UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
Or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to
Commission File number
MKS INSTRUMENTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts | 04-2277512 | |
(State or other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
2 Tech Drive, Suite 201, Andover, Massachusetts | 01810 | |
(Address of Principal Executive Offices) | (Zip Code) |
(
(Registrant’s Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, | MKSI | Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
Large accelerated filer | ☒ | Accelerated filer | ☐ | Emerging growth company | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with or any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule
Aggregate market value of the voting and
Number of shares outstanding of the issuer’s common stock, no par value, as of February 19, 2020:
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for our 20202022 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission no later than 120 days after the close of our fiscal year ended December 31, 2019,2021, are incorporated by reference into Part III of this Annual Report on Form
TABLE OF CONTENTS
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Special Note Regarding Forward-Looking Statements
This Annual Report on Form
SUMMARY OF RISK FACTORS
Below is a summary of the principal factors that make an investment in MKS speculative or risky. The following summary does not contain all of the information that may be important to you, and you should read the below summary in conjunction with the more detailed discussion of risks set forth under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Risks Related to Our Pending Acquisition of Atotech
• | We may be unable to complete our pending acquisition of Atotech Limited, or Atotech, or otherwise realize the benefits of the acquisition of Atotech, which could have a material adverse effect on us, and we are exposed to significant risks relating to the acquisition of Atotech. |
• | Our consolidated indebtedness will increase substantially in connection with the acquisition of Atotech, which increased level of indebtedness could adversely affect us, including by decreasing our business flexibility. |
Risks Related to the COVID-19 Pandemic and other Widespread Health Crises
• | The COVID-19 pandemic has negatively impacted our business, and the pandemic and other widespread health crises may have a materially adverse effect on our business, financial condition and operating results. |
Risks Related to Operating a Global Business
• | We face significant risks associated with doing business internationally. |
• | Unfavorable currency exchange rate fluctuations may lead to lower operating margins or may cause us to change customer pricing, which could result in reduced sales and losses. |
Risks Related to Our Industries and Markets
• | Our business depends significantly on capital spending in the semiconductor and electronics manufacturing industries, which are characterized by periodic fluctuations that may cause a reduction in demand for our products. |
• | Many of the markets and industries we serve are highly competitive, are subject to rapid technological advancement, and have narrow design windows, and if we fail to introduce new and innovative products or improve our existing products, or if our products or the applications we invest in do not achieve widespread adoption, our business, financial condition and operating results will be harmed. |
• | We offer products for multiple markets and must face the challenges of supporting the distinct needs of each of the markets we serve. |
Risks Related to Our Operations
• | Supply chain disruptions or other manufacturing interruptions or delays could affect our ability to meet customer demand and lead to higher costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory. |
• | Our dependence on sole and limited source suppliers and international suppliers could affect our ability to manufacture products and systems. |
• | Our failure to successfully manage the transition of certain of our products to other manufacturing locations and/or to contract manufacturers would likely harm our business, financial condition and operating results. |
• | Our products could contain defects, which would increase our costs and seriously harm our business, financial condition, operating results and customer relationships. |
• | We outsource a number of services to third-party service providers, which decreases our control over the performance of these functions. Disruptions or delays at our third-party service providers could adversely impact our operations. |
• | The loss of net revenues from any one of our major customers would likely have a material adverse effect on us. |
• | Key personnel may be difficult to attract and retain. |
Acquisition Risks
• | As part of our business strategy, we have entered into and may continue to pursue business combinations and acquisitions that may be difficult to identify and complete, challenging and costly to integrate, disruptive to our business and our management, and/or dilutive to stockholder value. |
Financial Risks
• | The terms of our Term Loan Facility and ABL Facility impose significant financial obligations and risks upon us, limit our ability to take certain actions, and could discourage a change in control. |
• | A material amount of our assets represents goodwill and intangible assets, and our net income would be reduced if our goodwill or intangible assets become impaired. |
Legal, Tax, Regulatory and Compliance Risks
• | If significant tariffs or other trade restrictions on our products or components that are imported from or exported to China continue or are increased, our business, financial condition and operating results may be materially harmed. |
• | We are subject to international trade compliance regulations, and violations of those regulations could result in fines or trade restrictions, which could have a material adverse effect on us. |
• | Changes in tax rates or tax regulation or the termination of tax incentives could affect our operating results. |
• | We are subject to environmental regulations. If we fail to comply with these regulations, our business could be harmed. |
• | We are exposed to various risks related to legal proceedings, including product liability claims, intellectual property infringement claims, contractual claims and securities class action litigation, which if successful, could have a material adverse effect on our commercial relationships, business, financial condition and operating results. |
Risks Related to Cybersecurity, Data Privacy and Intellectual Property Protection
• | We are exposed to risks related to cybersecurity threats and incidents and subject to restrictions of and changes in laws and regulations governing data privacy and data protection that could have a material adverse effect on our business. |
• | Our proprietary technology is important to the continued success of our business. Our failure to protect this proprietary technology may significantly impair our competitive position. |
Risks Related to Owning Our Common Stock
• | Our quarterly operating results have fluctuated, and are likely to continue to vary significantly, which may result in volatility in the market price of our common stock. |
• | The market price of our common stock has fluctuated and may continue to fluctuate for reasons over which we have no control. |
• | We may not pay dividends on our common stock. |
• | Some provisions of our restated articles of organization, as amended, our amended and restated by-laws and Massachusetts law could discourage potential acquisition proposals and could delay or prevent a change in control. |
PART I
Item 1. | Business |
MKS Instruments, Inc. (“MKS” or the “Company”) was founded in 1961 as a Massachusetts corporation. We are a global provider of instruments, systems, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for our customers. Our products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, vacuum technology, temperature sensing, lasers, photonics, optics, precision motion control, vibration control and laser-based manufacturing systems solutions. We also provide services relating to the maintenance and repair of our products, installation services and training. Our primary served markets include semiconductor, industrial technologies, life and health sciences and research and defense.
Recent Events
Acquisitions
On July 15, 2021, we completed our acquisition of Photon Control Inc. (“Photon Control” and such acquisition, the “Photon Control Acquisition”), pursuant to a definitive agreement. Photon Control designs, manufactures and distributes a wide range of optical sensors and systems to measure temperature and position used in semiconductor wafer fabrication. At the effective time of the Photon Control Acquisition, each share of Photon Control’s common stock issued and outstanding as of immediately prior to the effective time of the Photon Control Acquisition was converted into the right to receive 3.60 per share in cash in Canadian dollars (“CAD”), without interest and subject to deduction for any required withholding tax. We paid to the former Photon Control securityholders aggregate consideration of CAD 379 million or $303 million, excluding related transaction fees and expenses. We funded the payment of the aggregate consideration with available cash on hand. Photon Control is included in our Light & Motion segment.
The Photon Control Acquisition has helped us deliver on one of our long-term strategic objectives, which is to broaden our portfolio of key technologies to better serve our customers. The Photon Control Acquisition further advances our strategy to enhance our Surround the Chamber® offering by adding optical sensors for temperature control for critical etch and deposition applications in semiconductor wafer fabrication.
On July 1, 2021, we entered into a definitive agreement (as amended from time to time, the “Implementation Agreement”) to acquire Atotech Limited (“Atotech”), a leading process chemicals technology company and a market leader in advanced electroplating solutions. Pursuant to the Implementation Agreement, we agreed to pay $16.20 per share in cash and 0.0552 of a share of our common stock for each outstanding common share of Atotech. At the time of the announcement of the acquisition, the total value of the aggregate cash and stock consideration was approximately $5.1 billion. The final value of the consideration will be determined at the time of the closing of the acquisition, which is expected to occur in the first quarter of 2022, subject to the satisfaction of certain closing conditions, including receipt of regulatory approval from China and approval by the Royal Court of Jersey. Our obligations to complete the acquisition are not subject to any financing condition. We intend to fund the cash portion of the transaction with a combination of available cash on hand and committed term loan debt financing. In connection with entering into the Implementation Agreement, we entered into (a) a commitment letter (the “Initial Commitment Letter”), dated as of July 1, 2021, with JPMorgan Chase Bank, N.A. and Barclays Bank PLC (collectively, the “Initial Commitment Parties”) and (b) joinders to the Initial Commitment Letter to add certain additional lender parties (the “Commitment Letter Joinders” and, together with the Initial Commitment Letter, the “Commitment Letter”) dated as of July 23, 2021, with the Initial Commitment Parties and the additional lenders party thereto (collectively, the “Supplemental Commitment Parties” and, together with the Initial Commitment Parties, the “Commitment Parties”), pursuant to which, subject to the terms and conditions set forth therein, the Commitment Parties committed to provide (i) a senior secured term loan credit facility in an aggregate principal amount of $5.3 billion (the “New Term Loan Facility”) and (ii) a senior secured revolving credit facility with aggregate total commitments of $500 million (the “New Revolving Credit Facility”). The New Term Loan Facility and New Revolving Credit Facility would refinance our existing term loan facility (the “Term Loan Facility”) and our existing asset-based revolving credit facility (the “ABL Facility”), respectively, and the New Term Loan Facility would be used to finance a portion of the acquisition and to refinance certain existing indebtedness of Atotech.
On October 22, 2021, we completed the syndication of the New Term Loan Facility, comprised of two tranches: a $4.7 billion loan at LIBOR plus 2.25%, a floor of 0.50% and 0.25% of original issue discount, and a Euro tranche of 0.5 billion
Euro (“EUR”), or approximately $0.6 billion at EURIBOR plus 2.75%, a floor of 0.00% and 0.25% of original issue discount. Subsequent to the syndication, the $4.7 billion tranche is expected to be modified to reference a term rate based on the Secured Overnight Financing Rate (plus an applicable credit spread adjustment) as the benchmark rate.
The Commitment Parties’ obligations under the Commitment Letter and the closing and initial funding under the New Term Loan Facility are subject to certain customary conditions including, without limitation, the consummation of the acquisition of Atotech in accordance with the Implementation Agreement, the accuracy of specified representations and warranties of us and other customary closing conditions.
Where You Can Find More Information
We file reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to you on the SEC’s internet sitewebsite at http://www.sec.gov.
Our website is http://www.mksinst.com. We are not including the information contained in our website as part of, or incorporating it by reference into, this annual reportAnnual Report on Form
Markets and Applications
Since our inception, we have focused on satisfying the needs of our customers by establishing long-term collaborative relationships. We have a diverse base of customers and our primary served markets are manufacturers of capital equipment forinclude semiconductor, manufacturing, industrial technologies, life and health sciences, as well as research and defense.
We have developed the following two product strategies that have been instrumental in delivering value to our customers and helping them solve their most complex problems:
• | Our Surround the Chamber® offering includes a wide range of products, design and development services, system level integration, training programs, calibration, service, and repair for our semiconductor customers. This unique combination of products and services enables our customers to solve the challenges of ultra-thin layers, new materials and complex 3D structures while maintaining quality and productivity levels. We have cultivated this strategy over the past two decades by adding critical enabling technologies to our portfolio. |
• | Our Surround the Workpiece® offering includes product design and development, system level integration, research and development, system, subsystem and component selection, and maintenance, repair and calibration services in the field of laser-based guidance and control for manufacturing processes. |
We believe our long history and deep expertise in solving critical problems positionsposition us well to address these challenges for our customers.
Semiconductor Market
A significant portion of our sales are derived from products sold to semiconductor capital equipment manufacturers and semiconductor device manufacturers. Our products are used in the major semiconductor processing steps, such as depositing thin films of material onto silicon wafer substrates, etching, cleaning, lithography, metrology, packaging and inspection.
drive the need for tighter process measurement and control, all of which MKS supports. We believe we are the broadest critical subsystem provider in the wafer fabrication equipment ecosystem and address over 85% of the market.
Approximately 49%62%, 55%59%, and 57%49% of our net revenues for the years2021, 2020 and 2019, 2018 and 2017, respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers.
Advanced Markets
In addition to the semiconductor market, our products are used in the industrial technologies, life and health sciences, as well asand research and defense markets.
Industrial Technologies
Industrial technologies encompasses a wide range of diverse applications, such asincluding advanced electronics manufacturing comprising flexible and rigid PCBprinted circuit board (“PCB”) processing/fabrication, electronic component manufacturing, glass coating laser marking, measurement and scribing, natural gas and oil production, environmental monitoring and electronic thin films. Electronic thin films are a primary component of numerous electronic products including flat panel displays, light emitting diodes, solar cells and data storage media. Industrial technologies manufacturers are located in developedOther applications include laser marking, measurement and developing countries across the globe.
Life and Health Sciences
Our products for life and health sciences are used in a diverse array of applications, including bioimaging, medical instrument sterilization, medical device manufacturing, analytical, diagnostic and surgical instrumentation, consumable medical supply manufacturing and pharmaceutical production. Our life and health sciences customers are located globally.
Research and Defense
Our products for research and defense are sold to government, university and industrial laboratories for applications involving research and development in materials science, physical chemistry, photonics, optics and electronics materials. Our products are also sold for monitoring and defense applications including surveillance, imaging and infrastructure protection. Major equipment providers
Approximately 38%, 41% and research laboratories are concentrated in China, Europe, Japan, South Korea, Taiwan, and the United States.
International Markets
A significant portion of our net revenues are from sales to customers in international markets. For the years2021, 2020 and 2019, 2018 and 2017, international net revenues accounted for approximately 53%57%, 51%55% and 50%53% of our total net revenues, respectively. A significant portion of our international net revenues were from sales to customers in China, Germany, Israel, Japan, South Korea and South Korea.Taiwan. We expect that international revenues will continue to account for a significant percentage of total net revenues for the foreseeable future, and that in particular, the proportion of our sales to Asian customers will continue to increase, due in large part to our acquisition of ESI, as approximately 80% of ESI’s customers are located in Asia. Long-lived assets, located in the United States, were $208 million and $147 million as of December 31, 2019 and 2018, respectively, excluding goodwill, intangible assets, and long-term
Reportable Segments, and Product and Service Offerings
We group our product/serviceproduct offerings into three groups. These three groups are: Advanced Manufacturing Components, Advanced Manufacturing Systems and Global Service. The Advanced Manufacturing Components is comprised of product revenues fromby the Company’sfollowing reportable segments: Vacuum & Analysis and(“V&A”), Light & Motion segments. The Advanced Manufacturing Systems is comprised of product revenues from the Company’s(“L&M”) and Equipment & Solutions segment.(“E&S”). Global Service is comprisedrepresents our service offerings and consists of total service revenuesservices from all three of the Company’sour reportable segments.
The V&A segment provides a broad range of instruments, components and Vacuum Control Solutions Products
• | Pressure and Vacuum Control Solutions Products, which consist of direct and indirect pressure measurement. |
• | Materials Delivery Solutions Products, which include flow and valve technologies as well as integrated pressure measurement and control subsystems, which provide customers with precise control capabilities. |
• | Power Solutions Products, which consist of microwave, power delivery systems, radio frequency matching networks and metrology products. Our power delivery solutions are used to provide energy to various etching, stripping and deposition processes. |
• | Plasma and Reactive Gas Products, whichconsist of reactive gas products that create reactive species. A reactive gas is used to facilitate various chemical reactions in the processing of thin films, including the deposition of films, etching and cleaning of films and surface modifications. |
The L&M segment provides a broad range of instruments, components and subsystems which provide customers with preciseare derived from our core competencies in lasers, photonics, optics, temperature sensing, precision motion control capabilities.
• | Laser Products, which consist of continuous wave and pulsed nanosecond and ultrafast lasers based on diode, diode-pumped solid-state and fiber laser technologies. |
• | Photonics Products, which include precision motion control, optical tables and vibration isolation systems, photonic instruments, high-performance optics and optical assemblies, opto-mechanical components, temperature sensing products for wafer fabrication systems, laser and LED measurement products, including laser power and energy meters and laser beam profilers and complex optical and photonic subsystems. |
The E&S segment provides a range of laser-based systems for PCB manufacturing, including flexible interconnect PCB processing systems and HDI solutions for rigid PCB manufacturing and substrate processing, as well as passive component MLCC testing.
• | Laser-based systems for PCB manufacturing,which include flexible interconnect PCB processing systems and high-density interconnect solutions for rigid PCB manufacturing and substrate processing. |
• | Multi-layer ceramic capacitor (“MLCC”) test systems, which include testing of ultra-small form factor MLCCs, used mainly in smartphones and other electronics manufacturing and large chip MLCCs, used mainly in automotive and infrastructure applications. |
For further information on our segments, see Note 21 to the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K.
Global Service includes:
• | Installation services and training for many of our products. |
• | Technical support offices located near many of our customers’ facilities. |
• | Repair and calibration services at internal service depots and authorized service providers located worldwide. |
• | Warranties on our products for periods that typically range from one to three years, with the majority of the warranties on our products ranging from one to two years. We typically provide warranties on our repair services for periods ranging from 90 days to up to one year, depending upon the type of repair. We also offer extended warranties ranging from one to five years. |
Customers
We sell our products and services to thousands of customers worldwide, in a wide range of end markets. Revenues from our top ten customers accounted for approximately47%, 44% and 33%, 41% and 43% of net revenues for 2021, 2020 and 2019, respectively, with the years 2019, 2018 and 2017, respectively. There were no individualincreasing percentages attributable to increasing semiconductor market sales. As a percentage of net revenues from our top ten customers, thatsemiconductor market revenue accounted for greater than 10%90% in each of our revenues for 2019.these years. Lam Research Corporation and Applied Materials, Inc. were our top two customers in 2021 and together accounted for 12% and 13% and Lam Research Corporation accounted for 11% and 12%approximately 27% of our net revenues. Both of these customers are in the semiconductor market. The semiconductor market has historically experienced cyclical variations in product supply and demand. It is subject to rapid demand shifts, which are difficult to predict, and we cannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry. For example, our semiconductor market revenue sequentially increased 32% in 2021, sequentially increased 49% in 2020, and sequentially decreased 19% in 2019. We believe net revenues forattributable to our semiconductor market customers are affected by the years ended 2018cyclical nature of the semiconductor market.
Sales and 2017, respectively.
Our worldwide sales marketing, service and supportmarketing organizations are also critical to our strategy of maintaining close relationships with semiconductor capital equipment manufacturers, semiconductor device manufacturers and manufacturers of advanced
applications. We market and sell our products and services through our global direct sales organization, an international network of independent distributors and sales representatives, our websites and product catalogs. As of December 31, 2019,2021, we had approximately 560800 sales and marketing employees worldwide. We maintain a marketing staff that identifies customer requirements, assists in product planning and specifications, and focuses on future trends in the markets we serve.
Research and Development
Our products incorporate sophisticated technologies to measure, monitor, deliver, analyze, power, control and controlimprove complex semiconductor and advanced manufacturing processes, thereby enhancing uptime, yield and throughput for our customers. Our products have continuously advanced as we strive to meet our customers’ evolving needs. We have developed, and continue to develop, new products to address industry trends, such as the shrinking of integrated circuit critical dimensions and technology inflections, and, in the flat panel display and solar markets, the transition to larger substrate sizes, which require more advanced processing and process control technology.technology, the continuing drive toward more complex and accurate components and devices within the handset and tablet market, the transition to 5G for both devices and infrastructure, supporting the growth in units and via counts of the High Density Interconnect PCB drilling market, and the industry transition to electric cars in the automotive market. In addition, we have developed, and continue to develop, products that support the migration to new classes of materials, ultra-thin layers, and 3D structures that are used in small geometry manufacturing.
We involve our marketing, engineering, manufacturing and sales personnel in the development of new products in order to reduce the time to market for new products. Our employees also work closely with our customers’ development personnel, helping us to identify and define future technical needs on which to focus research and development efforts. We support research at academic institutions targeted at advances in materials science, and semiconductor process development.
As of December 31, 2019,2021, we had approximately 760900 research and development employees located in facilities around the world. Our research and development expenses were $164.1$200 million, $135.7$173 million and $132.6$164 million for the years2021, 2020 and 2019, 2018 and 2017, respectively. Our research and development efforts include numerous projects, none of which are individually material, and generally have a duration of 3 to 30 months, depending upon whether the product is an enhancement of existing technology or a new product. Our current initiatives include projects to enhance the performance characteristics of older products, to develop new products and to integrate various technologies into subsystems.
Manufacturing
Manufacturing activities include the assembly and testing of components and subassemblies, which are integrated into our products. Our manufacturing facilities are located in Austria, Canada, China, France, Germany, Israel, Italy, Romania, Singapore, South Korea and the United States. We outsource somealso rely on significant subcontracted operations in Mexico and selected contract manufacturers in Asia. Our business depends on the timely supply of products and services that meet the rapidly changing technical and volume requirements of our assembly work.customers, which depends in part on the timely delivery of parts, components and subassemblies from suppliers, including contract manufacturers. We purchase a wide range of electronic, optical, mechanical and electrical components, some of which are designed to our specifications. We consider our lean manufacturing techniques and responsiveness to customers’ significantly fluctuating product demands to be a competitive advantage. As of December 31, 2019,2021, we had approximately 3,4004,200 manufacturing-related employees.
Backlog
We generally schedule production of our products based upon our customers’ delivery requirements. Our lead times are very short, as a large portion of our orders are received and shipped within 90 days. While backlog is calculated on the basis of firm orders,In many cases, orders may be subject to cancellation or delay, in many cases,rescheduling by the customer with limited or no penalty. Our backlog at any particular date, therefore, is not necessarily indicative of actual sales which may be generated for any succeeding period. Historically, our backlog levels have fluctuated based upon the ordering patterns of our customers and changes in our manufacturing capacity. Beginning in 2021, semiconductor market customers generally both increased order volumes and extended lead times. We believe recent ordering patterns reflect our customers’ efforts to mitigate the impact of supply chain constraints and provide us with increased visibility to schedule production and secure materials.
Competition
The market for our products is cyclical and highly competitive. Principal competitive factors include:
Product quality, performance and price;
Historical customer relationships;
Breadth of product line;
Ease of use;
Manufacturing capabilities and responsiveness; and
Customer service and support.
Although we believe that we compete favorably with respect to these factors, we can make no assurances that we will continue to do so.
We encounter substantial competition in most of our product lines, although no single competitor competes with us across all product lines. Certain of our competitors may have greater financial and other resources than we do. In some cases, competitors are smaller than we are, but are well established in specific product niches.
For example, Advanced Energy Industries, Inc. offers products that compete with our power deliverysolutions and reactive gas generator products. Hitachi Ltd. and Horiba Ltd. products compete with our mass flow controllers. Inficon, Inc. offers products that compete with our vacuum measurement and gas analysis products and our vacuum gauging products. Brooks Instrument and VAT, Inc. offer products that compete with our vacuum components. Sigma Koki Co., Ltd. offers products that compete with our optics and photonics products. Coherent, Inc. offers products that compete with our lasers and photonics instruments. Qioptiq offers products that compete with our laser and optics products. IPG Photonics, Inc. offers products that compete with our laser products. Jenoptik AG offers products that compete with our laser, optics, and photonics products. PI miCos GmbH offers products that compete with our photonics products. Thorlabs, Inc. offers products that compete with our optics, lasers and photonics products. Trumpf Group, Lumentum Holdings Inc., Edgwave GmbH, and Amplitude Systemes SA, Wuhan Raycus Fiber Laser Technologies Co., Ltd, Maxphotonics Co. Ltd., Photonics Industries, Advanced Optowave Corporation and Light Conversion UAB offer products that compete with our laser products. Our laser systems primarily compete with laser systems provided by Via Mechanics, Ltd., EO Technics Co., Ltd., LPKF Laser & Electronics AG, Mitsubishi Electric Corporation, and Han’s Laser Technology Industry Group Co., Ltd. Our component test products primarily compete with Humo Laboratory Ltd., as well as component manufacturers that develop systems for internal use.
Patents and Other Intellectual Property Rights
We rely on a combination of patent, copyright, trademark and trade secret laws and license agreements to establish and protect our proprietary rights. As of December 31, 2019,2021, we owned 724682 U.S. patents and 1,5011,656 foreign patents that expire at various dates through 2039.2044. As of December 31, 2019,2021, we had 10790 pending U.S. patent applications. Foreign counterparts of certain U.S. applications have been filed or may be filed at the appropriate time.
We require each of our employees, including our executive officers, to enter into standard agreements pursuant to which the employee agrees to keep confidential all of our proprietary information and to assign to us all inventions while they are employed by us.
Government Regulations
We are subject to various federal, state, local and international laws and regulations relating to the development, manufacture, sale and distribution of our products and services, and it is our policy to comply with the laws in every jurisdiction in which we conduct business. Regulations include but are not limited to those related to environment, corruption, bribery, import and export controls, competition, product safety, workplace health and safety, employment, labor and data privacy. The following describes certain significant regulations that may have a material effect on our capital expenditures, earnings and competitive position. For additional information about risks related to government regulations, please refer to “Risk Factors – Legal, Tax, Regulatory and Compliance Risks” in Part I, Item 1A of this Annual Report on Form 10-K.
Trade Compliance
We are subject to trade compliance laws in both the United States and other jurisdictions where we operate, including export regulations such as the U.S. Export Administration Regulations, administered by the U.S. Department of Commerce’s Bureau of Industry and Security, and the International Traffic in Arms Regulation, administered by the Department of State’s Directorate of Defense Trade Controls.
Environmental Regulations
We are subject to various, federal, state, local and international regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and waste and the cleanup of contaminated sites.
Human Capital
In order to compete and succeed in highly competitive markets and industries that are subject to rapid technological change, we believe it is critical to attract, motivate and retain a dedicated, talented and innovative team of employees. As part of these efforts, we strive to foster a diverse, equitable and inclusive community, invest in continuous learning and development, engage meaningfully with employees, offer a competitive compensation and benefits program and provide a safe and healthy workplace.
As of December 31, 2019,2021, we employedhad a total workforce of approximately 5,500 persons.6,400 individuals across 19 countries, with 26% located in the Asia-Pacific region, 24% located in Europe and the Middle East and 50% located in North America. Of our total workforce, approximately 6,000 were employees and approximately 400 were temporary workers. Of our total workforce, 14% work in research and development, 66% work in operations, manufacturing, service and quality assurance, and 20% work in sales, order administration, marketing, finance, legal, information technology, general management and other administrative functions.
Diversity, Equity and Inclusion
At MKS, our commitment to diversity, equity and inclusion (“DE&I”) is core to our culture. We believe that diversity of gender, race, ethnicity, sexual orientation, culture, education, background and experience fuels innovation and results as well as enables our ongoing success depends uponemployees to succeed. Our executive team is comprised of 20% female members and 20% racially diverse members. Our Board of Directors is comprised of 38% female members, 25% racially diverse members and 13% LGBTQ+, members and our continued abilityLead Director is a woman. We have been recognized for our commitment to advancing women’s representation on the boards of directors of public companies.
We have taken a number of steps to foster DE&I at MKS:
• | Over the last two years, approximately 240 of our leaders around the world completed a six-week DE&I program hosted by a consulting firm recognized as best-in-class in the area of DE&I capability building. |
• | In 2021, we offered DE&I training for all employees and began bias awareness training for our global talent acquisition team. |
• | We proactively provide our hiring managers with diverse candidate slates in our employee recruiting process and, in accordance with our Corporate Governance Guidelines, seek diverse candidates for the pool from which our Board of Director nominees are chosen. |
• | We regularly conduct robust analyses of pay practices across gender globally and other diversity factors within the United States to detect any existing disparities within base and total compensation, taking prompt and effective action to correct any identified disparities. Our most recent analysis of our global employees' compensation, which was conducted over the past two years, has, with minimal required adjustments, resulted in equitable pay for our employees. |
• | We offer regional and global initiatives that afford employees opportunities to engage in mentoring programs, book reading groups and facilitated discussion groups, webinars and workshops that celebrate and recognize awareness months and days. |
Learning and Development
MKS is committed to investing in learning and professional development. Our employees have access to a wide range of programs, classes and resources to help them excel in their careers and share what they learn with their colleagues. Our performance management process includes performance feedback and career development discussions that are dynamic and
actionable throughout the year. In 2021, we broadly rolled out a course to develop our focus on employee engagement, change management and leadership excellence. Over the last two years, our leaders also completed the DE&I course described above. In addition, we provide financial support for college and graduate education for U.S. employees and access to online learning for all employees in local languages to help further the careers of our entire workforce.
Employee Engagement
MKS is committed to meaningful engagement with its employees. In 2021, MKS conducted its first global employee engagement survey, the results of which were thoroughly assessed and shared with our Chief Executive Officer and executive leadership team as well as our Board of Directors. We plan to conduct employee engagement surveys on an annual basis and use the feedback we receive to examine current practices and drive new initiatives.
Our executive management team also conducts quarterly calls with employees around the world to ensure they are connected to the progress of the Company. In addition, during the COVID-19 pandemic, we have increased our employee engagement efforts through employee surveys and regular written and video communications.
Compensation and Benefits
MKS is committed to providing total compensation packages that attract, motivate and retain highly skilledour employees. OutsideAdditionally, MKS is committed to recognizing and rewarding each employee’s sustained performance and results. In 2020, we launched a recognition program for all U.S. employees, which allows peer-to-peer recognition and recognition by managers. We plan to expand our recognition program globally in 2022. We also maintain a global flexible work policy that will extend beyond the ongoing COVID-19 pandemic. We are committed to ensuring that our total compensation packages are externally competitive while supporting our business plans and strategies.
As employee turnover is an indicator of employee satisfaction, we monitor turnover globally. MKS has a very stable and committed workforce, as evidenced by low voluntary turnover. Our 12-month rolling average for voluntary turnover at the end of 2021 was below 7%. Our employee average tenure is more than 10 years.
Health and Safety and Pandemic Response
MKS is committed to providing a safe and healthy workplace for all employees. We accomplish this through strict compliance with applicable laws and regulations regarding workplace safety, including recognition and control of workplace hazards, tracking injury and illness rates, utilizing a global travel health program and maintaining detailed emergency and disaster recovery plans. We also offer employees and eligible family members a full range of health and wellness programs, as well as many clinical and administrative services.
MKS’ top priority during the ongoing COVID-19 pandemic has been and continues to be protecting the health and safety of our employees and their families, our customers and our community. The commitment to this effort is evidenced by the extensive planning and numerous actions MKS swiftly took to respond to the pandemic, including the development and implementation of an infectious disease playbook, a work-from-home program, health check protocols and screenings for all employees working on site, new process workflows at physical sites to ensure reduced contact for employees working on site, contact tracing processes and protocols, quarantining and testing protocols for exposure and positive tests, travel guidelines and protocols to ensure employees who must travel for work can do so safely, and phased return-to-work plans and approval processes to enable non-manufacturing employees to return to work when permitted by local government regulations. MKS continues to maintain workplace flexibility such as working remotely where possible to reduce the number of people who are on site each day.
Additional information regarding MKS’ activities related to its people and sustainability can be found in our Corporate Social Responsibility Report, which is accessible through the Corporate Social Responsibility section of our website at https://www.mksinst.com/corporate-social-responsibility. Our Corporate Social Responsibility Report is updated periodically. This website address is intended to be an inactive textual reference only. None of the United States, there are certain countries where our employees are representedinformation on, or accessible through, MKS’ website is part of this Annual Report on Form 10-K or is incorporated by works councils or trade unions, as is common practice or required by law. We believe our employee relations are good.
Item 1A. | Risk Factors |
This section describes certain risks we face in our business. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business. If any of the events or circumstances described in the following risksthis section actually occurs, our business, financial condition or operating results wouldcould suffer, and the tradingmarket price of our common stock could decline. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this report and our other filings with the Securities and Exchange Commission.
Risks Related to Our Pending Acquisition of Atotech
We may be unable to complete our pending acquisition of Atotech Limited, or Atotech, or otherwise realize the benefits of the acquisition of Atotech, which could have a material adverse effect on us, and we are exposed to significant risks relating to the acquisition of Atotech.
On July 1, 2021, we announced that we had entered into a definitive agreement (as amended, the “Implementation Agreement”) to acquire Atotech, a leading process chemicals technology company (the “Atotech Acquisition”). Pursuant to the Implementation Agreement, and subject to the terms and conditions contained therein, at the closing of the acquisition, we will acquire all of the outstanding shares of Atotech for $16.20 in cash and 0.0552 of a share of MKS common stock for each Atotech common share. At the time of the announcement of the acquisition, the total value of the aggregate cash and stock consideration was approximately $5.1 billion. The final value of the consideration will be determined at the time of the closing of the acquisition, which is expected to occur in the first quarter of 2022, subject to satisfaction of certain closing conditions, including receipt of regulatory approval from China and approval from the Royal Court of Jersey. The failure to receive regulatory approval from China or the Royal Court of Jersey, or the failure to satisfy any other closing condition could delay the completion of the acquisition or prevent it from occurring. Any delay in completing the acquisition could cause us to not realize some or all of the benefits that we expect to achieve. Further, even if we are unable to complete the acquisition, we will still have incurred substantial expenses and diverted significant management time and resources from our ongoing business. There can be no assurance that the remaining closing conditions will be satisfied or waived or that the transaction will be completed.
Until the completion of the acquisition, we will operate independently of Atotech. It is possible that the pendency of the acquisition could result in the loss of key employees, higher than expected costs, diversion of management attention or the disruption of our ongoing businesses, which may adversely affect the combined company’s ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits and cost savings of the acquisition.
Our obligations under the Implementation Agreement to acquire Atotech are not subject to any financing condition. In connection with the proposed acquisition, as further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Events” contained in Part II, Item 7 of this Annual Report on Form 10-K, we entered into a debt commitment letter with JPMorgan Chase Bank, N.A. and Barclays Bank PLC (together with certain additional lenders party thereto via joinder, the “Commitment Parties”) to obtain a senior secured term loan credit facility in the aggregate principal amount of $5.3 billion to finance, in part, the acquisition and a $500 million senior secured revolving credit facility, which may be used to finance, in part, the payment of fees and expenses in connection with the acquisition, for working capital and for general corporate purposes. The obligations of the Commitment Parties under the commitment letter are subject to certain conditions. We can provide no assurance that the Commitment Parties will ultimately provide the financing as contemplated by the commitment letter or that the terms of any indebtedness we incur will not be less favorable to us than we expect.
Although we have completed the syndication of the aforementioned senior secured term loan and senior secured revolving credit facilities, the closing and initial funding thereunder is subject to certain customary conditions including, without limitation, the consummation of the acquisition of Atotech in accordance with the Implementation Agreement, the accuracy of our specified representations and warranties and other customary closing conditions.
We have incurred, and we will continue to incur, transaction fees, including legal, regulatory and other costs associated with closing the transaction, as well as expenses related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. We may be unable to offset transaction and integration-related costs with the elimination of duplicative costs or the realization of other efficiencies related to the integration of the business.
The success of the Atotech Acquisition, if completed, will depend in part on our ability to realize the anticipated business opportunities and growth prospects from combining our business with that of Atotech. We may never realize these business opportunities and growth prospects. We do not have previous experience in the specialty chemistry industry, which Atotech serves. The specialty chemistry industry is also subject to highly complex environmental regulations, across multiple jurisdictions around the globe, and may expose us to significant additional liabilities for past or future activities. There can be
no assurances we will have success in this industry. In addition, we may experience increased competition that limits our ability to expand our business. Integrating operations will be complex and will require significant effort and expenditures on the part of both us and Atotech. Combining our businesses could make it more difficult to maintain relationships with customers, employees or suppliers. If we are unable to successfully or timely integrate the operations of Atotech’s business, we may be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the acquisition and our business could be adversely affected.
Our consolidated indebtedness will increase substantially in connection with the Atotech acquisition, which increased level of indebtedness could adversely affect us, including by decreasing our business flexibility.
In connection with the Atotech Acquisition, we expect to incur up to $5.3 billion of indebtedness, which could have the effect, among other things, of reducing our flexibility to respond to changing business, industry and economic conditions, limiting our ability to obtain financing in the future and increasing interest expense. We will also incur various costs and expenses associated with our indebtedness. The amount of cash required to pay interest on our increased indebtedness levels following completion of the acquisition, and thus the demands on our cash resources, will be greater than the amount of cash flows required to service the levels of indebtedness we have incurred prior to the transaction. Our increased levels of indebtedness following completion of the acquisition could also reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the acquisition, or if the financial performance of the combined company does not meet current expectations, then our ability to service our indebtedness may be adversely impacted.
All of the indebtedness to be incurred in connection with the acquisition will bear interest at variable interest rates. If interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our cash flows. Although we plan to hedge a portion of the variable rate indebtedness, any hedges are likely to carry a higher initial interest cost or require the payment of premiums to our counterparties. In addition, our credit ratings affect the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations. While we have obtained ratings of our indebtedness from nationally recognized statistical rating organizations in connection with the debt financing, there can be no assurance that we will achieve or maintain any particular rating in the future. Moreover, we may be required to raise substantial additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements. Our ability to arrange additional financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. There can be no assurance that we will be able to obtain additional financing or refinancing on terms acceptable to us or at all.
In addition, while we expect that the negative covenants in the definitive agreements governing our indebtedness will not affect our ability to pay quarterly dividends in the future, consistent with past practices, the terms of such definitive agreements will restrict our ability to pay dividends in certain circumstances.
Risks Related to the COVID-19 Pandemic and other Widespread Health Crises
The COVID-19 pandemic has negatively impacted our business, and the pandemic and other widespread health crises may have a materially adverse effect on our business, financial condition and operating results.
The COVID-19 pandemic has subjected, and the evolution of the COVID-19 pandemic or the emergence of other widespread health crises may continue to subject, our business, financial condition and operating results to a number of risks, including:
• | Supply chain disruptions and other operational challenges, including shortages of and significant price increases and increased lead times for raw materials, components and subassemblies, increased employee turnover, increased health and safety measures, site closures, and other restrictions on the movement of people, goods and raw materials, which could frustrate our ability to obtain materials from suppliers and meet customer demand, in each case on favorable terms, on a timely basis, or at all, harming our relationships with customers, creating opportunities for competitors and exposing us to contractual disputes or liability; |
• | The implementation of government mandates and other regulatory actions, including business shutdowns, manufacturing restrictions, and quarantines, which could reduce or halt our operations or the operations of our customers and suppliers, carry into the future for an extended or unknown duration, and contain complex requirements that make compliance difficult; |
• | Decreased employee productivity or availability, whether due to illnesses or due to the measures we or government authorities may take to mitigate their spread and effects, including site closures, restrictions on travel and vaccine mandates, which could lead to employee attrition; and |
• | A decline in industry and global economic conditions that reduces demand from and weakens the financial health of our customers, resulting in delayed or canceled orders, requests for payment deferrals or other contract modifications, and, if we do not anticipate significant or sudden decreases in order patterns, excess inventory. |
These risks may be heightened in certain geographies, segments and markets, or under certain other circumstances. For example, in the first half of 2020, our research and defense market was negatively impacted by university and research lab closures caused by the COVID-19 pandemic. Since the first quarter of 2021, we have experienced significant constraints due to global supply chain disruptions, including procuring electronic components, which have negatively impacted, and continue to impact, our sales, costs and margins, and our ability to produce timely products to meet customer demand. In addition, since 2021, we believe certain of our semiconductor market customers have increased order volumes to mitigate the impact of supply chain constraints arising from the COVID-19 pandemic, which could lead to a future decrease in order volumes. In the future, we may be more likely to be affected by government mandates in China, where we and our customers and suppliers have a significant presence and where the government has taken strict measures to eliminate the spread of COVID-19. We are more likely to be affected by supply chain disruptions where we rely on sole and limited source suppliers for raw materials, components and subassemblies critical to the manufacturing of our products due to unique component designs, including customers’ “copy exact” requirements, or specialized quality and performance requirements. In addition, the effects of the COVID-19 pandemic and other widespread health crises could exacerbate the other risks described in this Annual Report on Form 10-K.
Risks Related to Operating a Global Business
We face significant risks associated with doing business internationally.
We face significant risks from our substantial operations in and sales to international markets. We maintain operations in more than 15 countries, with significant employee populations and/or facilities in Asia (especially China, Israel and South Korea), Europe (especially France and Germany) and Mexico, and we make sales to customers in approximately 90 countries, with a significant number of customers in Asia (especially China, South Korea, Japan and Taiwan) and Europe (especially Germany). Our presence in international markets, and the risks associated with doing business internationally, may change or increase as our business grows. These risks include:
• | Adverse changes or instability in political or economic conditions in countries or regions where we and our customers and suppliers are located, including currency devaluations, debt defaults, lack of liquidity and recessions; |
• | Challenges of administering our diverse business and product lines globally; |
• | Actions of government regulatory authorities, including embargoes, sanctions (including “anti-blocking” rules), executive orders, import, export and reexport restrictions, antiboycott laws, tariffs (including anti-dumping and countervailing duties), currency controls, trade restrictions and trade barriers (including retaliatory actions), license requirements (including license-specific restrictions and provisos), citizenship requirements, environmental requirements and other rules and regulations (including extraterritorial rules and regulations) applicable to the manufacture, import, export and reexport of our products, all of which may be complicated and conflicting, require significant investments in cost, time and resources for compliance, and impose strict and severe penalties for noncompliance; |
• | Political and social attitudes, laws, rules, regulations and policies within countries that favor domestic companies over non-domestic companies, including customer- or government-supported efforts to promote the development and growth of local competitors; |
• | Greater risk of violations of U.S. and international laws and regulations, including anti-corruption and trade laws, by our employees, sales representatives, distributors or other agents; |
• | Increased credit risk and differing financial conditions of customers and distributors, resulting in longer accounts receivable collection periods and payment cycles, increased bad debt write-offs and additions to reserves; |
• | Overlapping, burdensome and differing tax structures and laws; |
• | Potential for certain tax benefits to be revoked or reclaimed; |
• | Reduced, inconsistent or differing protection of intellectual property; |
• | Increasingly stringent privacy, security, consumer and data protection laws, including the E.U. General Data Protection Regulation, the Data Security Law of China and the China Personal Information Protection Law; |
• | Shipping, logistics and other supply chain complications or cargo security requirements, including forced-labor mitigation rules; |
• | Adverse currency exchange rate fluctuations; |
• | Restrictions on currency conversion or the transfer of funds, including restrictions on certain financial institutions themselves; |
• | Compliance costs, withholding taxes and legal and contractual restrictions associated with repatriating overseas earnings; |
• | Increased risk of exposure to significant health concerns (such as COVID-19, Sudden Acute Respiratory Syndrome, Avian Influenza and the H7N9, Ebola or Zika viruses); |
• | Differences in business practices, culture, language and management style; |
• | Complex, burdensome and differing labor and employment laws and practices; |
• | Changing labor conditions and difficulties staffing, managing, and rationalizing our foreign operations, including, rising wages and other labor costs, retention of employees, the formation of labor unions and works councils and the maintenance of defined benefit pension plans; |
• | Nationalization or other expropriation of private enterprises; |
• | Involuntary geopolitical annexations or accessions through military force or otherwise; and |
• | Increased risk of exposure to civil unrest, terrorism and military activities. |
If we experience any of the risks associated with doing business internationally, our business, financial condition and operating results could be significantly harmed.
