UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM10-Q

 

 

(MARK ONE)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 20162017

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 number0-23621

 

 

MKS INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts 04-2277512

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2 Tech Drive, Suite 201, Andover, Massachusetts 01810
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (978)645-5500

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x  Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)  Smaller reporting company ¨
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 29, 2016,May 2, 2017, the registrant had 53,373,75454,108,231 shares of common stock outstanding.

 

 

 


MKS INSTRUMENTS, INC.

FORM10-Q

INDEX

 

PART I.

 

FINANCIAL INFORMATION

 

ITEM 1.

 

FINANCIAL STATEMENTS (Unaudited)

 
 

Condensed Consolidated Balance Sheets – March  31, 20162017 and December 31, 20152016

  3 
 

Condensed Consolidated Statements of Operations and Comprehensive Income – Three months ended March 31, 20162017 and 20152016

  4 
 

Condensed Consolidated Statements of Cash Flows –Three– Three months ended March 31, 20162017 and 20152016

  5 
 

Notes to theUnaudited Condensed Consolidated Unaudited Consolidated Financial Statements

  6 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  2531 

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  3441 

ITEM 4.

 

CONTROLS AND PROCEDURES

  3441 

PART II.

 

OTHER INFORMATION

 

ITEM 1.

 

LEGAL PROCEEDINGS

  3442 

ITEM 1A.

 

RISK FACTORS

  35

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS3643 

ITEM 6.

 

EXHIBITS

  3643 

SIGNATURES

  3744 

EXHIBIT INDEX

  3845 

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

ITEM 1. FINANCIAL STATEMENTS.

MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

 

  March 31, 2016 December 31, 2015   March 31, 2017 December 31, 2016 
ASSETS      

Current assets:

      

Cash and cash equivalents

  $357,855   $227,574    $255,912  $228,623 

Restricted cash

   5,274  5,287 

Short-term investments

   308,768   430,663     155,299  189,463 

Trade accounts receivable, net

   113,472   101,883     267,249  248,757 

Inventories, net

   151,650   152,631     285,518  275,869 

Other current assets

   27,388   26,760     52,266  50,770 
  

 

  

 

   

 

  

 

 

Total current assets

   959,133   939,511     1,021,518  998,769 

Property, plant and equipment, net

   67,561   68,856     169,833  174,559 

Goodwill

   199,999   199,703     590,502  588,585 

Intangible assets, net

   42,575   44,027     396,409  408,004 

Long-term investments

   9,933  9,858 

Other assets

   21,392   21,250     32,352  32,467 
  

 

  

 

   

 

  

 

 

Total assets

  $1,290,660   $1,273,347    $2,220,547  $2,212,242 
  

 

  

 

   

 

  

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

      

Short-term borrowings and current portion of long-term debt

  $10,623  $10,993 

Accounts payable

  $28,076   $23,177     70,493  69,337 

Accrued compensation

   20,983   28,424     50,034  67,728 

Income taxes payable

   3,510   4,024     27,469  22,794 

Deferred revenue

   16,197  14,463 

Other current liabilities

   45,372   35,359     55,580  51,985 
  

 

  

 

   

 

  

 

 

Total current liabilities

   97,941   90,984     230,396  237,300 

Long-term debt

   552,232  601,229 

Non-current deferred taxes

   64,221  66,446 

Non-current accrued compensation

   46,201  44,714 

Other liabilities

   21,650   21,482     22,092  20,761 

Commitments and contingencies (Note 17)

   
  

 

  

 

 

Total liabilities

   915,142  970,450 
  

 

  

 

 

Commitments and contingencies (Note 18)

   

Stockholders’ equity:

      

Preferred Stock, $0.01 par value per share, 2,000,000 shares authorized; none issued and outstanding

   —      —       —     —   

Common Stock, no par value, 200,000,000 shares authorized; 53,305,017 and 53,199,720 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively

   113   113  

Common Stock, no par value, 200,000,000 shares authorized; 53,886,862 and 53,672,861 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

   113  113 

Additional paid-in capital

   745,840   744,725     783,371  777,482 

Retained earnings

   434,803   427,214     550,385  494,744 

Accumulated other comprehensive loss

   (9,687 (11,171   (28,464 (30,547
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   1,171,069   1,160,881     1,305,405  1,241,792 
  

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

  $1,290,660   $1,273,347    $2,220,547  $2,212,242 
  

 

  

 

   

 

  

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(Unaudited)

 

   Three Months Ended March 31, 
   2016  2015 

Net revenues:

   

Products

  $153,621   $186,096  

Services

   30,060    27,743  
  

 

 

  

 

 

 

Total net revenues

   183,681    213,839  

Cost of revenues:

   

Cost of products

   85,352    98,652  

Cost of services

   20,416    18,141  
  

 

 

  

 

 

 

Total cost of revenues (exclusive of amortization shown separately below)

   105,768    116,793  
  

 

 

  

 

 

 

Gross profit

   77,913    97,046  

Research and development

   17,227    16,680  

Selling, general and administrative

   33,950    30,867  

Acquisition costs

   2,494    30  

Restructuring

   —      788  

Amortization of intangible assets

   1,683    1,671  
  

 

 

  

 

 

 

Income from operations

   22,559    47,010  

Interest and other income, net

   1,246    504  
  

 

 

  

 

 

 

Income before income taxes

   23,805    47,514  

Provision for income taxes

   6,242    13,728  
  

 

 

  

 

 

 

Net income

  $17,563   $33,786  
  

 

 

  

 

 

 

Other comprehensive income:

   

Changes in value of financial instruments designated as cash flow hedges, net of tax benefit(1)

  $(1,546 $(822

Foreign currency translation adjustments, net of tax of $0

   2,652    (3,206

Unrealized gain on investments, net of tax expense(2)

   378    334  
  

 

 

  

 

 

 

Total comprehensive income

  $19,047   $30,092  
  

 

 

  

 

 

 

Net income per share:

   

Basic

  $0.33   $0.63  
  

 

 

  

 

 

 

Diluted

  $0.33   $0.63  
  

 

 

  

 

 

 

Cash dividends per common share

  $0.17   $0.165  
  

 

 

  

 

 

 

Weighted average common shares outstanding:

   

Basic

   53,235    53,214  
  

 

 

  

 

 

 

Diluted

   53,563    53,529  
  

 

 

  

 

 

 

   Three Months Ended March 31, 
   2017  2016 

Net revenues:

   

Products

  $392,922  $153,621 

Services

   44,231   30,060 
  

 

 

  

 

 

 

Total net revenues

   437,153   183,681 

Cost of revenues:

   

Cost of products

   205,060   85,352 

Cost of services

   26,546   20,416 
  

 

 

  

 

 

 

Total cost of revenues (exclusive of amortization shown separately below)

   231,606   105,768 
  

 

 

  

 

 

 

Gross profit

   205,547   77,913 

Research and development

   33,282   17,227 

Selling, general and administrative

   74,220   33,950 

Acquisition and integration costs

   1,442   2,494 

Restructuring

   522   —   

Amortization of intangible assets

   12,501   1,683 
  

 

 

  

 

 

 

Income from operations

   83,580   22,559 

Interest income

   516   924 

Interest expense

   8,832   44 

Other income

   2,021   366 
  

 

 

  

 

 

 

Income before income taxes

   77,285   23,805 

Provision for income taxes

   12,225   6,242 
  

 

 

  

 

 

 

Net income

  $65,060  $17,563 
  

 

 

  

 

 

 

Other comprehensive income:

   

Changes in value of financial instruments designated as cash flow hedges, net of tax benefit(1)

  $(2,440 $(1,546

Foreign currency translation adjustments, net of tax of $0

   4,534   2,652 

Unrecognized pension gain, net of tax expense(2)

   115   —   

Unrealized (loss) gain on investments, net of tax (benefit) expense(3)

   (126  378 
  

 

 

  

 

 

 

Total comprehensive income

  $67,143  $19,047 
  

 

 

  

 

 

 

Net income per share:

   

Basic

  $1.21  $0.33 
  

 

 

  

 

 

 

Diluted

  $1.18  $0.33 
  

 

 

  

 

 

 

Cash dividends per common share

  $0.175  $0.17 
  

 

 

  

 

 

 

Weighted average common shares outstanding:

   

Basic

   53,769   53,235 
  

 

 

  

 

 

 

Diluted

   54,958   53,563 
  

 

 

  

 

 

 

 

(1)Tax benefit was $1,041$1,831 and $133$1,041 for the three months ended March 31, 20162017 and 2015,2016, respectively.
(2)Tax expense was $254of $86 and $54$0 for the three months ended March 31, 2017 and 2016, respectively.
(3)Tax (benefit) expense was $(94) and 2015,$254 for the three months ended March 31, 2017 and 2016, respectively.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

  Three Months Ended March 31,   Three Months Ended March 31, 
  2016 2015   2017 2016 

Cash flows provided by operating activities:

      

Net income

  $17,563   $33,786    $65,060  $17,563 

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

   5,278   5,532     21,833  5,278 

Amortization of debt issuance costs, original issue discount and soft call premium

   2,715   —   

Stock-based compensation

   4,152   3,212     8,782  4,152 

Provision for excess and obsolete inventory

   2,948   2,683     5,031  2,948 

Provision for bad debt

   17   (172   316  17 

Deferred income taxes

   347   736     (1,809 347 

Excess tax benefits from stock-based compensation

   (233 (524   —    (233

Other

   68   1     85  68 

Changes in operating assets and liabilities:

      

Trade accounts receivable

   (10,084 (19,030   (15,215 (10,084

Inventories

   (844 (12,817   (11,714 (844

Income taxes

   2,316   2,034     8,067  2,316 

Other current assets

   (3,562 (5,029   (1,525 (3,562

Accrued compensation

   (7,086 (4,930   (16,786 (7,086

Other current and non-current liabilities

   7,718   2,735     1,082  7,718 

Accounts payable

   4,772   3,587     809  4,772 

Other assets

   (189 7,801     (674 (189
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   23,181   19,605     66,057  23,181 
  

 

  

 

   

 

  

 

 

Cash flows provided by (used in) investing activities:

   

Acquisition of businesses, net of cash acquired

   —     (9,867

Cash flows provided by investing activities:

   

Purchases of investments

   (82,135 (164,327   (42,292 (82,135

Maturities of investments

   76,972   38,205     55,672  76,972 

Sales of investments

   128,250   17,414     21,179  128,250 

Purchases of property, plant and equipment

   (2,156 (2,504   (4,099 (2,156

Other

   —     5  
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) investing activities

   120,931   (121,074

Net cash provided by investing activities

   30,460  120,931 
  

 

  

 

   

 

  

 

 

Cash flows used in financing activities:

      

Restricted cash

   (148  —   

Proceeds from short-term borrowings

   736   —   

Payments on short-term borrowings

   (1,398  —   

Payments on long-term borrowings

   (51,570  —   

Repurchase of common stock

   (1,545  —       —    (1,545

Net payments related to employee stock awards

   (2,587 (2,105   (2,894 (2,587

Dividend payments to common stockholders

   (9,056 (8,784   (9,419 (9,056

Excess tax benefits from stock-based compensation

   233   524     —    233 
  

 

  

 

   

 

  

 

 

Net cash used in financing activities

   (12,955 (10,365   (64,693 (12,955
  

 

  

 

   

 

  

 

 

Effect of exchange rate changes on cash and cash equivalents

   (876 (890   (4,535 (876
  

 

  

 

   

 

  

 

 

Increase (decrease) in cash and cash equivalents

   130,281   (112,724

Increase in cash and cash equivalents

   27,289  130,281 

Cash and cash equivalents at beginning of period

   227,574   305,437     228,623  227,574 
  

 

  

 

   

 

  

 

 

Cash and cash equivalents at end of period

  $357,855   $192,713    $255,912  $357,855 
  

 

  

 

   

 

  

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

1)Basis of Presentation

The terms “MKS” and the “Company” refer to MKS Instruments, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The interim financial data as of March 31, 20162017, and for the three months ended March 31, 20162017 and 20152016 are unaudited; however, in the opinion of MKS, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The condensed consolidated balance sheet presented as of December 31, 20152016 has been derived from the consolidated audited financial statements as of that date. The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with the instructions to Form10-Q and do not include all of the information and note disclosures required by United States generally accepted accounting principles (“U.S. GAAP”). The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the MKS Annual Report on Form10-K for the year ended December 31, 20152016 filed with the Securities and Exchange Commission on February 26, 2016.March 1, 2017.

The preparation of these unaudited condensed consolidated 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On anon-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, stock-based compensation, inventory, intangible assets, goodwill and other long-lived assets, warranty liabilities, pension liabilities, acquisition expenses, income taxes and investments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

2)Recently Issued Accounting Pronouncements

In March 2016,2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation2017-07, “Compensation-Retirement Benefits (Topic 718)—Improvements715)-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This standard requires that an employer disaggregate the service cost component from the other components of net benefit cost. This standard also provides explicit guidance on how to Employee Share-Based Payment Accounting.present the service cost component and the other components of the net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The provisions of this ASU are effective for annual periods beginning after December 31, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company does not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU2017-04, “Intangibles-Goodwill and Other (Topic 350).” This standard simplifies several aspectshow an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the accountingcarrying amount of goodwill. The provisions of this ASU are effective for share-based payment transactions, includingannual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company expects to adopt this new standard in 2017 when it performs its annual goodwill impairment test in the income tax consequences, classificationfourth quarter. The adoption of awards as either equity or liabilities, and classificationthis ASU is not expected to have a material impact on the statementCompany’s consolidated financial statements.

In January 2017, the FASB issued ASU2017-01, “Business Combinations (Topic 805)-Clarifying the Definition of cash flows.a Business.” This standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard also provides a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is applicable under certain circumstances. The Company does not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

In November 2016, the FASB issued ASU2016-18, “Statement of Cash Flows (Topic 230)-Restricted Cash,” an amendment to ASU2016-15. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. Early adoption is permitted. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years and should be applied at the time of adoption of ASU2016-15. The Company does not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU2016-16, “Income Taxes (Topic 740)-Intra-Entity Transfer of Assets Other Than Inventory.” This standard requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs as opposed to when the assets have been sold to an outside party. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating the requirements of this ASU and has not yet determined its impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU2016-15, “Statement of Cash Flows (Topic 230)-Classification of Certain Cash Receipts and Cash Payments.” This standard addresses eight specific cash flow issues with the objective of addressing the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the requirements of this ASU and has not yet determined its impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU2016-02, “Leases (Topic 842).” This standard requires the recognition of lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the requirements of this ASU and has not yet determined its impact on the Company’s consolidated financial statements.

In September 2015,January 2016, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)”—Simplifying the Accounting for Measurement-Period Adjustments.2016-01, “Financial Instruments—Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This standard requiresASU provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The new pronouncement revises accounting related to equity investments and the presentation of certain fair value changes for financial assets and liabilities measured at fair value. Among other things, it amends the presentation and disclosure requirements of equity securities that an acquirer recognize adjustments to provisional amounts thatdo not result in consolidation and are identified duringnot accounted for under the measurement periodequity method. Changes in the reporting period in which the adjustments are identified, including the cumulative effectfair value of the change in the provisional amount as if the accounting had been completed at the acquisition date. This ASU is effective for annual periods beginning after December 15, 2015, including interim periods within those fiscal years. The Company adopted this ASU in the first quarter of 2016. Adoption of this ASU could have a material impact on the Company’s consolidated financial position and results of operations when accounting for future acquisitions.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330)—Simplifying the Measurement of Inventory.” The amendments in this ASU apply to all inventory that is measured using first-in, first-out or average cost. This standard requires that an entity measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Adoption of this ASU is not expected to have a material impact on the Company’s consolidated statements of financial position and results of operations.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” Under this guidance, managementthese equity securities will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosuresrecognized directly in certain circumstances. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for annual and interim periods thereafter. This ASU is not expected to have an impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes all existing revenue recognition requirements, including most industry-specific guidance. This standard requires a company to recognize revenue when it transfers goods and services to customers in an amount that reflects the consideration that the company expects to be entitled to in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and assets recognized from costs incurred to obtain or fulfill a contract.net income. This pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period.those fiscal years. The Company does not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU2014-09, Revenue from Contracts with Customers (Topic 606). ASU2014-09 provides for a single comprehensive model to use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU2014-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company does not plan to early adopt the standard, but has not yet selectedpreliminarily concluded that it will use the modified retrospective method upon adoption in the first quarter of 2018.

In March, April, May and December 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a transition method.gross versus net basis, identifying performance obligations and licensing arrangements, narrow-scope improvements and practical expedients, and technical corrections and improvements, respectively. The Company is currently evaluatinghas reviewed its plan for the implementation and will continue to report the status against that plan with the Company’s Audit Committee. The Company has established a cross functional project steering committee and implementation team to identify potential differences that would result from applying the requirements of this ASUthe new standard to the Company’s revenue contracts and related expense line items. The Company has identified the various revenue streams, including product revenues, service revenues, installation and training, that could be impacted by Topic 606 and has not yet determined its impact onstarted to review individual customer contracts related to these revenue streams to determine if any material differences exist between the Company’s consolidated financial statements.current revenue standard, Accounting Standards Codification Topic 605 and

3)Investments

The fair value of investments classified as short-term consists of the following:

   March 31, 2016   December 31, 2015 

Available-for-sale investments:

    

Time deposits and certificates of deposit

  $23,005    $11,892  

Bankers’ acceptance drafts

   1,646     728  

Asset-backed securities

   74,057     124,997  

Corporate obligations

   90,856     165,109  

Municipal bonds

   4,611     8,355  

U.S. treasury obligations

   4,360     —    

U.S. agency obligations

   110,233     119,582  
  

 

 

   

 

 

 
  $308,768    $430,663  
  

 

 

   

 

 

 

The following tables show the gross unrealized gains and (losses) aggregated by investment category for short-term available-for-sale investments:

As of March 31, 2016:  Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 

Short-term investments:

        

Available-for-sale investments:

        

Time deposits and certificates of deposit

  $23,005    $—      $—      $23,005  

Bankers’ acceptance drafts

   1,646     —       —       1,646  

Asset-backed securities

   74,068     27     (38   74,057  

Corporate obligations

   90,944     52     (140   90,856  

Municipal bonds

   4,604     9     (2   4,611  

U.S. treasury obligations

   4,355     5     —       4,360  

U.S. agency obligations

   110,216     24     (7   110,233  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $308,838    $117    $(187  $308,768  
  

 

 

   

 

 

   

 

 

   

 

 

 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

As of December 31, 2015:  Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 

Short-term investments:

        

Available-for-sale investments:

        

Time deposits and certificates of deposit

  $11,893    $ —      $(1  $11,892  

Bankers acceptance drafts

   728     —       —       728  

Asset-backed securities

   125,271     —       (274   124,997  

Corporate obligations

   165,445     5     (341   165,109  

Municipal bonds

   8,346     13     (4   8,355  

U.S. agency obligations

   119,699     3     (120   119,582  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $431,382    $21    $(740  $430,663  
  

 

 

   

 

 

   

 

 

   

 

 

 

Topic 606. In the second quarter of 2017, the Company will be reviewing the additional disclosure requirements of the new standard and the potential impact on its internal control structure and revenue recognition policy. The Company has not completed its assessment of the new revenue recognition standard and has not yet determined the impact on its consolidated financial statements. The Company anticipates that it will complete its assessment of the new standard and its potential financial impact by the end of the third quarter of 2017.

