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 September 30, 2016March 31, 2017

or

 

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

For the transition period from                    to                    

Commission file 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 November 1, 2016May 2, 2017, the registrant had 53,592,71554,108,231 shares of common stock outstanding.

 

 

 


MKS INSTRUMENTS, INC.

FORM10-Q

INDEX

 

PART I.

 

FINANCIAL INFORMATION

 

ITEM 1.

 

FINANCIAL STATEMENTS (Unaudited).

 
 

Condensed Consolidated Balance Sheets – September 30, 2016March  31, 2017 and December 31, 20152016

  3 
 

Condensed Consolidated Statements of Operations and Comprehensive Income – Three and nine months ended September 30,March 31, 2017 and 2016 and 2015

  4 
 

Condensed Consolidated Statements of Cash Flows – NineThree months ended September 30,March 31, 2017 and 2016 and 2015

  5 
 

Notes to theUnaudited Condensed Consolidated Financial Statements

  6 

ITEM 2.

 

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

  31 

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK

  4241 

ITEM 4.

 

CONTROLS AND PROCEDURES.PROCEDURES

  4441 

PART II.

 

OTHER INFORMATION

 

ITEM 1.

 

LEGAL PROCEEDINGS.PROCEEDINGS

42

ITEM 1A.

RISK FACTORS

43

ITEM 6.

EXHIBITS

43

SIGNATURES

  44 
ITEM 1A.

RISK FACTORS.

45
ITEM 6.

EXHIBITS.

45

SIGNATURES

46

EXHIBIT INDEX

  4745 

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)

 

  September 30, 2016 December 31, 2015   March 31, 2017 December 31, 2016 
ASSETS      

Current assets:

      

Cash and cash equivalents

  $366,874   $227,574    $255,912  $228,623 

Restricted cash

   5,931    —      5,274  5,287 

Short-term investments

   53,104   430,663     155,299  189,463 

Trade accounts receivable, net

   243,853   101,883     267,249  248,757 

Inventories, net

   278,965   152,631     285,518  275,869 

Other current assets

   53,616   26,760     52,266  50,770 
  

 

  

 

   

 

  

 

 

Total current assets

   1,002,343   939,511     1,021,518  998,769 

Property, plant and equipment, net

   179,694   68,856     169,833  174,559 

Goodwill

   594,635   199,703     590,502  588,585 

Intangible assets, net

   419,811   44,027     396,409  408,004 

Long-term investments

   15,256    —      9,933  9,858 

Other assets

   29,926   21,250     32,352  32,467 
  

 

  

 

   

 

  

 

 

Total assets

  $2,241,665   $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

  $11,528   $—     $10,623  $10,993 

Accounts payable

   68,371   23,177     70,493  69,337 

Accrued compensation

   63,424   28,424     50,034  67,728 

Income taxes payable

   13,758   4,024     27,469  22,794 

Deferred revenue

   16,197  14,463 

Other current liabilities

   73,354   35,359     55,580  51,985 
  

 

  

 

   

 

  

 

 

Total current liabilities

   230,435   90,984     230,396  237,300 

Long-term debt, net

   639,068    —   

Long-term debt

   552,232  601,229 

Non-current deferred taxes

   91,928   2,655     64,221  66,446 

Non-current accrued compensation

   44,739   13,395     46,201  44,714 

Other liabilities

   19,956   5,432     22,092  20,761 
  

 

  

 

   

 

  

 

 

Total liabilities

   1,026,126   112,466     915,142  970,450 
  

 

  

 

 

Commitments and contingencies (Note 20)

   

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; 53,578,091 and 53,199,720 shares issued and outstanding at September 30, 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

   770,444   744,725     783,371  777,482 

Retained earnings

   458,369   427,214     550,385  494,744 

Accumulated other comprehensive loss

   (13,387 (11,171   (28,464 (30,547
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   1,215,539   1,160,881     1,305,405  1,241,792 
  

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

  $2,241,665   $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 September 30, Nine Months Ended September 30,   Three Months Ended March 31, 
  2016 2015 2016 2015   2017 2016 

Net revenues:

        

Products

  $335,156   $179,441   $774,248   $553,818    $392,922  $153,621 

Services

   45,504   29,891   115,954   87,319     44,231  30,060 
  

 

  

 

  

 

  

 

   

 

  

 

 

Total net revenues

   380,660   209,332   890,202   641,137     437,153  183,681 

Cost of revenues:

        

Cost of products

   183,789   95,710   433,134   294,211     205,060  85,352 

Cost of services

   28,486   19,393   74,857   56,853     26,546  20,416 
  

 

  

 

  

 

  

 

   

 

  

 

 

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

   212,275   115,103   507,991   351,064     231,606  105,768 
  

 

  

 

  

 

  

 

   

 

  

 

 

Gross profit

   168,385   94,229   382,211   290,073     205,547  77,913 

Research and development

   32,268   17,217   77,709   51,464     33,282  17,227 

Selling, general and administrative

   70,424   33,396   175,803   97,532     74,220  33,950 

Acquisition costs

   233    —     10,932   30  

Acquisition and integration costs

   1,442  2,494 

Restructuring

   —     562   24   1,569     522   —   

Amortization of intangible assets

   12,452   1,691   22,990   5,071     12,501  1,683 
  

 

  

 

  

 

  

 

   

 

  

 

 

Income from operations

   53,008   41,363   94,753   134,407     83,580  22,559 

Interest and other (expense) income, net

   (10,760 721   (16,332 2,015  

Interest income

   516  924 

Interest expense

   8,832  44 

Other income

   2,021  366 
  

 

  

 

  

 

  

 

   

 

  

 

 

Income before income taxes

   42,248   42,084   78,421   136,422     77,285  23,805 

Provision for income taxes

   9,699   12,315   19,099   39,647     12,225  6,242 
  

 

  

 

  

 

  

 

   

 

  

 

 

Net income

  $32,549   $29,769   $59,322   $96,775    $65,060  $17,563 
  

 

  

 

  

 

  

 

   

 

  

 

 

Other comprehensive income:

        

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

  $(229 $939   $(2,104 $2  

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

   5,698   (3,623 (536 (6,217   4,534  2,652 

Unrealized (loss) gain on investments and minimum pension liability adjustment, net of tax (benefit) expense(2)

   (31 100   424   16  

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

  $37,987   $27,185   $57,106   $90,576    $67,143  $19,047 
  

 

  

 

  

 

  

 

   

 

  

 

 

Net income per share:

        

Basic

  $0.61   $0.56   $1.11   $1.82    $1.21  $0.33 
  

 

  

 

  

 

  

 

   

 

  

 

 

Diluted

  $0.60   $0.56   $1.10   $1.81    $1.18  $0.33 
  

 

  

 

  

 

  

 

   

 

  

 

 

Cash dividends per common share

  $0.17   $0.17   $0.51   $0.505    $0.175  $0.17 
  

 

  

 

  

 

  

 

   

 

  

 

 

Weighted average common shares outstanding:

        

Basic

   53,574   53,314   53,423   53,304     53,769  53,235 
  

 

  

 

  

 

  

 

   

 

  

 

 

Diluted

   54,315   53,568   53,895   53,562     54,958  53,563 
  

 

  

 

  

 

  

 

   

 

  

 

 

 

(1) Tax (benefit) expensebenefit was $(117)$1,831 and $548$1,041 for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Tax (benefit) expense was $(1,357) and $20 for the nine months ended September 30, 2016 and 2015, respectively.
(2) Tax (benefit) expense was $(15)of $86 and $59$0 for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively.
(3)Tax (benefit) expense was $274$(94) and $221$254 for the ninethree months ended September 30,March 31, 2017 and 2016, and 2015, 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)

 

  Nine Months Ended September 30,   Three Months Ended March 31, 
  2016 2015   2017 2016 

Cash flows provided by operating activities:

      

Net income

  $59,322   $96,775    $65,060  $17,563 

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

      

Depreciation and amortization

   43,757   16,606     21,833  5,278 

Amortization of inventory step-up adjustment to fair value

   15,090    —    

Amortization of debt issuance cost and original issue discount

   6,453    —    

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

   2,715   —   

Stock-based compensation

   19,826   10,025     8,782  4,152 

Provision for excess and obsolete inventory

   11,045   9,235     5,031  2,948 

Provision for bad debt

   167   (358   316  17 

Deferred income taxes

   (9,567 (2,153   (1,809 347 

Excess tax benefits from stock-based compensation

   (678 (884   —    (233

Other

   125   248     85  68 

Changes in operating assets and liabilities:

      

Trade accounts receivable

   (44,508 (11,424   (15,215 (10,084

Inventories

   (5,077 (25,219   (11,714 (844

Income taxes

   20,418   10,461     8,067  2,316 

Other current assets

   (8,846 (7,935   (1,525 (3,562

Accrued compensation

   4,460   3,619     (16,786 (7,086

Other current and non-current liabilities

   4,568   4,557     1,082  7,718 

Accounts payable

   14,110   (7,542   809  4,772 

Other assets

   (3,288 (441   (674 (189
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   127,377   95,570     66,057  23,181 
  

 

  

 

   

 

  

 

 

Cash flows used in investing activities:

   

Acquisition of businesses, net of cash acquired

   (939,591 (9,910

Cash flows provided by investing activities:

   

Purchases of investments

   (116,075 (318,340   (42,292 (82,135

Maturities of investments

   148,606   131,004     55,672  76,972 

Sales of investments

   337,592   35,720     21,179  128,250 

Proceeds from sale of property, plant and equipment

   40   8  

Purchases of property, plant and equipment

   (11,959 (8,831   (4,099 (2,156
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (581,387 (170,349

Net cash provided by investing activities

   30,460  120,931 
  

 

  

 

   

 

  

 

 

Cash flows provided by (used in) financing activities:

   

Cash flows used in financing activities:

   

Restricted cash

   (6,176  —      (148  —   

Proceeds from short-term borrowings

   15,434   2,020     736   —   

Payments of short-term borrowings

   (8,289 (2,020

Net proceeds from long-term borrowings

   743,746    —   

Payments of long-term borrowings

   (111,825  —   

Payments on short-term borrowings

   (1,398  —   

Payments on long-term borrowings

   (51,570  —   

Repurchase of common stock

   (1,545 (8,866   —    (1,545

Net payments related to employee stock awards

   (3,108 (800   (2,894 (2,587

Dividend payments to common stockholders

   (27,249 (26,928   (9,419 (9,056

Excess tax benefits from stock-based compensation

   678   884     —    233 
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) financing activities

   601,666   (35,710

Net cash used in financing activities

   (64,693 (12,955
  

 

  

 

   

 

  

 

 

Effect of exchange rate changes on cash and cash equivalents

   (8,356 199     (4,535 (876
  

 

  

 

   

 

  

 

 

Increase (decrease) in cash and cash equivalents

   139,300   (110,290

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

  $366,874   $195,147    $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 September 30, 2016March 31, 2017, and for the three and nine months ended September 30,March 31, 2017 and 2016 and 2015 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.

On April 29, 2016, the Company completed its acquisition of Newport Corporation which is more fully described in Note 3 below. This transaction was recorded using the purchase method of accounting; accordingly, the financial results of the acquisition are included in the accompanying unaudited condensed consolidated financial statements for the periods subsequent to the acquisition.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 August 2016,March 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. 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 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. The Company expects to adopt this new standard in 2017 when it performs its annual goodwill impairment test in the fourth quarter. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU2017-01, “Business Combinations (Topic 805)-Clarifying the Definition of 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 March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting.” This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. This ASU will be adopted in the first quarter of 2017 and could have a material 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 January 2016, the FASB issued ASU2016-01, “Financial Instruments—Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU 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 do not result in consolidation and are not

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

accounted for under the equity method. Changes in the fair value of these equity securities will be recognized directly in net income. This pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within 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 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. The Company does not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

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, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. The Company does not expect the adoption of this ASU to have an impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU2014-09, “Revenue Revenue from Contracts with Customers (Topic 606),” which supersedes all. 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 requirements, including most industry-specific guidance. This standard requires a company to recognize revenueguidance in GAAP 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. Thebecomes effective. 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. This pronouncement2014-09 is effective for annualfiscal years and interim periods within those years beginning after December 15, 2017, including interim periods within those fiscal years.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.