We have significant facilities and operations and a considerable number of employees in Israel. A number of our products are manufactured in facilities located in Israel. The Middle East remains a volatile region, and the future of peace efforts between Israel and neighboring countries remains extremely uncertain. Any armed conflicts or significant political instability in the region is likely to negatively affect business conditions and could significantly disrupt our operations in Israel. Further, many of our employees in Israel may be called for active military duty under emergency circumstances. If a military conflict or war arises, our operations in Israel could be disrupted by the absence of one or more key employees or a significant number of other employees. Any such disruptions could adversely affect our business.
The U.S. government continues to take action against certain of our customers, particularly in Asia, including indictments for various criminal charges, and in some cases, restrictions on doing business with these customers (or restrictions on third parties from engaging designated entities), including the suspension of our ability to fill outstanding orders. These actions have caused us, and may in the future cause us, to lose anticipated revenue from product sales, the amount of which could be significant. In addition, these or other customers could elect to purchase products from unaffected non-U.S. competitors, even when trade restrictions are not in place, jeopardizing our long-term relationship with them. Further, compliance with regulatory restrictions may cause us to breach contractual obligations, which could result in costs, penalties and litigation.
Additionally, potential customers in certain countries, particularly in Asia, have a strong preference for technology and products developed by suppliers based in their home countries. The trade dispute between the U.S. government and the Chinese government has reinforced and broadened this preference, as potential and existing customers seek to avoid the uncertainty related to the trade dispute. While we have attempted to mitigate these issues by establishing a significant local presence in many of these countries, companies like us that are based elsewhere remain at a disadvantage.
Unfavorable currency exchange rate fluctuations may lead to lower operating margins or may cause us to change customer pricing, which could result in reduced sales and losses.
Although we report our financial position and operating results in U.S. dollars, a significant portion of our net revenues are from customers in international markets and we have facilities where costs are incurred in currencies other than the U.S. dollar. In addition, we carry certain assets and liabilities in currencies other than the U.S. dollar. Our expected indebtedness for the Atotech Acquisition includes a Euro tranche of EUR 0.5 billion, or approximately $0.6 billion. Currency exchange rate fluctuations could have an adverse effect on our assets, liabilities, net revenues, expenses and operating results and we could experience losses with respect to our hedging activities. Unfavorable exchange rate fluctuations could require us to increase or decrease prices to customers, which could result in lower net revenues from such customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our operating results would be adversely affected by declining net revenues or profit margins for our products. Such exchange rate fluctuations could also increase the costs and expenses of our non-U.S. operations when translated into U.S. dollars or require us to modify our current business practices. In addition, most sales made by our foreign subsidiaries are denominated in the currency of the country in which these products are sold and the currency they receive in payment for such sales could be less valuable on a U.S. dollar basis at the time of
receipt as a result of exchange rate fluctuations. We enter into foreign exchange forward contracts to reduce a portion of our currency exposure arising from intercompany sales of inventory as well as intercompany accounts receivable and intercompany loans. However, we cannot be certain that our efforts will be adequate to protect us from significant exchange rate fluctuations or that such efforts will not expose us to additional exchange rate risks.
Risks Related to Our Industries and Markets
Our business depends significantly on capital spending in the semiconductor and consumer electronics manufacturing industries, which are characterized by periodic fluctuations that may cause a reduction in demand for our products.
Our business depends upon the capital expenditures of semiconductor device manufacturers, which in turn depends upon the demand for semiconductors. Approximately 49%62%, 55%59% and 57%49% of our net revenues for the years2021, 2020 and 2019, 2018 and 2017, respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers. We anticipate that sales to these customers will continue to account for a substantial portion of our net revenues. Ourrevenues. Although our business is not as dependent upon our industrial technologies market, also experiences cyclical fluctuations, resulting largely from the ebb and flow of demand for consumercapital expenditures in electronics particularly mobile phones. While
During downturns in the semiconductor and consumer electronics manufacturing industries, periods of overcapacity have resulted in rapid and significantly reduced demand for our products, which may result in lower gross margins due to reduced absorption of manufacturing overhead, as our ability to rapidly and effectively reduce our cost structure in response to such downturns is limited by the fixed nature of many of our expenses in the near term. Further, our ability to reduce our long-term expenses is constrained by our need to continue investment in next-generation product technology and to support and service our products. In addition, due to the relatively long manufacturing lead times for some of the products we sell to these industries, we may incur expenditures or purchase raw materials or components for products we are unable to sell. As a result, downturns in these industries may materially harm our business, financial condition and operating results. Conversely, whenduring upturns in these industries, occur, we may have difficulty rapidly and effectively increasing our manufacturing capacity to meet sudden increases in customer demand. If we fail to do so, we may lose business to our competitors and our relationships with our customers may be harmed.
Many of the markets and industries we serve are highly competitive, are subject to rapid technological advancement, and have narrow design windows, and if we fail to introduce new and innovative products or improve our existing products, or if our products or the applications we invest in do not achieve widespread adoption, our business, financial condition and operating results will be harmed.
We operate in highly competitive markets characterized by rapid technological advances, frequent product introductions and enhancements, changing customer requirements, evolving industry standards, substantial capital investment and increasing price pressure. Our success depends upon our ability to continuously develop, market and support superior products, processes and solutions. Factors that could harm our competitive position include:
• | Our failure to anticipate demand for and internally develop or acquire new, improved and disruptive technologies; |
• | Our investment in emerging applications that do not achieve widespread adoption or significant growth; |
• | Delays in introducing new, enhanced and differentiated products, many of which are difficult to design and manufacture because of their sophistication and complexity; |
• | Reduced manufacturing capabilities, customer service or support; |
• | Our inability to have semiconductor device manufacturers direct semiconductor capital equipment manufacturers to use our products at their semiconductor fabrication facilities; |
• | Failure of customers to achieve market demand for their products that incorporate our technologies; |
• | Efforts of customers to internally develop products that compete with our technologies or to engage subcontract manufacturers or system integrators to manufacture competitive products on their behalf; |
• | Competitors that develop products that offer superior performance or technological features; |
• | Competitors with greater financial, technical, marketing and other resources, including ownership by or affiliations with members of government, political entities or larger, multinational businesses, which may offer a number of |
competitive advantages, such as the ability to incur lower costs due to control over sources of components and raw materials or exclusive agreements with suppliers thereof; |
• | Competitors with greater recognition and stronger presences in specific product niches and/or regions; |
• | Competitors, particularly in China, that are able to develop low-cost competitive products; |
• | Difficulties in displacing competitors’ products that are designed into customers’ products; |
• | Pricing pressure from customers and competitors, particularly new competitors that offer aggressive price and payment terms in an attempt to gain market share, and especially during cyclical downturns in our markets, when end-markets become more sensitive to costs and competitors are more likely to seek to maintain or increase market share, reduce inventory or introduce more technologically advanced or lower-cost products; and |
• | Industry consolidation among competitors, which could exacerbate certain of these factors. |
Certain of these factors could cause customers to defer or cancel orders for our products and/or place orders for our competitors’ products. This is particularly significant to us, as our success depends on many of our products being designed into new generations of equipment and manufacturing processes. Certain markets in which we operate, such as the semiconductor capital equipment market and the mobile phone market, which is part of our industrial technologies market, experience cyclicality and unevenness in capital spending. If we are unable to introduce new products in a timely manner or are otherwise unsuccessful in making sales to customers, we may miss market upturns or fail to have our products or subsystems designed into our customers’ products. For example, new products designed by capital equipment manufacturers typically have a lifespan of five to fifteen years. We must develop products that are technologically advanced in a timely manner so that they are positioned to be chosen for use in each successive generation of capital equipment.
These factors could also prompt us to agree to pricing concessions or extended payment terms with our customers, in an effort to expand into new markets, gain volume orders or improve customer cost of ownership in highly competitive applications. In other cases, we may discontinue selling certain products if we cannot offset price erosion through shifts in operations.
Finally, these factors could render the portfolios of products or lines of business from which we generate significant net revenues obsolete. If our customers or the industries we serve shift to other technologies, our business, financial condition and operating results would be harmed.
We offer products for multiple markets and must face the challenges of supporting the distinct needs of each of the markets we serve.
We offer products for very diverse markets. Because we operate in multiple markets, we must work constantly to understand the needs, standards and technical requirements of many different applications within these markets, and must devote significant resources to developing different products for these markets. Product development is costly and time consuming. We must anticipate trends in our customers’ industries and develop products before our customers’ products and processes are commercialized. If we do not anticipate our customers’ needs and future activities, we may invest substantial resources in developing products that do not achieve broad market acceptance. Our growth prospects rely in part on successful entry into new segments, which depends on displacing competitors who are more familiar with these markets and better known to customers. In many cases, we are attempting to enter or expand our presence in these new segments with newly introduced products that are not yet proven in the industry. Our decision to continue to offer products to a given market or to penetrate new markets is based in part on our judgment of the size, growth rate, profitability and other factors that contribute to the attractiveness of a particular market. If our product offerings in any particular market are not competitive, our analyses of a market are incorrect or our sales and marketing approach for a market is ineffective, we may not achieve anticipated growth rates in this market, and our business, financial condition and operating results would be harmed.
Further, serving diverse markets requires an understanding of different sales cycles and customer types, and the development and maintenance of a complex global sales team and sales channels to support the markets’ differing needs. It also requires dynamic operations that can support both complex, customized product builds as well as quick turn-around for commercial off-the-shelf sales. If we fail to provide sales and operational support for our diverse markets, our business, financial condition and operating results would be harmed.
Risks Related to Our Operations
Supply chain disruptions or other manufacturing interruptions or delays could affect our ability to meet customer demand and lead to higher costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.
Our business depends on the timely supply of products and services that meet the rapidly changing technical and volume requirements of our customers, which depends in part on the timely delivery of parts, components and subassemblies from suppliers, including contract manufacturers. For example, since the first quarter of 2021, we have experienced significant constraints due to global supply chain disruptions, including procuring electronic components, which have negatively impacted, and continue to impact, our sales, costs and margins, and our ability to produce timely products to meet customer demand. Cyclical industry conditions and volatility of demand for manufacturing equipment increase capital, technical, operational and other risks for us and for companies throughout our supply chain. We may also experience significant disruptions in our supply chain, interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased costs or customer order cancellations as a result of:
• | Volatility in the availability and cost of materials, including rare earth elements, whether due to interruptions in production by suppliers, allocations of products to other purchasers, fluctuations in foreign currency exchange rates, changes in worldwide price levels, environmental limitations or other factors; |
• | Pandemics such as COVID-19, natural disasters or other events beyond our control (such as earthquakes at our facilities in California and Portland, Oregon, floods or storms, wildfires, power outages (particularly rolling blackouts recently experienced in China), regional economic downturns, social unrest, political instability, terrorism, or acts of war), particularly where we or our suppliers, subcontractors and contract manufacturers conduct manufacturing; |
• | Global logistics network challenges, such as limited availability of and constraints on freight capacity; |
• | Information technology or infrastructure failures; and |
• | New laws or regulations. |
In addition, if we need to rapidly increase our business and manufacturing capacity to meet increases in demand or expedited shipment schedules, this may exacerbate any interruptions in our manufacturing operations and supply chain and the associated effect on our working capital. Moreover, if actual demand for our products is different than expected, we may purchase more/fewer parts than necessary or incur costs for canceling, postponing or expediting delivery of parts. If we purchase inventory in anticipation of customer demand that does not materialize, or if our customers reduce or delay orders, we may incur excess inventory charges. Any of these factors could materially and adversely affect our business, financial condition and operating results.
Our dependence on sole and limited source suppliers and international suppliers could affect our ability to manufacture products and systems.
We rely on sole and limited source suppliers and international suppliers for some of our components and subassemblies that are critical to manufacturing our products and/or our testing and operations processes due to unique component designs as well as specialized quality and performance requirements. This reliance involves several risks, including:
• | The inability to obtain an adequate supply of required components; |
• | Quality and reliability problems with components, which in turn adversely affects our products’ quality and reliability; |
• | Prohibitively higher component prices due to the imposition of tariffs; |
• | Supply chain disruptions, including as a result of the relocation of our low-cost and sole and limited source suppliers to less-developed countries, such as the movement of some suppliers from China to the Philippines or Vietnam; |
• | Reduced control over pricing and timing of delivery of components; |
• | The inability of our suppliers to develop technologically advanced products to support our growth and development of new products; |
• | The unavailability of service and/or spare parts for critical capital equipment; and |
• | The inability or unwillingness of our suppliers to continue to offer supplies or services on commercially acceptable terms. |
We may not be able to obtain and qualify alternative sources of these components on favorable terms, on a timely basis, or at all, because there are a limited number of suppliers. The use of alternative sources could also require us to redesign our products, resulting in increased costs, likely shipping delays and the potential need to requalify products with customers, particularly those who have “copy exact” requirements. Any inability to redesign our products could result in further costs and shipping delays. Increased costs would decrease our profit margins if we could not pass the costs to our customers. Further, shipping delays could damage our relationships with customers and have a material adverse effect on our business and operating results.
Our failure to successfully manage the transition of certain of our products to other manufacturing locations and/or to contract manufacturers would likely harm our business, financial condition and operating results.
As part of our continuous cost-reduction efforts, we continue to relocate the manufacture of certain of our existing product lines and subassemblies to, and initiate the manufacture of certain new products in, our facilities in China, Israel, Romania and Singapore, as well as to our significant subcontracted operations in Mexico and selected contract manufacturers in Asia. In the future, we may expand the level of manufacturing, administrative and certain other operations that we move to other global locations to take advantage of cost efficiencies available to us in those locations. However, we may not achieve the significant cost savings or other benefits that we anticipate from moving manufacturing and other operations, and costs may increase as development and manufacturing expertise increase and labor, material, shipping and facility-related costs rise, as we have seen in our manufacturing locations in China. If these costs increase to the extent that we no longer realize suitable gross margins from our products manufactured in these countries, we may need to relocate the manufacture of these products to other lower-cost regions. Additionally, if we are unable to successfully manage the relocation, initiation or oversight of the manufacture of these products, our business, financial condition and operating results would be harmed.
In particular, transferring product lines to other manufacturing locations and/or to our contract manufacturers’ facilities often requires us to transplant complex manufacturing equipment and processes across a large geographical distance and to train a completely new workforce concerning the use of this equipment and these processes. In addition, certain of our customers may require the requalification of products supplied to them in connection with the relocation of manufacturing operations. If we are unable to manage these transfers and training smoothly and comprehensively, or if we are unable to requalify products in a timely manner, we could suffer manufacturing and supply chain delays, excessive product defects, harm to our operating results and our reputation with our customers, and loss of customers. Further, the utilization of overseas manufacturing locations and contract manufacturers may require additional customs tariffs or may require export licenses, which may be difficult or costly to obtain.
Additionally, qualifying contract manufacturers and commencing volume production is expensive and time-consuming, and there is no guarantee we will continue to do so successfully. Further, our reliance on contract manufacturers reduces our control over the assembly process, quality assurance, production costs and material and component supply for our products. If we fail to manage our relationships with our contract manufacturers, or if any of our contract manufacturers experience financial difficulty, or delays, disruptions, capacity constraints or quality control problems in their operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. Further, if we or our contract manufacturers are unable to negotiate with suppliers for reduced material or component costs, our operating results could be harmed.
In addition, our contract manufacturers may terminate our agreements with them upon prior notice to us or immediately for reasons such as if we become insolvent, or if we fail to perform a material obligation under the agreements. If we are required to change contract manufacturers or assume internal manufacturing operations for any reason, including the termination of one of our contract manufacturing contracts, we will likely suffer manufacturing and shipping delays, lost sales, increased costs and damage to our customer relationships, any of which would harm our business, financial condition and operating results.
Our products could contain defects, which would increase our costs and seriously harm our business, financial condition, operating results and customer relationships.
Many of our products are inherently complex in design and, in some cases, require extensive customization and/or ongoing regular maintenance. Further, the manufacture of these products often involves a highly complex and precise process and the utilization of specially qualified components that conform to stringent specifications. Many of our products also require highly skilled labor. As a result of the technical complexity of these products, design defects, skilled labor turnover, changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective or nonconforming materials by us or our suppliers could adversely affect our manufacturing yields and product reliability. This could in turn harm our business, operating results, financial condition and customer relationships.
We provide warranties for our products, and we accrue allowances for estimated warranty costs at the time we recognize revenue for the sale of the products. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. We establish warranty reserves based on historical warranty costs for our products. If actual return rates or repair and replacement costs differ significantly from our estimates, our operating results would be negatively impacted.
Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other suppliers, which may contain defects. Further, some of our customers use our products in ways other than their intended purpose. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to promptly identify and fix defects or other problems, we could experience, among other things:
• | Loss of customers; |
• | Increased costs of product returns and warranty expenses; |
• | Increased costs required to analyze and mitigate the defects or problems; |
• | Damage to our reputation; |
• | Failure to attract new customers or achieve market acceptance; |
• | Diversion of development, engineering and service resources; and/or |
• | Legal action by our customers. |
The occurrence of any of these factors could seriously harm our business, financial condition and operating results.
We outsource a number of services to third-party service providers, which decreases our control over the performance of these functions. Disruptions or delays at our third-party service providers could adversely impact our operations.
We outsource a number of services, including certain information technology systems management, logistics functions, contract manufacturing and accounting functions, to third-party service providers. While outsourcing arrangements may lower our cost of operations, they also reduce our direct control over the services rendered. This diminished control may have an adverse effect on the quality or quantity of services rendered, on our ability to quickly respond to changing market conditions, or on our ability to ensure compliance with all applicable domestic and foreign laws and regulations. If we do not effectively develop and manage our outsourcing strategies, if required export and other governmental approvals are not timely obtained, if our third-party service providers do not perform as anticipated, or do not adequately protect our data from cyber-related security breaches, or if there are delays or difficulties in enhancing business processes, we may experience operational difficulties (such as limitations on our ability to pay suppliers in a timely manner), increased costs, manufacturing or service interruptions or delays, loss of intellectual property rights or other sensitive data, quality and compliance issues, and challenges in managing our product inventory or recording and reporting financial and management information, any of which could materially and adversely affect our business, financial condition and operating results.
The loss of net revenues from any one of our major customers would likely have a material adverse effect on us.
Our top ten customers accounted for approximately 47%, 44% and 33% of our net revenues for 2021, 2020 and 2019, respectively. Our top two customers, Lam Research Corporation and Applied Materials, Inc., together accounted for approximately 27%, 24% and 18% of net revenues for the years 2021, 2020 and 2019, respectively. In any one reporting period, a single customer or several customers may contribute even a larger percentage of our consolidated net revenues. Further, our Equipment & Solutions Division also depends on a few significant customers for a large portion of its revenue in any given quarter. The loss of a major customer or any significant reduction in orders by these customers, including reductions due to market or competitive conditions, would likely have a material adverse effect on our business, financial condition and operating results. None of our significant customers has entered into an agreement with us requiring it to purchase any minimum quantity of our products.
Attempts to lessen the adverse effect of any loss or reduction of net revenues through the rapid addition of new customers would be difficult because a relatively small number of companies dominate the semiconductor and electronics manufacturing industries. Further, prospective customers typically require lengthy qualification periods prior to placing volume orders with a new supplier. Our future success will continue to depend upon:
• | Our ability to maintain relationships with existing key customers; |
• | Our ability to attract new customers and satisfy any required qualification periods; |
• | Our ability to introduce new products in a timely manner for existing and new customers; |
• | The successes of our original equipment manufacturing (“OEM”) customers in creating demand for their capital equipment products that incorporate our products; and |
• | Our ability to gain significant customers in new, emerging segments of our markets. |
Key personnel may be difficult to attract and retain.
Our ability to maintain and grow our business is directly related to the service of our employees in each area of our business, as we consider talent to be a significant asset. Our performance is directly tied to our ability to hire, train, motivate and retain qualified personnel, including highly skilled technical, financial, managerial, and sales and marketing personnel. There is significant competition for personnel in the technology marketplace, particularly in certain geographies where we are located, including the Boston area, the Orange County, California area, the San Francisco Bay area, China, Germany and Singapore. Also, as a result of the COVID-19 pandemic, employees in our industries are increasingly able to work remotely, which could increase employee mobility and turnover, making it more difficult for us to attract and retain employees. In addition, many semiconductorof our product manufacturing processes and consumer electronics manufacturersproduct service require deep technical expertise, and it can be particularly challenging to identify and attract candidates and retain employees possessing such expertise. We have experienced and may continue to experience attrition in certain key positions. A related challenge is that a significant portion of our technical talent is nearing retirement age, and we may have difficulty attracting a sufficient number of employees with the necessary skills to replace them. If we are unable to hire sufficient numbers of qualified employees or retain and motivate existing employees, our business and operating results would be harmed.
Acquisition Risks
As part of our business strategy, we have entered into and may continue to pursue business combinations and acquisitions that may be difficult to identify and complete, challenging and costly to integrate, disruptive to our business and our management, and/or dilutive to stockholder value.
As a part of our business strategy, we have entered into and continue to pursue business combinations and acquisitions. In particular, the acquisitions of Newport Corporation (“Newport”) in April 2016 and Electro Scientific Industries, Inc. (“ESI”) in February 2019 significantly increased our size, including with respect to net revenues, product offerings, and/or number of employees and facilities. Our ability to successfully identify suitable acquisition targets, complete acquisitions on acceptable terms, and efficiently and effectively integrate our acquired businesses is critical to our growth. We may not be able to identify target companies that meet our strategic objectives or successfully negotiate and complete acquisitions with companies we have identified on acceptable terms. Further, we may incur significant expense in pursuing acquisitions that cannot be completed, or are significantly delayed, due to regulatory or other restrictions. Additionally, our credit facilities only permit us to make acquisitions under certain circumstances, and also restrict our ability to incur additional indebtedness in certain circumstances. We may not realize the benefits we anticipate from these acquisitions, including our pending acquisition of Atotech, because of significant challenges, such as:
• | The difficulty, distraction, resource requirements, cost and disruption of integrating the operations, technology and personnel of the acquired companies; |
• | The potential disruption of our ongoing business and distraction of management; |
• | Possible internal control or other compliance weaknesses of the acquired companies; |
• | Significant expenses related to the acquisitions, including any resulting shareholder litigation; |
• | The assumption of unknown or contingent liabilities associated with acquired businesses; |
• | The potential to incur or record significant cash or non-cash charges or write down the carrying value of intangible assets and goodwill obtained in the acquisitions, which could adversely impact our cash flow or lower our earnings in the period or periods for which we incur such charges or write down such assets; |
• | Potentially incompatible cultural differences between the two companies; |
• | Incorporating the acquired companies’ technology and products into our current and future product lines, and successfully generating market demand for these expanded product lines; |
• | Potential additional geographic dispersion of operations; |
• | The difficulty in achieving anticipated synergies and efficiencies; |
• | The difficulty in leveraging the acquired companies’ and our combined technologies and capabilities across our product lines and customer base; |
• | Burdensome requirements or conditions imposed by government regulators in connection with their review of acquisitions, including divestitures and restrictions on the conduct of our business or the business of the acquired companies; |
• | Potential sales disruptions as a result of integrating the acquired companies’ sales channels with our sales channels; and |
• | Our ability to retain key customers, suppliers and employees of the acquired companies. |
We may also face competitive disadvantages by selling products that are new to us and/or selling products in markets and geographies that are new to us. In addition, if we are not successful in completing acquisitions or integrating acquired
businesses, we may be required to re-evaluate our growth strategy. We may incur substantial expenses and devote significant management time and resources to complete acquisitions that may not generate the financial results we planned to achieve.
In particular, we continue to experience some significant risks associated with the acquisition of ESI (the “ESI Merger”), including our ability to retain key personnel and to realize the anticipated growth in net revenues from the acquired business, as well as the potential to incur or record significant cash or non-cash charges or write down the carrying value of intangible assets and goodwill obtained in the ESI Merger, which could adversely impact our cash flow or lower our earnings in the period or periods for which we incur such charges or write down such assets.
In addition, we could use substantial portions of our available cash for all or a portion of the purchase price of future acquisitions. We could also issue additional securities as consideration for or to finance these acquisitions, which could cause significant stockholder dilution, or obtain additional debt financing, which would increase our costs, reduce our future cash flow and subject us to covenants and other restrictions that may impede our ability to manage our operations, without achieving the desired accretion to our business.
As a result of our previous acquisitions, we have several different decentralized operating and customers in Asia, a region that in past years has experienced serious economic problems including currency devaluations, debt defaults, lackaccounting systems. We will need to continue to modify our accounting policies, internal controls, procedures and compliance programs to provide consistency across all of liquidityour operations. In order to increase efficiency and recessions.
Financial Risks
The terms of our Term Loan Facility and ABL Facility impose significant financial obligations and risks upon us, limit our ability to take certain actions, and could discourage a change in control.
The total outstanding principal balance of our Term Loan Facility, as defined and as described further in Item 7 of this Annual Report on Form
A significant portion of amountsthe amount outstanding under the credit facilities bearTerm Loan Facility bears interest at a variable interest rates.rate. Although we hedge some of the variable interest rate exposure, if interest rates increase, variable rate debt will create higher debt service requirements, which would adversely affect our cash flows. In addition, our credit ratings could affect the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings of our indebtedness reflect each nationally recognized statistical rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations. We cannot make any assurances that we will achieve a particular rating or maintain a particular rating in the future. Moreover, we may be required to raise substantial additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements. Our ability to obtain additional financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. We cannot make any assurances that we will be able to obtain additional financing or refinancing on terms acceptable to us or at all.
Our Term Loan Facility and ABL Facility contain several negative covenants that, among other things and subject to certain exceptions, restrict our ability and/or our subsidiaries’ ability to:
• | Incur additional indebtedness; |
• | Pay certain dividends on our capital stock or redeem, repurchase or retire certain capital stock or certain other indebtedness; |
• | Make certain investments, loans and acquisitions; |
• | Engage in certain transactions with our affiliates; |
• | Sell assets, including capital stock of our subsidiaries; |
• | Materially alter the business we conduct; |
• | Consolidate or merge; |
• | Incur liens; and |
• | Engage in sale-leaseback transactions. |
These restrictions on our ability to engage in or benefit from these actions limit our flexibility in planning for, or reacting to, changes in and opportunities for our business, such as limiting our ability to engage in mergers and acquisitions. This could place us at a competitive disadvantage. If the matters described in our other risk factors result in a material adverse effect on our business, financial condition or operating results, we may be unable to comply with the terms of our credit facilities or experience an event of default.
Our Term Loan Facility and ABL Facility contain customary events of default, including:
• | Failure to make required payments; |
• | Failure to comply with certain agreements or covenants; |
• | Materially breaching any representation or warranty; |
• | Failure to pay, or cause acceleration of, certain other indebtedness; |
• | Certain events of bankruptcy and insolvency; |
• | Failure to pay certain judgments; and |
• | A change in control of us. |
The amount of cash available to us for repayment of amounts owed under these credit facilities will depend on our usage of our existing cash balances and our operating performance and ability to generate cash flow from operations, in future periods, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. We cannot provide any assurances that we will generate sufficient cash flow from operations to service our debt obligations. Any failure to repay these obligations as they become due would result in an event of default under the credit facilities.
If an event of default occurs, the lenders may end their obligation to make loans to us under the credit facilities and may declare any outstanding indebtedness under these credit facilities immediately due and payable. In such case, we would need to obtain additional financing or significantly deplete our available cash, or both, to repay this indebtedness. Any additional financing may not be available on reasonable terms or at all, and significant depletion of our available cash would harm our ability to fund our operations or execute our broader corporate objectives. If we were unable to repay outstanding indebtedness following an event of default, then in addition to other available rights and remedies, the lenders could initiate foreclosure proceedings on substantially all of our assets. Any such foreclosure proceedings or other rights and remedies successfully implemented by the lenders in an event of default would have a material adverse effect on our business, financial condition and operating results.
Further, because a change in control of us constitutes an event of default under these credit facilities, this would likelymay be a deterrent to asome potential acquirers, as it would likely require an acquirer asto repay any potential acquisition would trigger an event of default, unless the lenders agreed to waive such event of default. We cannot guarantee that any such waiver would be obtained.
In December 2019, a novel strain of coronavirus,
A material amount of our assets represents goodwill and intangible assets, and our net income would be reduced if our goodwill or intangible assets become impaired.
As of December 31, 2019,2021, our goodwill and intangible assets, net, represented approximately $1,058.5 million,$1.8 billion, or 31%40% of our total assets. Goodwill is generated in our acquisitions when the cost of an acquisition exceeds the fair value of the net tangible and identifiable intangible assets we acquire. AsFor example, as a result of the ESI acquisition,Merger, we added approximately $474 million of additional goodwill and intangible assets. Goodwill isand indefinite-lived intangible assets are subject to an impairment analysis at least annually based on the fair value of the reporting unit. Intangible assets relate primarily to the developed technologies, customer relationships and patents and trademarks acquired by us as part of our acquisitions of other companies and are subject to an impairment analysis whenever events or changes in circumstances exist that indicate that the carrying value of the intangible asset might not be recoverable. We will continue to monitor and evaluate the carrying value of goodwill and intangible assets. If market and economic conditions or business performance deteriorate, the likelihood that we would record an impairment charge would increase, which impairment charge could materially and adversely affect our financial condition and operating results.
Legal, Tax, Regulatory and Compliance Risks
If significant tariffs or other trade restrictions on our products are intensely competitive, and we believe that competition from both new and existing competitors will increase in the future. Principal competitive factors include:
Trade tensions between the United States and adversely affected by competitive pressureChina have increased substantially in recent years, resulting in significant tariff increases, additional sanctions against specified entities, and price-based competition.
Since the beginning of 2019, the pace at which regulatory changes have been implemented has been extraordinarily high, which increases the resources needed to monitor and comply with the regulation, while heightening the risk of non-compliance. Between May 2019 and August 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) added China-based Huawei Technologies Co., Ltd. (“Huawei”) and a total of 152 of its affiliates onto its Entity List, thereby requiring an export license for the sale of U.S. items to Huawei. In May 2020, BIS also modified the Foreign Direct Product rule to further restrict Huawei’s ability to directly or indirectly source U.S. origin items, and then modified the existing “military end-use” rule, expanding the scope of products and technologies that would require licenses for military end-uses, primarily in China. BIS further named 103 specific companies as “military end users” (mostly in China). In December 2020, Hong Kong lost its favorable trade status and BIS added Semiconductor Manufacturing International Corporation (“SMIC”) and ten of its affiliates, along with 66 other companies to the Entity List. BIS continues to add Chinese-based companies onto its Entity List. Accordingly, we have implemented additional monitoring processes and suspended orders from Huawei, SMIC and certain other designated Chinese-based customers where subject to U.S. jurisdiction. We have also been negatively impacted by the cancellation of orders from customers who are suppliers to these firms.
In addition, China has adopted, and announced its intention to further adopt, new regulations, which could have an adverse effect on our operations. For example, in response to the imposition of U.S. tariffs in 2018 and 2019, China imposed its own retaliatory tariffs. In May 2019, China’s Ministry of Commerce announced an “unreliable entity list” under which non-Chinese entities that cut off suppliers to Chinese companies may be subject to government action. In September 2020, it disclosed potential enforcement mechanisms in the form of an “Unreliable Entity List.” This regulation has yet to be implemented, and its effects are unknown at this time.
The ongoing geopolitical and economic uncertainty between the United States and China caused by recent tariffs, Entity List and “military end user” designations, and foreign-made product rules, and the unknown impact of current and future Chinese trade regulations, may continue to cause increased costs, as well as restrictions on our ability to sell, or a decreased demand from customers to purchase, our products, directly and indirectly, which could materially harm our business, financial condition and operating results.
orders, as well as to our significant subcontracted operations in Mexico and selected contract manufacturers in Asia. In the future, we may expand the level of manufacturing, administrative and certain other operationsthey limit expenditures that we perform offshore to take advantage of cost efficiencies available to us in those countries. However, we may not achieve the significant cost savings or other benefits that we would anticipate from moving manufacturing and other operations to these countries, and costs may increase in these countries as development and manufacturing expertise increase and labor, material, shipping and facility-related costs rise, as we have seen in our manufacturing locations in China. If these costs increase to the extent that we no longer realize suitable gross margins from our products manufactured in these countries, we may need to relocate the manufacture of these products to other lower-cost regions. Additionally, if we are unable to successfully manage the relocation, initiation or oversight of the manufacture of these products, our business, financial condition and operating results would be harmed.
We are subject to international trade compliance regulations, and violations of those regulations could result in fines or trade restrictions, which could have a material adverse effect on us.
We are subject to trade compliance laws in both the United States and other jurisdictions where we operate. For example, exports of our products and technology developed or manufactured in the U.S.United States are subject to export controls imposed by the U.S. Government and administered by the U.S. Departments of Commerce and, to a lesser extent, State and Treasury. Export regulations govern exports of our products and technology developed or manufactured in other countries, including, for example, Austria, China, France, Germany, Israel, Romania and Singapore, and China.Singapore. In certain instances, these regulations may require obtaining licenses from the administering agency prior to exporting products or technology to international locations or foreign nationals, including foreign nationals
Changes in tax rates or tax regulation or the termination of tax incentives could affect our operating results.
As a global company, we are subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future annual and quarterly effective tax rates could be affected by numerous factors, including changes in the applicable tax laws; composition of
The enactment of the Tax Cuts and Jobs Act (the “Act”“TCJA”) in December 2017 significantly affected U.S. tax law by changing how the U.S.United States imposes tax on multinational corporations. The U.S. Department of Treasury has broad authority under the ActTCJA to issue regulations and interpretive guidance. No proposed or final regulations have been issued for certain significant provisions of the Act, and other provisions may require corrective action by Congress.
On October 4, 2021, 136 members of the Organization for Economic Co-operation and Development (“OECD”) agreed to a global minimum tax rate of 15%. On December 20, 2021, OECD published its model rules on the agreed minimum tax known as the Global Anti-Base Erosion (“GloBE”) rules. The GloBE rules provide a framework for a coordinated multi-country system of taxation intended to ensure large multinational enterprise groups pay a minimum level of tax on the income
arising in each of the jurisdictions where they operate. Individual country legislation is expected in 2022 and the expected effective date of such legislation is in 2023.
Additionally, on November 19, 2021, the U.S. House of Representatives approved the Build Back Better Act (the “BBBA”). The BBBA contains proposed corporate and international tax reforms, including a 15% minimum tax on the adjusted financial statement income of certain large corporations, a 1% interest excise tax on certain publicly traded corporations that buy back stock from their shareholders and additional limitations on the deduction for business interest, among other tax provisions. This version of the bill has not been approved by the U.S. Senate. In addition,the event that the GloBE rules are implemented and/or the BBBA or similar legislation is enacted, we could be subject to an increase in our effective tax rate, which would adversely impact our financial results.
We are subject to regular examination by the United StatesU.S. Internal Revenue Service and state, local and foreign tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, we can make no assurances that any final determination of tax liability will not be materially different from the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our financial condition and operating results.
In certain foreign jurisdictions, we qualify for tax incentives and tax holidays based on our ability to meet, on a continuing basis, various tests relating to our employment levels, research and development expenditures and other qualification requirements in a particular foreign jurisdiction. While we intend to operate in such a manner to maintain and maximize our tax incentives, we can make no assurances that we have so qualified or that we will so qualify for any particular year or jurisdiction. If we fail to qualify or remain qualified for certain foreign tax incentives and tax holidays, the tax incentives we previously received may be terminated and/or retroactively revoked, requiring repayment of past tax benefits, and we would be subject to an increase in our effective tax rate, which would adversely impact our financial results.
We are subject to environmental regulations. If we fail to comply with these regulations, our business could be harmed.
Our operations are subject to various federal, state, local and international laws and regulations relating to theenvironmental protection, of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and waste and the cleanup of contaminated sites. In the United States, we are subject to the federal regulation and control of the Environmental Protection Agency (“EPA”), and we are subject to regulations and controls of comparable authorities in other countries. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our business, financial condition or operating results or financial condition.
Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by applicable federal, state, federallocal and international laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. We have been, and may in the future be, subject to claims by employees or third parties alleging such contamination or injury, and could be liable for damages, which liability could exceed the amount of our liability insurance coverage (if any) and the resources of our business.
Certain portions of the soil at the former facility of our Spectra-Physics lasers business, located in Mountain View, California, and certain portions of the aquifer surrounding the facility, through which contaminated groundwater flows, are part of an
We have certain ongoing costs related to investigation, monitoring and remediation of the site that have not been material to us as a whole in the recent past. However, while we benefitted from the indemnification of certain costs by a third party in the past, that indemnification is now in a transition period, and we will become subject to a greater portion of future costs of remediation going forward. Our ultimate costs of remediation and other potential liabilities are difficult to predict. In the event that the EPA and the California Regional Water Quality Control Board determine that the site cleanup requires additional measures to ensure that it meets current standards for environmental contamination, or if they enhance any of the applicable required standards, we will likely become subject to additional remediation obligations in the future. In addition to our investigation, monitoring and remediation obligations, we may be liable for property damage or personal injury claims relating
to this site. While we are not aware of any material claims at this time, such claims could be made against us in the future. If significant costs or other liability relating to this site arise in the future, our business, financial condition and operating results would be adversely affected.
The environmental regulations that we are subject to include a variety of federal, state, local and international environmental regulations that restrict the use and disposal of materials used in the manufacture of our products or require design changes or recycling of our products. If we fail to comply with any present or future regulations, we could be subject to future liabilities, the suspension of manufacturing or a prohibition on the sale of products we manufacture. In addition, suchthese regulations could restrict our ability to equip our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations, including expenses associated with the recall of any
We are exposed to various risks related to legal proceedings, including product liability claims, intellectual property infringement claims, contractual claims and securities class action litigation, which if successful, could have a material adverse effect on our commercial relationships, business, financial condition and operating results.
From time to time, we may be involved in legal proceedings, enforcement actions or claims regarding product performance, product warranty, product certification, product liability, patent infringement, misappropriation of trade secrets, other intellectual property rights, antitrust, environmental regulations, securities, contracts, unfair competition, employment, workplace safety, and other matters. We can provide no assurance of the outcome of these legal proceedings, enforcement actions or claims or that the insurance we maintain will be adequate to cover them.
For example, some of our products, such as certain ultrafast lasers, are used in medical and scientific research applications where malfunctions could result in serious injury. In addition, certain of our products may be hazardous if not operated properly or if defective. We are exposed to significant risks for product liability claims in the event of a significant line down situation or if death, personal injury or property damage results from the use of our products. We may experience material product liability losses in the future. We currently maintain insurance for certain product liability claims. However, our insurance coverage may not continue to be available on acceptable terms, if at all. This insurance coverage also may not adequately cover liabilities that we incur. Further, if our products are defective, we may be required to recall or redesign these products. A successful claim against us that exceeds our insurance coverage level or that is not covered by insurance, or any product recall, could have a material adverse effect on our commercial relationships, business, financial condition and operating results.
In addition, securities class action lawsuits and derivative lawsuits are often brought against companies who have entered into business combinations and acquisitions. We are currently involved in securities class action litigation in connection with the acquisition of Newport and previously were involved in a securities class action litigation in connection with the acquisition of ESI. In each case, the plaintiffs alleged, among other things, that the then-current directors of the acquired company breached their fiduciary duties to their respective shareholders by agreeing to sell the company through an inadequate and unfair process, leading to inadequate and unfair consideration, by agreeing to unfair deal protection devices, and by omitting material information from the proxy statement. We, or the companies we acquire, may be subject to additional securities class action litigation in connection with future business combinations and acquisitions.
Regardless of the outcome, securities class action litigation such as this can be time-consuming, result in significant expense to us and divert attention and resources of our management and other key employees. Costs and expenses, or an
unfavorable outcome in such cases, could exceed applicable insurance coverage, if any. Any such unfavorable outcome could have a material adverse effect on our business, financial condition, operating results and cash flows.
With respect to our intellectual property, we have from time to time received claims from third parties alleging that we are infringing certain trademarks, patents or other intellectual property rights held by them. Such infringement claims have in the past and may in the future result in litigation or enforcement action. Any such action could be protracted and costly, and we could become subject to damages for infringement, or to an injunction preventing us from making, selling or using certain of our products or services, or using certain of our trademarks. Such claims could also result in the necessity of obtaining a license or paying damages relating to one or more of our products, services or current or future technologies, which may not be available on commercially reasonable terms or at all. Any intellectual property action and the failure to obtain necessary licenses or other rights or develop substitute technology may divert management’s attention from other matters and could have a material adverse effect on our business, financial condition and operating results. In addition, the terms of some of our customer contracts require us to indemnify the customer for any claim of infringement brought by a third party based on our products. Claims of this kind may have a material adverse effect on our business, financial condition or operating results.
Although our standard commercial documentation sets forth the terms and conditions that we intend to apply to commercial transactions with our business partners, counterparties to these transactions may not explicitly agree to our terms and conditions. In situations where we engage in business with a third party without an explicit written agreement regarding the applicable terms and conditions, or where the commercial documentation applicable to the transaction is subject to interpretation, we may have disputes with those third parties regarding the applicable terms and conditions of our transaction with them. These disputes could result in deterioration of commercial relationships, costly and time-consuming litigation or additional concessions or obligations being offered by us to resolve these disputes, or could impact our net revenue or cost recognition. Any of these outcomes could materially and adversely affect our business, financial condition and operating results.
In addition, from time to time in the normal course of business we indemnify parties with whom we enter into contractual relationships, including customers, suppliers, consultants and lessors, with respect to certain matters. We have agreed, under certain conditions, to hold these parties harmless against specified losses, such as those arising from a breach of representations or covenants, negligence or willful misconduct, and other third-party claims that our products and/or technologies infringe intellectual property rights. We may be compelled to enter into or accrue for probable settlements of alleged indemnification obligations, or we may be subject to potential liability arising from our customers’ involvement in legal disputes. In addition, notwithstanding the provisions related to limitations on our liability that we seek to include in our business agreements, the counterparties to such agreements may dispute our interpretation or application of such provisions, and a court of law may not interpret or apply such provisions in our favor, any of which could result in an obligation for us to pay significant additional damages and engage in costly legal proceedings. It is difficult to determine the maximum potential amount of liability under any indemnification obligations, whether or not asserted, due to the unique facts and circumstances likely to be involved in any particular claim. Our business, financial condition and operating results in a reported fiscal period could be materially and adversely affected if we expend significant amounts in defending or settling any asserted claims, regardless of their merit or outcomes.
Legal proceedings, enforcement actions and claims, whether with or without merit, and associated internal investigations, may be time-consuming and expensive to prosecute, defend or conduct; divert management’s attention and other resources; inhibit our ability to sell our products or services; result in adverse judgments for damages, injunctive relief, penalties and fines; and negatively affect our business. We can make no assurances regarding the outcome of current or future legal proceedings, enforcement actions, claims or investigations or that the insurance we maintain will be adequate to cover them.
