UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(MARK ONE)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
Commission file number
MKS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2277512 | |
(State or other jurisdiction | (I.R.S. Employer | |
of | Identification No.) |
2 Tech Drive, Suite 201, Andover, Massachusetts | 01810 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange which registered | ||
Common Stock, no par value | MKSI | Nasdaq Global Select Market |
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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File
requiredtobesubmitted pursuanttoRule405ofRegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submitIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐Indicate by check mark whether the registrant is a shell company (as defined in Rule
As of October
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
ITEM 1. | |||||||||
3 | |||||||||
4 | |||||||||
5 | |||||||||
7 | |||||||||
8 | |||||||||
ITEM 2. | 33 | ||||||||
ITEM 3. | 46 | ||||||||
ITEM 4. | 46 | ||||||||
ITEM 1. | 47 | ||||||||
ITEM 1A. | 47 | ||||||||
ITEM 6. | 48 | ||||||||
49 | |||||||||
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS. |
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands,millions, except share and per share data)
(Unaudited)
ASSETS |
| September 30, 2020 |
|
| December 31, 2019 |
| |||
Current assets: |
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
| $ | 493.3 |
|
| $ | 414.6 |
| |
Short-term investments |
|
| 222.4 |
|
|
| 109.4 |
| |
Trade accounts receivable, net of allowance for doubtful accounts of $2.0 and $1.8 at September 30, 2020 and December 31, 2019, respectively |
|
| 363.9 |
|
|
| 341.1 |
| |
Inventories |
|
| 494.2 |
|
|
| 462.1 |
| |
Other current assets |
|
| 95.9 |
|
|
| 106.3 |
| |
Total current assets |
|
| 1,669.7 |
|
|
| 1,433.5 |
| |
|
|
|
|
|
|
|
|
| |
Property, plant and equipment, net |
|
| 267.9 |
|
|
| 241.9 |
| |
Right-of-use asset |
|
| 180.1 |
|
|
| 64.5 |
| |
Goodwill |
|
| 1,062.1 |
|
|
| 1,058.5 |
| |
Intangible assets, net |
|
| 523.3 |
|
|
| 564.6 |
| |
Long-term investments |
|
| 6.3 |
|
|
| 5.8 |
| |
Other assets |
|
| 41.5 |
|
|
| 47.5 |
| |
Total assets |
| $ | 3,750.9 |
|
| $ | 3,416.3 |
| |
|
|
|
|
|
|
|
|
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| |
Current liabilities: |
|
|
|
|
|
|
|
| |
Short-term debt |
| $ | 12.0 |
|
| $ | 12.1 |
| |
Accounts payable |
|
| 113.4 |
|
|
| 88.4 |
| |
Accrued compensation |
|
| 95.4 |
|
|
| 100.9 |
| |
Income taxes payable |
|
| 18.8 |
|
|
| 15.4 |
| |
Lease liability |
|
| 16.8 |
|
|
| 20.6 |
| |
Deferred revenue and customer advances |
|
| 30.4 |
|
|
| 21.5 |
| |
Other current liabilities |
|
| 77.5 |
|
|
| 58.8 |
| |
Total current liabilities |
|
| 364.3 |
|
|
| 317.7 |
| |
|
|
|
|
|
|
|
|
| |
Long-term debt, net |
|
| 816.8 |
|
|
| 871.7 |
| |
Non-current deferred taxes |
|
| 67.2 |
|
|
| 72.4 |
| |
Non-current accrued compensation |
|
| 44.9 |
|
|
| 43.9 |
| |
Non-current lease liability |
|
| 172.2 |
|
|
| 44.8 |
| |
Other liabilities |
|
| 58.7 |
|
|
| 42.5 |
| |
Total liabilities |
|
| 1,524.1 |
|
|
| 1,393.0 |
| |
Commitments and contingencies (Note 19) |
|
|
|
|
|
|
|
| |
Stockholders’ equity: |
|
|
|
|
|
|
|
| |
Preferred Stock, $0.01 par value per share, 2,000,000 shares authorized; NaN issued and outstanding |
|
| — |
|
|
| — |
| |
Common Stock, no par value, 200,000,000 shares authorized; 55,135,910 and 54,596,183 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively |
|
| 0.1 |
|
|
| 0.1 |
| |
Additional paid-in capital |
|
| 861.6 |
|
|
| 864.3 |
| |
Retained earnings |
|
| 1,382.7 |
|
|
| 1,181.2 |
| |
Accumulated other comprehensive loss |
|
| (17.6 | ) |
|
| (22.3 | ) | |
Total stockholders’ equity |
|
| 2,226.8 |
|
|
| 2,023.3 |
| |
Total liabilities and stockholders’ equity |
| $ | 3,750.9 |
|
| $ | 3,416.3 |
| |
September 30, 2019 | December 31, 2018 | |||||||
ASSET S | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 386,281 | $ | 644,345 | ||||
Short-term investments | 88,847 | 73,826 | ||||||
Trade accounts receivable, net of allowance for doubtful accounts of $5,190 and $5,243 at September 30, 2019 and December 31, 2018, respectively | 327,983 | 295,454 | ||||||
Inventories | 463,263 | 384,689 | ||||||
Other current assets | 94,011 | 65,790 | ||||||
Total current assets | 1,360,385 | 1,464,104 | ||||||
Property, plant and equipment, net | 236,124 | 194,367 | ||||||
Right-of-use asset | 67,632 | — | ||||||
Goodwill | 1,054,091 | 586,996 | ||||||
Intangible assets, net | 580,880 | 319,807 | ||||||
Long-term investments | 10,146 | 10,290 | ||||||
Other assets | 45,286 | 38,682 | ||||||
Total assets | $ | 3,354,544 | $ | 2,614,246 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 12,623 | $ | 3,986 | ||||
Accounts payable | 88,078 | 83,825 | ||||||
Accrued compensation | 87,045 | 82,350 | ||||||
Income taxes payable | 11,048 | 16,358 | ||||||
Lease liability | 20,575 | — | ||||||
Deferred revenue and customer advances | 22,363 | 14,246 | ||||||
Other current liabilities | 68,925 | 62,520 | ||||||
Total current liabilities | 310,657 | 263,285 | ||||||
Long-term debt, net | 873,450 | 343,842 | ||||||
Non-current deferred taxes | 69,190 | 48,223 | ||||||
Non-current accrued compensation | 43,704 | 55,598 | ||||||
Non-current lease liability | 47,294 | — | ||||||
Other liabilities | 36,718 | 30,111 | ||||||
Total liabilities | 1,381,013 | 741,059 | ||||||
Commitments and contingencies (Note 19) | ||||||||
Stockholders’ equity: | ||||||||
Preferred Stock, $0.01 par value per share, 2,000,000 shares authorized; NaN issued and outstanding | — | — | ||||||
Common Stock, 0 par value, 200,000,000 shares authorized; 54,496,664 and 54,039,554 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 113 | 113 | ||||||
Additional paid-in capital | 856,437 | 793,932 | ||||||
Retained earnings | 1,149,457 | 1,084,797 | ||||||
Accumulated other comprehensive loss | (32,476 | ) | (5,655 | ) | ||||
Total stockholders’ equity | 1,973,531 | 1,873,187 | ||||||
Total liabilities and stockholders’ equity | $ | 3,354,544 | $ | 2,614,246 | ||||
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,millions, except per share data)
(Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 506.8 |
|
| $ | 386.2 |
|
| $ | 1,441.0 |
|
| $ | 1,184.9 |
|
Services |
|
| 83.0 |
|
|
| 76.3 |
|
|
| 228.8 |
|
|
| 215.2 |
|
Total net revenues |
|
| 589.8 |
|
|
| 462.5 |
|
|
| 1,669.8 |
|
|
| 1,400.1 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products |
|
| 280.7 |
|
|
| 216.3 |
|
|
| 794.8 |
|
|
| 672.2 |
|
Cost of services |
|
| 47.1 |
|
|
| 41.2 |
|
|
| 127.1 |
|
|
| 113.8 |
|
Total cost of revenues (exclusive of amortization shown separately below) |
|
| 327.8 |
|
|
| 257.5 |
|
|
| 921.9 |
|
|
| 786.0 |
|
Gross profit |
|
| 262.0 |
|
|
| 205.0 |
|
|
| 747.9 |
|
|
| 614.1 |
|
Research and development |
|
| 42.5 |
|
|
| 41.7 |
|
|
| 127.7 |
|
|
| 122.3 |
|
Selling, general and administrative |
|
| 87.0 |
|
|
| 82.1 |
|
|
| 260.3 |
|
|
| 247.8 |
|
Acquisition and integration costs |
|
| 0.5 |
|
|
| 2.1 |
|
|
| 3.4 |
|
|
| 35.5 |
|
Restructuring and other |
|
| 3.1 |
|
|
| 1.5 |
|
|
| 6.8 |
|
|
| 4.7 |
|
Amortization of intangible assets |
|
| 12.5 |
|
|
| 17.0 |
|
|
| 42.6 |
|
|
| 50.3 |
|
Asset impairment |
|
| — |
|
|
| — |
|
|
| 1.2 |
|
|
| — |
|
COVID-19 related net credits |
|
| — |
|
|
| — |
|
|
| (1.2 | ) |
|
| — |
|
Fees and expenses related to repricing of Term Loan |
|
| — |
|
|
| 0.6 |
|
|
| — |
|
|
| 6.5 |
|
Gain on sale of long-lived assets |
|
| — |
|
|
| (6.8 | ) |
|
| — |
|
|
| (6.8 | ) |
Income from operations |
|
| 116.4 |
|
|
| 66.8 |
|
|
| 307.1 |
|
|
| 153.8 |
|
Interest income |
|
| 0.1 |
|
|
| 1.2 |
|
|
| 1.1 |
|
|
| 4.3 |
|
Interest expense |
|
| 6.6 |
|
|
| 13.5 |
|
|
| 22.7 |
|
|
| 35.3 |
|
Other expense (income), net |
|
| 1.1 |
|
|
| (0.9 | ) |
|
| 3.0 |
|
|
| 0.2 |
|
Income before income taxes |
|
| 108.8 |
|
|
| 55.4 |
|
|
| 282.5 |
|
|
| 122.6 |
|
Provision for income taxes |
|
| 17.1 |
|
|
| 8.0 |
|
|
| 48.0 |
|
|
| 25.0 |
|
Net income |
| $ | 91.7 |
|
| $ | 47.4 |
|
| $ | 234.5 |
|
| $ | 97.6 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in value of financial instruments designated as cash flow hedges |
| $ | (0.6 | ) |
| $ | (0.8 | ) |
| $ | (7.7 | ) |
| $ | (8.6 | ) |
Foreign currency translation adjustments |
|
| 17.1 |
|
|
| (14.5 | ) |
|
| 12.1 |
|
|
| (18.2 | ) |
Net actuarial gain on pension and post-retirement benefits |
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
|
Unrealized gain (loss) on investments |
|
| — |
|
|
| — |
|
|
| 0.2 |
|
|
| (0.1 | ) |
Total comprehensive income |
| $ | 108.3 |
|
| $ | 32.2 |
|
| $ | 239.2 |
|
| $ | 70.8 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.66 |
|
| $ | 0.86 |
|
| $ | 4.26 |
|
| $ | 1.79 |
|
Diluted |
| $ | 1.66 |
|
| $ | 0.86 |
|