3)Acquisitions

Newport Corporation

On April 29, 2016, the Company completed its acquisition of Newport Corporation (“Newport”) pursuant to an Agreementcurrent revenue standard, Accounting Standards Codification Topic 605 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 and sub-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.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–STATEMENTS – (continued)

(in thousands, except share and per share data)

 

The purchase priceTopic 606. In the second quarter of Newport consisted2017, the Company will be reviewing the additional disclosure requirements of the following: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.

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)3)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 11.

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.

The following table summarizes the allocation of the preliminary purchase price to the fair values assigned to assets acquired and liabilities assumed at the date of the Newport Merger:

Current assets (including cash)

  $185,155  

Inventory

   142,714  

Intangible assets

   399,806  

Goodwill

   396,216  

Property, plant and equipment

   119,932  

Long-term assets

   22,725  
  

 

 

 

Total assets acquired

   1,266,548  

Current liabilities

   98,458  

Other long-term liabilities

   160,812  
  

 

 

 

Total liabilities assumed

   259,270  
  

 

 

 

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  
  

 

 

 

For the three and nine months ended September 30, 2016, the Company recorded $4,971 and $15,090 incremental cost of sales charges associated with the fair value write-up of inventory acquired in the merger with Newport.

The fair value write-up of acquired property, plant and equipment of $36,242 will be amortized over the useful life of the asset. Property, plant and equipment is valued at its value-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.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

The following table reflects the allocation of the acquired intangible assets and liabilities and related estimate of useful lives:

Order backlog

  $12,100     1 year  

Customer relationships

   243,093     6-18 years  

Trademarks and trade names

   55,900     Indefinite  

Developed technology

   75,386     4-8 years  

In-process research and development

   6,899     Undefined(1) 

Leasehold interest, net(2)

   2,126     4-5 years  
  

 

 

   

Total

  $395,504    
  

 

 

   

(1)The useful lives of in-process research and development will be defined in the future upon further evaluation of the status of these programs.
(2)Leasehold interest is comprised of a favorable leasehold asset of $6,428 and an unfavorable leasehold liability of $4,302.Investments

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.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations. The finalization of the purchase accounting assessment will result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company’s results of operations and financial position. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company will record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill to reflect additional information received about facts and circumstances which existed at the date of acquisition. The Company records adjustments to the assets acquired and liabilities assumed subsequent to the purchase price allocation period in the Company’s operating results in the period in which the adjustments were determined. The size and breadth of the Newport Merger necessitates the use of this measurement period to adequately analyze and assess a number of the factors used in establishing the fair value of certain tangible and intangible assets acquired and liabilities assumed as of the acquisition date and the related tax impacts of any changes made. Any potential adjustments made could be material in relation to the preliminary values presented above.

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 to attract new customers and revenue and cross sell to existing customers.

The results of this acquisition were included in the Company’s consolidated operations beginning on April 29, 2016. Newport constitutes the Company’s Light & Motion Division reportable segment (see Note 19).

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 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 $6,631 and $3,334 as compensation expense and stock-based compensation expense, respectively, for the nine months ended September 30, 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 reporting period-end and are excluded from the computation of basic earnings per share and included in the computation of diluted earnings per share for such reporting period.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

Pro Forma Results

The following unaudited pro forma financial information presents the combined results of operations of the Company as if the Newport Merger had occurred on January 1, 2015. The unaudited pro forma financial information is not necessarily indicative of what the Company’s condensed consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 

Total net revenues

  $380,660    $355,955    $1,070,471    $1,090,641  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $35,915    $23,725    $65,313    $48,239  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

  $0.67    $0.45    $1.22    $0.90  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $0.66    $0.44    $1.21    $0.90  
  

 

 

   

 

 

   

 

 

   

 

 

 

The unaudited pro forma financial information above gives effect primarily to the following:

(1)Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment from the purchase price allocation.

(2)Revenue adjustments as a result of the reduction in deferred revenue related to its estimated fair value.

(3)Incremental interest expense related to the Company’s term loan credit agreement.

(4)The exclusion of acquisition costs and inventory step-up amortization from the three and nine month periods ended September 30, 2016 and the addition of these items to the nine month period ended September 30, 2015.

(5)The estimated tax impact of the above adjustments.

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. The Company accounted for this investment using the cost method of accounting.

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 was paid to the sellers in the second quarter of 2016. 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 the assets acquired and liabilities assumed at the date of the Precisive acquisition:

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  
  

 

 

 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

Substantially all of the purchase price is deductible for tax purposes. The following table reflects the allocation of the acquired intangible assets and related estimates of useful lives. These acquired intangibles will be amortized on a straight-line basis, which approximates the pattern of use.

Order backlog

  $50     18 months  

Customer relationships

   1,430     8 years  

Exclusive patent license

   2,600     10 years  

Trade names

   210     10 years  

Developed technology

   820     10 years  
  

 

 

   

Total

  $5,110    
  

 

 

   

The fair value of the acquired intangibles was determined using the income approach. The Precisive 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; (2) potential to leverage the Company’s sales force and intellectual property to attract new customers and revenue; and (3) potential 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.

The results of this acquisition were included in the Company’s consolidated operations beginning on March 17, 2015. Precisive is included in the Company’s Instruments, Control and Vacuum Products group within the Vacuum & Analysis Division segment.

4)Investments

Investmentsinvestments classified as short-term consists of the following:

 

 September 30, 2016 December 31, 2015   March 31, 2017   December 31, 2016 

Available-for-sale investments:

      

Time deposits and certificates of deposit

 $1,395   $11,892    $3,479   $23,818 

Bankers’ acceptance drafts

 2,487   728     1,117    1,439 

Asset-backed securities

 18,326   124,997     36,682    36,809 

Commercial paper

 2,793    —      12,134    24,381 

Corporate obligations

 16,701   165,109     51,393    46,707 

Municipal bonds

 593   8,355     251    591 

Promissory note

   675    675 

U.S. treasury obligations

 1,152    —      20,424    25,414 

U.S. agency obligations

 9,657   119,582     29,144    29,629 
 

 

  

 

   

 

   

 

 
 $53,104   $430,663    $155,299   $189,463 
 

 

  

 

   

 

   

 

 

Investments classified as long-term consists of the following:

 

  September 30, 2016  December 31, 2015 

Available-for-sale investments:

  

Group insurance contracts

 $5,956   $—   

Cost method investments:

  

Minority interest in Reno Sub-Systems, Inc.

  9,300    —   
 

 

 

  

 

 

 
 $15,256   $—   
 

 

 

  

 

 

 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

   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 for short-term and long-term available-for-sale investments:

 

                                                        
As of September 30, 2016:  Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair
Value
 
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

  $1,395    $—     $—     $1,395    $3,479   $—     $—     $3,479 

Bankers’ acceptance drafts

   2,487     —      —      2,487     1,117    —      —      1,117 

Asset-backed securities

   18,317     13     (4   18,326     36,711    12    (41   36,682 

Commercial paper

   2,794     —       (1   2,793     12,160    —      (26   12,134 

Corporate obligations

   16,699     15     (13   16,701     51,328    70    (5   51,393 

Municipal bonds

   592     1     —      593     251    —      —      251 

Promissory note

   675    —      —      675 

U.S. treasury obligations

   1,151     1     —      1,152     20,418    6    —      20,424 

U.S. agency obligations

   9,653     4     —      9,657     29,114    34    (4   29,144 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $53,088    $34    $(18  $53,104    $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 September 30, 2016:  Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair
Value
 
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

  $5,988    $—     $(32  $5,956    $6,497   $—     $(864  $5,633 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

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

  $11,893    $—     $(1  $11,892    $23,818   $—     $—     $23,818 

Bankers’ acceptance drafts

   728     —      —      728  

Bankers acceptance drafts

   1,439    —      —      1,439 

Asset-backed securities

   125,271     —      (274   124,997     36,847    6    (44   36,809 

Commercial paper

   24,423    —      (42   24,381 

Corporate obligations

   165,445     5     (341   165,109     46,700    21    (14   46,707 

Municipal bonds

   8,346     13     (4   8,355     591    —      —      591 

Promissory note

   675    —      —      675 

U.S. treasury obligations

   25,414    —      —      25,414 

U.S. agency obligations

   119,699     3     (120   119,582     29,631    8    (10   29,629 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $431,382    $21    $(740  $430,663    $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 September 30, 2016March 31, 2017 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 investments on the accompanying balance sheet.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 and nine months ended September 30, 2016March 31, 2017 and 2015.2016.

 

5)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.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

The fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1  Quoted prices in active markets for identical assets or liabilities 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 2  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or securities or derivative contracts that are valued using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company categorizes such assets and liabilities based on the lowest level input that is significant to the fair value measurement 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 September 30, 2016March 31, 2017 and are summarized as follows:

 

       Fair Value Measurements at Reporting Date Using 

Description

  September 30,
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

  $10,105    $10,105    $—     $—   

Time deposits and certificates of deposit

   1,000     —       1,000    

Bankers’ acceptance drafts

   936     —      936     —   

Commercial paper

   2,845     —       2,845     —    

U.S. agency obligations

   650     —       650     —    

Restricted cash – money market funds

   5,931     5,931    —      —   

Available-for-sale investments:

        

Time deposits and certificates of deposit

   1,395     —      1,395     —   

Bankers’ acceptance drafts

   2,487     —      2,487     —   

Asset-backed securities

   18,326     —      18,326     —   

Commercial paper

   2,793     —       2,793     —    

Corporate obligations

   16,701     —      16,701     —   

Municipal bonds

   593     —      593     —   

U.S. treasury obligations

   1,152     —      1,152     —   

U.S. agency obligations

   9,657     —      9,657     —   

Group insurance contracts

   5,956     —      5,956     —   

Derivatives – currency forward contracts

   250     —      250     —   

Derivatives – option contracts

   72     —      72     —   

Funds in investments and other assets:

        

Israeli pension assets

   13,779     —      13,779     —   

Restricted cash – non-current

   245     245     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $94,873    $16,281    $78,592    $—   
  

 

 

   

 

 

   

 

 

   

 

 

 

       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–STATEMENTS – (continued)

(in thousands, except share and per share data)

 

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

Description

  September 30,
2016
   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   March 31, 2017   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 

Liabilities:

        

Derivatives – currency forward contracts

  $3,030    $—     $3,030    $—   

Derivatives – option contracts

   17     —      17     —   
  

 

   

 

   

 

   

 

 

Total liabilities

  $3,047    $—     $3,047    $—   
  

 

   

 

   

 

   

 

 

Reported as follows:

                

Assets:

                

Cash and cash equivalents(1)

  $15,536    $10,105    $5,431    $—     $16,399   $1,263   $15,136   $—   

Restricted cash

   5,931     5,931     —       —      5,274    5,274    —      —   

Short-term investments

   53,104     —      53,104     —      155,299    —      155,299    —   

Other current assets

   322     —      322     —      678    —      678    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total current assets

  $74,893    $16,036    $58,857    $—     $177,650   $6,537   $171,113   $—   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Long-term investments(2)

  $5,956    $—     $5,956    $—      5,633    —      5,633    —   

Other long-term assets

   13,779     —       13,779     —      19,452    —      19,452    —   

Restricted cash – non-current

   245     245    —       —      744    744    —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total long-term assets

   19,980     245     19,735     —      $25,829   $744   $25,085   $—   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Liabilities:

                
  

 

   

 

   

 

   

 

 

Other current liabilities

  $3,047    $—     $3,047    $—     $3,666   $—     $3,666   $—   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)The cash and cash equivalentsequivalent amounts presented in the table above do not include cash of $349,885$238,663 andnon-negotiable time deposits of $1,453$850 as of September 30, 2016.March 31, 2017.
(2)The long-term investments presented in the table above do not include our minority interest investment in Reno Sub-Systems, Inc.,a private company, which is accounted for under the cost method.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–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   $—     $—   

Bankers’ acceptance drafts

   11     —      11     —   

Time deposits and certificates of deposit

   4,900    —      4,900    —   

Bankers acceptance drafts

   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

  $263    $—     $263    $—     $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 recorded as 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 September 30, 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 and group insurance contracts.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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

Israeli Pension Assets

Israeli pension assets represent investments in mutual funds, government securities and other time deposits. These investments are set aside for the retirement benefit of the employees 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 usually large commercial banks. The forward foreign currency exchange and option contracts are valued using broker quotations or market transactions and are classified within Level 2 of the fair value hierarchy.