Risks Related to Cybersecurity, Data Privacy and Intellectual Property Protection
We are exposed to risks related to cybersecurity threats and incidents and subject to restrictions of and changes in laws and regulations governing data privacy and data protection that could have a material adverse effect on our business.
We rely on various information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information and to carry out and support a variety of business activities, including finance and accounting, order management, human resources, communications, manufacturing, research and development, intellectual property, supply chain management, sales and IT, including critical functions such as internet connectivity, network communications, and email. Some of these activities are processed via Software-as-a-Service (“SaaS”) products provided by third parties and hosted on their own networks and servers, or third-party networks and servers. The data on such various information technology networks and systems includes confidential information, personally identifiable information, transactional information and intellectual property belonging to us and our employees, customers, suppliers and other business partners.
Like other companies, we are subject to ongoing cybersecurity threats, including hacking, phishing, malware, ransomware, denial of service attacks, and other attacks. These threats may be related to employee error or misuse to sophisticated and targeted attempts by bad actors to gain unauthorized access to information systems. We and our third-party vendors have experienced, and expect to continue to be subject to, cybersecurity threats and incidents, including industry-wide vulnerabilities, such as Log4j, which was reported in December 2021. We cannot guarantee that these and other attacks will not have an impact in the future.
Despite the implementation of a variety of security controls and measures, as well as those of our third-party vendors, there is no assurance that such actions will be sufficient to prevent a cybersecurity incident due to attacks by hackers, employee error or malfeasance, computer viruses, malware and ransomware, telecommunication failures, systems failures, natural disasters, or other catastrophic events. We also face the challenge of supporting our older systems and implementing necessary upgrades. Further, as we transition to using more cloud-based solutions that are dependent on the internet or other networks to operate, we may become a greater target for cyber threats. As cyber threats continue to rapidly evolve and become increasingly more difficult to detect and defend against, our current security controls and measures may not be effective in preventing cybersecurity incidents and we may not have the capabilities to detect certain vulnerabilities. These risks may be further amplified by the increased reliance on remote access to IT systems as a result of use of SaaS software and cloud services as well as employees working remotely in response to the COVID-19 pandemic. Additionally, our merger, acquisition and divestiture activity may also require transitions to or from, and the integration of, various information management systems. Those systems that we acquire or that are used by acquired entities or businesses may also pose security risks of which we are unaware or unable to mitigate, particularly during the transition of these systems.
While we continue to assess and address the implications of existing and new domestic and foreign regulations relating to data privacy, the evolving regulatory landscape presents a number of legal and operational challenges, and our efforts to comply with these regulations may be unsuccessful. For example, regulations in the EU and China have established a prohibition on the transfer of personally identifiable information from their respective countries to other countries whose laws do not protect personal data to an adequate level of privacy or security. While we have utilized certain permitted approaches for transferring personally identifiable information from these countries to the United States, these approaches may be reviewed and invalidated by courts or regulatory bodies and we may be required to ascertain an alternative legal basis for such transfers.
A failure to comply with the ever-changing regulatory landscape, or a breach of our operational or security systems or infrastructure, or those of our customers, suppliers and other business partners, could disrupt our business; result in the disclosure, misuse, corruption or loss of confidential information, including intellectual property, personally identifiable information and other critical data of ours and our employees, customers, suppliers and other business partners; result in competitive disadvantages to the extent the information is competitively sensitive; damage our reputation; affect our relationships with our, employees, customers, suppliers and other business partners, including loss of confidence which could lead to loss of or reduction in orders; decrease the value of our investment in research, development and engineering; adversely affect our business operations including disruption of manufacturing processes; cause losses; result in liability under contracts; result in litigation; result in investigations; require notifications to regulatory authorities and impacted individuals; result in significant penalties and/or fines from regulatory bodies, including privacy laws and export control laws; add to the complexity of our compliance obligations; and increase our cybersecurity protection and remediation costs.
The costs of compliance with, and other burdens imposed by, privacy, cybersecurity, data protection and data localization laws, regulations and policies, including restrictions on marketing activities, could have a material adverse effect on our business, financial condition and operating results. Further, customers and third-party providers increasingly demand rigorous contractual provisions regarding privacy, cybersecurity, data protection, confidentiality, and intellectual property, which may also increase our overall compliance burden.
Although we maintain insurance related to cybersecurity risks, all of these costs, expenses, liability and other matters may not be covered adequately by insurance and may result in an increase in our costs for insurance or insurance not being available to us on economically feasible terms, or at all. Insurers may also deny us coverage as to any future claim. Any of these results could harm our financial condition, business and reputation.
Our proprietary technology is important to the continued success of our business. Our failure to protect this proprietary technology may significantly impair our competitive position.
Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trademark and trade secret protection and other agreements, such as nondisclosure agreements and other contractual agreements with our employees and third parties, to protect our proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in countries outside the United States, where the laws may not protect our proprietary rights as fully as in the United States. For example, the patent prosecution and
enforcement systems within China, where we have a significant customer base and manufacturing presence, and where we have recently transferred several important laser product lines, are less robust than these systems in other jurisdictions and as a result, we may be limited in our ability to enforce our intellectual property rights there. We would also likely be at a disadvantage in any enforcement proceeding in China as a foreign entity seeking protection against a Chinese company. Patent and trademark laws and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks, trade secrets and similar proprietary rights. In addition, patents issued to us may be challenged, invalidated or circumvented. The loss or expiration of any of our key patents could lead to a significant loss of sales of certain of our products and could materially affect our future operating results. We have in the past and may in the future be subject to or may initiate interference proceedings or validity challenges in the U.S. Patent and Trademark Office, or similar international agencies, which can demand significant financial and management resources. The process of seeking patent protection can be time consuming and expensive and patents may not be issued from currently pending or future applications. Moreover, our existing patents or any new patents that may be issued may not be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us. We may initiate claims, enforcement actions or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors, which claims could result in costly litigation, the diversion of our technical and management personnel and the assertion of counterclaims by defendants, including counterclaims asserting invalidity of our patents. We will take such actions where we believe that they are of sufficient strategic or economic importance to us to justify the cost.
Risks Related to Owning Our Common Stock
Our quarterly operating results have fluctuated, and are likely to continue to vary significantly, which may result in volatility in the market price of our common stock.
A substantial portion of our shipments occurs shortly after an order is received, and therefore we generally operate with a relatively low level of backlog. As a result, a decrease in demand for our products from one or more customers could occur with limited advance notice and could have a significant adverse effect on our operating results in any particular period. Further, we often recognize a significant portion of the revenue of certain of our business lines in the last month of each fiscal quarter, due in part to the tendency of some customers to wait until late in a quarter to commit to purchase our products as a result of capital expenditure approvals and budgeting constraints occurring at the end of a quarter, or the hope of obtaining more favorable pricing from a competitor. Thus, variations in timing of sales can cause significant fluctuations in our quarterly sales, gross margin and profitability. In addition, orders expected to ship in one period could shift to another period due to changes in the timing of our customers’ purchase decisions, requests for rescheduled delivery dates, material shortages, manufacturing capacity constraints or logistics delays. Our orders are generally subject to rescheduling without penalty or cancellation without penalty other than reimbursement for certain labor and material costs. Our operating results for a particular period may be adversely affected if our customers, particularly our largest customers, cancel or reschedule orders, or if we cannot fill orders in time due to material shortages, capacity constraints or unexpected delays in manufacturing, testing, shipping, delivery or product acceptance. Also, we base our manufacturing plans on our forecasted product mix. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders, which would result in delays in the shipment of our products and could shift sales to a subsequent period. Moreover, a significant percentage of our expenses are fixed and based in part on expectations of net revenues. Our inability to adjust spending quickly enough to compensate for any shortfall would magnify the adverse impact of a shortfall in net revenues on our operating results.
Customers of our high-value, more complex products often require substantial time to qualify our products and make purchase decisions. In addition, some of our sales to defense and security customers are under major defense programs that involve lengthy competitive bidding and qualification processes. These customers often perform, or require us to perform, extensive configuration, testing and evaluation of our products before committing to purchasing them, which can require a significant upfront investment in time and resources. The sales cycle for these products from initial contact through shipment varies significantly, is difficult to predict and can last more than a year. If we fail to anticipate the likelihood of, or the costs or timing associated with, sales of these products, or the cancellation or rescheduling of orders for these products, our business and operating results would be harmed.
Our worldwide sales to customers in the research and defense markets rely to a large extent on government funding for research and defense-related programs. Any decline in government funding as a result of reduced budgets in connection with fiscal austerity measures, revised budget priorities or other causes would likely result in reduced sales of our products that are purchased either directly or indirectly with government funding, which would have an adverse impact on our operating results. Concerns regarding the global availability of credit may also make it more difficult for our customers to raise capital, whether debt or equity, to finance their projects and purchases of capital equipment, which would adversely affect sales of our products and therefore harm our business and operating results.
Other factors that could cause fluctuations in our financial results include:
• | A worldwide economic slowdown or disruption in the global financial markets; |
• | Fluctuations in our customers’ capital spending, industry cyclicality (particularly in the semiconductor and electronics manufacturing industries), market seasonality (particularly in the research, defense and electronics manufacturing industries), levels of government funding available to our customers (particularly in the life and health sciences, and research and defense markets) and other economic conditions within the markets we serve; |
• | The timing of the receipt of orders within a given period; |
• | Demand for our products and the products sold by our customers; |
• | Disruption in sources of supply; |
• | Production capacity constraints; |
• | Regulatory and trade restrictions in the countries we manufacture and sell our products; |
• | Specific features requested by customers; |
• | Natural disasters or other events beyond our control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war); |
• | The timing of product shipments and revenue recognition within a given quarter; |
• | Changes in our pricing practices or in the pricing practices of our competitors or suppliers; |
• | Our and our competitors’ timing in introducing new products; |
• | Engineering and development investments relating to new product introductions, and significant changes to our manufacturing and outsourcing operations; |
• | Market acceptance of any new or enhanced versions of our products; |
• | The timing and level of inventory obsolescence, scrap and warranty expenses; |
• | The availability, quality and cost of components and raw materials we use to manufacture our products; |
• | Changes in our effective tax rates; |
• | Changes in our capital structure, including cash, marketable securities and debt balances, and changes in interest rates; |
• | Changes in bad debt expense based on the collectability of our accounts receivable; |
• | The timing, type and size of acquisitions and divestitures, and related expenses and charges; |
• | Fluctuations in currency exchange rates; |
• | Our expense levels; |
• | Impairment of goodwill and amortization of intangible assets; and |
• | Fees, expenses and settlement costs or judgments against us relating to litigation or regulatory compliance. |
As a result of these factors, among others, we may experience quarterly or annual fluctuations in our operating results, and our operating results for any period may fall below our expectations or the expectations of public market analysts or investors. In any such event, the price of our common stock could fluctuate or decline significantly. Consequently, we believe that quarter-to-quarter and year-to-year comparisons of our operating results, or any other similar period-to-period comparisons, may not be reliable indicators of our future performance.
The market price of our common stock has fluctuated and may continue to fluctuate for reasons over which we have no control.
The stock market has from time to time experienced, and is likely to continue to experience, extreme price and volume fluctuations. Prices of securities of technology companies have been especially volatile and have often fluctuated for reasons that are unrelated to the operating performance of the companies. Historically, the market price of shares of our common stock has fluctuated greatly and could continue to fluctuate due to a variety of factors. In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If we become the subject of securities class action litigation, it could result in substantial costs and a diversion of our management’s attention and resources.
We may not pay dividends on our common stock.
Holders of our common stock are only entitled to receive dividends when and if they are declared by our Board of Directors. Our credit facilities restrict our ability to pay dividends on our capital stock under certain circumstances. Although we have declared cash dividends on our common stock since 2011, and occasionally increased the dividends from prior
quarters, we are not required to do so, and we may reduce or eliminate our cash dividend in the future. This could adversely affect the market price of our common stock.
Some provisions of our restated articles of organization, as amended, our amended and restated
Anti-takeover provisions could diminish the opportunities for stockholders to participate in tender offers, including tender offers at a price above the then currentthen-current market price of our common stock. Such provisions may also inhibit increases in the market price of our common stock that could result from takeover attempts. For
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
The following table provides information concerning MKS’ principal and certain other owned and leased facilities as of December 31, 2019:
Country | City | Sq. Ft. | Activity | Reportable Segment | Lease Expires | |||||||||||||
CHINA | Shenzhen | 302,000 | Manufacturing | Vacuum & Analysis | August 31, 2025 | |||||||||||||
FRANCE | (1) | 183,000 | Manufacturing, Research and Development | Light & Motion | Owned | |||||||||||||
ISRAEL | Jerusalem | 118,000 | Manufacturing, Sales, Research and Development | Light & Motion | (2) | |||||||||||||
MEXICO | Nogales | 174,700 | Manufacturing, Service | Vacuum & Analysis and Light & Motion | (3) | |||||||||||||
UNITED STATES | Andover, MA | 158,000 | Corporate Headquarters, Manufacturing, Research and Development | Vacuum & Analysis | (4) | |||||||||||||
Irvine, CA | 254,900 | Manufacturing, Research and Development | Light & Motion | (5) | ||||||||||||||
Rochester, NY | 156,000 | Manufacturing, Sales, Customer Support, Service, Research and Development | Vacuum & Analysis | Owned | ||||||||||||||
Santa Clara, CA | 139,500 | Manufacturing, Customer Support, Research and Development | Light & Motion | March 31, 2021 | ||||||||||||||
Wilmington, MA | 118,000 | Manufacturing, Customer Support, Service, Research and Development | Vacuum & Analysis | Owned | ||||||||||||||
Portland, OR | 197,017 | Manufacturing, Office, and Warehouse | Equipment & Solutions | (6) | ||||||||||||||
Country | City | Sq. Ft. | Activity | Reportable Segment | Owned/Leased | |||||||
China | Shenzhen | 302,000 | Manufacturing and | V&A and L&M | Leased | |||||||
Wuxi | 65,000 | Manufacturing, Sales, Customer Support, Service and Warehouse | L&M | Leased | ||||||||
France | Beaune-la-Rolande | 93,000 | Manufacturing, Research and Development | L&M | Owned | |||||||
Israel | Jerusalem | 118,000 | Manufacturing, Sales and Research and Development | L&M | Owned and Leased | |||||||
Mexico | Nogales | 248,000 | Manufacturing and Service | V&A and L&M | Leased | |||||||
Singapore | Singapore | 50,000 | Manufacturing and Sales | E&S | Leased | |||||||
United States | Andover, MA | 158,000 | Corporate Headquarters, Manufacturing and Research and Development | V&A | Owned and Leased | |||||||
Beaverton, OR | 113,000 | Manufacturing, Office and Warehouse | E&S | Leased | ||||||||
Broomfield, CO | 107,000 | Manufacturing, Research and Development | V&A | Leased | ||||||||
Irvine, CA | 233,000 | Manufacturing, Research and Development | L&M | Leased | ||||||||
Milpitas, CA | 103,000 | Manufacturing, Sales, Customer Support, Service and Research and Development | L&M | Leased | ||||||||
Rochester, NY | 156,000 | Manufacturing, Sales, Customer Support, Service and Research and Development | V&A | Owned | ||||||||
Wilmington, MA | 118,000 | Manufacturing, Customer Support, Service and Research and Development | V&A | Owned | ||||||||
In addition to the significant facilities listed above, MKS also provides manufacturing, worldwide sales and marketing, customer support and services from various other leased and owned facilities throughout the world not listedworld. See “Business–Sales and Marketing” and “Business–Reportable Segments, and Product and Service Offerings” in the table above. See “Business—Sales, Marketing, Service and Support.”Part I, Item 1 of this Annual Report on Form 10-K. We believe that our current facilities are suitable and adequate to meet our needs.
Item 3. | Legal Proceedings |
For a description of a putative class of stockholders of Newport Corporation (“Newport”) for claims relatedour material pending legal proceedings, see Note 23 to the merger agreement (“Newport Merger Agreement”) between the Company, Newport, and a wholly-owned subsidiary of the Company (“Merger Sub”). The lawsuits named as defendants the
Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol MKSI.
On February 19, 2020,17, 2022, we had 8375 stockholders of record.
Dividend Policy and Cash Dividends
Holders of our common stock are entitled to receive dividends when and if they are declared by our Board of Directors. During 2019,2021, our Board of Directors declared a cash dividend of $0.20 per share during the first quarter and $0.22 per share during each of the second, third and fourth quarters, which totaled $48 million or $0.86 per share. During 2020, our Board of Directors declared a cash dividend of $0.20 per share during each quarter, of 2019, which totaled $43.5$44 million or $0.80 per share. During 2018, our Board of Directors declared a cash dividend of $0.18 per share during the first quarter of 2018 and $0.20 per share for the second, third and fourth quarters of 2018, which totaled $42.4 million or $0.78 per share.
On February 10, 2020,7, 2022, our Board of Directors declared a quarterly cash dividend of $0.20$0.22 per share to be paid on March 6, 202011, 2022 to shareholders of record as of February 24, 2020.
Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our Board of Directors.Directors. The Board of Directors intends to declare and pay cash dividends on our common stock based on our financial conditions and results of operations of the Company, although it has no obligation to do so. Our credit facilities contain covenants that restrict our ability to grant cash dividends in certain circumstances.
Share Repurchase Program
On July 25, 2011, our Board of Directors approved, and on July 27, 2011, we publicly announced a share repurchase program for the repurchase of up to an aggregate of $200 million of our outstanding common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased depends upon a variety of factors, including business conditions, stock market conditions and business development activities, including, but not limited to, merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any time without prior notice.
During 2019,2021 and 2020, the Company did not repurchase any shares of common stock. During 2018, the Company repurchased approximately 818,000 shares of its common stock for $75.0 million, or an average price of $91.67 per share. We have repurchased approximately 2,588,0002.6 million shares of common stock for approximately $127.0$127 million pursuant to the program since its adoption.
Comparative Stock Performance
The following graph compares the cumulative total shareholder return (assuming reinvestment of dividends) from investing $100 on December 31, 2014,2016, and plotted at the last trading day of each of the fiscal years ended December 31, 2015, 2016, 2017, 2018, 2019, 2020 and 2019 in each2021 of MKS’ common stock; a peer group index which represents a combination of all companies comprising the Morningstar Global Semiconductor Equipment & Materials Industry Group Index and Morningstar Global Scientific & Technical Instruments Industry Group Index, published by Zacks Investment Research, Inc., with these indices weighted equally; and the Nasdaq Market Index. The stock price performance on the graph below is not necessarily indicative of future price performance. Our common stock is listed on the Nasdaq
Performance Graph
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| ||||||
MKS Instruments, Inc. | $ | 100.00 |
| $ | 160.51 |
| $ | 110.65 |
| $ | 190.23 |
| $ | 261.97 |
| $ | 304.89 |
|
Nasdaq Market Index | $ | 100.00 |
| $ | 129.64 |
| $ | 125.96 |
| $ | 172.18 |
| $ | 249.51 |
| $ | 304.85 |
|
Morningstar Global Semiconductor Equipment & Materials and Morningstar Global Scientific & Technical Instruments | $ | 100.00 |
| $ | 154.00 |
| $ | 126.33 |
| $ | 210.81 |
| $ | 311.73 |
| $ | 430.90 |
|
*Morningstar Global Select Market under the ticker symbol MKSI.
2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||
MKS Instruments, Inc. | $ | 100.00 | $ | 100.24 | $ | 168.06 | $ | 269.74 | $ | 185.96 | $ | 319.70 | |||||||||||||
Nasdaq Market Index | $ | 100.00 | $ | 106.96 | $ | 116.45 | $ | 150.96 | $ | 146.67 | $ | 200.49 | |||||||||||||
Morningstar Semiconductor Equipment & Materials/Scientific & Technical Instruments * | $ | 100.00 | $ | 87.08 | $ | 111.78 | $ | 167.05 | $ | 140.53 | $ | 233.18 | |||||||||||||
Item 6. | Reserved. |
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Statement of Operations Data(1) | ||||||||||||||||||||
Net revenues | $ | 1,899,773 | $ | 2,075,108 | $ | 1,915,977 | $ | 1,295,342 | $ | 813,524 | ||||||||||
Gross profit(2) | $ | 830,431 | $ | 979,476 | $ | 891,451 | $ | 565,619 | $ | 362,872 | ||||||||||
Income from operations(3) | $ | 219,851 | $ | 494,059 | $ | 406,634 | $ | 157,267 | $ | 156,612 | ||||||||||
Net income(4) | $ | 140,386 | $ | 392,896 | $ | 339,132 | $ | 104,809 | $ | 122,297 | ||||||||||
Basic net income per share | $ | 2.57 | $ | 7.22 | $ | 6.26 | $ | 1.96 | $ | 2.30 | ||||||||||
Diluted net income per share | $ | 2.55 | $ | 7.14 | $ | 6.16 | $ | 1.94 | $ | 2.28 | ||||||||||
Cash dividends paid per common share | $ | 0.80 | $ | 0.78 | $ | 0.71 | $ | 0.68 | $ | 0.68 | ||||||||||
Balance Sheet Data (1) | ||||||||||||||||||||
Cash and cash equivalents, including restricted cash | $ | 414,572 | $ | 644,345 | $ | 333,887 | $ | 233,910 | $ | 227,574 | ||||||||||
Short-term investments | $ | 109,417 | $ | 73,826 | $ | 209,434 | $ | 189,463 | $ | 430,663 | ||||||||||
Working capital | $ | 1,115,866 | $ | 1,200,819 | $ | 946,431 | $ | 761,469 | $ | 848,527 | ||||||||||
Total assets | $ | 3,416,320 | $ | 2,614,246 | $ | 2,414,018 | $ | 2,212,242 | $ | 1,273,347 | ||||||||||
Short-term debt(5) | $ | 12,099 | $ | 3,986 | $ | 2,972 | $ | 10,993 | $ | — | ||||||||||
Long-term debt, net(5) | $ | 871,667 | $ | 343,842 | $ | 389,993 | $ | 601,229 | $ | — | ||||||||||
Other liabilities(6) | $ | 203,628 | $ | 133,932 | $ | 145,296 | $ | 131,921 | $ | 21,482 | ||||||||||
Stockholders’ equity | $ | 2,023,344 | $ | 1,873,187 | $ | 1,588,907 | $ | 1,241,792 | $ | 1,160,881 | ||||||||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes principal factors affecting the results of our operations, financial condition, cash flows and liquidity, as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements.Statements, and is intended to better allow investors to view the Company from management’s perspective. This section focuses on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of our future operating results or of our future financial condition. This section provides an analysis of our financial results for the year ended December 31, 20192021 compared to the year ended December 31, 2018.2020. For the discussion and analysis covering the year ended December 31, 20182020 compared to the year ended December 31, 2017,2019, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form
Overview
We are a global provider of instruments, systems, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for our customers. Our products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, vacuum technology, temperature sensing, lasers, photonics, optics, precision motion control, vibration control and laser-based manufacturing systems solutions. We also provide services relating to the maintenance and repair of our products, installation services and training. Our primary served markets include semiconductor, industrial technologies, life and health sciences and research and defense.
Recent Events
Acquisitions
On February 1, 2019,July 15, 2021, we completed our acquisition of Electro Scientific Industries,Photon Control Inc. (“ESI”Photon Control” and such acquisition, the “Photon Control Acquisition”), pursuant to an Agreementa definitive agreement. Photon Control designs, manufactures and Plandistributes a wide range of Merger, dated as of October 29, 2018 (the “ESI Merger”).optical sensors and systems to measure temperature and position used in semiconductor wafer fabrication. At the effective time of the ESI Merger and pursuant to the terms and conditions of the merger agreement,Photon Control Acquisition, each share of ESI’sPhoton Control’s common stock that was issued and outstanding as of immediately prior to the effective time of the ESI MergerPhoton Control Acquisition was converted into the right to receive $30.003.60 per share in cash, in Canadian dollars (“CAD”), without interest and subject to deduction offor any required withholding tax. We paid to the former ESI stockholdersPhoton Control securityholders aggregate consideration of approximately $1.033 billion,CAD 379 million or $303 million, excluding related transaction fees and expenses, andnon-cashconsideration related to the exchange of share-based awards of approximately $31 million for a total purchase consideration of approximately $1.063 billion.expenses. We funded the payment of the aggregate consideration with available cash on hand. Photon Control is included in our Light & Motion (“L&M”) segment.
The Photon Control Acquisition has helped us deliver on one of our long-term strategic objectives, which is to broaden our portfolio of key technologies to better serve our customers. The Photon Control Acquisition further advances our strategy to enhance our Surround the Chamber® offering by adding optical sensors for temperature control for critical etch and deposition applications in semiconductor wafer fabrication.
On July 1, 2021, we entered into a definitive agreement (as amended from time to time, the “Implementation Agreement”) to acquire Atotech, a leading process chemicals technology company and a market leader in advanced electroplating solutions. Pursuant to the Implementation Agreement, we agreed to pay $16.20 per share in cash and 0.0552 of a share of our common stock for each outstanding common share of Atotech. At the time of the announcement of the acquisition, the total value of the aggregate cash and stock consideration was approximately $5.1 billion. The final value of the consideration will be determined at the time of the closing of the acquisition, which is expected to occur in the first quarter of 2022, subject to the satisfaction of certain closing conditions, including receipt of regulatory approval from China and approval by the Royal Court of Jersey. Our obligations to complete the acquisition are not subject to any financing condition. We intend to fund the cash portion of the transaction with a combination of our available cash on hand and committed term loan debt financing. In connection with entering into the proceeds from our 2019 IncrementalImplementation Agreement, we entered into (a) a commitment letter (the “Initial Commitment Letter”), dated as of July 1, 2021, with JPMorgan Chase Bank, N.A. and Barclays Bank PLC (collectively, the “Initial Commitment Parties”) and (b) joinders to the Initial Commitment Letter to add certain additional lender parties (the “Commitment Letter Joinders” and, together with the Initial Commitment Letter, the “Commitment Letter”) dated as of July 23, 2021, with the Initial Commitment Parties and the additional lenders party thereto (collectively, the “Supplemental Commitment Parties” and, together with the Initial Commitment Parties, the “Commitment Parties”), pursuant to which, subject to the terms and conditions set forth therein, the Commitment Parties committed to provide (i) a senior
secured term loan credit facility in an aggregate principal amount of $5.3 billion (the “New Term Loan Facility”) and (ii) a senior secured revolving credit facility with aggregate total commitments of $500 million (the “New Revolving Credit Facility”). The New Term Loan Facility and New Revolving Credit Facility would refinance our existing term loan facility (the “Term Loan Facility”) and our existing asset-based revolving credit facility (the “ABL Facility”), respectively, and the New Term Loan Facility would be used to finance a portion of the acquisition and to refinance certain existing indebtedness of Atotech.
On October 22, 2021, we completed the syndication of the New Term Loan Facility, comprised of two tranches: a $4.7 billion loan at LIBOR plus 2.25%, a floor of 0.50% and 0.25% of original issue discount, and a Euro tranche of 0.5 billion Euro (“EUR”), or approximately $0.6 billion at EURIBOR plus 2.75%, a floor of 0.00% and 0.25% of original issue discount. Subsequent to the syndication, the $4.7 billion tranche is expected to be modified to reference a term rate based on SOFR (plus an applicable credit spread adjustment) as definedthe benchmark rate.
The Commitment Parties’ obligations under the Commitment Letter and as described further below.
Segments and Markets
The Vacuum & Analysis (“V&A”) segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, and vacuum technology.
The Light & MotionL&M segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in lasers, photonics, optics, temperature sensing, precision motion control and vibration control.
The Equipment & Solutions segment was created in conjunction with the ESI Merger. The Equipment & Solutions(“E&S”) segment provides a range of products including laser-based systems for PCB manufacturing, which include flexible interconnect PCB processing systems and high-density interconnect solutions for the micro-machining industry that enable customers to optimize production. The primary served markets for the Equipment & Solutions segment
Semiconductor Market
A significant portion of our sales is derived from products sold to semiconductor capital equipment manufacturers and testing.semiconductor device manufacturers. Our products are used in major semiconductor processing steps, such as depositing thin films of material onto silicon wafer substrates, etching, cleaning, lithography, metrology and inspection. The Equipment & Solutions segment’s systems incorporate specialized laser technologysemiconductor industry continually faces new challenges as products become smaller, more powerful and proprietaryhighly mobile. Ultra-thin layers, smaller critical dimensions, new materials, 3D structures, and the ongoing need for higher yield and productivity drive the need for tighter process measurement and control, software to efficiently processall of which MKS supports. We believe we are the materialsbroadest critical subsystem provider in the wafer fabrication equipment (“WFE”) ecosystem and components that are an integral partaddress over 85% of electronic devicesthe market.
Approximately 62% and systems.
Net revenues between sales to customers in our advanced markets and sales to customers in our semiconductor capital equipment manufacturermarket increased by $439 million, or 32%, in 2021, compared to 2020, due to increases in net revenues in V&A and semiconductor device manufacturer markets will be relatively consistent for the foreseeable future, excluding the impact of any future acquisitions.
The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we cannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry.
In 2021, we experienced supply chain disruptions, component shortages and significant price increases for certain components in our semiconductor market due to global capacity constraints compounded by increasing global demand as well as the ongoing COVID-19 pandemic. We expect these disruptions and shortages to continue in the near-term while our suppliers adjust to significant increases in demand and respond to the challenges posed by the COVID-19 pandemic, all of which may negatively impact net revenues from our semiconductor market for the three months ending March 31, 2022.
Advanced Markets
In addition to the semiconductor market, our products are used in the industrial technologies, life and health sciences, research and defense markets.
Industrial Technologies
Industrial technologies encompasses a wide range of diverse applications, including advanced electronics manufacturing comprising flexible and rigid printed circuit board (“PCB”) processing/fabrication, electronic component manufacturing, glass coating and electronic thin films. Electronic thin films are a primary component of numerous electronic products including flat panel displays, light emitting diodes, solar cells and data storage media. Other applications include laser marking, measurement and scribing, natural gas and oil production and environmental monitoring.
Life and Health Sciences
Our products for life and health sciences are used in a diverse array of applications, including bioimaging, medical instrument sterilization, medical device manufacturing, analytical, diagnostic and surgical instrumentation, consumable medical supply manufacturing and pharmaceutical production.
Research and Defense
Our products for research and defense are sold to government, university and industrial laboratories for applications involving research and development in materials science, physical chemistry, photonics, optics and electronics materials. Our products are also sold for monitoring and defense applications including surveillance, imaging and infrastructure protection.
Approximately 38% and 41% of our net revenues in the years ended December 31, 2021 and 2020, respectively, were from advanced markets.
Net revenues from customers in our advanced markets increased by $180 million, or 19%, in 2021, compared to 2020, with E&S, V&A and L&M recording net revenue increases of $67 million, $62 million and $51 million, respectively. Net revenues in our industrial technologies market increased $164 million, primarily in advanced electronics manufacturing applications such as PCB processing/fabrication and electronic component manufacturing. Net revenues in our research and defense market increased $11 million, due to a rebound in demand following university and research lab closures in the first half of 2020 caused by the COVID-19 pandemic.
International Markets
A significant portion of our net revenues is from sales to customers in international markets. International net revenues accounted for approximately 53%57% and 51%55% of our total net revenues in 20192021 and 2018,2020, respectively. A significant portion of our international net revenues was from China, Israel, Japan, South Korea Germany and Japan. We expect international net revenues will continue to represent a significant percentage of our total net revenues. Long-lived assets located in the United States were $208 million and $147 million, in 2019 and 2018, respectively, excluding goodwill, intangible assets, and long-term
Critical Accounting Policies and Estimates
The MD&A discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.States (“U.S. GAAP”). The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On anallowance for doubtful accounts, pension plan
We believe the following critical accounting policies affect the most significant judgments, assumptions and estimates we use in preparing our consolidated financial statements:
Revenue Recognition and Allowance. We account for Doubtful Accounts
• | Identify the contract with a customer |
• | Identify the performance obligations in the contract |
• | Determine the transaction price |
• | Allocate the transaction price to performance obligations in the contract |
• | Recognize revenue when or as we satisfy a performance obligation |
Revenue under ASC 606 is recognized when or as obligations under the terms of a contract with our customer has been satisfied and control has transferred to the customer. The majority of our performance obligations, and associated revenue, are transferred to customers at a point in time, generally upon shipment of a product to the customer or receipt of the product by the customer and without significant judgments. Installation services are not significant and are usually completed in a short period of time (normally less than two weeks) and therefore, recorded at a point in time when the installation services are completed, rather than over time as they are not material. Extended warranty, service contracts, and repair services, which are transferred to the customer over time, are recorded as revenue as the services are performed. For repair services, we make an accrual at each quarter end based upon historical repair times within our product groups to record revenue based upon the estimated number of days completed to date, which is consistent with ratable recognition. Customized products with no alternative future use to us, and that have an enforceable right to payment for performance completed to date, are also recorded over time. We consider this to be a faithful depiction of the transfer to the customer of revenue over time as the work is performed or service is delivered, ratably over time.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract. Sales, value add, and other taxes we collect
We periodically enter into contracts with our customers in which a customer may purchase a combination of goods and or services, such as products with installation services or extended warranty obligations.warranties. These contracts include multiple promises that we evaluate to determine if the promises are separate performance obligations. Once we determine the performance obligations, we then determine the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the method we expect to better predict the amount of consideration to which it will be entitled. There are no constraints on the variable consideration recorded. We then allocate the transaction price to each performance obligation in the contract based on a relative stand-alone selling price charged separately to customers or using an expected cost pluscost-plus margin method. The corresponding revenues are recognized when or as the related performance obligations are satisfied, which are noted above. The impact of variable consideration has been immaterial.
We sometimes sell separately-pricedseparately priced service contracts and extended warranty contracts related to certain of our products, especially our laser products. The separately priced contracts generally range from 12 to 60 months. We normally receive payment at the inception of the contract or beginning of an annual period and recognize revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the obligations under the contract.
We monitor and track the amount of product returns, provide for sales return allowances and reduce revenue at the time of shipment for the estimated amount of such future returns, based on historical experience. While product returns have historically been within our expectations and the provisions established, there is no assurance that we will continue to experience the same return rates that we have in the past. Any significant increase in product return rates could have a material adverse impact on our operating results for the period or periods in which such returns materialize.
While we maintain a credit approval process, significant judgments are made by management in connection with assessing our customers’ ability to pay at the time of shipment. Despite this assessment, from time to time, our customers are unable to meet their payment obligations. We continuously monitor our customers’ credit worthiness and use our judgment in establishing a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, there is no assurance that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our customers could have a material adverse impact on the collectability of accounts receivable and our future operating results.
Inventory
Warranty Costs.
Pension Plans.
Stock-Based Compensation Expense.
We typically issue restricted stock units (“RSUs”) as stock-based compensation. We also provide certain employees the opportunity to purchase our shares through an Employee Stock Purchase Plan (“ESPP”). For RSUs, the fair value is the closing
market price of the stock price on the date of grant. We estimate the fair value of stock appreciation rights and shares issued under our ESPP using the Black-Scholes pricing model, which is affected by our stock price as well as assumptions regardingincorporates a number of complex and subjective variables. These variables, include ourincluding expected stock price volatility over the term of the awards, expected life, risk free interest rate and expected dividends. Management determined that blended volatility, a combination of historical and implied volatility, is more reflective of market conditions and a better indicator of expected volatility than historical or implied volatility alone.
Certain RSUs involve stock to be issued upon the achievement of performance conditions (“performance shares”) under our stock incentive plans.plan. Such performance shares become available, subject to time-based vesting conditions if, and to the extent that, financial or operational performance criteria for the applicable period are achieved. Accordingly, the number of performance shares earned will vary based on the level of achievement of financial or operational performance objectives for the applicable period. Until such time that our financial performance can ultimately be determined, each quarter we estimate the number of performance shares to be earned based on an evaluation of the probability of achieving the financial performance objectives. Such estimates are revised, if necessary, in subsequent periods when the underlying factors change our evaluation of the probability of achieving the financial performance objectives. Accordingly, share-based compensation expense associated with performance shares may differ significantly from the amount recorded in the current period.
The assumptions used in calculating the fair value of share-based compensation awards represents management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
Intangible Assets, Goodwill and Other Long-Lived Assets
Goodwill and indefinite-lived intangible assets are subject to annual impairment testing as well as testing upon the occurrence of any event that indicates a potential impairment. Intangible assets and other long-lived assets are also subject to an impairment test if there is an indicator of impairment. If our expectations of future results and cash flows are significantly diminished, intangible assets and goodwill may be impaired and the resulting charge to operations may be material. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists, and then measure the impairment using discounted cash flows. To measure impairment for goodwill, we compare the fair value of our reporting units by measuring discounted cash flows to the book value of the reporting units. Goodwill would be impaired if the resulting implied fair value was less than the recorded book value of the goodwill.
The estimation of useful lives and expected cash flows require us to make significant judgments regarding future periods that are subject to some factors outside of our control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.
We have elected to perform our annual goodwill impairment test as of October 31 of each year, or more often if events or circumstances indicate that there may be impairment. Goodwill is the amount by which the cost of acquired net assets exceeded the fair value of those net assets on the date of acquisition. We allocate goodwill to reporting units at the time of acquisition or when there is a change in the reporting structure and base that allocation on which reporting units will benefit from the acquired assets and liabilities. Reporting units are defined as operating segments or one level below an operating segment, referred to as a component. The estimated fair value of our reporting units was based on discounted cash flow models derived from internal earnings and internal and external market forecasts. Determining fair value requires the exercise of significant judgment, including assumptions about appropriate discount and perpetual growth rates, as well as forecasted revenue growth rates and gross profit and operating margins. Discount rates are based on a weighted average cost of capital (“WACC”), which represents the average rate a business must pay its providers of debt and equity. The WACC used to test goodwill is derived from a group of comparable companies. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. We make every effort to forecast these future cash flows as accurately as possible with the information available at the time the forecast is developed.
In performing our annual goodwill impairment test, we are permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying
undertake the qualitative assessment and we conclude that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we would then proceed to the quantitative impairment test. In the quantitative assessment, we compare the fair value of the reporting unit to its carrying amount, which includes goodwill. If the fair value exceeds the carrying value, no impairment loss exists. If the fair value is less than the carrying amount, a goodwill impairment loss is measured and recorded.
As of October 31, 2019,2021, we performed our annual impairment assessment of goodwill using a quantitative assessment for our Equipment & Solutions reporting unit, which comprises our Equipment & Solutions reportable segment, and a qualitative assessment for all of our other reporting units andunits. We determined that it iswas more likely than not that the fair values were more than the carrying values for each of the reporting units exceed their carrying amount. units.
We will continue to monitor and evaluate the carrying value of goodwill. If market and economic conditions or business performance deteriorate, this could increase the likelihood of us recording an impairment charge. However, we believe it is not reasonably likely that an impairment will occur at any of its reporting units over the next twelve months.
Income Taxes.
Accounting for income taxes requires a
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total net revenues of certain line items included in our consolidated statements of operations and comprehensive income data:
|
| Years Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Net revenues: |
|
|
|
|
|
|
|
|
Product |
|
| 87.4 | % |
|
| 86.5 | % |
Service |
|
| 12.6 |
|
|
| 13.5 |
|
Total net revenues |
|
| 100.0 |
|
|
| 100.0 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
Product |
|
| 46.5 |
|
|
| 47.5 |
|
Service |
|
| 6.7 |
|
|
| 7.5 |
|
Total cost of revenues (exclusive of amortization shown separately below) |
|
| 53.2 |
|
|
| 55.0 |
|
Gross profit |
|
| 46.8 |
|
|
| 45.0 |
|
Research and development |
|
| 6.8 |
|
|
| 7.4 |
|
Selling, general and administrative |
|
| 13.0 |
|
|
| 15.2 |
|
Acquisition and integration costs |
|
| 1.0 |
|
|
| 0.1 |
|
Restructuring and other |
|
| 0.4 |
|
|
| 0.4 |
|
Amortization of intangible assets |
|
| 1.9 |
|
|
| 2.4 |
|
Asset impairment |
|
| — |
|
|
| 0.1 |
|
COVID-19 related net credits |
|
| — |
|
|
| (0.1 | ) |
Income from operations |
|
| 23.7 |
|
|
| 19.5 |
|
Interest income |
|
| — |
|
|
| 0.1 |
|
Interest expense |
|
| 0.9 |
|
|
| 1.3 |
|
Other expense, net |
|
| 0.3 |
|
|
| 0.1 |
|
Income before income taxes |
|
| 22.5 |
|
|
| 18.2 |
|
Provision for income taxes |
|
| 3.8 |
|
|
| 3.1 |
|
Net income |
|
| 18.7 | % |
|
| 15.1 | % |
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Net revenues: | ||||||||
Product | 84.8 | % | 88.4 | % | ||||
Service | 15.2 | 11.6 | ||||||
Total net revenues | 100.0 | % | 100.0 | % | ||||
Cost of revenues: | ||||||||
Product | 48.1 | 46.7 | ||||||
Service | 8.2 | 6.1 | ||||||
Total cost of revenues | 56.3 | 52.8 | ||||||
Gross profit | 43.7 | % | 47.2 | % | ||||
Research and development | 8.6 | 6.5 | ||||||
Selling, general and administrative | 17.4 | 14.4 | ||||||
Acquisition and integration costs | 2.0 | 0.1 | ||||||
Restructuring and other | 0.4 | 0.3 | ||||||
Fees and expenses related to repricing of Term Loan Facility | 0.3 | — | ||||||
Amortization of intangible assets | 3.5 | 2.1 | ||||||
Gain on the sale of long-lived assets | (0.3 | ) | — | |||||
Asset impairment | 0.2 | — | ||||||
Income from operations | 11.6 | % | 23.8 | % | ||||
Interest income | 0.3 | 0.3 | ||||||
Interest expense | 2.3 | 0.8 | ||||||
Other expense, net | 0.2 | 0.1 | ||||||
Income from operations before income taxes | 9.4 | % | 23.2 | % | ||||
Provision for income taxes | 2.0 | 4.3 | ||||||
Net income | 7.4 | % | 18.9 | % | ||||
Year Ended December 31, 20192021 compared to 2018
Net Revenues
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Product |
| $ | 2,578.6 |
|
| $ | 2,014.8 |
|
Service |
|
| 371.0 |
|
|
| 315.2 |
|
Total net revenues |
| $ | 2,949.6 |
|
| $ | 2,330.0 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Product | $ | 1,611.3 | $ | 1,835.2 | ||||
Service | 288.5 | 239.9 | ||||||
Total net revenues | $ | 1,899.8 | $ | 2,075.1 | ||||
Net product revenues decreased $223.9increased $564 million in 2019,2021, compared to 2018. The decrease was attributed to a decrease in net product revenues, primarily due to lower volume, from our semiconductor customers of $209.5 million and a decrease in net product revenues from customer in our advanced markets of $14.4 million. The decrease in product revenue from our semiconductor customers for the MKS business, excluding the impact of the ESI Merger (the “legacy MKS business”), during 2019, was $241.7 million compared to 2018, offset by an increase in2020. Net product revenues from our semiconductor market increased $394 million due to broad-based increases in demand for semiconductor capital equipment across memory, foundry and logic manufacturing applications and contributions from Photon Control, offset by a decrease in net revenues from E&S, due to a discontinuation of certain non-core products. Net revenues from our top ten customers accounted for 47%, 44% and 33% of $32.2 millionnet revenues for 2021, 2020 and 2019, respectively, with the increasing percentages attributable to increasing semiconductor market sales. As a percentage of net revenues from our top ten customers, semiconductor market revenue accounted for greater than 90% in each of these years. The semiconductor market has historically experienced cyclical variations in product supply and demand. It is subject to rapid demand shifts, which are difficult to predict, and we cannot be certain as to the Equipment & Solutions segment, as a resulttiming or extent of future demand or any future weakness in the semiconductor capital equipment industry. For example, our semiconductor market revenue sequentially increased 32% in 2021, sequentially increased 49% in 2020, and sequentially decreased 19% in 2019. We believe net revenues attributable to our semiconductor market customers are affected by the cyclical nature of the ESI Merger. The decrease insemiconductor market.