| $ | 4.24 |
|
| $ | 1.77 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 55.2 |
|
|
| 54.9 |
|
|
| 55.1 |
|
|
| 54.6 |
|
Diluted |
|
| 55.4 |
|
|
| 55.2 |
|
|
| 55.3 |
|
|
| 55.0 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 386,173 | $ | 426,255 | $ | 1,184,862 | $ | 1,432,931 | ||||||||
Services | 76,278 | 60,897 | 215,260 | 181,636 | ||||||||||||
Total net revenues | 462,451 | 487,152 | 1,400,122 | 1,614,567 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of products | 216,238 | 219,311 | 672,161 | 747,522 | ||||||||||||
Cost of services | 41,209 | 35,981 | 113,812 | 97,453 | ||||||||||||
Total cost of revenues (exclusive of amortization shown separately below) | 257,447 | 255,292 | 785,973 | 844,975 | ||||||||||||
Gross profit | 205,004 | 231,860 | 614,149 | 769,592 | ||||||||||||
Research and development | 41,566 | 31,898 | 122,354 | 103,259 | ||||||||||||
Selling, general and administrative | 82,101 | 70,822 | 247,792 | 229,952 | ||||||||||||
Fees and expenses related to term loan | 642 | — | 6,489 | 378 | ||||||||||||
Acquisition and integration costs | 2,103 | 36 | 35,510 | (1,132 | ) | |||||||||||
Restructuring and other | 1,525 | 1,364 | 4,690 | 4,374 | ||||||||||||
Amortization of intangible assets | 17,020 | 10,695 | 50,299 | 32,786 | ||||||||||||
Gain on sale of long-lived assets | (6,773 | ) | — | (6,773 | ) | — | ||||||||||
Income from operations | 66,820 | 117,045 | 153,788 | 399,975 | ||||||||||||
Interest income | 1,230 | 1,516 | 4,367 | 4,077 | ||||||||||||
Interest expense | 13,542 | 3,719 | 35,335 | 13,071 | ||||||||||||
Other ( expense, netincome ) | (914 | ) | 326 | 199 | 1,179 | |||||||||||
Income before income taxes | 55,422 | 114,516 | 122,621 | 389,802 | ||||||||||||
Provision for income taxes | 7,994 | 21,239 | 24,999 | 68,542 | ||||||||||||
Net income | $ | 47,428 | $ | 93,277 | $ | 97,622 | $ | 321,260 | ||||||||
Other comprehensive income: | ||||||||||||||||
Changes in value of financial instruments designated as cash flow hedges, net of tax (benefit) expense (1) | $ | (782 | ) | $ | 163 | $ | (8,554 | ) | $ | 8,053 | ||||||
Foreign currency translation adjustments, net of tax of $0 | (14,553 | ) | (3,576 | ) | (18,229 | ) | (11,314 | ) | ||||||||
Unrecognized pension gain (loss), net of tax expense (benefit) (2) | 91 | 24 | 92 | (13 | ) | |||||||||||
Unrealized gain (loss) on investments, net of tax expense (benefit) (3) | 16 | 230 | (130 | ) | (95 | ) | ||||||||||
Total comprehensive income | $ | 32,200 | $ | 90,118 | $ | 70,801 | $ | 317,891 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.86 | $ | 1.71 | $ | 1.79 | $ | 5.89 | ||||||||
Diluted | $ | 0.86 | $ | 1.70 | $ | 1.77 | $ | 5.82 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 54,945 | 54,476 | 54,636 | 54,539 | ||||||||||||
Diluted | 55,204 | 54,954 | 55,045 | 55,171 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands,millions, except share and per share data)
(Unaudited)
|
| Common Stock |
|
| Additional Paid-In |
|
| Retained |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders’ |
| ||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Income/(Loss) |
|
| Equity |
| |||||||
Balance at December 31, 2019 |
|
| 54,596,183 |
|
| $ | 0.1 |
|
| $ | 864.3 |
|
| $ | 1,181.2 |
|
| $ | (22.3 | ) |
| $ | 2,023.3 |
| |
Net issuance under stock-based plans |
|
| 276,800 |
|
|
|
|
|
|
| (20.4 | ) |
|
|
|
|
|
|
|
|
|
| (20.4 | ) | |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
| 8.5 |
|
|
|
|
|
|
|
|
|
|
| 8.5 |
| |
Cash dividend ($0.20 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11.0 | ) |
|
|
|
|
|
| (11.0 | ) | |
Comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 69.1 |
|
|
|
|
|
|
| 69.1 |
| |
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (17.0 | ) |
|
| (17.0 | ) | |
Balance at March 31, 2020 |
|
| 54,872,983 |
|
|
| 0.1 |
|
|
| 852.4 |
|
|
| 1,239.3 |
|
|
| (39.3 | ) |
|
| 2,052.5 |
| |
Net issuance under stock-based plans |
|
| 205,850 |
|
|
|
|
|
|
| (0.5 | ) |
|
|
|
|
|
|
|
|
|
| (0.5 | ) | |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
| 6.8 |
|
|
|
|
|
|
|
|
|
|
| 6.8 |
| |
Cash dividend ($0.20 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11.0 | ) |
|
|
|
|
|
| (11.0 | ) | |
Comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 73.7 |
|
|
|
|
|
|
| 73.7 |
| |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5.1 |
|
|
| 5.1 |
| |
Balance at June 30, 2020 |
|
| 55,078,833 |
|
|
| 0.1 |
|
|
| 858.7 |
|
|
| 1,302.0 |
|
|
| (34.2 | ) |
|
| 2,126.6 |
| |
Net issuance under stock-based plans |
|
| 57,077 |
|
|
|
|
|
|
| (4.5 | ) |
|
|
|
|
|
|
|
|
|
| (4.5 | ) | |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
| 7.4 |
|
|
|
|
|
|
|
|
|
|
| 7.4 |
| |
Cash dividend ($0.20 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11.0 | ) |
|
|
|
|
|
| (11.0 | ) | |
Comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 91.7 |
|
|
|
|
|
|
| 91.7 |
| |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 16.6 |
|
|
| 16.6 |
| |
Balance at September 30, 2020 |
|
| 55,135,910 |
|
| $ | 0.1 |
|
| $ | 861.6 |
|
| $ | 1,382.7 |
|
| $ | (17.6 | ) |
| $ | 2,226.8 |
| |
Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||
Shares | Amount | Paid-In Capital | Retained Earnings | Comprehensive Loss | Stockholders’ Equity | |||||||||||||||||||
Balance at December 31, 2018 | 54,039,554 | $ | 113 | $ | 793,932 | $ | 1,084,797 | $ | (5,655 | ) | $ | 1,873,187 | ||||||||||||
Net issuance under stock-based plans | 192,218 | 22,491 | 22,491 | |||||||||||||||||||||
Stock-based compensation | 27,838 | 27,838 | ||||||||||||||||||||||
Cash dividend ($0.20 per common share) | (10,843 | ) | (10,843 | ) | ||||||||||||||||||||
Comprehensive income (net of tax): | ||||||||||||||||||||||||
Net income | 12,455 | 12,455 | ||||||||||||||||||||||
Other comprehensive loss | (4,267 | ) | (4,267 | ) | ||||||||||||||||||||
Balance at March 31, 2019 | 54,231,772 | 113 | 844,261 | 1,086,409 | (9,922 | ) | 1,920,861 | |||||||||||||||||
Net issuance under stock-based plans | 247,920 | (2,113 | ) | (2,113 | ) | |||||||||||||||||||
Stock-based compensation | 7,205 | 7,205 | ||||||||||||||||||||||
Cash dividend ($0.20 per common share) | (10,880 | ) | (10,880 | ) | ||||||||||||||||||||
Stock dividends accrued | 232 | (232 | ) | — | ||||||||||||||||||||
Comprehensive income (net of tax): | ||||||||||||||||||||||||
Net income | 37,739 | 37,739 | ||||||||||||||||||||||
Other comprehensive loss | (7,325 | ) | (7,325 | ) | ||||||||||||||||||||
Balance at June 30, 2019 | 54,479,692 | 113 | 849,585 | 1,113,036 | (17,247 | ) | 1,945,487 | |||||||||||||||||
Net issuance under stock-based plan s | 16,972 | (629 | ) | (629 | ) | |||||||||||||||||||
Stock-based compensation | 7,376 | 7,376 | ||||||||||||||||||||||
Cash dividend ($0.20 per common share) | (10,898 | ) | (10,898 | ) | ||||||||||||||||||||
Stock dividends accrued | 105 | (105 | ) | — | ||||||||||||||||||||
Other | (4 | ) | (4 | ) | ||||||||||||||||||||
Comprehensive income (net of tax): | ||||||||||||||||||||||||
Net income | 47,428 | 47,428 | ||||||||||||||||||||||
Other comprehensive loss | (15,229 | ) | (15,229 | ) | ||||||||||||||||||||
Balance at September 30, 2019 | 54,496,664 | $ | 113 | $ | 856,437 | $ | 1,149,457 | $ | (32,476 | ) | $ | 1,973,531 | ||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in thousands,millions, except share and per share data)
(Unaudited)
|
| Common Stock |
|
| Additional Paid-In |
|
| Retained |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders’ |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Income/(Loss) |
|
| Equity |
| ||||||
Balance at December 31, 2018 |
|
| 54,039,554 |
|
| $ | 0.1 |
|
| $ | 793.9 |
|
| $ | 1,084.8 |
|
| $ | (5.6 | ) |
| $ | 1,873.2 |
|
Net issuance under stock-based plans |
|
| 192,218 |
|
|
|
|
|
|
| 22.5 |
|
|
|
|
|
|
|
|
|
|
| 22.5 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
| 27.8 |
|
|
|
|
|
|
|
|
|
|
| 27.8 |
|
Cash dividend ($0.20 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (10.8 | ) |
|
|
|
|
|
| (10.8 | ) |
Comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12.5 |
|
|
|
|
|
|
| 12.5 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (4.3 | ) |
|
| (4.3 | ) |
Balance at March 31, 2019 |
|
| 54,231,772 |
|
|
| 0.1 |
|
|
| 844.2 |
|
|
| 1,086.5 |
|
|
| (9.9 | ) |
|
| 1,920.9 |
|
Net issuance under stock-based plans |
|
| 247,920 |
|
|
|
|
|
|
| (2.1 | ) |
|
|
|
|
|
|
|
|
|
| (2.1 | ) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
| 7.2 |
|
|
|
|
|
|
|
|
|
|
| 7.2 |
|
Cash dividend ($0.20 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (10.9 | ) |
|
|
|
|
|
| (10.9 | ) |
Stock dividends accrued |
|
|
|
|
|
|
|
|
|
| 0.2 |
|
|
| (0.2 | ) |
|
|
|
|
|
| — |
|
Comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 37.7 |
|
|
|
|
|
|
| 37.7 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (7.3 | ) |
|
| (7.3 | ) |