 

6)5)Derivatives

The Company enteredenters 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 term loan balance of the Credit Agreement, as described further in Note 11.9. This cash flow 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 September 30, 2016.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 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 will beis recorded currently in earnings in the period in which 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.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

As of September 30, 2016March 31, 2017 and December 31, 2015,2016, the Company had outstanding forward foreign exchange contracts with gross notional values of $41,471$124,959 and $89,989,$120,208, respectively. The following tables provide a summary of the primary net hedging positions and corresponding fair values held as of September 30, 2016March 31, 2017 and December 31, 2015:2016:

 

  September 30, 2016   March 31, 2017 

Currency Hedged (Buy/Sell)

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

U.S. Dollar/Japanese Yen

  $13,213    $(1,876  $35,644   $(493

U.S. Dollar/South Korean Won

   18,150     (930   45,972    (1,804

U.S. Dollar/Euro

   3,969     (14   20,150    (15

U.S. Dollar/U.K. Pound Sterling

   1,461     207     6,599    (43

U.S. Dollar/Taiwan Dollar

   4,678     (167   16,594    (647
  

 

   

 

   

 

   

 

 

Total

  $41,471    $(2,780  $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 condensed consolidated balance sheet.

MKS INSTRUMENTS, INC.

   December 31, 2015 

Currency Hedged (Buy/Sell)

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

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  
  

 

 

   

 

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

 

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

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

 

   September 30, 2016   December 31, 2015 

Derivative assets:

    

Forward exchange contracts

  $250    $1,486  

Foreign currency option contracts

   72     —   

Derivative liabilities:

    

Forward exchange contracts

   (3,030   (263

Foreign currency option contracts

   (17   —   
  

 

 

   

 

 

 

Total net derivative (liabilities) assets(1)

  $(2,725  $1,223  
  

 

 

   

 

 

 

Derivatives Designated as Hedging Instruments

  March 31, 2017   December 31, 2016 

Derivative assets:

    

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:

    

Foreign exchange contracts(1)

   (3,666   (543

Foreign currency options contracts(1)

   —      (16
  

 

 

   

 

 

 

Total net derivative assets designated as hedging instruments

  $2,440   $7,330 
  

 

 

   

 

 

 

 

(1)The derivative asset of $322$678 and derivative liability of $3,047$(3,666) related to the foreign exchange contracts and foreign currency option contracts are classified in other current assets and other current liabilities respectively, in the condensed consolidated balance sheet as of September 30, 2016.March 31, 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 respectively, in the condensed 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 September 30, 2016March 31, 2017, 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 (losses) on derivatives designated as hedging instruments:

 

  Three Months Ended
September 30,
   Nine Months Ended
September 30,
   Three Months Ended March 31, 

Derivatives Designated as Cash Flow Hedging Instruments

  2016   2015   2016   2015   2017   2016 

Forward exchange contracts:

            

Net gain (loss) recognized in OCI(1)

  $326    $1,148    $(3,107  $(2,372

Net (loss) gain reclassified from accumulated OCI into income(2)

  $(764  $857    $(487  $2,766  

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 and nine months ended September 30, 2016March 31, 2017 and 2015.2016. The tax effect of the gains or losses reclassified from accumulated OCI into income is immaterial.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

As of September 30, 2016, the Company had outstanding foreign currency option contracts related to the Israeli Shekel with gross notional values of $(476) and a net fair value asset of $55. These instruments do not qualify for hedge accounting.

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

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 

Derivatives Not Designated as Hedging Instruments

  2016   2015   2016   2015 

Forward exchange contracts:

        

Net (loss) gain recognized in income(1)

  $(339  $116    $(1,283  $1,331  

Foreign currency option contracts:

        

Net (loss) gain recognized in income(1)

  $(63  $—      $52    $—    
   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)

 

7)6)Inventories, net

Inventories consist of the following:

 

  September 30, 2016   December 31, 2015   March 31, 2017   December 31, 2016 

Raw materials

  $100,691    $78,352    $159,354   $150,150 

Work-in-process

   94,679     23,297     48,306    39,105 

Finished goods

   83,595     50,982     77,858    86,614 
  

 

   

 

   

 

   

 

 
  $278,965    $152,631    $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 summarizes the allocation of the purchase price to the fair values assigned to assets acquired and liabilities assumed at the date of the Newport Merger:

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 
  

 

 

 

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.

The fair valuewrite-up of acquired property, plant and equipment of $36,242 will be amortized over the useful life of the asset. Property, plant and equipment is 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 estimate of useful lives:

Order backlog

  $12,100    1 year 

Customer relationships

   247,793    6-18 years 

Trademarks and trade names

   55,900    Indefinite 

Developed technology

   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   
  

 

 

   

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 to attract new customers and revenue and cross sell to existing customers.

The results of this acquisition were included in the Company’s consolidated operations beginning on April 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 computation of diluted earnings per share for each reporting period.

Cost Method Investment in a Private Company

On April 27, 2016, the 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 ninethree months ended September 30, 2016March 31, 2017 and year ended December 31, 20152016 were as follows:

 

  Nine Months Ended September 30, Twelve Months Ended December 31, 
  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)

   396,216    —    396,216   8,017    —    8,017     —      —     —      396,027   —    396,027 

Foreign currency translation

   (1,284  —    (1,284 (695  —    (695   1,917    —    1,917    (7,145  —    (7,145
  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

 

Ending balance at September 30, 2016 and December 31, 2015

  $734,049   $(139,414 $594,635   $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 $396,216$396,027 of goodwill related to the Newport Merger. During 2015, the Company recorded $7,042 of goodwill related to the acquisition of Precisive. During 2015, the Company recorded a purchase accounting adjustment of $975 primarily related to an inventory valuation adjustment related to an acquisition that occurred in 2014.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–STATEMENTS – (continued)

(in thousands, except share and per share data)

 

Intangible Assets

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

 

As of September 30, 2016:

  Gross   Accumulated
Amortization
   Foreign Currency
Translation
   Net 

Completed technology(1)

  $176,586    $(89,912  $(290  $86,384  

Customer relationships(1)

   280,344     (25,742   (954   253,648  

Patents, trademarks, trade names and other(1)

   104,824     (31,899   (26   72,899  

In-process research and development(1)

   6,899     —      (19   6,880  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $568,653    $(147,553  $(1,289  $419,811  
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2015:

  Gross   Accumulated
Amortization
   Foreign Currency
Translation
   Net 

Completed technology(2)

  $101,200    $(82,330  $(272  $18,598  

Customer relationships(2)

   37,251     (16,345   10     20,916  

Patents, trademarks, trade names and other(2)

   30,396     (25,888   5     4,513  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $168,847    $(124,563  $(257  $44,027  
  

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2017:

  Gross   Accumulated
Amortization
   Foreign
Currency
Translation
   Net 

Completed technology

  $176,586   $(103,127  $(746  $72,713 

Customer relationships

   285,044    (34,246   (2,634   248,164 

Patents, trademarks, trade names and other

   111,723    (36,118   (73   75,532 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $573,353   $(173,491  $(3,453  $396,409 
  

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2016:

  Gross   Accumulated
Amortization
   Foreign
Currency
Translation
   Net 

Completed technology(1)

  $176,586   $(97,707  $(1,068  $77,811 

Customer relationships(1)

   285,044    (29,709   (3,404   251,931 

Patents, trademarks, trade names and other(1)

   111,723    (33,397   (64   78,262 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $573,353   $(160,813  $(4,536  $408,004 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)During 2016, the Company recorded $399,806$404,506 of separately identified intangible assets related to the Newport Merger, of which $75,386 was completed technology, $243,093$247,793 was customer relationships $74,428and $81,327 was patents, trademarks, trade names, and other, and $6,899 was in-process research and development. Thedevelopment and other. During 2016, the Company also recorded $4,302 of unfavorable lease commitments, which is recorded in other liabilities in the balance sheet.
(2)During 2015, the Company recorded $5,110 of separately identified intangible assets related to the acquisition of Precisive, of which $820 was completed technology, $1,430 was customer relationships and $2,860 was patents, trademarks, trade names and other.

Aggregate amortization expense related to acquired intangibles for the three and nine months ended September 30,March 31, 2017 and 2016 was $12,452$12,501 and $22,990,$1,683, respectively. The amortization expense for the three months ended March 31, 2017, is net of $177 amortization income from unfavorable lease commitments. Aggregate net amortization expense related to acquired intangiblesintangible assets and unfavorable lease commitments for the three and nine months ended September 30, 2015 was $1,691 and $5,071, respectively. Estimated amortization expense for each of the remaining fiscalfuture years is as follows:

 

Year

  Amount   Amount 

2016 (remaining)

  $12,605  

2017

   42,335  

2017 (remaining)

  $33,053 

2018

   38,287     42,951 

2019

   38,244     39,833 

2020

   34,270     27,940 

2021

   27,276     20,071 

2022

   17,475 

Thereafter

   170,894     155,672 

 

9)Other Assets

   September 30, 2016   December 31, 2015 

Other Current Assets:

    

Income tax receivable

  $7,754    $8,682  

Prepaid income tax

   10,825     4,755  

Other

   35,037     13,323  
  

 

 

   

 

 

 

Total other current assets

  $53,616    $26,760  
  

 

 

   

 

 

 

Other Assets:

    

Deferred tax assets, net

  $3,025    $19,252  

Other

   26,901     1,998  
  

 

 

   

 

 

 

Total other assets

  $29,926    $21,250  
  

 

 

   

 

 

 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

10)Other Liabilities

   September 30, 2016   December 31, 2015 

Other Current Liabilities:

    

VAT payable

  $6,004    $3,075  

Customer prepayments

   4,349     1,741  

Product warranties

   8,083     5,205  

Deferred revenue

   14,704     7,189  

Other

   40,214     18,149  
  

 

 

   

 

 

 

Total other current liabilities

  $73,354    $35,359  
  

 

 

   

 

 

 

Other Liabilities:

    

Long-term income tax payable

  $14,140    $4,483  

Other

   5,816     949  
  

 

 

   

 

 

 

Total other liabilities

  $19,956    $5,432  
  

 

 

   

 

 

 

11)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 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). 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.

The term loans are prepayable in whole or in part from time to time, and were initially subject to a prepayment premium if a prepayment was to be made on or prior to October 29, 2016 and only in certain circumstances. The Company will be obligated to pay a prepayment fee equal to 1.00% of the amount of the term loans outstanding immediately prior to any amendment resulting in a repricing transaction.

