two tax rates resulted primarily from valuation allowances on deferred tax assets and tax rate differences at the subsidiary level.

For each period, the difference to the statutory tax rate is mainly due to financing expenses incurred in our holding companies which were not offset against taxable profit, leading to a difference for unrecognized deferred taxes and benefits on previously unrecognized deferred taxes of $21.1 million in Successor fiscal 2017, as well as due to changes in valuation allowance of deferred tax assets of negative $1.4 million in Predecessor fiscal 2017 and negative $4.0 million in Predecessor fiscal 2016. Additionally, statutory tax rates in our key regions differ from those statutory rates applicable for the controlling entities in the respective years, leading to differences between the statutory tax rate and the overall effective tax rate and a resulting decrease in tax expenses of $12.5 million in Successor fiscal 2017, a decrease of $0.2 million in Predecessor 2017 and an increase of $0.7 million in Predecessor fiscal 2016.

Furthermore, on December 22, 2017, the United States government enacted the 2017 U.S. Tax Legislation, which lead to a non-cash income tax benefit of approximately $11 million in Successor fiscal 2017. Lastly, the relative tax rates as between Successor fiscal 2017 and Predecessor fiscal 2016 were impacted by other permanent differences, in particular from transaction cost incurred which are non-deductible for tax purposes, but also from repatriation of profits and international transfer pricing regulations, which led to an increase in tax expenses of $33.8 million in Successor fiscal 2017 and negative $0.2 million in Predecessor fiscal 2016.

Pro Forma: Income tax expense decreased $18.4 million, or 28.6%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. This increase is primarily attributable to the tax impact of the Acquisition related adjustments and a shift in the profit mix between high and low tax jurisdictions, partially offset by the changes in the U.S. statutory tax rate going forward enacted as of December 22, 2017.

Selected Segment Information

The following table presents revenue by segment and Segment Adjusted EBITDA for the following periods:

 

     Predecessor                 Successor                 Successor
Pro Forma
    Successor  

($ in millions)

   Year ended
December 31,
2016
    January 1
through
January 31,
2017
                Year ended
December 31,
2017(1)
                Year ended
December 31,
2017
    Year ended
December 31,
2018
 

EL

                      

EL Chemistry revenues

   $ 481.0     $ 39.0           $ 488.9           $ 527.9     $ 568.5  

EL Equipment revenues

     112.0       6.8             114.1             120.9       100.9  
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

EL Segment revenues

     593.0       45.8             603.0             648.8       669.4  
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

EL Segment Adjusted EBITDA(2)

     175.3       14.4             193.7             208.1       227.2  

EL Segment Adjusted EBITDA margin

     29.6     31.4           32.1           32.1     33.9

GMF

                      

GMF Chemistry revenues

   $ 471.6     $ 37.9           $ 449.6           $ 487.5     $ 498.0  

GMF Equipment revenues

     59.6       7.6             41.0             48.6       45.4  
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

GMF Segment revenues

     531.2       45.5             490.6             536.1       543.4  
  

 

 

   

 

 

         

 

 

         

 

 

   

 

 

 

GMF Segment Adjusted EBITDA(2)

     118.7       10.7             127.5             138.2       146.5  

GMF Segment Adjusted EBITDA margin

     22.3     23.5           26.0           25.8     27.0

 

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(1)   Reflects 11 months of operations of Atotech UK Topco Limited following the Acquisition.
(2)   For additional information regarding Segment Adjusted EBITDA, see Note 24 to our financial statements appearing elsewhere in this prospectus.

Successor fiscal 2018 compared to Successor fiscal 2017 and Pro Forma Successor fiscal 2017

Electronics Segment Revenues

Historical: EL revenues were $669.4 million for Successor fiscal 2018 compared to $603.0 million and $45.8 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

Pro Forma: EL revenues increased $20.6 million, or 3.2%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018 primarily as a result of increased EL Chemistry revenues, which grew $40.6 million, or 7.7%, over such period and were partially offset by decreased equipment revenues of $20.0 million. The increase in chemistry revenues primarily reflects solid growth in chemistry due to price and volume increases driven by high-end smartphone and automotive applications. In addition, EL Chemistry revenues were impacted by an increase in revenues due to fluctuations in palladium prices ($14.9 million) and an increase in revenues as a result of a positive impact of currency fluctuations ($11.1 million). Excluding the impact of these items, our EL Chemistry revenues grew by $14.6 million, or 2.8%, for Successor fiscal 2018 compared to Pro Forma Successor fiscal 2017. While EL Chemistry revenues increased, equipment revenues decreased due to lower order intakes arising from delayed customer investment decisions.

Electronics Segment Adjusted EBITDA

Historical: Segment Adjusted EBITDA was $227.2 million for Successor fiscal 2018 compared to $193.7 million and $14.4 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively. Segment Adjusted EBITDA margin increased from 32.1% and 31.4% for Successor fiscal 2017 and the Predecessor period January 1, 2017 through January 31, 2017, respectively to 33.9% for Successor fiscal 2018.

Pro Forma: Segment Adjusted EBITDA increased $19.1 million, or 9.2%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. Segment Adjusted EBITDA margin increased from 32.1% in Pro Forma Successor fiscal 2017 to 33.9% in Successor fiscal 2018. This increase was attributable to increases in chemistry revenue and a more favorable product mix due to the factors discussed above, as well as the successful implementation of cost improvement programs.

General Metal Finishing Segment Revenues

Historical: GMF revenues were $543.4 million for Successor fiscal 2018 compared to $490.6 million and $45.5 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively.

Pro Forma: GMF revenues increased $7.3 million, or 1.4%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018 primarily as a result of increased GMF Chemistry revenues, which grew $10.5 million, or 2.2%, over such period. This increase is primarily attributable to higher customer demand in the global automotive markets, particularly outside of Asia, as well as the sanitary and heavy machinery markets mainly during the first half of fiscal 2018. In addition, GMF Chemistry revenues were impacted by a decrease in revenues due to the discontinuance of our Chrome VI product line ($4.6 million), an increase in revenues due to fluctuations in palladium prices ($5.5 million), and an increase in revenues as a result of a positive impact of currency fluctuations ($5.2 million). Excluding the impact of these items, our GMF Chemistry revenues grew by $4.4 million, or 0.9%, for Successor fiscal 2018 compared to Pro Forma Successor fiscal 2017. The remaining change in GMF revenues is attributable to a decrease in equipment revenue reflecting cautious customer investment levels.