Net product revenues in advanced markets increased $169 million due to increased net revenue from customersour industrial technologies markets, primarily in advanced electronics manufacturing applications such as PCB processing/fabrication and
electronic component manufacturing. Net product revenues in our
Net service revenues consisted mainly of fees for services related to the maintenance and repair of our products, sales of spare parts, and installation and training. Service revenues increased $48.6$56 million in 2019,2021, compared to 2018. The increase was primarily attributed to an increase in2020. Net service revenues from our semiconductor customers increased $45 million and net service revenues from advanced market customers increased $11 million, both reflective of higher product revenues in our advanced markets of $55.2 million from the Equipment & Solutions segment as a result of the ESI Merger.
Total international net revenues, including product and service, were $1.0$1.7 billion in 20192021, compared to $1.1$1.3 billion for 2018.in 2020. The decreaseincrease in 20192021 was primarily due to decreases in net revenues in Japan and South Korea, partially offset by an increaseincreases in net revenues from China.
The following table sets forth our net revenues by reportable segment:
Net Revenues
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Vacuum & Analysis |
| $ | 1,861.5 |
|
| $ | 1,405.9 |
|
Light & Motion |
|
| 813.4 |
|
|
| 689.6 |
|
Equipment & Solutions |
|
| 274.7 |
|
|
| 234.5 |
|
Total net revenues |
| $ | 2,949.6 |
|
| $ | 2,330.0 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Vacuum & Analysis | $ | 990.5 | $ | 1,260.9 | ||||
Light & Motion | 725.6 | 814.2 | ||||||
Equipment & Solutions | 183.7 | — | ||||||
Total net revenues | $ | 1,899.8 | $ | 2,075.1 | ||||
Net revenues for our Vacuum & AnalysisV&A segment decreased $270.4increased $456 million in 2019,2021, compared to 2018,2020, due primarily to a volume decreasesincrease of $233.1$393 million from our semiconductor customers and $37.3an increase of $63 million from our advanced marketmarkets customers, primarily from customers in our process and industrial technologies market.
Net revenues for our Light & MotionL&M segment decreased $88.6increased $124 million in 2019,2021, compared to 2018,2020, due to decreasesan increase of $14.3$73 million from our semiconductor customers and $74.3an increase of $51 million from our advanced marketmarkets customers, primarily from volume decreases from customers in our process and industrial technologies market.
Net revenues from our E&S segment increased $40 million in 2021, compared to 2020, due to an increase of $67 million from our advanced markets customers, primarily from customers in our industrial technologies market, partially offset by a decrease of $27 million from our semiconductor customers, resulting from the discontinuation of certain non-core products.
The following table sets forth gross profit as a percentage of net revenues by product and service:
Gross Profit
|
| Years Ended December 31, |
|
| % Points |
| ||||||
(As a percentage of net revenues) |
| 2021 |
|
| 2020 |
|
| Change |
| |||
Product |
|
| 46.8 | % |
|
| 45.1 | % |
|
| 1.7 | % |
Service |
|
| 46.5 | % |
|
| 44.8 | % |
|
| 1.7 | % |
Total gross profit percentage |
|
| 46.8 | % |
|
| 45.0 | % |
|
| 1.8 | % |
Years Ended December 31, | % Points Change | |||||||||||
(As a percentage of net revenues) | 2019 | 2018 | ||||||||||
Product | 43.3 | % | 47.2 | % | (3.9 | )% | ||||||
Service | 46.0 | % | 47.3 | % | (1.3 | )% | ||||||
Total gross profit percentage | 43.7 | % | 47.2 | % | (3.5 | )% | ||||||
Gross profit as a percentage of net product revenues decreasedincreased by 3.91.7 percentage points in 2019,2021, compared to 2018,2020, primarily due to lower factory utilization and lowerhigher revenue volumes partially offset byand favorable product mix.
Gross profit as a percentage of net service revenues decreasedincreased by 1.31.7 percentage points in 2019,2021, compared to 2018,2020, primarily due to unfavorable product mix and higher material costs, partially offset by higher utilization of service technicians.
The following table sets forth gross profit as a percentage of net revenues by reportable segment:
Gross Profit
|
| Years Ended December 31, | % Points |
| ||||||||
(As a percentage of net revenues) |
| 2021 |
|
| 2020 |
|
| Change |
| |||
Vacuum & Analysis |
|
| 46.6 | % |
|
| 45.1 | % |
|
| 1.5 | % |
Light & Motion |
|
| 47.4 |
|
|
| 44.9 |
|
|
| 2.5 |
|
Equipment & Solutions |
|
| 46.3 |
|
|
| 45.2 |
|
|
| 1.1 |
|
Total gross profit percentage |
|
| 46.8 | % |
|
| 45.0 | % |
|
| 1.8 | % |
Years Ended December 31, | % Points Change | |||||||||||
(As a percentage of net revenues) | 2019 | 2018 | ||||||||||
Vacuum & Analysis | 43.0 | % | 45.8 | % | (2.8 | )% | ||||||
Light & Motion | 46.1 | 49.3 | (3.2 | ) | ||||||||
Equipment & Solutions | 36.8 | — | — | |||||||||
Total net revenues | 43.7 | % | 47.2 | % | (3.5 | )% | ||||||
Gross profit as a percentage of net revenues for our Vacuum & AnalysisV&A segment decreased by 2.8 percentage points in 2019, compared to 2018,increased primarily due to lower factory utilization and lowerhigher revenue volumes partially offset byand favorable product mix.
Gross profit as a percentage of net revenues for our Light & MotionL&M segment decreased by 3.2 percentage points in 2019, compared to 2018,increased primarily due to lower factory utilization, lowerhigher revenue volumes and favorable product mix partially offset by unfavorable product mix.
Gross profit as a percentage of net revenues for our Equipment & Solutions includes the inventory
Research and Development
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Research and development |
| $ | 200.0 |
|
| $ | 173.1 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Research and development expenses | $ | 164.1 | $ | 135.7 | ||||
Research and development expenses increased $28.4$27 million in 2019,2021, compared to 2018, due to an increase of $26.8 million from the ESI Merger,2020, primarily due to increases of $16.8$19 million in compensation-related expense, $3.5 million in project materials, $3.4 million in depreciation expense and $1.7 million in occupancy costs, and an increase of $1.6 million from the legacy MKS business, primarily due to increases of $2.8$3 million in project materials and $0.6$3 million in professional fees, offset by a $2.1 million decrease in compensation-related expense.
Our research and development isefforts are primarily focused on developing and improving our instruments, components, subsystems, and process control and systems solutions to improve process performance and productivity.
We have thousands of products and our research and development efforts primarily consist of a large number of projects related to these products, none of which is individually material to us. Current projects typically have durations of 3 to 30 months, depending upon whether the product is an enhancement of existing technology or a new product. Our current initiatives include projectsproducts have continuously advanced as we strive to enhance the performance characteristics of older products,meet our customers’ evolving needs. We have developed, and continue to develop, new products and to integrate various technologies into subsystems. These projects support in large part,address industry trends, such as the transition in the semiconductor industry to smallershrinking of integrated circuit geometriescritical dimensions and technology inflections, and, in the flat panel display and solar markets, the transition to larger substrate sizes, which require more advanced processing and process control
We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets. We expect to continue to make significant investment in research and development activities. We are subject to risks from products not being developed in a timely manner, as well as from rapidly changing customer requirements and competitive threats from other companies and technologies. Our success primarily depends on our products being designed into new generations of equipment for the semiconductor industry and advanced technology markets. We develop products that are technologically advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital equipment.equipment and advanced markets applications. If our products are not chosen to be designed into our customers’ products, our net revenues may be reduced during the lifespan of those products.
Selling, General and Administrative
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Selling, general and administrative |
| $ | 385.1 |
|
| $ | 353.1 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Selling, general and administrative expenses | $ | 330.3 | $ | 298.1 | ||||
Selling, general and administrative expenses increased $32.2$32 million during 2019,2021, compared to 2018, due to an increase of $38.7 million from the ESI Merger,2020, primarily due to $24.0increases of $26 million in compensation-related expense, $4.1costs, $7 million of depreciation expense, $2.2in commissions and $3 million of travel and entertainment expense and $2.3 million of consulting and professional feesin information technology costs, partially offset by a decrease of $6.5 million from the legacy MKS business, primarily due to a decrease of $8.5$4 million in compensation-related expense, offset by an increase of $1.4 million in occupancy costs.
Acquisition and Integration Costs
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Acquisition and integration costs |
| $ | 29.8 |
|
| $ | 3.8 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Acquisition and integration costs | $ | 37.3 | $ | 3.1 | ||||
Acquisition and integration costs incurred during 2019 and 20182021 related primarily to the ESI Merger. In 2019, these costs consisted primarily of compensation costs for certain executives from ESI who had change in control provisions in their respective ESI employment agreements that were accounted for as dual-trigger arrangements and other stock vesting accelerations, as well as consulting and professional fees associatedin connection with the ESI Merger. In 2018, theseour recently completed acquisition of Photon Control, our pending acquisition of Atotech and our proposed acquisition of Coherent, Inc. Acquisition and integration costs during 2020 consisted primary of consulting and professional fees associated with the ESI Merger offset by $1.1 million severance accrual reversalintegration costs related to the Newport Merger.
Restructuring and other
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Restructuring and other |
| $ | 11.1 |
|
| $ | 9.4 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Restructuring and other | $ | 7.0 | $ | 4.6 | ||||
Restructuring and other charges whichcosts incurred in 2021 primarily consisted ofrelated to duplicate facility costs attributed to entering into new leases, severance costs relateddue to an organization-wide reductiona global cost saving initiative, severance costs relating to the pending closure of two facilities in workforce, the consolidation of service functions in Asia,Europe and the movement of certain productsproduct manufacturing to lowerlow cost regions.
Restructuring and other costs regionsin 2020 primarily consisted of duplicate facility costs attributed to entering into new facility leases, costs related to the exit of certain product groups and costs incurred fromrelated to the pending closure of a facility in Europe. In addition, we recorded a charge forSuch costs were offset by an insurance reimbursement related to a legal settlement from a contractual obligation we assumed as part of the Newport Merger.
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Fees and expenses related to repricing of Term Loan Facility | $ | 6.6 | $ | 0.4 | ||||
Amortization of Intangible Assets
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Amortization of intangible assets |
| $ | 55.3 |
|
| $ | 55.2 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Amortization of intangible assets | $ | 67.4 | $ | 43.5 | ||||
Amortization of intangible assets increased by $23.9 millionwere consistent in 2019,2021 compared to 2018, due to2020. New amortization costs in 2021 from our acquisition of Photon Control in July 2021 were offset by the decrease of certain intangible assets acquired in the ESI Merger.
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Gain on sale of long-lived assets | $ | (6.8 | ) | $ | — | |||
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Asset impairment | $ | 4.7 | $ | — | ||||
Interest Expense, Net
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Interest expense, net |
| $ | 24.8 |
|
| $ | 27.7 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Interest expense, net | $ | 38.7 | $ | 11.2 | ||||
Interest expense, net, increaseddecreased by $27.5$3 million in 2019,2021, compared to 2018,2020, primarily due to lower interest expense related to Amendment No. 5, as described below.a result of lower interest rates and lower average debt balances as a result of principal payments made.
Other Expense, Net
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Other expense, net |
| $ | 8.6 |
|
| $ | 3.1 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Other expense, net | $ | 3.3 | $ | 1.9 | ||||
Other expense, net, for 20192021 and 20182020 primarily related to changes in foreign exchange rates.
Provision for Income Taxes
|
| Years Ended December 31, |
| |||||
(Dollars in millions) |
| 2021 |
|
| 2020 |
| ||
Provision for income taxes |
| $ | 114.1 |
|
| $ | 72.9 |
|
Years Ended December 31, | ||||||||
(Dollars in millions) | 2019 | 2018 | ||||||
Provision for income taxes | $ | 37.5 | $ | 88.1 | ||||
Our effective tax rates for the years 20192021 and 20182020 were 21.1%17.1% and 18.3%17.2%, respectively. Our 2019 effective tax rate was higher than the U.S. statutory tax rate due to the global intangible low taxed income inclusion,
As of December 31, 2019,2021, the total gross unrecognized tax benefits, which excludes interest and penalties, was $43.5$43 million. As of December 31, 2018,2020, the total gross unrecognized tax benefits, which excludes interest and penalties, was $32.7$47 million. The net increasedecrease was primarily attributable to the release of a reserve related to federal research tax credits, partially offset by an addition of historical gross unrecognized tax benefits for ESI as a result of the ESI Merger during the quarter ended March 31, 2019.
We accrue interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of December 31, 20192021 and 2018,2020, we accrued interest on unrecognized tax benefits of approximately $0.5$1 million and $0.6$1 million, respectively.
Over the next 12 months, it is reasonably possible that we may recognize approximately $1.5$4 million of previously net unrecognized tax benefits, excluding interest and penalties, related to various U.S. federal, state and foreign tax positions primarily due to the expiration of statutes of limitations.
We are subject to examination by U.S. federal, state and foreign tax authorities. The U.S. Internal Revenue Service (the “IRS”) commenced an examination of our U.S. federal income tax filings for tax years 2015 and 2016 during the quarter ended September 30, 2017. This audit was effectively settled during the quarter ended March 31, 2018, and the impact was not material. Also, during the quarter ended March 31, 2018, we received notification from the IRS of its intent to audit our subsidiary, Newport, for the tax year 2015. This audit commenced during the quarter ended June 30, 2018 and was effectively settled during the quarter ended June 30, 2019 with a no change result. The U.S. statute of limitations remains open for tax years 20162018 through the present. The statute of limitations for our tax filings in other jurisdictions varies between fiscal years 20142015 through present. We also have certain federal credit carry-forwardscarryforwards and state tax loss and credit carry-forwardscarryforwards that are open to examination for tax years 20002002 through the present.
In 2021, we recorded a net benefit to income tax expense of $1.7$4 million, excluding interest and penalties, due to reserve releases related to the expiration of certain statutes of limitations for previously open tax years. In 2020, we recorded a net benefit to income tax expense of $1 million, excluding interest and penalties, due to reserve releases related to the expiration of certain statutes of limitations for previously open tax years and the effective settlement of an IRSInternal Revenue Service audit. In 2018, we recorded a net benefit to income tax expense of $1.6 million, excluding interest and penalties, due to reserve releases related to the expiration of certain statutes of limitations for previously open tax years and the effective settlement of an IRS audit.
Our future effective tax rate depends on various factors, including the impact of tax legislation, further interpretations and guidance from U.S. federal and state governments on the impact of proposed regulations issued by the IRS, as well as the geographic composition of our
2021. The ARPA income tax provisions that are effective in future years are being evaluated and we have not yet determined the impact on our consolidated financial statements.
Liquidity and Capital Resources
Cash, cash equivalents and short-term marketable investments totaled $524.0$1 billion at December 31, 2021, an increase of $207 million compared to $836 million at December 31, 2019, a decrease of $194.2 million compared to $718.2 million at December 31, 2018.2020. The primary driver in our current and anticipated future cash flows is and will continue to be cash generated from operations, consisting primarily of our net income, excluding
Our total cash and cash equivalents and short-term marketable investments at December 31, 2021 consisted of $619 million held in the United States and $419 million held by our foreign subsidiaries. We believe that our current cash and investments position and available borrowing capacity, together with the cash anticipated to be generated from our operations, will be sufficient to satisfy our estimated working capital, planned capital expenditure requirements, and any future cash dividends declared by our Board of Directors or share repurchases through at least the next 12 months and the foreseeable future.
In periods when our sales are growing, higher sales to customers will result in increased trade receivables, and inventories will generally increase as we build products for future sales. This may result in lower cash generated from operations. Conversely, in periods when our sales are declining, our trade accounts receivable and inventory balances will generally decrease, resulting in increased cash from operations.
Net cash provided by operating activities was $244.5$639 million for 20192021 and resulted from net income of $140.4$551 million, which included
Net cash provided by operating activities was $413.8$513 million for 20182020 and resulted from net income of $392.9$350 million, which included
Net cash used in investing activities was $947.2$205 million for 2019 and was due to the payment of a portion of2021, reflecting the purchase priceof Photon Control for the ESI Merger of $988.6$268 million, net of cash and cash equivalents acquired, and purchases of property, plant and equipment of $63.9$87 million, primarily for production related equipment, offset by the net sales and maturities of short-term investments of $63.2 million and proceeds from the sale of long-lived assets of $42.1$150 million. Net cash provided byused in investing activities was $72.8$202 million for 2018, due to2020, reflecting net sales and maturitiespurchases of short-term investments of $135.7$117 million offset by theand purchases of property, plant and equipment of $62.9 million.
Net cash provided byused in financing activities was $476.2$65 million for 20192021 and was from net proceeds of $530.7 million, mainly from our 2019 Incremental Term Loan Facility, as defined and as described further below, usedprimarily due to finance the ESI Merger, offset by dividend payments made to holders of our common stockholdersstock of $43.5$48 million and net payments of short and long-term borrowings of $14 million.
Net cash used in financing activities was $121 million for 2020 and was primarily due to a repayment of our Term Loan Facility of $59 million, dividend payments made to holders of our common stock of $44 million and net payments related to tax payments for employee stock awards of $11.0$20 million, offset by net proceeds from short-term borrowings of $2 million. Net cash used in financing activities was $178.0 million for 2018 and primarily resulted from the repurchase of common stock of $75.0 million, partial repayment of our Term Loan Facility of $50.0 million, dividend payments made to common stockholders of $42.4 million and net payments related to tax payments for employee stock awards of $11.1 million.
For the year ended December 31, 2019,2021, we paid cash dividends of $43.5$48 million in the aggregate or $0.80$0.86 per share. For the year ended December 31, 2018,2020, we paid cash dividends of $42.4$44 million in the aggregate or $0.78$0.80 per share. Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our Board of Directors. Holders of our common stock are entitled to receive dividends when and if they are declared by our Board of Directors. In addition, underUnder the terms of our Term Loan Facility and our ABL Facility, as defined and described further below, we may be restricted from paying dividends under certain circumstances.
On February 10, 2020,7, 2022, our Board of Directors declared a quarterly cash dividend of $0.20$0.22 per share to be paid on March 6, 202011, 2022 to shareholders of record as of February 24, 2020.28, 2022.
Atotech Acquisition
On July 1, 2021, we entered into an Implementation Agreement to acquire Atotech, a leading process chemicals technology company and a market leader in advanced electroplating solutions. Pursuant to the Implementation Agreement, we agreed to pay $16.20 per share in cash and 0.0552 of a share of our common stock for each outstanding common share of Atotech. At the time of the announcement of the acquisition, the total value of the aggregate cash and stock consideration was approximately $5.1 billion. The final value of the consideration will be determined at the time of the closing of the acquisition, which is expected to occur in the first quarter of 2022, subject to the satisfaction of certain closing conditions, including receipt of regulatory approval from China and approval by the Royal Court of Jersey. Our obligations to complete the acquisition are not subject to any financing condition. Additional information regarding the funding of the acquisition, the New Term Loan Facility, the New Revolving Credit Facility, and the refinancing of the Term Loan Facility and ABL Facility, is discussed under “Recent Events” above.
Senior Secured Term Loan Credit Facility
In connection with the completion of the acquisition of Newport MergerCorporation (“Newport”) in April 2016 (the “Newport Merger”), we entered into a term loan credit agreement (the(as amended, the “Term Loan Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto, (the “Lenders”), thatwhich provided a senior secured term loan credit facility (the “Term Loan Facility”) in the original principal amount of $780.0 million (the “2016million. We have entered into seven amendments to the Term Loan Facility”),Credit Agreement since 2016, including most recently the May Term Loan Amendment (as defined below). The Term Loan Facility is subject to increase at our option and subject to receipt of lender commitments in accordance with the Term Loan Credit Agreement (the 2016Agreement. The maturity date of the Term Loan Facility together with the 2019 Incremental Term Loan Facility and 2019 Term Loan Refinancing Facility (each as defined below), the “Term Loan Facility”). Prior to the effectiveness of Amendment No. 6 (as defined below), the 2016 Term Loan Facility had a maturity date of April 29, 2023.is February 2, 2026. As of December 31, 2019,2021, borrowings under the Term Loan FacilityFacility bear interest per annum at one of the following rates selected by us: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in
In May 2021, we entered into an interest rate swap agreement, which hasamendment (the “May Term Loan Amendment”) to the Term Loan Credit Agreement. The May Term Loan Amendment amends the Term Loan Facility to, among other things, (i) increase our ability to incur additional incremental debt facilities to (x) the greater of (1) $600 million and (2) 100% of consolidated EBITDA, plus (y) an amount equal to the sum of all voluntary prepayments of term loans under the Term Loan Facility, plus (z) an additional unlimited amount subject to pro forma compliance with a maturity datesecured leverage ratio test of September 30, 2020,3.25:1.00, and (ii) increase our flexibility under certain debt, lien, investment, restricted payment and disposition baskets. The fees incurred, including certain customary lender consent fees, in connection with the May Term Loan Amendment were immaterial.
We are required to fix the rate on $335.0 millionmake scheduled quarterly amortization payments each equal to 0.25% of the then-outstanding balanceoriginal principal amount of the 2016 Term Loan Facility. The rate was fixed at 1.198% per annum plus the applicable credit spread, which was 1.75% atAs of December 31, 2019. At December 31, 2019,2021, the notional amount of this transaction was $250.0 million and it had a fair value asset of $0.8 million.
As of December 31, 2019,2021, after giving effect to all amendments and repayments prior to such date, the remaining balance of deferred finance fees and original issue discountoutstanding principal amount of the Term Loan Facility was $11.8 million. A portion of the deferred finance fees and original issue discount have been accelerated in connection with the various debt prepayments and extinguishments during 2016, 2017, 2018 and 2019.
Under the Term Loan Credit Agreement, we are required to prepay outstanding term loans, subject to certain exceptions, with portions of our annual excess cash flow as well as with the net cash proceeds of certain of our asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. Due to our prepayments of term loan debt of $100 million during 2019, we were not required to make a prepayment of excess cash flow for the period ended December 31, 2019.
All obligations under the Term Loan Facility are guaranteed by certain of our domestic subsidiaries and are collateralizedsecured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
The Term Loan Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions
generally permitted to be taken by a secured creditor. At December 31, 2019,2021, we were in compliance with all covenants under the Term Loan Credit Agreement.
Senior Secured Asset-Based Revolving Credit Facility
In February 1, 2019, in connection with the completion of the ESI Merger, we entered into an asset-based revolving credit agreement with Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto (the “ABL Credit Agreement”), that provides a senior secured asset-based revolving credit facility of up to $100.0$100 million, subject to a borrowing base limitation (the “ABL Facility”). On April 26, 2019, weWe have entered into a First Amendmenttwo amendments to the ABL Credit Agreement which amendedsince 2019. As of December 31, 2021, after giving effect to all amendments, the borrowing base calculation for eligible
As of December 31, 2021, any borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in
In addition to paying interest on any outstanding principal under the ABL Facility, we are required to pay a commitment fee in respect of the unutilized commitments thereunder equal to 0.25% per annum. We must also pay customary letter of credit fees and agency fees.
Under the ABL Facility, we wrote off $0.2 million of previously capitalized debt issuance costs.
There is no scheduled amortization under the ABL Facility. TheAny principal amount outstanding under the ABL Facility is due and payable in full on the fifth anniversary of the closing date.
All obligations under the ABL Facility are guaranteed by certain of our domestic subsidiaries and are collateralizedsecured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
From the time when we have excess availability less than the greater of (a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing baseLine Cap and (b) $8.5$9 million until the time when we have excess availability equal to or greater than the greater of (a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing baseLine Cap and (b) $8.5$9 million for 30 consecutive days, or during the continuance of an event of default, the ABL Credit Agreement requires us tothat we maintain a Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement)fixed charge coverage ratio, tested on the last day of each fiscal quarter, of at least 1.0 to 1.0.
The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor. We have not borrowed against this ABL Facility to date.
Lines of Credit and Short-Term Borrowing Arrangements
Our Japanese subsidiaries hashave lines of credit and short-term borrowing arrangementsa financing facility with twovarious financial institutions, many of which arrangements generally expire and are renewed at three-month intervals.intervals with the remaining having no expiration date. The lines of credit and financing facility provided for aggregate borrowings as of December 31, 2019,2021 of up to an equivalent of $21.1$29 million U.S. dollars. One of the borrowing arrangements has an interest rate based on the Tokyo Interbank Offer Rate at the time of borrowing and the other has an interest rate based on the Japanese Short-Term Prime Lending Rate. There were no borrowings outstanding under these arrangements at December 31, 2019 and 2018, respectively.
Contractual Obligations
As of December 31, 2021, we are a party to purchase commitments for certain unsecured borrowingsinventory components and have standby letters of credit, some of which do not have fixed expiration dates. At December 31, 2019,other equipment and services used in our maximum exposure as a resultnormal operations totaling approximately $389 million. The majority of these financial guaranteespurchase commitments covered by these arrangements are for periods of less than one year.
In addition, we have various operating leases for real estate and standby lettersnon-real estate items. The non-real estate leases are mainly comprised of credit was approximately $5.1 million.automobiles but also include office equipment and other lower-valued items. Future payments related to operating leases are as follows:
Year Ending December 31, |
| Operating Leases |
| |
2022 |
| $ | 24.0 |
|
2023 |
|
| 22.6 |
|
2024 |
|
| 21.0 |
|
2025 |
|
| 18.8 |
|
2026 |
|
| 16.7 |
|
Thereafter |
|
| 158.1 |
|
Total lease payments |
|
| 261.2 |
|
Less: imputed interest |
|
| 50.6 |
|
Total lease liabilities |
| $ | 210.6 |
|
Contractual maturities of our buildings in Boulder, Colorado and three of our buildings in Portland, Oregon. Total net cash proceeds received for these two transactions was $41.2 million and we recognized a net gain on the sale of these long-lived assets of $6.8 million.
Year Ending December 31, |
| Amount |
| |
2022 |
| $ | 9.0 |
|
2023 |
|
| 9.0 |
|
2024 |
|
| 9.0 |
|
2025 |
|
| 9.0 |
|
2026 |
|
| 788.4 |
|
Payment Due By Period | ||||||||||||||||||||||||
Less than | After | |||||||||||||||||||||||
Contractual Obligations (In thousands) | Total | 1 Year | 1-3 years | 3-5 years | 5 years | Other | ||||||||||||||||||
Operating lease obligations | $ | 65,391 | $ | 20,227 | $ | 21,374 | $ | 12,917 | $ | 10,873 | $ | — | ||||||||||||
Purchase obligations(1) | 302,270 | 258,137 | 30,737 | 10,615 | 2,781 | — | ||||||||||||||||||
Pension obligations | 38,651 | 1,133 | 2,519 | 3,020 | 31,979 | — | ||||||||||||||||||
Debt | 895,576 | 12,099 | 18,031 | 17,937 | 847,509 | — | ||||||||||||||||||
Other long-term liabilities reflected on the Balance Sheet under U.S. GAAP(2) | 120,669 | — | 7,147 | 433 | 77,907 | 35,182 | ||||||||||||||||||
Total | $ | 1,422,557 | $ | 291,596 | $ | 79,808 | $ | 44,922 | $ | 971,049 | $ | 35,182 | ||||||||||||
We have a number of defined benefit pension plans, which cover substantially all of our full-time employees in France, Germany, Israel, Japan and Taiwan. In addition, we have certain pension assets and liabilities relating to our former employees in the United Kingdom. As of December 31, 2021, our estimated benefit payments over the next 10 years amount to $15 million. The majority of the benefit payments covered by these arrangements occurs after 2026.
Derivatives
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments and those utilized as economic hedges. We operate internationally, and in the normal course of business, are exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, such as foreign exchange forward exchange contracts and an interest rate hedgeoptions, to manage certain foreign currency exposure, and interest rate exposures.swaps to manage interest rate exposure.
By nature, all financial instruments involve market and credit risks. We enter into derivative instruments with major investment grade financial institutions and no collateral is required. We have policies to monitor the credit risk of these counterparties. While there can be no assurance, we do not anticipate any material
Interest Rate Swap Agreements
We entered into various interest rate swap agreements as described further in Note 9 to the Notes to Consolidated Financial Statements that exchange the variable LIBOR interest rate to a fixed rate in order to manage the exposure to interest rate fluctuations associated with the variable LIBOR interest rate paid on the outstanding balance of the Term Loan Facility. We expect to enter into interest rate swap agreements in order to manage the exposure to interest rate fluctuations associated with the variable SOFR interest rate of the New Term Loan Facility.
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| April 3, 2019 |
| April 5, 2019 |
| March 31, 2023 |
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| 2.309 | % |
| $ | 300 |
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| $ | 300 |
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| $ | (5 | ) |
| $ | (12 | ) |
2 |
| October 29, 2020 |
| October 26, 2021 |
| February 28, 2025 |
|
| 0.485 | % |
| $ | 200 |
|
| $ | 200 |
|
|
| 4 |
|
|
| (1 | ) |
3 |
| October 29, 2020 |
| March 31, 2022 |
| February 28, 2025 |
|
| 0.623 | % |
| $ | 100 |
|
| $ | 100 |
|
|
| 5 |
|
|
| (1 | ) |
|
|
|
|
|
|
|
|
|
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|
|
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|
| Total |
|
| $ | 4 |
|
| $ | (14 | ) | |
The interest rate swaps are recorded at fair value on the balance sheet and changes in the fair value are recognized in Accumulated Other Comprehensive Income. To the extent that these arrangements are no longer an effective hedge, any ineffectiveness measured in the hedging relationships is recorded immediately in earnings in the period it occurs. The fair value of the interest rate swaps is classified in other assets or non-current liabilities, accordingly, in the consolidated balance sheet.
Currency Option Agreements
In conjunction with financing the proposed acquisition of Atotech, we expect to issue EUR 500 million term loan debt. At the expected close, a portion of those proceeds will settle Atotech’s existing EUR 200 million term loan, and the EUR 300 million balance will be converted into USD in support of the USD purchase price. We purchased foreign currency option contracts to fix the conversion of EUR 300 million into USD as noted below:
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Trade Date |
| Effective Date |
| Maturity |
| Fixed Rate |
|
| Notional Amount in EUR |
|
| Notional Amount in USD |
|
| Year Ended December 31, 2021 Fair Value Asset |
| ||||
October 26, 2021 |
| October 26, 2021 |
| January 31, 2022 |
| $ | 1.1615 |
|
| $ | 300 |
|
| $ | 348 |
|
| $ | 3 |
|
The currency swaps are recorded at fair value on the balance sheet and changes in the fair value are recognized immediately in earnings. The fair value asset is classified in other current assets in the consolidated balance sheet. We recorded an unrealized gain of $3 million in 2021, net of premiums, which is included in other expense, net.
In conjunction with the Photon Control Acquisition, we entered into a foreign currency contract to hedge the Canadian dollar purchase price. In 2021, we recorded a fair value realized loss of $10 million, which is included in other expense, net.
Foreign Exchange Contracts
We hedge a portion of our forecasted foreign currency denominated intercompany sales of inventory, over a maximum period of eighteen months, using forward foreign exchange forward contracts accounted for as cash-flow hedges related to British, Euro, Japanese, South Korean British, Euro and Taiwanese currencies. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria, changes in the derivatives’ fair value are not included in current earnings but are included in accumulated other comprehensive income in stockholders’ equity. These changes in fair value will subsequently be reclassified into earnings, as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currentlyimmediately in earnings in the period it occurs. The cash flows resulting from forward exchange contracts are classified in the consolidated statements of cash flows as part of cash flows from operating activities. We do not enter into derivative instruments for trading or speculative purposes.
We also enter into foreign exchange forward exchange contracts to hedge certain balance sheet amounts. To the extent the hedge accounting criteria is not met, the related foreign currency forward contracts are considered as economic hedges and changes in the fair value of these contracts are recorded immediately in earnings in the period in which they occur. These include hedges that are used to reduce exchange rate risks arising from the change in fair value of certain foreign currency-denominated assets and liabilities (i.e., payables, receivables) and other economic hedges where the hedge accounting criteria were not met.
We had foreign exchange forward exchange contracts with notional amounts totaling $154.7$240 million outstanding at December 31, 20192021, of which $51.7$108 million werewas outstanding to exchange South Korean Wonwon to U.S. dollars and $45.9$60 million werewas outstanding to exchange Japanese Yenyen to U.S. dollars. We had forward exchange contracts with notional amounts totaling $159.4$176 million outstanding at December 31, 20182020, of which $59.1$62 million werewas outstanding to exchange South Korean Wonwon to U.S. dollars and $43.8$62 million werewas outstanding to exchange Japanese Yenyen to U.S. dollars.
As of December 31, 2019,2021, the unrealized loss that will be reclassified from accumulated other comprehensive income to earnings over the next twelve months is immaterial. Gains and losses on forward exchange contracts that qualify for hedge accounting are classified in cost of products in 20192021 and 20182020, and totaled a (loss) gain (loss) of $5.7$(2) million and $(3.4)$2 million, respectively. There were no ineffective portions of the derivatives recorded in 20192021 and 2018.
We hedge certain intercompany accounts receivable and intercompany loans with forward exchange contracts. Typically, as these derivatives hedge existing amounts that are denominated in foreign currencies, the derivatives do not qualify for hedge accounting. Realized and unrealized gains and losses on forward exchange contracts that do not qualify for hedge accounting are recognized currentlyimmediately in earnings. The net foreign exchange gains or losses on these derivatives were immaterial in each of 20192021 and 2018.2020. Foreign currency gains or losses are classified in other expense, net. The cash flows resulting from forward exchange contracts are classified in our consolidated statements of cash flows as part of cash flows from operating activities. We do not hold or issue derivative financial instruments for trading purposes.
Recently Issued Accounting Pronouncements
In December 2019,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Market Risk and Sensitivity Analysis
Our primary exposures to market risks include fluctuations in interest rates on our Term Loan Facility, as defined and as described further in Item 7 of this Annual Report on Form
Foreign Exchange Rate Risk
We mainly enter into forward exchange contracts to reduce currency exposure arising from intercompany sales of inventory. We also enter into forward exchange contracts to reduce foreign exchange risks arising from the change in fair value of certain foreign currency denominated assets and liabilities.
We had forward exchange contracts with notional amounts totaling $154.7$240 million outstanding and a net fair value asset of $3 million at December 31, 2021. We had forward exchange contracts with notional amounts totaling $176 million outstanding and a net fair value liability of $0.2$7 million at December 31, 2019. We had forward exchange contracts with notional amounts totaling $159.4 million outstanding and a net fair value asset totaling $1.3 million at December 31, 2018.2020. The potential fair value loss for a hypothetical 10% adverse change in the currency exchange rate on our forward exchange contracts at December 31, 20192021 and 20182020 would be immaterial.
Interest Rate Risk
We hold our cash, cash equivalents and short-term investments for working capital purposes. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of such investments to fluctuate. To minimize this risk, we maintain our portfolio of cash, cash equivalents and short-term investments in a variety of securities, including money market funds and government debt securities. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income. The effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our operating results or the total fair value of our portfolio.
We enter into various interest rate swap agreements as described further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Derivatives” that exchange the portfolio.
We are exposed to market risks related to fluctuations in interest rates related to our Term Loan Facility. As of December 31, 2019,2021, we owed $892.4$824 million, with $250.0$524 million at a fixedvariable interest rate of 1.198%,1.75% plus the applicable credit spread which was 1.75% at December 31, 2019, $300.0LIBOR, and $300 million at a fixed interest rate of 2.309%, plus the applicable credit spread, which was 1.75% at December 31, 2019, and $342.4 million at a variable interest rate of 1.75% plus LIBOR.2021. We performed a sensitivity analysis on the outstanding portion of our debt obligations as of December 31, 2019.2021. Should the current average interest rate increase or decrease by 10%, the resulting annual increase or decrease to interest expense at December 31, 2021 would be approximately $1.2immaterial.
Currency Option Agreements
In conjunction with financing the proposed acquisition of Atotech, we expect to issue EUR 500 million asterm loan debt. At the expected close, a portion of those proceeds will refinance Atotech’s existing EUR 200 million term loan, the balance to be converted into USD in support of the USD purchase price. We purchased foreign currency option contracts to hedge the conversion of EUR 300 million into USD. We had foreign currency option contracts with notional amounts totaling EUR 300 million outstanding and a net fair value asset of $3 million at December 31, 2019.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of MKS Instruments, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of MKS Instruments, Inc. and its subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2021, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 as listed in the index2021 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’sCompany's internal control over financial reporting as of December 31, 2019,2021, based on criteria established in
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’sCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Electro Scientific Industries,Photon Control Inc. (“Photon Control”) from its assessment of internal control over financial reporting as of December 31, 2019,2021 because it was acquired by the Company in a purchase business combination during 2019.2021. We have also excluded Electro Scientific Industries, Inc.Photon Control from our audit of internal control over financial reporting. Electro Scientific Industries, Inc.Photon Control is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 29% and 10%, respectively,approximately 1% of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.2021.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.
Acquisition of Electro
As described in Note 125 to the consolidated financial statements, the Company completed its acquisition of Electro Scientific Industries, Inc. (“ESI”)Photon Control for a total net purchase price of $1,019.2$268.4 million, net of cash and cash equivalents acquired. As part of the purchase price allocation, management recorded $255.7which resulted in recording a $110 million for thecompleted technology intangible asset. The fair value of the acquired laser completed technology intangible asset which was determined using the income approach. In performing the valuation for the intangible asset, the key underlying judgments and assumptions used included the appropriate discount rate as well as forecasted revenue growth rates, and gross profit and operating margins.
The principal considerations for our determination that performing procedures relating to the acquisition of Photon Control - valuation of the laser completed technology intangible asset is a critical audit matter are there wasthe significant judgment by management when estimatingdeveloping the fair value of the acquired laser completed technology intangible asset, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relatingmanagement’s significant assumptions related to management’s estimates and assumptions with respect to the discount rate and forecasted revenue growth rates and gross profit and operating margins.the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures over the discount rate and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the acquired laser completed technology intangible asset and controls over the development of significant assumptions related to the discount rate and forecasted revenue growth rates and gross profit and operating margins.the discount rate. These procedures also included, among others, (i) reading the purchase agreement and (ii) evaluating the methods and significant assumptions used by management in developingtesting management’s process for estimating the fair value forof the laseracquired completed technology intangible asset, includingasset. Testing management’s process included evaluating the discount rateappropriateness of the income approach, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of significant assumptions related to the forecasted revenue growth rates and gross profit and operating margins, and (iii) testing the completeness, accuracy and relevance of the underlying data used in the valuation. Evaluating whether the discount rate andfor the completed technology intangible asset. Evaluating the reasonableness of the forecasted revenue growth rates and gross profit and operating margins were reasonable involved considering the past performance of the acquired entitybusiness and industry data. Professionals with specialized skill and knowledge were used to assist in the evaluation of management’s valuation model and certain significant assumptions, including the discount rate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 28, 2020
We have served as the Company’s auditor since 1981.
MKS Instruments, Inc.
Consolidated Balance Sheets
(in millions, except per share data)
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 966.3 |
|
| $ | 608.3 |
|
Short-term investments |
|
| 76.4 |
|
|
| 227.7 |
|
Trade accounts receivable, net of allowance for doubtful accounts of $3.6 and $2.0 at December 31, 2021 and 2020, respectively |
|
| 442.6 |
|
|
| 392.7 |
|
Inventories |
|
| 576.7 |
|
|
| 501.4 |
|
Other current assets |
|
| 85.3 |
|
|
| 74.3 |
|
Total current assets |
|
| 2,147.3 |
|
|
| 1,804.4 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 325.3 |
|
|
| 284.3 |
|
Right-of-use assets |
|
| 184.3 |
|
|
| 184.4 |
|
Goodwill |
|
| 1,228.2 |
|
|
| 1,066.4 |
|
Intangible assets, net |
|
| 576.0 |
|
|
| 512.2 |
|
Long-term investments |
|
| 6.2 |
|
|
| 6.5 |
|
Other assets |
|
| 73.0 |
|
|
| 45.6 |
|
Total assets |
| $ | 4,540.3 |
|
| $ | 3,903.8 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term debt |
| $ | 9.0 |
|
| $ | 14.5 |
|
Accounts payable |
|
| 168.1 |
|
|
| 110.6 |
|
Accrued compensation |
|
| 131.9 |
|
|
| 117.9 |
|
Income taxes payable |
|
| 25.1 |
|
|
| 18.3 |
|
Lease liabilities |
|
| 18.0 |
|
|
| 15.8 |
|
Deferred revenue and customer advances |
|
| 37.5 |
|
|
| 31.2 |
|
Other current liabilities |
|
| 71.2 |
|
|
| 65.6 |
|
Total current liabilities |
|
| 460.8 |
|
|
| 373.9 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, net |
|
| 807.9 |
|
|
| 815.0 |
|
Non-current deferred taxes |
|
| 99.1 |
|
|
| 59.2 |
|
Non-current accrued compensation |
|
| 49.3 |
|
|
| 49.5 |
|
Non-current lease liability |
|
| 192.6 |
|
|
| 187.4 |
|
Other non-current liabilities |
|
| 44.0 |
|
|
| 57.9 |
|
Total liabilities |
|
| 1,653.7 |
|
|
| 1,542.9 |
|
Commitments and contingencies (Note 23) |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 2 shares authorized; NaN issued and outstanding |
|
| — |
|
|
| — |
|
Common stock, no par value, 200 shares authorized; 55.5 and 55.2 shares issued and outstanding at December 31, 2021 and 2020, respectively |
|
| 0.1 |
|
|
| 0.1 |
|
Additional paid-in capital |
|
| 906.7 |
|
|
| 873.2 |
|
Retained earnings |
|
| 1,991.0 |
|
|
| 1,487.3 |
|
Accumulated other comprehensive (loss) income |
|
| (11.2 | ) |
|
| 0.3 |
|
Total stockholders’ equity |
|
| 2,886.6 |
|
|
| 2,360.9 |
|
Total liabilities and stockholders' equity |
| $ | 4,540.3 |
|
| $ | 3,903.8 |
|
December 31, | ||||||||
2019 | 2018 | |||||||
(in thousands, except share data) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 414,572 | $ | 644,345 | ||||
Short-term investments | 109,417 | 73,826 | ||||||
Trade accounts receivable, net of allowance for doubtful accounts of $1,783 and $5,243 at December 31, 2019 and 2018, respectively | 341,064 | 295,454 | ||||||
Inventories | 462,146 | 384,689 | ||||||
Other current assets | 106,348 | 65,790 | ||||||
Total current assets | 1,433,547 | 1,464,104 | ||||||
Property, plant and equipment, net | 241,871 | 194,367 | ||||||
Right-of-use asset | 64,497 | — | ||||||
Goodwill | 1,058,454 | 586,996 | ||||||
Intangible assets, net | 564,630 | 319,807 | ||||||
Long-term investments | 5,854 | 10,290 | ||||||
Other assets | 47,467 | 38,682 | ||||||
Total assets | $ | 3,416,320 | $ | 2,614,246 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 12,099 | $ | 3,986 | ||||
Accounts payable | 88,397 | 83,825 | ||||||
Accrued compensation | 100,851 | 82,350 | ||||||
Income taxes payable | 15,448 | 16,358 | ||||||
Lease liability | 20,632 | — | ||||||
Deferred revenue and customer advances | 21,494 | 14,246 | ||||||
Other current liabilities | 58,760 | 62,520 | ||||||
Total current liabilities | 317,681 | 263,285 | ||||||
Long-term debt, net | 871,667 | 343,842 | ||||||
Non-current deferred taxes | 72,428 | 48,223 | ||||||
Non-current accrued compensation | 43,930 | 55,598 | ||||||
Non-current lease liability | 44,759 | — | ||||||
Other non-current liabilities | 42,511 | 30,111 | ||||||
Total liabilities | 1,392,976 | 741,059 | ||||||
Commitments and contingencies (Note 2 3 ) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value, 2,000,000 shares authorized; NaN issued and outstanding | — | — | ||||||
Common stock, 0 par value, 200,000,000 shares authorized; 54,596,183 and 54,039,554 shares issued and outstanding at December 31, 2019 and 2018, respectively | 113 | 113 | ||||||
Additional paid-in capital | 864,305 | 793,932 | ||||||
Retained earnings | 1,181,216 | 1,084,797 | ||||||
Accumulated other comprehensive loss | (22,290 | ) | (5,655 | ) | ||||
Total stockholders’ equity | 2,023,344 | 1,873,187 | ||||||
Total liabilities and stockholders’ equity | $ | 3,416,320 | $ | 2,614,246 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
MKS Instruments, Inc.