Balance at June 30, 2019 |
|
| 54,479,692 |
|
|
| 0.1 |
|
|
| 849.5 |
|
|
| 1,113.1 |
|
|
| (17.2 | ) |
|
| 1,945.5 |
|
Net issuance under stock-based plans |
|
| 16,972 |
|
|
|
|
|
|
| (0.6 | ) |
|
|
|
|
|
|
|
|
|
| (0.6 | ) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
| 7.4 |
|
|
|
|
|
|
|
|
|
|
| 7.4 |
|
Cash dividend ($0.20 per common share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (10.9 | ) |
|
|
|
|
|
| (10.9 | ) |
Stock dividends accrued |
|
|
|
|
|
|
|
|
|
| 0.1 |
|
|
| (0.1 | ) |
|
|
|
|
|
| — |
|
Comprehensive income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 47.4 |
|
|
|
|
|
|
| 47.4 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (15.3 | ) |
|
| (15.3 | ) |
Balance at September 30, 2019 |
|
| 54,496,664 |
|
|
| 0.1 |
|
| $ | 856.4 |
|
| $ | 1,149.5 |
|
| $ | (32.5 | ) |
| $ | 1,973.5 |
|
Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||
Shares | Amount | Paid-In Capital | Retained Earnings | Comprehensive Income/(Loss) | Stockholders’ Equity | |||||||||||||||||||
Balance at December 31, 2017 | 54,355,535 | $ | 113 | $ | 789,644 | $ | 795,698 | $ | 3,452 | $ | 1,588,907 | |||||||||||||
Net issuance under stock-based plans | 136,568 | (8,920 | ) | (8,920 | ) | |||||||||||||||||||
Stock-based compensation | 10,426 | 10,426 | ||||||||||||||||||||||
Cash dividend ($0.18 per common share) | (9,808 | ) | (9,808 | ) | ||||||||||||||||||||
Accounting Standards Codification Topic 606 adjustment | 1,809 | 1,809 | ||||||||||||||||||||||
Comprehensive income (net of tax): | ||||||||||||||||||||||||
Net income | 105,121 | 105,121 | ||||||||||||||||||||||
Other comprehensive gain | 10,805 | 10,805 | ||||||||||||||||||||||
Balance at March 31, 2018 | 54,492,103 | 113 | 791,150 | 892,820 | 14,257 | 1,698,340 | ||||||||||||||||||
Net issuance under stock-based plans | 295,050 | (4,132 | ) | (4,132 | ) | |||||||||||||||||||
Stock-based compensation | 6,366 | 6,366 | ||||||||||||||||||||||
Cash dividend ($0.20 per common share) | (10,942 | ) | (10,942 | ) | ||||||||||||||||||||
Accounting Standards Codification Topic 606 adjustment | (42 | ) | (42 | ) | ||||||||||||||||||||
Comprehensive income (net of tax): | ||||||||||||||||||||||||
Net income | 122,862 | 122,862 | ||||||||||||||||||||||
Other comprehensive loss | (11,014 | ) | (11,014 | ) | ||||||||||||||||||||
Balance at June 30, 2018 | 54,787,153 | 113 | 793,384 | 1,004,698 | 3,243 | 1,801,438 | ||||||||||||||||||
Net issuance under stock-based plans | 15,601 | (588 | ) | (588 | ) | |||||||||||||||||||
Stock-based compensation | 5,213 | 5,213 | ||||||||||||||||||||||
Cash dividend ($0.20 per common share) | (10,858 | ) | (10,858 | ) | ||||||||||||||||||||
Stock repurchase | (818,131 | ) | (11,871 | ) | (63,129 | ) | (75,000 | ) | ||||||||||||||||
Accounting Standards Codification Topic 606 adjustment | (29 | ) | (29 | ) | ||||||||||||||||||||
Comprehensive income (net of tax): | ||||||||||||||||||||||||
Net income | 93,277 | 93,277 | ||||||||||||||||||||||
Other comprehensive loss | (3,160 | ) | (3,160 | ) | ||||||||||||||||||||
Balance at September 30, 2018 | 53,984,623 | $ | 113 | $ | 786,138 | $ | 1,023,959 | $ | 83 | $ | 1,810,293 | |||||||||||||
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)millions)
(Unaudited)
|
| Nine Months Ended September 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Cash flows provided by operating activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 234.5 |
|
| $ | 97.6 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 75.8 |
|
|
| 79.9 |
|
Amortization of inventory step-up adjustment to fair value |
|
| — |
|
|
| 7.6 |
|
Amortization of debt issuance costs, original issue discount and soft call premium |
|
| 2.1 |
|
|
| 6.5 |
|
Stock-based compensation |
|
| 22.7 |
|
|
| 42.1 |
|
Provision for excess and obsolete inventory |
|
| 19.8 |
|
|
| 18.6 |
|
Provision for doubtful accounts |
|
| 0.2 |
|
|
| 0.2 |
|
Deferred income taxes |
|
| (0.7 | ) |
|
| (9.1 | ) |
Gain on sale of long-lived asset |
|
| — |
|
|
| (6.8 | ) |
Asset impairment |
|
| 1.2 |
|
|
| — |
|
Other |
|
| 1.6 |
|
|
| 0.4 |
|
Changes in operating assets and liabilities, net of business acquired: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
| (20.9 | ) |
|
| 9.3 |
|
Inventories |
|
| (47.1 | ) |
|
| (25.8 | ) |
Income taxes |
|
| 21.4 |
|
|
| (0.7 | ) |
Other current and non-current assets |
|
| 10.9 |
|
|
| (18.2 | ) |
Accrued compensation |
|
| (5.8 | ) |
|
| (13.4 | ) |
Other current and non-current liabilities |
|
| 25.8 |
|
|
| 3.0 |
|
Accounts payable |
|
| 24.5 |
|
|
| (23.9 | ) |
Net cash provided by operating activities |
|
| 366.0 |
|
|
| 167.3 |
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
Acquisition of business, net of cash acquired |
|
| — |
|
|
| (988.6 | ) |
Purchases of investments |
|
| (358.2 | ) |
|
| (171.3 | ) |
Maturities of investments |
|
| 181.5 |
|
|
| 93.3 |
|
Sales of investments |
|
| 64.3 |
|
|
| 162.4 |
|
Proceeds from sale of assets |
|
| — |
|
|
| 41.2 |
|
Purchases of property, plant and equipment |
|
| (59.9 | ) |
|
| (44.7 | ) |
Net cash used in investing activities |
|
| (172.3 | ) |
|
| (907.7 | ) |
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities: |
|
|
|
|
|
|
|
|
Net proceeds from short and long-term borrowings |
|
| 20.1 |
|
|
| 642.2 |
|
Payments on short and long-term borrowings |
|
| (77.0 | ) |
|
| (107.8 | ) |
Net payments related to employee stock awards |
|
| (25.4 | ) |
|
| (11.8 | ) |
Dividend payments |
|
| (33.0 | ) |
|
| (32.6 | ) |
Net cash (used in) provided by financing activities |
|
| (115.3 | ) |
|
| 490.0 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| 0.3 |
|
|
| (7.6 | ) |
Increase (decrease) in cash and cash equivalents |
|
| 78.7 |
|
|
| (258.0 | ) |
Cash and cash equivalents at beginning of period |
|
| 414.6 |
|
|
| 644.3 |
|
Cash and cash equivalents at end of period |
| $ | 493.3 |
|
| $ | 386.3 |
|
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows provided by operating activities: | ||||||||
Net income | $ | 97,622 | $ | 321,260 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 79,863 | 59,906 | ||||||
Amortization of inventory step-up adjustment to fair value | 7,624 | — | ||||||
Amortization of debt issuance costs, original issue discount, and soft call premium | 6,554 | 3,784 | ||||||
Stock-based compensation | 42,140 | 22,005 | ||||||
Provision for excess and obsolete inventory | 18,599 | 15,575 | ||||||
Provision for doubtful accounts | 226 | 859 | ||||||
Deferred income taxes | (9,067 | ) | (3,525 | ) | ||||
Gain on sale of long-lived asset | (6,773 | ) | — | |||||
Other | 364 | 531 | ||||||
Changes in operating assets and liabilities, net of business acquired: | ||||||||
Trade accounts receivable | 9,284 | (23,125 | ) | |||||
Inventories | (25,795 | ) | (80,441 | ) | ||||
Income taxes | (760 | ) | (13,874 | ) | ||||
Other current and non-current assets | (18,194 | ) | (17,652 | ) | ||||
Accrued compensation | (13,449 | ) | (15,529 | ) | ||||
Other current and non-current liabilities | 3,016 | 8,934 | ||||||
Accounts payable | (23,992 | ) | (385 | ) | ||||
Net cash provided by operating activities | 167,262 | 278,323 | ||||||
Cash flows used in investing activities: | ||||||||
Acquisition of business, net of cash acquired | (988,599 | ) | — | |||||
Purchases of investments | (171,316 | ) | (213,774 | ) | ||||
Maturities of investments | 93,344 | 135,339 | ||||||
Sales of investments | 162,415 | 67,868 | ||||||
Proceeds from sale of assets | 41,214 | — | ||||||
Purchases of property, plant and equipment | (44,753 | ) | (36,885 | ) | ||||
Net cash used in investing activities | (907,695 | ) | (47,452 | ) | ||||
Cash flows provided by (used in) financing activities: | ||||||||
Repurchase of common stock | — | (75,000 | ) | |||||
Net proceeds from short and long-term borrowings | 642,180 | 60,624 | ||||||
Payments on short-term borrowings | (3,927 | ) | (57,865 | ) | ||||
Payments on long-term borrowings | (103,869 | ) | (50,002 | ) | ||||
Net payments related to employee stock awards | (11,728 | ) | (13,641 | ) | ||||
Dividend payments to common stockholders | (32,621 | ) | (31,608 | ) | ||||
Net cash provided by (used in) financing activities | 490,035 | (167,492 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (7,666 | ) | 2,584 | |||||
(Decrease) increase in cash and cash equivalents | (258,064 | ) | 65,963 | |||||
Cash and cash equivalents at beginning of period | 644,345 | 333,887 | ||||||
Cash and cash equivalents at end of period | $ | 386,281 | $ | 399,850 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands,millions, 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, 2019,2020, and for the three and nine months ended September 30, 20192020 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, 20182019 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 Form
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 an