3)Investments

The fair value of investments classified as short-term consists of the following:

   March 31, 2017   December 31, 2016 

Available-for-sale investments:

    

Time deposits and certificates of deposit

  $3,479   $23,818 

Bankers’ acceptance drafts

   1,117    1,439 

Asset-backed securities

   36,682    36,809 

Commercial paper

   12,134    24,381 

Corporate obligations

   51,393    46,707 

Municipal bonds

   251    591 

Promissory note

   675    675 

U.S. treasury obligations

   20,424    25,414 

U.S. agency obligations

   29,144    29,629 
  

 

 

   

 

 

 
  $155,299   $189,463 
  

 

 

   

 

 

 

Investments classified as long-term consists of the following:

   March 31, 2017   December 31, 2016 

Available-for-sale investments:

    

Group insurance contracts

  $5,633   $5,558 

Cost method investments:

    

Minority interest in a private company(1)

   4,300    4,300 
  

 

 

   

 

 

 
  $9,933   $9,858 
  

 

 

   

 

 

 

(1)In April 2016, the Company invested $9,300 for a minority interest in a private company. For the year ended December 31, 2016, the Company recognized $5,000 of impairment charges related to this cost method investment.

The following tables show the gross unrealized gains and (losses) aggregated by investment category foravailable-for-sale investments:

As of March 31, 2017:  Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 

Short-term investments:

        

Available-for-sale investments:

        

Time deposits and certificates of deposit

  $3,479   $—     $—     $3,479 

Bankers’ acceptance drafts

   1,117    —      —      1,117 

Asset-backed securities

   36,711    12    (41   36,682 

Commercial paper

   12,160    —      (26   12,134 

Corporate obligations

   51,328    70    (5   51,393 

Municipal bonds

   251    —      —      251 

Promissory note

   675    —      —      675 

U.S. treasury obligations

   20,418    6    —      20,424 

U.S. agency obligations

   29,114    34    (4   29,144 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $155,253   $122   $(76  $155,299 
  

 

 

   

 

 

   

 

 

   

 

 

 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

As of March 31, 2017:  Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 

Long-term investments:

        

Available-for-sale investments:

        

Group insurance contracts

  $6,497   $—     $(864  $5,633 
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2016:  Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 

Short-term investments:

        

Available-for-sale investments:

        

Time deposits and certificates of deposit

  $23,818   $—     $—     $23,818 

Bankers acceptance drafts

   1,439    —      —      1,439 

Asset-backed securities

   36,847    6    (44   36,809 

Commercial paper

   24,423    —      (42   24,381 

Corporate obligations

   46,700    21    (14   46,707 

Municipal bonds

   591    —      —      591 

Promissory note

   675    —      —      675 

U.S. treasury obligations

   25,414    —      —      25,414 

U.S. agency obligations

   29,631    8    (10   29,629 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $189,538   $35   $(110  $189,463 
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2016:  Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 

Long-term investments:

        

Available-for-sale investments:

        

Group insurance contracts

  $6,276   $—     $(718  $5,558 
  

 

 

   

 

 

   

 

 

   

 

 

 

The tables above, which show the gross unrealized gains and (losses) aggregated by investment category foravailable-for-sale investments as of March 31, 20162017 and December 31, 2015,2016, 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 next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date 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 stock trades “ex-dividend.“ex-dividend. The cost of marketable securities sold is determined by the specific identification method. Realized gains or losses are reflected in income and were not material for the three months ended March 31, 20162017 and 2015.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

2016.

 

4)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 1Quoted prices in active markets for identical assets or liabilities assessed 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.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

Level 2Observable 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 3Unobservable 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 in its entirety. The Company’s 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 or liability.

Assets and liabilities of the Company are measured at fair value on a recurring basis as of March 31, 2017 and are summarized as follows:

       Fair Value Measurements at Reporting Date Using 

Description

  March 31, 2017   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

  $1,263   $1,263   $—     $—   

Time deposits and certificates of deposit

   2,300    —      2,300    —   

Bankers’ acceptance drafts

   682    —      682    —   

Commercial paper

   10,604    —      10,604    —   

Corporate obligations

   1,550    —      1,550    —   

Restricted cash – money market funds

   5,274    5,274    —      —   

Available-for-sale investments:

        

Time deposits and certificates of deposit

   3,479    —      3,479    —   

Bankers’ acceptance drafts

   1,117    —      1,117    —   

Asset-backed securities

   36,682    —      36,682    —   

Commercial paper

   12,134    —      12,134    —   

Corporate obligations

   51,393    —      51,393    —   

Municipal bonds

   251    —      251    —   

Promissory note

   675    —      675    —   

U.S. treasury obligations

   20,424    —      20,424    —   

U.S. agency obligations

   29,144    —      29,144    —   

Group insurance contracts

   5,633    —      5,633    —   

Derivatives – currency forward contracts

   664    —      664    —   

Derivatives – options contracts

   14    —      14    —   

Funds in investments and other assets:

        

Israeli pension assets

   14,024    —      14,024    —   

Derivatives – interest rate hedge –non-current

   5,428    —      5,428    —   

Restricted cash –non-current

   744    744    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $203,479   $7,281   $196,198   $—   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives – currency forward contracts

  $3,666   $—     $3,666   $—   
  

 

 

   

 

 

   

 

 

   

 

 

 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

Assets and liabilities of the Company are measured at fair value on a recurring basis as of March 31, 2016 and are summarized as follows:

       Fair Value Measurements at Reporting Date Using 

Description

  March 31, 2016   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

  $197,650    $197,650    $—      $—    

Bankers’ acceptance drafts

   15     —       15     —    

Commercial paper

   9,999     —       9,999     —    

U.S. agency obligations

   35,496     —       35,496     —    

Available-for-sale investments:

        

Time deposits and certificates of deposit

   23,005     —       23,005     —    

Bankers’ acceptance drafts

   1,646     —       1,646     —    

Asset-backed securities

   74,057     —       74,057     —    

Corporate obligations

   90,856     —       90,856     —    

Municipal bonds

   4,611     —       4,611     —    

U.S. treasury obligations

   4,360     —       4,360     —    

U.S. agency obligations

   110,233     —       110,233     —    

Derivatives – currency forward contracts

   487     —       487     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $552,415    $197,650    $354,765    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Derivatives – currency forward contracts

  $2,193    $—      $2,193    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

Reported as follows:

        

Assets:

        

Cash and cash equivalents(1)

  $243,160    $197,650    $45,510    $—    

Short-term investments

   308,768     —       308,768     —    

Other current assets

   487     —       487     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

  $552,415    $197,650    $354,765    $—    
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Other current liabilities

  $(2,193  $—      $(2,193  $—    
  

 

 

   

 

 

   

 

 

   

 

 

 
       Fair Value Measurements at Reporting Date Using 

Description

  March 31, 2017   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 

Reported as follows:

        

Assets:

        

Cash and cash equivalents(1)

  $16,399   $1,263   $15,136   $—   

Restricted cash

   5,274    5,274    —      —   

Short-term investments

   155,299    —      155,299    —   

Other current assets

   678    —      678    —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

  $177,650   $6,537   $171,113   $—   
  

 

 

   

 

 

   

 

 

   

 

 

 

Long-term investments(2)

   5,633    —      5,633    —   

Other long-term assets

   19,452    —      19,452    —   

Restricted cash –non-current

   744    744    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term assets

  $25,829   $744   $25,085   $—   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Other current liabilities

  $3,666   $—     $3,666   $—   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)The cash and cash equivalent amounts presented in the table above do not include cash of $102,950$238,663 andnon-negotiable time deposits of $11,745$850 as of March 31, 2016.2017.
(2)The long-term investments presented in the table above do not include our minority interest investment in a private company, which is accounted for under the cost method.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

Assets and liabilities of the Company are measured at fair value on a recurring basis as of December 31, 20152016 and are summarized as follows:

 

      Fair Value Measurements at Reporting Date Using       Fair Value Measurements at Reporting Date Using 

Description

  December 31, 2015   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   December 31,
2016
   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

  $106,099    $106,099    $—      $—      $10,155   $10,155   $—     $—   

Time deposits and certificates of deposit

   4,900    —      4,900    —   

Bankers acceptance drafts

   11     —       11     —       448    —      448    —   

Commercial paper

   11,828    —      11,828    —   

Corporate obligations

   330     —       330     —       2,025    —      2,025    —   

Available-for-sale investments:

        

U.S. agency obligations

   3,899    —      3,899    —   

Restricted cash – money market funds

   5,287    5,287    —      —   

Available-for-sale securities:

        

Time deposits and certificates of deposit

   11,892     —       11,892     —       23,818    —      23,818    —   

Bankers’ acceptance drafts

   728     —       728     —    

Bankers acceptance drafts

   1,439    —      1,439    —   

Asset-backed securities

   124,997     —       124,997     —       36,809    —      36,809    —   

Commercial paper

   24,381    —      24,381    —   

Corporate obligations

   165,109     —       165,109     —       46,707    —      46,707    —   

Municipal bonds

   8,355     —       8,355     —       591    —      591    —   

Promissory note

   675    —      675    —   

U.S. treasury obligations

   25,414    —      25,414    —   

U.S. agency obligations

   119,582     —       119,582     —       29,629    —      29,629    —   

Group insurance contracts

   5,558    —      5,558    —   

Derivatives – currency forward contracts

   1,486     —       1,486     —       2,985    —      2,985    —   

Derivatives – options contracts

   4    —      4    —   

Funds in investments and other assets:

        

Israeli pension assets

   13,910    —      13,910    —   

Derivatives – interest rate hedge –non-current

   4,900    —      4,900    —   

Restricted cash –non-current

   573    573    —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total assets

  $538,589    $106,099    $432,490    $—      $255,935   $16,015   $239,920   $—   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Liabilities:

                

Derivatives – currency forward contracts Total liabilities

  $263    $—      $263    $—    

Derivatives – currency forward contracts

  $543   $—     $543   $—   

Derivatives – options contracts

   16    —      16    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Reported as follows:

        

Total liabilities

  $559   $—     $559   $—   
  

 

   

 

   

 

   

 

 

Assets:

                

Cash and cash equivalents(1)

  $106,440    $106,099    $341    $—      $33,255   $10,155   $23,100   $—   

Restricted cash

   5,287    5,287    —      —   

Short-term investments

   430,663     —       430,663     —       189,463    —      189,463    —   

Other current assets

   1,486     —       1,486     —       2,989    —      2,989    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total current assets

  $538,589    $106,099    $432,490    $—      $230,994   $15,442   $215,552   $—   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Long-term investments(2)

  $5,558   $—     $5,558   $—   

Other long-term assets

   18,810    —      18,810    —   

Restricted cash –non-current

   573    573    —      —   
  

 

   

 

   

 

   

 

 

Total long-term assets

  $24,941   $573   $24,368   $—   
  

 

   

 

   

 

   

 

 

Liabilities:

                

Other current liabilities

  $263    $—      $263    $—      $559   $—     $559   $—   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)The cash and cash equivalentsequivalent amounts presented in the table above do not include cash of $110,118$192,432 andnon-negotiable time deposits of $11,016$2,936 as of December 31, 2015.2016.
(2)The long-term investments presented in the table above do not include our minority interest investment in a private company, which is accounted for under the cost method.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

Money Market Funds

Money market funds are cash and cash equivalents and are classified within Level 1 of the fair value hierarchy.

Restricted Cash

The Company has letters of credit, which require it to maintain specified cash deposit balances, consisting mainly of money market funds, as collateral. Such amounts have been classified as restricted cash and are classified as Level 1.

Available-For-Sale Investments

As of March 31, 2016, available-for-saleAvailable-for-sale investments consistedconsists of time deposits and drafts denominated in the Euro currency, certificates of deposit, bankers’bankers acceptance drafts, asset-backed securities (which include auto loans, credit card receivables and equipment trust receivables), corporate obligations, municipal bonds, U.S. treasury obligations and U.S. agency obligations.

The Company measures its debt and equity investments at fair value. The Company’savailable-for-sale investments are classified within Level 1 and Level 2 of the fair value hierarchy.

MKS INSTRUMENTS, INC.Israeli Pension Assets

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(Israeli pension assets represent investments in thousands, except sharemutual funds, government securities and per share data)

other time deposits. These investments are set aside for the retirement benefit of the employees at 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, which may adversely affect its operating results and financial position. When deemed appropriate, the Company minimizes its risks from foreign currency exchange rate fluctuations through the use of derivative financial instruments. The principal market in which the Company executes its foreign currency contracts is the institutional market in anover-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. The forward foreign currency exchange contracts are valued using broker quotations or market transactions and are classified within Level 2 of the fair value hierarchy.

 

5)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 forward contracts and foreign currency option contracts, to manage certain foreign currency exposure.

By nature, all financial 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 materialnon-performance by any of these counterparties.

Interest Rate Swap Agreement

On September 30, 2016, the Company entered into an interest rate swap agreement to fix the rate on approximately 50% of its remaining outstanding balance of the Credit Agreement, as described further in Note 9. This hedge fixes the interest rate paid on the hedged debt at 1.198% per annum plus the credit spread of 3.50% through September 30, 2020. The interest rate swap will be recorded at fair value on the balance sheet and changes in the fair value will be recognized in other comprehensive income (loss) (“OCI”). To the extent that this arrangement is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs. The notional amount of this transaction was $335,000 and had a fair value of $5,428 at March 31, 2017.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

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 forward foreign exchange contracts accounted for as cash-flow hedges related to Japanese, South Korean, British, Euro and Taiwanese currencies. To the extent these derivatives are effective inoff-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 other comprehensive income (loss) (“OCI”)OCI 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 currently 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.

The Company also enters into forward exchange contracts to hedge certain balance sheet amounts and foreign currency option contracts related to the Israeli Shekel. To the extent the hedge accounting criteria is not met, the related foreign currency forward contracts and foreign currency option 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.

As of March 31, 2017 and December 31, 2016, the Company had outstanding forward foreign exchange contracts with gross notional values of $124,959 and $120,208, respectively. The following tables provide a summary of the primary net hedging positions and corresponding fair values held as of March 31, 2017 and December 31, 2016:

   March 31, 2017 

Currency Hedged (Buy/Sell)

  Gross Notional
Value
   Fair Value(1)
Asset/(Liability)
 

U.S. Dollar/Japanese Yen

  $35,644   $(493

U.S. Dollar/South Korean Won

   45,972    (1,804

U.S. Dollar/Euro

   20,150    (15

U.S. Dollar/U.K. Pound Sterling

   6,599    (43

U.S. Dollar/Taiwan Dollar

   16,594    (647
  

 

 

   

 

 

 

Total

  $124,959   $(3,002
  

 

 

   

 

 

 

   December 31, 2016 

Currency Hedged (Buy/Sell)

  Gross Notional
Value
   Fair Value(1)
Asset/(Liability)
 

U.S. Dollar/Japanese Yen

  $30,522   $763 

U.S. Dollar/South Korean Won

   50,049    1,342 

U.S. Dollar/Euro

   18,040    156 

U.S. Dollar/U.K. Pound Sterling

   6,067    117 

U.S. Dollar/Taiwan Dollar

   15,530    64 
  

 

 

   

 

 

 

Total

  $120,208   $2,442 
  

 

 

   

 

 

 

(1)Represents the fair value of the net (liability) asset amount included in the consolidated balance sheet.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

As of March 31, 2016 and December 31, 2015, the Company had outstanding forward foreign exchange contracts with gross notional values of $65,796 and $89,989, respectively. The following tables provide a summary of the primary net hedging positions and corresponding fair values held as of March 31, 2016 and December 31, 2015:

   March 31, 2016 

Currency Hedged (Buy/Sell)

  Gross Notional
Value
   Fair Value(1)
Asset/(Liability)
 

U.S. Dollar/Japanese Yen

  $19,664    $(1,333

U.S. Dollar/South Korean Won

   26,906     (208

U.S. Dollar/Euro

   7,600     (286

U.S. Dollar/U.K. Pound Sterling

   2,950     128  

U.S. Dollar/Taiwan Dollar

   8,676     (7
  

 

 

   

 

 

 

Total

  $65,796    $(1,706
  

 

 

   

 

 

 

(1)Represents the fair value of the net (liability) asset amount included in the consolidated balance sheet.

   December 31, 2015 

Currency Hedged (Buy/Sell)

  Gross Notional
Value
   Fair Value(1)
Asset/(Liability)
 

U.S. Dollar/Japanese Yen

  $26,848    $(136

U.S. Dollar/South Korean Won

   34,777     915  

U.S. Dollar/Euro

   10,987     19  

U.S. Dollar/U.K. Pound Sterling

   4,587     61  

U.S. Dollar/Taiwan Dollar

   12,790     364  
  

 

 

   

 

 

 

Total

  $89,989    $1,223  
  

 

 

   

 

 

 

(1)Represents the fair value of the net (liability) asset amount included in the consolidated balance sheet.