 

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General Metal Finishing Segment Adjusted EBITDA

Historical: Segment Adjusted EBITDA was $146.5 million for Successor fiscal 2018 compared to $127.5 million and $10.7 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively. Segment Adjusted EBITDA margin increased from 26.0% and 23.5% for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively to 27.0% for Successor fiscal 2018.

Pro Forma: Segment Adjusted EBITDA increased $8.3 million, or 6.0%, from Pro Forma Successor fiscal 2017 to Successor fiscal 2018. Segment Adjusted EBITDA margin increased from 25.8% in Pro Forma Successor fiscal 2017 to 27.0% in Successor fiscal 2018. This increase was attributable to increases in chemistry revenue and a more favorable product mix due to the factors discussed above, as well as the successful implementation of cost improvement programs.

Successor fiscal 2017 and Predecessor period January 1, 2017 through January 31, 2017 compared to Predecessor fiscal 2016 and Pro Forma Successor fiscal 2017 compared to Predecessor fiscal 2016

Electronics Segment Revenues

Historical: EL revenues were $603.0 million and $45.8 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $593.0 million for Predecessor fiscal 2016.

Pro Forma: EL revenues increased $55.8 million, or 9.4%, from Predecessor 2016 to Pro Forma Successor fiscal 2017 primarily as a result of increased EL Chemistry revenues, which grew $46.9 million, or 9.8%, over such period. This change was largely attributable to strong demand for advanced HDIs and rigid-flex PCBs from the high-end smartphone supply chain and wallet share gains at key PCB manufacturers. In addition, EL Chemistry revenues were impacted by a decrease in revenues due to the discontinuance of our EM product line ($2.9 million), an increase in revenues due to fluctuations in palladium prices ($17.5 million), and an increase in revenues as a result of a positive impact of currency fluctuations ($1.2 million). Excluding the impact of these items, our EL Chemistry revenues grew by $31.1 million, or 6.5%, for Pro Forma Successor fiscal 2017 compared to Predecessor fiscal 2016. The remaining change in EL revenues is attributable to an increase in equipment revenue driven by strong order intakes after the introduction of new technologies.

Electronics Segment Adjusted EBITDA

Historical: Segment Adjusted EBITDA was $193.7 million and $14.4 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $175.3 million for Predecessor fiscal 2016. Segment Adjusted EBITDA margin increased from 29.6% in Predecessor fiscal 2016 to 32.1% and 31.4%, respectively, for Successor fiscal 2017 and the Predecessor period January 1, 2017 through January 31, 2017.

Pro Forma: Segment Adjusted EBITDA increased $32.8 million, or 18.7%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. Segment Adjusted EBITDA margin increased from 29.6% in Predecessor fiscal 2016 to 32.1% in Pro Forma Successor fiscal 2017. This increase was attributable to increases in revenue due to the factors discussed above, as well as the successful implementation of cost improvement programs.

General Metal Finishing Segment Revenues

Historical: GMF revenues were $490.6 million and $45.5 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $531.2 million for Predecessor fiscal 2016.

 

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Pro Forma: GMF revenues increased $4.9 million, or 0.9%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017 primarily as a result of increased GMF Chemistry revenues, which grew $15.9 million, or 3.4%, over such period. This change was driven by strong demand from automotive customers in Asia, as well as wallet share gains and a major new customer in the Americas region. In addition, GMF Chemistry revenues were impacted by a decrease in revenues due to the discontinuance of our Chrome VI product line ($27.1 million), an increase in revenues due to fluctuations in palladium prices ($8.3 million), and an increase in revenues as a result of a positive impact of currency fluctuations ($1.6 million). Excluding the impact of these items, our GMF Chemistry revenues grew by $33.1 million, or 7.0%, for Pro Forma Successor fiscal 2017 compared to Predecessor fiscal 2016. The remaining change in GMF revenues is attributable to a decrease in equipment revenue driven by strong order intakes in 2016 as compared to 2017.

General Metal Finishing Segment Adjusted EBITDA

Historical: Segment Adjusted EBITDA was $127.5 million and $10.7 million for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017, respectively, compared to $118.7 million for Predecessor fiscal 2016. Segment Adjusted EBITDA margin increased from 22.3% in Predecessor fiscal 2016 to 26.0% and 23.5%, respectively, for Successor fiscal 2017 and the Predecessor period from January 1, 2017 through January 31, 2017.

Pro Forma: Segment Adjusted EBITDA increased $19.5 million, or 16.5%, from Predecessor fiscal 2016 to Pro Forma Successor fiscal 2017. Segment Adjusted EBITDA margin increased from 22.3% in Predecessor fiscal 2016 to 25.8% in Pro Forma Successor fiscal 2017. This increase was attributable to increases in revenue due to the factors discussed above, as well as the successful implementation of cost improvement programs.

Liquidity and Capital Resources

Our liquidity requirements are principally related to funding our operating expenses, making interest payments under our indebtedness, meeting working capital requirements, and making capital expenditures. Our capital expenditures during Predecessor fiscal 2016, Successor fiscal 2017 and Successor fiscal 2018 were $84.0 million, $47.8 million and $56.6 million, respectively.

We anticipate that the cash flows from operations, cash on hand, and availability under the revolving credit facility and our local lines of credit will be sufficient to fund our liquidity requirements. From time to time, we may establish new local lines of credit or utilize existing local lines of credit. We will manage our global cash balances by utilizing available cash management strategies, which may include intercompany agreements, permitted dividends, and hedging. However, our ability to fund our liquidity requirements will depend on our ability to generate and access cash in the future. This is subject to general economic, financial, contractual, competitive, legislative, regulatory, and other factors, some of which are beyond our control, as well as the factors described in “Risk Factors” including our ability to access cash generated in China as described in “Risk Factors—Risks Related to our Business—The Chinese government’s control of currency conversion and expatriation of funds may affect our liquidity.”

Historical Cash Flows

The following table summarizes our primary sources and uses of cash for the periods indicated:

 

     Predecessor                 Successor  

($ in millions)

   Year ended
December 31,
2016
    January 1
through
January 31,
2017
                  Year ended
December 31,
2017
    Year ended
December 31,
2018
 

Net cash provided by (used in):

              

Operating activities

   $ 229.6     $ (8.7         $ 107.2     $ 166.7  

Investing activities

   $ (83.2   $ (3.3         $ (2,736.3   $ (53.9

Financing activities

   $ (199.0   $ (140.3         $ 2,933.6     $ (37.7

 

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Successor fiscal 2018 compared to Successor fiscal 2017

Changes in historical cash flows for the Successor fiscal 2018 compared to Successor fiscal 2017 reflect, among other things, the additional month of operations during the Successor fiscal 2018, as compared to the Successor fiscal 2017, which excludes the Predecessor period January 1, 2017 through January 31, 2017.