While the Company’s operations and financial performance in certain areas of its business have been negatively impacted by the coronavirus (“COVID-19”) pandemic, the impact to the Company’s financial results for the three and nine months ended September 30, 2020 was minimal due to the strong demand for its products from its semiconductor customers. The extent to which the COVID-19 pandemic impacts the Company’s financial results and operations for the remainder of 2020 and beyond will depend on future developments that are highly uncertain and cannot be predicted at this time. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
2) | Recently Issued or Adopted Accounting |
In October 2018,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
In December 2019, the Federal Funds Effective RateFASB issued ASU 2019-12, “Income Taxes (Topic 740).” This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and the Securities Industrysimplify U.S. GAAP for other areas of Topic 740 by clarifying and Financial Markets Association Municipal Swap Rate.amending existing guidance. This standard is effective for annual periods beginning after December 15, 2018,2021, including interim periods within those fiscal years.years beginning after December 15, 2022. The Company adopted this ASU duringevaluated the first quarter of 2019 and the adoptionrequirements of this ASU did not have a materialand the impact of pending adoption on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU
8
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands,millions, except share and per share data)
In June 2016, the FASB issued ASU
3) | Leases |
The Company has various operating leases for real estate and
Some of the Company’s real estate lease agreements include Company options to either extend and/or terminate the lease. The cost of these options is included in our operating lease liabilities to the extent that such options are reasonably certain of being exercised. Leases with renewal options allow the Company has lease arrangements with lease and
During the
The Company has existing leases that include variable lease and
The elements of lease expense were as follows:
|
|
|
| Three Months Ended September 30, |
| ||||
|
|
|
| 2020 |
| 2019 |
| ||
Lease cost: |
|
|
|
|
|
| |||
Operating lease cost(1) | $ | 7.2 |
| $ | 5.9 |
| |||
Short-term lease |
| 1.4 |
|
| 1.1 |
| |||
Total lease cost | $ | 8.6 |
| $ | 7.0 |
| |||
|
|
|
| Nine Months Ended September 30, |
| ||||
|
|
|
| 2020 |
| 2019 |
| ||
Lease cost: |
|
|
|
|
|
| |||
Operating lease cost(1) | $ | 22.1 |
| $ | 16.6 |
| |||
Short-term lease |
| 3.7 |
|
| 3.4 |
| |||
Total lease cost | $ | 25.8 |
| $ | 20.0 |
| |||
Three Months September 30, | Nine Months September 30, | |||||||
Lease Cost: | ||||||||
Operating lease cost | $ | 6,313 | $ | 17,694 | ||||
(1) | Operating lease cost includes an immaterial amount of variable expenses and sublease rental income. |
The weighted average discount rate and the weighted average remaining lease term were
9
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands,millions, except share and per share data)
Future lease payments under
2020 (remaining) |
| $ | 0.3 |
|
2021 |
|
| 12.1 |
|
2022 |
|
| 18.1 |
|
2023 |
|
| 16.9 |
|
2024 |
|
| 16.3 |
|
Thereafter |
|
| 179.3 |
|
Total lease payments |
|
| 243.0 |
|
Less: imputed interest |
|
| 54.0 |
|
Total operating lease liabilities |
| $ | 189.0 |
|
Amount | ||||
Year Ending December 31, | ||||
2019 (remaining) | $ | 5,887 | ||
2020 | 21,569 | |||
2021 | 14,064 | |||
2022 | 8,497 | |||
2023 | 7,158 | |||
Thereafter | 17,453 | |||
Total lease payments | 74,628 | |||
Less:imputed interest | 6,759 | |||
Total operating lease liabilities | $ | 67,869 | ||
The remaining 2020 lease payment amount of $0.3 and the 2021 lease payment amount of $12.1 are net of tenant improvement allowances of $5.2 and $10.0, respectively. Amounts presented above do not include payments underrelating to immaterial leases excluded from the balance sheet as part of transition elections adopted upon implementation of ASU 2016-02,“Leases”, on January 1, 2019, as well as operating leases prior to adoptionwith terms of ASUless than twelve months.
Operating | ||||
Year Ending December 31, | ||||
2019 | $ | 20,106 | ||
2020 | 17,142 | |||
2021 | 10,325 | |||
2022 | 5,573 | |||
2023 | 4,411 | |||
Thereafter | 8,739 | |||
Total minimum lease payments | $ | 66,296 | ||
4) | Revenue from Contracts with Customers |
Contract assets as of September 30, 20192020 and December 31, 20182019 were $3,405$3.7 and $3,624,$3.5, respectively, and are included in other current assets
A rollforward of the Company’s deferred revenue and customer advances is as follows:
|
| Nine Months Ended September 30, 2020 |
|
| Nine Months Ended September 30, 2019 |
| ||
Beginning balance, January 1(1) |
| $ | 24.8 |
|
| $ | 17.5 |
|
Deferred revenue and customer advances assumed in ESI Merger |
|
| — |
|
|
| 4.6 |
|
Additions to deferred revenue and customer advances |
|
| 76.3 |
|
|
| 41.9 |
|
Amount of deferred revenue and customer advances recognized in income |
|
| (65.6 | ) |
|
| (38.8 | ) |
Ending balance, September 30(2) |
| $ | 35.5 |
|
| $ | 25.2 |
|
Nine Months September 30, | ||||
Beginning balance, January 1 (1) | $ | 17,474 | ||
Deferred revenue and customer advances assumed in ESI Merger | 4,629 | |||
Additions to deferred revenue and customer advances | 41,922 | |||
Amount of deferred revenue and customer advances recognized in | (38,787 | ) | ||
Ending balance, September 30 (2) | $ | 25,238 | ||
(1) | Beginning deferred revenue and customer advances as of January 1, |
(2) | Ending deferred revenue and customer advances as of September 30, |
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers:
|
| Three Months Ended September 30, 2020 |
| |||||||||||||
|
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Total |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 313.9 |
|
| $ | 156.9 |
|
| $ | 36.0 |
|
| $ | 506.8 |
|
Services |
|
| 47.4 |
|
|
| 19.0 |
|
|
| 16.6 |
|
|
| 83.0 |
|
Total net revenues |
| $ | 361.3 |
|
| $ | 175.9 |
|
| $ | 52.6 |
|
| $ | 589.8 |
|
Three Months Ended September 30, 2019 | ||||||||||||||||
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 197,203 | $ | 156,436 | $ | 32,534 | $ | 386,173 | ||||||||
Services | 43,478 | 16,024 | 16,776 | 76,278 | ||||||||||||
Total net revenues | $ | 240,681 | $ | 172,460 | $ | 49,310 | $ | 462,451 | ||||||||
10
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands,millions, except share and per share data)
|
| Three Months Ended September 30, 2019 |
| |||||||||||||
|
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Total |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 197.2 |
|
| $ | 156.4 |
|
| $ | 32.6 |
|
| $ | 386.2 |
|
Services |
|
| 43.5 |
|
|
| 16.0 |
|
|
| 16.8 |
|
|
| 76.3 |
|
Total net revenues |
| $ | 240.7 |
|
| $ | 172.4 |
|
| $ | 49.4 |
|
| $ | 462.5 |
|
|
| Nine Months Ended September 30, 2020 |
| |||||||||||||
|
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Total |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 863.5 |
|
| $ | 457.3 |
|
| $ | 120.2 |
|
| $ | 1,441.0 |
|
Services |
|
| 131.6 |
|
|
| 50.0 |
|
|
| 47.2 |
|
|
| 228.8 |
|
Total net revenues |
| $ | 995.1 |
|
| $ | 507.3 |
|
| $ | 167.4 |
|
| $ | 1,669.8 |
|
|
| Nine Months Ended September 30, 2019 |
| |||||||||||||
|
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Total |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 581.6 |
|
| $ | 502.5 |
|
| $ | 100.8 |
|
| $ | 1,184.9 |
|
Services |
|
| 129.1 |
|
|
| 46.5 |
|
|
| 39.6 |
|
|
| 215.2 |
|
Total net revenues |
| $ | 710.7 |
|
| $ | 549.0 |
|
| $ | 140.4 |
|
| $ | 1,400.1 |
|
Three Months Ended September 30, 201 8 | ||||||||||||||||
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 239,924 | $ | 186,331 | $ | — | $ | 426,255 | ||||||||
Services | 46,114 | 14,783 | — | 60,897 | ||||||||||||
Total net revenues | $ | 286,038 | $ | 201,114 | $ | — | $ | 487,152 | ||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 581,611 | $ | 502,496 | $ | 100,755 | $ | 1,184,862 | ||||||||
Services | 129,080 | 46,531 | 39,649 | 215,260 | ||||||||||||
Total net revenues | $ | 710,691 | $ | 549,027 | $ | 140,404 | $ | 1,400,122 | ||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
Net revenues: | ||||||||||||||||
Products | $ | 865,714 | 567,217 | $ | — | $ | 1,432,931 | |||||||||
Services | 136,996 | 44,640 | — | 181,636 | ||||||||||||
Total net revenues | $ | 1,002,710 | $ | 611,857 | $ | — | $ | 1,614,567 | ||||||||
Product revenue, excluding revenue from certain custom products, is recorded at a point in time, while the majority of the service revenue and revenue from certain custom products is recorded over time.
Refer to Note 17 for revenue by reportable segment geography and groupings of similar products.