The following table provides a summary of the fair value amounts of the Company’s derivative instruments:

 

Derivatives Designated as Hedging Instruments

  March 31, 2016   December 31, 2015   March 31, 2017   December 31, 2016 

Derivative assets:

        

Forward exchange contracts

  $487    $1,486  

Foreign exchange contracts(1)

  $664   $2,985 

Foreign currency options contracts(1)

   14    4 

Foreign currency interest rate hedge(2)

   5,428    4,900 

Derivative liabilities:

        

Forward exchange contracts

   (2,193   (263

Foreign exchange contracts(1)

   (3,666   (543

Foreign currency options contracts(1)

   —      (16
  

 

   

 

   

 

   

 

 

Total net derivative (liabilities) assets designated as hedging instruments(1)

  $(1,706  $1,223  

Total net derivative assets designated as hedging instruments

  $2,440   $7,330 
  

 

   

 

   

 

   

 

 

 

(1)The derivative asset of $487$678 and derivative liability of $2,193$(3,666) related to the foreign exchange contracts and foreign currency option contracts are classified in other current assets and other current liabilities in the consolidated balance sheet as of March 31, 2016.2017. The derivative asset of $1,486$2,989 and derivative liability of $263$(559) related to the foreign exchange contracts and foreign currency option contracts are classified in other current assets and other current liabilities in the consolidated balance sheet as of December 31, 2015.2016. These foreign exchange 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 balance sheet.
(2)The foreign currency interest rate hedge assets of $5,428 and $4,900 are classified in other assets in the consolidated balance sheet as of March 31, 2017 and December 31, 2016, respectively,

The net amount of existing gains as of March 31, 20162017, that the Company expects to reclassify from OCI into earnings within the next twelve months is immaterial.

The following table provides a summary of the (losses) gains on derivatives designated as hedging instruments:

   Three Months Ended March 31, 

Derivatives Designated as Cash Flow Hedging Instruments

  2017   2016 

Forward exchange contracts:

    

Net loss recognized in OCI(1)

  $(6,978  $(3,418

Net gain reclassified from accumulated OCI into income(2)

  $452   $696 

(1)Net change in the fair value of the effective portion classified in OCI.
(2)Effective portion classified in cost of products for the three months ended March 31, 2017 and 2016. The tax effect of the gains or losses reclassified from accumulated OCI into income is immaterial.

The following table provides a summary of the losses on derivatives not designated as hedging instruments:

   Three Months Ended March 31, 

Derivatives Not Designated as Hedging Instruments

  2017   2016 

Forward exchange contracts:

    

Net loss recognized in income(1)

  $(1,463  $(565

(1)The Company enters into foreign exchange contracts to hedge against changes in the balance sheet for certain subsidiaries and also enters into foreign currency option contracts to mitigate the risk associated with certain foreign currency transactions in the ordinary course of business. These derivatives are not designated as hedging instruments and gains or losses from these derivatives are recorded immediately in selling, general and administrative expenses.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

6)Inventories, net

Inventories consist of the following:

   March 31, 2017   December 31, 2016 

Raw materials

  $159,354   $150,150 

Work-in-process

   48,306    39,105 

Finished goods

   77,858    86,614 
  

 

 

   

 

 

 
  $285,518   $275,869 
  

 

 

   

 

 

 

7)Acquisitions

Newport Corporation

On April 29, 2016, the Company completed its acquisition of Newport Corporation (“Newport”) pursuant to an Agreement and Plan of Merger, dated as of February 22, 2016 (the “Merger Agreement”), by and among the Company, PSI Equipment, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), and Newport (the “Newport Merger”). At the effective time of the Newport Merger and pursuant to the terms and conditions of the Merger Agreement, each share of Newport’s common stock that was issued and outstanding immediately prior to the effective time of the Newport Merger was converted into the right to receive $23.00 in cash, without interest and subject to deduction for any required withholding tax.

Newport’s innovative solutions leverage its expertise in advanced technologies, including lasers, photonics and precision motion equipment, and optical components andsub-systems, to enhance the capabilities and productivity of its customers’ manufacturing, engineering and research applications. Newport is a global supplier of advanced-technology products and systems to customers in the scientific research and defense/security, microelectronics, life and health sciences and industrial manufacturing markets.

The purchase price of Newport consisted of the following:

Cash paid for outstanding  shares(1)

  $905,254 

Settlement of share-based compensation awards(2)

   8,824 

Cash paid for Newport debt(3)

   93,200 
  

 

 

 

Total purchase price

  $1,007,278 
  

 

 

 

Less: Cash and cash equivalents acquired

   (61,463
  

 

 

 

Total purchase price, net of cash and cash equivalents acquired

  $945,815 
  

 

 

 

(1)Represents cash paid of $23.00 per share for approximately 39,359,000 shares of Newport common stock, without interest and subject to a deduction for any required withholding tax.
(2)Represents the vested but not issued portion of Newport share-based compensation awards as of the acquisition date of April 29, 2016.
(3)Represents the cash paid for the outstanding balance of Newport’s senior secured revolving credit agreement.

The Company funded the payment of the aggregate consideration with a combination of the Company’s available cash on hand and the proceeds from the Company’s senior secured Term Loan Facility, as described in Note 9.

Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Newport 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 all such goodwill and intangible assets will not be deductible for tax purposes.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

The following table provides a summarysummarizes the allocation of the (losses) gains on derivatives designated as hedging instruments:

   Three Months Ended March 31, 

Derivatives Designated as Cash Flow Hedging Instruments

  2016   2015 

Forward exchange contracts:

    

Net loss recognized in OCI(1)

  $(3,418  $(2,090

Net gain reclassified from accumulated OCI into income(2)

  $696    $1,193  

(1)Net change in the fair value of the effective portion classified in OCI.
(2)Effective portion classified in cost of products for the three months ended March 31, 2016 and 2015. The tax effect of the gains or losses reclassified from accumulated OCI into income is immaterial.

The following table provides a summary of the (losses) gains on derivatives not designated as hedging instruments:

   Three Months Ended March 31, 

Derivatives Not Designated as Hedging Instruments

  2016   2015 

Forward exchange contracts:

    

Net (loss) gain recognized in income(1)

  $(565  $98  

(1)The Company enters into foreign exchange contracts to hedge against changes in the balance sheet for certain subsidiaries. These derivatives are not designated as hedging instruments and gains or losses from these derivatives are recorded immediately in selling, general and administrative expenses.

6)Inventories

Inventories consist of the following:

   March 31, 2016   December 31, 2015 

Raw materials

  $78,707    $78,352  

Work-in-process

   24,665     23,297  

Finished goods

   48,278     50,982  
  

 

 

   

 

 

 
  $151,650    $152,631  
  

 

 

   

 

 

 

7)Acquisitions

Newport Corporation

See Note 18 for information on the acquisition of Newport Corporation.

Precisive, LLC

On March 17, 2015, the Company acquired Precisive, LLC (“Precisive”) for $12,085, net of cash acquired of $435. The purchase price included a deferred payment amount of $2,600 to cover any potential indemnification claims, which amount will be paid to the sellers after 15 months assuming there are no indemnification claims. Precisive is an innovative developer of optical analyzers based on Tunable Filter Spectroscopy, which provide real-time gas analysis in the natural gas and hydrocarbon processing industries, including refineries, hydrocarbon processing plants, gas-to-power machines, biogas processes and fuel gas transportation and metering, while delivering customers a lower total cost of ownership.

The following table summarizes the estimated fair value of thevalues assigned to assets acquired and liabilities assumed at the date of acquisition:the Newport Merger:

 

Current assets

  $693  

Non-current assets

   18  

Intangible assets

   5,110  

Goodwill

   7,042  
  

 

 

 

Total assets acquired

   12,863  
  

 

 

 

Total current liabilities assumed

   (343
  

 

 

 

Fair value of assets acquired and liabilities assumed

   12,520  
  

 

 

 

Less cash acquired

   (435
  

 

 

 

Total purchase price, net of cash acquired

  $12,085  
  

 

 

 

Current assets (including cash)

  $186,137 

Inventory

   142,714 

Intangible assets

   404,506 

Goodwill

   396,027 

Property, plant and equipment

   119,932 

Long-term assets

   22,725 
  

 

 

 

Total assets acquired

   1,272,041 

Current liabilities

   95,156 

Intangible liability

   4,302 

Other long-term liabilities

   165,305 
  

 

 

 

Total liabilities assumed

   264,763 
  

 

 

 

Fair value of assets acquired and liabilities assumed

   1,007,278 
  

 

 

 

Less: Cash and cash equivalents acquired

   (61,463
  

 

 

 

Total purchase price, net of cash and cash equivalents acquired

  $945,815 
  

 

 

 

MKS INSTRUMENTS, INC.For the year ended December 31, 2016, the Company recorded $15,090 of incremental cost of sales charges associated with the fair valuewrite-up of inventory acquired in the merger with Newport.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except shareThe fair valuewrite-up of acquired property, plant and per share data)

Substantially allequipment of $36,242 will be amortized over the useful life of the purchase priceasset. Property, plant and equipment is deductible for tax purposes. valued at itsvalue-in-use, unless there was a known plan to dispose of the asset.

The acquired intangible assets are being amortized on a straight-line basis, which approximates the economic use of the asset.

The following table reflects the allocation of the acquired intangible assets and liabilities and related estimatesestimate of useful lives. These acquired intangibles will be amortized on a straight-line basis, which approximates the pattern of use.lives:

 

Order backlog

  $50    18 months  $12,100    1 year 

Customer relationships

   1,430    8 years   247,793    6-18 years 

Exclusive patent license

   2,600    10 years

Trade names

   210    10 years

Trademarks and trade names

   55,900    Indefinite 

Developed technology

   820    10 years   75,386    4-8 years 

In-process research and development

   6,899    Undefined(1) 

Leasehold interest (favorable)

   6,428    4-5 years 
  

 

     

 

   

Total intangible assets

  $404,506   
  $5,110      

 

   

Leasehold interest (unfavorable)

  $4,302   
  

 

     

 

   

(1)The useful lives ofin-process research and development will be defined in the future upon further evaluation of the status of these programs.

The fair value of the acquired intangibles was determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by the Company’s management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of tangible and intangible assets, the excess amount of which was allocated to goodwill.

The Company believes the amount of goodwill relative to identifiable intangible assets relates to several factors including: (1) potential buyer-specific synergies related to market opportunities for a combined product offering; and (2) potential to leverage the Company’s sales force and intellectual property to attract new customers and revenue;revenue and (3) potentialcross sell to strengthen and expand into new but complementary markets, including targeting new applications such as natural gas processing, hydrocarbon processing and other oil and gas segments.existing customers.

The results of this acquisition were included in the Company’s consolidated operations beginning on March 17, 2015. PrecisiveApril 29, 2016. Newport constitutes the Company’s Light & Motion reportable segment (see Note 16).

Certain executives from Newport have severance provisions in their respective Newport employment agreements. The agreements include terms that are accounted for as dual-trigger arrangements. Through the Company’s acquisition accounting, the expense

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

relating to these benefits was recognized in the combined entity’s financial statements, however, the benefit itself will not be distributed until the final provision is met by each eligible executive. The Company recorded costs of $5,816 and $3,334 as compensation expense and stock-based compensation expense, respectively, for the twelve months ended December 31, 2016 in connection with these severance provisions. The shares underlying the restricted stock units and stock appreciation rights that are eligible for accelerated vesting if the executive exercises his rights are not issued as of each reportingperiod-end and are excluded from the computation of basic earnings per share and included in the Company’s Instruments, Control and Vacuum Products group andcomputation of diluted earnings per share for each reporting period.

Cost Method Investment in a Private Company

On April 27, 2016, the Advanced Manufacturing Capital Equipment reportable segment.Company invested $9,300 for a minority interest in a private company, which operates in the field of semiconductor process equipment instrumentation. The Company accounted for this investment using the cost method of accounting. During the fourth quarter of 2016, the Company recognized an impairment loss on this investment of $5,000 based upon financial information of this private company.

 

8)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 of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. The Company assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.

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.

The changes in the carrying amount of goodwill and accumulated impairment (loss) during the three months ended March 31, 20162017 and year ended December 31, 20152016 were as follows:

 

  2016   2015   Three Months Ended March 31, 2017   Twelve Months Ended December 31, 2016 
  Gross
Carrying
Amount
   Accumulated
Impairment
(Loss)
 Net   Gross
Carrying
Amount
 Accumulated
Impairment
(Loss)
 Net   Gross
Carrying
Amount
   Accumulated
Impairment
(Loss)
 Net   Gross
Carrying
Amount
 Accumulated
Impairment
(Loss)
 Net 

Beginning balance at January 1

  $339,117    $(139,414 $199,703    $331,795   $(139,414 $192,381    $727,999   $(139,414 $588,585   $339,117  $(139,414 $199,703 

Acquired goodwill(1)

   —       —      —       8,017    —     8,017     —      —     —      396,027   —    396,027 

Foreign currency translation

   296     —     296     (695  —     (695   1,917    —    1,917    (7,145  —    (7,145
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

 

Ending balance at March 31, 2016 and December 31, 2015

  $339,413    $(139,414 $199,999    $339,117   $(139,414 $199,703  

Ending balance at March 31, 2017 and December 31, 2016

  $729,916   $(139,414 $590,502   $727,999  $(139,414 $588,585 
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

 

(1)During 2016, the Company recorded $396,027 of goodwill related to the Newport Merger.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

(1)During 2015, the Company recorded $7,042 of goodwill related to the acquisition of Precisive. During the second quarter of 2015, the Company recorded a purchase accounting adjustment of $975 primarily related to an inventory valuation adjustment related to the acquisition of Granville-Phillips.

Intangible Assets

Components of the Company’s intangible assets are comprised of the following:

 

As of March 31, 2016:

  Gross   Accumulated
Amortization
   Foreign
Currency
Translation
   Net 

As of March 31, 2017:

  Gross   Accumulated
Amortization
   Foreign
Currency
Translation
   Net 

Completed technology

  $101,200    $(82,939  $(142  $18,119    $176,586   $(103,127  $(746  $72,713 

Customer relationships

   37,251     (17,251   105     20,105     285,044    (34,246   (2,634   248,164 

Patents, trademarks, trade names and other(1)

   30,396     (26,056   11     4,351     111,723    (36,118   (73   75,532 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $168,847    $(126,246  $(26  $42,575    $573,353   $(173,491  $(3,453  $396,409 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

As of December 31, 2015

  Gross   Accumulated
Amortization
   Foreign
Currency
Translation
   Net 

As of December 31, 2016:

  Gross   Accumulated
Amortization
   Foreign
Currency
Translation
   Net 

Completed technology(1)

  $101,200    $(82,330  $(272  $18,598    $176,586   $(97,707  $(1,068  $77,811 

Customer relationships(1)

   37,251     (16,345   10     20,916     285,044    (29,709   (3,404   251,931 

Patents, trademarks, trade names and other(1)

   30,396     (25,888   5     4,513     111,723    (33,397   (64   78,262 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $168,847    $(124,563  $(257  $44,027    $573,353   $(160,813  $(4,536  $408,004 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)During 2015,2016, the Company recorded $5,110$404,506 of separately identified intangible assets related to the acquisition of Precisive,Newport Merger, of which $820$75,386 was completed technology, $1,430$247,793 was customer relationships and $2,860$81,327 was patents, trademarks, trade names,in-process research and development and other. During 2016, the Company also recorded $4,302 of unfavorable lease commitments, which is recorded in other liabilities in the balance sheet.

Aggregate amortization expense related to acquired intangibles for the three months ended March 31, 2017 and 2016 was $12,501 and 2015 was $1,683, and $1,671, respectively. EstimatedThe amortization expense for eachthe three months ended March 31, 2017, is net of the remaining fiscal$177 amortization income from unfavorable lease commitments. Aggregate net amortization expense related to acquired intangible assets and unfavorable lease commitments for future years is as follows:

 

Year

  Amount   Amount 

2016 (remaining)

  $4,990  

2017

   6,601  

2017 (remaining)

  $33,053 

2018

   6,586     42,951 

2019

   6,543     39,833 

2020

   6,489     27,940 

2021

   4,709     20,071 

2022

   17,475 

Thereafter

   6,657     155,672 

9)Debt

Term Loan Credit Agreement

In connection with the completion of the Newport Merger, the Company entered into a term loan credit agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto (the “Lenders”), that provided senior secured financing of $780,000, subject to increase at the Company’s option in accordance with the Credit Agreement (the “Term Loan Facility”). Borrowings under the Term Loan Facility 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 in The Wall Street Journal, (3) a 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%, plus, in each case, an applicable margin (that was initially 3.00% and was decreased as described below); 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 0.75%, plus an applicable margin (that was initially 4.00% and was decreased as described below). The Company has elected the interest rate as described in clause (b). The Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.

On June 9, 2016, the Company entered into Amendment No. 1 (the“Re-pricing Amendment 1”) to the Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Re-pricing

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

9)Other Assets

Amendment 1 decreased the applicable margin for borrowings under the Company’s Term Loan Facility to 2.50% for base rate borrowings and 3.50% for LIBOR borrowings and extended the period during which a pre-payment premium may be required for a“Re-pricing Transaction” (as defined in the Credit Agreement) until six months after the effective date of theRe-pricing Amendment 1. In connection with the execution of theRe-pricing Amendment 1, the Company paid a pre-payment premium of 1.00%, or $7,300, as well as certain fees and expenses of the administrative agent and the Lenders, in accordance with the terms of the Credit Agreement. Immediately prior to the effectiveness of theRe-pricing Amendment 1, the Company prepaid $50,000 of principal under the Credit Agreement. In September 2016, the Company prepaid an additional $60,000 under the Credit Agreement.

On September 30, 2016, the Company entered into an interest rate swap agreement, which has a maturity date of September 30, 2020, to fix the rate on $335,000 of the outstanding balance of the Credit Agreement. The rate is fixed at 1.198% per annum plus the credit spread of 3.50%.

On December 14, 2016, the Company entered into Amendment No. 2 (the “Re-pricing Amendment 2”) to the Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Re-pricing Amendment 2 decreased the applicable margin for the Company’s term loan under the Credit Agreement to 2.75% for LIBOR borrowings and 1.75% for base rate borrowings and reset the period during which a pre-payment premium may be required for a “Re-pricing Transaction” (as defined in the Credit Agreement) until six months after the effective date of the Re-pricing Amendment. In November 2016, prior to the effectiveness of the Re-pricing Amendment 2, the Company prepaid an additional $40,000 of principal under the Credit Agreement. In March 2017, the Company prepaid $50,000 of principal under the Credit Agreement. After pre-payments of $200,000 and regularly scheduled principal payments of $4,966, the total outstanding principal balance was $575,034 as of March 31, 2017.