Operating activities

Net cash generated by operating activities was $166.7 million for Successor fiscal 2018 compared to $107.2 million for Successor fiscal 2017, an increase of $59.5 million. The increase in net cash generated by operating activities for fiscal 2018 was primarily due to the decrease in consolidated net loss, compared to fiscal 2017 as a result of higher sales due to the additional month of operations in fiscal 2018 as well as cost reductions.

Investing activities

Net cash used in investing activities was $53.9 million for Successor fiscal 2018 compared to $2,736.3 million for Successor fiscal 2017, a decrease of $2,682.4 million. The decrease was primarily due to the inclusion of the purchase price for the Acquisition of Atotech B.V. in cash flows for 2017.

Financing activities

Net cash used by financing activities was $37.7 million for Successor fiscal 2018, compared to net cash generated from financing activities of $2,933.6 million for Successor fiscal 2017. The decrease in net cash generated was primarily due to the inclusion of financing activities related to the Acquisition in cash flows for Successor fiscal 2017, primarily comprised of the equity contribution of $1,245.0 million from Carlyle as well as net proceeds from borrowings under our senior secured credit facilities and the issuance of the Opco Notes totaling $1,838.2 million and partially offset by a dividend paid to our shareholders of $490.5 million in 2018 related to the Acquisition.

January 1, 2017 through January 31, 2017 (Predecessor)

Operating activities

Net cash used in operating activities for the Predecessor period from January 1, 2017 through January 31, 2017 was $8.7 million, which was primarily attributable to a net increase in working capital of $20.7 million, partially offset by consolidated net income of $13.2 million.

Investing activities

Net cash used in investing activities for the Predecessor period from January 1, 2017 through January 31, 2017 was $3.3 million, which was substantially attributable to purchases of intangible assets and property, plant, and equipment.

Financing activities

Net cash used in financing activities for the Predecessor period from January 1, 2017 through January 31, 2017 was $140.3 million, substantially attributable to dividend payments to TOTAL of $110.6 million in connection with the Acquisition and a decrease in current borrowings of $23.0 million.

Successor fiscal 2017 compared to Predecessor fiscal 2016

Changes in historical cash flows for the Successor fiscal 2017 compared to Predecessor fiscal 2016 reflect, among other things, the additional month of operations during the Predecessor fiscal 2016, as compared to the Successor fiscal 2017, which excludes the Predecessor period January 1, 2017 through January 31, 2017.

 

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Operating activities

Net cash generated by operating activities was $107.2 million for Successor fiscal 2017 compared to $229.6 million for Predecessor fiscal 2016, a decrease of $122.4 million. The decrease in net cash generated by operating activities for fiscal 2017 was primarily due to the decrease in consolidated net income as a result of acquisition costs paid in connection with the Acquisition, partially offset by an increase in depreciation, amortization, and finance costs, as well as a decrease in working capital.

Investing activities

Net cash used in investing activities was $2,736.3 million for Successor fiscal 2017 compared to $83.2 million for Predecessor fiscal 2016, an increase of $2,653.1 million. The increase was primarily due to the Acquisition of Atotech B.V., partially offset by less capital expenditures.

Financing activities

Net cash generated from financing activities was $2,933.6 million for Successor fiscal 2017, compared to net cash used by financing activities of $199.0 million for Predecessor fiscal 2016. The increase in net cash generated was primarily due to the new equity contribution of $1,245.0 million from Carlyle as well as net proceeds from borrowings under our senior secured credit facilities and the issuance of the Opco Notes totaling $1,838.2 million, partially offset by a dividend paid to TOTAL of $110.6 million in January 2017 related to the Acquisition.

Debt Agreements

Our liquidity requirements are significantly impacted by the cash expense associated with servicing our indebtedness. As of December 31, 2018, our principal outstanding indebtedness totals $2,285.9 million (excluding $6.7 million of local lines of credit), before giving effect to the estimated impact of IFRS 16 “Leases.” The following table details our borrowings outstanding as of December 31, 2018 and the associated interest expense, including amortization of debt issuance costs and debt discounts, and average effective interest rates for such borrowings for the year ended December 31, 2018:

 

($ in millions)

   Principal balance
as of December 31,
2018
     Average annual
interest rate, for
twelve month period
    Interest expense for
year ended
December 31, 2018
 

USD Term Loan Facility

   $ 1,071.0        4.800   $ 57.2  

RMB Term Loan Facility(2)

   $ 489.9        5.200   $ 33.7  

Revolving Credit Facility

     —          —       $ 2.2  

Opco Notes

   $ 425.0        6.250   $ 26.3  

Holdco Notes

   $ 300.0        8.750 %(1)    $ 15.6  

 

(1)   The Holdco Notes bear cash interest at a rate of 8.750% per annum and PIK interest at a rate of 9.500% per annum. To date, we have elected to pay all interest in cash.
(2)   Reflects currency exchange rate in effect at period end.

Senior Secured Credit Facilities

Our senior secured credit facilities consist of our USD Term Loan Facility, our RMB Term Loan Facility, and our multicurrency revolving credit facility. Our revolving credit facility provides for revolving loans and letters of credit pursuant to commitments in an aggregate principal amount of $250.0 million with borrowing capacity of $227.5 million after giving effect to $22.5 million of guarantee obligations. Letters of credit issued under our revolving credit facility are subject to a $75.0 million sublimit. We may use future borrowings under our revolving credit facility to fund working capital and for other general corporate purposes, including permitted

 

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acquisitions and other investments. Our ability to draw under our revolving credit facility or issue letters of credit thereunder will be conditioned upon, among other things (including the covenants governing our other indebtedness), delivery of required notices, accuracy of the representations and warranties contained in the credit agreement governing our senior secured credit facilities and the absence of any default or event of default under our senior secured credit facilities, subject to certain exceptions.

At the Acquisition closing date, our RMB Term Loan Facility was initially incurred entirely in U.S. dollars in an aggregate principal amount of $500.0 million with the option to redenominate into an equivalent amount of RMB. Since the Acquisition closing date, Opco redenominated the entire amount of the RMB Term Loan Facility from U.S. dollars into RMB. Opco incurred $32.0 million of fees associated with such redenomination.