5) | Investments |
September 30, | December 31, | |||||||
Available-for-sale investments: | ||||||||
Time deposits and certificates of deposit | $ | 6,262 | $ | 102 | ||||
Bankers’ acceptance drafts | 4,540 | 989 | ||||||
Asset-backed securities | — | 9,113 | ||||||
Commercial paper | 44,981 | 19,359 | ||||||
Corporate obligations | — | 9,352 | ||||||
U.S. treasury obligations | 3,602 | 13,298 | ||||||
U.S. agency obligations | 29,462 | 21,613 | ||||||
| $ | 88,847 | $ | 73,826 | |||||
September 30, | December 31, | |||||||
Available-for-sale investments: | ||||||||
Group insurance contracts | $ | 5,746 | $ | 5,890 | ||||
Cost method investments: | ||||||||
Minority interest in a private company | 4,400 | 4,400 | ||||||
| $ | 10,146 | $ | 10,290 | |||||
The following tables show the gross unrealized gains and (losses) aggregated by investment category for available-for-sale investments:
As of September 30, 2020: |
| Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized (Losses) |
|
| Estimated Fair Value |
| ||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
| $ | 0.3 |
|
| $ | — |
|
| $ | — |
|
| $ | 0.3 |
|
Bankers’ acceptance drafts |
|
| 3.1 |
|
|
| — |
|
|
| — |
|
|
| 3.1 |
|
U.S. treasury obligations |
|
| 219.0 |
|
|
| — |
|
|
| — |
|
|
| 219.0 |
|
|
| $ | 222.4 |
|
| $ | — |
|
| $ | — |
|
| $ | 222.4 |
|
As of September 30, 2020: |
| Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized (Losses) |
|
| Estimated Fair Value |
| ||||
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group insurance contracts |
| $ | 5.5 |
|
| $ | 0.8 |
|
| $ | — |
|
| $ | 6.3 |
|
As of September 30 , 2019: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Short-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Time deposits and certificates of deposit | $ | 6,261 | $ | 1 | $ | — | $ | 6,262 | ||||||||
Bankers’ acceptance drafts | 4,540 | — | — | 4,540 | ||||||||||||
Commercial paper | 45,342 | — | (361 | ) | 44,981 | |||||||||||
U.S. treasury obligations | 3,601 | 1 | — | 3,602 | ||||||||||||
U.S. agency obligations | 29,460 | 4 | (2 | ) | 29,462 | |||||||||||
| $ | 89,204 | $ | 6 | $ | (363 | ) | $ | 88,847 | ||||||||
11
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
As of December 31, 2019: |
| Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized (Losses) |
|
| Estimated Fair Value |
| ||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
| $ | 13.1 |
|
| $ | — |
|
| $ | — |
|
| $ | 13.1 |
|
Bankers' acceptance drafts |
|
| 4.0 |
|
|
| — |
|
|
| — |
|
|
| 4.0 |
|
Commercial paper |
|
| 61.5 |
|
|
| — |
|
|
| (0.3 | ) |
|
| 61.2 |
|
U.S. treasury obligations |
|
| 5.0 |
|
|
| — |
|
|
| — |
|
|
| 5.0 |
|
U.S. agency obligations |
|
| 26.1 |
|
|
| — |
|
|
| — |
|
|
| 26.1 |
|
|
| $ | 109.7 |
|
| $ | — |
|
| $ | (0.3 | ) |
| $ | 109.4 |
|
As of December 31, 2019: |
| Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized (Losses) |
|
| Estimated Fair Value |
| ||||
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group insurance contracts |
| $ | 5.2 |
|
| $ | 0.6 |
|
| $ | — |
|
| $ | 5.8 |
|
As of September 30 , 2019: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Long-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Group insurance contracts | $ | 5,329 | $ | 417 | $ | — | $ | 5,746 | ||||||||
As of December 31 , 2018: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Short-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Time deposits and certificates of deposit | $ | 102 | $ | — | $ | — | $ | 102 | ||||||||
Bankers’ acceptance drafts | 989 | — | — | 989 | ||||||||||||
Asset-backed securities | 9,121 | 1 | (9 | ) | 9,113 | |||||||||||
Commercial paper | 19,504 | — | (145 | ) | 19,359 | |||||||||||
Corporate obligations | 9,367 | — | (15 | ) | 9,352 | |||||||||||
U.S. treasury obligations | 13,294 | 4 | — | 13,298 | ||||||||||||
U.S. agency obligations | 21,617 | 2 | (6 | ) | 21,613 | |||||||||||
| $ | 73,994 | $ | 7 | $ | (175 | ) | $ | 73,826 | ||||||||
As of December 31 , 2018: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Long-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Group insurance contracts | $ | 5,546 | $ | 344 | $ | — | $ | 5,890 | ||||||||
The tables above, which show the gross unrealized gains and (losses) aggregated by investment category for
The Company reviews and evaluates its investments for any indication of possible impairment. Based on this review, the Company has determined that the unrealized losses related to these investments at September 30, 2019 and December 31, 20182020 were temporary.
Interest income is accrued as earned. Dividend income is recognized as income on the date the stocksecurity trades
6) | Fair Value Measurements |
In accordance with the provisions of fair value accounting, a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model
The fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities | |||||||
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. | |||||||
12
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
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, 20192020 and are summarized as follows:
|
|
|
|
|
| Fair Value Measurements at Reporting Date Using |
| |||||||||
Description |
| September 30, 2020 |
|
| Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 0.4 |
|
| $ | 0.4 |
|
| $ | — |
|
| $ | — |
|
U.S. treasury obligations |
|
| 69.4 |
|
|
| — |
|
|
| 69.4 |
|
|
| — |
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
|
| 0.3 |
|
|
| — |
|
|
| 0.3 |
|
|
| — |
|
Bankers' acceptance drafts |
|
| 3.1 |
|
|
| — |
|
|
| 3.1 |
|
|
| — |
|
U.S. treasury obligations |
|
| 219.0 |
|
|
| — |
|
|
| 219.0 |
|
|
| — |
|
Group insurance contracts |
|
| 6.3 |
|
|
| — |
|
|
| 6.3 |
|
|
| — |
|
Derivatives – currency forward contracts |
|
| 0.1 |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
Funds in investments and other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israeli pension assets |
|
| 17.3 |
|
|
| — |
|
|
| 17.3 |
|
|
| — |
|
Deferred compensation plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds and exchange traded funds |
|
| 1.5 |
|
|
| — |
|
|
| 1.5 |
|
|
| — |
|
Money market securities |
|
| 0.1 |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
Total assets |
| $ | 317.5 |
|
| $ | 0.4 |
|
| $ | 317.1 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives – currency forward contracts |
| $ | 2.2 |
|
| $ | — |
|
| $ | 2.2 |
|
| $ | — |
|
Derivatives – interest rate hedge – non-current |
|
| 14.0 |
|
|
| — |
|
|
| 14.0 |
|
|
| — |
|
Total liabilities |
| $ | 16.2 |
|
| $ | — |
|
| $ | 16.2 |
|
| $ | — |
|
Reported as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1) |
| $ | 69.8 |
|
| $ | 0.4 |
|
| $ | 69.4 |
|
| $ | — |
|
Short-term investments |
|
| 222.4 |
|
|
| — |
|
|
| 222.4 |
|
|
| — |
|
Other current assets |
|
| 0.1 |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
Total current assets |
| $ | 292.3 |
|
| $ | 0.4 |
|
| $ | 291.9 |
|
| $ | — |
|
Long-term investments |
| $ | 6.3 |
|
| $ | — |
|
| $ | 6.3 |
|
| $ | — |
|
Other assets |
|
| 18.9 |
|
|
| — |
|
|
| 18.9 |
|
|
| — |
|
Total long-term assets |
| $ | 25.2 |
|
| $ | — |
|
| $ | 25.2 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
| $ | 2.2 |
|
| $ | — |
|
| $ | 2.2 |
|
| $ | — |
|
Other liabilities |
| $ | 14.0 |
|
| $ | — |
|
| $ | 14.0 |
|
| $ | — |
|
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Description | September 30, 2019 | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 4,732 | $ | 4,732 | $ | — | $ | — | ||||||||
Time deposits and certificates of deposit | 4,651 | — | 4,651 | — | ||||||||||||
Commercial paper | 40,966 | — | 40,966 | — | ||||||||||||
U.S. treasury obligations | 7,999 | — | 7,999 | — | ||||||||||||
U.S. agency obligations | 20,592 | — | 20,592 | — | ||||||||||||
Restricted cash – money market funds | 330 | 330 | — | — | ||||||||||||
Available-for-sale investments: | ||||||||||||||||
Time deposits and certificates of deposit | 6,262 | — | 6,262 | — | ||||||||||||
Bankers’ acceptance drafts | 4,540 | — | 4,540 | — | ||||||||||||
Commercial paper | 44,981 | — | 44,981 | — | ||||||||||||
U.S. treasury obligations | 3,602 | — | 3,602 | — | ||||||||||||
U.S. agency obligations | 29,462 | — | 29,462 | — | ||||||||||||
Group insurance contracts | 5,746 | — | 5,746 | — | ||||||||||||
Derivatives – currency forward contracts | 4,232 | — | 4,232 | — | ||||||||||||
Funds in investments and other assets: | ||||||||||||||||
Israeli pension assets | 16,135 | — | 16,135 | — | ||||||||||||
Deferred compensation plan assets: | ||||||||||||||||
Mutual funds and exchange traded funds | 1,832 | — | 1,832 | — | ||||||||||||
Money market securities | 483 | — | 483 | — | ||||||||||||
Total assets | $ | 196,545 | $ | 5,062 | $ | 191,483 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivatives – currency forward contracts | $ | 308 | $ | — | $ | 308 | $ | — | ||||||||
Derivatives – interest rate hedge – non-current | 6,908 | — | 6,908 | — | ||||||||||||
Total liabilities | $ | 7,216 | $ | — | $ | 7,216 | $ | — | ||||||||
Reported as follows: | ||||||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents, including restricted cash (1) | $ | 79,270 | $ | 5,062 | $ | 74,208 | $ | — | ||||||||
Short-term investments | 88,847 | — | 88,847 | — | ||||||||||||
Other current assets | 4,232 | — | 4,232 | — | ||||||||||||
Total current assets | $ | 172,349 | $ | 5,062 | $ | 167,287 | $ | — | ||||||||
Long-term investments (2) | $ | 5,746 | $ | — | $ | 5,746 | $ | — | ||||||||
Other assets | 18,450 | — | 18,450 | — | ||||||||||||
Total long-term assets | $ | 24,196 | $ | — | $ | 24,196 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Other current liabilities | $ | 308 | $ | — | $ | 308 | $ | — | ||||||||
Other liabilities | $ | 6,908 | $ | — | $ | 6,908 | $ | — | ||||||||
(1) | The cash and cash equivalent amounts presented in the table above do not include cash of |
13
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands,millions, 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, 20182019 and are summarized as follows:
|
|
|
|
|
| Fair Value Measurements at Reporting Date Using |
| |||||||||