The Company incurred $28,747 of deferred finance fees, original issue discount and a re-pricing fee related to the term loans under the Term Loan Facility, which is included in long-term debt in the accompanying consolidated balance sheets and will be amortized to interest expense over the estimated life of the term loans using the effective interest method. A portion of these fees have been written-off in connection with the various debt pre-payments during 2016 and the first quarter of 2017. The remaining balance of the deferred finance fees, original issue discount and re-pricing fee related to the Term Loan Facility was $16,987 as of March 31, 2017.

Under the 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 asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. The Company is also required to make scheduled quarterly payments each equal to 0.25% of the principal amount of the term loans outstanding on December 14, 2016 (the date of the Re-Pricing Amendment 2) less the amount of certain voluntary and mandatory repayments after such date, with the balance due on the seventh anniversary of the closing date.

All obligations under the Term Loan Facility are guaranteed by certain of the Company’s domestic subsidiaries, and are secured by substantially all of the Company’s assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.

The 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 March 31, 2017, the Company was in compliance with all covenants under the Credit Agreement.

Senior Secured Asset-Based Revolving Credit Facility

In connection with the completion of the Newport Merger, the Company also entered into an asset-based credit agreement with Deutsche Bank AG New York Branch, 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 Facility”), that provides senior secured financing of up to $50,000, subject to a borrowing base limitation. The borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of certain eligible accounts; plus (b) subject to certain notice and field examination and appraisal requirements, the lesser of (i) the lesser of (A) 65% of the lower of cost or market value of certain eligible inventory and (B) 85% of the net orderly liquidation value of certain eligible inventory and (ii) 30% of the borrowing base; minus (c) reserves established by the administrative agent; provided that until the administrative agent’s receipt of a field examination of accounts receivable the borrowing base shall be equal to 70% of the book value of certain eligible accounts. The ABL Facility includes borrowing capacity in the form of letters of credit up to $15,000. The Company has not drawn against the ABL Facility.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

   March 31, 2016   December 31, 2015 

Other Current Assets:

    

Income tax receivable

  $6,233    $8,682  

Prepaid income tax

   6,562     4,755  

VAT tax receivable

   186     3,264  

Prepaid service and support

   3,290     2,970  

Other

   11,117     7,089  
  

 

 

   

 

 

 

Total other current assets

  $27,388    $26,760  
  

 

 

   

 

 

 

Other Assets:

    

Deferred tax assets, net

  $19,139    $19,252  

Other

   2,253     1,998  
  

 

 

   

 

 

 

Total other assets

  $21,392    $21,250  
  

 

 

   

 

 

 

Borrowings under the ABL Facility 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 in The Wall Street Journal, and (3) a 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%, plus, in each case, an initial applicable margin of 0.75%; and (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, plus an initial applicable margin of 1.75%. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.

10)Other Liabilities

   March 31, 2016   December 31, 2015 

Other Current Liabilities:

    

VAT payable

  $5,221    $3,075  

Customer prepayments

   2,621     1,741  

Product warranties

   5,039     5,205  

Deferred revenue

   7,832     7,189  

Other

   24,659     18,149  
  

 

 

   

 

 

 

Total other current liabilities

  $45,372    $35,359  
  

 

 

   

 

 

 

Other Liabilities:

    

Long-term income tax payable

  $3,832    $4,483  

Accrued compensation

   13,939     13,395  

Other

   3,879     3,604  
  

 

 

   

 

 

 

Total other liabilities

  $21,650    $21,482  
  

 

 

   

 

 

 

11)Debt

The Company incurred $1,201 of costs in connection with the ABL Facility, which were capitalized and included in other assets in the accompanying consolidated balance sheets and will be amortized to interest expense using the straight-line method over the contractual term of five years of the ABL Facility.

In addition to paying interest on outstanding principal under the ABL Facility, the Company is required to pay a commitment fee in respect of the unutilized commitments thereunder. The initial commitment fee is 0.375% per annum. The total commitment fee recognized in interest expense in 2016 was $128. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the commitment fee is subject to downward adjustment based on the amount of average unutilized commitments for the three month period immediately preceding such adjustment date. The Company must also pay customary letter of credit fees and agency fees.

Lines of Credit and Short-Term Borrowing Arrangements

One of the Company’s Japanese subsidiarysubsidiaries has lines of credit and short-term borrowing arrangements with two financial institutions which arrangements generally expire and are renewed at three-monththree month intervals. The lines of credit provided for aggregate borrowings as of March 31, 20162017 of up to an equivalent of $20,455$20,547 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-termShort-Term Prime Lending Rate. There were no borrowings outstanding under these arrangements at March 31, 20162017 and December 31, 2015.2016.

The Company assumed various revolving lines of credit and a financing facility with the completion of the Newport Merger. These revolving lines of credit and financing facility have no expiration date and provided for aggregate borrowings as of March 31, 2017 of up to an equivalent of $11,167 U.S. dollars. These lines of credit have a base interest rate of 1.25% plus a Japanese Yen overnight LIBOR rate.

One of the Company’s Austrian subsidiaries has four outstanding loans from the Austrian government to fund research and development. These loans are unsecured and do not require principal repayment as long as certain conditions are met. Interest on these loans is payable semi-annually. The interest rates associated with these loans range from 0.75% - 2.00%.

   March 31, 2017   December 31, 2016 

Short-term debt:

    

Japanese lines of credit

  $3,461   $4,245 

Japanese receivables financing facility

   782    458 

Other debt

   98    8 

Current portion of Term Loan Facility

   6,282    6,282 
  

 

 

   

 

 

 
  $10,623   $10,993 
  

 

 

   

 

 

 

   March 31, 2017   December 31, 2016 

Long-term debt:

    

Austrian loans due through March 2020

  $467   $548 

Term Loan Facility, net(1)

   551,765    600,681 
  

 

 

   

 

 

 
  $552,232   $601,229 
  

 

 

   

 

 

 

(1)Net of deferred financing fees, original issuance discount andre-pricing fee of $16,987 and $19,642 as of March 31, 2017 and December 31, 2016, respectively.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

The Company recognized interest expense of $8,831 and $44 for the three months ended March 31, 2017 and 2016, respectively. The increase is primarily related to the Term Loan Facility.

Contractual maturities of the Company’s debt obligations as of March 31, 2017, are as follows:

Year

  Amount 

2017 (remaining)

  $9,053 

2018

   6,298 

2019

   6,687 

2020

   6,327 

2021

   6,282 

2022

   6,282 

Thereafter

   538,913 

12)10)Product Warranties

The Company records 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. The product warranty liability is included in other current liabilities in the consolidated balance sheets.

Product warranty activities were as follows:

 

  Three Months Ended March 31,   Three Months Ended March 31, 
  2016   2015   2017   2016 

Beginning of period

  $5,205    $6,266    $8,261   $5,205 

Provision for product warranties

   783     1,109     3,014    783 

Direct charges to warranty liability

   (984   (1,244   (2,857   (984

Foreign currency translation

   35     (67   67    35 
  

 

   

 

   

 

   

 

 

End of period

  $5,039    $6,064    $8,485   $5,039 
  

 

   

 

   

 

   

 

 

 

13)11)Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2017 and 2016 was 15.8% and 2015 was 26.2% and 28.9%, respectively. The effective tax rate for the three months ended March 31, 20162017 and related income tax expense, was lower than the U.S. statutory tax rate primarilymainly due to the geographic mix of income and profits earned by the Company’s international subsidiaries being taxed at rates lower than the U.S. statutory tax rate, the deduction for domestic production activities and the federal research credit offset by state income taxes. windfall stock compensation tax benefit related to the adoption of a new accounting standard that became applicable during the quarter ended March 31, 2017.

The effective tax rate for the three months ended March 31, 20152016 was lower than the U.S. statutory tax rate primarilymainly due to the impact of lower tax rates on foreign income and the deduction for domestic production activities.

As of March 31, 2017, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $25,925. At December 31, 2016, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $3,712. At December 31, 2015, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $4,332. The net decrease from December 31, 2015 was primarily attributable to a release of reserves for uncertain tax positions due to the expiration of the statute of limitations related to a previously open tax year.$25,465. As of March 31, 2016,2017, if these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of $3,707,$18,854, excluding interest and penalties, would impact the Company’s effective tax rate. The Company accrues interest expense, and if applicable, penalties, for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of March 31, 20162017 and December 31, 2015,2016, the Company had accrued interest on unrecognized tax benefits of approximately $125$469 and $157,$491, respectively.

Over the next 12 months it is reasonably possible that the Company may recognize approximately $1,469$1,702 of previously net unrecognized tax benefits related to various U.S. federal, state and foreign tax positions primarily as a result of the expiration of certain statutes of limitations.

The Company and its subsidiaries are subject to examination by U.S. federal, state and foreign tax authorities. The United States Internal Revenue Service commenced an examination of the Company’s U.S. federal tax filings for tax years 2011 through 2013 during the quarter ended March 31, 2015. The audit was effectively settled during the three months ended December 31, 2015 upon the Company’s acceptance of the income tax examination changes. As part of the audit the Company consented to extend the U.S. statute of limitations for tax year 2011 until September 30, 2016.

The U.S. statute of limitations remains open for tax years 2011 through present. The statute of limitations for the Company’s tax filings in other jurisdictions varies between fiscal years 2008 through present.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

The Company and its subsidiaries are subject to examination by U.S. federal, state and foreign tax authorities. The U.S. statute of limitations remains open for tax years 2013 through present. The statute of limitations for the Company’s tax filings in other jurisdictions varies between fiscal years 2008 through present. We also have certain federal credit carry-forwards and state tax loss and credit carry-forwards that are open to examination for tax years 2000 through the present.

14)12)Pension Plans

As a result of the acquisition of Newport, the Company has 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 and Japan. In addition, there are certain pension liabilities relating to former employees in the United Kingdom. The German plan is unfunded, as permitted under the plan and applicable laws. The net periodic benefit costs during the three months ended March 31, 2017, were approximately $260 and the Company made contributions of $227 to these plans, during the three months ended March 31, 2017.

13)Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:

 

  Three Months Ended March 31,   Three Months Ended March 31, 
  2016   2015   2017   2016 

Numerator:

        

Net income

  $17,563    $33,786    $65,060   $17,563 
  

 

   

 

   

 

   

 

 

Denominator:

        

Shares used in net income per common share – basic

   53,235,000     53,214,000     53,769,000    53,235,000 

Effect of dilutive securities:

        

Stock options, restricted stock and employee stock purchase plan

   328,000     315,000  

Restricted stock units, stock appreciation rights and shares issued under employee stock purchase plan

   1,189,000    328,000 
  

 

   

 

   

 

   

 

 

Shares used in net income per common share – diluted

   53,563,000     53,529,000     54,958,000    53,563,000 
  

 

   

 

   

 

   

 

 

Net income per common share:

        

Basic

  $0.33    $0.63    $1.21   $0.33 

Diluted

  $0.33    $0.63    $1.18   $0.33 

Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders 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 (stock options(restricted stock units and restricted stock units)appreciation rights) had been converted to such common shares, and if such assumed conversion is dilutive.

As of March 31, 2016, restricted stock units related to an aggregate of approximately 737,000 shares were outstanding. For the three months ended March 31, 20162017 and 2015,2016, there were no weighted-average shares of restricted stock units or stock appreciation rights that would have had an anti-dilutive effect on EPS, and would thus need to be excluded from the computation of diluted weighted-average shares.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

15)14)Stockholder’s 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 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 dependswill depend upon a variety of factors, including business conditions, stock market conditions debt agreement limitations 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. The Company has repurchased approximately 1,770,000 shares of common stock for approximately $52,000 pursuant to the program since its adoption.

There were no shares repurchased during the three months ended March 31, 2017. During the three months ended March 31, 2016, the Company repurchased approximately 45,000 shares of its common stock for $1,545, or an average price of $34.50 per share. During the three months ended March 31, 2015, the Company did not repurchase any shares of common stock.

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. During the three months ended March 31, 2017, the Company’s Board of Directors declared a cash dividend of $0.175 per share, which dividends totaled $9,419. During the three months ended March 31, 2016, the Company’s Board of Directors declared a cash dividend of $0.17 per share, which dividends totaled $9,056. During the three months ended March 31, 2015, the Board of Directors authorized a cash dividend of $0.165 per share, which dividends totaled $8,784.

On May 2, 2016, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per share to be paid on June 10, 2016 to shareholders of record as of May 30, 2016. 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.

15)Stock Based Compensation

In connection with the completion of the Newport Merger, the Company assumed:

all restricted stock units (“RSUs”) granted under any Newport equity plan that were outstanding immediately prior to the effective time of the Newport Merger, and as to which shares of Newport common stock were not fully distributed in connection with the closing of the Newport Merger, and

all stock appreciation rights granted under any Newport equity plan, whether vested or unvested, that were outstanding immediately prior to the effective time of the Newport Merger.

As of the effective time of the Newport Merger, based on a formula provided in the Merger Agreement, (a) the Newport RSUs were converted automatically into RSUs with respect to 360,674 shares of the Company’s common stock (the “Assumed RSUs”), and (b) the Newport stock appreciation rights were converted automatically into stock appreciation rights with respect to 899,851 shares of the Company’s common stock (the “Assumed SARs”).

Included in the total number of Assumed RSUs were 36,599 RSUs for outside directors that were part of the Newport Deferred Compensation Plan (the “DC Plan”), from which 19,137 underlying shares were released in May 2016. As of March 31, 2017, 17,462 RSUs remained outstanding under the DC Plan, and an additional 234 shares were added to the DC Plan due to reinvested dividends. These Assumed RSUs will not become issued shares until their respective release dates.

The shares of the Company’s common stock that are subject to the Assumed SARs and the Assumed RSUs are issuable pursuant to the Company’s 2014 Stock Incentive Plan (the “Plan”).

The 1,260,525 shares of the Company’s common stock that are issuable pursuant to the Assumed RSUs and the Assumed SARs under the Plan were registered under the Securities Act of 1933, as amended (the “Securities Act”), on a registration statement on FormS-8. These shares are in addition to the 18,000,000 shares of the Company’s common stock reserved for issuance under the Plan and previously registered under the Securities Act on a registration statement on FormS-8.

During the three months ended March 31, 2017, the Company granted 171,179 RSUs with a weighted average grant date fair value of $66.06. There were no SARs granted during the three months ended March 31, 2017.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

The total stock-based compensation expense included in the Company’s consolidated statements of income and comprehensive income was as follows:

   Three Months Ended
March 31, 2017
   Three Months Ended
March 31, 2016
 

Cost of revenues

  $930   $440 

Research and development expense

   745    374 

Selling, general and administrative expense

   7,107    3,338 
  

 

 

   

 

 

 

Totalpre-tax stock-based compensation expense

  $8,782   $4,152 
  

 

 

   

 

 

 

At March 31, 2017, the total compensation expense related to unvested stock-based awards granted to employees, officers and directors under the Plan that had not been recognized was $23,759, net of estimated forfeitures. The future compensation expense is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures except for retirement eligible employees in which the Company expenses the fair value of the grant in the period the grant is issued. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

The following table presents the activity for RSUs under the Plan:

   Three Months Ended March 31, 2017 
   Outstanding RSUs   Weighted Average
Grant Date
Fair Value
 

RSUs – beginning of period

   1,325,516   $34.38 

Accrued dividend shares

   47    66.20 

Granted

   171,179    66.06 

Vested

   (499,743   33.59 

Forfeited or expired

   (34,180   33.50 
  

 

 

   

 

 

 

RSUs – end of period

   962,819   $40.46 
  

 

 

   

 

 

 

The following table presents the activity for SARs under the Plan:

   Three Months Ended March 31, 2017 
   Outstanding SARs   Weighted Average
Grant Date
Fair Value
 

SARs – beginning of period

   599,334   $28.10 

Granted

   —      —   

Exercised

   (120,206   25.81 

Forfeited or expired

   (9,563   25.58 
  

 

 

   

 

 

 

SARs Outstanding – end of period

   469,565   $28.74 
  

 

 

   

 

 

 

At March 31, 2017, the Company’s outstanding and exercisable SARs, the weighted-average base value, the weighted average remaining contractual life and the aggregate intrinsic value thereof, were as follows:

   Number of
Shares
   Weighted
Average Base
Value
   Weighted Average
Remaining
Contractual
Life (years)
   Aggregate
Intrinsic Value
 

SARs outstanding

   469,565   $28.74    3.9   $18,787 

SARs exercisable

   398,868   $28.32    3.7   $16,127 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

16)Business Segment, Geographic Area, Product and Significant Customer Information

The Company develops, manufactures, sellsis a global provider of instruments, subsystems and services productsprocess control solutions that measure, control, deliver, power, monitor and monitoranalyze critical parameters of advanced manufacturing processes. processes to improve process performance and productivity. The Company also provides services relating to the maintenance and repair of products it sells, installation services and training.

The Company’s Chief Operating Decision Maker (“CODM”) utilizes consolidated financial information to make decisions about allocating resources and assessing performance for the entire Company. In addition, certain disaggregated financial information is also provided to the CODM,Company, which is used in the decision making process to assess performance. Based upon the information provided to the CODM, the Company has determined it has fourtwo reportable segments.

Effective April 29, 2016, in conjunction with the Newport Merger, the Company changed its reportable segments based upon the organizational structure of the Company and how the CODM utilizes information provided to allocate resources and make decisions. The Company’s two reportable segments are Advanced Manufacturing Capital Equipment, Global Service, Asia Region Salesare: Vacuum & Analysis and Other.Light & Motion. The Company has reported corporate expensesVacuum & Analysis segment represents the legacy MKS business and certain intercompany pricing transactions in a Corporate and Eliminations reconciling column.the Light & Motion segment represents the legacy Newport business.

The Advanced Manufacturing Capital EquipmentVacuum & Analysis segment includes the development, manufacturing and salesprovides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in pressure measurement and control, products,flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control and information technology, ozone generation and delivery, RF & DC power, and reactive gas products, materials delivery productsgeneration and vacuum products, alltechnology.

The Light & Motion segment provides a broad range of instruments, components and subsystems which are utilized in semiconductor processing and other similar advanced manufacturing processes. Sales in this segment include both external sales and intercompany product sales, which are recorded at transfer prices in accordance with applicable tax requirements.