Borrowings under our USD Term Loan Facility bear interest at a floating rate that may, at our option, be set at either LIBOR plus 3.00% (subject to a LIBOR floor of 1.00%), or the alternate base rate (which is based on the public and federal trends rate, the prime rate, or one-month LIBOR plus 1%) plus 2.00% (subject to a base rate floor of 2.00%). Borrowings under our revolving credit facility currently bear interest at a floating rate that may, at our option, be set at either LIBOR plus 3.75% (subject to a LIBOR floor of 0.00%), or an alternate base rate plus 2.75% (subject to a base rate floor of 0.00%). The applicable margin for our revolving credit facility is subject to two step downs of 25 basis points each based on Opco’s latest reported consolidated first lien net leverage ratio. Our RMB Term Loan Facility bears interest at a floating rate based on a prevailing official lending rate (the “PBOC Benchmark Rate”) that was communicated to Opco by the Bank of China Limited, Shanghai Branch at the time the loans were redenominated into RMB. This rate reflects the official lending rate per annum promulgated and announced by the People’s Bank of China. The margin applicable for such term loans denominated in RMB is 100% of the PBOC Benchmark Rate as of the date of redenomination into RMB for five years following the Acquisition Closing Date and 130% of the PBOC Benchmark Rate thereafter until final maturity. Our revolving credit facility will mature on January 31, 2022 and our USD Term Loan Facility and RMB Term Loan Facility will mature on January 31, 2024.

Opco Notes

On January 31, 2017, Alpha 3 B.V. and Alpha US Bidco, Inc. (the “Opco Issuers”), our indirect wholly owned subsidiaries, issued the Opco Notes and related guarantees thereof. The Opco Notes are unconditionally guaranteed on a senior basis by certain of the Opco Issuers’ subsidiaries. The Opco Notes were sold at par and are due on February 1, 2025. The Opco Notes bear interest at 6.250% payable semi-annually on February 1 and August 1.

On and after February 1, 2020, we have the option to redeem all or part of the Opco Notes at the following redemption prices:

 

Period

   Redemption
price
 

2020

     103.125

2021

     101.563

2022 and thereafter

     100.000

Notwithstanding the foregoing, at any time and from time to time prior to February 1, 2020, we may redeem in the aggregate up to 40% of the original aggregate principal amount of the Opco Notes with the net cash proceeds of one or more Equity Offerings (as defined in the indenture governing the Opco Notes), at a redemption price equal to 106.250% plus accrued and unpaid interest, if any, to (but not including) the redemption date. Upon the occurrence of certain events constituting a change of control, holders of the Opco Notes have the right to require us to purchase all or part of the Opco Notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the repurchase date.

 

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Holdco Notes

On May 30, 2018, Holdco, our indirect wholly owned subsidiary, issued $300.0 million aggregate principal amount of 8.750/9.500% senior PIK Toggle Notes due 2023. The Holdco Notes were sold at an issue price of 99.010% and are due on June 1, 2023. Cash interest will accrue on the Holdco Notes at the rate of 8.750% per annum and PIK interest will accrue on the Holdco Notes at the rate of 9.500% per annum.

On and after June 1, 2019, we have the option to redeem all or part of the Holdco Notes at the following redemption prices:

 

Period

   Redemption
price
 

2019

     102.000

2020

     101.000

2021 and thereafter

     100.000

Notwithstanding the foregoing, at any time and from time to time prior to June 1, 2019, we may redeem the Holdco Notes, in whole or in part with an amount equal to the cash proceeds of one or more Equity Offerings (as such term is defined in the indenture governing the Holdco Notes), at a redemption price equal to 102.000%, plus accrued and unpaid interest, if any, to (but not including) the redemption date. Upon the occurrence of certain events constituting a change of control, holders of the Holdco Notes have the right to require us to purchase all or part of the Holdco Notes at a purchase price equal to 101.000% of the principal amount plus accrued and unpaid interest, if any, to the repurchase date.

Covenants

The Holdco Notes Indenture, the Opco Notes Indenture, and the credit agreement governing our senior secured credit facilities contain several covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions these covenants place on us include limitations on our ability to:

 

   

merge and consolidate with other companies;

 

   

incur indebtedness;

 

   

grant liens or security interests on assets;

 

   

make acquisitions, loans, advances, or investments;

 

   

pay dividends;

 

   

sell or otherwise transfer assets;

 

   

optionally prepay or modify terms of junior lien (in the case of the senior secured credit facilities only) or pay subordinated indebtedness (in the case of the Holdco Notes, Opco Notes and the senior secured credit facilities);

 

   

enter into certain restrictive agreements; or

 

   

in the case of the senior secured credit facilities, change our fiscal year.

With respect to our revolving credit facility, we are also required to maintain a maximum first lien net leverage ratio not in excess of 7.30 to 1.00, tested at the end of any quarter when more than 35% of our revolving credit facility (excluding letters of credit, any amounts drawn to fund certain original issue discount or upfront fees, and certain ordinary course ancillary facilities incurred under the revolving credit facility, and further reduced by up to $100.0 million of cash on our balance sheet that is the result of certain equity overfunding on the Acquisition Closing Date, the proceeds of which have not otherwise been utilized to make distributions or dividends) is utilized at such date.

 

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The Holdco Notes Indenture, the Opco Notes Indenture, and the credit agreement governing our senior secured credit facilities also contain several customary affirmative covenants. We, or our affiliates, may from time to time seek to repurchase or retire the Holdco Notes, the Opco Notes, or term loans through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, their liquidity, contractual restrictions, and other factors. The amounts involved may be material.

Local Lines of Credit

We have local lines of credit in both Malaysia and India and from time to time may have lines of credit in other jurisdictions. As of December 31, 2018, we had $6.7 million outstanding on local lines of credit consisting of MYR 22.0 million and INR 143.8 million (together $7.4 million), net of a $0.7 million intercompany deposit to a non-consolidated entity.

Contractual Obligations and Commitments

The following table presents a summary of our significant contractual obligations as of December 31, 2018 as adjusted to give pro forma effect to this offering and the use of proceeds therefrom.