On June 9, 2016, the Company entered into Amendment No. 1 (the “Repricing Amendment”“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 Repricing Re-pricing

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except share and per share data)

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 prepaymentpre-payment premium may be required for a “Repricing“Re-pricing Transaction” (as defined in the Credit Agreement) until six months after the effective date of the Repricing Amendment.Re-pricing Amendment 1. In connection with the execution of the RepricingRe-pricing Amendment 1, the Company paid a prepaymentpre-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 the RepricingRe-pricing Amendment 1, the Company prepaid $50,000 of principal under the Credit Agreement. OnIn September 29, 2016, the Company made another voluntary prepayment ofprepaid an additional $60,000 of principal under the Credit Agreement. This prepayment was in addition to a scheduled principal payment of $1,825. As a result, the outstanding principal amount of the term loan was $668,175 as of September 30, 2016.

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 repricingre-pricing fee related to the term loans under the Term Loan Facility, which areis 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

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

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 such original principal amount reduced by any such prepayments (including the $110,000 prepaid to date in 2016), 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 September 30, 2016,March 31, 2017, the Company iswas 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)

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 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.

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-monththree 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 subsidiaries 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 September 30, 2016March 31, 2017 of up to an equivalent of $22,763$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 September 30, 2016March 31, 2017 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 September 30, 2016March 31, 2017 of up to an equivalent of $9,897$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–STATEMENTS – (continued)

(in thousands, except share and per share data)

 

Short-term debt:  September 30, 2016 

Japanese lines of credit

  $3,958  

Japanese receivables financing facility

   252  

Other debt

   18  

Current portion of Term Loan Facility

   7,300  
  

 

 

 
  $11,528  
  

 

 

 
Long-term debt:  September 30, 2016 

Austrian loans due through March 2020

  $587  

Term Loan Facility, net(1)

   638,481  
  

 

 

 
  $639,068  
  

 

 

 

(1)Net of deferred financing fees, original issuance discount and repricing fees of $22,394.

For the three and nine months ended September 30, 2016, theThe Company recognized interest expense of $8,461$8,831 and $11,989, respectively,$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 September 30, 2016March 31, 2017, are as follows:

 

Year

  Amount   Amount 

2016 (remaining)

  $6,054  

2017

   7,404  

2017 (remaining)

  $9,053 

2018

   7,312     6,298 

2019

   7,726     6,687 

2020

   7,344     6,327 

2021

   7,300     6,282 

2022

   6,282 

Thereafter

   629,850     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 condensed consolidated balance sheet.sheets.

Product warranty activities were as follows:

 

  Nine Months Ended September 30,   Three Months Ended March 31, 
  2016   2015   2017   2016 

Beginning of period

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

Product warranty liability from Newport Merger

   3,040     —   

Provision for product warranties

   5,067     3,527     3,014    783 

Direct charges to warranty liability

   (5,213   (3,859   (2,857   (984

Foreign currency translation

   43     (97   67    35 
  

 

   

 

   

 

   

 

 

End of period(1)

  $8,142    $5,837  

End of period

  $8,485   $5,039 
  

 

   

 

   

 

   

 

 

 

(1)11)Short-term product warranty of $8,083 and long-term product warranty of $59 are included in other current liabilities and other liabilities, respectively, in the accompanying condensed consolidated balance sheet.Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2017 and 2016 was 15.8% and 26.2%, respectively. The effective tax rate for the three months ended March 31, 2017 and related income tax expense, was lower than the U.S. statutory tax rate mainly due to the geographic mix of income 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 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, 2016 was lower than the U.S. statutory tax rate mainly 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 $25,465. As of March 31, 2017, if these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of $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, 2017 and December 31, 2016, the Company had accrued interest on unrecognized tax benefits of approximately $469 and $491, respectively.    

Over the next 12 months it is reasonably possible that the Company may recognize approximately $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.

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.

 

13)12)Pension Plans

As a result of the acquisition of Newport, Merger, 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.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

For financial reporting purposes, the calculation of net periodic pension costs was based upon a number of actuarial assumptions including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions were based upon management’s judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and the cash funding requirements of the Company’s pension plans.

The Company has included the net periodic benefit costs for the plans from the date of the acquisition on April 29, 2016 through September 30, 2016. The net periodic benefit costs included the following components:

   Three months ended
September 30, 2016
   Nine months ended
September 30, 2016
 

Service cost

  $596    $1,000  

Interest cost on projected benefit obligation

   121     201  

Expected return on plan assets

   (44   (75
  

 

 

   

 

 

 
  $673    $1,126  
  

 

 

   

 

 

 

14)Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, 2016 was 23.0% and 24.4%, respectively. The effective tax rate for the three and nine months ended September 30, 2016 was lower than the U.S. statutory tax rate primarily 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 federal research credit and the deduction for domestic production activities. These amounts were partially offset by taxes paid on the Company’s reorganization of certain international subsidiaries and state income taxes. The Company’s effective tax rate for the three and nine months ended September 30, 2015 was 29.3% and 29.1%, respectively. The effective tax rate for the three and nine months ended September 30, 2015 was lower than the U.S. statutory tax rate primarily 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 and the deduction for domestic production activities.

As of September 30, 2016, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $30,567. At December 31, 2015, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $4,332. The net increase from December 31, 2015 was primarily attributable to the addition of historical gross unrecognized tax benefits for Newport which were included as a result of the acquisition in April 2016. As of September 30, 2016, if these gross unrecognized tax benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of $19,399, 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 September 30, 2016 and December 31, 2015, the Company had accrued interest on unrecognized tax benefits of approximately $738 and $157, respectively.

Over the next 12 months it is reasonably possible that the Company may recognize approximately $3,370 of previously net unrecognized tax benefits, excluding interest and penalties, 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 DecemberMarch 31, 2015 upon the Company’s acceptance of the income tax examination changes. As part of the audit,2017, were approximately $260 and the Company consentedmade contributions of $227 to extendthese plans, during 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 2013 through present. The statute of limitations for the Company’s tax filings in other jurisdictions varies between fiscal years 2007 through present. The Company also has certain federal credit carry-forwards and state tax loss and credit carry-forwards that are open for examination for tax years 2000 through present.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)three months ended March 31, 2017.

 

15)13)Interest and Other (Expense) Income, Net

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 

Interest income

  $404    $778    $1,859    $2,147  

Other income

   1,544     —       1,583     —    

Interest expense

   (12,007   (57   (20,527   (132

Impact of foreign exchange (expense) income

   (701   —       753     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and other (expense) income, net

  $(10,760  $721    $(16,332  $2,015  
  

 

 

   

 

 

   

 

 

   

 

 

 

In 2016, the Company reclassified the impact of foreign exchange income (expense) from selling, general and administrative expenses to interest and other (expense) income, net. The amount included in selling, general and administrative expenses for the three and nine months ended September 30, 2015 was expense of $836 and $288, respectively.

16)Net Income Per Share

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

 

  Three Months Ended September 30,   Nine Months Ended September 30,   Three Months Ended March 31, 
  2016   2015   2016   2015   2017   2016 

Numerator:

            

Net income

  $32,549    $29,769    $59,322    $96,775    $65,060   $17,563 
  

 

   

 

   

 

   

 

   

 

   

 

 

Denominator:

            

Shares used in net income per common share – basic

   53,574,000     53,314,000     53,423,000     53,304,000     53,769,000    53,235,000 

Effect of dilutive securities:

            

Stock options, restricted stock, stock appreciation rights and employee stock purchase plan

   741,000     254,000     472,000     258,000  

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

   54,315,000     53,568,000     53,895,000     53,562,000     54,958,000    53,563,000 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income per common share:

            

Basic

  $0.61    $0.56    $1.11    $1.82    $1.21   $0.33 

Diluted

  $0.60    $0.56    $1.10    $1.81    $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(restricted stock units and stock appreciation rights) had been converted to such common shares, and if such assumed conversion is dilutive.

For the three months ended March 31, 2017 and 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)

 

17)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. We haveThe Company has repurchased approximately 1,770,000 shares of our 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 ninethree months ended September 30,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 nine months ended September 30, 2015, the Company repurchased approximately 244,000 shares of its common stock for $8,866, or an average price of $36.32 per share.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

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 ninethree months ended September 30,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, in the first, second and third quarters of 2016, which totaled $27,249. During the nine months ended September 30, 2015, the Company’s Board of Directors declared a cash dividend of $0.165 per share in the first quarter of 2015 and a cash dividend of $0.17 per share in the second and third quarters of 2015, which dividends totaled $26,928.

On October 24, 2016, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per share to be paid on December 9, 2016 to shareholders of record as of November 28, 2016.$9,056. 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.

 

18)15)Stock-BasedStock 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 September 30, 2016,March 31, 2017, 17,462 RSUs remained outstanding under the DC Plan, and an additional 136234 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 ninethree months ended September 30, 2016,March 31, 2017, the Company granted 740,985171,179 RSUs with a weighted average grant date fair value of $35.51$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 the Company did not grant any stock appreciation rights.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
September 30,
   Nine Months Ended
September 30,
 
  2016   2015   2016   2015   Three Months Ended
March 31, 2017
   Three Months Ended
March 31, 2016
 

Cost of revenues

  $666    $432    $1,996    $1,489    $930   $440 

Research and development expense

   551     405     1,614     1,255     745    374 

Selling, general and administrative expense

   3,941     2,410     16,216     7,281     7,107    3,338 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total pre-tax stock-based compensation expense

  $5,158    $3,247    $19,826    $10,025    $8,782   $4,152 
  

 

   

 

   

 

   

 

   

 

   

 

 

At September 30, 2016,March 31, 2017, the total compensation expense related to unvested stock-based awards granted to employees, officers and directors under the Company’s stock–based compensation planPlan that had not been recognized was $29,283,$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.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

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

 

   Nine Months Ended September 30, 2016 
   Non-vested RSUs   Weighted Average
Grant Date
Fair value
 

Non-vested RSUs – beginning of period

   733,162    $30.94  

Assumed RSUs from Newport Merger

   360,674     35.01  

Accrued dividend shares

   136     43.64  

Granted

   740,985     35.51  

Vested

   (452,251   31.18  

Forfeited

   (55,474   33.74  
  

 

 

   

 

 

 

Non-vested RSUs – end of period

   1,327,232    $34.40  
  

 

 

   

 

 

 
   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 
  

 

 

   

 

 

 

ForThe following table presents the three months ended September 30, 2016, there were approximately 529,000 and 213,000 weighted-average RSUs and stock appreciation rights, respectively, that would have an anti-dilutive effect on EPS, and would thus need to be excluded fromactivity for SARs under the computation of diluted weighted-average shares. For the nine months ended September 30, 2016, there were approximately 401,000 and 181,000 weighted-average RSUs and stock appreciation rights, respectively, that would have an anti-dilutive effect on EPS, and would thus need to be excluded from the computation of diluted weighted-average shares.Plan:

As of September 30, 2015, stock options and RSUs related to an aggregate of approximately 752,000 shares were outstanding. For the three and nine months ended September 30, 2015, there were no RSUs or stock options that were excluded from the computation of diluted weighted-average shares outstanding that would have had an anti-dilutive effect on EPS.

   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 September 30, 2016,March 31, 2017, the Company’s outstanding and exercisable stock appreciation rights,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
 

Stock appreciation rights outstanding

   712,284    $27.86     4.1    $15,581  

Stock appreciation rights exercisable

   482,001    $26.52     3.5    $11,185  
   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)

 

19)16)Business Segment, Geographic Area, Product and Significant Customer Information

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

The Company’s Chief Operating Decision Maker (“CODM”) utilizes financial information to make decisions about allocating resources and assessing performance for the entire 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 two 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 theare: Vacuum & Analysis Divisionand Light & Motion. The Vacuum & Analysis segment represents the legacy MKS business and the Light & Motion Division.segment represents the legacy Newport business.