The Global Service segment includes the worldwide servicing of instruments and control products, power and reactive gas products, materials delivery products and vacuum products, all of which are utilized in semiconductor processing and other similar advanced manufacturing processes. It also includes sales of custom fabrication services.

The Asia Region Sales segment mainly resells productsderived from the Advanced Manufacturing Capital EquipmentCompany’s core competencies in lasers, photonics and Other segments into Asia regions.

The Other segment includes operating segments that are not required to be reported separately as a reportable segment and includes sales for products that are re-sold from the Advanced Manufacturing Capital Equipment into Europe regions as well as sales from other operating segments.optics.

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 except that a substantial portion of the sales of the Advanced Manufacturing Capital Equipment and Other segments are intercompany sales to the regions at tax-based transfer prices and certain significant costs, including stock-based compensation and management incentive compensation, are not allocated to the segments and are included in Corporate and Eliminations. The CODM reviews several metrics of each operating segment, including net revenues and gross profit (loss).

The Company does not maintain balance sheets for the majority of its operating segments and, as such, amounts have not been allocated to the reportable segments.purposes. The Company does not disclose external or intersegment revenues separately by reportable segment as this information is not presented to the CODM for decision making purposes.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

The following is net revenues by reportable segment:

 

   Three Months Ended March 31, 
   2016   2015 

Advanced Manufacturing Capital Equipment

  $153,570    $179,233  

Global Service

   30,060     27,743  

Asia Region Sales(1)

   43,848     55,377  

Other

   16,327     21,216  

Corporate and Eliminations

   (60,124   (69,730
  

 

 

   

 

 

 
  $183,681    $213,839  
  

 

 

   

 

 

 
   Three Months Ended March 31, 
   2017   2016 

Vacuum & Analysis

  $277,984   $183,681 

Light & Motion

   159,169    —   
  

 

 

   

 

 

 
  $437,153   $183,681 
  

 

 

   

 

 

 

The following is a reconciliation of segment gross profit to consolidated net income:

 

   Three Months Ended March 31, 
   2016   2015 

Gross profit by reportable segment:

    

Advanced Manufacturing Capital Equipment

  $67,630    $78,688  

Global Service

   9,644     9,603  

Asia Region Sales(1)

   2,413     6,920  

Other

   4,370     6,843  

Corporate and Eliminations

   (6,144   (5,008
  

 

 

   

 

 

 

Total gross profit by reportable segment

   77,913     97,046  

Operating expenses:

    

Research and development

   17,227     16,680  

Selling, general and administrative

   33,950     30,867  

Acquisition costs

   2,494     30  

Restructuring

   —       788  

Amortization of intangible assets

   1,683     1,671  
  

 

 

   

 

 

 

Income from operations

   22,559     47,010  

Interest and other income, net

   1,246     504  
  

 

 

   

 

 

 

Income before income taxes

   23,805     47,514  

Provision for income taxes

   6,242     13,728  
  

 

 

   

 

 

 

Net income

  $17,563    $33,786  
  

 

 

   

 

 

 

(1)The Asia Region Sales segment does not represent total geographical Asia financial information. This sales operation only represents the sales from the resale of Advanced Manufacturing Capital Equipment and Other segment products in their respective regions. The Advanced Manufacturing Capital Equipment and Other segments both have sales in this region as well. Accordingly, total geographical sales include sales from multiple reportable segments.
   Three Months Ended March 31, 
   2017   2016 

Gross profit by reportable segment:

    

Vacuum & Analysis

  $128,924   $77,913 

Light & Motion

   76,623    —   
  

 

 

   

 

 

 

Total gross profit by reportable segment

   205,547    77,913 

Operating expenses:

    

Research and development

   33,282    17,227 

Selling, general and administrative

   74,220    33,950 

Acquisition and integration costs

   1,442    2,494 

Restructuring

   522    —   

Amortization of intangible assets

   12,501    1,683 
  

 

 

   

 

 

 

Income from operations

   83,580    22,559 

Interest and other (expense) income, net

   (6,295   1,246 
  

 

 

   

 

 

 

Income before income taxes

   77,285    23,805 

Provision for income taxes

   12,225    6,242 
  

 

 

   

 

 

 

Net income

  $65,060   $17,563 
  

 

 

   

 

 

 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

The following is capital expenditures by reportable segment for the three months ended March 31, 20162017 and 2015:2016:

 

   Advanced
Manufacturing
Capital Equipment
   Global Service   Asia Region
Sales
   Other   Corporate and
Eliminations
   Total 

Three Months Ended March 31, 2016:

            

Capital expenditures

  $1,389    $39    $81    $28    $619    $2,156  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2015:

            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

  $1,522    $122    $42    $74    $744    $2,504  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following is depreciation and amortization by reportable segment for the three months ended March 31, 2016 and 2015:

 

  

   Advanced
Manufacturing
Capital Equipment
   Global Service   Asia Region
Sales
   Other   Corporate and
Eliminations
   Total 

Three Months Ended March 31, 2016:

            

Depreciation and amortization

  $4,111    $255    $89    $244    $579    $5,278  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2015:

            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

  $4,247    $256    $85    $310    $634    $5,532  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Vacuum & Analysis   Light & Motion   Total 

Three Months Ended March 31, 2017:

      

Capital expenditures

  $2,374   $1,725��  $4,099 
  

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2016:

      

Capital expenditures

  $2,156   $—     $2,156 
  

 

 

   

 

 

   

 

 

 

Goodwill associated with eachThe following is depreciation and amortization by reportable segment for the three months ended March 31, 2017 and 2016:

   Vacuum & Analysis   Light & Motion   Total 

Three Months Ended March 31, 2017:

      

Depreciation and amortization

  $5,122   $16,711   $21,833 
  

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2016:

      

Depreciation and amortization

  $5,278   $—     $5,278 
  

 

 

   

 

 

   

 

 

 

Total income tax expense is not presented by reportable segment because the necessary information is not available or used by the CODM.

The following is segment assets by reportable segment:

March 31, 2017:  Vacuum &
Analysis
   Light & Motion   Corporate,
Eliminations
and Other
   Total 

Segment assets:

        

Accounts receivable

  $165,210   $123,247   $(21,208  $267,249 

Inventory, net

   167,322    118,196    —      285,518 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment assets

  $332,532   $241,443   $(21,208  $552,767 
  

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2016:  Vacuum &
Analysis
   Light & Motion   Corporate,
Eliminations
and Other
   Total 

Segment assets:

        

Accounts receivable

  $148,516   $121,516   $(21,275  $248,757 

Inventory, net

   165,040    110,829    —      275,869 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment assets

  $313,556   $232,345   $(21,275  $524,626 
  

 

 

   

 

 

   

 

 

   

 

 

 

A reconciliation of our reportable segmentssegment assets to consolidated total assets is as follows:

 

   March 31, 2016   December 31, 2015 

Reportable segment:

    

Advanced Manufacturing Capital Equipment

  $174,344    $174,344  

Global Service

   19,826     19,826  

Asia Region Sales

   —       —    

Other

   6,228     6,228  

Foreign currency translation

   (399   (695
  

 

 

   

 

 

 

Total goodwill

  $199,999    $199,703  
  

 

 

   

 

 

 

Worldwide Product Information

Because the reportable segment information above does not reflect worldwide sales of the Company’s products, the Company groups its products into three groups of similar products based upon the similarity of product function. Worldwide net revenue for each group of products is as follows:

   Three Months Ended March 31, 
   2016   2015 

Instruments, Control and Vacuum Products

  $94,478    $110,436  

Power and Reactive Gas Products

   77,116     88,499  

Analytical Solutions Products

   12,087     14,904  
  

 

 

   

 

 

 
  $183,681    $213,839  
  

 

 

   

 

 

 

Sales of Instruments, Control and Vacuum Products and Power and Reactive Gas Products are included in the Company’s Advanced Manufacturing Capital Equipment, Asia Region Sales, Global Service and Other segments because the products are sold through those segments. Sales of the Analytical Solutions Products are included in the Asia Region Sales, Global Service and Other segments because the products are sold through those segments.

   March 31, 2017   December 31, 2016 

Total segment assets

  $552,767   $524,626 

Cash and cash equivalents, restricted cash and investments

   426,418    433,231 

Income tax receivable and other current assets

   52,266    50,770 

Property, plant and equipment, net

   169,833    174,559 

Goodwill and intangible assets, net

   986,911    996,589 

Other assets

   32,352    32,467 
  

 

 

   

 

 

 

Consolidated total assets

  $2,220,547   $2,212,242 
  

 

 

   

 

 

 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

Geographic

Information about the Company’s operations in different geographic regions is presented in the tables below. Net revenues to unaffiliated customers are based on the location in which the sale originated. Transfers between geographic areas are at negotiated transfer prices and have been eliminated from consolidated net revenues.

 

  Three Months Ended March 31,   Three Months Ended March 31, 
  2016   2015   2017   2016 

Net revenues:

        

United States

  $94,218    $120,181    $218,050   $94,218 

Korea

   20,550     32,072     44,878    20,550 

Japan

   16,236     17,256     37,792    16,236 

Asia (excluding Korea and Japan)

   33,456     23,683     88,243    33,456 

Europe

   19,221     20,647     48,190    19,221 
  

 

   

 

   

 

   

 

 
  $183,681    $213,839    $437,153   $183,681 
  

 

   

 

   

 

   

 

 
  March 31, 2016   December 31, 2015 

Long-lived assets:(1)

      March 31, 2017   December 31, 2016 

United States

  $55,620    $56,594    $119,337   $122,547 

Europe

   5,584     5,783     28,152    28,717 

Asia

   8,612     8,952     49,275    49,406 
  

 

   

 

   

 

   

 

 
  $69,816    $71,329    $196,764   $200,670 
  

 

   

 

   

 

   

 

 

 

(1)Long-lived assets include property, plant and equipment, net and certain other long-term assets, excluding long-term tax related accounts.

Goodwill associated with each of our reportable segments is as follows:

   March 31, 2017   December 31, 2016 

Reportable segment:

    

Vacuum & Analysis

  $200,206   $199,453 

Light & Motion

   390,296    389,132 
  

 

 

   

 

 

 

Total goodwill

  $590,502   $588,585 
  

 

 

   

 

 

 

Worldwide Product Information

Because the reportable segment information above does not reflect worldwide sales of the Company’s products, the Company groups its products into seven groups of similar products based upon the similarity of product function. Worldwide net revenue for each group of products is as follows:

   Three Months Ended March 31, 
   2017   2016 

Analytical and Control Solutions Products

  $31,820   $22,978 

Materials Delivery Solutions Products

   43,454    27,509 

Power, Plasma and Reactive Gas Solutions Products

   122,800    77,116 

Pressure and Vacuum Measurement Products

   79,910    56,078 

Lasers Products

   44,944    —   

Optics Products

   46,505    —   

Photonics Products

   67,720    —   
  

 

 

   

 

 

 
  $437,153   $183,681 
  

 

 

   

 

 

 

Sales of Analytical and Control Solutions Products; Materials Delivery Solutions Products; Power, Plasma and Reactive Gas Solutions Products; and Pressure and Vacuum Measurement Products are included in the Company’s Vacuum & Analysis segment. Sales of Lasers Products; Optics Products; and Photonics Products are included in the Light & Motion segment.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

Major Customers

The Company had two customers with net revenues greater than 10% of total net revenues in the periods shown as follows:

 

  Three Months Ended March 31,   Three Months Ended March 31, 
  2016 2015   2017 2016 

Applied Materials, Inc.

   18.8 17.4   13.0 18.8

LAM Research Corporation

   17.1 12.1   12.6 17.1

 

17)Restructuring

During the three months ended March 31, 2017 and 2016, the Company recorded restructuring charges of $522 and $0, respectively. The restructuring charges for the three months ended March 31, 2017 relate to the restructuring of one of our international facilities and the consolidation of certain sales offices.

The activity related to the Company’s restructuring accrual is shown below:

   Three Months Ended
March 31, 2017
 

Balance at January 1

  $540 

Charged to expense

   522 

Payments and adjustment

   (347
  

 

 

 

Balance at March 31

  $715 
  

 

 

 

18)Commitments and Contingencies

On March 9, 2016, a putative class action lawsuit captionedDixon Chung v. Newport Corp., et al, Case No.A-16-733154-C, was filed in the District Court, Clark County, Nevada on behalf of a putative class of stockholders of Newport Corporation (“Newport”) for claims related to the February 22, 2016Merger Agreement and Plan of Merger (the “Merger Agreement”) between the Company, Newport, and PSI Equipment, Inc., a Nevada corporation and a wholly owned subsidiary of the Company, which was merged with Newport on April 29, 2016 and is the surviving corporation of such merger (“Merger Sub”).Sub. The complaint, namesfiled on March 9, 2016, named as defendants the Company, Newport and Merger Sub, and certain currentthen-current and former members of Newport’s former board of directors. The complaint alleges that the named directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, and by agreeing to unfair deal protection devices. The complaint also alleges that the Company, Newport, and Merger Sub aided and abetted the named directors’ alleged breaches of their fiduciary duties. The complaint seeks injunctive relief, including to enjoin or rescind the Merger Agreement, monetary damages, and an award of attorneys’ and other fees and costs, among other relief. On March 25, 2016, the plaintiff in the Chung action filed an amended complaint, which adds certain allegations, including that the definitivepreliminary proxy statement filed by Newport on March 29,15, 2016 (the “Proxy”) omitted material information. The amended complaint also names as defendants the Company, Newport, Merger Sub, and then-current members of Newport’s board of directors.

Also on March 25, 2016, a second putative class action complaint captionedHubert C. Pincon v. Newport Corp., et al., Case No.A-16-734039-B, was filed in the District Court, Clark County, Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Merger Agreement. The complaint names as defendants the Company, Newport, and Merger Sub and the

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

then-current members of Newport’s former board of directors. It alleges that the named directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices, and by omitting material information from the Proxy. The complaint also alleges that the Company, Newport, and Merger Sub aided and abetted the named directors’ alleged breaches of their fiduciary duties. The complaint seeks injunctive relief, including to enjoin or rescind the Merger Agreement, and an award of attorneys’ and other fees and costs, among other relief.

On April 14, 2016, the Court granted plaintiffs’ motion to consolidate the Pincon and Chung actions and appointed counsel in the Pincon action as lead counsel. Also on April 14, 2016, the Court granted plaintiffs’ motion for expedited discovery and scheduled a hearing on plaintiffs’ anticipated motion for a preliminary injunction for April 25, 2016. On April 20, 2016, plaintiffs filed a motion to vacate the hearing on their anticipated motion for a preliminary injunction and notified the Court that they did not presently intend to file a motion for a preliminary injunction regarding the Merger Agreement. On April 22, 2016, the Court vacated the hearing on plaintiffs’ anticipated motion for a preliminary injunction. In August, plaintiffs completed the expedited discovery that the Court ordered.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

On October 19, 2016, plaintiffs filed an amended complaint captionedIn re Newport Corporation Shareholder Litigation, Case No.A-16-733154-B, in the District Court, Clark County, Nevada, on behalf of a class of Newport’s stockholders for claims related to the Merger Agreement. The complaint names as defendants the Company, Newport, and the then-current members of Newport’s former board of directors. It alleges that the named directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices, and by omitting material information from the Proxy. The complaint also alleges that the Company and Newport aided and abetted the named directors’ alleged breaches of their fiduciary duties. The complaint seeks monetary damages, includingpre- and post-judgment interest. On December 9, 2016, both the Company and the Newport defendants filed motions to dismiss. Plaintiffs filed an opposition to the motions to dismiss on January 13, 2017. On February 3, 2017, the Company and the Newport defendants filed their reply briefs in support of their motions to dismiss. A hearing on the motions to dismiss was held on February 15, 2017.

The Company believes that the claims asserted in the complaintsamended complaint have no merit and the Company, Newport Merger Sub and the named directors intend to defend vigorously against these claims.

We are alsoThe Company is subject to various other legal proceedings and claims, which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial condition or cash flows.

 

18)19)Subsequent Events

Acquisition of Newport Corporation

OnIn April 29, 2016,2017, the Company completed the sale of its acquisition of Newport pursuantData Analytics Solutions business for approximately $80,000 and expects to the Merger Agreement (the “Newport Merger”). At the effective time of the Merger and pursuant to the terms and conditions of the Merger Agreement, each share of Newport’s common stock issued and outstanding as of immediately prior to the effective time of the Newport Merger was converted into the right to receive $23.00 in cash, without interest and subject to deduction for any required withholding tax.

The aggregate consideration paid by the Company to the former Newport stockholders was approximately $905,000, excluding related transaction fees and expenses and repaymentrecord apre-tax gain of approximately $93,000$75,000, during the second quarter of Newport’s U.S. indebtedness outstanding as2017. This business, which had net revenues in 2016 of immediately prior to$12,700 and was included in the effective time of the Newport Merger. The Company funded the payment of the aggregate consideration withVacuum & Analysis segment, was no longer a combinationpart of the Company’s available cash on hand and the proceeds fromlong-term strategic objectives.

The business did not qualify as a discontinued operation as this sale did not represent a strategic shift in the Company’s senior secured term loan facility described below.business, nor did the sale have a major effect on the Company’s operations, therefore, the results of operations for all periods are included in the Company’s income from operations.

The Company wasassets and liabilities of this business have not able to include certain required disclosuresbeen reclassified or segregated in its quarterly report on Form 10-Q for the three months ended March 31, 2016 because the information necessary to complete the preliminary purchase price allocation relatedconsolidated balance sheet or consolidated statements of cash flows due to the acquisition was not yet available.immaterial amounts.

In connection with the completion of the Newport Merger, the Company entered into a term loan credit agreement with Barclays Bank PLC as administrative agent and collateral agent, that provided senior secured financing of $780,000, subject to increase in accordance with the terms of the term loan credit agreement.

In connection with the completion of the Newport Merger, the Company also entered into an asset-based credit agreement with Deutsche Bank AG New York Branch as administrative agent and collateral agent, that provides senior secured financing of up to $50,000, subject to a borrowing base limitation, none of which has been drawn down by the Company to date.

Newport is a global supplier of advanced-technology products and systems to customers in the scientific research and defense/security, microelectronics, life and health sciences and industrial manufacturing markets.

Investment in Reno Sub-Systems, Inc.