 

     Payments due by period as of December 31, 2018  

(in millions)

   Total      Less
than 1
year
     1-3
years
     3-5
years
     Over
5 years
 

Contractual Obligations:

              

Long-term indebtedness, including current portion and interest(1)

   $ 3,010.5      $ 155.8      $ 309.2      $ 591.9      $ 1,953.6  

Operating lease obligations(2)

     51.5        13.3        17.3        7.7        13.2  

Management fee(3)

     9.4        9.4        —          —          —    

Other(4)

     29.7        25.9        3.1        0.6        0.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commitments given

   $ 3,101.1      $ 204.4      $ 329.6      $ 600.2      $ 1,966.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Figures assume that our senior secured credit facilities, the Holdco Notes, and the Opco Notes are repaid upon maturity, and the revolving portion of our senior secured credit facilities remains undrawn, which may or may not reflect future events. Future interest payments include the fee on the unused availability under our revolving credit facility, and are based on an assumed average interest rate. Actual interest payments and repayment amounts may change and such changes may be material.
(2)   Does not give effect to the applications of IFRS 16 “Leases.” We adopted IFRS 16 “Leases” on January 1, 2019. We estimate that the adoption of IFRS 16 “Leases” would have increased our fixed assets and our capital lease obligations by approximately $84.5 million as of December 31, 2018.
(3)   Upon the consummation of the offering, we expect to make a one-time payment of approximately $8.5 million to Carlyle in connection with the termination of its consulting services agreement, pursuant to its terms. As a result of the termination, Carlyle and its affiliates will have no further obligation to provide services to us, and we will have no further obligation to make annual payments of $1.8 million. See “Certain Relationships and Related Person Transactions—Consulting Agreement.
(4)   Represents other commitments consisting primarily of purchasing obligations.

Contingent Liabilities

Our contingent liabilities primarily comprise guarantees of third-party obligations, including indemnification obligations under purchase and sale agreements, letters of credit, payment guarantees, down payment guarantees and performance bonds, and other similar obligations in the ordinary course of business.

 

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Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, subsidiaries, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements and we have not accrued any liabilities related to such indemnification obligations in our audited financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements other than operating leases entered into in the ordinary course of business.

Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note 3, “Summary of Significant Accounting Policies,” to our audited financial statements as of and for the year ended December 31, 2018 included elsewhere in this prospectus. The preparation of the audited financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in many instances, the reported amounts of revenue and expenses during the applicable reporting period. A change in estimates and assumptions could have a material impact on our results. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the audited financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the audited financial statements.

Revenue Recognition

The Company early adopted IFRS 15 “Revenue from Contracts with Customers” on January 31, 2017 (Predecessor) and at December 31, 2017 (Successor) using the full retrospective application to all periods presented in the historical consolidated financial statements. Under the new standard, revenue is recognized when the entity can identify a contract, identify performance obligations, determine the transaction price, and allocate the transaction price between the purchase obligations. Revenue is then recognized as performance obligations are satisfied. Revenue is measured net of returns, trade discounts, and volume rebates. For sales of chemistry, revenues are recorded at the time of the transfer of ownership, according to the terms in the contract. These revenues are recorded at the time of the transfer of ownership, according to the terms in the contract.

Revenue also includes sales of equipment. Equipment revenue is recognized and allocated to the individual performance obligations when or as the customer obtains control over the goods or services to be performed under the contract. The contract assessment for sale of equipment, retrofits, and modifications revealed that only one performance obligation is given that includes the installation process which takes several months until the final qualification protocol is prepared and acceptance by the customer takes place. Thus, control is transferred over a certain period of time, in general, ending with the finalization of the protocol of qualification and acceptance of the installed equipment by the customer. For these sales, the Company uses the cost-to-cost input method and recognizes revenue on the basis of direct measurements of the value to the customer of the goods and services transferred to date relative to the remaining goods and services under the contract.

 

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Business Combination

We account for business combinations under the acquisition method of accounting pursuant to IFRS 3 “Business Combination”. This method requires the recording of acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, royalty rates, asset lives, and market multiples, among other items.

The fair values of intangible assets were estimated using an income approach, either the excess earnings method (customer relationships) or the relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Under the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life and applying a royalty rate to the revenue estimate. These intangible assets enable us to secure markets for our products, develop new products to meet the evolving business needs and competitively produce our existing products.

The fair value of real properties acquired was based on the consideration of their highest and best use in the market. The fair values of property, plant, and equipment, other than real properties, were based on the consideration that unless otherwise identified, they will continue to be used “as is” and as part of the ongoing business. In contemplation of the in-use premise and the nature of the assets, the fair value was developed primarily using a cost approach. The determination of the fair value of assets acquired and liabilities assumed involves assessing factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the date of the acquisition.

The results of operations for businesses acquired are reflected in the financial statements from the date of the Acquisition. See Note 5 to the Successor financial statements for further detail on the Acquisition and related accounting.

Income Tax

Income taxes include the current and deferred tax expenses or benefit not recognized in other comprehensive income, or directly in equity.

Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting periods, that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.

Deferred income taxes are calculated using the liability method on temporary differences between the carrying amounts of assets and liabilities and their tax basis, and on carry-forwards of unused tax losses and tax credits.

Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective periods of realization, provided they are enacted or substantively enacted by the end of the reporting period. Deferred tax assets are recognized to the extent that it is probable that they will be able to be utilized against future taxable income, based on the Company’s forecast of future operating results which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. Deferred tax liabilities are always provided for in full.

Deferred tax assets and liabilities are offset only when the Company has a right and intention to set off current tax assets and liabilities from the same taxation authority.

 

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Changes in deferred tax assets or liabilities are recognized as a component of tax income or expense in profit or loss, except where they relate to items that are recognized in other comprehensive income or directly in equity, in which case the related deferred tax is also recognized in other comprehensive income or equity, respectively.

Impairment of Goodwill

The recoverable amount of goodwill is tested for impairment annually, or more frequently if any indication of impairment exists.

Assets are grouped into cash-generating units (“CGUs”) and tested. A CGU is a group of assets that generates cash inflows that are largely independent of the cash inflows from other groups of assets. We determined that we operate as two CGUs, GMF, and EL. For this purpose, assets (and capital expenditure cash flows included in the discounted cash flows) are allocated between the two CGUs.

An impairment loss is recognized when the recoverable amount is lower than the carrying amount of the assets. The recoverable amount is the higher of the fair value (less costs of disposal) and value in use. The value in use of a CGU is determined by reference to the discounted expected future cash flows, based upon the management’s expectation of future economic and operating conditions.

See Note 5 to the Successor financial statements for further detail on the Acquisition and related accounting.

Derivative and Hedging Instruments

We occasionally use derivative instruments to manage our exposure to risks of changes in foreign exchange rates. Derivative instruments are measured at fair value. Under IAS 39 “Financial Instruments: Recognition and Measurement,” which was applicable to the Predecessor year ended December 31, 2016 and the month ended January 31, 2017 and the Successor year ended December 31, 2017, and IFRS 9 “Financial Instruments” which was applicable to the year ended December 31, 2018, changes in fair value of derivative instruments were recognized in the statement of income or, if cash flow or net investment hedge accounting was applied, in other comprehensive income for the effective portion of changes in fair value, and were recognized in the balance sheet in the accounts corresponding to their nature. The derivative instruments used by us are foreign currency forwards and options exclusively. Forward and option exchange contracts are valued on the basis of a comparison of the negotiated forward rates with the rates in effect on the financial markets at year-end for similar maturities.