Description |
| December 31, 2019 |
|
| Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 0.6 |
|
| $ | 0.6 |
|
| $ | — |
|
| $ | — |
|
Time deposits and certificates of deposit |
|
| 2.2 |
|
|
| — |
|
|
| 2.2 |
|
|
| — |
|
Commercial paper |
|
| 42.6 |
|
|
| — |
|
|
| 42.6 |
|
|
| — |
|
U.S. treasury obligations |
|
| 2.7 |
|
|
| — |
|
|
| 2.7 |
|
|
| — |
|
U.S. agency obligations |
|
| 17.1 |
|
|
| — |
|
|
| 17.1 |
|
|
| — |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
|
| 13.1 |
|
|
| — |
|
|
| 13.1 |
|
|
| — |
|
Bankers' acceptance drafts |
|
| 4.0 |
|
|
| — |
|
|
| 4.0 |
|
|
| — |
|
Commercial paper |
|
| 61.2 |
|
|
| — |
|
|
| 61.2 |
|
|
| — |
|
U.S. treasury obligations |
|
| 5.0 |
|
|
| — |
|
|
| 5.0 |
|
|
| — |
|
U.S. agency obligations |
|
| 26.1 |
|
|
| — |
|
|
| 26.1 |
|
|
| — |
|
Group insurance contracts |
|
| 5.8 |
|
|
| — |
|
|
| 5.8 |
|
|
| — |
|
Derivatives – currency forward contracts |
|
| 1.1 |
|
|
| — |
|
|
| 1.1 |
|
|
| — |
|
Derivatives –interest rate hedge - current |
|
| 0.8 |
|
|
| — |
|
|
| 0.8 |
|
|
| — |
|
Funds in investments and other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israeli pension assets |
|
| 16.7 |
|
|
| — |
|
|
| 16.7 |
|
|
| — |
|
Deferred compensation plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds and exchange traded funds |
|
| 2.0 |
|
|
| — |
|
|
| 2.0 |
|
|
| — |
|
Money market funds |
|
| 0.5 |
|
|
| — |
|
|
| 0.5 |
|
|
| — |
|
Total assets |
| $ | 201.5 |
|
| $ | 0.6 |
|
| $ | 200.9 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives – currency forward contracts |
| $ | 0.3 |
|
| $ | — |
|
| $ | 0.3 |
|
| $ | — |
|
Derivatives – interest rate hedge - non-current |
|
| 6.5 |
|
|
| — |
|
|
| 6.5 |
|
|
| — |
|
Total liabilities |
| $ | 6.8 |
|
| $ | — |
|
| $ | 6.8 |
|
| $ | — |
|
Reported as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1) |
| $ | 65.2 |
|
| $ | 0.6 |
|
| $ | 64.6 |
|
| $ | — |
|
Short-term investments |
|
| 109.4 |
|
|
| — |
|
|
| 109.4 |
|
|
| — |
|
Other current assets |
|
| 1.9 |
|
|
| — |
|
|
| 1.9 |
|
|
| — |
|
Total current assets |
| $ | 176.5 |
|
| $ | 0.6 |
|
| $ | 175.9 |
|
| $ | — |
|
Long-term investments |
| $ | 5.8 |
|
| $ | — |
|
| $ | 5.8 |
|
| $ | — |
|
Other assets |
|
| 19.2 |
|
|
| — |
|
|
| 19.2 |
|
|
| — |
|
Total long-term assets |
| $ | 25.0 |
|
| $ | — |
|
| $ | 25.0 |
|
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
| $ | 0.3 |
|
| $ | — |
|
| $ | 0.3 |
|
| $ | — |
|
Other liabilities |
| $ | 6.5 |
|
| $ | — |
|
| $ | 6.5 |
|
| $ | — |
|
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Description | December 31, 2018 | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 180,340 | $ | 180,340 | $ | — | $ | — | ||||||||
Time deposits and certificates of deposit | 850 | — | 850 | — | ||||||||||||
Commercial paper | 2,687 | — | 2,687 | — | ||||||||||||
U.S. agency obligations | 3,418 | — | 3,418 | — | ||||||||||||
Restricted cash – money market funds | 110 | 110 | — | — | ||||||||||||
Available-for-sale investments: | ||||||||||||||||
Time deposits and certificates of deposit | 102 | — | 102 | — | ||||||||||||
Bankers’ acceptance drafts | 989 | — | 989 | — | ||||||||||||
Asset-backed securities | 9,113 | — | 9,113 | — | ||||||||||||
Commercial paper | 19,359 | — | 19,359 | — | ||||||||||||
Corporate obligations | 9,352 | — | 9,352 | — | ||||||||||||
U.S. treasury obligations | 13,298 | — | 13,298 | — | ||||||||||||
U.S. agency obligations | 21,613 | — | 21,613 | — | ||||||||||||
Group insurance contracts | 5,890 | — | 5,890 | — | ||||||||||||
Derivatives – currency forward contracts | 2,485 | — | 2,485 | — | ||||||||||||
Funds in investments and other assets: | ||||||||||||||||
Israeli pension assets | 14,408 | — | 14,408 | — | ||||||||||||
Derivatives – interest rate hedge – non-current | 6,083 | — | 6,083 | — | ||||||||||||
Total assets | $ | 290,097 | $ | 180,450 | $ | 109,647 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivatives – currency forward contracts | $ | 1,168 | $ | — | $ | 1,168 | $ | — | ||||||||
Reported as follows: | ||||||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents, including restricted cash (1) | $ | 187,405 | $ | 180,450 | $ | 6,955 | $ | — | ||||||||
Short-term investments | 73,826 | — | 73,826 | — | ||||||||||||
Other current assets | 2,485 | — | 2,485 | — | ||||||||||||
Total current assets | $ | 263,716 | $ | 180,450 | $ | 83,266 | $ | — | ||||||||
Long-term investments (2) | $ | 5,890 | $ | — | $ | 5,890 | $ | — | ||||||||
Other assets | 20,491 | — | 20,491 | — | ||||||||||||
Total long-term assets | $ | 26,381 | $ | — | $ | 26,381 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Other current liabilities | $ | 1,168 | $ | — | $ | 1,168 | $ | — | ||||||||
(1) | The cash and cash equivalent amounts presented in the table above do not include cash of |
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands,millions, except share and per share data)
Money Market Funds
Money market funds are cash and cash equivalents and are classified within Level 1 of the fair value hierarchy.
Available-For-Sale Investments
As of September 30, 2020 and December 31, 2019, available-for-sale investments consisted of time deposits and drafts denominated in the Euro currency, certificates of deposit, bankers’ acceptance drafts, asset-backed securities (which include auto loans, credit card receivables and equipment trust receivables), commercial paper, corporate obligations, U.S. treasury obligations, U.S. agency obligations and group insurance contracts.
The Company measures its debt and equity investments at fair value. The Company’s
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.
7) | Derivatives |
The Company enters into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments and those utilized as economic hedges. The Company operates internationally and, in the normal course of business, is exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. The Company has used derivative instruments, such as forward foreign currency exchange contracts, to manage certain foreign currency exposure, and interest rate swaps to manage interest rate 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 material
Interest Rate Swap Agreements
On September 30, 2016,
On April 3, 2019, the Company entered into an interest rate swap agreement, which has a maturity date of March 31, 2023, to fix the rate on $300,000$300.0 of the then-outstanding balance of the 2019 Incremental Term Loan Facility, as described further in Note 11. The rate
The interest rate swaps are recorded at fair value on the balance sheet and changes in the fair value are recognized in other comprehensive income (loss) (“OCI”). To the extent that these arrangements are no longer an effective hedge, any ineffectiveness measured in the hedging relationships is recorded currently in earnings in the period it occurs.
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.hedges. To the extent these derivatives are effective in
15
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
As of September 30, 20192020 and December 31, 2018,2019, the Company had outstanding forward foreign exchange contracts with gross notional values of $142,789$158.9 and $159,394,$154.7, respectively.
|
| September 30, 2020 |
| |||||
Currency Hedged (Buy/Sell) |
| Gross Notional Value |
|
| Fair Value(1) |
| ||
U.S. Dollar/Japanese Yen |
| $ | 55.2 |
|
| $ | (0.4 | ) |
U.S. Dollar/South Korean Won |
|
| 40.9 |
|
|
| (0.4 | ) |
U.S. Dollar/Euro |
|
| 13.6 |
|
|
| (0.3 | ) |
U.S. Dollar/U.K. Pound Sterling |
|
| 6.2 |
|
|
| (0.1 | ) |
U.S. Dollar/Taiwan Dollar |
|
| 43.0 |
|
|
| (0.9 | ) |
Total |
| $ | 158.9 |
|
| $ | (2.1 | ) |
|
| December 31, 2019 |
| |||||
Currency Hedged (Buy/Sell) |
| Gross Notional Value |
|
| Fair Value(1) |
| ||
U.S. Dollar/Japanese Yen |
| $ | 45.9 |
|
| $ | — |
|
U.S. Dollar/South Korean Won |
|
| 51.7 |
|
|
| 0.2 |
|
U.S. Dollar/Euro |
|
| 15.7 |
|
|
| 0.2 |
|
U.S. Dollar/U.K. Pound Sterling |
|
| 8.3 |
|
|
| (0.2 | ) |
U.S. Dollar/Taiwan Dollar |
|
| 33.1 |
|
|
| (0.4 | ) |
Total |
| $ | 154.7 |
|
| $ | (0.2 | ) |
September 30, 2019 | ||||||||
Currency Hedged (Buy/Sell) | Gross Value | Fair (1) | ||||||
U.S. Dollar/Japanese Yen | $ | 43,339 | $ | (83 | ) | |||
U.S. Dollar/South Korean Won | 42,082 | 2,191 | ||||||
U.S. Dollar/Euro | 31,689 | 1,326 | ||||||
U.S. Dollar/U.K. Pound Sterling | 7,320 | 382 | ||||||
U.S. Dollar/Taiwan Dollar | 18,359 | 108 | ||||||
Total | $ | 142,789 | $ | 3,924 | ||||
December 31, 2018 | ||||||||
Currency Hedged (Buy/Sell) | Gross Value | Fair (1) | ||||||
U.S. Dollar/Japanese Yen | $ | 43,770 | $ | (478 | ) | |||
U.S. Dollar/South Korean Won | 59,149 | 570 | ||||||
U.S. Dollar/Euro | 23,515 | 688 | ||||||
U.S. Dollar/U.K. Pound Sterling | 11,827 | 323 | ||||||
U.S. Dollar/Taiwan Dollar | 21,133 | 214 | ||||||
Total | $ | 159,394 | $ | 1,317 | ||||
(1) | Represents |
The following table provides a summary of the fair value amounts of the Company’s derivative instruments:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Derivative assets: |
|
|
|
|
|
|
|
|
Foreign exchange contracts(1) |
| $ | 0.1 |
|
| $ | 1.1 |
|
Interest rate hedge(2) |
|
| — |
|
|
| 0.8 |
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
Foreign exchange contracts(1) |
|
| (2.2 | ) |
|
| (1.3 | ) |
Interest rate hedge(2) |
|
| (14.0 | ) |
|
| (6.5 | ) |
Total net derivative liability designated as hedging instruments |
| $ | (16.1 | ) |
| $ | (5.9 | ) |
September 30, | December 31, | |||||||
Derivative assets: | ||||||||
Foreign exchange contracts (1) | $ | 4,232 | $ | 2,485 | ||||
Interest rate hedge (2) | — | 6,083 | ||||||
Derivative liabilities: | ||||||||
Foreign exchange contracts (1) | (308 | ) | (1,168 | ) | ||||
Interest rate hedge (2) | (6,908 | ) | — | |||||
Total net derivative (liability)asset designated as hedging | $ | (2,984 | ) | $ | 7,400 | |||
(1) | The derivative |
(2) | The interest rate hedge asset of |
The net amount of existing gains as of September 30, 20192020 that the Company expectsis expected to reclassifybe reclassified from OCI into earnings within the next twelve12 months is immaterial.