On April 27, 2016, the Company invested $9,300 for a minority interest in Reno Sub-Systems, Inc., a Delaware corporation, which operates in the field of semiconductor process equipment instrumentation.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used herein, the words “believes,” “anticipates,” “plans,” “expects,” “estimates,” “would,” “will,” “intends” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect management’s current opinions and are subject to certain risks and uncertainties that could cause results to differ materially from those stated or implied. While we may elect to update forward looking statements in the future, we specifically disclaim any obligation to do so even if our estimates or expectations change. Risks and uncertainties include, but are not limited to those discussed in our Annual Report on Form10-K for the year ended December 31, 20152016 in the section entitled “Risk Factors” as referenced in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form10-Q.

Overview

We are a global provider of instruments, subsystems and process control solutions that measure, control, power, deliver, monitor and analyze critical parameters of advanced manufacturing processes to improve process performance and productivity. We also provide services relating to the maintenance and repair of our products, software maintenance, installation services and training.

Our products are derived from our core competencies in pressure measurementautomation and control, materials delivery, gas composition analysis, control and information technology,lasers, materials delivery, optics, photonics, pressure, power, and reactive gas generation and vacuum technology. Ourvacuum. We also provide services related to the maintenance and repair of our products, are used in diverse markets, applicationsinstallation services and processes. training.

Our primary served markets are manufacturers of capital equipment for semiconductor devices,manufacturing, electronic thin films, life and for other thin film applications including flat panel displays, solar cellshealth sciences, process and light emitting diodes (“LEDs”), data storage media and other advanced coatings. We also leverage our technology into other markets with advanced manufacturing applications including medical equipment, pharmaceutical manufacturing, energy generation and environmental monitoring.

We have a diverse base of customers that includes manufacturers of semiconductor capital equipment and semiconductor devices, thin film capital equipment used in the manufacture of flat panel displays, LEDs, solar cells, data storage media, analysis metrology and other coating applications; and other industrial medical, pharmaceutical manufacturing, energy generation, environmental monitoring and other advanced manufacturing companies,technologies, as well as university, governmentresearch and industrial research laboratories. For the three months ended March 31, 2016 and 2015, approximately 73% and 71% of our net revenues, respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers. We expect that sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers will continue to account for a substantial portion of our sales.

Our reportable segments are Advanced Manufacturing Capital Equipment, Global Service, Asia Region Sales and Other. We report corporate expenses and certain intercompany pricing transactions in a Corporate and Eliminations reconciling column.

The Advanced Manufacturing Capital Equipment segment includes the development, manufacture and sales of instruments and control products, power and reactive gas products and vacuum products, all of which are utilized in semiconductor processing and other similar advanced manufacturing processes. Sales in this segment include both external sales and intercompany product sales, which are recorded at transfer prices in accordance with applicable tax requirements.

The Global Service segment includes the worldwide servicing of instruments and control products, power and reactive gas products and vacuum products, all of which are utilized in semiconductor processing and other similar advanced manufacturing processes. It also includes sales of custom fabrication services.

The Asia Region Sales segment mainly resells products from the Advanced Manufacturing Capital Equipment and Other segments into Asia regions.

The Other segment includes operating segments that are not required to be reported separately as a reportable segment and includes sales for products that are re-sold from the Advanced Manufacturing Capital Equipment into Europe regions as well as sales from other operating segments.

Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers decreased by 11% for the three months ended March 31, 2016, compared to the same period in the prior year. However, net revenues have increased by 18% for the three months ended March 31, 2016, compared to the three months ended December 31, 2015 due to volume increases as we have seen a recent improvement in the semiconductor market. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry.

Our net revenues sold to customers in other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications, decreased by 22% for the three months ended March 31, 2016, compared to the same period in the prior year and decreased by 16% for the three months ended March 31, 2016, compared to the three months ended December 31, 2015. Revenues from customers in other advanced markets are made up of many different markets, including general industrial, solar, film, medical, analysis metrology and other markets. Some of these markets are project-based and our revenues can fluctuate quarter to quarter. The decrease for the three months ended March 31, 2016, compared to the same period in the prior year, was primarily attributed to decreases in the medical, thin film, coating & data storage and LED markets.

A significant portion of our net revenues is from sales to customers in international markets. For the three months ended March 31, 2016 and 2015, international net revenues accounted for approximately 49% and 44% of our net revenues, respectively. A significant portion of our international net revenues were in Korea and Japan. We expect that international net revenues will continue to represent a significant percentage of our total net revenues.

Recent Eventsdefense.

Acquisition of Newport Corporation

On April 29, 2016, we completed our acquisition of Newport Corporation (“Newport”) pursuant to thean Agreement and Plan of Merger Agreementdated as of February 22, 2016 (the “Newport Merger”). At the effective time of the Newport Merger, and pursuant to the terms and conditions of the Newport Merger Agreement, each share of Newport’s common stock issued and outstanding as of immediately prior to the effective time of the Newport Merger was converted into the right to receive $23.00 in cash, without interest and subject to deduction for any required withholding tax. We paid to the former Newport stockholders aggregate consideration of approximately $905 million, excluding related transaction fees and expenses, and repayment ofrepaid approximately $93 million of Newport’s U.S. indebtedness outstanding as of immediately prior to the effective time of the Newport Merger. We funded the payment of the aggregate consideration with a combination of our available cash on hand of approximately $240 million and the proceeds from the senior secured term loan facility described below.

In connection with the completion of the Newport Merger, we entered into a term loan credit agreement with Barclays Bank PLC as administrative agent and collateral agent, that provided senior secured financingTerm Loan Facility of $780 million subject to increase in accordance with the terms of the term loan credit agreement.

In connection with the completion of the Newport Merger, we also entered into an asset-based credit agreement with Deutsche Bank AG New York Branch as administrative agent and collateral agent, that provides senior secured financing of up to $50 million, subject to a borrowing base limitation, none of which has been drawn down to date.described below.

Newport is a global supplier of advanced-technology products and systems to customers in the scientific research and defense/security, microelectronics, life and health sciences and industrial manufacturing markets.

Effective April 29, 2016, in conjunction with our acquisition of Newport, we changed the structure of our reportable segments based upon our organizational structure and how our Chief Operating Decision Maker utilizes information provided to allocate resources and make decisions. Our two reportable segments are the Vacuum & Analysis segment and the Light & Motion segment. The Vacuum & Analysis segment represents the legacy MKS business and the Light & Motion segment represents the legacy Newport business.

The Vacuum & Analysis 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, residual gas analysis, leak detection, control and information technology, ozone generation and delivery, RF & DC power, reactive gas generation and vacuum technology. The Light & Motion segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in lasers, photonics,sub-micron positioning, vibration isolation and optics.

Approximately 60% and 73% of our net revenues for the three months ended March 31, 2017 and 2016, respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers. As a result of our acquisition of Newport, we estimate that sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers could account for approximately 50% to 60% of our total sales in future periods.

Approximately 40% and 27% of our net revenues for the three months ended March 31, 2017 and 2016, respectively, were from other advanced manufacturing applications. These include, but are not limited to, electronic thin film, life and health sciences, process and industrial technologies and research and defense.

Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers increased by $125.4 million, or 93%, for the three months ended March 31, 2017, compared to the same period in the prior year. This increase is attributed to net

semiconductor revenues from the Newport Merger of $41.3 million and net semiconductor revenues from the legacy MKS business (Vacuum & Analysis segment), which increased $84.1 million, or 62%, for the three months ended March 31, 2017, compared to the same period in the prior year. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry.

Our net revenues from customers in other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications, increased by $128.0 million, or 261%, for the three months ended March 31, 2017, compared to the same period in the prior year. This increase is attributed to net revenues from the Newport Merger of $117.8 million and net revenues from the legacy MKS business (Vacuum & Analysis segment) which increased by $10.2 million, or 21%, from customers in other advanced markets. Revenues from customers in other advanced markets are made up of many different markets including electronic thin film, life and health sciences, process and industrial technologies and research and defense.

A significant portion of our net revenues is from sales to customers in international markets. For the three months ended March 31, 2017 and 2016, international net revenues accounted for approximately 50% and 49% of our net revenues, respectively. A significant portion of our international net revenues were in Korea, Japan and Israel. We expect that international net revenues will continue to represent a significant percentage of our total net revenues.

Recent Events

Sale of Data Analytics Solutions business

In April 2017, we completed the sale of our Data Analytics Solutions business for approximately $80.0 million and expect to record apre-tax gain of approximately $75.0 million, during the second quarter of 2017. This business, which had net revenues in 2016 of $12.7 million and was included in the Vacuum & Analysis segment, was no longer a part of our long-term strategic objectives.

The business did not qualify as a discontinued operation as this sale did not represent a strategic shift in our business, nor did the sale have a major effect on our operations, therefore, the results of operations for all periods are included in our income from operations. The assets and liabilities of this business have not been reclassified or segregated in the consolidated balance sheet or consolidated statements of cash flows due to the immaterial amounts.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. There have been no material changes in our critical accounting policies since December 31, 2015.2016. For further information, please see the discussion of critical accounting policies in our Annual Report on Form10-K for the year ended December 31, 20152016 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”

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.

 

  Three Months Ended March 31,   Three Months Ended March 31, 
  2016 2015   2017 2016 

Net revenues:

      

Product

   83.6 87.0   89.9 83.6

Services

   16.4   13.0     10.1  16.4 
  

 

  

 

   

 

  

 

 

Total net revenues

   100.0   100.0     100.0  100.0 

Cost of revenues:

      

Cost of product revenues

   46.5   46.1     46.9  46.5 

Cost of service revenues

   11.1   8.5     6.1  11.1 
  

 

  

 

   

 

  

 

 

Total cost of revenues (exclusive of amortization shown separately below)

   57.6   54.6     53.0  57.6 
  

 

  

 

   

 

  

 

 

Gross profit

   42.4   45.4     47.0  42.4 

Research and development

   9.4   7.8     7.6  9.4 

Selling, general and administrative

   18.4   14.4     17.0  18.4 

Acquisition costs

   1.4    —    

Acquisition and integration costs

   0.3  1.4 

Restructuring

   —     0.4     0.1   —   

Amortization of intangible assets

   0.9   0.8     2.9  0.9 
  

 

  

 

   

 

  

 

 

Income from operations

   12.3   22.0     19.1  12.3 

Interest income, net

   0.7   0.2  

Interest and other (expense) income, net

   (1.4 0.7 
  

 

  

 

   

 

  

 

 

Income from operations before income taxes

   13.0   22.2     17.7  13.0 

Provision for income taxes

   3.4   6.4     2.8  3.4 
  

 

  

 

   

 

  

 

 

Net income

   9.6 15.8   14.9 9.6
  

 

  

 

   

 

  

 

 

Net Revenues

 

  Three Months Ended March 31,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change   2017   2016 

Product

  $153.6    $186.1     (17.5)%   $392.9   $153.6 

Service

   30.1     27.7     8.4     44.2    30.1 
  

 

   

 

   

 

   

 

   

 

 

Total net revenues

  $183.7    $213.8     (14.1)%   $437.1   $183.7 
  

 

   

 

   

 

   

 

   

 

 

Product revenues decreased $32.5increased $239.3 million during the three months ended March 31, 2016,2017, compared to the same period in the prior year. The decreaseThis increase was primarily attributed to netthe Newport Merger, as revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers, which decreased by $19.3associated with Newport products were $146.4 million primarily due to volume, duringfor the three months ended March 31, 2016,2017. Product revenues increased for our legacy MKS business (Vacuum & Analysis segment) by $92.9 million for the three months ended March 31, 2017, compared to the same period in the prior year. The remainderyear, primarily due to an increase in product revenues from our semiconductor capital equipment and semiconductor device manufacture customers of the decrease was$83.1 million, primarily attributeddue to volume and an increase in product revenue decreases inrevenues from our other advanced markets including medical,electronic thin film coating & data storage and LED markets for the three months ended March 31, 2016, compared to the same period in the prior year.market of $6.0 million.

Service revenues consisted mainly of fees for services related to the maintenance and repair of our products, and software services, installation and training. Service revenues increased $2.4$14.1 million during the three months ended March 31, 2016,2017, compared to the same period in the prior year. TheThis increase was primarily attributed to the Newport Merger, as revenues associated with Newport services were $12.7 million for the three months ended March 31, 2016,2017. Service revenues increased for our legacy MKS business (Vacuum & Analysis segment) by $1.4 million for the three months ended March 31, 2017, compared to the same period in the prior year, was primarily attributeddue to increases in service revenues from our semiconductor market.capital equipment and semiconductor device manufacture customers of $1.0 million.

Total international net revenues, including product and services,service, was $219.1 million for the three months ended March 31, 2017, or 50.1% of net revenues, compared to $89.5 million for the three months ended March 31, 2016, or 48.7% of net revenues, compared to $93.7 million for the three months ended March 31, 2015 or 43.8% of net revenues. The decreaseincrease in international revenues of $4.2$129.6 million forprimarily relates to $79.3 million from the three months ended March 31, 2016, comparedNewport Merger. The remainder of the increase of $50.3 million is attributed to the same periodour legacy MKS business (Vacuum & Analysis) segment, primarily due to increases in the prior year, related mainly to a decrease in net revenuesrevenue of $24.3 million in Korea, where we sell$6.4 million in Israel, $5.4 million in Shanghai, and $4.8 million in Singapore. The majority of our foreign revenues are from sales to customers in Asia, primarily into the semiconductor market.in Korea, Japan and Israel.

The following is our net revenues by reportable segment:

 

   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change 

Net revenues:

      

Advanced Manufacturing Capital Equipment

  $153.6    $179.2     (14.3)% 

Global Service

   30.1     27.7     8.4  

Asia Region Sales

   43.8     55.4     (20.8

Other

   16.3     21.2     (23.0

Corporate and Eliminations

   (60.1   (69.7   13.8  
  

 

 

   

 

 

   

 

 

 

Total net revenues

  $183.7    $213.8     (14.1)% 
  

 

 

   

 

 

   

 

 

 
   Three Months Ended March 31, 
(dollars in millions)  2017   2016 

Net revenues:

    

Vacuum & Analysis

  $278.0   $183.7 

Light & Motion

   159.1    —   
  

 

 

   

 

 

 

Total net revenues

  $437.1   $183.7 
  

 

 

   

 

 

 

Net revenues decreased infor our Asia Region Sales and Advanced Manufacturing Capital Equipment segments by 20.8% and 14.3%Vacuum & Analysis segment increased $94.3 million for the three months ended March 31, 2016, respectively,2017, compared to the same period in the prior year. These decreases wereyear, primarily attributeddue to decreasesan increase in net revenues from our semiconductor capital equipment manufacture and semiconductor device manufacture customers which decreased by 10.9%of $84.1 million and an increase in net revenues from customers in our electronic thin film markets of $6.1 million.

Net revenues from our Light & Motion segment was $159.1 million for the three months ended March 31, 2016, compared to2017. This segment represents the same period inlegacy Newport business, which was acquired during the prior year. The Asia Region Sales segment was also impacted by negative changes in foreign exchange rates.second quarter of 2016.

NetGross Profit

   Three Months Ended March 31, 
   2017  2016  % Points
Change
 

Gross profit as a percentage of net revenues:

    

Product

   47.8  44.4  3.4

Service

   40.0   32.1   7.9 
  

 

 

  

 

 

  

 

 

 

Total gross profit

   47.0  42.4  4.6
  

 

 

  

 

 

  

 

 

 

Gross profit as a percentage of net product revenues in our Global Service segment increased by 8.4%3.4 percentage points for the three months ended March 31, 2016,2017, compared to the same period in the prior year. The increase was primarily attributed to an increase in service revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers,8.1 percentage points related to favorable revenue volumes, partially offset by a decrease inof 2.2 percentage points due to unfavorable mix, 1.9 percentage points due to higher labor and overhead charges, resulting from the Newport Merger and 0.4 percentage points due to higher excess and obsolete inventory charges.

Gross profit as a percentage of net service revenues from other advanced markets.

Net revenues in our Other segment decreasedincreased by 23%7.9 percentage points for the three months ended March 31, 2016,2017, compared to the same period in the prior year. This segment, which has operations mainly in Europe, is not impacted as much by the semiconductor capital equipment market. The decrease for the three months ended March 31, 2016increase was primarily attributed to decreases in our other advanced markets as well as the negative impact of changes in foreign exchange rates.

Gross Profit

   Three Months Ended March 31, 
   2016  2015  % Points
Change
 

Gross profit as a percentage of net revenues:

    

Product

   44.4  47.0  (2.6)% 

Service

   32.1    34.7    (2.6
  

 

 

  

 

 

  

 

 

 

Total gross profit

   42.4  45.4  (3.0)% 
  

 

 

  

 

 

  

 

 

 

Gross profit as a percentage of net product revenues decreased by 2.6 percentage points for the three months ended March 31, 2016, compared to the same period in the prior year. The decrease was primarily attributed to a decrease of 2.55.6 percentage points due to lower revenue volumes.

Gross profit as a percentage of net service revenues decreased by 2.6 percentage points for the three months ended March 31, 2016, comparedfavorable material costs, primarily from an adjustment to the same periodmaterial costs that we do not expect to reoccur in the prior year. The decrease was primarily attributed to a decrease of 5.5future, and 3.1 percentage points due to unfavorablefavorable product mix, partially offset by an increase of 3.8 percentage points due to lower overhead costs.mix. Cost of service revenues, including salaries and related expenses and other fixed costs, consists primarily of providing services for repair software services and training.

The following is gross profit as a percentage of net revenues by reportable segment:

 

   Three Months Ended March 31, 
   2016  2015  % Points
Change
 

Gross profit:

    

Advanced Manufacturing Capital Equipment

   44.0  43.9  0.1

Global Service

   32.1    34.7    (2.6

Asia Region Sales

   5.5    12.5    (7.0

Other

   26.8    32.3    (5.5

Corporate and Eliminations

   10.2    7.2    3.0  
  

 

 

  

 

 

  

 

 

 

Total gross profit

   42.4  45.4  (3.0)% 
  

 

 

  

 

 

  

 

 

 

   Three Months Ended March 31, 
   2017  2016  % Points
Change
 

Gross profit:

    

Vacuum & Analysis

   46.4  42.4  4.0

Light & Motion

   48.1   —     100.0 
  

 

 

  

 

 

  

 

 

 

Total gross profit

   47.0  42.4  4.6
  

 

 

  

 

 

  

 

 

 

Gross profit for the Advanced Manufacturing Capital Equipmentour Vacuum & Analysis segment remained flat for the three months ended March 31, 2016, compared to the same period in the prior year. The negative impact of lower revenue volumes was offsetincreased by favorable product mix.