Consolidated Statements of Operations and Comprehensive Income
(in millions, except per share data)
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 2,578.6 |
|
| $ | 2,014.8 |
|
| $ | 1,611.3 |
|
Services |
|
| 371.0 |
|
|
| 315.2 |
|
|
| 288.5 |
|
Total net revenues |
|
| 2,949.6 |
|
|
| 2,330.0 |
|
|
| 1,899.8 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
| 1,370.9 |
|
|
| 1,106.4 |
|
|
| 913.5 |
|
Services |
|
| 198.5 |
|
|
| 174.1 |
|
|
| 155.9 |
|
Total cost of revenues (exclusive of amortization shown separately below) |
|
| 1,569.4 |
|
|
| 1,280.5 |
|
|
| 1,069.4 |
|
Gross profit |
|
| 1,380.2 |
|
|
| 1,049.5 |
|
|
| 830.4 |
|
Research and development |
|
| 200.0 |
|
|
| 173.1 |
|
|
| 164.1 |
|
Selling, general and administrative |
|
| 385.1 |
|
|
| 353.1 |
|
|
| 330.3 |
|
Acquisition and integration costs |
|
| 29.8 |
|
|
| 3.8 |
|
|
| 37.3 |
|
Restructuring and other |
|
| 11.1 |
|
|
| 9.4 |
|
|
| 7.0 |
|
Amortization of intangible assets |
|
| 55.3 |
|
|
| 55.2 |
|
|
| 67.4 |
|
Asset impairment |
|
| — |
|
|
| 2.3 |
|
|
| 4.7 |
|
COVID-19 related net credits |
|
| — |
|
|
| (1.2 | ) |
|
| — |
|
Fees and expenses related to repricing of Term Loan Facility |
|
| — |
|
|
| — |
|
|
| 6.6 |
|
Gain on sale of long-lived assets |
|
| — |
|
|
| — |
|
|
| (6.8 | ) |
Income from operations |
|
| 698.9 |
|
|
| 453.8 |
|
|
| 219.8 |
|
Interest income |
|
| 0.6 |
|
|
| 1.4 |
|
|
| 5.4 |
|
Interest expense |
|
| 25.4 |
|
|
| 29.1 |
|
|
| 44.1 |
|
Other expense, net |
|
| 8.6 |
|
|
| 3.1 |
|
|
| 3.3 |
|
Income before income taxes |
|
| 665.5 |
|
|
| 423.0 |
|
|
| 177.8 |
|
Provision for income taxes |
|
| 114.1 |
|
|
| 72.9 |
|
|
| 37.4 |
|
Net income |
| $ | 551.4 |
|
| $ | 350.1 |
|
| $ | 140.4 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in value of financial instruments designated as cash flow hedges |
| $ | 20.0 |
|
| $ | (10.6 | ) |
| $ | (10.0 | ) |
Foreign currency translation adjustments |
|
| (31.5 | ) |
|
| 34.7 |
|
|
| (6.2 | ) |
Unrecognized pension loss |
|
| — |
|
|
| (1.7 | ) |
|
| (0.5 | ) |
Unrealized gain on investments |
|
| — |
|
|
| 0.2 |
|
|
| — |
|
Total comprehensive income |
| $ | 539.9 |
|
| $ | 372.7 |
|
| $ | 123.7 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 9.95 |
|
| $ | 6.36 |
|
| $ | 2.57 |
|
Diluted |
| $ | 9.90 |
|
| $ | 6.33 |
|
| $ | 2.55 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 55.4 |
|
|
| 55.1 |
|
|
| 54.7 |
|
Diluted |
|
| 55.7 |
|
|
| 55.3 |
|
|
| 55.1 |
|
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(in thousands, except per share data) | ||||||||||||
Net Revenues: | ||||||||||||
Products | $ | 1,611,297 | $ | 1,835,202 | $ | 1,701,301 | ||||||
Services | 288,476 | 239,906 | 214,676 | |||||||||
Total net revenues | 1,899,773 | 2,075,108 | 1,915,977 | |||||||||
Cost of revenues: | ||||||||||||
Products | 913,482 | 969,288 | 906,369 | |||||||||
Services | 155,860 | 126,344 | 118,157 | |||||||||
Total cost of revenues (exclusive of amortization shown separately below) | 1,069,342 | 1,095,632 | 1,024,526 | |||||||||
Gross profit | 830,431 | 979,476 | 891,451 | |||||||||
Research and development | 164,061 | 135,720 | 132,555 | |||||||||
Selling, general and administrative | 330,346 | 298,118 | 290,056 | |||||||||
Acquisition and integration costs | 37,262 | 3,113 | 5,332 | |||||||||
Restructuring and other | 6,983 | 4,567 | 3,920 | |||||||||
| Fees and expenses related to repricing of Term Loan Facility | 6,637 | 378 | 492 | |||||||||
Amortization of intangible assets | 67,402 | 43,521 | 45,743 | |||||||||
Gain on sale of long-lived assets | (6,773 | ) | — | — | ||||||||
Asset impairment | 4,662 | — | 6,719 | |||||||||
Income from operations | 219,851 | 494,059 | 406,634 | |||||||||
Interest income | 5,453 | 5,775 | 3,021 | |||||||||
Interest expense | 44,135 | 16,942 | 30,990 | |||||||||
Gain on sale of business | — | — | 74,856 | |||||||||
Other expense, net | 3,333 | 1,942 | 5,896 | |||||||||
Income before income taxes | 177,836 | 480,950 | 447,625 | |||||||||
Provision for income taxes | 37,450 | 88,054 | 108,493 | |||||||||
Net income | $ | 140,386 | $ | 392,896 | $ | 339,132 | ||||||
Other comprehensive income , net of tax : | ||||||||||||
Changes in value of financial instruments designated as cash flow hedges | $ | (10,013 | ) | $ | 4,942 | $ | (4,568 | ) | ||||
Foreign currency translation adjustments | (6,111 | ) | (14,161 | ) | 37,172 | |||||||
Unrecognized pension (loss) gain | (536 | ) | 149 | 323 | ||||||||
Unrealized gain (loss) on investments | 25 | (37 | ) | 1,072 | ||||||||
Total comprehensive income | $ | 123,751 | $ | 383,789 | $ | 373,131 | ||||||
Net income per share: | ||||||||||||
Basic | $ | 2.57 | $ | 7.22 | $ | 6.26 | ||||||
Diluted | $ | 2.55 | $ | 7.14 | $ | 6.16 | ||||||
Weighted average common shares outstanding: | ||||||||||||
Basic | 54,711 | 54,406 | 54,137 | |||||||||
Diluted | 55,111 | 54,992 | 55,074 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
MKS Instruments, Inc.
Consolidated Statements of Stockholders’ Equity
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
| Total |
| |||
|
| Common Stock |
|
|
|
| Paid-In |
|
|
|
| Retained |
|
|
|
| Comprehensive |
|
|
|
| Stockholders' |
| |||||||||||
|
| Shares |
|
|
|
| Amount |
|
|
|
| Capital |
|
|
|
| Earnings |
|
|
|
| (Loss) Income |
|
|
|
| Equity |
| ||||||
Balance at December 31, 2018 |
|
| 54.0 |
|
|
|
| $ | 0.1 |
|
|
|
| $ | 793.9 |
|
|
|
| $ | 1,084.8 |
|
|
|
| $ | (5.6 | ) |
|
|
| $ | 1,873.2 |
|
Net issuance under stock-based plans |
|
| 0.6 |
|
|
|
|
|
|
|
|
|
|
| (11.0 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11.0 | ) |
Settlement of share-based compensation awards(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 30.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 30.6 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 50.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 50.3 |
|
Cash dividend ($0.80 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (43.5 | ) |
|
|
|
|
|
|
|
|
|
| (43.5 | ) |
Stock dividends accrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 0.5 |
|
|
|
|
| (0.5 | ) |
|
|
|
|
|
|
|
|
|
| — |
|
Comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 140.4 |
|
|
|
|
|
|
|
|
|
|
| 140.4 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (16.7 | ) |
|
|
|
| (16.7 | ) |
Balance at December 31, 2019 |
|
| 54.6 |
|
|
|
|
| 0.1 |
|
|
|
|
| 864.3 |
|
|
|
|
| 1,181.2 |
|
|
|
|
| (22.3 | ) |
|
|
|
| 2,023.3 |
|
Net issuance under stock-based plans |
|
| 0.6 |
|
|
|
|
|
|
|
|
|
|
| (20.7 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (20.7 | ) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 29.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 29.6 |
|
Cash dividend ($0.80 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (44.0 | ) |
|
|
|
|
|
|
|
|
|
| (44.0 | ) |
Comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 350.1 |
|
|
|
|
|
|
|
|
|
|
| 350.1 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 22.6 |
|
|
|
|
| 22.6 |
|
Balance at December 31, 2020 |
|
| 55.2 |
|
|
|
|
| 0.1 |
|
|
|
|
| 873.2 |
|
|
|
|
| 1,487.3 |
|
|
|
|
| 0.3 |
|
|
|
|
| 2,360.9 |
|
Net issuance under stock-based plans |
|
| 0.3 |
|
|
|
|
|
|
|
|
|
|
| (3.3 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3.3 | ) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 36.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 36.7 |
|
Cash dividend ($0.86 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (47.6 | ) |
|
|
|
|
|
|
|
|
|
| (47.6 | ) |
Stock dividends accrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 0.1 |
|
|
|
|
| (0.1 | ) |
|
|
|
|
|
|
|
|
|
| — |
|
Comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 551.4 |
|
|
|
|
|
|
|
|
|
|
| 551.4 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11.5 | ) |
|
|
|
| (11.5 | ) |
Balance at December 31, 2021 |
|
| 55.5 |
|
|
|
| $ | 0.1 |
|
|
|
| $ | 906.7 |
|
|
|
| $ | 1,991.0 |
|
|
|
| $ | (11.2 | ) |
|
|
| $ | 2,886.6 |
|
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Total Stockholders’ Equity | ||||||||||||||||||||
(in thousands, except share data) | Shares | Amount | ||||||||||||||||||||||
Balance at December 31, 2016 | 53,672,861 | $ | 113 | $ | 777,482 | $ | 494,744 | $ | (30,547 | ) | $ | 1,241,792 | ||||||||||||
Net issuance under stock-based plans | 682,674 | (12,216 | ) | (12,216 | ) | |||||||||||||||||||
Stock-based compensation | 24,378 | 24,378 | ||||||||||||||||||||||
Cash dividend ($0.71 per common share) | (38,178 | ) | (38,178 | ) | ||||||||||||||||||||
Comprehensive income (net of tax): | ||||||||||||||||||||||||
Net income | 339,132 | 339,132 | ||||||||||||||||||||||
Other comprehensive gain | 33,999 | 33,999 | ||||||||||||||||||||||
Balance at December 31, 2017 | 54,355,535 | $ | 113 | $ | 789,644 | $ | 795,698 | $ | 3,452 | $ | 1,588,907 | |||||||||||||
Net issuance under stock-based plans | 502,150 | (11,104 | ) | (11,104 | ) | |||||||||||||||||||
Stock-based compensation | 27,262 | 27,262 | ||||||||||||||||||||||
Stock repurchase | (818,131 | ) | (11,870 | ) | (63,130 | ) | (75,000 | ) | ||||||||||||||||
Cash dividend ($0.78 per common share) | (42,405 | ) | (42,405 | ) | ||||||||||||||||||||
Accounting Standards Codification Topic 606 adjustment | 1,738 | 1,738 | ||||||||||||||||||||||
Comprehensive income (net of tax): | ||||||||||||||||||||||||
Net income | 392,896 | 392,896 | ||||||||||||||||||||||
Other comprehensive loss | (9,107 | ) | (9,107 | ) | ||||||||||||||||||||
Balance at December 31, 2018 | 54,039,554 | $ | 113 | $ | 793,932 | $ | 1,084,797 | $ | (5,655 | ) | $ | 1,873,187 | ||||||||||||
Net issuance under stock-based plans | 556,629 | (11,010 | ) | (11,010 | ) | |||||||||||||||||||
Settlement of share-based compensation awards(1) | 30,630 | 30,630 | ||||||||||||||||||||||
Stock-based compensation | 50,318 | 50,318 | ||||||||||||||||||||||
Cash dividend ($0.80 per common share) | (43,528 | ) | (43,528 | ) | ||||||||||||||||||||
Stock dividends accrued | 435 | (435 | ) | — | ||||||||||||||||||||
Other | (4 | ) | (4 | ) | ||||||||||||||||||||
Comprehensive income (net of tax): | ||||||||||||||||||||||||
Net income | 140,386 | 140,386 | ||||||||||||||||||||||
Other comprehensive loss | (16,635 | ) | (16,635 | ) | ||||||||||||||||||||
Balance at December 31, 2019 | 54,596,183 | $ | 113 | $ | 864,305 | $ | 1,181,216 | $ | (22,290 | ) | $ | 2,023,344 | ||||||||||||
(1) | Represents the vested but unissued portion of Electro Scientific Industries, Inc. (“ESI”) share-based compensation awards as of the acquisition date of February 1, 2019 as described further in Note |
The accompanying notes are an integral part of the consolidated financial statements.
MKS Instruments, Inc.
Consolidated Statements of Cash Flows
(in thousands)millions)
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 551.4 |
|
| $ | 350.1 |
|
| $ | 140.4 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 104.1 |
|
|
| 99.2 |
|
|
| 110.0 |
|
Unrealized (gain) loss on derivatives not designated as hedging instruments |
|
| (4.2 | ) |
|
| (0.4 | ) |
|
| 0.1 |
|
Amortization of inventory step-up adjustment to fair value |
|
| — |
|
|
| — |
|
|
| 7.6 |
|
Amortization of debt issuance costs and original issue discount |
|
| 2.3 |
|
|
| 2.7 |
|
|
| 7.1 |
|
Stock-based compensation |
|
| 36.7 |
|
|
| 29.5 |
|
|
| 49.2 |
|
Provision for excess and obsolete inventory |
|
| 16.2 |
|
|
| 24.8 |
|
|
| 24.7 |
|
Deferred income taxes |
|
| 1.2 |
|
|
| (7.1 | ) |
|
| (4.2 | ) |
Asset impairment |
|
| — |
|
|
| 2.3 |
|
|
| 4.7 |
|
Other |
|
| 3.3 |
|
|
| 0.7 |
|
|
| (6.6 | ) |
Changes in operating assets and liabilities, net of businesses acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
| (52.7 | ) |
|
| (44.8 | ) |
|
| (0.1 | ) |
Inventories |
|
| (91.7 | ) |
|
| (52.2 | ) |
|
| (29.3 | ) |
Income taxes payable |
|
| 1.3 |
|
|
| 21.6 |
|
|
| (12.4 | ) |
Other current and non-current assets |
|
| (0.3 | ) |
|
| 40.9 |
|
|
| (9.8 | ) |
Current and non-current accrued compensation |
|
| 17.0 |
|
|
| 19.4 |
|
|
| (4.2 | ) |
Other current and non-current liabilities |
|
| (0.6 | ) |
|
| 5.5 |
|
|
| (8.5 | ) |
Accounts payable |
|
| 55.5 |
|
|
| 21.0 |
|
|
| (24.2 | ) |
Net cash provided by operating activities |
|
| 639.5 |
|
|
| 513.2 |
|
|
| 244.5 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired |
|
| (268.4 | ) |
|
| — |
|
|
| (988.6 | ) |
Purchases of investments |
|
| (497.0 | ) |
|
| (522.4 | ) |
|
| (246.3 | ) |
Maturities of investments |
|
| 478.3 |
|
|
| 332.4 |
|
|
| 142.6 |
|
Sales of investments |
|
| 169.2 |
|
|
| 72.5 |
|
|
| 166.9 |
|
Proceeds from sale of assets |
|
| — |
|
|
| — |
|
|
| 42.1 |
|
Purchases of property, plant and equipment |
|
| (86.7 | ) |
|
| (84.9 | ) |
|
| (63.9 | ) |
Net cash used in investing activities |
|
| (204.6 | ) |
|
| (202.4 | ) |
|
| (947.2 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from short and long-term borrowings |
|
| 1.0 |
|
|
| 27.0 |
|
|
| 642.2 |
|
Payments of short and long-term borrowings |
|
| (15.2 | ) |
|
| (83.8 | ) |
|
| (111.5 | ) |
Net payments related to employee stock awards |
|
| (3.3 | ) |
|
| (20.7 | ) |
|
| (11.0 | ) |
Dividend payments |
|
| (47.6 | ) |
|
| (44.0 | ) |
|
| (43.5 | ) |
Net cash (used in) provided by financing activities |
|
| (65.1 | ) |
|
| (121.5 | ) |
|
| 476.2 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (11.8 | ) |
|
| 4.4 |
|
|
| (3.2 | ) |
Increase (decrease) in cash and cash equivalents |
|
| 358.0 |
|
|
| 193.7 |
|
|
| (229.7 | ) |
Cash and cash equivalents at beginning of period |
|
| 608.3 |
|
|
| 414.6 |
|
|
| 644.3 |
|
Cash and cash equivalents at end of period |
| $ | 966.3 |
|
| $ | 608.3 |
|
| $ | 414.6 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 23.0 |
|
| $ | 26.3 |
|
| $ | 39.9 |
|
Income taxes |
| $ | 109.9 |
|
| $ | 65.6 |
|
| $ | 35.5 |
|
Years Ended December 31, | ||||||||||||
201 9 | 201 8 | 201 7 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 140,386 | $ | 392,896 | $ | 339,132 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 110,034 | 79,853 | 82,556 | |||||||||
Amortization of inventory step-up adjustment to fair value | 7,624 | — | — | |||||||||
Amortization of debt issuance cost and original issue discount | 7,074 | 4,718 | 10,699 | |||||||||
Stock-based compensation | 49,194 | 27,262 | 24,378 | |||||||||
Provision for excess and obsolete inventory | 24,734 | 22,324 | 20,213 | |||||||||
Provision for doubtful accounts | (728 | ) | 1,435 | 825 | ||||||||
Deferred income taxes | (4,215 | ) | (19,388 | ) | (4,831 | ) | ||||||
Gain on sale of long-lived asset | (6,773 | ) | — | — | ||||||||
Gain on sale of business | — | — | (74,856 | ) | ||||||||
Asset impairment | 4,662 | — | 6,719 | |||||||||
Other | 870 | 2,649 | 824 | |||||||||
Changes in operating assets and liabilities, net of business acquired: | ||||||||||||
Trade accounts receivable | (93 | ) | (546 | ) | (44,077 | ) | ||||||
Inventories | (29,289 | ) | (73,779 | ) | (72,471 | ) | ||||||
| Income taxes payable | (12,374 | ) | (11,430 | ) | 12,805 | |||||||
Other current and non-current assets | (9,830 | ) | (1,639 | ) | (8,631 | ) | ||||||
Current and non-current accrued compensation | (4,191 | ) | (8,649 | ) | 32,502 | |||||||
Other current and non-current liabilities | (8,424 | ) | (3,948 | ) | 18,030 | |||||||
Accounts payable | (24,152 | ) | 2,023 | 11,405 | ||||||||
Net cash provided by operating activities | 244,509 | 413,781 | 355,222 | |||||||||
Cash flows (used in) provided by investing activities: | ||||||||||||
Acquisition of business, net of cash acquired | (988,599 | ) | — | — | ||||||||
Net proceeds from sale of business | — | — | 72,509 | |||||||||
Purchases of investments | (246,315 | ) | (253,598 | ) | (229,557 | ) | ||||||
Maturities of investments | 142,571 | 181,749 | 157,342 | |||||||||
Sales of investments | 166,915 | 207,542 | 53,564 | |||||||||
Proceeds from sale of assets | 42,079 | — | — | |||||||||
Purchases of property, plant and equipment | (63,904 | ) | (62,941 | ) | (31,287 | ) | ||||||
Other | — | — | 66 | |||||||||
Net cash (used in) provided by investing activities | (947,253 | ) | 72,752 | 22,637 | ||||||||
| Cash flows provided by (used in) financing activities: | ||||||||||||
Net proceeds from short and long-term borrowings | 642,207 | 67,669 | 28,551 | |||||||||
Payments of short-term borrowings | (5,375 | ) | (67,163 | ) | (29,711 | ) | ||||||
Payments of long-term borrowings | (106,116 | ) | (50,003 | ) | (228,141 | ) | ||||||
Repurchases of common stock | — | (75,000 | ) | — | ||||||||
| Net payments related to employee stock awards | (11,010 | ) | (11,104 | ) | (12,216 | ) | ||||||
Dividend payments | (43,528 | ) | (42,405 | ) | (38,178 | ) | ||||||
Net cash provided by (used in) financing activities | 476,178 | (178,006 | ) | (279,695 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | (3,207 | ) | 1,931 | 1,813 | ||||||||
(Decrease) increase in cash and cash equivalents | (229,773 | ) | 310,458 | 99,977 | ||||||||
| Cash and cash equivalents at beginning of period | 644,345 | 333,887 | 233,910 | |||||||||
Cash and cash equivalents at end of period | $ | 414,572 | $ | 644,345 | $ | 333,887 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 39,899 | $ | 14,593 | $ | 20,467 | ||||||
Income taxes | $ | 35,512 | $ | 91,765 | $ | 104,691 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
61
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands,millions, except share and per share data)
1) | Business Description |
MKS Instruments, Inc. (“MKS” or the “Company”) was founded in 1961 and is a global provider of instruments, systems, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for ourits customers. The Company’s products are derived from its core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, vacuum technology, temperature sensing, lasers, photonics, optics, precision motion control, vibration control and laser-based manufacturing systems solutions. The Company also provides services relating to the maintenance and repair of its products, installation services and training. The Company’s primary served markets include semiconductor, industrial technologies, life and health sciences, and research and defense. The Company groups its product/service offerings into
2) | Basis of Presentation |
The consolidated financial statements include the accounts of MKS Instruments, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an
3) | Summary of Significant Accounting Policies |
Revenue from Contracts with Customers
The Company adoptedaccounts for revenue using Accounting Standards Codification (“ASC”) 606 (“ASC 606”) on January 1, 2018. The Company applies ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for the twelve months ended December 31, 2019 and 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition.
• | Identify the contract with a customer |
• | Identify the performance obligations in the contract |
• | Determine the transaction price |
• | Allocate the transaction price to performance obligations in the contract |
• | Recognize revenue when or as the Company satisfies a performance obligation |
Revenue under
62
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
also recorded over time. The Company considers this to be a faithful depiction of the transfer to the customer of revenue over time as the work is performed or service is delivered, ratably over time.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company’s normal payment terms are 30 to 60 days, but vary by the type and location of its customers and the products or services offered. The time between invoicing and when payment is due is not significant. For certain products and services and customer types, the Company requires payment before the products or services are delivered to, or performed for, the customer.
Contracts with Multiple Performance Obligations
The Company periodically enters into contracts with its customers in which a customer may purchase a combination of goods and or services, such as products with installation services or extended warranty obligations.warranties. These contracts include multiple promises that the Company evaluates to determine if the promises are separate performance obligations. Once the Company determines the performance obligations, the Company then determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the method the Company expects to better predict the amount of consideration to which it will be entitled. There are no constraints on the variable consideration recorded. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price charged separately to customers or using an expected cost plus margincost-plus-margin method. The corresponding revenues are recognized when or as the related performance obligations are satisfied, which are noted above. The impact of variable consideration was immaterial
Deferred Revenues
The Company’s standard assurance warranty period is normally 12 to 24 months. The Company sells separately-pricedseparately priced service contracts and extended warranty contracts related to certain of its products, especially its laser products. The separately priced contracts generally range from 12 to 60 months. The
Costs to Obtain and Fulfill a Contract
The Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administration expenses. The Company has elected to recognize the costs for freight and shipping when control over products has transferred to the customer as an expense in cost of sales.
Product revenue,revenues, excluding revenue from certain custom products, is recorded at a point in time, while the majority of service revenuerevenues and revenue from certain custom products is recorded over time.
Accounts Receivable Allowances
Accounts receivable allowances include sales returns and bad debt allowances. The Company monitors and tracks the amount of product returns and reduces revenue at the time of shipment for the estimated amount of such future returns, based on historical experience. The Company makes estimates evaluating its allowance for doubtful accounts. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that it has identified.
63
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Research and Development
Research and development costs are expensed as incurred and consist mainly of compensation-related expenses and project materials. The Company’s research and development efforts include numerous projects, which generally have a duration of 3 to 30 months. Acquiredwhichif acquired in a business combination, are capitalized at fair value as an intangible asset until the related project is completed, are then amortized over the estimated useful life of the product. The Company monitors projects and, if they are abandoned, the Company immediately writes them off.
Advertising Costs
Advertising costs are expensed as incurred and were immaterial in 2019, 20182021, 2020 and 2017.
Leases
The Company accounts for leases under ASC 842, “Leases”. Under ASC 842, a contract is or contains a lease when the Company has the right to control the use of the identified asset. The Company determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for use.
The Company determines if the lease is an operating or finance lease at the lease commencement date based upon the terms of the lease and the nature of the asset. The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The Company does not have material financing leases.
The Company measures the lease liability as the present value of future lease payments, discounted using the discount rate for the lease at the commencement date. The Company is typically unable to determine the implicit interest rate, so it uses an incremental borrowing rate based on the lease term and economic environment at commencement date. The ROU asset is initially measured as the amount of the lease liability, adjusted for any initial lease costs, prepaid lease payments and reduced by any lease incentives.
The Company’s contracts often include non-lease components such as common area maintenance. MKS has elected the practical expedient to account for the lease and non-lease components as a single lease component. For leases with a term of one year or less the Company has elected not to record the lease asset or liability. The lease payments are recognized in the consolidated statement of earnings on a straight-line basis over the lease term. The Company includes lease costs within cost of revenues and operating expenses.
Stock-Based Compensation
The accounting for share-based compensation expense requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. For restricted stock units (“RSUs”), the fair value is measured on the date of grant and expensed normally over a
three-yearManagement determined that blended volatility, a combination of historical and implied volatility, is more reflective of market conditions and a better indicator of expected volatility than historical or implied volatility
64
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Accumulated Other Comprehensive Income
For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to Accumulated Other Comprehensive Income (“OCI”(“OCI”). Unrealized gains and losses on securities classified as
Net Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding and diluted net income per share is based on the weighted average number of common shares outstanding and all potential dilutive common equivalent shares outstanding. The dilutive effect of RSUs and SARsequity awards are determined under the treasury stock method using the average market price for the period. Common equivalent shares are included in the per share calculations when the effect of their inclusion would be dilutive.
Cash and Cash Equivalents and Investments
All highly liquid investments with a maturity date of three months or less at the date of purchase are considered to be cash equivalents. The appropriate classification of investments in securities is determined at the time of purchase. Debt securities that the Company does not have the intent and ability to hold to maturity are classified as
The Company classifies investments with maturity dates greater than twelve months in short-term investments rather than long-term investments. This method classifies these securities as current based on the nature of the securities and the availability for use in current operations. The Company believes this method is preferable because it is more reflective of the Company’s assessment of its overall liquidity position.
The Company reviews its investment portfolio on a quarterly basis to identify and evaluate individual investments that have indications of possible impairment. The factors considered in determining whether a loss is other-than-temporary include: the length of time and extent to which fair market value has been below the cost basis, the financial condition and near-term prospects of the issuer, credit quality, and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
Concentrations of Credit Risk
The Company’s significant concentrations of credit risk consist principally of cash and cash equivalents, investments, forward exchange contracts, interest rate swaps and trade accounts receivable. The Company maintains cash and cash equivalents with financial institutions, including some banks with which it had borrowings. The Company maintains investments primarily in U.S. Treasury and government agency securities and corporate debt securities. The Company enters into forward currency contracts with high credit-quality financial institutions in order to minimize credit risk exposure.
The Company’s largest customers are primarily concentrated in the semiconductor industry, and a limited number of these customers account for a significant portion of the Company’s revenues. The Company regularly monitors the creditworthiness of its customers and believes it has adequately provided for potential credit loss exposures. Credit is extended for all customers based primarily on financial condition, and collateral is not required.
During the years2021, 2020 and 2019, 2018approximately 62%, 59% and 2017, approximately 49%, 55% and 57% of the Company’s net revenues, respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers. There were no customers thatNaN customer represented 10% or moreapproximately 18% of the Company’s accounts receivable balance as of December 31, 20192021 and 2018.
Inventories
Inventories are stated at the lower of cost or market,net realizable value, cost being determined using a standard costing system which approximates cost based on a
65
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
and records a provision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost, based primarily on its estimated forecast of product demand.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property, plant and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is recognized in earnings.
Depreciation is provided on the straight-line method over the estimated useful lives of ten to
Acquisition Accounting
The fair value of the consideration exchanged in an acquisitiona business combination is allocated to tangible assets and identifiable intangible assets acquired and liabilities assumed at acquisition date fair value. Goodwill is measured as the excess of the consideration transferred over the net fair value of identifiable assets acquired and liabilities assumed. The accounting for an acquisition involves a considerable amount of judgement and estimation. Cost, income, market or a combination of approaches may be used to establish the fair value of consideration exchanged, assets acquired, and liabilities assumed, depending on the nature of those items. The valuation approach is determined in accordance with generally accepted valuation methods. Key areas of estimation and judgment may include the selection of valuation approaches, cost of capital, market characteristics, cost structure, impacts of synergies, and estimates of terminal value, among other factors.
While the Company uses best estimates and assumptions as part of the purchase price allocation process to estimate the value of assets acquired and liabilities assumed, estimates are inherently uncertain and subject to refinement. During the measurement period, which maybe up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill, to the extent that adjustments are identified to the preliminary purchase price allocation. Upon conclusion of the measurement period, or final determination of the value of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to results of operations.
Intangible Assets
Intangible assets resulting from the acquisitions of businesses are estimated by management based on the fair value of assets acquired. These include acquired customer lists, technology, patents, trademarks, trade names covenants not to compete and IPR&D. Intangible assets are amortized from one to eighteen years on a straight-line basis which represents the estimated periods of benefit and the expected pattern of consumption.
Goodwill
Goodwill is the amount by which the cost of acquired net assets exceeded the fair value of those net assets on the date of acquisition. The Company allocates goodwill to reporting units at the time of acquisition or when there is a change in the reporting structure and bases that allocation on which reporting units will benefit from the acquired assets and liabilities. Reporting units are defined as operating segments or one level below an operating segment, referred to as a component. The Company assesses goodwill for impairment on an annual basis as of October 31 or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired.
The estimated fair value of the Company’s reporting units areis based on discounted cash flow models derived from internal earnings and internal and external market forecasts. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount and terminal growth rates, as well as forecasted revenue, growth rates and gross profit and operating margins. Discount rates are based on a weighted average cost of capital (“WACC”), which represents the average rate a business must pay its providers of debt and equity. The WACC used to test goodwill is derived from a group of comparable companies. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity.
66
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The Company makes every effort to forecast these future cash flows as accurately as possible with the information available at the time the forecast is developed.
In performing the Company’s annual goodwill impairment test, the Company is permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of ourthe Company’s reporting unit is less than its carrying amount, including goodwill. In performing the qualitative assessment, the Company considers certain events and circumstances specific to the reporting unit and to the entity as a whole, such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when evaluating whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The Company is also permitted to bypass the qualitative assessment and proceed directly to the quantitative test. If the Company chooses to undertake the qualitative assessment and concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company would then proceed to the quantitative impairment test. In the quantitative assessment, the Company compares the fair value of the reporting unit to its carrying amount, which includes goodwill. If the fair value exceeds the carrying value, no impairment loss exists. If the fair value is less than the carrying amount, a goodwill impairment loss is measured and recorded.
As of October 31, 2019,2021, the Company performed its annual impairment assessment of goodwill by performing a quantitative impairment analysis of its Equipment & Solutions reporting unit and a qualitative analysis for all otherof its reporting units and determined that it is more likely than not that the fair values of the reporting units exceed their carrying amount.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. This periodic review may result in an adjustment of estimated depreciable lives or asset impairment. When indicators of impairment are present, the carrying values of the asset are evaluated in relation to their operating performance and future undiscounted cash flows of the underlying business. If the future undiscounted cash flows are less than their carrying value, impairment exists. The impairment is measured as the difference between the carrying value and the fair value of the underlying asset. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.
Foreign Exchange
The functional currency of the majority of the Company’s foreign subsidiaries is the applicable local currency. For those subsidiaries, assets and liabilities are translated to U.S. dollars at
Net foreign exchange (gain) losslosses resulting from re-measurement were $(31), $2,497$8.7, $3.5 and $6,132$3.6 for the years ended December 31, 2019, 20182021, 2020, and 2017,2019, respectively, and are included in other expense, (income).net. These amounts do not reflect the corresponding gain (loss) from foreign exchange contracts.forward contracts, which are included in cost of sales. See Note 9 “Derivatives” regarding foreign exchange contracts.
Employee Benefit Plans
The majority of the Company’s employees participate in defined contribution plans, (401(k) plans) whereby the Company, matches aat its discretion, makes certain percentage of salarymatching contributions based uponon participating employees’ annual contribution to the amount of each participant’s annual contributionplan and their total compensation.
The Company also has defined benefit retirement plans at certain of its foreign subsidiaries. The Company accounts for these plans based on the provisions of ASC Topic 715, “Compensation-Retirement Benefits.” Some of the key assumptions used to calculate the pension expense and projected benefit obligation include the discount rate, rate of forecasted salary increases, the expected long-term rate of return on plan assets and the mortality lives of participants.expected mortality. The obligation for these claims and the related periodic cotscosts are measured using actuarial techniques and assumptions. Actuarial gains and losses are deferred and amortized over future periods.
67
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Income Taxes
The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and also for operating loss and tax credit carry-forwards.carryforwards. On a quarterly basis, the Company evaluates both the positive and negative evidence that affects the realizability of net deferred tax assets and assesses the need for a valuation allowance. The future benefit to be derived from its deferred tax assets is dependent upon its ability to generate sufficient future taxable income in each jurisdiction of the right type to realize the assets. The Company records a valuation allowance to reduce its net deferred tax assets to the amount that is expected to be realized. To the extent the Company establishes a valuation allowance an expense will be recorded as a component of the provision for income taxes on the statement of operations.
Accounting for income taxes requires a
Income tax effects resulting from changes in tax law are generally accounted for by the Company in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations. On December 22, 2017, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance for reporting entities’ ability to timely complete the accounting for certain income tax effects of the Act and allowed a measurement period up to one year from the enactment date of the “Act”. The Company obtained, prepared and analyzed the information needed to complete the accounting requirements under ASC Topic 740 and as a result, in accordance with SAB 118, the Company finalized and recorded the effects of the Act during the quarter ended December 31, 2018.
4) | Recently Issued or Adopted Accounting Pronouncements |
In December 2019,October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" ("ASU
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The standard was effective upon issuance and generally can be applied through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this update to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this update do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). The Company’s adoption of the requirements of these standards has not resulted in a material impact on its financial position, results of operations and cash flows, but the adoption of the requirements may impact the Company in the future.
68
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
In December 2019, the FASB issued ASU 2019-12,
5) | Acquisitions |
Photon Control
On July 15, 2021, the Company’s consolidated financial statements.
The Photon Control Acquisition has helped the Company recorded a cumulative effectdeliver on one of initially applying this new standard, resultingits long-term strategic objectives, which is to broaden its portfolio of key technologies to better serve its customers. The Photon Control Acquisition further advances the Company’s strategy to enhance its Surround the Chamber® offering by adding optical sensors for temperature control for critical etch and deposition applications in semiconductor wafer fabrication.
The purchase price of Photon Control consisted of the additionfollowing:
Cash paid for outstanding shares (1) |
| $ | 302.7 |
|
Less: Cash and cash equivalents acquired |
|
| (34.3 | ) |
Total purchase price, net of cash and cash equivalents acquired |
| $ | 268.4 |
|
(1) | Represents cash paid of CAD 3.60 per share for approximately 105.2 shares of Photon Control common stock, without interest and subject to deduction for any required withholding tax. |
Under the acquisition method of $71,042 of
The following table summarizes the allocation of the purchase price to the impactfair values assigned to assets acquired and liabilities assumed at the date of adopting this standard, see Note 5 to the Consolidated
69
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands,millions, except share and per share data)
Current assets |
| $ | 51.4 |
|
Intangible assets |
|
| 121.2 |
|
Goodwill |
|
| 168.0 |
|
Other non-current assets |
|
| 8.6 |
|
Total assets acquired |
|
| 349.2 |
|
Current liabilities |
|
| 13.7 |
|
Non-current deferred taxes |
|
| 32.1 |
|
Other long-term liabilities |
|
| 0.7 |
|
Total liabilities assumed |
|
| 46.5 |
|
Fair value of assets acquired and liabilities assumed |
|
| 302.7 |
|
Less: Cash and cash equivalents acquired |
|
| (34.3 | ) |
Total purchase price, net of cash and cash equivalents acquired |
| $ | 268.4 |
|
The acquired intangible assets are being amortized on a broader range of information to estimate expected credit losses overstraight-line basis, which approximates the lifetimeeconomic use of the asset. There have been several consequential subsequent amendments to this standard. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. assets over their estimated useful lives.
The Company does not expect adoptionfollowing table reflects the allocation of this ASU to have a material impact on its consolidated financial statements.
Completed technology |
| $ | 110.0 |
|
| 9 years |
Customer relationships |
|
| 9.4 |
|
| 10 years |
Trade names |
|
| 0.2 |
|
| 0.5 years |
Backlog |
|
| 1.6 |
|
| 1.5 years |
|
| $ | 121.2 |
|
|
|
The fair value of $20,632 and long-term lease liability of $44,759 were reflected on the balance sheet as of December 31, 2019.