We do not use any other derivatives. Our Opco Notes and Holdco Notes contain certain redemption features that are required to be accounted for separately at fair value as embedded derivatives. Embedded derivatives are measured at fair value and recognized in the balance sheet accounts corresponding to their nature. The embedded derivatives present in each of the Opco Notes and the Holdco Notes are valued as a single compound derivative based on a set of discounted cash flow scenarios in which binomial interest rate trees are created utilizing market based volatility assumptions and constant interest rate spreads to determine scenarios in which each option would be rationally exercised. Changes in fair value of such derivatives are recognized in “Other expense, net” in the statement of income.

Recent Accounting Guidance

IFRS 16 “Leases” is effective for annual periods beginning on or after January 1, 2019. We adopted this standard on January 1, 2019, by using the simplified retrospective approach. Therefore, the Company will not restate the comparative amounts for the year prior to adoption, as allowed by IFRS 16.C7, and will continue to report them under IAS 17 and IFRIC 4.

 

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IFRS 16 “Leases” changes the definition of a lease and provides a single on-balance lease accounting model for lessees. A lessee recognizes a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. We will recognize new assets and liabilities for operating leases with some exceptions. In addition, expenses related to leases will now change from straight-line operating lease expenses to depreciation charge for right-of-use assets and interest expense on lease liabilities. Lessor accounting remains similar to the current standard and no significant impact is expected for finance leases.

The actual impact of applying IFRS 16 “Leases” on our financial statements in the period of initial application will depend on future economic conditions, including our incremental borrowing rate at January 1, 2019, the composition of our lease portfolio at that date, our latest assessment of whether we will exercise any lease renewal options, and the extent to which we choose to use practical expedients and recognition exemptions.

We anticipate the adoption of IFRS 16 “Leases” will have less than a 5% impact to our total assets at December 31, 2018. Additionally, we do not expect the adoption of IFRS 16 “Leases” to impact our ability to comply with our senior secured credit facilities, Holdco Notes Indenture, and Opco Notes Indenture.

Quantitative and Qualitative Disclosures about Market Risk

Our business and financial results are affected by fluctuations in world financial markets, including interest rates and foreign currency exchange rates. We may in the future utilize derivative financial instruments (including LIBOR swap arrangements), among other methods, to hedge some of these exposures. We do not use derivative financial instruments for speculative or trading purposes.

Interest Rate Risk

We are subject to the risk that the fair value of future cash flows will fluctuate as a result of changes in prevailing market conditions. In order to manage that risk, our indebtedness includes both fixed and floating rate interest rates. The principal outstanding amount of our loans was $2,285.9 million of which $1,214.9 million bore interest at a fixed rate as of December 31, 2018.

As of December 31, 2018, an increase of interest rates of 100 basis points would have resulted in additional interest expense in the amount of $10.7 million for fiscal 2018.

Foreign Currency Exchange Rate Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to the U.S. dollar, the currency in which we prepare our financial statements. This is because when we generate revenues and cash flows in a currency other than the U.S. dollar, these amounts must be translated into U.S. dollars for purposes of preparing our financial statements. Accordingly, our reported financial results will generally benefit when the U.S. dollar is weak relative to other currencies and will generally be adversely affected when the U.S. dollar is strong relative to other currencies. Because the majority of our non-U.S. dollar revenues are denominated in Euros and RMB, we are particularly impacted by changes in the price of these currencies relative to the U.S. dollar. For Pro Forma Successor fiscal 2017, 18%, 33% and 40% of our revenues were denominated in Euros, RMB and other non-U.S. dollar currencies, respectively. For Successor fiscal 2018, 17%, 34% and 41% of our revenues were denominated in Euros, RMB and other non-U.S. dollar currencies, respectively.

In addition to this translational risk, we are subject to foreign currency transaction risk when we or any of our subsidiaries enter into transactions denominated in currencies other than the functional currency of the applicable entity. Specifically, we and our subsidiaries face the risk of adverse movements in the price of the applicable foreign currency relative to the applicable functional currency between the time a transaction is originally entered into and the time that it is settled.

 

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To mitigate our foreign currency translational risk, we may from time to time engage in translation exposure hedging. To mitigate our foreign transaction risk, we generally try to have our subsidiaries transact in their respective functional currencies and may from time to time enter into hedging arrangements. However, we do not manage our foreign currency exposure in a manner that eliminates all the effects of changes in foreign currency exchange rates on our revenues, cash flows, or the fair values of our assets and liabilities and as a result, changes in foreign currency exchanges rates may adversely affect us.

Commodity Price Risk

We currently have effective contractual arrangements with nearly all of our customers for passing through changes in the cost of palladium to them. Should these arrangements no longer be in place or effective in the future, we may need to hedge these costs and our results could be adversely affected.

 

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OUR INDUSTRY AND END-MARKETS

We are #1 in the global EL plating chemistry market and #1 in the global GMF plating chemistry market, with the top three players in each market collectively holding a significant portion of those markets. The remaining share of each market is generally held by small, local suppliers focused on specific technologies or geographies. Within our EL segment, we currently focus on a $2.3 billion portion of the broader $25 billion global electrochemical market. Within our GMF segment, we currently focus on a $2.1 billion portion of the broader $10 billion global surface finishing chemistry market.

We expect our markets to grow at a CAGR of approximately 3.6% from 2017 to 2021 driven by various secular growth trends such as digitalization, further device miniaturization, increased data volumes and processing speed requirements, the growth of the consumer class in emerging markets, increasing environmental regulations, and rising product quality and durability standards. We believe our unique business model, characterized by consistent and significant investment in R&D, a focus on high-tech growth applications, customer intimacy and integration, and chemistry-equipment solutions approach, positions us to continue to increase our market share. Over time, we expect our innovation, organic growth strategy, and potential bolt-on M&A will expand our market opportunity.

EL Industry and Trends

The EL plating chemistry market is a $2.3 billion industry and is expected to grow at a 3.7% CAGR from 2017 to 2021. We are #1 in the global EL plating chemistry market with a 23% market share. EL plating chemistry is used in electronic applications such as PCBs embedded in smartphones, automotive electronics, communication infrastructure, cloud computing infrastructure, and consumer electronics.

 

EL Chemistry Addressable Market     EL Competitive Landscape (2017)

 

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Source: Industry report by a major third-party consulting firm and/or management estimates.