The Vacuum & Analysis Divisionsegment provides a broad range of instruments, components subsystems and softwaresubsystems which are derived from the Company’s core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, 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 Divisionsegment provides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in lasers, photonics sub-micron positioning, vibration isolation and 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. 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 September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 

Vacuum & Analysis Division

  $229,167    $209,332    $620,207    $641,137  

Light & Motion Division

   151,493     —      269,995     —    
  

 

 

   

 

 

   

 

 

   

 

 

 
  $380,660    $209,332    $890,202    $641,137  
  

 

 

   

 

 

   

 

 

   

 

 

 
   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 September 30,   Nine Months Ended September 30,   Three Months Ended March 31, 
  2016   2015   2016   2015   2017   2016 

Gross profit by reportable segment:

            

Vacuum & Analysis Division

  $104,232    $94,229    $273,004    $290,073  

Light & Motion Division

   64,153     —      109,207     —   

Vacuum & Analysis

  $128,924   $77,913 

Light & Motion

   76,623    —   
  

 

   

 

   

 

   

 

   

 

   

 

 

Total gross profit by reportable segment

   168,385     94,229     382,211     290,073     205,547    77,913 

Operating expenses:

            

Research and development

   32,268     17,217     77,709     51,464     33,282    17,227 

Selling, general and administrative

   70,424     33,396     175,803     97,532     74,220    33,950 

Acquisition costs

   233     —       10,932     30  

Acquisition and integration costs

   1,442    2,494 

Restructuring

   —       562     24     1,569     522    —   

Amortization of intangible assets

   12,452     1,691     22,990     5,071     12,501    1,683 
  

 

   

 

   

 

   

 

   

 

   

 

 

Income from operations

   53,008     41,363     94,753     134,407     83,580    22,559 

Interest and other (expense) income, net

   (10,760   721     (16,332   2,015     (6,295   1,246 
  

 

   

 

   

 

   

 

   

 

   

 

 

Income before income taxes

   42,248     42,084     78,421     136,422     77,285    23,805 

Provision for income taxes

   9,699     12,315     19,099     39,647     12,225    6,242 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income

  $32,549    $29,769    $59,322    $96,775    $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 and nine months ended September 30, 2016March 31, 2017 and 2015:2016:

 

   Vacuum & Analysis
Division
   Light & Motion
Division
   Total 

Three Months Ended September 30, 2016:

      

Capital expenditures

  $2,772    $1,923    $4,695  
  

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2016:

      

Capital expenditures

  $7,964    $3,995    $11,959  
  

 

 

   

 

 

   

 

 

 
   Vacuum & Analysis
Division
   Light & Motion
Division
   Total 

Three Months Ended September 30, 2015:

      

Capital expenditures

  $3,497    $—     $3,497  
  

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2015:

      

Capital expenditures

  $8,831    $—     $8,831  
  

 

 

   

 

 

   

 

 

 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)

(in thousands, except share and per share data)

   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 
  

 

 

   

 

 

   

 

 

 

The following is depreciation and amortization by reportable segment for the three and nine months ended September 30, 2016March 31, 2017 and 2015:2016:

 

  Vacuum & Analysis
Division
   Light & Motion
Division
   Total   Vacuum & Analysis   Light & Motion   Total 

Three Months Ended September 30, 2016:

      

Three Months Ended March 31, 2017:

      

Depreciation and amortization

  $5,142    $16,907    $22,049    $5,122   $16,711   $21,833 
  

 

   

 

   

 

   

 

   

 

   

 

 

Nine Months Ended September 30, 2016:

      

Three Months Ended March 31, 2016:

      

Depreciation and amortization

  $15,628    $28,129    $43,757    $5,278   $—     $5,278 
  

 

   

 

   

 

   

 

   

 

   

 

 
  Vacuum & Analysis
Division
   Light & Motion
Division
   Total 

Three Months Ended September 30, 2015:

      

Depreciation and amortization

  $5,524    $—     $5,524  
  

 

   

 

   

 

 

Nine Months Ended September 30, 2015:

      

Depreciation and amortization

  $16,606    $—     $16,606  
  

 

   

 

   

 

 

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:

 

September 30, 2016  Vacuum & Analysis
Division
   Light & Motion
Division
   Corporate &
Eliminations
   Total 
March 31, 2017:  Vacuum &
Analysis
   Light & Motion   Corporate,
Eliminations
and Other
   Total 

Segment assets:

                

Accounts receivable

  $136,654    $128,401    $(21,202  $243,853    $165,210   $123,247   $(21,208  $267,249 

Inventory

   161,219     117,746     —       278,965  

Inventory, net

   167,322    118,196    —      285,518 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total segment assets

  $297,873    $246,147    $(21,202  $522,818    $332,532   $241,443   $(21,208  $552,767 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
December 31, 2015  Vacuum & Analysis
Division
   Light & Motion
Division
   Corporate &
Eliminations
   Total 
December 31, 2016:  Vacuum &
Analysis
   Light & Motion   Corporate,
Eliminations
and Other
   Total 

Segment assets:

                

Accounts receivable

  $101,883    $—     $—     $101,883    $148,516   $121,516   $(21,275  $248,757 

Inventory

   152,631     —      —      152,631  

Inventory, net

   165,040    110,829    —      275,869 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total segment assets

  $254,514    $—     $—     $254,514    $313,556   $232,345   $(21,275  $524,626 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

A reconciliation of segment assets to consolidated total assets is as follows:

 

   September 30, 2016   December 31, 2015 

Total segment assets

  $522,818    $254,514  

Cash and cash equivalents and investments

   435,234     658,237  

Other current assets, including restricted cash

   59,547     26,760  

Property, plant and equipment, net

   179,694     68,856  

Goodwill and intangible assets, net

   1,014,446     243,730  

Other assets

   29,926     21,250  
  

 

 

   

 

 

 

Consolidated total assets

  $2,241,665    $1,273,347  
  

 

 

   

 

 

 

Goodwill associated with the Company’s reportable segments is as follows:

   September 30, 2016   December 31, 2015 

Reportable segment:

    

Vacuum & Analysis Division

  $200,368    $199,703  

Light & Motion Division

   394,267     —   
  

 

 

   

 

 

 

Total goodwill

  $594,635    $199,703  
  

 

 

   

 

 

 

   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–STATEMENTS – (continued)

(in thousands, except share and per share data)

Worldwide Product Information

The Company groups its products into six 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 September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 

Instruments, Control & Vacuum Products

  $114,491    $98,614    $317,141    $319,491  

Power & Reactive Gas Products

   98,827     95,311     259,797     276,787  

Analytical Solutions Products

   15,907     15,407     43,334     44,859  

Photonics Products

   62,226     —      108,090     —   

Optics Products

   44,331     —      79,594     —   

Lasers Products

   44,878     —      82,246     —   
  

 

 

   

 

 

   

 

 

   

 

 

 
  $380,660    $209,332    $890,202    $641,137  
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales of Instruments, Control & Vacuum Products, Power & Reactive Gas Products and Analytical Solutions Products are included in the Company’s Vacuum & Analysis Division segment. Sales of Photonics Products, Optics Products and Lasers Products are included in the Light & Motion Division segment.

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 September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 

Net revenues:

        

North America

  $198,305    $122,348    $460,994    $365,942  

Korea

   32,642     27,760     79,240     87,181  

Japan

   26,970     14,699     68,738     49,001  

Asia (excluding Korea and Japan)

   75,179     24,833     173,526     79,259  

Europe

   47,564     19,692     107,704     59,754  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $380,660    $209,332    $890,202    $641,137  
  

 

 

   

 

 

   

 

 

   

 

 

 

  Three Months Ended March 31, 
  2017   2016 

Net revenues:

    

United States

  $218,050   $94,218 

Korea

   44,878    20,550 

Japan

   37,792    16,236 

Asia (excluding Korea and Japan)

   88,243    33,456 

Europe

   48,190    19,221 
  

 

   

 

 
  $437,153   $183,681 
  

 

   

 

 
  September 30, 2016   December 31, 2015 

Long-lived assets:(1)

      March 31, 2017   December 31, 2016 

North America

  $120,379    $56,594  

United States

  $119,337   $122,547 

Europe

   30,818     5,783     28,152    28,717 

Asia

   50,551     8,952     49,275    49,406 
  

 

   

 

   

 

   

 

 
  $201,748    $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-relatedtax 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–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 September 30, Nine Months Ended September 30,   Three Months Ended March 31, 
  2016 2015 2016 2015   2017 2016 

Applied Materials, Inc.

   12 18 14 18   13.0 18.8

LAM Research Corporation

   9 16 11 14   12.6 17.1

 

20)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 for claims related to the Merger Agreement between the Company, Newport, and Merger Sub. The complaint, filed on March 9, 2016, named as defendants the Company, Newport and Merger Sub, and certain then-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 preliminary proxy statement filed by Newport on March 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 the Newport’s stockholders for claims related to the Merger Agreement. The complaint names as defendants the Company, Newport, and Merger Sub 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, 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 24,19, 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 amended complaint have no merit and the Company, Newport and the named directors intend to defend vigorously against these claims.

The Company is subject to various other legal proceedings and claims, which have arisen in the ordinary course of business. In the Company’s 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.

19)Subsequent Events

In April 2017, the Company completed the sale of its Data Analytics Solutions business for approximately $80,000 and expects to record apre-tax gain of approximately $75,000, during the second quarter of 2017. This business, which had net revenues in 2016 of $12,700 and was included in the Vacuum & Analysis segment, was no longer a part of the Company’s long-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 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 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.

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, 2016 in the section entitled “Risk Factors” as referenced in Part II, Item 1A “Risk Factors” of thethis Quarterly Report on Form 10-Q for the period ended June 30, 2016, filed with the Securities and Exchange Commission on August 3, 2016.10-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 measurement and control, flow measurementautomation and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control and information technology, ozone generation andlasers, materials delivery, RF & DCoptics, photonics, pressure, power, reactive gas generation, vacuum technology, lasers, photonics, sub-micron positioning, vibration isolation and optics. vacuum. We also provide services related to the maintenance and repair of our products, installation services and training.

Our primary served markets include semiconductorare manufacturers of capital equipment generalfor semiconductor manufacturing, electronic thin films, life and health sciences, process and industrial life sciencestechnologies, as well as research and research.defense.

Acquisition of Newport Corporation

On April 29, 2016, we completed our acquisition of Newport Corporation (“Newport”) pursuant to an Agreement and Plan of Merger dated as of February 22, 2016 (the “Newport Merger”). At the effective time of the Newport Merger, 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 repaid 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 facilityTerm Loan Facility of $780 million 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 Divisionsegment and the Light & Motion Division.segment. The Vacuum & Analysis segment represents the legacy MKS business and the Light & Motion segment represents the legacy Newport business.

The Vacuum & Analysis Divisionsegment provides a broad range of instruments, components subsystems and softwaresubsystems 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 Divisionsegment 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.