Gross profit for the Asia Region Sales segment decreased by 7.04.0 percentage points for the three months ended March 31, 2016,2017, compared to the same period in the prior year. This decrease wasyear, primarily attributed to transfer pricing,as a result of higher revenue volumes, favorable labor and overhead charges, partially offset by unfavorable product mix and unfavorable changes in foreign exchange rates.mix.

Gross profit for the Otherour Light & Motion segment decreased by 5.5 percentage pointswas 48.1% for the three months ended March 31, 2016, compared to the same period2017. The Light & Motion segment was established in the prior year. This decrease was primarily attributed to unfavorable product mix.second quarter of 2016 as a result of the Newport Merger.

Research and Development

 

  Three Months Ended March 31,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change 
(dollars in millions  2017   2016 

Research and development expenses

  $17.2    $16.7     3.3  $33.3   $17.2 

Research and development expenses increased $0.5$16.1 million for the three months ended March 31, 2016,2017, compared to the same period in the prior year. The increase was primarily attributed to an$13.9 million from the Newport Merger, and consisted primarily of $10.2 million of compensation costs and related benefits, $1.6 million of project materials and $0.9 million of occupancy costs. The remaining increase of $0.7$2.2 million in compensation-related expenses.related to the legacy MKS business (Vacuum & Analysis segment) consisted primarily of $0.9 million for project materials and $0.6 million for variable compensation related costs.

Our research and development efforts are primarily focused on developing and improving our instruments, components, subsystems and process control 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 projects to enhance the performance characteristics of older products, to develop new products and to integrate various technologies into subsystems. These projects support in large part the transition in the semiconductor industry to smaller integrated circuit geometries and in the flat panel display and solar markets to larger substrate sizes, which require more advanced process control technology. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, fees paid to consultants, material costs for prototypes and other expenses related to the design, development, testing and enhancement of our products.

We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets, and we expect to continue to make significant investment in research and development activities. We are subject to risks if products are not developed in a timely manner, due to 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 other 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. 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

 

  Three Months Ended March 31,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change   2017   2016 

Selling, general and administrative expenses

  $34.0    $30.9     10.0  $74.2   $34.0 

Selling, general and administrative expenses increased by $3.1$40.2 million forin the three months ended March 31, 2016,2017, compared to the same period in the prior year. The increase was primarily attributed to a $1.5$33.4 million from the Newport Merger, and consisted primarily of $20.0 million of compensation costs and related benefits, $2.2 million for depreciation expense, $2.1 million for commissions and $2.0 million for consulting and professional fees. The remaining increase in compensation-related expenses, includingof $6.8 million related to the timinglegacy MKS business (Vacuum & Analysis segment) consisted primarily of stock$4.4 million for compensation expense as well as the seasonal increase in certaincosts and related benefits, primarily variable compensation, costs. In addition, in 2016, we re-classified the impact of foreign exchange from selling, general and administrative expenses to interest$1.0 million for consulting and other income, net, which resulted in a $0.9 million decrease in the selling, general and administrative expenses line item.professional fees.

Acquisition and Integration Costs

 

  Three Months Ended March 31,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change   2017   2016 

Acquisition costs

  $2.5    $—       8201.2

Acquisition and integration costs

  $1.4   $2.5 

We incurred $1.4 million and $2.5 million of acquisition and integration costs infor the three months ended March 31, 2017 and 2016, which was comprised primarily of legal and professional feesrespectively, related to the Newport Merger which closed on April 29, 2016. We incurred $30 thousand of acquisitionMerger. These costs in the three months ended March 31, 2015, which was comprisedwere primarily of legal fees related to our acquisition of Precisive, LLC (“Precisive”) that was completed on March 17, 2015.legal and other professional fees.

Restructuring

 

  Three Months Ended March 31,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change   2017   2016 

Restructuring

  $—      $0.8     (100.0)%   $0.5   $—   

Restructuring expense for the three months ended March 31, 2015, included2017, relates to the restructuring charges primarily related to severance costs associated with a reduction in workforce of approximately 120 people, primarily at one of our foreign manufacturing sites, as we outsourced a non-core manufacturing process.international facilities and the consolidation of certain sales offices.

Amortization of Intangible Assets

 

  Three Months Ended March 31   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change   2017   2016 

Amortization of intangible assets

  $1.7    $1.7     0.7  $12.5   $1.7 

Amortization expense remained flat forincreased by $10.8 million during the three months ended March 31, 2016,2017, compared to the same period in the prior year. This increase was primarily attributed to the amortization of intangible assets acquired in the Newport Merger.

Interest and Other(Expense) Income, Net

 

  Three Months Ended March 31,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change   2017   2016 

Interest and other income, net

  $1.2    $0.5     147.4

Interest (expense) income, net

  $(8.3  $0.9 

Interest and other income,expense, net, increased by $0.7$9.2 million forduring the three months ended March 31, 2016,2017, compared to the same period in the prior year. TheThis increase is primarily attributed to a change in the mix$8.8 million of interest expense related to our investment portfolio, as well as a larger average investment balance. In addition, there was aTerm Loan Facility.

Other income

   Three Months Ended March 31, 
(dollars in millions)  2017   2016 

Other income

  $2.0   $0.4 

Other income increased by $1.6 million and relates primarily to favorable foreign exchange gain of $0.4 million in the three months ended March 31, 2016.exchange.

Provision for Income Taxes

 

  Three Months Ended March 31,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change   2017   2016 

Provision for income taxes

  $6.2    $13.7     (54.5)%   $12.2   $6.2 

Our effective tax rate for the three months ended March 31, 2017 and 2016 was 15.8% and 2015 was 26.2% and 28.9%, respectively. The effective tax rate for the three months ended March 31, 20162017, was lower than the U.S. statutory tax rate primarilymainly due to the geographic mix of income and profits earned by the Company’sour international subsidiaries being taxed at rates lower than the U.S. statutory tax rate, the impact of the deduction for domestic production activities and the federal research credit offset by state income taxes. Thestock compensation benefit related to the adoption of a new accounting standard that became applicable during the quarter ended March 31, 2017. Our effective tax rate for the three months ended March 31, 20152016 was lower than the U.S. statutory tax rate due to the impact of lower tax rates on profits earned by our international subsidiaries and the impact of the deduction for domestic production activities.

Our future effective tax rate depends on various factors, including the impact of tax legislation, the geographic composition of ourpre-tax income, and changes in tax reserves for unrecognized tax benefits. We monitor these factors and timely adjust our estimates of the effective tax rate accordingly. We expect that the geographic mix ofpre-tax income will continue to have a favorable impact on our effective tax rate however the geographic mix ofpre-tax income can change based on multiple factors resulting in changes to the effective tax rate in future periods. We also expect that the impact of the windfall stock compensation tax benefit on the tax rate will vary significantly from quarter to quarter due to the timing of vesting and exercise of stock grants and the impact of changes in our stock price.

Additionally, theOur effective tax rate could be adversely affected by changes in the valuation of deferred tax assets and liabilities. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate sufficient future taxable income in the United States.

While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax law and regulations. We and our subsidiaries are subject to examination by U.S. federal, state and foreign tax authorities. The United States Internal Revenue Service commenced an examination of our U.S. federal tax filings for open tax years 2011 through 2013 during the three months ended March 31, 2015. This audit was effectively settled during the three months ended December 31, 2015 upon our acceptance of the income tax examination changes. Additionally, the recognition and measurement of certain tax benefits include estimates and judgment by management. Accordingly, we could record additional provisions or benefits for U.S. federal, state, and foreign taxes matters in future periods as new information becomes available.

Liquidity and Capital Resources

Cash and cash equivalents and short-term marketable investments totaled $666.6$411.2 million at March 31, 2016,2017, compared to $658.2$418.1 million at December 31, 2015.2016.

Net cash provided by operating activities was $66.1 million for the three months ended March 31, 2017, and resulted from net income of $65.1 million, which includednon-cash charges of $36.9 million, offset by a net increase in working capital of $35.9 million. The net increase in working capital was primarily due to a decrease in accrued compensation of $16.8 million, asyear-end bonuses were paid, an increase in trade accounts receivable of $15.2 million and an increase in inventories of $11.7 million, related to an increase in business activities and an increase in other current assets of $1.5 million. These increases in working capital were partially offset by an increase in income taxes of $8.1 million and an increase in other current andnon-current liabilities of $1.1 million.

Net cash provided by operating activities was $23.2 million for the three months ended March 31, 2016, and resulted from net income of $17.6 million, which includednon-cash charges of $12.6 million, offset by a net increase in working capital of $7.0 million. The net increase in working capital was primarily due to an increase in trade accounts receivable of $10.1 million, related to an increase in business activities, a decrease in accrued compensation of $7.1 million and an increase in other current assets of $3.6 million. These increases in working capital were partially offset by an increase in accrued liabilities of $7.7 million, an increase in accounts payable of $4.8 million and an increase in income taxes of $2.3 million.

Net cash provided by operatinginvesting activities was $19.6$30.5 million for the three months ended March 31, 20152017, and resulted from $34.6 million of net incomesale and maturities of $33.8 million, which included non-cash charges of $11.4 million,short-term investments, partially offset by increases$4.1 million in working capitalpurchases of $25.6 million. The net increase in working capital was primarily due to an increase in trade accounts receivable of $19.0 million, an increase in inventories of $12.8 million, an increase in other current assets of $5.0 million and a decrease in accrued compensation of $4.9 million. These increases in working capital were offset by a decrease in other assets of $7.8 million, an increase in accounts payable of $3.6 million, an increase in other current and non-current liabilities of $2.7 million and an increase in net income taxes of $2.0 million.

production-related equipment. Net cash provided by investing activities was $120.9 million for the three months ended March 31, 2016 and resulted primarily from $123.1 million of net sale and maturities of short-term investments which was used to partially finance the Newport Merger,acquisition, partially offset by $2.2 million in purchases of production-related equipment.

Net cash used in investingfinancing activities of $121.1was $64.7 million for the three months ended March 31, 20152017, and resulted primarily from $108.7$51.6 million used for the partial repayment of the Term Loan Facility used to finance the Newport Merger ($50 million waspre-paid and $1.6 million was a regularly scheduled payment of principal), $9.4 million of dividend payments made to common stockholders and $2.9 million of net purchases of short-term and long-term investments, $9.9 million of net cash primarily usedpayments related to tax payments for the acquisition of Precisive and $2.5 million in purchases of production related equipment.

employee stock awards. Net cash used in financing activities was $13.0 million for the three months ended March 31, 2016, and resulted primarily from $9.1 million of dividend payments made to common stockholders, $2.6 million of net payments related to tax payments for employee stock awards and $1.5 million used in the repurchase of our common stock. Net cash used in financing activities was $10.4 million for the three months ended March 31, 2015 and resulted primarily from $8.8 million of dividend payments made to common stockholders and $2.1 million of net payments related to tax payments for employee stock awards.

Our Japanese subsidiary has lines of credit and short-term borrowing arrangements with two financial institutions, which arrangements generally expire and are renewed at three month intervals. The lines of credit provided for aggregate borrowings as of March 31, 2016 of up to an equivalent of $20.5 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 March 31, 2016 and December 31, 2015.

On July 25, 2011, our Board of Directors approved 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 the three months ended March 31, 2017, there were no repurchases of our common stock. During the three months ended March 31, 2016, we repurchased approximately 45,000 shares of our common stock for $1.5 million, or an average price of $34.50 per share.

During the three months ended March 31, 2015, we did not repurchase any shares2017, our Board of common stock.

Directors declared a cash dividend of $0.175 per share that totaled $9.4 million. During the three months ended March 31, 2016, our Board of Directors declared a cash dividend of $0.17 per share that totaled $9.1 million. During the three months ended March 31, 2015, our Board of Directors declared a quarterly cash dividend of $0.165 that totaled $8.8 million.

On May 2, 2016, our Board of Directors declared a quarterly cash dividend of $0.17 per share to be paid on June 10, 2016 to shareholders of record as of May 30, 2016. 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. In addition, under the terms of our senior secured term loan facilityTerm Loan Facility and our senior secured asset-based revolving credit facility, we may be restricted from paying dividends under certain circumstances.

Our total cash and cash equivalents and short-term marketable investments at March 31, 20162017, consisted of $335.6$152.0 million held in the United States and $331.0$259.2 million held by our foreign subsidiaries, substantially all of which would be subject to tax in the United States if returned to the United States. We believe our existing United States cash and short-term investment balances are adequate to meet domestic operating needs, including estimated working capital, planned capital expenditure requirements, payment of debt and any future cash dividends, if declared, during the next twelve months and the foreseeable future.

On April 27, 2016, we invested $9.3 million for a minority interest in Reno Sub-Systems, Inc.,a private company, which operates in the field of semiconductor process equipment instrumentation. We accounted for this investment using the cost method of accounting. During the fourth quarter of 2016, we recognized an impairment loss on this investment of $5.0 million.

AcquisitionSale of Newport CorporationData Analytics Solutions business

OnIn April 29, 2016,2017, we completed the Newport Merger. At the effective timesale of the Newport Mergerour Data Analytics Solutions business for approximately $80.0 million and pursuantexpect to the terms and conditions of the Newport Merger Agreement, each share of Newport’s common stock issued and outstanding as of immediately prior to the effective time of the Newport Merger was converted into the right to receive $23.00 in cash, without interest and subject to deduction for any required withholding tax. We paid to the former Newport stockholders aggregate considerationrecord apre-tax gain of approximately $905$75.0 million, excluding related transaction feesduring the second quarter of 2017. This business, which had net revenues in 2016 of $12.7 million and expenses and repayment of approximately $93 million of Newport’s U.S. indebtedness outstanding as of immediately prior towas included in the effective time of the Newport Merger. We funded the payment of the aggregate consideration withVacuum & Analysis segment, was no longer a combinationpart of our available cash on hand and the proceeds from the senior secured term loan facility described below.long-term strategic objectives.

Senior Secured Term Loan FacilityCredit Agreement

In connection with the completion of the Newport Merger, we entered into a term loan credit agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto (the “Lenders”), that provided senior secured financing of $780$780.0 million, subject to increase at our option in accordance with the Credit Agreement (the “Term Loan Facility”). Borrowings under the Term Loan Facility bear interest per annum at one of the following rates selected by us: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“prime rate” quoted in The Wall Street Journal, (3) a 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%, plus, in each case, an applicable margin of(that was initially 3.00% and was decreased as described below); 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 0.75%, plus an applicable margin of(that was initially 4.00% and was decreased as described below). We have elected the interest rate as described in clause (b). The Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.

In June 2016, we entered into Amendment No. 1 (the“Re-pricing Amendment 1”) to the Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. TheRe-pricing Amendment 1 decreased the applicable margin for borrowings under our Term Loan Facility to 2.50% for base rate borrowings and 3.50% for LIBOR borrowings and extended the period during which a pre-payment premium may be required for a“Re-pricing Transaction” (as defined in the Credit Agreement) until six months after the effective date of theRe-pricing Amendment 1. In connection with the execution of theRe-pricing Amendment 1, we paid a pre-payment premium of 1.00%, or $7.3 million, as well as certain fees and expenses of the facility.administrative agent and the Lenders, in accordance with the terms of the Credit Agreement. Immediately prior to the effectiveness of theRe-pricing Amendment 1, we prepaid $50.0��million of principal under the Credit Agreement. In September 2016, we prepaid an additional $60.0 million under the Credit Agreement.

In September 2016, we entered into an interest rate swap agreement, which has a maturity date of September 30, 2020, to fix the rate on $335.0 million of the outstanding balance of the Credit Agreement. The rate is fixed at 1.198% per annum plus the credit spread of 3.50%.

In December 2016, we entered into Amendment No. 2 (the “Re-pricing Amendment 2”) to the Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Re-pricing Amendment 2 decreased the applicable margin for the Company’s term loan under the Credit Agreement to 2.75% for LIBOR borrowings and 1.75% for base rate borrowings and reset the period during which a pre-payment premium may be required for a “Re-pricing Transaction” (as defined in the Credit Agreement) until six months after the effective date of the Re-pricing Amendment. In November 2016, prior to the effectiveness of the Re-pricing Amendment 2, we prepaid an additional $40.0 million of principal under the Credit Agreement. In March 2017, the Company prepaid $50.0 million of principal under the Credit Agreement. After pre-payments of $200.0 million and regularly scheduled principal payments of $5.0 million, the total outstanding principal balance was $575.0 million as of March 31, 2017.

We incurred $28.7 million of deferred finance fees, original issue discount and a re-pricing fee related to the term loans under the Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and will be amortized to interest expense over the estimated life of the term loans using the effective interest method. A portion of these fees have been written-off in connection with the various debt pre-payments during 2016. The remaining balance of the deferred finance fees, original issue discount and re-pricing fee related to the Term Loan Facility was $17.0 million as of March 31, 2017.

Under the 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 asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt.debt. We are also required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the term loans madeoutstanding on December 14, 2016 (the date of the closingRe-Pricing Amendment 2) less the amount of certain voluntary and mandatory repayments after such date, with the balance due on the seventh anniversary of the closing date.

All obligations under the Term Loan Facility are guaranteed by certain of our domestic subsidiaries, and are secured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.

The 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 lendersLenders 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 March 31, 2017, we were in compliance with all covenants under the Credit Agreement.

Senior Secured Asset-Based Revolving Credit Facility

In connection with the completion of the Newport Merger, we also entered into an asset-based credit agreement (the “ABL Agreement”) with Deutsche Bank AG New York Branch, 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 Facility”), that provides senior secured financing of up to $50.0 million, subject to a borrowing base limitation (the “ABL Facility”).limitation. The borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of certain eligible accounts; plus (b) subject to certain notice and field examination and appraisal requirements, the lesser of (i) the lesser of (A) 65% of the lower of cost or market value of certain eligible inventory and (B) 85% of the net orderly liquidation value of certain eligible inventory and (ii) 30% of the borrowing base; minus (c) reserves established by the administrative agent; provided that until the administrative agent’s receipt of a field examination of accounts receivable the borrowing base shall be equal to 70% of the book value of certain eligible accounts. The ABL Facility includes borrowing capacity in the form of letters of credit up to $15$15.0 million. We have not drawn against the ABL Facility.