(1)   Includes end-markets such as industrial & medical, and others.

The EL market benefits from broad digitalization and proliferation of PCBs and SCs, driven by prominent secular trends, including:

 

   

5G Infrastructure: The rollout of 5G wireless infrastructure is expected to require approximately twice the number of high-frequency base stations compared to those needed for 4G in order to support the higher data traffic volumes, speeds, and frequency capabilities. This increased infrastructure need will drive incremental demand for advanced PCBs and SCs. 5G is also expected to enable new applications

 

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that consume larger amounts of data, at higher speeds, and on higher frequencies, which is expected to increase the requirements for plating technology in devices transmitting, receiving, and processing such data.

 

   

Next-Generation Smartphones: The smartphone market is a highly innovation-intensive market characterized by constant technological advancements such as OLED displays, flexible screens, additional sensing features, and increased processing speeds. In addition, the new generation of smartphones will be 5G compatible. These advancements, along with increased battery life, require constant PCB miniaturization and greater line density, which drive demand for advanced plating solutions, such as mSAPs, to meet technical requirements.

 

   

Increasing Electronics Content in Automotive: The automotive industry is undergoing a fundamental and transformational change with an evolution towards electrification of powertrains (EVs and HEVs) and ADAS/autonomous vehicles. These trends will drive increasing electronic content per vehicle, with the value of electronic systems within a car expected to grow to 40% of total automotive manufacturing costs by 2030, creating significant additional demand for higher value PCBs and SCs.

 

   

Cloud Computing Infrastructure Growth: Adoption of big data-related analytics is expected to drive increased need for cloud computing infrastructure for data storage and IoT devices for data creation. There is significant industry investment in this area, with approximately 60 million servers estimated to be shipped globally from 2018 to 2022, compared to 44 million shipped globally from 2014 to 2018. Additionally, utilizing this data will call for increases in processing speed. Together, these factors are expected to drive adoption of, and demand for, advanced PCBs and SCs.

 

   

Adoption of Consumer and Industrial “Internet of Things” Devices: The growth of IoT results in increasing proliferation of connected sensors and devices in various consumer electronics (“smart” homes) and industrial (machine learning) applications. By 2022, there are expected to be 15.8 billion connected IoT devices, compared to 5.3 billion in 2018. As the capability of IoT devices increases, so will demand, driving higher volumes, device miniaturization, and state-of-the-art PCBs, HDIs, and SCs.

We are well-positioned to take advantage of these trends and the resulting complexity given our advanced chemistry capabilities, equipment integration, and reputation for quality and high-touch customer service.

 

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The following illustration outlines components of a high-end smartphone dependent upon EL chemistry:

 

 

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GMF Industry and Trends

The GMF plating chemistry market is a $2.1 billion industry and is expected to grow at a 3.4% CAGR from 2017 to 2021. We are #1 in the global GMF plating chemistry market, with a 21% market share. GMF plating chemistry is predominantly used in automotive surface finishing and other industrial applications such as heavy machinery, household appliances, fixtures, and construction.

 

GMF Chemistry Addressable Market      GMF Competitive Landscape (2017)

 

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Source: Industry report by a major third-party consulting firm and/or management estimates.

(1)   Includes end-markets such as household fixtures and decorative hardware, cosmetic, fashion, jewelry, energy, and others.

 

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The GMF market benefits from growing industrial- and consumer-driven demand, driven by prominent secular trends, including:

 

   

Increasing Quality Requirements: The trend towards improving product quality to meet longer warranty standards requires greater useful lives of parts and components, driving demand for high-performance GMF plating processes. These processes increase wear- and corrosion-resistance of our customers’ end-products.

 

   

Premiumization: The growth of the consumer class in emerging markets such as China and India has led to increased demand for light and premium vehicles, household appliances, and heavy machinery. This increased “premiumization” of products and demand for new products has led to more and higher-value chrome surfaces (e.g., satin finishes) and growing per-unit plating content. Consumer purchases in China and India are expected to grow from approximately $6.1 trillion in 2015 to approximately $25.0 trillion in 2030 and, as purchasing power in these markets continues to rise, these demand patterns should continue driving increased volumes of our products.

 

   

Increasing Environmental Regulation: New environmental requirements regulating specific substances used in certain chemical processes, water and waste disposal, and tightening emissions standards, such as Euro 6d-TEMP and China 6 among other measures, have led OEMs and our customers to emphasize sustainable products and systems. These new regulations are expected to increase demand for our market-leading environmentally sustainable solutions and technology.

 

   

Lightweighting: Increasingly stringent emissions standards, environmental regulations, and an emphasis on range for EVs and HEVs have increased demand for automotive weight-efficiency. This increase in lightweighting drives demand for GMF plating applications, particularly our POP and DECO products, which can enable substitution of metal for plastics with metallic finishes. Lightweighting also leads to new innovations because, as new lighter-weight materials are utilized, they will require tailored chemistry solutions to address new challenges, such as advanced corrosion protection requirements.

We are well-positioned to take advantage of these trends and the resulting complexity given our advanced chemistry capabilities, equipment integration, and reputation for quality and high-touch customer service.

 

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The following illustration outlines components of a medium-sized automotive dependent upon GMF chemistry:

 

 

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Equipment Industry and Trends

In addition to the chemistry markets, we also compete within the equipment markets for EL and GMF plating chemistry applications where we have the #1 global market share in EL horizontal plating equipment and the #3 market share in GMF plating equipment. We have also recently invested in VCP technology, which substantially increases our addressable market for plating equipment and will provide us with the opportunity to increase our market share and chemistry sales. We view our equipment offering as critical in supporting our chemistry sales, as well as in providing our comprehensive systems and solutions approach. We expect the equipment market to benefit from the same drivers as the underlying chemical markets. Consequently, we estimate the value of the EL equipment market to grow at a CAGR of approximately 3.7% from 2017 to 2021 and we expect the GMF equipment market to grow at a CAGR of approximately 3.4% from 2017 to 2021. As equipment represents a substantial upfront investment for our customers, procurement decisions for equipment products typically follow the characteristics of the capital and technological investment cycles. Once installed, our equipment is a source of recurring revenue and an important growth driver for our chemistry, spare parts/wear parts, service, line upgrades, retrofits, and technical support.