For the nine months ended September 30, 2016Approximately 60% and 2015, approximately 58% and 70%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 47% and 16%$125.4 million, or 93%, for the three and nine months ended September 30, 2016, respectively,March 31, 2017, compared to the same periodsperiod in the prior year. These increases are primarilyThis increase is attributed to net

semiconductor revenues from the Newport Merger of $37.1$41.3 million and $64.3 million for the three and nine months ended September 30, 2016, respectively. Netnet semiconductor revenues forfrom the legacy MKS business (Vacuum & Analysis Division segment), which increased $29.9$84.1 million, and $6.4 millionor 62%, for the three and nine months ended

September 30, 2016, respectively, March 31, 2017, compared to the same periodsperiod 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 manufacture customers,product applications, increased by 157% and 92%$128.0 million, or 261%, for the three and nine months ended September 30, 2016, respectively,March 31, 2017, compared to the same periodsperiod in the prior year. These increases are primarilyThis increase is attributed to net revenues from customers in other advanced markets resulting from the Newport Merger of $114.3$117.8 million and $205.6 million for the three and nine months ended September 30, 2016, respectively. These increases are offset by decreases in net revenues from customers in other advanced markets from the legacy MKS business (Vacuum & Analysis Division segment) of $10.0which increased by $10.2 million, and $27.2 million for the three and nine months ended September 30, 2016, respectively, mainly related to the general industrial and solaror 21%, from customers in other advanced markets. Revenues from customers in other advanced markets are made up of many different markets including generalelectronic thin film, life and health sciences, process and industrial life sciences, defensetechnologies and research and solar. Some of these markets are project-based and our revenues can fluctuate quarter to quarter.defense.

A significant portion of our net revenues is from sales to customers in international markets. For the ninethree months ended September 30,March 31, 2017 and 2016, and 2015, international net revenues accounted for approximately 48%50% and 43%49% of our total net revenues, respectively. A significant portion of our international net revenues were in Korea, Japan and Israel. Following the Newport Merger, weWe expect that international net revenues will continue to represent a significant percentage of our total net revenues.

Recent Events

In connection with the completionSale of the Newport Merger, we entered into a term loan credit agreement dated as of April 29, 2016 (the “Credit Agreement”) with Barclays Bank PLC as administrative agent and collateral agent, that provided senior secured financing of $780 million, subject to increase in accordance with the terms of the Credit Agreement.Data Analytics Solutions business

In June 2016,April 2017, we entered into an amendmentcompleted the sale of our Data Analytics Solutions business for approximately $80.0 million and expect to the Credit Agreement (the “Repricing Amendment”) where we decreased the applicable margin for borrowings by 0.50%. In connection with the Repricing Amendment we paidrecord a prepayment premiumpre-tax gain of 1.0% or $7.3 million, as well as certain fees and expenses. Immediately prior to the effectiveness of the Repricing Amendment, we prepaid $50 million of principal under the Credit Agreement. In September 2016, we voluntarily prepaid an additional $60 million of principal under the Credit Agreement. The total outstanding principal balance of the Credit Agreement as of September 30, 2016, which included a regularly scheduled principal payment of $1.8approximately $75.0 million, during the thirdsecond quarter of 2017. This business, which had net revenues in 2016 of $12.7 million and was $668.2 million.included in the Vacuum & Analysis segment, was no longer a part of our long-term strategic objectives.

In September 2016,The business did not qualify as a discontinued operation as this sale did not represent a strategic shift in our business, nor did the Company also entered into an interest rate swap agreementsale 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 fix the rate on approximately 50% of the remaining outstanding term loan balance under the Credit Agreement. The swap converts the floating rate on $335 million of the outstanding principal amount of the term loan to a fixed interest rate of 4.70% through September 2020.

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.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
September 30,
 Nine Months Ended
September 30,
   Three Months Ended March 31, 
  2016 2015 2016 2015   2017 2016 

Net revenues:

        

Product

   88.0 85.7 87.0 86.4   89.9 83.6

Services

   12.0   14.3   13.0   13.6     10.1  16.4 
  

 

  

 

  

 

  

 

   

 

  

 

 

Total net revenues

   100.0   100.0   100.0   100.0     100.0  100.0 

Cost of revenues:

        

Cost of product revenues

   48.3   45.7   48.7   45.9     46.9  46.5 

Cost of service revenues

   7.5   9.3   8.4   8.9     6.1  11.1 
  

 

  

 

  

 

  

 

   

 

  

 

 

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

   55.8   55.0   57.1   54.8     53.0  57.6 
  

 

  

 

  

 

  

 

   

 

  

 

 

Gross profit

   44.2   45.0   42.9   45.2     47.0  42.4 

Research and development

   8.5   8.2   8.7   8.0     7.6  9.4 

Selling, general and administrative

   18.4   15.9   19.8   15.2     17.0  18.4 

Acquisition costs

   0.1    —    1.2    —   

Acquisition and integration costs

   0.3  1.4 

Restructuring

   —    0.3    —    0.2     0.1   —   

Amortization of intangible assets

   3.3   0.8   2.6   0.8     2.9  0.9 
  

 

  

 

  

 

  

 

   

 

  

 

 

Income from operations

   13.9   19.8   10.6   21.0     19.1  12.3 

Interest (expense) income, net

   (2.8 0.3   (1.8 0.3  

Interest and other (expense) income, net

   (1.4 0.7 
  

 

  

 

  

 

  

 

   

 

  

 

 

Income from operations before income taxes

   11.1   20.1   8.8   21.3     17.7  13.0 

Provision for income taxes

   2.5   5.9   2.1   6.2     2.8  3.4 
  

 

  

 

  

 

  

 

   

 

  

 

 

Net income

   8.6 14.2 6.7 15.1   14.9 9.6
  

 

  

 

  

 

  

 

   

 

  

 

 

Net Revenues

 

  Three Months Ended September 30, Nine Months Ended September 30,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change 2016   2015   % Change   2017   2016 

Product

  $335.2    $179.4     86.8 $774.3    $553.8     39.8  $392.9   $153.6 

Service

   45.5     29.9     52.2   115.9     87.3     32.8     44.2    30.1 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 

Total net revenues

  $380.7    $209.3     81.8 $890.2    $641.1     38.9  $437.1   $183.7 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 

Product revenues increased $155.8 million and $220.5$239.3 million during the three and nine months ended September 30, 2016, respectively,March 31, 2017, compared to the same periodsperiod in the prior year. These increases wereThis increase was primarily attributed to the Newport Merger, which accounted for productas revenues of $137.7 million and $247.3associated with Newport products were $146.4 million for the three and nine months ended September 30, 2016, respectively.March 31, 2017. Product revenues increased for our legacy MKS business (Vacuum & Analysis Division segment) by $18.0$92.9 million for the three months ended September 30, 2016,March 31, 2017, compared to the same period in the prior year, primarily due to an increase in product revenues from our semiconductor capital equipment manufacture and semiconductor device manufacture customers of $26.6$83.1 million, primarily due to volume offset by a decreaseand an increase in product revenues from our other advanced marketselectronic thin film market of $8.6 million, which include general industrial, life sciences, defense and research and solar. Product revenues decreased for our legacy MKS business (Vacuum & Analysis Division segment) by $26.8 million for the nine months ended September 30, 2016, primarily due to decreases in revenue of $24.6 million from our other advanced markets, mainly in the solar and general industrial markets.$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 $15.6 million and $28.6$14.1 million during the three and nine months ended September 30, 2016, respectively,March 31, 2017, compared to the same periodsperiod in the prior year. These increases wereThis increase was primarily attributableattributed to the Newport Merger, which accounted for serviceas revenues of $13.8 million and $22.7associated with Newport services were $12.7 million for the three and nine months ended September 30, 2016, respectively.

March 31, 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, primarily due to increases in service revenues from our semiconductor capital equipment and semiconductor device manufacture customers of $1.0 million.

Total international net revenues, including product and service, were $182.4 million and $429.2was $219.1 million for the three and nine months ended September 30, 2016, respectively,March 31, 2017, or 50.1% of net revenues, compared to $87.0 million and $275.2$89.5 million for the three and nine months ended September 30, 2015, respectively. These increasesMarch 31, 2016, or 48.7% of $95.4net revenues. The increase in international revenues of $129.6 million and $154.0primarily relates to $79.3 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year, were primarily attributable tofrom the Newport Merger, which had total international netMerger. The remainder of the increase of $50.3 million is attributed to our legacy MKS business (Vacuum & Analysis) segment, primarily due to increases in revenue of $24.3 million in Korea, $6.4 million in Israel, $5.4 million in Shanghai, and $4.8 million in Singapore. The majority of our foreign revenues of $64.8 millionare from sales to customers in Asia, primarily in Korea, Japan and $115.2 million for the three and nine months ended September 30, 2016, respectively.Israel.

The following is our net revenues by reportable segment:

 

  Three Months Ended September 30, Nine Months Ended September 30,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   % Change 2016   2015   % Change   2017   2016 

Net revenues:

               

Vacuum & Analysis Division

  $229.2    $209.3     9.5 $620.2    $641.1     (3.3)% 

Light & Motion Division

   151.5     —      100.0   270.0     —      100.0  

Vacuum & Analysis

  $278.0   $183.7 

Light & Motion

   159.1    —   
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 

Total net revenues

  $380.7    $209.3     81.8 $890.2    $641.1     38.9  $437.1   $183.7 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 

Net revenues for our Vacuum & Analysis Division segment increased $19.9$94.3 million for the three months ended September 30, 2016March 31, 2017, compared to the same period in the prior year, primarily due to an increase in net revenues from our semiconductor capital equipment manufacture and semiconductor device manufacture customers of $29.9$84.1 million offset by a decreaseand an increase in revenues of $10.0 million from our other advanced markets, including general industrial, life sciences, defense and research and solar markets. Net revenues for our Vacuum & Analysis Division segment decreased $20.9 million for the nine months ended September 30, 2016 compared to the same period in the prior year, primarily due to a decrease in total net revenues from customers in our other advancedelectronic thin film markets of $27.2$6.1 million. This segment represents the legacy MKS business.

Net revenues from our Light & Motion Division segment was $151.5$159.1 million and $270.0 for the three and nine months ended September 30, 2016.March 31, 2017. This segment represents the legacy Newport business, which was acquired during the second quarter of 2016.

Gross Profit

 

  Three Months Ended September 30, Nine Months Ended September 30,   Three Months Ended March 31, 
  2016 2015 % Points
Change
 2016 2015 % Points
Change
   2017 2016 % Points
Change
 

Gross profit as a percentage of net revenues:

           

Product

   45.2 46.7 (1.5)%  44.1 46.9 (2.8)%    47.8 44.4 3.4

Service

   37.4   35.1   2.3   35.4   34.9   0.5     40.0  32.1  7.9 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

 

Total gross profit

   44.2 45.0 (0.8)%  42.9 45.2 (2.3)%    47.0 42.4 4.6
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

 

Gross profit as a percentage of net product revenues decreasedincreased by 1.53.4 percentage points for the three months ended September 30, 2016, compared to the same period in the prior year. The decrease was primarily attributed to higher material costs, mainly from the $5.0 million of inventory step-up amortization from the Newport Merger, partially offset by an increase from higher revenue volumes.

Gross profit as a percentage of net product revenues decreased by 2.8 percentage points for the nine months ended September 30, 2016, compared to the same period in the prior year. The decrease was primarily attributed to a decrease of 4.2 percentage points due to higher material costs, mainly from the $15.1 million of inventory step-up amortization from the Newport Merger and a decrease of 2.5 percentage points due to higher overhead costs, mainly from the Newport Merger, partially offset by an increase of 3.5 percentage points from higher revenue volumes.

Gross profit as a percentage of net service revenues increased by 2.3 percentage points for the three months ended September 30, 2016,March 31, 2017, compared to the same period in the prior year. The increase was primarily attributed to 8.1 percentage points related to favorable revenue volumes, partially offset by a net increasedecrease of 1.72.2 percentage points due to lower directunfavorable mix, 1.9 percentage points due to higher labor and overhead costscharges, resulting from the Newport Merger and 0.4 percentage points due to higher excess and obsolete inventory charges.

Gross profit as a percentage of revenues.net service revenues increased by 7.9 percentage points for the three months ended March 31, 2017, compared to the same period in the prior year. This increase was primarily attributed to 5.6 percentage points due to favorable material costs, primarily from an adjustment to material costs that we do not expect to reoccur in the future, and 3.1 percentage points due to favorable product 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.