Borrowings under the ABL Facility 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 theThe Wall Street Journal,, and (3) a 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%, plus, in each case, an initial applicable margin of 0.75% subject to upward or downward adjustment each fiscal quarter;; and (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, plus an initial applicable margin of 1.75%. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.

We have incurred $1.2 million of costs in connection with the ABL Facility, which were capitalized and included in other assets in the accompanying consolidated balance sheets and will be amortized to interest expense using the straight-line method over the contractual term of five years of the ABL Facility.

UnderIn addition to paying interest on outstanding principal under the ABL Facility, we are required to pay a commitment fee in respect of the unutilized commitments whichthereunder. The initial commitment fee is initially 0.375% per annum,annum. The total commitment fee recognized in interest expense in 2016 was $0.1 million. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the commitment fee is subject to downward adjustment.adjustment based on the amount of average unutilized commitments for the three month period immediately preceding such adjustment date. We must also pay customary letter of credit fees and agency fees.

Lines of Credit and Short-Term Borrowing Arrangements

One of our Japanese subsidiaries has lines of credit and short-term borrowing arrangements with two financial institutions which arrangements generally expire and are also requiredrenewed at three month intervals. The lines of credit provided for aggregate borrowings as of March 31, 2017, of up to prepayan equivalent of $20.5 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 March 31, 2017 and December 31, 2016.

We assumed various revolving lines of credit and a financing facility with the completion of the Newport Merger. These revolving lines of credit and financing facility have no expiration date and provided for aggregate borrowings as of March 31, 2017, of up to an equivalent of $11.2 million U.S. dollars. These lines of credit have a base interest rate of 1.25% plus a Japanese Yen overnight LIBOR rate.

One of our Austrian subsidiaries has four outstanding loans and/or cash collateralize letters of credit underfrom the Austrian government to fund research and development. These loans are unsecured and do not require principal repayment as long as certain circumstances as described in the ABL Facility,conditions are met. Interest on these loans is payable semi-annually. The interest rates associated with no reduction of the commitment amount.these loans range from 0.75% - 2.00%.

All obligations under the ABL Facility are guaranteed by certain of our domestic subsidiaries, and are secured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.

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. The ABL Credit Agreement also contains negative covenants applicable to us and our subsidiaries, including under certain circumstances based on our excess availability, financial covenants requiring us to maintain a fixed charge coverage ratio of at least 1.0 to 1.0.

Off-Balance Sheet Arrangements

We do not have any financial partnerships with unconsolidated entities, such as entities often referred to as structured finance, special purpose entities or variable interest entities, which are often established for the purpose of facilitatingoff-balance sheet arrangements or for other contractually narrow or limited purposes. Accordingly, we have nooff-balance sheet arrangements that have or are reasonably expected to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Recently Issued Accounting Pronouncements

In March 2016,2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2017-07, “Compensation-Retirement Benefits (Topic 715)-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This standard requires that an employer disaggregate the service cost component from the other components of net benefit cost. This standard also provides explicit guidance on how to present the service cost component and the other components of the net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The provisions of this ASU are effective for annual periods beginning after December 31, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. We do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

In January 2017, the (“FASB”) issued ASU2017-04, “Intangibles-Goodwill and Other (Topic 350).” This standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of goodwill. The provisions of this ASU are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We expect to adopt this new standard in 2017 when we perform our annual goodwill impairment test in the fourth quarter. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2016-09 “Compensation—Stock Compensation2017-01, “Business Combinations (Topic 718)—Improvements to Employee Share-Based Payment Accounting.805)-Clarifying the Definition of a Business.” This standard simplifies several aspectsclarifies the definition of a business with the accountingobjective of adding guidance to assist entities with evaluating whether transactions should be accounted for share-based paymentas acquisitions (or disposals) of assets or businesses. This standard also provides a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions includingis inefficient and costly and that the income tax consequences, classificationdefinition does not permit the use of awards as either equity or liabilities, and classification on the statement of cash flows.reasonable judgment. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is applicable under certain circumstances. We do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU2016-18, “Statement of Cash Flows (Topic 230)-Restricted Cash,” an amendment to ASU2016-15. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. Early adoption is permitted. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years and should be applied at the time of adoption of ASU2016-15. We do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU2016-16, “Income Taxes (Topic 740)-Intra-Entity Transfer of Assets Other Than Inventory.” This standard requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs as opposed to when the assets have been sold to an outside party. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. We are currently evaluating the requirements of this ASU and have not yet determined its impact on our consolidated financial statements.

In August 2016, the FASB issued ASU2016-15, “Statement of Cash Flows (Topic 230)-Classification of Certain Cash Receipts and Cash Payments.” This standard addresses eight specific cash flow issues with the objective of addressing the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the requirements of this ASU and have not yet determined its impact on our consolidated financial statements.

In February 2016, the FASB issued ASU2016-02, “Leases (Topic 842).” This standard requires the recognition of lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the requirements of this ASU and have not yet determined its impact on our consolidated financial statements.

In September 2015,January 2016, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)—Simplifying the Accounting for Measurement-Period Adjustments.2016-01, “Financial Instruments—Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This standard requiresASU provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The new pronouncement revises accounting related to equity investments and the presentation of certain fair value changes for financial assets and liabilities measured at fair value. Among other things, it amends the presentation and disclosure requirements of equity securities that an acquirer recognize adjustments to provisional amounts thatdo not result in consolidation and are identified duringnot accounted for under the measurement periodequity method. Changes in the reporting period in which the adjustments are identified, including the cumulative effectfair value of the change in the provisional amount as if the accounting had been completed at the acquisition date. This ASU is effective for annual periods beginning after December 15, 2015, including interim periods within those fiscal years. The Company adopted this ASU in the first quarter of 2016. Adoption of this ASU could have a material impact on our consolidated financial position and results of operations when accounting for future acquisitions.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330)—Simplifying the Measurement of Inventory.” The amendments in this ASU apply to all inventory that is measured using first-in, first-out or average cost. This standard requires that an entity measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Adoption of this ASU is not expected to have a material impact on our consolidated statements of financial position and results of operations.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” Under this guidance, managementthese equity securities will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosuresrecognized directly in certain circumstances. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for annual and interim periods thereafter. This ASU is not expected to have an impact on our consolidated financial statements.

In May 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes all existing revenue recognition requirements, including most industry-specific guidance. This standard requires a company to recognize revenue when it transfers goods and services to customers in an amount that reflects the consideration that the company expects to be entitled to in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and assets recognized from costs incurred to obtain or fulfill a contract.net income. This pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period.those fiscal years. We do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU2014-09, Revenue from Contracts with Customers (Topic 606). ASU2014-09 provides for a single comprehensive model to use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in Generally Accepted Accounting Principles when it becomes effective. ASU2014-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We do not plan to early adopt the standard, but have not yet selectedpreliminarily concluded that we will use the modified retrospective method upon adoption in the first quarter of 2018.

In March, April, May and December 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a transition method.gross versus net basis, identifying performance obligations and licensing arrangements, narrow-scope improvements and practical expedients, and technical corrections and improvements, respectively. We are currently evaluatinghave reviewed our plan for the implementation and will continue to report the status against that plan with our Audit Committee. We have established a cross functional project steering committee and implementation team to identify potential differences that would result from applying the requirements of this ASUthe new standard to the our revenue contracts and related expense line items. We have identified the various revenue streams, including product revenues, service revenues, installation and training, that could be impacted by Topic 606 and has started to review individual customer contracts related to these revenue streams to determine if any material differences exist between the current revenue standard, Accounting Standards Codification Topic 605 and Topic 606. In the second quarter of 2017, we will be reviewing the additional disclosure requirements of the new standard and the potential impact on its internal control structure and revenue recognition policy. We have not completed our assessment of the new revenue recognition standard and have not yet determined itsthe impact on our consolidated financial statements. We anticipate that we will complete our assessment of the new standard and its potential financial impact by the end of the third quarter of 2017.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information concerning market risk is contained in the section entitled “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report on Form10-K for the year ended December 31, 20152016 filed with the Securities and Exchange Commission on February 26, 2016.March 1, 2017. As of March 31, 2016,2017, there were no material changes in our exposure to market risk from December 31, 2015.2016.

ITEM 4. CONTROLS AND PROCEDURES.

ITEM 4.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 March 31, 2016.2017. The term “disclosure controls and procedures,” as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2016,2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended March 31, 20162017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 1.LEGAL PROCEEDINGS.

On March 9, 2016, a putative class action lawsuit captioned Dixon Chung v. Newport Corp., et al, Case No.A-16-733154-C, was filed in the District Court, Clark County, Nevada on behalf of a putative class of the Company’s stockholders of Newport Corporation (“Newport”) for claims related to the February 22, 2016 Agreement and Plan of Merger (the “Merger Agreement”) between the Company, Newport Corporation (“Newport”), and PSI Equipment, Inc., a Nevada corporation and a wholly owned subsidiary of the Company, which was merged with Newport on April 29, 2016 and is the surviving corporation of such merger (“Merger Sub”). The complaint names as defendants the Company, Newport, Merger Sub, and certain currentthen-current and former members of Newport’s former board of directors. The complaint alleges that the named directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, and by agreeing to unfair deal protection devices. The complaint also alleges that the Company, Newport, and Merger Sub aided and abetted the named directors’ alleged breaches of their fiduciary duties. The complaint seeks injunctive relief, including to enjoin or rescind the Merger Agreement, monetary damages, and an award of attorneys’ and other fees and costs, among other relief. On March 25, 2016, the plaintiff in the Chung action filed an amended complaint, which adds certain allegations, including that the definitive proxy statement filed by Newport on March 29, 2016 (the “Proxy”(“the Proxy”) omitted material information. The amended complaint also names as defendants the Company, Newport, Merger Sub, and then-current members of Newport’s board of directors.

Also on March 25, 2016, a second putative class action complaint captioned Hubert C. Pincon v. Newport Corp., et al., Case No.A-16-734039-B, was filed in the District Court, Clark County, Nevada, on behalf of a putative class of the Newport’sCompany’s stockholders for claims related to the Merger Agreement. The complaint names as defendants the Company, Newport, and Merger Sub and the members of Newport’s former board of directors. It alleges that the named directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices, and by omitting material information from the Proxy. The complaint also alleges that the weCompany, Newport, and Merger Sub aided and abetted the named directors’ alleged breaches of their fiduciary duties. The complaint seeks injunctive relief, including to enjoin or rescind the Merger Agreement, and an award of attorneys’ and other fees and costs, among other relief.

On April 14, 2016, the Court granted plaintiffs’ motion to consolidate the Pincon and Chung actions and appointed counsel in the Pincon action as lead counsel. Also on April 14, 2016, the Court granted plaintiffs’ motion for expedited discovery and scheduled a hearing on plaintiffs’ anticipated motion for a preliminary injunction for April 25, 2016. On April 20, 2016, plaintiffs filed a motion to vacate the hearing on their anticipated motion for a preliminary injunction and notified the Court that they did not presently intend to file a motion for a preliminary injunction regarding the Merger Agreement. On April 22, 2016, the Court vacated the hearing on plaintiffs’ anticipated motion for a preliminary injunction. In August, plaintiffs completed the expedited discovery that the court ordered.

We believeOn October 19, 2016, plaintiffs filed an amended complaint captioned In re Newport Corporation Shareholder Litigation, Case No.A-16-733154-B, in the District Court, Clark County, Nevada, on behalf of a class of Newport’s stockholders for claims related to the Merger Agreement. The complaint names as defendants the Company, Newport, and the then-current members of Newport’s former board of directors. It alleges that the named directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices, and by omitting material information from the Proxy. The complaint also alleges that the Company and Newport aided and abetted the named directors’ alleged breaches of their fiduciary duties. The complaint seeks monetary damages, includingpre- and post-judgment interest. On December 9, 2016, both the Company and the Newport defendants filed motions to dismiss. Plaintiffs filed an opposition to the motions to dismiss on January 13, 2017. On February 3, 2017, the Company and the Newport defendants filed their reply briefs in support of their motions to dismiss. A hearing on the motions to dismiss was held on February 15, 2017.

The Company believes that the claims asserted in the complaintsamended complaint have no merit and we,the Company, Newport Merger Sub and the named directors intend to defend vigorously against these claims.

We are alsoThe Company is subject to various other legal proceedings and claims, which have arisen in the ordinary course of business. In ourthe opinion of management, the ultimate disposition of these matters will not have a material adverse effect on ourthe Company’s results of operations, financial condition or cash flows.

ITEM 1A. RISK FACTORS.

ITEM 1A.RISK FACTORS.

Information regarding risk factors affecting the Company’s business are discussed in the Company’s Annual Report on Form10-K for the year ended December 31, 20152016 in the section entitled “Risk Factors.” There have been no material changes from the risks disclosed therein.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table sets forth certain information with respect to repurchases of our common stock during the three months ended March 31, 2016.

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 Total Number of
Shares Purchased
   Average Price Paid
per Share
   Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)(2)
   Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs(1)
(in thousands)
 

January 1 – January 31, 2016

  38,651    $34.52     38,651    $148,183  

February 1 – February 29, 2016

  6,147    $34.38     6,147    $147,972  

March 1 – March 31, 2016

  —      $—       —      $147,972  
 

 

 

     

 

 

   

Total

  44,798    $34.50     44,798    

(1)On July 25, 2011, our Board of Directors approved a share repurchase program (the “Program”) for the repurchase of up to an aggregate of $200 million of our common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means, which we announced on July 27, 2011. The timing and quantity of any shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions, debt agreement limitations 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.
(2)We have repurchased approximately 1,770,000 shares of our common stock for approximately $52.0 million pursuant to the Program since its adoption.

ITEM 6. EXHIBITS.

ITEM 6.EXHIBITS.

The exhibits filed as part of this quarterly report on Form10-Q are listed in the exhibit index immediately preceding the exhibits and are incorporated herein.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   MKS INSTRUMENTS, INC.
May 6, 20169, 2017  By: 

/s/ Seth H. Bagshaw

   Seth H. Bagshaw
   Vice President, Chief Financial Officer and Treasurer
   (Principal Financial Officer)

EXHIBIT INDEX

 

Exhibit

No.

  

Exhibit Description

  +2.1+3.1(1)Agreement and Plan of Merger, by and among the Registrant, PSI Equipment, Inc. and Newport Corporation, dated February 22, 2016
  +3.1(2)  Restated Articles of Organization of the Registrant
  +3.2(3)(2)  Articles of Amendment to Restated Articles of Organization, as filed with the Secretary of State of Massachusetts on May 18, 2001
  +3.3(4)(3)  Articles of Amendment to Restated Articles of Organization, as filed with the Secretary of State of Massachusetts on May 16, 2002
  +3.4(5)(4)  Amended and RestatedBy-Laws of the Registrant
+10.1(1)Commitment Letter by and among the Registrant, Barclays Bank PLC, Deutsche Bank Securities Inc., and Deutsche Bank AG New York Branch, dated February 22, 2016
+10.2(6)Term Loan Credit Agreement, by and among the Registrant, Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto, dated April 29, 2016
+10.3(6)ABL Credit Agreement, by and among the Registrant, Deutsche Bank AG New York Branch, 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, dated April 29, 2016
+10.4*(7)Letter Agreement between the Registrant and Robert J. Phillippy, dated May 2, 2016
  10.5*Newport Corporation’s 2006 Performance-Based Stock Incentive Plan
  10.6*Form of Stock Appreciation Right Award Agreement under Newport Corporation’s 2006 Performance-Based Stock Incentive Plan
  10.7*Newport Corporation’s 2011 Stock Incentive Plan
  10.8*Newport Corporation’s Amended and Restated 2011 Stock Incentive Plan
  10.9*Form of Restricted Stock Unit Award Agreement (with performance-based vesting) used under Newport Corporation’s 2011 Stock Incentive Plan and Amended and Restated 2011 Stock Incentive Plan
  10.10*Form of Stock Appreciation Right Award Agreement used under Newport Corporation’s 2011 Stock Incentive Plan and the Amended and Restated 2011 Stock Incentive Plan
  10.11*Form of Indemnification Agreement between Newport Corporation and Robert J. Phillippy
  10.12*Form of the Registrant’s RSU Assumption Agreement for U.S. Employees Relating to Newport Corporation’s Amended and Restated 2011 Stock Incentive Plan and 2011 Stock Incentive Plan
  10.13*Form of the Registrant’s RSU Assumption Agreement for Employees Outside of the United States Relating to Newport Corporation’s Amended and Restated 2011 Stock Incentive Plan and 2011 Stock Incentive Plan
  10.14*Form of the Registrant’s SAR Assumption Agreement for U.S. Employees Relating to Newport Corporation’s Amended and Restated 2011 Stock Incentive Plan, 2011 Stock Incentive Plan and 2006 Performance-Based Stock Incentive Plan
  10.15 *Form of the Registrant’s SAR Assumption Agreement for Employees Outside of the United States Relating to Newport Corporation’s Amended and Restated 2011 Stock Incentive Plan, 2011 Stock Incentive Plan and 2006 Performance-Based Stock Incentive Plan
  31.1  Certification of Principal Executive Officer pursuant to Rule13a-14(a)/Rule 15d-14(a)Rule15d-14(a) of the Securities Exchange Act of 1934, as amended
  31.2  Certification of Principal Financial Officer pursuant to Rule13a-14(a)/Rule 15d-14(a)Rule15d-14(a) of the Securities Exchange Act of 1934, as amended
  32.1  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS  XBRL Instance Document.
101.SCH  XBRL Taxonomy Extension Schema Document.
101.CAL  XBRL Taxonomy Calculation Linkbase Document.
101.LAB  XBRL Taxonomy Labels Linkbase Document.
101.PRE  XBRL Taxonomy Presentation Linkbase Document.
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document.

 

+    PreviouslyPreviously filed
*Management contract or compensatory plan arrangement.
(1)Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 23, 2016.

(2)Incorporated by reference to the Registration Statement on FormS-4 (FileNo. 333-49738) filed with the Securities and Exchange Commission on November 13, 2000.
(2)Incorporated by reference to the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2001.
(3)Incorporated by reference to the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2001.2002.
(4)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
(5)Incorporated by reference to the Current Report on Form8-K filed with the Securities and Exchange Commission on May 6, 2014.
(6)Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 29, 2016.
(7)Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 2, 2016.

 

3945