Twelve Months Ended December 31, 2019 | ||||
Lease cost: | ||||
Operating lease(1) | $ | 23,176 | ||
| Leases with a term less than 12 months | 4,305 | |||
Total lease cost | $ | 27,481 | ||
Year Ending December 31, | Amount | |||
2020 | $ | 22,299 | ||
2021 | 14,862 | |||
2022 | 9,006 | |||
2023 | 7,563 | |||
2024 | 6,660 | |||
Thereafter | 11,387 | |||
Total lease payments | 71,777 | |||
Less: imputed interest | 6,386 | |||
Total operating lease liabilities | $ | 65,391 | ||
The results of operations of the Photon Control business from the Photon Control Acquisition closing date of July 15, 2021 through December 31, 2018, prior to adoption of ASU
Year Ending December 31, | Amount | |||
2019 | $ | 20,106 | ||
2020 | 17,142 | |||
2021 | 10,325 | |||
2022 | 5,573 | |||
2023 | 4,410 | |||
Thereafter | 8,739 | |||
Total minimum lease payments | $ | 66,295 | ||
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Beginning balance, January 1(1) | $ | 17,474 | $ | 27,800 | ||||
Deferred revenue and customer advances assumed in ESI Merger | 4,629 | — | ||||||
Additions to deferred revenue and customer advances | 77,727 | 73,171 | ||||||
Amount of deferred revenue and customer advances recognized in income | (75,046 | ) | (83,497 | ) | ||||
Ending balance, December 31(2) | $ | 24,784 | $ | 17,474 | ||||
Year Ended December 31, 2019 | ||||||||||||||||
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 819,078 | $ | 663,730 | $ | 128,489 | $ | 1,611,297 | ||||||||
Services | 171,445 | 61,840 | 55,191 | 288,476 | ||||||||||||
Total net revenues | $ | 990,523 | $ | 725,570 | $ | 183,680 | $ | 1,899,773 | ||||||||
Year Ended December 31, 2018 | ||||||||||||||||
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 1,080,343 | $ | 754,859 | $ | — | $ | 1,835,202 | ||||||||
Services | 180,519 | 59,387 | — | 239,906 | ||||||||||||
Total net revenues | $ | 1,260,862 | $ | 814,246 | $ | — | $ | 2,075,108 | ||||||||
Year Ended December 31, 2017 | ||||||||||||||||
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 1,047,639 | $ | 653,662 | $ | — | $ | 1,701,301 | ||||||||
Services | 159,818 | 54,858 | — | 214,676 | ||||||||||||
Total net revenues | $ | 1,207,457 | $ | 708,520 | $ | — | $ | 1,915,977 | ||||||||
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Available-for-sale investments: | ||||||||
Time deposits and certificates of deposit | $ | 13,045 | $ | 102 | ||||
Bankers’ acceptance drafts | 4,043 | 989 | ||||||
Asset-backed securities | — | 9,113 | ||||||
Commercial paper | 61,205 | 19,359 | ||||||
Corporate obligations | — | 9,352 | ||||||
U.S. treasury obligations | 5,000 | 13,298 | ||||||
U.S. agency obligations | 26,124 | 21,613 | ||||||
| $ | 109,417 | $ | 73,826 | |||||
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Available-for-sale investments: | ||||||||
Group insurance contracts | $ | 5,854 | $ | 5,890 | ||||
Cost method investments: | ||||||||
Minority interest in a private company(1) | — | 4,400 | ||||||
| $ | 5,854 | $ | 10,290 | |||||
As of December 31, 2019: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Short-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Time deposits and certificates of deposit | $ | 13,045 | $ | — | $ | — | $ | 13,045 | ||||||||
| Bankers’ acceptance drafts | 4,043 | — | — | 4,043 | ||||||||||||
Commercial paper | 61,498 | — | (293 | ) | 61,205 | |||||||||||
U.S. treasury obligations | 4,999 | 1 | — | 5,000 | ||||||||||||
U.S. agency obligations | 26,123 | 2 | (1 | ) | 26,124 | |||||||||||
| $ | 109,708 | $ | 3 | $ | (294 | ) | $ | 109,417 | ||||||||
As of December 31, 2019: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Long-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Group insurance contracts | $ | 5,261 | $ | 593 | $ | — | $ | 5,854 | ||||||||
As of December 31, 2018: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Short-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Time deposits and certificates of deposit | $ | 102 | $ | — | $ | — | $ | 102 | ||||||||
| Bankers’ acceptance drafts | 989 | — | — | 989 | ||||||||||||
Asset-backed securities | 9,121 | 1 | (9 | ) | 9,113 | |||||||||||
Commercial paper | 19,504 | — | (145 | ) | 19,359 | |||||||||||
Corporate obligations | 9,367 | — | (15 | ) | 9,352 | |||||||||||
U.S. treasury obligations | 13,294 | 4 | — | 13,298 | ||||||||||||
U.S. agency obligations | 21,617 | 2 | (6 | ) | 21,613 | |||||||||||
| $ | 73,994 | $ | 7 | $ | (175 | ) | $ | 73,826 | ||||||||
As of December 31, 2018: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Long-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Group insurance contracts | $ | 5,546 | $ | 344 | $ | — | $ | 5,890 | ||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Description | December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 288 | $ | 288 | $ | — | $ | — | ||||||||
Time deposits and certificates of deposit | 2,190 | — | 2,190 | — | ||||||||||||
Commercial paper | 42,559 | — | 42,559 | — | ||||||||||||
U.S. treasury obligations | 2,700 | — | 2,700 | |||||||||||||
U.S. agency obligations | 17,071 | — | 17,071 | — | ||||||||||||
Restricted cash – money market funds | 333 | 333 | — | — | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
Time deposits and certificates of deposit | 13,045 | — | 13,045 | — | ||||||||||||
| Bankers’ acceptance drafts | 4,043 | — | 4,043 | — | ||||||||||||
Commercial paper | 61,205 | — | 61,205 | — | ||||||||||||
U.S. treasury obligations | 5,000 | — | 5,000 | — | ||||||||||||
U.S. agency obligations | 26,124 | — | 26,124 | — | ||||||||||||
Group insurance contracts | 5,854 | — | 5,854 | — | ||||||||||||
Derivatives – currency forward contracts | 1,074 | — | 1,074 | — | ||||||||||||
Derivatives – interest rate hedge - current | 843 | — | 843 | — | ||||||||||||
Funds in investments and other assets: | ||||||||||||||||
Israeli pension assets | 16,713 | — | 16,713 | — | ||||||||||||
Deferred compensation plan assets: | ||||||||||||||||
Mutual funds and exchange traded funds | 2,002 | — | 2,002 | — | ||||||||||||
Money market securities | 485 | — | 485 | — | ||||||||||||
Total assets | $ | 201,529 | $ | 621 | $ | 200,908 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivatives – currency forward contracts | $ | 259 | $ | — | $ | 259 | $ | — | ||||||||
Derivatives – interest rate hedge – non-current | 6,510 | — | 6,510 | — | ||||||||||||
Total liabilities | $ | 6,769 | $ | — | $ | 6,769 | $ | — | ||||||||
Reported as follows: | ||||||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents, including restricted cash(1) | $ | 65,141 | $ | 621 | $ | 64,520 | $ | — | ||||||||
Short-term investments | 109,417 | — | 109,417 | — | ||||||||||||
Other current assets | 1,917 | — | 1,917 | — | ||||||||||||
Total current assets | $ | 176,475 | $ | 621 | $ | 175,854 | $ | — | ||||||||
Long-term investments | $ | 5,854 | $ | — | $ | 5,854 | $ | — | ||||||||
Other assets | 19,200 | — | 19,200 | — | ||||||||||||
Total long-term assets | $ | 25,054 | $ | — | $ | 25,054 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Other current liabilities | $ | 259 | $ | — | $ | 259 | $ | — | ||||||||
Other liabilities | $ | 6,510 | $ | — | $ | 6,510 | $ | — | ||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Description | December 31, 2018 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 180,340 | $ | 180,340 | $ | — | $ | — | ||||||||
Time deposits and certificates of deposit | 850 | — | 850 | — | ||||||||||||
Commercial paper | 2,687 | — | 2,687 | — | ||||||||||||
U.S. agency obligations | 3,418 | — | 3,418 | — | ||||||||||||
Restricted cash – money market funds | 110 | 110 | — | — | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
Time deposits and certificates of deposit | 102 | — | 102 | — | ||||||||||||
| Bankers’ acceptance drafts | 989 | — | 989 | — | ||||||||||||
Asset-backed securities | 9,113 | — | 9,113 | — | ||||||||||||
Commercial paper | 19,359 | — | 19,359 | — | ||||||||||||
Corporate obligations | 9,352 | — | 9,352 | — | ||||||||||||
U.S. treasury obligations | 13,298 | — | 13,298 | — | ||||||||||||
U.S. agency obligations | 21,613 | — | 21,613 | — | ||||||||||||
Group insurance contracts | 5,890 | — | 5,890 | — | ||||||||||||
Derivatives – currency forward contracts | 2,485 | — | 2,485 | — | ||||||||||||
Funds in investments and other assets: | ||||||||||||||||
Israeli pension assets | 14,408 | — | 14,408 | — | ||||||||||||
Derivatives – interest rate hedge – non-current | 6,083 | — | 6,083 | — | ||||||||||||
Total assets | $ | 290,097 | $ | 180,450 | $ | 109,647 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivatives – currency forward contracts | $ | 1,168 | $ | — | $ | 1,168 | $ | — | ||||||||
Reported as follows: | ||||||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents, including restricted cash(1) | $ | 187,405 | $ | 180,450 | $ | 6,955 | $ | — | ||||||||
Short-term investments | 73,826 | — | 73,826 | — | ||||||||||||
Other current assets | 2,485 | — | 2,485 | — | ||||||||||||
Total current assets | $ | 263,716 | $ | 180,450 | $ | 83,266 | $ | — | ||||||||
Long-term investments(2) | $ | 5,890 | $ | — | $ | 5,890 | $ | — | ||||||||
Other assets | 20,491 | — | 20,491 | — | ||||||||||||
Total long-term assets | $ | 26,381 | $ | — | $ | 26,381 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Other current liabilities | $ | 1,168 | $ | — | $ | 1,168 | $ | — | ||||||||
December 31, 2019 | ||||||||
Currency Hedged (Buy/Sell) | Gross Notional Value | Fair Value (1) | ||||||
U.S. Dollar/Japanese Yen | $ | 45,899 | $ | 43 | ||||
U.S. Dollar/South Korean Won | 51,733 | 167 | ||||||
U.S. Dollar/Euro | 15,670 | 221 | ||||||
U.S. Dollar/U.K. Pound Sterling | 8,279 | (166 | ) | |||||
U.S. Dollar/Taiwan Dollar | 33,093 | (450 | ) | |||||
Total | $ | 154,674 | $ | (185 | ) | |||
December 31, 2018 | ||||||||
Currency Hedged (Buy/Sell) | Gross Notional Value | Fair Value (1) | ||||||
U.S. Dollar/Japanese Yen | $ | 43,770 | $ | (478 | ) | |||
U.S. Dollar/South Korean Won | 59,149 | 570 | ||||||
U.S. Dollar/Euro | 23,515 | 688 | ||||||
U.S. Dollar/U.K. Pound Sterling | 11,827 | 323 | ||||||
U.S. Dollar/Taiwan Dollar | 21,133 | 214 | ||||||
Total | $ | 159,394 | $ | 1,317 | ||||
Years Ended December 31, | ||||||||
Derivatives Designated as Hedging Instruments | 2019 | 2018 | ||||||
Derivative asset: | ||||||||
Forward exchange contracts(1) | $ | 1,074 | $ | 2,485 | ||||
Foreign currency interest rate hedge(2) | 843 | 6,083 | ||||||
Derivative liability: | ||||||||
Forward exchange contracts(1) | (1,259 | ) | (1,168 | ) | ||||
Foreign currency interest rate hedge(2) | (6,510 | ) | — | |||||
Total net derivative (liability) asset designated as hedging instruments | $ | (5,852 | ) | $ | 7,400 | |||
Derivatives Designated as Cash Flow Hedging Instruments | Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | ||||||||||
Forward exchange contracts: | ||||||||||||
Net (loss) gain recognized in OCI, net of tax(1) | $ | (10,013 | ) | $ | 4,942 | $ | (4,568 | ) | ||||
Net gain (loss) reclassified from OCI into income(2) | $ | 5,658 | $ | (3,367 | ) | $ | (2,685 | ) | ||||
Years Ended December 31, | ||||||||||||
Derivatives Not Designated as Hedging Instruments | 2019 | 2018 | 2017 | |||||||||
Forward exchange contracts: | ||||||||||||
Net (loss) gain recognized in income(1) | $ | (1,314 | ) | $ | 105 | $ | (3,416 | ) | ||||
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Raw material | $ | 288,771 | $ | 235,593 | ||||
Work-in-process | 79,367 | 61,908 | ||||||
Finished goods | 94,008 | 87,188 | ||||||
| $ | 462,146 | $ | 384,689 | |||||
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Land | $ | 11,926 | $ | 11,448 | ||||
Buildings | 113,303 | 104,023 | ||||||
Machinery and equipment | 396,193 | 330,821 | ||||||
Furniture and fixtures, office equipment and software | 186,651 | 149,145 | ||||||
Leasehold improvements | 80,389 | 66,569 | ||||||
Construction in progress | 46,926 | 44,823 | ||||||
835,388 | 706,829 | |||||||
Less: accumulated depreciation | 593,517 | 512,462 | ||||||
| $ | 241,871 | $ | 194,367 | |||||
Electro Scientific Industries, Inc.
On February 1, 2019, the Company completed its acquisition of Electro Scientific Industries, Inc. (“ESI”) pursuant to an Agreement and Plan of Merger, dated as of October 29, 2018 (the “Merger Agreement”), by and among the Company, EAS Equipment, Inc., formerly a Delaware corporation and a wholly-owned subsidiary of the Company, and ESI (the “ESI Merger”). At the effective time of the ESI Merger and pursuant to the terms and conditions of the Merger Agreement, each share of ESI’s common stock that was issued and outstanding immediately prior to the effective time of the ESI Merger was converted into the right to receive $30.00 in cash, without interest and subject to deduction of any required withholding tax.
ESI provides laser-based manufacturing systems solutions for the micro-machining industry that enable customers to optimize production. Its market is composed primarily of flexible and rigid PCBprinted circuit board (“PCB”) processing/fabrication semiconductor wafer processing and passive component manufacturing and testing. ESI solutions incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.
70
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The purchase price of ESI consisted of the following:
Cash paid for outstanding shares (1) |
| $ | 1,032.7 |
|
Settlement of share-based compensation awards (2) |
|
| 30.6 |
|
Total purchase price |
|
| 1,063.3 |
|
Less: cash and cash equivalents acquired |
|
| (44.1 | ) |
Total purchase price, net of cash and cash equivalents acquired |
| $ | 1,019.2 |
|
Cash paid for outstanding shares(1) | $ | 1,032,671 | ||
Settlement of share-based compensation awards(2) | 30,630 | |||
Total purchase price | 1,063,301 | |||
Less: cash and cash equivalents acquired | (44,072 | ) | ||
Total purchase price, net of cash and cash equivalents acquired | $ | 1,019,229 | ||
(1) | Represents cash paid of $30.00 per share for approximately |
(2) | Represents the vested but unissued portion of ESI share-based compensation awards as of the acquisition date of February 1, 2019. |
Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of ESI based on their fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The Company expects that none of such goodwill and intangible assets will be deductible for tax purposes.
The following table summarizes the allocation of the purchase price to the fair values assigned to assets acquired and liabilities assumed at the date of the ESI Merger:
Current assets (excluding inventory) |
| $ | 208.0 |
|
Inventory |
|
| 81.7 |
|
Intangible assets |
|
| 316.2 |
|
Goodwill |
|
| 474.0 |
|
Property, plant and equipment |
|
| 65.5 |
|
Long-term assets |
|
| 9.6 |
|
Total assets acquired |
|
| 1,155.0 |
|
Current liabilities |
|
| 51.5 |
|
Non-current deferred taxes |
|
| 33.0 |
|
Other long-term liabilities |
|
| 7.2 |
|
Total liabilities assumed |
|
| 91.7 |
|
Fair value of assets acquired and liabilities assumed |
|
| 1,063.3 |
|
Less: Cash and cash equivalents acquired |
|
| (44.1 | ) |
Total purchase price, net of cash and cash equivalents acquired |
| $ | 1,019.2 |
|
Current assets (excluding inventory) | $ | 208,009 | ||
Inventory | 81,696 | |||
Intangible assets | 316,200 | |||
Goodwill | 473,951 | |||
Property, plant and equipment | 65,489 | |||
Long-term assets | 9,633 | |||
Total assets acquired | 1,154,978 | |||
Current liabilities | 51,479 | |||
Non-current deferred taxes | 33,039 | |||
Other long-term liabilities | 7,159 | |||
Total liabilities assumed | 91,677 | |||
Fair value of assets acquired , and liabilities assumed | 1,063,301 | |||
Less: Cash and cash equivalents acquired | (44,072 | ) | ||
Total purchase price, net of cash and cash equivalents acquired | $ | 1,019,229 | ||
The fair value
The fair value
The acquired intangible assets are being amortized on a straight-line basis, which approximates the economic use of the asset.
71
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The following table reflects the allocation of the acquired intangible assets and related estim
Completed technology - Laser |
| $ | 255.7 |
|
| 12 years |
Completed technology - Non-Laser |
|
| 18.3 |
|
| 10 years |
Trademarks and trade names |
|
| 14.4 |
|
| 7 years |
Customer relationships |
|
| 25.4 |
|
| 10 years |
Backlog |
|
| 2.4 |
|
| 1 year |
|
| $ | 316.2 |
|
|
|
Completed technology - Laser | $ | 255,700 | 12 years | |||||
Completed technology - Non-Laser | 18,300 | 10 years | ||||||
Trademarks and trade names | 14,400 | 7 years | ||||||
Customer relationships | 25,400 | 10 years | ||||||
Backlog | 2,400 | 1 year | ||||||
| $ | 316,200 | |||||||
The net fair value of the acquired intangiblesintangible assets was determined using the income approach. In performing these valuations, the key underlying judgments and assumptions used included the appropriate
The results of this acquisition were included in the Company’s consolidated statement of operations beginning on February 1, 2019. ESI constitutes theThe Company’s Equipment & Solutions reportable segment (see Note 21).
Certain executives
The Company’s consolidated net revenue and earnings for the year ended December 31, 2019 include the following amounts of revenue and earnings of ESI since the acquisition date:
|
| Year Ended December 31, |
| |
|
| 2019 |
| |
Total net revenues |
| $ | 183.7 |
|
Net loss |
| $ | (33.5 | ) |
Net loss per share: |
|
|
|
|
Basic |
| $ | (0.61 | ) |
Diluted |
| $ | (0.61 | ) |
Year EndedDecember 31, | ||||
2019 | ||||
Total net revenues | $ | 183,680 | ||
Net loss | $ | (33,446 | ) | |
Net loss per share: | ||||
Basic | $ | (0.61 | ) | |
Diluted | $ | (0.61 | ) | |
72
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands,millions, except share and per share data)
Pro Forma Results
The following unaudited pro forma financial information presents the combined results of operations of the Company as if the ESI Merger had occurred on January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of what the Company’s condensed consolidated results of operations actually would have been had the acquisition occurred at the beginning of eachthe year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined Company.
|
| Year Ended December 31, |
| |
|
| 2019 |
| |
Total net revenues |
| $ | 1,914.6 |
|
Net income |
| $ | 171.5 |
|
Net income per share: |
|
|
|
|
Basic |
| $ | 3.14 |
|
Diluted |
| $ | 3.11 |
|
Year Endeds December 31, | ||||||||
2019 | 2018 | |||||||
Total net revenues | $ | 1,914,561 | $ | 2,445,711 | ||||
Net income | $ | 171,537 | $ | 424,778 | ||||
Net income per share: | ||||||||
Basic | $ | 3.14 | $ | 7.81 | ||||
Diluted | $ | 3.11 | $ | 7.72 | ||||
The unaudited pro forma financial information above gives effect primarily to the following:
(1) | Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment from the purchase price allocation. |
(2) | Revenue and cost of goods sold adjustments as a result of the reduction in deferred revenue and the cost related to their estimated fair value. |
(3) | Incremental interest expense related to the |
(4) | The exclusion of acquisition costs and inventory step-up amortization. |
(5) | The exclusion of |
(6) | The estimated tax impact of the above adjustments. |
6) | Revenue from Contracts with Customers |
Contract assets as of Data Analytics Solutions
A roll forward of the Company’s long-term strategic objectives.deferred revenue and customer advances is as follows:
|
| 2021 |
|
| 2020 |
| ||
Beginning balance, January 1(1) |
| $ | 36.7 |
|
| $ | 24.8 |
|
Additions to deferred revenue and customer advances |
|
| 172.5 |
|
|
| 107.4 |
|
Amount of deferred revenue and customer advances recognized in income |
|
| (168.9 | ) |
|
| (95.5 | ) |
Ending balance, December 31(2) |
| $ | 40.3 |
|
| $ | 36.7 |
|
(1) | Beginning deferred revenue and customer advances as of January 1, 2021 included $18.3 of current deferred revenue, $5.6 of long-term deferred revenue and $12.8 of current customer advances. Beginning deferred revenue and customer advances as of January 1, 2020 included $12.4 of current deferred revenue, $3.3 of long-term deferred revenue and $9.1 of current customer advances. |
(2) | Ending deferred revenue and customer advances as of December 31, 2021 included $16.6 of current deferred revenue, $2.8 of long-term deferred revenue and $20.9 of current customer advances. Ending deferred revenue and customer advances as of December 31, 2020 included $18.3 of current deferred revenue, $5.6 of long-term deferred revenue and $12.8 of current customer advances. |
73
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Disaggregation of Revenue
The business did not qualifyfollowing table summarizes revenue from contracts with customers:
|
| Year Ended December 31, 2021 |
| |||||||||||||
|
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Total |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 1,629.0 |
|
| $ | 742.5 |
|
| $ | 207.1 |
|
| $ | 2,578.6 |
|
Services |
|
| 232.5 |
|
|
| 70.9 |
|
|
| 67.6 |
|
|
| 371.0 |
|
Total net revenues |
| $ | 1,861.5 |
|
| $ | 813.4 |
|
| $ | 274.7 |
|
| $ | 2,949.6 |
|
|
| Year Ended December 31, 2020 |
| |||||||||||||
|
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Total |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 1,222.4 |
|
| $ | 621.9 |
|
| $ | 170.5 |
|
| $ | 2,014.8 |
|
Services |
|
| 183.5 |
|
|
| 67.7 |
|
|
| 64.0 |
|
|
| 315.2 |
|
Total net revenues |
| $ | 1,405.9 |
|
| $ | 689.6 |
|
| $ | 234.5 |
|
| $ | 2,330.0 |
|
|
| Year Ended December 31, 2019 |
| |||||||||||||
|
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Total |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 819.1 |
|
| $ | 663.7 |
|
| $ | 128.5 |
|
| $ | 1,611.3 |
|
Services |
|
| 171.4 |
|
|
| 61.9 |
|
|
| 55.2 |
|
|
| 288.5 |
|
Total net revenues |
| $ | 990.5 |
|
| $ | 725.6 |
|
| $ | 183.7 |
|
| $ | 1,899.8 |
|
Refer to Note 21 for revenue by reportable segment, geography and groupings of similar products.
7) | Investments |
The following table shows the gross unrealized gains and (losses) aggregated by investment category for available-for-sale investments:
As of December 31, 2021: |
| Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized (Losses) |
|
| Estimated Fair Value |
| ||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
| $ | 22.0 |
|
| $ | — |
|
| $ | — |
|
| $ | 22.0 |
|
Bankers' acceptance drafts |
|
| 0.5 |
|
|
| — |
|
|
| — |
|
|
| 0.5 |
|
Commercial paper |
|
| 41.8 |
|
|
| — |
|
|
| — |
|
|
| 41.8 |
|
U.S. treasury obligations |
|
| 11.5 |
|
|
| — |
|
|
| — |
|
|
| 11.5 |
|
U.S. agency obligations |
|
| 0.6 |
|
|
| — |
|
|
| — |
|
|
| 0.6 |
|
|
| $ | 76.4 |
|
| $ | — |
|
| $ | — |
|
| $ | 76.4 |
|
As of December 31, 2021: |
| Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized (Losses) |
|
| Estimated Fair Value |
| ||||
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group insurance contracts |
| $ | 5.3 |
|
| $ | 0.9 |
|
| $ | — |
|
| $ | 6.2 |
|
74
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
As of December 31, 2020: |
| Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized (Losses) |
|
| Estimated Fair Value |
| ||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
| $ | 0.7 |
|
| $ | — |
|
| $ | — |
|
| $ | 0.7 |
|
Bankers' acceptance drafts |
|
| 3.8 |
|
|
| — |
|
|
| — |
|
|
| 3.8 |
|
U.S. treasury obligations |
|
| 223.2 |
|
|
| — |
|
|
| — |
|
|
| 223.2 |
|
|
| $ | 227.7 |
|
| $ | — |
|
| $ | — |
|
| $ | 227.7 |
|
As of December 31, 2020: |
| Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized (Losses) |
|
| Estimated Fair Value |
| ||||
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group insurance contracts |
| $ | 5.6 |
|
| $ | 0.9 |
|
| $ | — |
|
| $ | 6.5 |
|
The tables above, which show the gross unrealized gains and (losses) aggregated by investment category for available-for-sale investments as a discontinued operation as this sale did not represent a strategic shiftof December 31, 2021 and 2020, reflect the inclusion within short-term investments of investments with contractual maturities greater than one year from the date of purchase. Management has the ability, if necessary, to liquidate any of its investments in order to meet the Company’s liquidity needs in the Company’s business, nor didnext 12 months. Accordingly, those investments with contractual maturities greater than one year from the sale have a major effectdate of purchase are classified as short-term on the accompanying balance sheets.
Interest income is accrued as earned. Dividend income is recognized as income on the date the security trades “ex-dividend.” Realized gains or losses are reflected in income and were not material in 2021, 2020 and 2019.
8) | Fair Value Measurements |
In accordance with the provisions of fair value accounting, a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.
The fair value measurement guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or securities or derivative contracts that are valued using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company categorizes such assets and liabilities based on the lowest level input that is significant to the fair value measurement
75
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
in its entirety. The Company’s operations. Therefore,assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset.
Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2021, are summarized as follows:
|
|
|
|
|
| Fair Value Measurements at Reporting Date Using |
| |||||||||
Description |
| December 31, 2021 |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 55.4 |
|
| $ | 55.4 |
|
| $ | — |
|
| $ | — |
|
Commercial paper |
|
| 0.1 |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
U.S. treasury obligations |
|
| 175.0 |
|
|
| — |
|
|
| 175.0 |
|
|
| — |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
|
| 22.0 |
|
|
| — |
|
|
| 22.0 |
|
|
| — |
|
Bankers' acceptance drafts |
|
| 0.5 |
|
|
| — |
|
|
| 0.5 |
|
|
| — |
|
Commercial paper |
|
| 41.8 |
|
|
| — |
|
|
| 41.8 |
|
|
| — |
|
U.S. treasury obligations |
|
| 11.5 |
|
|
| — |
|
|
| 11.5 |
|
|
| — |
|
U.S. agency obligations |
|
| 0.6 |
|
|
| — |
|
|
| 0.6 |
|
|
| — |
|
Group insurance contracts |
|
| 6.2 |
|
|
| — |
|
|
| 6.2 |
|
|
| — |
|
Derivatives-foreign exchange forward contracts |
|
| 3.5 |
|
|
| — |
|
|
| 3.5 |
|
|
| — |
|
Derivatives-foreign currency options |
|
| 3.4 |
|
|
| — |
|
|
| 3.4 |
|
|
| — |
|
Derivatives-interest rate hedge-non-current |
|
| 8.7 |
|
|
| — |
|
|
| 8.7 |
|
|
| — |
|
Funds in investments and other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israeli pension assets |
|
| 20.3 |
|
|
| — |
|
|
| 20.3 |
|
|
| — |
|
Deferred compensation plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds and exchange traded funds |
|
| 1.6 |
|
|
| — |
|
|
| 1.6 |
|
|
| — |
|
Total assets |
| $ | 350.6 |
|
| $ | 55.4 |
|
| $ | 295.2 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives – forward exchange contracts |
| $ | 0.6 |
|
| $ | — |
|
| $ | 0.6 |
|
| $ | — |
|
Derivatives – interest rate hedge – non-current |
|
| 5.0 |
|
|
| — |
|
|
| 5.0 |
|
|
| — |
|
Total liabilities |
| $ | 5.6 |
|
| $ | — |
|
| $ | 5.6 |
|
| $ | — |
|
Reported as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 230.5 |
|
| $ | 55.4 |
|
| $ | 175.1 |
|
| $ | — |
|
Short-term investments |
|
| 76.4 |
|
|
| — |
|
|
| 76.4 |
|
|
| — |
|
Other current assets |
|
| 6.9 |
|
|
| — |
|
|
| 6.9 |
|
|
| — |
|
Total current assets |
| $ | 313.8 |
|
| $ | 55.4 |
|
| $ | 258.4 |
|
| $ | — |
|
Long-term investments |
| $ | 6.2 |
|
| $ | — |
|
| $ | 6.2 |
|
| $ | — |
|
Other assets |
|
| 30.6 |
|
|
| — |
|
|
| 30.6 |
|
|
| — |
|
Total long-term assets |
| $ | 36.8 |
|
| $ | — |
|
| $ | 36.8 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
| $ | 0.6 |
|
| $ | — |
|
| $ | 0.6 |
|
| $ | — |
|
Other liabilities |
| $ | 5.0 |
|
| $ | — |
|
| $ | 5.0 |
|
| $ | — |
|
76
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2020, are summarized as follows:
|
|
|
|
|
| Fair Value Measurements at Reporting Date Using |
| |||||||||
Description |
| December 31, 2020 |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 1.3 |
|
| $ | 1.3 |
|
| $ | — |
|
| $ | — |
|
Commercial paper |
|
| 0.3 |
|
|
| — |
|
|
| 0.3 |
|
|
| — |
|
U.S. treasury obligations |
|
| 62.1 |
|
|
| — |
|
|
| 62.1 |
|
|
| — |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
|
| 0.7 |
|
|
| — |
|
|
| 0.7 |
|
|
| — |
|
Bankers' acceptance drafts |
|
| 3.8 |
|
|
| — |
|
|
| 3.8 |
|
|
| — |
|
U.S. treasury obligations |
|
| 223.2 |
|
|
| — |
|
|
| 223.2 |
|
|
| — |
|
Group insurance contracts |
|
| 6.5 |
|
|
| — |
|
|
| 6.5 |
|
|
| — |
|
Funds in investments and other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israeli pension assets |
|
| 18.8 |
|
|
| — |
|
|
| 18.8 |
|
|
| — |
|
Deferred compensation plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds and exchange traded funds |
|
| 1.7 |
|
|
| — |
|
|
| 1.7 |
|
|
| — |
|
Total assets |
| $ | 318.4 |
|
| $ | 1.3 |
|
| $ | 317.1 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives – forward exchange contracts |
| $ | 6.5 |
|
| $ | — |
|
| $ | 6.5 |
|
| $ | — |
|
Derivatives – interest rate hedge – non-current |
|
| 14.0 |
|
|
| — |
|
|
| 14.0 |
|
|
| — |
|
Total liabilities |
| $ | 20.5 |
|
| $ | — |
|
| $ | 20.5 |
|
| $ | — |
|
Reported as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 63.7 |
|
| $ | 1.3 |
|
| $ | 62.4 |
|
| $ | — |
|
Short-term investments |
|
| 227.7 |
|
|
| — |
|
|
| 227.7 |
|
|
| — |
|
Total current assets |
| $ | 291.4 |
|
| $ | 1.3 |
|
| $ | 290.1 |
|
| $ | — |
|
Long-term investments |
| $ | 6.5 |
|
| $ | — |
|
| $ | 6.5 |
|
| $ | — |
|
Other assets |
|
| 20.5 |
|
|
| — |
|
|
| 20.5 |
|
|
| — |
|
Total long-term assets |
| $ | 27.0 |
|
| $ | — |
|
| $ | 27.0 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
| $ | 6.5 |
|
| $ | — |
|
| $ | 6.5 |
|
| $ | — |
|
Other liabilities |
| $ | 14.0 |
|
| $ | — |
|
| $ | 14.0 |
|
| $ | — |
|
Money Market Funds
Money market funds are cash and cash equivalents and are classified within Level 1 of the fair value hierarchy.
Available-For-Sale Investments
The Company measures its debt and equity investments at fair value. The Company’s available-for-sale investments are classified within Level 2 of the fair value hierarchy.
77
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Israeli Pension Assets
Israeli pension assets represent investments in mutual funds, government securities and other time deposits. These investments are set aside for the retirement benefit of the employees of the Company’s Israeli subsidiaries. These funds are classified within Level 2 of the fair value hierarchy.
Derivatives
As a result of the Company’s global operating activities, the Company is exposed to market risks from changes in foreign currency exchange rates and variable interest rates, which may adversely affect its operating results and financial position. When deemed appropriate, the Company minimizes its risks from foreign currency exchange rate and interest rate fluctuations through the use of operationsderivative financial instruments. The principal market in which the Company executes its foreign currency contracts, options and interest rate swaps is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. The foreign exchange forward contracts, options and interest rate hedge are valued using broker quotations, or market transactions and are classified within Level 2 of the fair value hierarchy.
9) | Derivatives |
The Company enters into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments and those utilized as economic hedges. The Company operates internationally and, in the normal course of business, is exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. The Company has used derivative instruments, such as foreign exchange forward contracts and options, to manage certain foreign currency exposure, and interest rate swaps to manage interest rate exposure.
By nature, all periodsfinancial instruments involve market and credit risks. The Company enters into derivative instruments with major investment grade financial institutions, for which no collateral is required. The Company has policies to monitor the credit risk of these counterparties. While there can be no assurance, the Company does not anticipate any material non-performance by any of these counterparties.
Foreign Exchange Contracts
The Company hedges a portion of its forecasted foreign currency-denominated intercompany sales of inventory, over a maximum period of eighteen months, using foreign exchange forward contracts accounted for as cash-flow hedges related to British, Euro, Japanese, South Korean and Taiwanese currencies. To the extent these derivatives are effective in off-setting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria, changes in the derivatives’ fair value are not included in current earnings but are included in OCI in stockholders’ equity. These changes in fair value will subsequently be reclassified into earnings, as applicable, when the Company’s income from operations. The assets and liabilities of this business have not been reclassified or segregatedforecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the consolidated balance sheet orhedging relationship is recorded immediately in earnings in the period it occurs. The cash flows resulting from forward exchange contracts are classified in the consolidated statements of cash flows as part of cash flows from operating activities. The Company does not enter into derivative instruments for trading or speculative purposes.
78
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
As of December 31, 2021 and 2020, the amounts were immaterial.Company had outstanding foreign exchange forward contracts with gross notional values of $240.4 and $176.2, respectively. The following tables provide a summary of the primary net hedging positions and corresponding fair values held as of December 31, 2021 and 2020:
|
| December 31, 2021 |
| |||||
Currency Hedged (Buy/Sell) |
| Gross Notional Value |
|
| Fair Value (1) |
| ||
U.S. dollar/Japanese yen |
| $ | 60.2 |
|
| $ | 1.7 |
|
U.S. dollar/South Korean won |
|
| 107.7 |
|
|
| 1.1 |
|
U.S. dollar/Euro |
|
| 15.1 |
|
|
| 0.3 |
|
U.S. dollar/U.K. pound sterling |
|
| 10.7 |
|
|
| — |
|
U.S. dollar/Taiwan dollar |
|
| 46.7 |
|
|
| (0.1 | ) |
Total |
| $ | 240.4 |
|
| $ | 3.0 |
|
|
| December 31, 2020 |
| |||||
Currency Hedged (Buy/Sell) |
| Gross Notional Value |
|
| Fair Value (1) |
| ||
U.S. dollar/Japanese yen |
| $ | 61.5 |
|
| $ | (1.1 | ) |
U.S. dollar/South Korean won |
|
| 62.2 |
|
|
| (3.1 | ) |
U.S. dollar/Euro |
|
| 13.1 |
|
|
| (0.6 | ) |
U.S. dollar/U.K. pound sterling |
|
| 6.1 |
|
|
| (0.3 | ) |
U.S. dollar/Taiwan dollar |
|
| 33.3 |
|
|
| (1.4 | ) |
Total |
| $ | 176.2 |
|
| $ | (6.5 | ) |
(1) | Represents the (payable) receivable amount included in the consolidated balance sheet. |
The foreign exchange forward contracts are subject to a master netting agreement with one financial institution. However, the Company has elected to record these contracts on a gross basis in the consolidated balance sheet.
Interest Rate Swap Agreements
The Company entered into various interest rate swap agreements that exchange the variable LIBOR interest rate to a fixed rate to manage the exposure to interest rate fluctuations associated with the variable LIBOR interest rate paid on the outstanding balance of the Term Loan Facility, as defined and described further in Note 15. The table below summarizes the various interest rate hedges entered into by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2021 |
|
| 2020 |
| ||
Swap |
| Trade Date |
| Effective Date |
| Maturity |
| Fixed Rate |
|
| Notional Amount at Effective Date |
|
| Notional Amount |
|
| Fair Value Asset (Liability) |
|
| Fair Value (Liability) |
| |||||
1 |
| April 3, 2019 |
| April 5, 2019 |
| March 31, 2023 |
|
| 2.309 | % |
| $ | 300.0 |
|
| $ | 300.0 |
|
| $ | (5.0 | ) |
| $ | (12.4 | ) |
2 |
| October 29, 2020 |
| October 26, 2021 |
| February 28, 2025 |
|
| 0.485 | % |
| $ | 200.0 |
|
| $ | 200.0 |
|
|
| 3.9 |
|
|
| (0.7 | ) |
3 |
| October 29, 2020 |
| March 31, 2022 |
| February 28, 2025 |
|
| 0.623 | % |
| $ | 100.0 |
|
| $ | 100.0 |
|
|
| 4.8 |
|
|
| (0.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
| $ | 3.7 |
|
| $ | (14.0 | ) | |
The interest rate swaps are recorded at fair value on the balance sheet and changes in the fair value are recognized in OCI, as these hedges have been determined to be effective. To the extent that these arrangements are no longer effective
79
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
hedges, any ineffectiveness measured in the hedging relationships is recorded immediately in earnings in the period it occurs. The fair value of the interest rate swaps is classified in other assets or non-current liabilities, accordingly, in the consolidated balance sheet.
Currency Option Agreements
In conjunction with financing the proposed acquisition of Atotech Limited (“Atotech”), the Company expects to issue EUR 500.0 in term loan debt. At the expected close, a portion of those proceeds will settle Atotech’s existing EUR 200.0 term loan and the EUR 300.0 balance will be converted into USD in support of the USD purchase price. The Company purchased foreign currency option contracts to fix the conversion of EUR 300.0 into USD as noted below:
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|
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|
|
|
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|
|
|
|
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|
|
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|
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|
|
Trade Date |
| Effective Date |
| Maturity |
| Fixed Rate |
|
| Notional Amount in EUR |
|
| Notional Amount in USD |
|
| Year Ended December 31, 2021 Fair Value Asset |
| ||||
October 26, 2021 |
| October 26, 2021 |
| January 31, 2022 |
| $ | 1.1615 |
|
| $ | 300.0 |
|
| $ | 348.3 |
|
| $ | 3.0 |
|
The currency swaps are recorded at fair value on the balance sheet and changes in the fair value are recognized immediately in earnings. The fair value asset is classified in other current assets in the consolidated balance sheet. The Company recorded an unrealized gain of $3.4 in 2021, net of premiums, which is included in other expense, net.
In conjunction with the Photon Control Acquisition, which closed in July 2021, the Company entered into a foreign currency contract to hedge the Canadian dollar purchase price. In 2021, the Company recorded a fair value realized loss of $10.3, which is included in other expense, net.
The following table provides a summary of the gain (loss) on derivatives designated as cash flow hedging instruments:
Derivatives Designated as Cash Flow Hedging Instruments |
| Years Ended December 31, |
| |||||||||
Forward exchange contracts: |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Net gain (loss) recognized in OCI, net of tax (1) |
| $ | 20.0 |
|
| $ | (10.6 | ) |
| $ | (10.0 | ) |
Net (loss) gain reclassified from OCI into income (2) |
| $ | (1.5 | ) |
| $ | 1.7 |
|
| $ | 5.7 |
|
(1) | Net change in the fair value of the effective portion classified in OCI. |
(2) | Effective portion classified in cost of products. The tax effect of the gains or losses reclassified from accumulated OCI into income is immaterial. |
The following table provides a summary of gain (loss) on derivatives not designated as cash flow hedging instruments:
Derivatives Not Designated as Cash Flow Hedging Instruments |
| Years Ended December 31, |
| |||||||||
Forward exchange contracts: |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Net gain (loss) recognized in income (1) |
| $ | 4.8 |
|
| $ | (1.5 | ) |
| $ | (1.3 | ) |
(1) | The Company enters into foreign exchange forward contracts to hedge against changes in the balance sheet for certain subsidiaries to mitigate the risk associated with certain foreign currency transactions in the ordinary course of business. These derivatives are not designated as cash flow hedging instruments and gains or losses from these derivatives are recorded immediately in other expense, net. |
80
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
10) | Inventories |
Inventories consist of the following:
|
| Years Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Raw material |
| $ | 393.8 |
|
| $ | 321.3 |
|
Work-in-process |
|
| 82.5 |
|
|
| 76.7 |
|
Finished goods |
|
| 100.4 |
|
|
| 103.4 |
|
Total |
| $ | 576.7 |
|
| $ | 501.4 |
|
Inventory-related excess and obsolete charges of $16.2, $24.8 and $24.7 were recorded in cost of products and services in the years ended December 31, 2021, 2020 and 2019, respectively.
11) | Property, Plant and Equipment |
Property, plant and equipment consist of the following:
|
| Years Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Land |
| $ | 11.9 |
|
| $ | 12.3 |
|
Buildings and building improvements |
|
| 132.8 |
|
|
| 120.2 |
|
Machinery and equipment |
|
| 428.1 |
|
|
| 397.8 |
|
Furniture and fixtures, office equipment and software |
|
| 186.7 |
|
|
| 187.1 |
|
Leasehold improvements |
|
| 151.7 |
|
|
| 95.4 |
|
Construction in progress |
|
| 27.2 |
|
|
| 70.6 |
|
|
|
| 938.4 |
|
|
| 883.4 |
|
Less: accumulated depreciation |
|
| 613.1 |
|
|
| 599.1 |
|
Total |
| $ | 325.3 |
|
| $ | 284.3 |
|
Depreciation of property, plant and equipment totaled $48.8, $44.0 and $42.6 for the years ended 2021, 2020 and 2019, respectively.
12) | Leases |
The Company has various operating leases for real estate and non-real estate items. The non-real estate leases are mainly comprised of automobiles but also include office equipment and other lower-valued items. The Company does not have any finance leases.
The elements of lease expense were as follows:
|
| Years Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Lease cost: |
|
|
|
|
|
|
|
|
Operating lease (1) |
| $ | 27.6 |
|
| $ | 29.2 |
|
Short-term lease |
|
| 4.5 |
|
|
| 4.9 |
|
Total lease cost |
| $ | 32.1 |
|
| $ | 34.1 |
|
(1) | Operating lease cost includes an immaterial amount of variable expenses, offset by certain sublease rental income. |
The weighted average discount rate and the weighted average remaining lease term were 3.0% and 14.2 years, respectively, as of December 31, 2021. The weighted average discount rate and the weighted average remaining lease term were 3.0% and 15 years, respectively, as of December 31, 2020. Operating cash flows used for operating leases for the years
81
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
ended December 31, 2021 and 2020 were $18.0 and $13.0, respectively. Operating cash flows used for operating leases for the years ended December 31, 2021 and 2020 were net of $5.0 and $10.3, respectively, in tenant improvement allowance receipts.
In 2019, the Company sold 2 properties in Boulder, Colorado, and 3 properties in Portland, Oregon, the latter of which were part of sale and leaseback transactions and leased back the buildings over varying terms into 2021. Total net cash proceeds received for these two transactions were $41.2 and the Company recognized a net gain on the sale of these long-lived assets of $6.8.
Future lease payments under non-cancelable leases as of December 31, 2021 are detailed as follows:
Year Ending December 31, |
| Operating Leases |
| |
2022 |
| $ | 24.0 |
|
2023 |
|
| 22.6 |
|
2024 |
|
| 21.0 |
|
2025 |
|
| 18.8 |
|
2026 |
|
| 16.7 |
|
Thereafter |
|
| 158.1 |
|
Total lease payments |
|
| 261.2 |
|
Less: imputed interest |
|
| 50.6 |
|
Total lease liabilities |
| $ | 210.6 |
|
The 2022 lease payment amount of $24.0 is net of tenant improvement allowances of $1.3. Amounts presented above do not include payments relating to immaterial leases excluded from the balance sheet as well as leases with terms of less than twelve months.
13) | Goodwill and Intangible Assets |
Goodwill
The Company’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess
Goodwill and purchased intangible assets with indefinite useful lives are not amortized but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment. The Company regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.
Effective JulyJanuary 1, 2018,2021, the Company reassigned goodwill to certain reporting units within the Light & Motion reportable segment, resulting from a reorganization of the composition of reporting units. The goodwill was reassigned to the reporting units affected using the relative fair value approach. In conjunction with this goodwill reassignment, the Company performed an interim quantitative impairment test as of July 1, 2018 for all of its reporting units and concluded that the fair values of each reporting unit exceeded their respective carrying values.