16
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
The following table provides a summary of the (losses) gains (losses) on derivatives designated as cash flow hedging instruments:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Derivatives Designated as Cash Flow Hedging Instruments |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Forward exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss recognized in accumulated OCI(1) |
| $ | (0.6 | ) |
| $ | (1.0 | ) |
| $ | (7.7 | ) |
| $ | (11.2 | ) |
Net gain reclassified from accumulated OCI into income(2) |
| $ | 0.4 |
|
| $ | 2.0 |
|
| $ | 2.2 |
|
| $ | 4.1 |
|
Three Months September 30, | Nine Months September 30, | |||||||||||||||
Derivatives Designated as Cash Flow Hedging Instruments | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Forward exchange contracts: | ||||||||||||||||
Net gain (loss) recognized in OCI (1) | $ | (1,024 | ) | $ | 212 | $ | (11,189 | ) | $ | 10,357 | ||||||
Net gain (loss) reclassified from accumulated OCI into income (2) | $ | 2,000 | $ | 306 | $ | 4,077 | $ | (4,882 | ) | |||||||
(1) | Net change in the fair value of the effective portion classified in accumulated OCI. |
(2) | Effective portion classified in cost of products for the three and nine months ended September 30, |
The following table provides a summary of the (loss) gain (loss) on derivatives not designated as hedging instruments:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Derivatives Not Designated as Hedging Instruments |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Forward exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain recognized in income(1) |
| $ | (0.6 | ) |
| $ | 0.1 |
|
| $ | (0.6 | ) |
| $ | (0.2 | ) |
Three Months September 30, | Nine Months September 30, | |||||||||||||||
Derivatives Not Designated as Hedging Instruments | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Forward exchange contracts: | ||||||||||||||||
Net gain (loss) recognized in income (1) | $ | 82 | $ | (111 | ) | $ | (166 | ) | $ | 12 | ||||||
(1) | The Company enters into foreign exchange contracts to hedge against changes in the balance sheet for certain subsidiaries to mitigate the risk associated with certain foreign currency transactions in the ordinary course of business. These derivatives are not designated as hedging instruments and gains or losses from these derivatives are recorded immediately in other (expense) income. |
8) | Inventories |
Inventories consist of the following:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Raw materials |
| $ | 316.6 |
|
| $ | 288.8 |
|
Work-in-process |
|
| 76.5 |
|
|
| 79.3 |
|
Finished goods |
|
| 101.1 |
|
|
| 94.0 |
|
|
| $ | 494.2 |
|
| $ | 462.1 |
|
9) | Acquisitions |
September 30, | December 31, | |||||||
Raw materials | $ | 291,613 | $ | 235,593 | ||||
Work-in-process | 84,814 | 61,908 | ||||||
Finished goods | 86,836 | 87,188 | ||||||
| $ | 463,263 | $ | 384,689 | |||||
Electro Scientific Industries, Inc.
On February 1, 2019, the Company completed its acquisition of Electro Scientific Industries, Inc. (“ESI”) pursuant to an Agreement and Plan of Merger, dated as of October 29, 2018 (the “Merger Agreement”), by and among the Company, EAS Equipment, Inc., formerly a Delaware corporation and a wholly-owned subsidiary of the Company, and ESI (the “ESI Merger”). At the effective time of the ESI Merger and pursuant to the terms and conditions of the Merger Agreement, each share of ESI’s common stock that was issued and outstanding immediately prior to the effective time of the ESI Merger was converted into the right to receive $30.00 in cash, without interest and subject to deduction of any required withholding tax.
The Company funded the payment of the aggregate considerationfor ESI’s outstanding shares with a combination of the Company’s available cash on hand and the proceeds from the Company’s senior secured term loan facility2019 Incremental Term Loan Facility, as defined and as described further in Note 11.
ESI provides laser-based manufacturing systems solutions for the micro-machining industry that enable customers to optimize production. It’sESI’s market is composed primarily of flexible and rigid PCB processing/fabrication, semiconductor wafer processing and passive component manufacturing and testing. ESI solutions incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.
17
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
The purchase price of ESI consisted of the following:
Cash paid for outstanding shares(1) |
| $ | 1,032.7 |
|
Settlement of share-based compensation awards(2) |
|
| 30.6 |
|
Total purchase price |
|
| 1,063.3 |
|
Less: Cash and cash equivalents acquired |
|
| (44.1 | ) |
Total purchase price, net of cash and cash equivalents acquired |
| $ | 1,019.2 |
|
Cash paid for outstanding shares(1) | $ | 1,032,671 | ||
Settlement of share-based compensation awards(2) | 30,630 | |||
Total purchase price | 1,063,301 | |||
Less: Cash and cash equivalents acquired | (44,072 | ) | ||
Total purchase price, net of cash and cash equivalents acquired | $ | 1,019,229 | ||
(1) | Represents cash paid of $30.00 per share for approximately 34,422,361 shares of ESI common stock, without interest and subject to a deduction for any required withholding tax. |
(2) | Represents the vested but not issued portion of ESI share-based compensation awards as of the acquisition date of February 1, 2019. |
Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of ESI based on their fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The Company expects that noneNone of suchthe goodwill and intangible assets will beare deductible for tax purposes.
The following table summarizes the final allocation of the preliminary purchase price to the fair values assigned to assets acquired and liabilities assumed at the date of the ESI Merger:
Current assets (excluding inventory) |
| $ | 208.0 |
|
Inventory |
|
| 81.7 |
|
Intangible assets |
|
| 316.2 |
|
Goodwill |
|
| 474.0 |
|
Property, plant and equipment |
|
| 65.5 |
|
Long-term assets |
|
| 9.6 |
|
Total assets acquired |
|
| 1,155.0 |
|
Current liabilities |
|
| 51.5 |
|
Non-current deferred taxes |
|
| 33.0 |
|
Other long-term liabilities |
|
| 7.2 |
|
Total liabilities assumed |
|
| 91.7 |
|
Fair value of assets acquired and liabilities assumed |
|
| 1,063.3 |
|
Less: Cash and cash equivalents acquired |
|
| (44.1 | ) |
Total purchase price, net of cash and cash equivalents acquired |
| $ | 1,019.2 |
|
Current assets (excluding inventory) | $ | 208,009 | ||
Inventory | 83,036 | |||
Intangible assets | 316,200 | |||
Goodwill | 471,722 | |||
Property, plant and equipment | 65,489 | |||
Long-term assets | 9,633 | |||
Total assets acquired | 1,154,089 | |||
Current liabilities | 51,479 | |||
Non-current deferred taxes | 32,150 | |||
Other long-term liabilities | 7,159 | |||
Total liabilities assumed | 90,788 | |||
Fair value of assets acquired and liabilities assumed | 1,063,301 | |||
Less: Cash and cash equivalents acquired | (44,072 | ) | ||
Total purchase price, net of cash and cash equivalents acquired | $ | 1,019,229 | ||
The fair value of approximately $12,600 to property, plant and equipment, based upon the final valuation for land and three ESI facilities located in Portland, Oregon. The Company also recorded a reduction in fair value of approximately $9,800 to inventories relating to three product lines. These adjustments also resulted in an adjustment to intangible assets of $2,400 and goodwill of $1,300 and the related impact to the deferred tax line items.
The fair value
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 related estimate of useful lives:
Completed technology - Laser |
| $ | 255.7 |
|
| 12 years |
Completed technology - Non-Laser |
|
| 18.3 |
|
| 10 years |
Trademarks and trade names |
|
| 14.4 |
|
| 7 years |
Customer relationships |
|
| 25.4 |
|
| 10 years |
Backlog |
|
| 2.4 |
|
| 1 year |
|
| $ | 316.2 |
|
|
|
Completed technology - Laser | $ | 255,700 | 12 years | ||||||
Completed technology - Non-Laser | 18,300 | 10 years | |||||||
Trademarks and trade names | 14,400 | 7 years | |||||||
Customer relationships | 25,400 | 10 years | |||||||
Backlog | 2,400 | 1 | |||||||
| $ | 316,200 | ||||||||
18
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share 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.
The net 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.Fair value estimates are The valuations were 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 records 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
The results of this acquisition were included in the Company’s consolidated statement of operations beginning on February 1, 2019. ESI constitutes the Company’s Equipment & Solutions reportable segment (see Note 17).
Certain executives from ESI had severance provisions in their respective ESI employment agreements. The agreements included terms that were 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. The Company recorded costs of $2,701$2.7 and $14,023$14.0 in acquisition and integration costs as compensation expense and stock-based compensation expense, respectively, for the nine months ended
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||
Total net revenues | $ | 49,308 | $ | 140,403 | ||||
Net loss | $ | (5,843 | ) | $ | (40,685 | ) | ||
Net loss per share: | ||||||||
Basic | $ | (0.11 | ) | $ | (0.74 | ) | ||
Diluted | $ | (0.11 | ) | $ | (0.74 | ) | ||
Pro Forma Results
The following unaudited pro forma financial information presents the combined results of operations of the Company as if the ESI Merger had occurred on January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of what the Company’s condensed consolidated results of operations actually would have been had the acquisition occurred at the beginning of eachthe year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined Company.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||
|
| 2019 |
|
| 2019 |
| ||
Total net revenues |
| $ | 462.5 |
|
| $ | 1,414.7 |
|
Net income |
| $ | 47.7 |
|
| $ | 127.7 |
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.87 |
|
| $ | 2.34 |
|
Diluted |
| $ | 0.86 |
|
| $ | 2.32 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Total net revenues | $ | 462,451 | $ | 573,070 | $ | 1,414,660 | $ | 1,917,348 | ||||||||
Net income | $ | 47,669 | $ | 91,111 | $ | 127,676 | $ | 357,333 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.87 | $ | 1.67 | $ | 2.34 | $ | 6.55 | ||||||||
Diluted | $ | 0.86 | $ | 1.65 | $ | 2.32 | $ | 6.48 | ||||||||
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, respectively, from the purchase price allocation. |
(2) | Revenue and cost of goods sold adjustments as a result of the reduction in deferred revenue and the cost related to their estimated fair value. |
(3) | Incremental interest expense related to the Company’s 2019 Incremental Term Loan |
(4) | The exclusion of acquisition costs and inventory and demonstration inventory step-up amortization from the three and nine |
(5) | The exclusion of debt issuance costs due to the modification of the |
(6) | The estimated tax impact of the above adjustments. |
19
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and second quarters of 2019. The impact of these adjustments has been revised for all periods presented above.