Gross profit as a percentage of net service revenues remained relatively flat, for the nine months ended September 30, 2016, compared to the same period in the prior year.

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

 

  Three Months Ended September 30, Nine Months Ended September 30,   Three Months Ended March 31, 
  2016 2015 % Points
Change
 2016 2015 % Points
Change
   2017 2016 % Points
Change
 

Gross profit:

           

Vacuum & Analysis Division

   45.5 45.0 0.5 44.0 45.2 (1.2)% 

Light & Motion Division

   42.3    —    42.3   40.4    —    40.4  

Vacuum & Analysis

   46.4 42.4 4.0

Light & Motion

   48.1   —    100.0 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

 

Total gross profit

   44.2 45.0 (0.8)%  42.9 45.2 (2.3)%    47.0 42.4 4.6
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

 

Gross profit for our Vacuum & Analysis Division segment increased by 0.54.0 percentage points for the three months ended September 30, 2016,March 31, 2017, compared to the same period in the prior year, primarily as a result of higher revenue volumes, favorable labor and favorable product mix,overhead charges, partially offset by slightly higher material costs and unfavorable changes in foreign exchange. Gross profit decreased by 1.2 percentage points for the nine months ended September 30, 2016, compared to the same period in the prior year, primarily as a result of unfavorable product mix and unfavorable changes in foreign exchange.mix.

Gross profit for our Light & Motion Division segment was 42.3% and 40.4% of net revenues48.1% for the three and nine months ended September 30, 2016. This included charges of $5.0 million and $15.1 million of inventory step-up amortization for the three and nine months ended September 30, 2016, respectively, related to the Newport Merger. Excluding these inventory step-up amortization charges, the gross profit would have been 45.6% and 46.0% for the three and nine months ended September 30, 2016, respectively.March 31, 2017. The Light & Motion Division segment was established in the second quarter of 2016 as a result of the Newport Merger.

Research and Development

 

  Three Months Ended September 30,   Nine Months Ended September 30,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   2016   2015 
(dollars in millions  2017   2016 

Research and development expenses

  $32.3    $17.2    $77.7    $51.5    $33.3   $17.2 

Research and development expenses increased $15.1$16.1 million for the three months ended September 30, 2016,March 31, 2017, compared to the same period in the prior year. The increase was primarily attributed to an increase of $14.1$13.9 million from ourthe Newport Merger, in the second quarter of 2016, and consisted mainlyprimarily of $10.7$10.2 million of compensation costs and related benefits, $1.4$1.6 million of project materials and $1.0$0.9 million of occupancy costs. The remaining increase of $1.0$2.2 million relatesrelated to the legacy MKS business (Vacuum & Analysis Division segment) and consistsconsisted primarily of $0.7$0.9 million of project materials.

Research and development expenses increased $26.2 million for the nine months ended September 30, 2016, compared to the same period in the prior year. The increase was primarily attributed to an increase of $24.1 million from our Newport Merger in the second quarter of 2016, and consisted mainly of $18.2 million of compensation costs and related benefits, $2.3 million of project materials and $1.7$0.6 million of occupancyfor variable compensation related costs. The remaining increase of $2.1 million relates to the legacy MKS business (Vacuum & Analysis Division segment) and consists primarily of $1.2 million of compensation and related benefits and $1.0 million of project materials.

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 September 30,   Nine Months Ended September 30,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   2016   2015   2017   2016 

Selling, general and administrative expenses

  $70.4    $33.4    $175.8    $97.5    $74.2   $34.0 

Selling, general and administrative expenses increased by $37.0$40.2 million forin the three months ended September 30, 2016, compared to the same period in the prior year. The increase was primarily attributable to an increase of $34.1 million from the Newport Merger, and consisted primarily of $20.9 million of compensation costs and related benefits, $2.9 million of consulting and professional fees, $2.2 million of depreciation, $1.9 million of commissions and $0.7 million of integration costs related to the acquisition. The remaining increase of $2.9 million related to the legacy MKS business (Vacuum & Analysis Division segment) and consisted primarily of $2.5 million of compensation related expenses, including the timing of stock compensation expense as well as the annual increase in compensation costs, and $1.7 million of integration costs related to the Newport Merger partially offset by $0.8 million of favorable changes in foreign exchange and $0.2 million decrease in commissions.

Selling, general and administrative expenses increased by $78.3 million for the nine months ended September 30, 2016,March 31, 2017, compared to the same period in the prior year. The increase was primarily attributed to an increase of $68.0$33.4 million from the Newport Merger, and consisted primarily of $35.7$20.0 million of compensation costs and related benefits, $11.0$2.2 million of integration costs related to the acquisition, $4.6for depreciation expense, $2.1 million offor commissions and $2.0 million for consulting and professional fees, $3.7 million of depreciation, $3.4 million of commissions, and $2.3 million of travel and entertainment-related expenses.fees. The remaining increase of $10.3$6.8 million related to the legacy MKS business (Vacuum & Analysis Division segment) and consisted primarily of $6.8$4.4 million of compensation-related expenses, including the timing of stock compensation expense as well as the annual increase infor compensation costs and $3.3related benefits, primarily variable compensation, and $1.0 million of integration costs related to the Newport Merger.for consulting and professional fees.

Acquisition and Integration Costs

 

  Three Months Ended September 30,   Nine Months Ended September 30,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   2016   2015   2017   2016 

Acquisition costs

  $0.2    $—     $10.9    $—   

Acquisition and integration costs

  $1.4   $2.5 

We incurred $0.2$1.4 million and $10.9$2.5 million of acquisition and integration costs infor the three and nine months ended September 30,March 31, 2017 and 2016, respectively, related to the Newport Merger. These acquisition costs were comprised mainly of bank feesprimarily related to legal and consulting andother professional fees.

Restructuring

 

  Three Months Ended September 30,   Nine Months Ended September 30,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   2016   2015   2017   2016 

Restructuring

  $—      $0.6    $—      $1.6    $0.5   $—   

Restructuring chargesexpense for the three months ended September 30, 2015 related to severance costs from a reduction in workforce of 14 people, arising from the consolidation of certain foreign manufacturing locations. Restructuring charges for the nine months ended September 30, 2015 primarily related to severance costs associated with a reduction in workforce of 137 people, primarily relatedMarch 31, 2017, relates to the outsourcingrestructuring of a non-core foreign manufacturing processone of our international facilities and the consolidation of certain foreign manufacturing locations.sales offices.

Amortization of Intangible Assets

 

  Three Months Ended September 30,   Nine Months Ended September 30,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   2016   2015   2017   2016 

Amortization of intangible assets

  $12.5    $1.7    $23.0    $5.1    $12.5   $1.7 

Amortization expense increased by $10.8 million and $17.9 million forduring the three and nine months ended September 30, 2016, respectively. These increases wereMarch 31, 2017, compared to the same period in the prior year. This increase was primarily attributableattributed to the amortization expense of intangible assets acquired throughin the Newport Merger.

Interest and Other (Expense) Income, Net

 

  Three Months Ended September 30,   Nine Months Ended September 30,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   2016   2015   2017   2016 

Interest and other (expense) income, net

  $(10.8  $0.7    $(16.3  $2.0  

Interest (expense) income, net

  $(8.3  $0.9 

Interest and other (expense) income,expense, net, of $(10.8)increased by $9.2 million and $(16.3) million forduring the three and nine months ended September 30, 2016, respectively, includes netMarch 31, 2017, compared to the same period in the prior year. This increase is primarily attributed to $8.8 million of interest expense of $11.6 million and $18.7 million for the three and nine months ended September 30, 2016, respectively, and primarily related to our senior secured Term Loan Facility (as defined below). During the threeFacility.

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 nine months ended September 30, 2016, we recorded net proceeds of $1.3 million from a Company-owned life insurance policy.relates primarily to favorable foreign exchange.

Provision for Income Taxes

 

  Three Months Ended September 30,   Nine Months Ended September 30,   Three Months Ended March 31, 
(dollars in millions)  2016   2015   2016   2015   2017   2016 

Provision for income taxes

  $9.7    $12.3    $19.1    $39.6    $12.2   $6.2 

Our effective tax rate for the three and nine months ended September 30,March 31, 2017 and 2016 was 23.0%15.8% and 24.4%26.2%, respectively. The effective tax rate for the three and nine months ended September 30, 2016March 31, 2017, 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 federal research credit and the deduction for domestic production activities. These amounts were partially offset by taxes paid onactivities and the Company’s reorganizationstock compensation benefit related to the adoption of certain international subsidiaries and state income taxes. Duringa new accounting standard that became applicable during the three and nine monthsquarter ended September 30, 2016, the geographic mix of our pre-tax income was impacted by additional acquisition-related costs associated with the Newport Merger, amortization of intangibles, reversal of other purchase accounting-related charges and interest expense primarily located in the U.S. tax jurisdiction. The acquisition-related costs are treated as expenses in the financial reports but are largely capitalized for tax purposes. The reduction in higher taxed U.S. income relative to income earned by our non-U.S. subsidiaries resulted in a reduction in the overall effective tax rate in periods after the acquisition. These effects of the acquisition on the tax rate are expected to diminish in future periods.

March 31, 2017. Our effective tax rate for the three and nine months ended September 30, 2015 was 29.3% and 29.1%, respectively. The effective tax rate for the three and nine months ended September 30, 2015March 31, 2016 was lower than the U.S. statutory tax rate primarily due to the geographic miximpact of income andlower tax rates on profits earned by the Company’sour international subsidiaries being taxed at rates lower than the U.S. statutory tax rate 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 taxtaxes matters in future periods as new information becomes available.

Liquidity and Capital Resources

Cash and cash equivalents and short-term marketable investments excluding restricted cash, totaled $420.0$411.2 million at September 30, 2016,March 31, 2017, compared to $658.2$418.1 million at December 31, 2015. The decrease is primarily related to cash and investments used for the Newport Merger.2016.

Net cash provided by operating activities was $127.4$66.1 million for the ninethree months ended September 30, 2016March 31, 2017, and resulted from net income of $59.3$65.1 million, which includednon-cash charges of $86.2$36.9 million, offset by a net increase in working capital of $18.1$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 $44.5$15.2 million as a resultand an increase in inventories of increased revenue levels,$11.7 million, related to an increase in business activities and an increase in other current assets of $8.8 million, an increase in inventories of $5.1 million and an increase in other non-current assets of $3.3$1.5 million. These increases in working capital were partially offset by an increase in income taxes of $20.4$8.1 million an increase in accounts payable of $14.1 million,and an increase in other current andnon-current liabilities of $4.6 million and an increase in accrued compensation of $4.5$1.1 million.

Net cash provided by operating activities was $95.6$23.2 million for the ninethree months ended September 30, 2015March 31, 2016, and resulted mainly from net income of $96.8$17.6 million, which includednon-cash charges of $32.7$12.6 million, partially offset by a net increase in working capital of $33.9$7.0 million. The net increase in working capital was primarily due to an increase in inventories of $25.2 million and an increase in trade accounts receivable of $11.4$10.1 million, both related to an increase in business activities, a decrease in accrued compensation of $7.1 million and an increase in other current assets of $7.9 million and a decrease in accounts payable of $7.5$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 $10.5 million, an increase in other current and non-current liabilities of $4.6 million and an increase in accrued compensation of $3.6$2.3 million.