 

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BUSINESS

We are the leading global provider of specialty electroplating solutions delivering chemistry, equipment, and service for high-growth technology applications. We are #1 in the global EL plating chemistry market, #1 in the global GMF plating chemistry market, and the #1 global manufacturer of horizontal plating equipment for PCB production. Our solutions are used in a wide variety of attractive end-markets, including smartphones, communication infrastructure, cloud computing infrastructure, computing and consumer electronics, automotive electronics, and automotive surface finishing, as well as in numerous industrial and consumer applications such as heavy machinery and household appliances. We benefit from various secular growth trends such as digitalization, increasing data volumes and processing speed requirements, the growth of the consumer class in emerging markets, increasing environmental regulations, and rising product quality and durability standards. We expect these trends to not only increase demand for our customers’ end-products that use our plating chemistry, but also increase the amount and value of plating chemistry used in each end-product, allowing our growth to outpace underlying end-market volume growth.

We are the only major company in our industry that provides both chemistry and equipment, which we sell through both our EL and GMF segments. Our comprehensive systems and solutions approach leverages our unique offering of chemistry, equipment, and service. We believe this business model creates a sustainable competitive advantage that helps us achieve deep customer intimacy and allows us to continue to grow our market share and capitalize on positive market growth trends. This approach is supported by our 17 state-of-the-art global technology centers, which allow us to provide local service around the world and to respond in real-time to customer needs. The combination of our comprehensive systems and solutions approach, expansive global manufacturing and sales footprint, customer-driven investments in R&D, and superior technical expertise makes us an ideal electroplating and surface finishing solutions partner for our diverse customer base. This drives long-lasting relationships and an industry-leading financial profile, with fiscal 2018 EL and GMF Segment Adjusted EBITDA margins of 33.9% and 27.0%, respectively.

Electroplating refers to an advanced manufacturing process that involves the electrolytic deposition of a thin metal coating on a substrate. This technique is widely used in the manufacturing of products for a variety of end-markets, including smartphones, automotive, heavy machinery, and household appliances. Electroplating provides mission-critical functionality to the final end-products, such as interconnection in electronic devices, corrosion protection and wear-resistance of mechanical components, and high-value aesthetic appearance in metal finishing of decorative parts and surfaces. Our solutions are mission-critical for the PCB, SC, and surface finishing industries, but typically account for less than 1% of total end-product cost. Our customers rely on these solutions to increase processing speeds, further miniaturize devices, transform product appearance, and increase product durability. Our direct customers are among the most important suppliers to the world’s leading OEMs in our key end-markets. In order to satisfy demanding OEM specifications, we often partner with OEMs and our direct customers to develop comprehensive solutions that embed, or “design-in” our offerings. The “designed-in” nature of our solutions and the associated testing and certification processes, which can last up to five years, lead to high switching costs for our direct customers and OEMs. Our solutions create significant value for our customers by consistently and reliably enabling superior product performance. Our ability to consistently deliver a compelling customer value proposition has led to long-standing customer relationships, with an average relationship length of 24 years among our top 25 customers and, underpins our sustainable competitive advantage.

 

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Our chemistry is found in a variety of everyday products across a wide range of attractive end-markets:

 

 

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Our business is defined by an unwavering commitment to R&D with a focus on high-growth applications, close customer collaboration, and market-led innovation. We believe that we consistently invest more in R&D than our competitors with our fiscal 2018 R&D expense representing 4.8% of revenue for the same period. Approximately 90% of our annual R&D investments support our existing customers’ product improvement and short-term R&D needs. This close collaboration enables us to pioneer new high-value solutions with reduced commercial risk, while the remainder of our R&D investment is focused on developing next-generation technologies, often in partnership with leading OEMs, customers, and universities. Our historical and continued investment in R&D allows us to solve complex technical problems associated with cutting-edge product innovations, such as OLED displays, flexible screens, and ADAS.

Our well-invested global footprint is comprised of our 17 state-of-the-art global technology centers, 15 chemistry production facilities, and two equipment production facilities. We believe we have the largest EL and GMF plating presence in Asia, with seven production facilities and nine technology centers, a distinct and crucial element of our business that enables us to capture growth throughout this key region. We serve customers locally in over 40 countries with approximately 3,800 employees, of whom 1,900 are directly engaged in customer support, leveraging their technical expertise in sales, marketing and service to enhance our customers’ operations, improve existing practices, and enable the rapid commercialization of new products. Of these approximately 1,900 technical experts, several hundred work directly with our customers at their facilities. Our scale and strong local presence are key competitive differentiators, allowing us to leverage our technology portfolio to address our customers’ current and future requirements, while simultaneously providing localized, high-touch customer service.

We sell our chemistry and equipment to a diverse mix of customers who are typically manufacturers serving global markets, ultimately mitigating our exposure to any individual geography. For fiscal 2018, our top ten customers accounted for approximately 25% of our total chemistry revenue.

 

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Our Business Segments

Our business operates in two business segments, Electronics and General Metal Finishing, with both offering chemistry, equipment, and service globally.

 

 

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(1)   See “Prospectus Summary—Summary Historical and Pro Forma Financial Information.”
(2)   Segment Adjusted EBITDA does not reflect the impact of the adjustment regarding IFRS 16 “Leases” as discussed in footnote 3(h) in “Summary Historical and Pro Forma Financial Information.”
(3)   Other end-markets include aerospace & military, medical & industrial, decorative hardware, and others.

Although these segments each have distinct end-markets and customers, they both benefit from our centralized functions and global scale. In addition, we leverage our significant R&D spend and resulting innovations, as well as our shared technology centers and production facilities, to benefit from technologies, innovations, best practices, and other key learnings across our product portfolio and segments. This R&D coordination, along with our centralized functions, results in better commercial focus and increased productivity and profitability.

 

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Electronics

Overview

We are #1 in the global EL plating chemistry market, with a market share of approximately 23% based on our fiscal 2017 EL plating chemistry revenue. We provide plating chemistry, equipment, and service used in the manufacturing of electronics components, including PCBs and SCs, with demand driven by a variety of end-markets, including smartphones, communication infrastructure, cloud computing infrastructure, automotive electronics, and consumer electronics in which we have strong positions. In addition, we have invested and developed solutions that have enabled a new wave of technological innovation, including the next generation of automotive electronics and electronic devices created by our customers and OEMs. In connection with these investments, the number of patents and patent applications related to our EL offerings increased from 693 in fiscal 2005 to 1,326 in fiscal 2018, or 91.3%. Our expansive footprint allows us to serve the global electronics supply chain, as demonstrated by our longstanding relationships with 28 of the top 30 global PCB manufacturers. Our top ten EL customers accounted for approximately 52% of our total EL revenue for fiscal 2018.

 

 

Revenues by End-Market(1)

 

   

 

Revenues by Geography(3)

 

   

 

End-user Demand by Geography(4)

 

 

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