82
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The changes in the carrying amount of goodwill and accumulated impairment losses were as follows:
|
| 2021 |
|
| 2020 |
| ||||||||||||||||||
|
| Gross Carrying Amount |
|
| Accumulated Impairment Loss |
|
| Net |
|
| Gross Carrying Amount |
|
| Accumulated Impairment Loss |
|
| Net |
| ||||||
Beginning balance at January 1 |
| $ | 1,211.8 |
|
| $ | (145.4 | ) |
| $ | 1,066.4 |
|
| $ | 1,202.8 |
|
| $ | (144.3 | ) |
| $ | 1,058.5 |
|
Acquired goodwill (1) |
|
| 168.0 |
|
|
| — |
|
|
| 168.0 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Impairment of goodwill (2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.1 | ) |
|
| (1.1 | ) |
Foreign currency translation |
|
| (6.2 | ) |
|
| — |
|
|
| (6.2 | ) |
|
| 9.0 |
|
|
| — |
|
|
| 9.0 |
|
Ending balance at December 31 |
| $ | 1,373.6 |
|
| $ | (145.4 | ) |
| $ | 1,228.2 |
|
| $ | 1,211.8 |
|
| $ | (145.4 | ) |
| $ | 1,066.4 |
|
2019 | 2018 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Impairment Loss | Net | Gross Carrying Amount | Accumulated Impairment Loss | Net | |||||||||||||||||||
Beginning balance at January 1 | $ | 731,272 | $ | (144,276 | ) | $ | 586,996 | $ | 735,323 | $ | (144,276 | ) | $ | 591,047 | ||||||||||
Acquired goodwill(1) | 473,951 | — | 473,951 | — | — | — | ||||||||||||||||||
Foreign currency translation | (2,493 | ) | — | (2,493 | ) | (4,051 | ) | — | (4,051 | ) | ||||||||||||||
Ending balance at December 31 | $ | 1,202,730 | $ | (144,276 | ) | $ | 1,058,454 | $ | 731,272 | $ | (144,276 | ) | $ | 586,996 | ||||||||||
(1) | During the |
(2) | During the year ended December 31, 2020, the Company recorded goodwill impairment charges related to the pending closure of a facility in Europe. |
Intangible Assets
The Company’s acquired intangible assets are comprised of the following:
As of December 31, 2021 |
| Gross |
|
| Accumulated Impairment Charges |
|
| Accumulated Amortization |
|
| Foreign Currency Translation |
|
| Net |
| |||||
Completed technology(1) |
| $ | 556.4 |
|
| $ | (0.1 | ) |
| $ | (241.7 | ) |
| $ | (0.2 | ) |
| $ | 314.4 |
|
Customer relationships(1) |
|
| 317.6 |
|
|
| (1.4 | ) |
|
| (124.2 | ) |
|
| (0.2 | ) |
|
| 191.8 |
|
Patents, trademarks, trade names and other(1) |
|
| 122.7 |
|
|
| — |
|
|
| (52.5 | ) |
|
| (0.4 | ) |
|
| 69.8 |
|
|
| $ | 996.7 |
|
| $ | (1.5 | ) |
| $ | (418.4 | ) |
| $ | (0.8 | ) |
| $ | 576.0 |
|
As of December 31, 2019 | Gross | Accumulated Impairment Charges | Accumulated Amortization | Foreign Currency Translation | Net | |||||||||||||||
Completed technology(1) | $ | 446,431 | $ | (105 | ) | $ | (178,310 | ) | $ | (208 | ) | $ | 267,808 | |||||||
Customer relationships(1) | 308,144 | (1,406 | ) | (84,167 | ) | (1,361 | ) | 221,210 | ||||||||||||
Patents, trademarks, trade names and other | 120,895 | — | (45,505 | ) | 222 | 75,612 | ||||||||||||||
| $ | 875,470 | $ | (1,511 | ) | $ | (307,982 | ) | $ | (1,347 | ) | $ | 564,630 | ||||||||
(1) | During the |
As of December 31, 2020 |
| Gross |
|
| Accumulated Impairment Charges |
|
| Accumulated Amortization |
|
| Foreign Currency Translation |
|
| Net |
| |||||
Completed technology |
| $ | 446.4 |
|
| $ | (0.1 | ) |
| $ | (209.8 | ) |
| $ | (0.1 | ) |
| $ | 236.4 |
|
Customer relationships |
|
| 308.2 |
|
|
| (1.4 | ) |
|
| (104.8 | ) |
|
| 1.7 |
|
|
| 203.7 |
|
Patents, trademarks, trade names and other |
|
| 120.9 |
|
|
| — |
|
|
| (48.6 | ) |
|
| (0.2 | ) |
|
| 72.1 |
|
|
| $ | 875.5 |
|
| $ | (1.5 | ) |
| $ | (363.2 | ) |
| $ | 1.4 |
|
| $ | 512.2 |
|
As of December 31, 2018 | Gross | Accumulated Impairment Charges | Accumulated Amortization | Foreign Currency Translation | Net | |||||||||||||||
Completed technology | $ | 172,431 | $ | (105 | ) | $ | (137,283 | ) | $ | (73 | ) | $ | 34,970 | |||||||
Customer relationships | 282,744 | (1,406 | ) | (63,788 | ) | (269 | ) | 217,281 | ||||||||||||
Patents, trademarks, trade names and other | 110,523 | — | (42,954 | ) | (13 | ) | 67,556 | |||||||||||||
| $ | 565,698 | $ | (1,511 | ) | $ | (244,025 | ) | $ | (355 | ) | $ | 319,807 | ||||||||
Aggregate amortization expense related to acquired intangible assets for the years2021, 2020 and 2019 2018was $55.3, $55.2 and 2017 was $67,402, $43,521 and $45,743,$67.4, respectively. The amortization expense in 2019, 2018 and 2017 is net of $0, $885 and $811, respectively, of amortization income from unfavorable lease commitments. Aggregate net amortization expense related to acquired intangible assets for future years is:
Year |
| Amount |
| |
2022 |
| $ | 59.6 |
|
2023 |
|
| 58.2 |
|
2024 |
|
| 57.3 |
|
2025 |
|
| 56.3 |
|
2026 |
|
| 52.7 |
|
Thereafter |
|
| 236.0 |
|
Year | Amount | |||
2020 | $ | 55,808 | ||
2021 | 47,720 | |||
2022 | 45,254 | |||
2023 | 44,902 | |||
2024 | 43,985 | |||
Thereafter | $ | 271,061 | ||
The Company excluded $55,900$55.9 of indefinite-lived trademarks and tradenamestrade names that were not subject to amortization from the table above.
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands,millions, except share and per share data)
14)Product Warranties
The Company provides for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by shipment volume, product failure rates, utilization levels, material usage and supplier warranties on parts delivered to the Company. Should actual product failure rates, utilization levels, material usage, or supplier warranties on parts differ from the Company’s estimates, revisions to the estimated warranty liability would be required.
Product warranty activities were as follows:
|
| Years Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Beginning balance |
| $ | 18.4 |
|
| $ | 14.9 |
|
Provision for product warranties |
|
| 38.1 |
|
|
| 28.3 |
|
Assumed product warranty liability from Photon Control Acquisition |
|
| 0.6 |
|
|
| — |
|
Direct and other charges to warranty liability |
|
| (36.0 | ) |
|
| (24.8 | ) |
Ending balance(1) |
| $ | 21.1 |
|
| $ | 18.4 |
|
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Beginning balance | $ | 10,399 | $ | 10,104 | ||||
Assumed product warranty liability from ESI Merger | 7,177 | — | ||||||
Provision for product warranties | 17,397 | 15,987 | ||||||
Direct and other charges to warranty liability | (20,100 | ) | (15,692 | ) | ||||
Ending balance(1) | $ | 14,873 | $ | 10,399 | ||||
(1) | Short-term product |
15)Debt
The Company’s outstanding debt is as follows:
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
Short-term debt: |
|
|
|
|
|
|
|
|
Term Loan Facility |
| $ | 9.0 |
|
| $ | 9.0 |
|
Japanese lines of credit and financing facility |
|
| — |
|
|
| 5.5 |
|
|
| $ | 9.0 |
|
| $ | 14.5 |
|
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
Long-term debt: |
|
|
|
|
|
|
|
|
Term Loan Facility, net(1) |
| $ | 807.9 |
|
| $ | 815.0 |
|
(1) | Net of remaining deferred financing fees, original issuance discount and repricing fees in the aggregate of $7.5 and $9.4 as of December 31, 2021 and December 31, 2020, respectively. |
The Company recognized interest expense of $25.4, $29.1 and $44.1 for the years ended December 30, 2021, 2020 and 2019, respectively.
Senior Secured Term Loan Credit Facility
In connection with the completion of the acquisition of Newport Corporation (“Newport”) in 2016 (the “Newport Merger”), the Company entered into a term loan credit agreement (the(as amended, the “Term Loan Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto, (the “Lenders”), thatwhich provided a senior secured term loan credit facility (the “Term Loan Facility”) in the original principal amount of $780,000 (the “2016$780.0. The Company has entered into seven amendments to the Term Loan Facility”),Credit Agreement since 2016, including most recently the May Term Loan Amendment (as defined below). The Term Loan Facility is subject to increase at the Company’s option and subject to receipt of lender commitments in accordance with the Term Loan Credit Agreement (the 2016 Term Loan Facility, together with the 2019 Incremental Term Loan Facility and 2019 Term Loan Refinancing Facility (each as defined below), the “Term Loan Facility”). Prior to the effectiveness of Amendment No. 6 (as defined below), the 2016 Term Loan Facility had aAgreement. The maturity date of April 29, 2023.the Term Loan
84
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Facility is February 2, 2026. As of December 31, 2019, 2021, borrowings under the Term Loan FacilityFacility bear interest per annum at one of the following rates selected by the Company: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted inLondon Interbank Offer Rate (“LIBOR”)LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of 1.75%1.00%, plus, in each case, an applicable margin;margin of 0.75%; or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a LIBOR rate floor of 0.0%, plus an applicable margin.margin of 1.75%. The Company has elected the interest rate as described in clause (b) of the foregoing sentence. The Term Loan Credit Agreement provides that, unless an alternate rate of interest is agreed, all loans will be determined by reference to the base
In May 2021, the Company entered into an amendment (“Amendment No. 5”(the “May Term Loan Amendment”) to the Term Loan Credit Agreement. The May Term Loan Amendment No. 5 providedamends the Term Loan Facility to, among other things, (i) increase the Company’s ability to incur additional incremental debt facilities to (x) the greater of (1) $600.0 and (2) 100% of consolidated EBITDA, plus (y) an amount equal to the sum of all voluntary prepayments of term loans under the Term Loan Facility, plus (z) an additional tranche
The Company is required to make scheduled quarterly amortization payments each equal to 0.25% of the original principal amount of the 2019 Term Loan Refinancing Facility with the balance due on February 2, 2026. If, on or prior to the date that is six months after the closing date of Amendment No. 6, the Company prepays any loans under the 2019 Term Loan Refinancing Facility in connection with a repricing transaction, the Company must pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid.
As of December 31, 2019,2021, after total principal prepayments of $525,000giving effect to all amendments and regularly scheduled principal payments of $12,646,repayments prior to such date, the total outstanding principal balanceamount of the Term Loan Facility was $892,354$824.4, and the interest rate was 3.45%1.8%.
Under the Term Loan Credit Agreement, the Company is required to prepay outstanding term loans, subject to certain exceptions, with portions of its annual excess cash flow as well as with the net cash proceeds of certain of its asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. As a result of prepayments of term loan debt of $100,000 during 2019, the Company was not required to make a prepayment of excess cash flow for the period ended December 31, 2019.
All obligations under the Term Loan Facility are guaranteed by certain of the Company’s domestic subsidiaries and are collateralizedsecured by substantially all of the Company’s assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
The Term Loan Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions generally permitted to be taken by a secured creditor. At December 31, 2019,2021, the Company was in compliance with all covenants under the Term Loan Credit Agreement.
Senior Secured Asset-Based Revolving Credit Facility
In February 1, 2019, in connection with the completion of the ESI Merger,acquisition of Electro Scientific Industries, Inc. (the “ESI Merger”), the Company entered into an asset-based
85
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
for the ABL Facility at any time equals the sum
As of December 31, 2021, borrowings under the ABL Facility bear interest at a rate per annum equal to, at the Company’s option, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in
In addition to paying interest on any outstanding principal under the ABL Facility, the Company is required to pay a commitment fee in respect of the unutilized commitments thereunder equal to
Under the ABL Facility, the Company wrote off $216 of previously capitalized debt issuance costs.
There is no scheduled amortization under the ABL Facility. TheAny principal amount outstanding under the ABL Facility is due and payable in full on the fifth anniversary of the closing date.
All obligations under the ABL Facility are guaranteed by certain of ourthe Company’s domestic subsidiaries and are collateralizedsecured by substantially all of the Company’s assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
From the time when the Company has excess availability less than the greater of (a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing baseLine Cap and (b) $8,500,$8.5 until the time when the Company has excess availability equal to or greater than the greater of (a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing baseLine Cap and (b) $8,500$8.5 for 30 consecutive days, or during the continuance of an event of default, the ABL Credit Agreement requires the Company to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement)fixed charge coverage ratio, tested on the last day of each fiscal quarter, of at least 1.0 to 1.0.
The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take
86
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor. The Company has not borrowed against this ABL Facility to date.
Lines of Credit and Short-Term Borrowing Arrangements
The Company’s Japanese subsidiaries hashave lines of credit and short-term borrowing arrangementsa financing facility with 2various financial institutions, many of which arrangements generally expire and are renewed at three-month intervals. intervals with the remaining having no expiration date. The lines of credit and financing facility provided for aggregate borrowings as of December 31, 20192021 of up to an equivalent of $21,126 U.S. dollars. One of the borrowing arrangements has an interest rate based on the Tokyo Interbank Offer Rate at the time of borrowing and the other has an interest rate based on the Japanese Short-Term Prime Lending Rate.$29.1. There were 0 borrowings outstanding under these arrangements at December 31, 2019 and 2018.
December 31, 2019 | December 31, 2018 | |||||||
Short-term debt: | ||||||||
| Japanese lines of credit | $ | 2,558 | $ | 2,724 | ||||
| Japanese receivables financing facility | 573 | 665 | ||||||
| Other debt | — | 597 | ||||||
| Term Loan Facility | 8,968 | — | ||||||
| $ | 12,099 | $ | 3,986 | |||||
December 31, 2019 | December 31, 2018 | |||||||
Long-term debt: | ||||||||
Other debt | $ | 94 | $ | 86 | ||||
Term Loan Facility, net(1) | 871,573 | 343,756 | ||||||
| $ | 871,667 | $ | 343,842 | |||||
Contractual maturities of the Company’s debt obligations as of December 31, 20192021 are as follows:
Year |
| Amount |
| |
2022 |
| $ | 9.0 |
|
2023 |
|
| 9.0 |
|
2024 |
|
| 9.0 |
|
2025 |
|
| 9.0 |
|
2026 |
|
| 788.4 |
|
Year | Amount | |||
2020 | $ | 12,099 | ||
2021 | 9,062 | |||
2022 | 8,968 | |||
2023 | 8,968 | |||
2024 | 8,968 | |||
Thereafter | 847,511 | |||
16) | Income Taxes |
A reconciliation of theCompany’s effective tax rate to the U.S. federal statutory rate is as follows:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
U.S. federal income tax statutory rate |
|
| 21.0 | % |
|
| 21.0 | % |
|
| 21.0 | % |
Federal tax credits |
|
| (0.7 | ) |
|
| (1.5 | ) |
|
| (2.9 | ) |
State income taxes, net of federal benefit |
|
| 1.5 |
|
|
| 1.1 |
|
|
| 2.3 |
|
Effect of foreign operations taxed at various rates |
|
| (4.5 | ) |
|
| (5.0 | ) |
|
| (4.4 | ) |
Executive compensation |
|
| 0.9 |
|
|
| 1.1 |
|
|
| 5.8 |
|
Gain on intercompany sale of assets |
|
| — |
|
|
| — |
|
|
| 2.9 |
|
Utilization of a capital loss |
|
| — |
|
|
| — |
|
|
| (1.2 | ) |
Foreign derived intangible income deduction |
|
| (1.7 | ) |
|
| (1.5 | ) |
|
| (3.8 | ) |
Global intangible low taxed income, net of foreign tax credits |
|
| 0.5 |
|
|
| 0.9 |
|
|
| 2.6 |
|
Revaluation of deferred income taxes |
|
| — |
|
|
| — |
|
|
| (1.4 | ) |
Stock-based compensation |
|
| (0.5 | ) |
|
| (0.7 | ) |
|
| (0.3 | ) |
Deferred tax asset valuation allowance |
|
| (0.8 | ) |
|
| 0.6 |
|
|
| 0.1 |
|
Release of income tax reserves (including interest) |
|
| (0.6 | ) |
|
| — |
|
|
| (0.8 | ) |
Withholding taxes on foreign dividends, net of foreign tax credits |
|
| 1.5 |
|
|
| 0.7 |
|
|
| 0.6 |
|
Other |
|
| 0.4 |
|
|
| 0.5 |
|
|
| 0.6 |
|
|
|
| 17.1 | % |
|
| 17.2 | % |
|
| 21.1 | % |
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
U.S. Federal income tax statutory rate | 21.0 | % | 21.0 | % | 35.0 | % | ||||||
Federal tax credits | (2.9 | ) | (0.7 | ) | (0.7 | ) | ||||||
State income taxes, net of federal benefit | 2.3 | 1.3 | 1.0 | |||||||||
Effect of foreign operations taxed at various rates | (4.4 | ) | (1.3 | ) | (12.1 | ) | ||||||
Qualified production activity tax benefit | — | — | (1.4 | ) | ||||||||
Executive compensation | 5.8 | — | — | |||||||||
Gain on intercompany sale of assets | 2.9 | — | — | |||||||||
Benefit of a capital loss | (1.2 | ) | — | — | ||||||||
Foreign derived intangible income deduction | (3.8 | ) | (2.1 | ) | — | |||||||
Global intangible low taxed income, net of foreign tax credits | 2.6 | 0.4 | — | |||||||||
Transition tax, net of foreign tax credits | — | (0.1 | ) | 6.4 | ||||||||
Revaluation of deferred income taxes | (1.4 | ) | (0.3 | ) | (5.0 | ) | ||||||
Revaluation of prepaid taxes | — | 1.6 | — | |||||||||
Stock-based compensation | (0.3 | ) | (1.3 | ) | (2.5 | ) | ||||||
Deferred tax asset valuation allowance | 0.1 | — | (0.1 | ) | ||||||||
Release of income tax reserves (including interest) | (0.8 | ) | (0.4 | ) | (0.4 | ) | ||||||
Foreign dividends, net of foreign tax credits | 0.6 | (1.0 | ) | 3.3 | ||||||||
Other | 0.6 | 1.2 | 0.7 | |||||||||
21.1 | % | 18.3 | % | 24.2 | % | |||||||
87
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands,millions, except share and per share data)
The components of income from operations before income taxes and the related provision for income taxes consist of the following:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Income before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 249.0 |
|
| $ | 132.0 |
|
| $ | 2.3 |
|
Foreign |
|
| 416.5 |
|
|
| 291.0 |
|
|
| 175.5 |
|
|
| $ | 665.5 |
|
| $ | 423.0 |
|
| $ | 177.8 |
|
Current taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 37.8 |
|
| $ | 29.2 |
|
| $ | 6.8 |
|
State |
|
| 10.3 |
|
|
| 6.1 |
|
|
| 2.0 |
|
Foreign |
|
| 64.8 |
|
|
| 44.7 |
|
|
| 32.8 |
|
|
|
| 112.9 |
|
|
| 80.0 |
|
|
| 41.6 |
|
Deferred taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
| 4.9 |
|
|
| (7.9 | ) |
|
| (1.7 | ) |
State and Foreign |
|
| (3.7 | ) |
|
| 0.8 |
|
|
| (2.5 | ) |
|
|
| 1.2 |
|
|
| (7.1 | ) |
|
| (4.2 | ) |
Provision for income taxes |
| $ | 114.1 |
|
| $ | 72.9 |
|
| $ | 37.4 |
|
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Income before income taxes: | ||||||||||||
United States | $ | 2,279 | $ | 287,309 | $ | 224,979 | ||||||
Foreign | 175,557 | 193,641 | 222,646 | |||||||||
| $ | 177,836 | $ | 480,950 | $ | 447,625 | |||||||
Current taxes: | ||||||||||||
United States | $ | 6,790 | $ | 41,428 | $ | 77,023 | ||||||
State | 2,068 | 8,094 | 6,149 | |||||||||
Foreign | 32,807 | 57,920 | 30,152 | |||||||||
41,665 | 107,442 | 113,324 | ||||||||||
Deferred taxes: | ||||||||||||
United States | (1,743 | ) | (2,533 | ) | (16,250 | ) | ||||||
State and Foreign | (2,472 | ) | (16,855 | ) | 11,419 | |||||||
(4,215 | ) | (19,388 | ) | (4,831 | ) | |||||||
Provision for income taxes | $ | 37,450 | $ | 88,054 | $ | 108,493 | ||||||
The significant components of the deferred tax assets and deferred tax liabilities are as follows:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Carryforward losses and credits |
| $ | 48.8 |
|
| $ | 54.2 |
|
Inventory and warranty reserves |
|
| 37.3 |
|
|
| 32.4 |
|
Accrued expenses and other reserves |
|
| 15.8 |
|
|
| 14.5 |
|
Stock-based compensation |
|
| 3.5 |
|
|
| 5.1 |
|
Executive supplemental retirement benefits |
|
| 1.5 |
|
|
| 1.8 |
|
Lease liability |
|
| 44.7 |
|
|
| 48.7 |
|
Unrealized net loss |
|
| — |
|
|
| 4.0 |
|
Other |
|
| 1.0 |
|
|
| 2.7 |
|
Total deferred tax assets |
| $ | 152.6 |
|
| $ | 163.4 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Acquired intangible assets and goodwill |
| $ | (136.5 | ) |
| $ | (116.2 | ) |
Depreciation and amortization |
|
| (23.3 | ) |
|
| (14.5 | ) |
Loan costs |
|
| (2.0 | ) |
|
| (1.8 | ) |
Right-of-use asset |
|
| (41.0 | ) |
|
| (46.4 | ) |
Foreign withholding taxes |
|
| (6.1 | ) |
|
| (3.2 | ) |
Unrealized gain |
|
| (1.6 | ) |
|
| — |
|
Total deferred tax liabilities |
|
| (210.5 | ) |
|
| (182.1 | ) |
Valuation allowance |
|
| (26.2 | ) |
|
| (30.6 | ) |
Net deferred tax liabilities |
| $ | (84.1 | ) |
| $ | (49.3 | ) |
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Deferred tax assets: | ||||||||
Carry-forward losses and credits | $ | 59,189 | $ | 23,675 | ||||
Inventory and warranty reserves | 29,661 | 17,945 | ||||||
Accrued expenses and other reserves | 12,607 | 10,260 | ||||||
Stock-based compensation | 8,580 | 5,351 | ||||||
Executive supplemental retirement benefits | 1,556 | 5,972 | ||||||
Lease liability | 15,284 | — | ||||||
Unrealized net loss | 2,741 | — | ||||||
Other | 2,347 | 2,396 | ||||||
Total deferred tax assets | $ | 131,965 | $ | 65,599 | ||||
Deferred tax liabilities: | ||||||||
Acquired intangible assets and goodwi ll | $ | (128,144 | ) | $ | (74,120 | ) | ||
Depreciation and amortization | (14,072 | ) | (8,332 | ) | ||||
Loan costs | (2,317 | ) | (1,108 | ) | ||||
Right-of-use asset | (14,415 | ) | — | |||||
Foreign withholding taxes | (5,008 | ) | (3,176 | ) | ||||
Unrealized net gain | — | (1,952 | ) | |||||
Total deferred tax liabilities | (163,956 | ) | (88,688 | ) | ||||
Valuation allowance | (27,360 | ) | (17,936 | ) | ||||
Net deferred tax liabilities | $ | (59,351 | ) | $ | (41,025 | ) | ||
As of December 31, 2019,2021, the
88
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Although the Company believes that its tax positions are consistent with applicable U.S. federal, state and international laws, it maintains certain tax reserves as of December 31, 20192021 in the event its tax positions were to be challenged by the applicable tax authority and additional tax assessed upon audit.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Balance at beginning of year |
| $ | 47.0 |
|
| $ | 43.5 |
|
| $ | 32.7 |
|
(Decreases) increases for prior years |
|
| (0.6 | ) |
|
| 1.1 |
|
|
| 9.3 |
|
Increases for the current year |
|
| 2.3 |
|
|
| 6.8 |
|
|
| 3.2 |
|
Reductions related to expiration of statutes of limitations and audit settlements |
|
| (5.6 | ) |
|
| (4.4 | ) |
|
| (1.7 | ) |
Balance at end of year |
| $ | 43.1 |
|
| $ | 47.0 |
|
| $ | 43.5 |
|
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Balance at beginning of year | $ | 32,684 | $ | 27,345 | $ | 25,465 | ||||||
Increases | 9,324 | 934 | 640 | |||||||||
Increases for the current year | 3,219 | 6,091 | 4,340 | |||||||||
Reductions related to expiration of statutes of limitations and audit settlements | (1,734 | ) | (1,686 | ) | (3,100 | ) | ||||||
Balance at end of year | $ | 43,493 | $ | 32,684 | $ | 27,345 | ||||||
The net decrease in gross unrecognized tax benefits which excludes interest and penalties, was $43,493. As of December 31, 2018, the total gross unrecognized tax benefits, which excludes interest and penalties,
The Company accrues interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of December 31, 2019, 20182021, 2020 and 2017,2019, the Company had accrued interest on unrecognized tax benefits of approximately $527, $568$1.0, $0.7 and $327,$0.5, respectively.
Over the next 12 months it is reasonably possible that the Company may recognize $1,463approximately $3.6 of previously net unrecognized tax benefits, excluding interest and penalties, related to various U.S. federal, state and foreign tax positions, primarily due to the expiration of statutes of limitations.
The Company and its subsidiaries areis subject to examination by U.S. federal, state and foreign tax authorities. The U.S. Internal Revenue Service commenced an examination of the Company’s U.S. federal income tax filings for tax years 2015 and 2016 during the quarter ended September 30, 2017. This audit was effectively settled during the quarter ended March 31, 2018, and the impact was not material. Also, during the quarter ended March 31, 2018, the Company received notification from the U.S. Internal Revenue Service of their intent to audit its U.S. subsidiary, Newport, for the tax year 2015. This audit commenced during the quarter
On a quarterly basis, the Company evaluates both positive and negative evidence that affects the realizability of net deferred tax assets and assesses the need for a valuation allowance. The future benefit to be derived from its deferred tax assets is dependent upon its ability to generate sufficient future taxable income to realize the assets.
During 2021, the Company decreased its valuation allowance by $4.4, primarily related to the release of the valuation allowance on its Austrian entities. During 2020, the Company increased its valuation allowance by $3.2. This increase was primarily related to certain foreign net operating loss carry-forward amounts. During 2019, the Company increased its valuation allowance by $9,424.$9.4. This increase was primarily attributable to the addition of historical valuation allowances for ESI and its subsidiaries which were included as a result of the ESI Merger during the quarter ended March 31, 2019. During 2018, the Company increased its valuation allowance by $4,307, primarily related to certain tax credit and net operating loss carry-forward amounts. During 2017, the Company increased its valuation allowance by $1,102, primarily related to certain state tax credits.
No provision has been made for deferred taxes related to remaining historical outside basis differences in certain of the Company’s
Certain of the Company’s subsidiaries have obtained tax rate reductions or tax holidays under government-sponsored incentive programs offered under government programs. AFor example, a Singapore subsidiary of ESIthe Company obtained a tax holiday in Singapore. The benefits of the holiday w
89
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
17) | Stock-Based Compensation |
Employee Stock Purchase Plans
The 2014 ESPP Plan was adopted by the Board of Directors on February 10, 2014 and approved by the Company’s stockholders on May 5, 2014. The 2014 ESPP Plan authorizes the issuance of up to an aggregate of
Equity Incentive Plans
The Company grants restricted stock units (“RSUs”)RSUs to employees and directors under the 2014 Stock Incentive Plan (the “2014 Plan”). The 2014 Plan is administered by the Compensation Committee of the Company’s Board of Directors. The 2014 Plan is intended to attract and retain employees and directors, and to provide an incentive for these individuals to assist the
The 2014 Plan was adopted by the Board of Directors on February 10, 2014 and was approved by the Company’s stockholders on May 5, 2014. Up to
Time-based
90
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands,millions, except share and per share data)
The following table presentstables present the activity for RSUs under the Plans:2014 Plan:
|
| Year Ended December 31, 2021 |
| |||||
|
| RSUs |
|
| Weighted Average Grant Date Fair Value |
| ||
RSUs — beginning of period |
|
| 0.6 |
|
| $ | 93.26 |
|
Granted |
|
| 0.2 |
|
| $ | 177.71 |
|
Vested |
|
| (0.3 | ) |
| $ | 95.95 |
|
RSUs — end of period |
|
| 0.5 |
|
| $ | 127.93 |
|
|
| Year Ended December 31, 2020 |
| |||||
|
| RSUs |
|
| Weighted Average Grant Date Fair Value |
| ||
RSUs — beginning of period |
|
| 1.1 |
|
| $ | 85.93 |
|
Granted |
|
| 0.3 |
|
| $ | 98.72 |
|
Vested |
|
| (0.8 | ) |
| $ | 85.32 |
|
RSUs — end of period |
|
| 0.6 |
|
| $ | 93.26 |
|
Year Ended December 31, 2019 | ||||||||
RSUs | Weighted Average Grant Date Fair Value | |||||||
| RSUs — beginning of period | 647,394 | $ | 74.04 | |||||
Assumed from ESI Merger | 736,133 | $ | 84.10 | |||||
Accrued dividend shares | 5,222 | $ | 85.67 | |||||
Granted | 434,970 | $ | 87.11 | |||||
Vested | (577,688 | ) | $ | 70.27 | ||||
Forfeited or expired | (143,498 | ) | $ | 89.55 | ||||
| RSUs — end of period | 1,102,533 | $ | 85.93 | |||||
The following table presents the activity forCompany had an immaterial amount of SARs under the Plans:
Year Ended December 31, 2019 | ||||||||
Outstanding and Exercisable SARs | Weighted Average Base Value | |||||||
SARs — beginning of period | 177,538 | $ | 28.52 | |||||
Assumed from ESI Merger | 12,787 | $ | 17.38 | |||||
Exercised | (77,473 | ) | $ | 26.29 | ||||
Forfeited or expired | (3,998 | ) | $ | 23.00 | ||||
SARs Outstanding — end of period | 108,854 | $ | 29.05 | |||||
Number of Shares | Weighted Average Base Value | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
SARs outstanding and exercisable | 108,854 | $ | 29.05 | 1.6 | $ | 8,813 | ||||||||||
Stock-Based Compensation Expense
The Company recognized the full impact of its share-based payment plans in the consolidated statements of operations and comprehensive income for the years 2019, 2018 and 2017.
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Stock-based compensation expense by type of award: |
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
| $ | 33.8 |
|
| $ | 27.0 |
|
| $ | 47.1 |
|
Employee stock purchase plan |
|
| 2.9 |
|
|
| 2.5 |
|
|
| 2.1 |
|
Total stock-based compensation |
|
| 36.7 |
|
|
| 29.5 |
|
|
| 49.2 |
|
Windfall tax effect on stock-based compensation |
|
| (4.6 | ) |
|
| (2.4 | ) |
|
| (2.2 | ) |
Net effect on net income |
| $ | 32.1 |
|
| $ | 27.1 |
|
| $ | 47.0 |
|
Effect on net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.58 |
|
| $ | 0.49 |
|
| $ | 0.86 |
|
Diluted |
| $ | 0.58 |
|
| $ | 0.49 |
|
| $ | 0.85 |
|
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Stock-based compensation expense by type of award: | ||||||||||||
RSUs | $ | 47,005 | $ | 24,883 | $ | 22,428 | ||||||
SARs | 73 | 98 | 529 | |||||||||
Employee stock purchase plan | 2,116 | 2,281 | 1,421 | |||||||||
Total stock-based compensation | $ | 49,194 | 27,262 | 24,378 | ||||||||
Windfall tax effect on stock-based compensation | (2,244 | ) | (8,277 | ) | (11,071 | ) | ||||||
Net effect on net income | $ | 46,950 | $ | 18,985 | $ | 13,307 | ||||||
Effect on net earnings per share: | ||||||||||||
Basic | $ | 0.86 | $ | 0.35 | $ | 0.25 | ||||||
Diluted | $ | 0.85 | $ | 0.35 | $ | 0.24 | ||||||
The
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Cost of revenues |
| $ | 3.8 |
|
| $ | 4.2 |
|
| $ | 2.8 |
|
Research and development expense |
|
| 4.5 |
|
|
| 4.0 |
|
|
| 3.8 |
|
Selling, general and administrative expense |
|
| 28.4 |
|
|
| 20.4 |
|
|
| 20.5 |
|
Acquisition and integration related expense |
|
| — |
|
|
| 0.9 |
|
|
| 21.7 |
|
Restructuring related expense |
|
| — |
|
|
| — |
|
|
| 0.4 |
|
Total pre-tax stock-based compensation expense |
| $ | 36.7 |
|
| $ | 29.5 |
|
| $ | 49.2 |
|
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cost of revenues | $ | 2,789 | $ | 3,516 | $ | 3,894 | ||||||
Research and development expense | 3,847 | 2,750 | 2,816 | |||||||||
Selling, general and administrative expense | 20,457 | 20,996 | 17,668 | |||||||||
Acquisition and integration related expense | 21,728 | — | — | |||||||||
Restructuring related expense | 373 | — | — | |||||||||
Total pre-tax stock-based compensation expense | $ | 49,194 | $ | 27,262 | $ | 24,378 | ||||||
91
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Valuation Assumptions
The Company determines the fair value of RSUs based on the closing market price of the Company’s common stock on the date of the award and estimates the fair value of stock appreciation rights and employee stock purchase plan rights using the Black-Scholes valuation model. Such values are recognized as expense on a straight-line basis for time-based awards and using the accelerated graded vesting method for performance-based awards, both over the requisite service periods, net of estimated forfeitures except for retirement eligible employees in which the Company expenses the fair value of the grant in the period in which the grant was
The weighted average fair value per share of employee stock purchase plan rights granted in 2021, 2020 and 2019 2018was $33.55, $23.88, and 2017 was $16.04, $21.74, and $13.14, respectively. The fair value of the employees’employee stock purchase plan rights was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
| Years Ended December 31, |
| |||||||||
Employee stock purchase plan rights: |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Expected life (years) |
|
| 0.5 |
|
|
| 0.5 |
|
|
| 0.5 |
|
Risk-free interest rate |
|
| 0.1 | % |
|
| 0.9 | % |
|
| 2.4 | % |
Expected volatility |
|
| 39.3 | % |
|
| 45.4 | % |
|
| 38.7 | % |
Expected annual dividends per share |
| $ | 0.88 |
|
| $ | 0.80 |
|
| $ | 0.80 |
|
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Employee stock purchase plan rights: | ||||||||||||
Expected life (years) | 0.5 | 0.5 | 0.5 | |||||||||
Risk-free interest rate | 2.4 | % | 1.8 | % | 0.8 | % | ||||||
Expected volatility | 38.7 | % | 38.6 | % | 26.5 | % | ||||||
Expected annual dividends per share | $ | 0.80 | $ | 0.76 | $ | 0.69 | ||||||
Expected volatilities for 2019, 2018 and 2017 are based on a combination of implied and historical volatilities of the Company’s common stock; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.
The total intrinsic value of SARs exercised and the total fair value of RSUs vested during 2019, 20182021, 2020 and 20172019 was approximately $68,123, $61,626$56.6, $86.2 and $60,302,$68.1, respectively. As of December 31, 2019,2021, the unrecognized compensation cost related to RSUs and SARs was approximately $26,137$35.6 and will be recognized over an estimated weighted average amortization period of 1.01 year.
18) | Stockholders’ Equity |
Stock Repurchase Program
On July 25, 2011, the Company’s Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of $200,000$200 of its outstanding common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions and business development activities, including, but not limited to, merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any time without prior notice.
Cash Dividends
Holders of the Company’s common stock are entitled to receive dividends when they are declared by the Company’s Board of Directors. In addition, the Company accrues dividend equivalents on the RSUs the Company assumed in the ESI Merger described in Note 17 above when dividends are declared by the Company’s Board of Directors. The Company’s Board of Directors declared a cash dividend of $0.20 per share during eachthe first quarter of 2019,2021 and $0.22 per share during the second, third and fourth quarters of 2021, which totaled $43,528$47.6 or $0.80$0.86 per share. The Company’s Board of Directors declared a cash dividend of $0.18 per share during the first quarter of 2018 and $0.20 per share during each quarter of the second, third and fourth quarters of 2018,2020, which totaled $42,405$44.0 or $0.78$0.80 per share.
Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of the Company’s Board of Directors.
On February 10, 2020,7, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.20$0.22 per share to be paid on March 6, 202011, 2022 to Stockholders of record as of February 24, 2020.
92
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
19) | Employee Benefit Plans |
The Company has a 401(k) profit-sharing plan for U.S. employees meeting certain requirements, in which eligible employees may contribute between 1% and 50% of their annual compensation to this plan, and, with respect to employees who are age 50 and older, certain specified additional amounts, limited by an annual maximum amount determined by the Internal Revenue Service. The Company, at its discretion, makes certain matching contributions to these plansthis plan based on participating employees’
The Company also has a small number of defined contribution plans at some of its foreign locations. The Company’s contributions were immaterial for 2021, 2020 and 2017, respectively.
The Company maintains a bonus plan which provides cash awards to keycertain employees, at the discretion of the compensation committeeCompensation Committee of the Company’s Board of Directors, based upon the Company’s operating results. In addition, the Company’s foreign locations also have various bonus plans based upon local operating results and employee performance. The total bonus expense
The Company provides supplemental retirement benefits for a small number of former retired executives. The total cost of these benefits
The Company also assumed a deferred compensation plan from eachplans as a result of the Newport Merger and the ESI Merger. Participants in the Newport deferred compensation planDeferred Compensation Plan were not permitted to make any new elections beginning with 2018 compensation. Participants in the ESI deferred compensation planDeferred Compensation Plan were not permitted to make any new elections beginning with 2020 compensation.
Defined Benefit Pension Plans
The Company has a resultnumber of the Newport Merger, the Company assumed all assets and liabilities of Newport’s defined benefit pension plans, which cover substantially all of its full-time employees in France, Germany, Israel, Japan and Japan.Taiwan. In addition, there arethe Company has certain pension assets and liabilities relating to its former employees in the United Kingdom. The German plan is unfunded, as permitted under the plan and applicable laws.
For financial reporting purposes, the Company obtained actuarial reports supporting the calculation of net periodic pension costs was based uponthat used a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All ofvarious plans. The Company reviewed these actuarial assumptions and concluded they were reasonable based upon management’s judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and the cash funding requirements of the Company’s pension plans.
The net periodic benefit costs for the plans included the following components:
|
| Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Service cost |
| $ | 1.1 |
|
| $ | 1.0 |
|
Interest cost on projected benefit obligations |
|
| 0.2 |
|
|
| 0.4 |
|
Expected return on plan assets |
|
| (0.1 | ) |
|
| (0.1 | ) |
Amortization of actuarial net loss |
|
| 0.7 |
|
|
| 0.5 |
|
|
| $ | 1.9 |
|
| $ | 1.8 |
|
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Service cost | $ | 828 | $ | 657 | ||||
Interest cost on projected benefit obligations | 471 | 433 | ||||||
Expected return on plan assets | (111 | ) | (115 | ) | ||||
Amortization of actuarial net loss | 136 | 127 | ||||||
| $ | 1,324 | $ | 1,102 | |||||
93
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The changes in projected benefit obligations and plan assets, as well as the ending balance sheet amounts for the Company’s defined benefit plans, were as follows:
|
| Year Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Change in projected benefit obligations: |
|
|
|
|
|
|
|
|
Projected benefit obligations, beginning of year |
| $ | 36.2 |
|
| $ | 30.1 |
|
Service cost |
|
| 1.1 |
|
|
| 1.0 |
|
Interest cost |
|
| 0.2 |
|
|
| 0.4 |
|
Contributions by plan participants |
|
| — |
|
|
| 0.7 |
|
Plan amendments |
|
| — |
|
|
| (0.2 | ) |
Actuarial loss |
|
| 0.1 |
|
|
| 3.0 |
|
Benefits paid |
|
| (1.4 | ) |
|
| (1.2 | ) |
Currency translation adjustments |
|
| (2.2 | ) |
|
| 2.4 |
|
Projected benefit obligations, end of year |
| $ | 34.0 |
|
| $ | 36.2 |
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year |
| $ | 12.9 |
|
| $ | 11.1 |
|
Company contributions |
|
| 0.7 |
|
|
| 1.1 |
|
(Loss) gain on plan assets |
|
| (0.1 | ) |
|
| 0.6 |
|
Benefits paid |
|
| (0.6 | ) |
|
| (0.5 | ) |
Currency translation adjustments |
|
| (0.6 | ) |
|
| 0.6 |
|
Fair value of plan assets, end of year |
|
| 12.3 |
|
|
| 12.9 |
|
Net underfunded status |
| $ | (21.7 | ) |
| $ | (23.3 | ) |
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Change in projected benefit obligations: | ||||||||
Projected benefit obligations, beginning of year | $ | 24,885 | $ | 25,736 | ||||
Assumed in ESI Merger | 3,522 | — | ||||||
Service cost | 828 | 657 | ||||||
Interest cost | 471 | 433 | ||||||
Actuarial loss (gain) | 2,057 | (98 | ) | |||||
Benefits paid | (1,469 | ) | (895 | ) | ||||
Currency translation adjustments | (242 | ) | (948 | ) | ||||
Projected benefit obligations, end of year | $ | 30,052 | $ | 24,885 | ||||
Change in plan assets: | ||||||||
Fair value of plan assets, beginning of year | $ | 7,822 | $ | 8,152 | ||||
Assumed in ESI Merger | 1,272 | — | ||||||
Company contributions | 1,846 | 324 | ||||||
Gain (loss) on plan assets | 591 | (56 | ) | |||||
Benefits paid | (569 | ) | (369 | ) | ||||
Currency translation adjustments | 131 | (229 | ) | |||||
Fair value of plan assets, end of year | 11,093 | 7,822 | ||||||
Net underfunded status | $ | (18,959 | ) | $ | (17,063 | ) | ||
As of December
|
| Estimated benefit payments |
| |
2022 |
| $ | 1.1 |
|
2023 |
|
| 1.1 |
|
2024 |
|
| 1.2 |
|
2025 |
|
| 1.6 |
|
2026 |
|
| 1.4 |
|
2027-2031 |
|
| 8.6 |
|
|
| $ | 15.0 |
|
Estimated benefit payments | ||||
2020 | $ | 1,133 | ||
2021 | 1,302 | |||
2022 | 1,217 | |||
2023 | 1,537 | |||
2024 | 1,483 | |||
2025-2029 | 8,646 | |||
| $ | 15,318 | |||
The Company expects to contribute $2,086less than $1.0 to the plans
The weighted-average rates used to determine the net periodic benefit costs were as follows:
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
Discount rate |
|
| 1.0 | % |
|
| 1.1 | % |
Rate of increase in salary levels |
|
| 2.0 | % |
|
| 2.2 | % |
Expected long-term rate of return on assets |
|
| 1.1 | % |
|
| 1.2 | % |
December 31, 2019 | December 31, 2018 | |||||||
Discount rate | 1.4 | % | 1.9 | % | ||||
Rate of increase in salary levels | 2.2 | % | 2.1 | % | ||||
Expected long-term rate of return on assets | 2.1 | % | 1.9 | % | ||||
In determining the expected long-term rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes, and economic and other indicators of future performance.