Net cash used inprovided by investing activities was $581.4$30.5 million for the ninethree months ended September 30,March 31, 2017, and resulted from $34.6 million of net sale and maturities of short-term investments, partially offset by $4.1 million in purchases of 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 the Newport Merger for $937.0$123.1 million and the purchase of production-related equipment of $12.0 million, partially offset by the net sale and maturities of short-term investments of $370.1 million, which was used to partially finance the Newport Merger. Net cash used in investing activities was $170.3 million for the nine months ended September 30, 2015 and resulted primarily from $151.6 million of net purchases of short-term and long-term investments, $9.9 million of cash primarily used for the acquisition, of Precisive, LLC on March 17, 2015 and $8.8partially offset by $2.2 million in purchases of production-related equipment.

Net cash provided byused in financing activities was $601.7$64.7 million for the ninethree months ended September 30, 2016March 31, 2017, and resulted primarily from net proceeds$51.6 million used for the partial repayment of $639.1 million, primarily related to the Credit AgreementTerm Loan Facility used to finance the Newport Merger partially offset by dividend payments made to common stockholders($50 million waspre-paid and $1.6 million was a regularly scheduled payment of $27.2 million, restricted cash of $6.2 million for collateral cash deposits relating to letters of credit and net payments related to tax payments made for employee stock awards of $3.1 million.

Net cash used in financing activities was $35.7 million for the nine months ended September 30, 2015 and consisted primarily of $26.9principal), $9.4 million of dividend payments made to common stockholders and $8.9$2.9 million of net payments related to tax payments for 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.

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. We have repurchased approximately 1,770,000 shares

During the three months ended March 31, 2017, there were no repurchases of our common stock for approximately $52.0 million pursuant to the program since its adoption.

stock. During the ninethree months ended September 30,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 nine months ended September 30, 2015, we repurchased approximately 244,000 shares of our common stock for $8.9 million, or an average price of $36.32 per share.

During the ninethree months ended September 30,March 31, 2017, our Board of 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 during the first, second and third quarters of 2016 that totaled $27.2$9.1 million. During the nine months ended September 30, 2015, our Board of Directors declared a cash dividend of $0.165 per share during the first quarter of 2015 and a cash dividend of $0.17 per share during the second and third quarters of 2015, which dividends totaled $26.9 million.

On October 24, 2016, our Board of Directors declared a quarterly cash dividend of $0.17 per share to be paid on December 9, 2016 to shareholders of record as of November 28, 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, 2017, consisted of $152.0 million held in the United States and $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 Delaware corporation,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

In connection withApril 2017, we completed the Newport Merger, which closed in April 2016, we paidsale of our Data Analytics Solutions business for approximately $80.0 million and expect 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 repaid approximately $93 million of Newport’s U.S. indebtedness outstanding as of immediately prior towas included in the effective time of the Newport Merger, and funded the payment of the aggregate consideration withVacuum & Analysis segment, was no longer a combinationpart of our available cash on hand of approximately $240 million and the proceeds from the senior secured term loan facility of $780 million described below.long-term strategic objectives.

Term Loan Credit Agreement

In connection with the completion of the Newport Merger, we entered into the Credit Agreementa term loan credit agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the Lenders,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” 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.

OnIn June 9, 2016, we entered into the Repricing Amendment No. 1 (the“Re-pricing Amendment 1”) to the Credit Agreement by and among us,the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The RepricingRe-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 prepaymentpre-payment premium may be required for a “Repricing“Re-pricing Transaction” (as defined in the Credit Agreement) until six months after the effective date of the Repricing Amendment.Re-pricing Amendment 1. In connection with the execution of the RepricingRe-pricing Amendment 1, we paid a prepaymentpre-payment premium of 1.00%, or $7.3 million, 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 the RepricingRe-pricing Amendment 1, we prepaid $50 $50.0��million of principal under the Credit Agreement. In September 2016, we prepaid an additional $60$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. TheIn 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 Credit Agreementterm 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 September 30, 2016, which also reflected a regularly scheduled principal payment of $1.8 million during the third quarter of 2016, was $668.2 million.March 31, 2017.

Under the Credit Agreement, we are required to prepay outstanding term loans, subject to certain exceptions, with portions of itsour 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. 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 such original principal amount reduced by any such prepayments (including the $110 million prepaid to date in 2016), 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 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, we were in compliance with all covenants under the Credit Agreement.

Senior Secured Asset-Based Revolving Credit Facility

In connection with ourthe 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, 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$50.0 million, 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$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 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.

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.

In 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 thereunder. The initial commitment fee is 0.375% per 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 based on the amount of average unutilized commitments for the three-monththree 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 renewed at three-monththree month intervals. The lines of credit provided for aggregate borrowings as of September 30, 2016March 31, 2017, of up to an equivalent of $22.8$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-termShort-Term Prime Lending Rate. There were no borrowings outstanding under these arrangements at September 30, 2016March 31, 2017 and December 31, 2015.2016.

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 September 30, 2016March 31, 2017, of up to an equivalent of $9.9$11.2 million U.S. dollars. As of September 30, 2016, $4.2 million was outstanding under these arrangements. 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 with a balance of $0.6 million at September 30, 2016 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% - 2.00%.

Our total cash and cash equivalents and short-term marketable investments at September 30, 2016 consisted of $214.1 million held in the United States and $205.9 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 and ability to borrow against our ABL Facility are adequate for us to meet domestic operating needs, including estimated working capital, planned capital expenditure requirements and any future cash dividends, if declared, during the next twelve months and the foreseeable future.

Off BalanceOff-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.

Contractual Obligations

In connection with the Newport Merger, in addition to debt obligations and pension obligations as described within this document, we have also assumed contractual capital and operating lease obligations and purchase obligations.

Future payments due under debt, lease, pension and purchase commitment obligations as of September 30, 2016 are as follows:

   Payment Due By Period 

Contractual Obligations (In thousands)

  Total   Less than
1 Year
   1-3 years   3-5 years   After
5 years
   Other(1) 

Operating lease obligations

  $70,369    $9,156    $41,669    $15,385    $4,159    $—    

Purchase obligations(2)

   205,506     52,437     125,471     18,137     9,461     —    

Pension obligations

   31,822     410     5,478     1,610     24,324     —    

Debt

   672,990     6,054     22,442     14,644     629,850     —    

Other long-term liabilities reflected on the Balance Sheet under U.S. GAAP(3)

   124,801     214     12,262     1,141     96,187     14,997  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,105,488    $68,271    $207,322    $50,917    $763,981    $14,997  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)This balance relates to our reserve for uncertain tax positions.
(2)As of September 30, 2016, we have entered into purchase commitments for certain inventory components and other equipment and services used in our normal operations. The majority of these purchase commitments covered by these arrangements are for periods of one to three years and aggregate to approximately $205.5 million.
(3)The majority of this balance relates to deferred tax liabilities.

Recently Issued Accounting Pronouncements

In August 2016,March 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 ASU2017-01, “Business Combinations (Topic 805)-Clarifying the Definition of 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. 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 March 2016, the FASB issued ASU 2016-09 “Compensation - Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting.” This standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. This ASU will be adopted in the first quarter of 2017 and could have a material 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 January 2016, the FASB issued ASU2016-01, “Financial Instruments—Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU 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 do not result in consolidation and are not accounted for under the

equity method. Changes in the fair value of these equity securities will be recognized directly in net income. This pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

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. We do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

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, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, including interim periods within 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 Revenue from Contracts with Customers (Topic 606),” which supersedes all. 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 requirements, including most industry-specific guidance. This standard requires a company to recognize revenueguidance in Generally Accepted Accounting Principles 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. Thebecomes effective. 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. This pronouncement2014-09 is effective for annualfiscal years and interim periods within those years beginning after December 15, 2017, including interim periods within those fiscal years.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 RiskRisk” contained in our Annual Report on Form10-K for the year ended December 31, 2016 filed with the Securities and Sensitivity Analysis

Our primary exposuresExchange Commission on March 1, 2017. As of March 31, 2017, there were no material changes in our exposure to market risks include fluctuations in interest rates on our Term Loan Facility and investment portfolio, as well as fluctuations in foreign currency exchange rates.

Interest Rate Risk

We hold our cash, cash equivalents and short-term investments for working capital purposes. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of such investments to fluctuate. To minimize this risk we maintain our portfolio of cash, cash equivalents and short-term investments in a variety of securities, including money market funds and government debt securities. The risk associated with fluctuating interest rates is limited to our investment portfolio. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income. The effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our operating results or the total fair value of the portfolio.

We are exposed to market risks related to fluctuations in interest rates related to our Term Loan Facility. As of September 30, 2016, we owed $668.2 million with $335.0 million at a fixed interest rate of 4.7% and $333.2 million at a variable interest rate of 4.25%. We performed a sensitivity analysis on the outstanding portion of our debt obligation as of September 30, 2016. Should the current average interest rate increase or decrease by 10%, the resulting annual increase or decrease to interest expense would be approximately $1.4 million as of September 30,from December 31, 2016.

From time to time, we have outstanding lines of credit and short-term borrowings with variable interest rates, primarily denominated in Japanese Yen. As of September 30, 2016, $4.2 million was outstanding under these arrangements. These lines of credit have a base interest rate of 1.25% plus a Japanese Yen overnight LIBOR rate. A 10% change in interest rates would not have had a material impact on our operating results.

Foreign Exchange Rate Risk

We mainly enter into forward exchange contracts to reduce currency exposure arising from intercompany sales of inventory. We also enter into forward exchange contracts to reduce foreign exchange risks arising from the change in fair value of certain foreign currency denominated assets and liabilities.

We had forward exchange contracts with notional amounts totaling approximately $41.5 million outstanding and a net fair value liability of $2.8 million at September 30, 2016. The potential fair value loss for a hypothetical 10% adverse change in the currency exchange rate on our forward exchange contracts at September 30, 2016 would be immaterial.

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 September 30, 2016.March 31, 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 September 30, 2016,March 31, 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 September 30, 2016March 31, 2017, 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 filed on March 9, 2016, names as defendants the Company, Newport, Merger Sub, and certain then-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 preliminarydefinitive proxy statement filed by Newport on March 15,29, 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 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 Courtcourt ordered.

On October 24,19, 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.

We believeThe Company believes that the claims asserted in the amended complaint have no merit and the Company, Newport 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 Form 10-Q10-K for the periodyear ended June 30,December 31, 2016 in the section entitled “Risk Factors.” There have been no material changes from the risks disclosed therein.

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.
November 8, 2016May 9, 2017  By: 

/s/ Seth H. Bagshaw

   

Seth H. Bagshaw

Vice President, Chief Financial Officer and Treasurer (Principal
(Principal Financial Officer)

EXHIBIT INDEX

 

Exhibit

No.

  

Exhibit Description

  +3.1(1)  Restated Articles of Organization of the Registrant
  +3.2(2)  Articles of Amendment to Restated Articles of Organization, as filed with the Secretary of State of Massachusetts on May 18, 2001
  +3.3(3)  Articles of Amendment to Restated Articles of Organization, as filed with the Secretary of State of Massachusetts on May 16, 2002
  +3.4(4)  Amended and RestatedBy-Laws of the Registrant
+10.1(5)*Employment Agreement dated August 1, 2016 between Seth Bagshaw and the Registrant
+10.2(5)*Employment Agreement dated August 1, 2016 between John Abrams and the Registrant
+10.3(5)*Employment Agreement dated August 1, 2016 between John Lee and the Registrant
+10.4(5)*Employment Agreement dated August 1, 2016 between Brian Quirk and the Registrant
+10.5(5)*Employment Agreement dated August 1, 2016 between Dennis Werth and Newport Corporation
+10.6(5)*Summary of 2016 Cash Incentive Bonus Arrangements with Dennis Werth
+10.7(5)*Form of Indemnification Agreement between Newport Corporation and Dennis L. Werth
  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 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, 2002.
(4)Incorporated by reference to the Registrant’s Current Report on Form8-K filed with the Securities and Exchange Commission on May 6, 2014.
(5)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.

 

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