94
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Plan assets were held in the following categories as a percentage of total plan assets:
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||||||||||
|
| Amount |
|
| Percentage |
|
| Amount |
|
| Percentage |
| ||||
Cash |
| $ | 0.2 |
|
|
| 1.6 | % |
| $ | 0.2 |
|
|
| 1.3 | % |
Debt securities |
|
| 5.1 |
|
| 41.5 |
|
|
| 5.2 |
|
| 40.5 |
| ||
Equity securities |
|
| 0.6 |
|
| 4.8 |
|
|
| 0.7 |
|
| 5.6 |
| ||
Other |
|
| 6.4 |
|
|
| 52.1 |
|
|
| 6.8 |
|
| 52.6 |
| |
|
| $ | 12.3 |
|
|
| 100 | % |
| $ | 12.9 |
|
|
| 100 | % |
Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Cash | $ | 430 | 4 | % | $ | 193 | 2 | % | ||||||||
Debt securities | 8,023 | 72 | 4,855 | 62 | ||||||||||||
Equity securities | 1,519 | 14 | 1,342 | 17 | ||||||||||||
Other | 1,121 | 10 | 1,432 | 19 | ||||||||||||
| $ | 11,093 | 100 | % | $ | 7,822 | 100 | % | |||||||||
In general, the Company’s asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market risk, while providing adequate liquidity to meet immediate and future benefit payment requirements.
The Company’s Israeli plans account for the deferred vested benefits using the shut-down method of accounting, which resulted in assets of $16,713$20.3 and vested benefit obligations of $19,692$23.1 as of December 31, 20192021, and assets of $14,409$18.8 and vested benefit obligations of $17,552$21.7 as of December 31, 2018.2020. Under the shut-down method, the liability is calculated as if it were payable as of the balance sheet date, on an undiscounted basis.
Other Pension-Related Assets
As of December 31, 20192021 and 2018,2020, the Company had assets with an aggregate market value of $5,854$6.2 and $5,890,$6.5, respectively,
20) | Net Income Per Share |
The following is a reconciliation of basic to diluted net income per share:
|
| Years Ended December 31, |
| |||||||||
Numerator: |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Net income |
| $ | 551.4 |
|
| $ | 350.1 |
|
| $ | 140.4 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per common share – basic |
|
| 55.4 |
|
|
| 55.1 |
|
|
| 54.7 |
|
Effect of dilutive securities |
|
| 0.3 |
|
|
| 0.2 |
|
|
| 0.4 |
|
Shares used in net income per common share – diluted |
|
| 55.7 |
|
|
| 55.3 |
|
|
| 55.1 |
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 9.95 |
|
| $ | 6.36 |
|
| $ | 2.57 |
|
Diluted |
| $ | 9.90 |
|
| $ | 6.33 |
|
| $ | 2.55 |
|
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Numerator: | ||||||||||||
Net income | $ | 140,386 | $ | 392,896 | $ | 339,132 | ||||||
Denominator: | ||||||||||||
Shares used in net income per common share — basic | 54,711,000 | 54,406,000 | 54,137,000 | |||||||||
Effect of dilutive securities | 400,000 | 586,000 | 937,000 | |||||||||
Shares used in net income per common share — diluted | 55,111,000 | 54,992,000 | 55,074,000 | |||||||||
Net income per common share: | ||||||||||||
Basic | $ | 2.57 | $ | 7.22 | $ | 6.26 | ||||||
Diluted | $ | 2.55 | $ | 7.14 | $ | 6.16 | ||||||
Basic earnings per share (“EPS”) is computed by dividing income available to holders of our common stockholdersstock by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding (using the treasury stock method) if securities containing potentially dilutive common shares (RSUs and SARs)(RSUs) had been converted to such common shares, and if such assumed conversion is dilutive.
In 2019, 20182021, 2020 and 2017,2019, the potential dilutive effect of
95
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
21) | Business Segment, Geographic Area, Product Information and Significant Customer Information |
The Company is a global provider of instruments,
The Company’s Chief Operating Decision Maker (“CODM”), which is the Company’s Chief Executive Officer, utilizes financial information to make decisions about allocating resources and assessing performance for the entire Company, which is used in the decision makingdecision-making process to assess performance. Effective February 1, 2019, in conjunction with its acquisition of ESI, the Company created a third reportable segment known as the Equipment & Solutions segment in addition to its 2 then-existing reportable segments: the Vacuum & Analysis segment and the Light & Motion segment.
Reportable Segments
The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery and vacuum technology.
The Light & Motion segment provides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in lasers, photonics, optics, temperature sensing, precision motion control and vibration control.
The Equipment & Solutions segment provides a range of products including laser-based systems for PCB manufacturing, which include flexible interconnect PCB processing systems and high-density interconnect solutions for the micro-machining industry that enable customers to optimize production. The Equipment & Solutions segment’s primary served markets include flexible and rigid PCB processing/fabrication, semiconductor wafermanufacturing and substrate processing and passive component manufacturing and testing. The Equipment & Solutions segment’s systems incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices andmulti-layer ceramic capacitor test systems.
The Company derives its segment results directly from the manner in which results are reported in its management reporting system. The accounting policies that the Company uses to derive reportable segment results are substantially the same as those used for external reporting purposes. The Company does not disclose external or intersegment revenues separately bygroups its similar products within its 3 reportable segment as this information is not presented to the CODM for decision making purposes.
The following table sets forth net revenues by reportable segment:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Vacuum & Analysis |
| $ | 1,861.5 |
|
| $ | 1,405.9 |
|
| $ | 990.5 |
|
Light & Motion |
|
| 813.4 |
|
|
| 689.6 |
|
|
| 725.6 |
|
Equipment & Solutions |
|
| 274.7 |
|
|
| 234.5 |
|
|
| 183.7 |
|
|
| $ | 2,949.6 |
|
| $ | 2,330.0 |
|
| $ | 1,899.8 |
|
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Vacuum & Analysis | $ | 990,523 | $ | 1,260,862 | $ | 1,207,457 | ||||||
Light & Motion | 725,570 | 814,246 | 708,520 | |||||||||
Equipment & Solutions | 183,680 | — | — | |||||||||
| $ | 1,899,773 | $ | 2,075,108 | $ | 1,915,977 | |||||||
96
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands,millions, except share and per share data)
The following table sets forth a reconciliation of segment gross profit to consolidated net income:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Gross profit by reportable segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Vacuum & Analysis |
| $ | 867.8 |
|
| $ | 633.7 |
|
| $ | 426.4 |
|
Light & Motion |
|
| 384.8 |
|
|
| 309.8 |
|
|
| 336.8 |
|
Equipment & Solutions |
|
| 127.6 |
|
|
| 106.0 |
|
|
| 67.2 |
|
Total gross profit by reportable segment |
|
| 1,380.2 |
|
|
| 1,049.5 |
|
|
| 830.4 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 200.0 |
|
|
| 173.1 |
|
|
| 164.1 |
|
Selling, general and administrative |
|
| 385.1 |
|
|
| 353.1 |
|
|
| 330.3 |
|
Acquisition and integration costs |
|
| 29.8 |
|
|
| 3.8 |
|
|
| 37.3 |
|
Restructuring and other |
|
| 11.1 |
|
|
| 9.4 |
|
|
| 7.0 |
|
Amortization of intangible assets |
|
| 55.3 |
|
|
| 55.2 |
|
|
| 67.4 |
|
Asset impairment |
|
| — |
|
|
| 2.3 |
|
|
| 4.7 |
|
COVID-19 related net credits |
|
| — |
|
|
| (1.2 | ) |
|
| — |
|
Fees and expenses related to repricing of Term Loan Facility |
|
| — |
|
|
| — |
|
|
| 6.6 |
|
Gain on sale of long-lived assets |
|
| — |
|
|
| — |
|
|
| (6.8 | ) |
Income from operations |
|
| 698.9 |
|
|
| 453.8 |
|
|
| 219.8 |
|
Interest income |
|
| 0.6 |
|
|
| 1.4 |
|
|
| 5.4 |
|
Interest expense |
|
| 25.4 |
|
|
| 29.1 |
|
|
| 44.1 |
|
Other expense, net |
|
| 8.6 |
|
|
| 3.1 |
|
|
| 3.3 |
|
Income before income taxes |
|
| 665.5 |
|
|
| 423.0 |
|
|
| 177.8 |
|
Provision for income taxes |
|
| 114.1 |
|
|
| 72.9 |
|
|
| 37.4 |
|
Net income |
| $ | 551.4 |
|
| $ | 350.1 |
|
| $ | 140.4 |
|
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Gross profit by reportable segment: | ||||||||||||
Vacuum & Analysis | $ | 426,464 | $ | 577,552 | $ | 551,078 | ||||||
Light & Motion | 336,764 | 401,924 | 340,373 | |||||||||
Equipment & Solutions | 67,203 | — | — | |||||||||
Total gross profit by reportable segment | 830,431 | 979,476 | 891,451 | |||||||||
Operating expenses: | ||||||||||||
Research and development | 164,061 | 135,720 | 132,555 | |||||||||
Selling, general and administrative | 330,346 | 298,118 | 290,056 | |||||||||
Acquisition and integration costs | 37,262 | 3,113 | 5,332 | |||||||||
Restructuring and other | 6,983 | 4,567 | 3,920 | |||||||||
Fees and expenses related to repricing of Term Loan Facility | 6,637 | 378 | 492 | |||||||||
Amortization of intangible assets | 67,402 | 43,521 | 45,743 | |||||||||
Gain on sale of long-lived assets | (6,773 | ) | — | — | ||||||||
Asset impairment | 4,662 | — | 6,719 | |||||||||
Income from operations | 219,851 | 494,059 | 406,634 | |||||||||
Interest income | 5,453 | 5,775 | 3,021 | |||||||||
Interest expense | 44,135 | 16,942 | 30,990 | |||||||||
Gain on sale of business | — | — | 74,856 | |||||||||
Other expense, net | 3,333 | 1,942 | 5,896 | |||||||||
Income before income taxes | 177,836 | 480,950 | 447,625 | |||||||||
Provision for income taxes | 37,450 | 88,054 | 108,493 | |||||||||
Net income | $ | 140,386 | $ | 392,896 | $ | 339,132 | ||||||
The
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Vacuum & Analysis |
| $ | 36.6 |
|
| $ | 36.0 |
|
| $ | 34.1 |
|
Light & Motion |
|
| 37.1 |
|
|
| 32.1 |
|
|
| 23.0 |
|
Equipment & Solutions |
|
| 13.0 |
|
|
| 16.8 |
|
|
| 6.8 |
|
Total capital expenditures |
| $ | 86.7 |
|
| $ | 84.9 |
|
| $ | 63.9 |
|
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
December 31, 2019: | ||||||||||||||||
Capital expenditures | $ | 34,130 | $ | 23,045 | $ | 6,729 | $ | 63,904 | ||||||||
December 31, 2018: | ||||||||||||||||
Capital expenditures | $ | 40,144 | $ | 22,797 | $ | — | $ | 62,941 | ||||||||
December 31, 2017: | ||||||||||||||||
Capital expenditures | $ | 17,111 | $ | 14,176 | $ | — | $ | 31,287 | ||||||||
The following table sets forth depreciation and amortization by reportable segment for the years ended December 31, 2019, 2018 and 2017:segment:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Vacuum & Analysis |
| $ | 22.9 |
|
| $ | 20.3 |
|
| $ | 16.8 |
|
Light & Motion |
|
| 46.0 |
|
|
| 43.2 |
|
|
| 53.9 |
|
Equipment & Solutions |
|
| 35.2 |
|
|
| 35.7 |
|
|
| 39.3 |
|
Total depreciation and amortization |
| $ | 104.1 |
|
| $ | 99.2 |
|
| $ | 110.0 |
|
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
December 31, 2019: | ||||||||||||||||
Depreciation and amortization | $ | 16,826 | $ | 53,857 | $ | 39,351 | $ | 110,034 | ||||||||
December 31, 2018: | ||||||||||||||||
Depreciation and amortization | $ | 20,808 | $ | 59,045 | $ | — | $ | 79,853 | ||||||||
December 31, 2017: | ||||||||||||||||
Depreciation and amortization | $ | 20,297 | $ | 62,259 | $ | — | $ | 82,556 | ||||||||
Total income tax expense is not presented by reportable segment because the necessary information is not available or used by the CODM.
97
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The following table sets forth segment assets by reportable segment:
|
| Accounts Receivable |
|
| Inventory |
|
| Total |
| |||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Vacuum & Analysis |
| $ | 285.4 |
|
| $ | 338.9 |
|
| $ | 624.3 |
|
Light & Motion |
|
| 146.2 |
|
|
| 177.3 |
|
|
| 323.5 |
|
Equipment & Solutions |
|
| 36.3 |
|
|
| 61.5 |
|
|
| 97.8 |
|
Corporate, Eliminations & Other |
|
| (25.3 | ) |
|
| (1.0 | ) |
|
| (26.3 | ) |
Total segment assets |
| $ | 442.6 |
|
| $ | 576.7 |
|
| $ | 1,019.3 |
|
|
| Accounts Receivable |
|
| Inventory |
|
| Total |
| |||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Vacuum & Analysis |
| $ | 229.1 |
|
| $ | 273.3 |
|
| $ | 502.4 |
|
Light & Motion |
|
| 122.6 |
|
|
| 166.1 |
|
|
| 288.7 |
|
Equipment & Solutions |
|
| 51.7 |
|
|
| 63.7 |
|
|
| 115.4 |
|
Corporate, Eliminations & Other |
|
| (10.7 | ) |
|
| (1.7 | ) |
|
| (12.4 | ) |
Total segment assets |
| $ | 392.7 |
|
| $ | 501.4 |
|
| $ | 894.1 |
|
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Corporate, Eliminations and Other | Total | ||||||||||||||||
December 31, 2019: | ||||||||||||||||||||
Segment assets: | ||||||||||||||||||||
Accounts receivable | $ | 185,889 | $ | 147,150 | $ | 40,125 | $ | (32,100 | ) | $ | 341,064 | |||||||||
Inventory | 224,815 | 163,768 | 73,458 | �� | 105 | 462,146 | ||||||||||||||
Total segment assets | $ | 410,704 | $ | 310,918 | $ | 113,583 | $ | (31,995 | ) | $ | 803,210 | |||||||||
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Corporate, Eliminations and Other | Total | ||||||||||||||||
December 31, 2018: | ||||||||||||||||||||
Segment assets: | ||||||||||||||||||||
Accounts receivable | $ | 171,604 | $ | 140,658 | $ | — | $ | (16,808 | ) | $ | 295,454 | |||||||||
Inventory | 222,965 | 161,658 | — | 66 | 384,689 | |||||||||||||||
Total segment assets | $ | 394,569 | $ | 302,316 | $ | — | $ | (16,742 | ) | $ | 680,143 | |||||||||
The following is a reconciliation of segment assets to consolidated total assets:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Total segment assets |
| $ | 1,019.3 |
|
| $ | 894.1 |
|
Cash and cash equivalents and short-term investments |
|
| 1,042.7 |
|
|
| 836.0 |
|
Other current assets |
|
| 85.3 |
|
|
| 74.3 |
|
Property, plant and equipment, net |
|
| 325.3 |
|
|
| 284.3 |
|
Right-of-use assets |
|
| 184.3 |
|
|
| 184.4 |
|
Goodwill and intangible assets, net |
|
| 1,804.2 |
|
|
| 1,578.6 |
|
Other assets and long-term assets |
|
| 79.2 |
|
|
| 52.1 |
|
Consolidated total assets |
| $ | 4,540.3 |
|
| $ | 3,903.8 |
|
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Total segment assets | $ | 803,210 | $ | 680,143 | ||||
Cash and cash equivalents and short-term investments | 523,989 | 718,171 | ||||||
Other current assets | 106,348 | 65,790 | ||||||
Property, plant and equipment, net | 241,871 | 194,367 | ||||||
| Right-of-use asset | 64,497 | — | ||||||
Goodwill and intangible assets, net | 1,623,084 | 906,803 | ||||||
Other assets and long-term assets | 53,321 | 48,972 | ||||||
Consolidated total assets | $ | 3,416,320 | $ | 2,614,246 | ||||
Geographic
Information about the Company’s operations in differentby geographic regionsregion is presented in the tables below. Net revenues tofrom unaffiliated customers are based on the location in which the sale originated. TransfersIntercompany sales between geographic areas are at tax transfer prices and have been eliminated from consolidated net revenues.
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
North America (1) |
| $ | 1,271.8 |
|
| $ | 1,058.9 |
|
| $ | 888.4 |
|
South Korea |
|
| 385.8 |
|
|
| 278.8 |
|
|
| 167.7 |
|
China |
|
| 355.1 |
|
|
| 273.5 |
|
|
| 178.6 |
|
Taiwan |
|
| 197.7 |
|
|
| 113.8 |
|
|
| 95.4 |
|
Japan |
|
| 196.8 |
|
|
| 163.2 |
|
|
| 143.1 |
|
Other Asia |
|
| 310.4 |
|
|
| 242.6 |
|
|
| 197.3 |
|
Europe |
|
| 232.0 |
|
|
| 199.2 |
|
|
| 229.3 |
|
|
| $ | 2,949.6 |
|
| $ | 2,330.0 |
|
| $ | 1,899.8 |
|
Years Ended December 31, | ||||||||||||
Net revenues: | 2019 | 2018 | 2017 | |||||||||
United States | $ | 888,370 | $ | 1,022,660 | $ | 955,284 | ||||||
China | 178,618 | 127,681 | 97,072 | |||||||||
South Korea | 167,651 | 203,567 | 212,763 | |||||||||
Japan | 143,081 | 193,264 | 167,318 | |||||||||
Germany | 150,584 | 159,508 | 122,339 | |||||||||
Other | 371,469 | 368,428 | 361,201 | |||||||||
| $ | 1,899,773 | $ | 2,075,108 | $ | 1,915,977 | |||||||
Years Ended | ||||||||
Long-lived assets:(1) | 201 9 | 201 8 | ||||||
United States | $ | 208,323 | $ | 146,687 | ||||
Europe | 41,433 | 26,794 | ||||||
Asia | 89,567 | 50,572 | ||||||
| $ | 339,323 | $ | 224,053 | |||||
(1) | North America includes the United States and an immaterial amount from Canada. |
98
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Long-lived assets: (1) |
|
|
|
|
|
|
|
|
North America (2) |
| $ | 425.2 |
|
| $ | 364.0 |
|
Asia |
|
| 105.7 |
|
|
| 94.8 |
|
Europe |
|
| 35.6 |
|
|
| 45.1 |
|
|
| $ | 566.5 |
|
| $ | 503.9 |
|
(1) | Long-lived assets include property, plant and equipment, net, right-of-use assets, and certain other assets, and exclude goodwill, intangible assets and long-term tax-related accounts. The increase in long-lived assets in North America for 2021 primarily relates to the Photon Control Acquisition. |
(2) | North America includes the United States and an immaterial amount from Canada. |
Goodwill associated with each of ourthe Company’s reportable segments is as follows:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Vacuum & Analysis |
| $ | 195.2 |
|
| $ | 196.2 |
|
Light & Motion |
|
| 558.1 |
|
|
| 395.3 |
|
Equipment & Solutions |
|
| 474.9 |
|
|
| 474.9 |
|
Total goodwill |
| $ | 1,228.2 |
|
| $ | 1,066.4 |
|
Years Ended December 31, | ||||||||
2019 | 2018 | |||||||
Reportable segment: | ||||||||
Vacuum & Analysis | $ | 196,717 | $ | 197,126 | ||||
Light & Motion | 388,463 | 389,870 | ||||||
Equipment & Solutions | 473,274 | — | ||||||
Total goodwill | $ | 1,058,454 | $ | 586,996 | ||||
The Company sells products and services to thousands of customers worldwide, in a wide range of end markets. Revenues from its top 10 customers accounted for 47%, 44% and 33% of net revenues for 2021, 2020 and 2019, respectively, with the increasing percentages attributable to increasing semiconductor market sales. As a percentage of revenue for each group of
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Advanced Manufacturing Components | $ | 1,482,808 | $ | 1,835,202 | $ | 1,701,301 | ||||||
Global Service | 288,476 | 239,906 | 214,676 | |||||||||
Advanced Manufacturing Systems | 128,489 | — | — | |||||||||
| $ | 1,899,773 | $ | 2,075,108 | $ | 1,915,977 | |||||||
The Company had 2 customers with net revenues greater than 10% of total service revenues for all three of the Company’s reportable segments. Advanced manufacturing systems is comprised of productnet revenues for the Company’s Equipment & Solutions segment.
|
| Years Ended December 31, |
| ||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
Lam Research Corporation |
| 16% |
|
| 14% |
|
| 9% |
|
Applied Materials, Inc. |
| 11% |
|
| 11% |
|
| 9% |
|
22) | Restructuring and Other |
Restructuring
During 2019,2021, the Company recorded restructuring charges of $5,532,$7.0, primarily
During 2020, the Company recorded restructuring charges of $2.7, primarily related to costs incurred from the pending closure of a facility in Europe and also to severance costs related to an organization-wide reduction in workforce, the consolidation of service functions in Asia and the movementexit of certain products to lower costs regions.
99
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands,millions, except share and per share data)
The activity related to the Company’s restructuring accrual is shown below:
|
| 2021 |
|
| 2020 |
| ||
Balance at January 1 |
| $ | 0.3 |
|
| $ | 3.7 |
|
Charged to expense |
|
| 7.0 |
|
|
| 2.7 |
|
Payments and adjustments |
|
| (4.7 | ) |
|
| (6.1 | ) |
Balance at December 31 |
| $ | 2.6 |
|
| $ | 0.3 |
|
2019 | 2018 | |||||||
Balance at January 1 | $ | 2,632 | $ | 3,244 | ||||
Charged to expense | 5,532 | 3,567 | ||||||
Payments and adjustments | (4,428 | ) | (4,179 | ) | ||||
Balance at December 31 | $ | 3,736 | $ | 2,632 | ||||
Other
During 2019,2021, the Company recorded a chargecharges of $1,451$2.8 related primarily to duplicate facility costs.
During 2020, the Company recorded charges of $7.2 related to duplicate facility costs. The Company also received an insurance reimbursement of $0.5 for costs recorded on a legal settlement from a contractual obligation assumed as part of the Newport
23) | Commitments and Contingencies |
In 2016, two putative class actions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.
On July 27, 2017, plaintiffs filed a second amended complaint containing substantially similar allegations but naming only Newport’s former directors as defendants. On August 8, 2017, the District Court dismissed the Company and Newport from the action. The second amended complaint seeks monetary damages, includingEngineers—Engineers - Employers Construction Industry Retirement Trust as class representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily dismissed from the litigation. On August 9, 2019, plaintiffs filed a motion for leave to file a third amended complaint, which was denied on October 10, 2019. On August 23, 2019, defendants filed a motion for summary judgment. On January 23, 2020, the courtDistrict Court entered its findings of fact, conclusions of law,
The Company is also subject to various legal proceedings and claims whichthat have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters, and the matters noted above, will not have a material adverse effect on ourthe Company’s results of operations, financial condition or cash flows.
100
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
On July 1, 2021, the Company entered into a definitive agreement (as amended from time to time, the “Implementation Agreement”) to acquire Atotech, a leading process chemicals technology company and a market leader in advanced electroplating solutions. Pursuant to the Implementation Agreement, the Company agreed to pay $16.20 per share in cash and 0.0552 of a share of MKS common stock for each outstanding common share of Atotech. At the time of the announcement of the acquisition, the total value of the aggregate cash and stock consideration was approximately $5,100. The final value of the consideration will be determined at the time of the closing of the acquisition, which is expected to occur in the first quarter of 2022, subject to the satisfaction of certain closing conditions, including receipt of regulatory approval from China and approval by the Royal Court of Jersey. The Company’s obligations to complete the acquisition are not subject to any financing condition. The Company leases certainintends to fund the cash portion of its facilitiesthe transaction with a combination of available cash on hand and machinery and equipment under operating leases expiring in various years through 2184. Refer to Note 5 for schedule of future lease payments undernon-cancelableleasescommitted term loan debt financing. In connection with entering into the Implementation Agreement, the Company entered into (a) a commitment letter (the “Initial Commitment Letter”), dated as of December 31, 2019.
On October 22, 2021, the Company completed the syndication of the New Term Loan Facility, comprised of two tranches: a USD 4,700 loan at LIBOR plus 2.25%, a floor of 0.50% and 0.25% of original issue discount, and a Euro tranche of EUR 500 (approximately USD 600) at EURIBOR plus 2.75%, a floor of 0.00% and 0.25% of original issue discount. Subsequent to the syndication, the $4.7 billion tranche is expected to be modified to reference a term rate based on the Secured Overnight Financing Rate (plus an applicable credit spread adjustment) as the benchmark rate.
The Commitment Parties’ obligations under the Commitment Letter and the closing and initial funding under the New Term Loan Facility are subject to certain customary conditions including, without limitation, the consummation of the acquisition of Atotech in accordance with the Implementation Agreement, the accuracy of specified representations and warranties of the Company and other customary closing conditions.
As of December 31, 2019,2021, the Company has entered into purchase commitments for certain
To the extent permitted by Massachusetts law, the Company’s Restated Articles of Organization, as amended, require the Company to indemnify any of its current or former officers or directors or any person who has served or is serving in any capacity with respect to any of the Company’s employee benefit plans. The Company believes that the estimated exposure for these indemnification obligations is currently not material. Accordingly, the Company has no material liabilities recorded for these requirements as of December 31, 2019.
The Company also enters into agreements in the ordinary course of business which include indemnification provisions. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party, generally its customers, for losses suffered or incurred by the indemnified party in connection with certain patent or other intellectual property infringement claims, and, in some instances, other claims, by any third party with respect to the Company’s
As part of past acquisitions and divestitures of businesses or assets, the Company has provided a variety of indemnifications to the sellers and purchasers for certain events or occurrences that took place prior to the date of the
101
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
acquisition or divestiture. Typically, certain of the indemnifications expire after a defined period of time following the transaction, but certain indemnifications may survive indefinitely. The maximum potential amount of future payments the Company could be required to make for such obligations is undeterminable at this time. Other than obligations recorded as liabilities at the time of the acquisitions, historically the Company has not made significant payments for these indemnifications. Accordingly, no material liabilities have been recorded for these obligations.
In conjunction with certain asset sales, the Company may provide routine indemnifications whose terms range in duration and often are not explicitly defined. Where appropriate, an obligation for such indemnification is recorded as a liability. Because the amounts of liability under these types of indemnifications are not explicitly stated, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of the asset sale, historically the Company has not made significant payments for these indemnifications.
Quarter Ended | ||||||||||||||||
March 31 | June 30 | Sept. 30 | Dec. 31 | |||||||||||||
(Table in thousands, except per share data) (Unaudited) | ||||||||||||||||
2019 | ||||||||||||||||
Statement of Operations Data | ||||||||||||||||
Net revenues | $ | 463,561 | $ | 474,110 | $ | 462,451 | $ | 499,651 | ||||||||
Gross profit | 198,118 | 211,027 | 205,004 | 216,282 | ||||||||||||
Income from operations | 23,066 | 63,902 | 66,820 | 66,063 | ||||||||||||
Net income | $ | 12,455 | $ | 37,739 | $ | 47,428 | $ | 42,764 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.23 | $ | 0.69 | $ | 0.86 | $ | 0.78 | ||||||||
Diluted | $ | 0.23 | $ | 0.69 | $ | 0.86 | $ | 0.77 | ||||||||
Cash dividends paid per common share | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | ||||||||
2018 | ||||||||||||||||
Statement of Operations Data | ||||||||||||||||
Net revenues | $ | 554,275 | $ | 573,140 | $ | 487,152 | $ | 460,541 | ||||||||
Gross profit | 262,855 | 274,877 | 231,860 | 209,884 | ||||||||||||
Income from operations | 131,639 | 151,291 | 117,045 | 94,084 | ||||||||||||
Net income | $ | 105,121 | $ | 122,862 | $ | 93,277 | $ | 71,636 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 1.93 | $ | 2.25 | $ | 1.71 | $ | 1.33 | ||||||||
Diluted | $ | 1.90 | $ | 2.22 | $ | 1.70 | $ | 1.32 | ||||||||
Cash dividends paid per common share | $ | 0.18 | $ | 0.20 | $ | 0.20 | $ | 0.20 | ||||||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019.2021. The term “disclosure controls and procedures,” as defined in Rules
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules
• | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
• | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures of the Company are being made only in accordance with authorization of our management and directors of the Company; and |
• | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019.2021. In making this assessment, we used the criteria set forth in the
We excluded ESIPhoton Control, which we acquired in 2021, from our assessment of internal control over financial reporting as of December 31, 2019 because we acquired it in 2019. ESI’s total2021. Photon Control’s assets and totalnet revenues representrepresented approximately 29% and 10%, respectively,1% of the Company’s total assets and totalnet revenues as of and for the year ended December 31, 2019.2021.
Our internal controls over financial reporting as of December 31, 20192021 have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its attestation report which appears in Item 8 of this Annual Report on Form
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules
Item 9B. | Other Information |
None.
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not applicable.
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item will be set forth under the captions “Proposal One — Election of Directors,” “Directors,” “Corporate Governance,” “Executive Officers,” “Corporate Governance — Code of Business Conduct and Ethics” and “Corporate Governance — Board of Directors Meetings and Committees of the Board of Directors — Audit Committee” in our definitive proxy statement for the 20202022 Annual Meeting of Stockholders, to be filed with the Securities and Exchange CommissionSEC no later than 120 days after the end of our fiscal year, and is incorporated herein by reference.
We are also required under Item 405 of Regulation
Item 11. | Executive Compensation |
The information required by this item will be set forth under the captions “Executive Officers,” “Executive Compensation —– Compensation Discussion and Analysis,” “Corporate Governance —– Board of Director Meetings and Committees of the Board of Directors – Compensation Committee —- Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report” and “Director Compensation” in our definitive proxy statement for the 20202022 Annual Meeting of Stockholders, to be filed with the Securities and Exchange CommissionSEC no later than 120 days after the end of our fiscal year, and is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by Item 403 of Regulation
The information required by Item 201(d) of Regulation
Item 13. | Certain Relationships and Related Transactions and Director Independence |
The information required by this item will be set forth under the captions “Corporate Governance —– Board Independence” and “Corporate Governance —– Transactions with Related Persons” in our definitive proxy statement for the 20202022 Annual Meeting of Stockholders, to be filed with the Securities and Exchange CommissionSEC no later than 120 days after the end of our fiscal year, and is incorporated herein by reference.
Item 14. | Principal Accountant Fees and Services |
The information required by this item will be set forth under the caption “Audit and Financial Accounting Oversight — Principal Accountant Fees and Services” in our definitive proxy statement for the 20202022 Annual Meeting of Stockholders, to be filed with the Securities and Exchange CommissionSEC no later than 120 days after the end of our fiscal year, and is incorporated herein by reference.
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
(a) | The following documents are filed as a part of this Annual Report on Form 10-K: |
1. | Financial Statements. The following Consolidated Financial Statements are included under Item 8 of this Annual Report on Form 10-K. |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: | ||||
| (PCAOB ID 238) | 56 | |||
Consolidated Balance Sheets at December 31, | 58 | |||
59 | ||||
60 | ||||
61 | ||||
62 |
2. | Financial Statement Schedules. The following consolidated financial statement schedule is included in this Annual Report on Form 10-K. |
Schedules other than those listed above have been omitted since they are either not required or information is otherwise included.
3. | Exhibits. The following exhibits are filed as part of this Annual Report on Form 10-K. |
Exhibit No. | Title | |||
+2.1(1) | Implementation Agreement, between the Registrant and Atotech Limited, dated as of July 1, 2021 | |||
2.2 | ||||
+3.1(2) | ||||
+3.2(3) | ||||
+3.3(4) | ||||
+3.4(5) | ||||
+4.1(6) | ||||
+4.2(6) | ||||
+10.1(7) | ||||
+10.2(8) | ||||
Exhibit No. | Title | |||
+10.3(9) |
+10.4(10) | ||||
+10.5(11) | ||||
+10.6(12) | ||||
+10.7(13) | ||||
+10.8(14) | ||||
+10.9(12) | ||||
+10.10(15) | ||||
+10.11(14) | ||||
+10.12(5)* | ||||
+10.13(5)* | ||||
+10.14(5)* | ||||
+10.15(16)* | ||||
+10.16(17)* | ||||
+10.17(18)* | ||||
+10.18(17)* | ||||
+10.19(19)* | ||||
+10.20(20)* | ||||
+10.21(20)* | ||||
+10.22(20)* | ||||
+10.23(20)* | ||||
Exhibit No. | Title | |||
+10.24(20)* | ||||
+10.25(21) * | ||||
+10.26(22)* | ||||
+10.27(19)* | ||||
+10.28(15)* | ||||
+10.29(6)* | ||||
+10.30(23)* | ||||
+10.31(16)* | ||||
+10.32(16)* | ||||
+10.33(16)* | ||||
+10.34(16)* | ||||
+10.35(16)* | ||||
+10.36(24)* | ||||
+10.37(25)* | ||||
+10.38(25)* | Employment Agreement, effective January 1, 2020, between David Henry and the Registrant | |||
+10.39(25)* | Employment Agreement, effective February 17, 2021, between Eric Taranto and the Registrant | |||
+10.40(1) | Lock-Up Agreement, between the Registrant and the Carlyle Shareholders, dated as of July 1, 2021 | |||
+10.41(1) | ||||
+10.42(26)* | ||||
21.1 | ||||
23.1 | ||||
31.1 | ||||
31.2 | ||||
32.1 |
101.INS** | ||||
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
101.SCH** | Inline XBRL Taxonomy Extension Schema Document | |||
101.CAL** | Inline XBRL Taxonomy Calculation Linkbase |
Exhibit No. | Title | |||
101.DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB** | Inline XBRL Taxonomy Labels Linkbase Document | |||
101.PRE** | Inline XBRL Taxonomy Presentation Linkbase Document | |||
104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
+ | Previously filed |
* | Management contract or compensatory plan arrangement |
** | Filed with this Annual Report on Form 10-K for the year ended December 31, |
The following materials from MKS Instruments, Inc.’s Annual Report on Form
(1) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on |
(2) | Incorporated by reference to the Registration Statement on Form S-4 333-49738), filed with the Securities and Exchange Commission on November 13, 2000. |
(3) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (File No. 000-23621), filed with the Securities and Exchange Commission on August 14, 2001. |
(4) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 000-23621), filed with the Securities and Exchange Commission on August 13, 2002. |
(5) | Incorporated by reference to the Registrant’s Current Report on Form 8-K 000-23621), filed with the Securities and Exchange Commission on May 6, 2014. |
(6) | Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019 (File No. 000-23621), filed with the Securities and Exchange Commission on February 28, 2020. |
(7) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on April 29, 2016. |
(8) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on June 9, 2016. |
(9) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on December 14, 2016. |
(10) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on July 6, 2017. |
(11) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on April 12, 2018. |
(12) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on February 1, 2019. |
(13) | Incorporated by reference to the 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on October 1, 2019 |
(14) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on May 10, 2021. |
(15) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (File No. 000-23621), filed with the Securities and Exchange Commission on August 7, 2019. |
(16) | Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018 (FileNo.000-23621) , filed with the Securities and Exchange Commission on February 26, 2019. |
(17) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 (File No. 000-23621), filed with the Securities and Exchange Commission on May 8, 2018. |
(18) | Incorporated by reference to the Registrant’s Current Report on Form 8-K |
(19) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on November 1, 2018. |
(20) | Incorporated by reference to the Registrant’s Quarterly Report on Form |
(21) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on November 20, 2019. |
(22) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 000-23621), filed with the Securities and Exchange Commission on August 3, |
(23) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on |
(24) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on February 12, 2020. |
(25) | Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020 (File No.000-23621), filed with the Securities and Exchange Commission on February 23, 2021. |
(26) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), with the Securities and Exchange Commission on February 11, 2022. |
(b) | Exhibits |
MKS hereby files as exhibits to our Annual Report on Form
Item 16. | Form 10-K Summary |
Not applicable.
MKS Instruments, Inc.
SCHEDULE II—II - VALUATION AND QUALIFYING ACCOUNTS
(in millions)
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Description |
| Balance at Beginning of Year |
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| Acquisition Beginning Balance |
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| Charged to Costs and Expenses |
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| Charged to Other Accounts |
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| Deductions & Write-offs |
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| Balance at End of Year |
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Allowance for doubtful accounts: |
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Years ended December 31, |
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2021 |
| $ | 2.0 |
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| $ | — |
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| $ | 1.3 |
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| $ | — |
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| $ | 0.3 |
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| $ | 3.6 |
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2020 |
| $ | 1.8 |
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| $ | — |
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| $ | 0.1 |
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| $ | — |
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| $ | 0.1 |
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| $ | 2.0 |
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2019 |
| $ | 5.2 |
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| $ | 0.2 |
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| $ | (0.7 | ) |
| $ | — |
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| $ | (2.9 | ) |
| $ | 1.8 |
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Description |
| Balance at Beginning of Year |
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| Acquisition Beginning Balance |
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| Charged to Costs and Expenses |
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| Charged to Other Accounts |
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| Deductions & Write-offs |
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| Balance at End of Year |
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Allowance for sales returns: |
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Years ended December 31, |
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2021 |
| $ | 1.8 |
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| $ | — |
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| $ | (0.1 | ) |
| $ | — |
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| $ | (0.1 | ) |
| $ | 1.6 |
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2020 |
| $ | 1.4 |
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| $ | — |
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| $ | 0.3 |
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| $ | — |
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| $ | 0.1 |
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| $ | 1.8 |
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2019 |
| $ | 1.0 |
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| $ | — |
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| $ | 0.2 |
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| $ | — |
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| $ | 0.2 |
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| $ | 1.4 |
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Description |
| Balance at Beginning of Year |
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| Acquisition Beginning Balance |
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| Charged to Costs and Expenses |
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| Charged to Other Accounts |
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| Deductions |
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| Balance at End of Year |
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Valuation allowance on deferred tax asset: |
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Years ended December 31, |
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2021 |
| $ | 30.6 |
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| $ | — |
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| $ | 2.3 |
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| $ | — |
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| $ | (6.7 | ) |
| $ | 26.2 |
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2020 |
| $ | 27.4 |
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| $ | — |
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| $ | 4.2 |
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| $ | — |
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| $ | (1.0 | ) |
| $ | 30.6 |
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2019 |
| $ | 17.9 |
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| $ | 5.9 |
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| $ | 4.9 |
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| $ | — |
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| $ | (1.3 | ) |
| $ | 27.4 |
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Additions | ||||||||||||||||||||||||
Description | Balance at Beginning of Year | Acquisition Beginning Balance | Charged to Costs and Expenses | Charged to Other Accounts | Deductions & Write-offs | Balance at End of Year | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||||||||||
Years ended December 31, | ||||||||||||||||||||||||
2019 | $ | 5,243 | $ | 201 | $ | (728 | ) | $ | — | $ | (2,933 | ) | $ | 1,783 | ||||||||||
2018 | $ | 4,135 | $ | — | $ | 1,435 | $ | — | $ | (327 | ) | $ | 5,243 | |||||||||||
2017 | $ | 3,909 | $ | — | $ | 825 | $ | — | $ | (599 | ) | $ | 4,135 | |||||||||||
Additions | ||||||||||||||||||||||||
Description | Balance at Beginning of Year | Acquisition Beginning Balance | Charged to Costs and Expenses | Charged to Other Accounts | Deductions & Write-offs | Balance at End of Year | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Allowance for sales returns: | ||||||||||||||||||||||||
Years ended December 31, | ||||||||||||||||||||||||
2019 | $ | 1,033 | $ | — | $ | 200 | $ | — | $ | 162 | $ | 1,395 | ||||||||||||
2018 | $ | 1,295 | $ | — | $ | 124 | $ | — | $ | (386 | ) | $ | 1,033 | |||||||||||
2017 | $ | 1,138 | $ | — | $ | (142 | ) | $ | — | $ | 299 | $ | 1,295 | |||||||||||
Additions | ||||||||||||||||||||||||
Description | Balance at Beginning of Year | Acquisition Beginning Balance | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Year | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Valuation allowance on deferred tax asset: | ||||||||||||||||||||||||
Years ended December 31, | ||||||||||||||||||||||||
2019 | $ | 17,936 | $ | 5,876 | $ | 4,934 | $ | — | $ | (1,386 | ) | $ | 27,360 | |||||||||||
2018 | $ | 13,629 | $ | — | $ | 4,825 | $ | — | $ | (518 | ) | $ | 17,936 | |||||||||||
2017 | $ | 12,527 | $ | — | $ | 1,603 | $ | — | $ | (501 | ) | $ | 13,629 | |||||||||||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form
MKS INSTRUMENTS, INC.
By: | ||
/s/ John T.C. Lee | ||
John T.C. Lee
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURES | TITLE | DATE | ||
/s/ | Chairman of the Board of Directors | February 28, | ||
Gerald G. Colella | ||||
/s/ John T.C. Lee | President, Chief Executive Officer and Director | February 28, | ||
John T.C. Lee | ||||
/s/ Seth H. Bagshaw | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | February 28, | ||
Seth H. Bagshaw | ||||
/s/ Rajeev Batra | Director | February 28, | ||
Rajeev Batra | ||||
/s/ | Director | February | ||
Peter J. Cannone III | ||||
/s/ | Director | February 28, | ||
Joseph B. Donahue | ||||
/s/ Jacqueline F. Moloney | Director | February 28, 2022 | ||
Jacqueline F. Moloney | ||||
/s/ Elizabeth A. Mora | Director | February 28, 2022 | ||
Elizabeth A. Mora | ||||
/s/ Michelle M. Warner | Director | February 28, 2022 | ||
Michelle M. Warner |
112