10) | 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 nine months ended September 30, 20192020 and year ended December 31, 20182019 were as follows:
|
| Nine Months Ended September 30, 2020 |
|
| Twelve Months Ended December 31, 2019 |
| ||||||||||||||||||
|
| Gross Carrying Amount |
|
| Accumulated Impairment Loss |
|
| Net |
|
| Gross Carrying Amount |
|
| Accumulated Impairment Loss |
|
| Net |
| ||||||
Beginning balance at January 1 |
| $ | 1,202.8 |
|
| $ | (144.3 | ) |
| $ | 1,058.5 |
|
| $ | 731.3 |
|
| $ | (144.3 | ) |
| $ | 587.0 |
|
Acquired goodwill |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 474.0 |
|
|
| — |
|
|
| 474.0 |
|
Foreign currency translation |
|
| 3.6 |
|
|
| — |
|
|
| 3.6 |
|
|
| (2.5 | ) |
|
| — |
|
|
| (2.5 | ) |
Ending balance at September 30, 2020 and December 31, 2019 |
| $ | 1,206.4 |
|
| $ | (144.3 | ) |
| $ | 1,062.1 |
|
| $ | 1,202.8 |
|
| $ | (144.3 | ) |
| $ | 1,058.5 |
|
Nine Months Ended | Twelve Months Ended December 31, 2018 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Impairment Loss | Net | Gross Carrying Amount | Accumulated Impairment Loss | Net | |||||||||||||||||||
Beginning balance at January 1 | $ | 731,272 | $ | (144,276 | ) | $ | 586,996 | $ | 735,323 | $ | (144,276 | ) | $ | 591,047 | ||||||||||
Acquired goodwill (1) | 471,727 | — | 471,727 | — | — | — | ||||||||||||||||||
Foreign currency translation | (4,632 | ) | — | (4,632 | ) | (4,051 | ) | — | (4,051 | ) | ||||||||||||||
Ending balance at September 30 and December 31 | $ | 1,198,367 | $ | (144,276 | ) | $ | 1,054,091 | $ | 731,272 | $ | (144,276 | ) | $ | 586,996 | ||||||||||
Intangible Assets
Components of the Company’s intangible assets are comprised of the following:
As of September 30, 2020: |
| Gross |
|
| Accumulated Impairment Charges |
|
| Accumulated Amortization |
|
| Foreign Currency Translation |
|
| Net |
| |||||
Completed technology |
| $ | 446.4 |
|
| $ | (0.1 | ) |
| $ | (203.2 | ) |
| $ | (0.1 | ) |
| $ | 243.0 |
|
Customer relationships |
|
| 308.2 |
|
|
| (1.4 | ) |
|
| (99.6 | ) |
|
| 0.2 |
|
|
| 207.4 |
|
Patents, trademarks, trade names and other |
|
| 120.9 |
|
|
| — |
|
|
| (47.8 | ) |
|
| (0.2 | ) |
|
| 72.9 |
|
|
| $ | 875.5 |
|
| $ | (1.5 | ) |
| $ | (350.6 | ) |
| $ | (0.1 | ) |
| $ | 523.3 |
|
As of December 31, 2019: |
| Gross |
|
| Accumulated Impairment Charges |
|
| Accumulated Amortization |
|
| Foreign Currency Translation |
|
| Net |
| |||||
Completed technology(1) |
| $ | 446.4 |
|
| $ | (0.1 | ) |
| $ | (178.3 | ) |
| $ | (0.2 | ) |
| $ | 267.8 |
|
Customer relationships(1) |
|
| 308.2 |
|
|
| (1.4 | ) |
|
| (84.2 | ) |
|
| (1.4 | ) |
|
| 221.2 |
|
Patents, trademarks, trade names and other(2) |
|
| 120.9 |
|
|
| — |
|
|
| (45.5 | ) |
|
| 0.2 |
|
|
| 75.6 |
|
|
| $ | 875.5 |
|
| $ | (1.5 | ) |
| $ | (308.0 | ) |
| $ | (1.4 | ) |
| $ | 564.6 |
|
As of September 30, 2019 : | Gross | Accumulated Impairment Charges | Accumulated Amortization | Foreign Currency Translation | Net | |||||||||||||||
Completed technology (1) | $ | 446,431 | $ | (105 | ) | $ | (167,816 | ) | $ | (282 | ) | $ | 278,228 | |||||||
Customer relationships (1) | 308,144 | (1,406 | ) | (79,028 | ) | (2,066 | ) | 225,644 | ||||||||||||
Patents, trademarks, trade names and other (1) | 120,895 | — | (44,036 | ) | 149 | 77,008 | ||||||||||||||
| $ | 875,470 | $ | (1,511 | ) | $ | (290,880 | ) | $ | (2,199 | ) | $ | 580,880 | ||||||||
(1) | During |
(2) | During 2019, the Company reclassified |
As of December 31, 2018 : | Gross | Accumulated Impairment Charges | Accumulated Amortization | Foreign Currency Translation | Net | |||||||||||||||
Completed technology | $ | 172,431 | $ | (105 | ) | $ | (137,283 | ) | $ | (73 | ) | $ | 34,970 | |||||||
Customer relationships | 282,744 | (1,406 | ) | (63,788 | ) | (269 | ) | 217,281 | ||||||||||||
Patents, trademarks, trade names and other | 110,523 | — | (42,954 | ) | (13 | ) | 67,556 | |||||||||||||
| $ | 565,698 | $ | (1,511 | ) | $ | (244,025 | ) | $ | (355 | ) | $ | 319,807 | ||||||||
20
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
Aggregate amortization expense related to acquired intangibles for the nine months ended September 30, 2020 and September 30, 2019 were $42.6 and 2018 was $50,299 and $32,786,$50.3, respectively.
Year |
| Amount |
| |
2020 (remaining) |
| $ | 13.2 |
|
2021 |
|
| 47.9 |
|
2022 |
|
| 45.4 |
|
2023 |
|
| 45.0 |
|
2024 |
|
| 44.1 |
|
2025 |
|
| 43.2 |
|
Thereafter |
|
| 228.6 |
|
The Company excluded $55.9 of indefinite-lived trademarks and trade names that were not subject to amortization from the table above.
Year | Amount | |||
2019 (remaining) | $ | 17,382 | ||
2020 | 55,392 | |||
2021 | 47,617 | |||
2022 | 45,182 | |||
2023 | 44,844 | |||
2024 | 43,927 | |||
Thereafter | 270,636 | |||
11) | Debt |
Senior Secured Term Loan Credit Agreement
In connection with the completion of the acquisition of Newport Corporation (“Newport”) in 2016 (the “Newport Merger”), the Company entered into a term loan credit agreement (the “Credit“Term Loan Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto (the “Lenders”), that provided a senior secured financingterm loan credit facility in the original principal amount of $780,000$780.0 (the “2016 Term Loan Facility”), subject to increase at the Company’s option and subject to receipt of lender commitments in accordance with the Term Loan Credit Agreement (the 2016 Term Loan Facility, together with the 2019 Incremental Term Loan Facility
The Company subsequently entered into
On September 30, 2016, the Company entered into an interest raterate swap agreement, which hashad a maturity date of
The Company incurred $28,747$28.7 of deferred finance fees, original issue discount and repricing fees related to the term loans under the 2016 Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
21
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
On February 1, 2019, in connection with the completion of the ESI Merger, the Company entered into an amendment (“Amendment No. 5”) to the Term Loan Credit Agreement. Amendment No. 5 provided an additional tranche
On April 3, 2019, the Company entered into an interest rate swap agreement, which has a maturity date of March 31, 2023, to fix the rate on $300,000$300.0 of the then-outstanding balance of the 2019 Incremental Term Loan Facility. The rate
The Company incurred $11,362$11.4 of deferred finance fees and original issue discount fees related to the term loans under the 2019 Incremental Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
On September 27, 2019, the Company entered into an amendment (“Amendment No. 6”) to the Term Loan Credit Agreement. Amendment No. 6 refinanced all existing loans outstanding under the 2016 Term Loan Facility and 2019 Incremental Term Loan Facility (“Existing Term Loans”) for a tranche
The Company incurred $2,242$2.2 of original issue discount fees related to the term loans under the 2019 Term Loan Refinancing Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
As of September 30, 2019,2020, the remaining balance of deferred finance fees and original issue discount of the Term Loan Facility was $12,258.$9.8. A portion of the deferred finance fees and original issue discount have been accelerated in connection with the various debt prepayments and extinguishments duringbetween 2016 2017, 2018 and 2019.
The 2019 Term Loan Refinancing Facility matures on February 2, 2026, and bears interest at a rate per annum equal to, at the Company’s option, a base rate or LIBOR rate (as described above) plus, in each case, an applicable margin equal to 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings. The 2019 Term Loan Refinancing Facility was issued with original issue discount of 0.25% of the principal amount thereof.
The Company is required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the 2019 Term Loan
As of
Under the Term Loan Credit Agreement, the Company is required to prepay outstanding term loans,
All obligations under the Term Loan Facility are guaranteed by certain of the Company’s domestic subsidiaries and are collateralized by substantially all of the Company’s assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
The Term Loan Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the Lenderslenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions generally permitted to be taken by a secured creditor. At September 30, 2019,2020, the Company was in compliance with all covenants under the Term Loan Credit Agreement.
22
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
Senior Secured Asset-Based Revolving Credit Facility
On February 1, 2019, in connection with the completion of the ESI Merger, the Company entered into an asset-based revolving credit agreement with Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto (the “ABL Credit Agreement”), that provides a senior secured asset-based revolving credit financingfacility of up to $100,000,$100.0, subject to a borrowing base limitation (the “ABL Facility”). On April 26, 2019, the Company entered into a First Amendment to the ABL Credit Agreement which amended the borrowing base calculation for eligible inventory prior to an initial field examination and appraisal requirements. The borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of certain eligible accounts; plus (b) prior to certain notice and field examination and appraisal requirements, the lesser of (i) 20% of net book value of eligible inventory in the United States and (ii) 30% of the borrowing base, and after the satisfaction of such 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, in each case, subject to additional limitations and examination requirements for eligible accounts and eligible inventory acquired in an acquisition after February 1, 2019. The ABL Facility includes borrowing capacity in the form of letters of credit up to $25,000.
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at the Company’s option, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in
In addition to paying interest on any outstanding principal under the ABL Facility, the Company is required to pay a commitment fee in respect of the unutilized commitments thereunder equal to 0.25% per annum. The Company must also pay customary letter of credit fees and agency fees.
If at any time the aggregate amount of costs in connection withoutstanding loans, protective advances, unreimbursed letter of credit drawings and undrawn letters of credit under the ABL Facility which were capitalizedexceeds the lesser of (a) the commitment amount and included(b) the borrowing base, the Company is required to repay outstanding loans and/or cash collateralize letters of credit, with no reduction of the commitment amount. During any period that the amount available under the ABL Facility is less than the greater of (i) $8.5 and (ii) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base for three consecutive business days, until the time when excess availability has been at least the greater of (i) $8.5 and (ii) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base, in other assetseach case, for 30 consecutive calendar days (a “Cash Dominion Period”), or during the continuance of an event of default, the Company is required to repay outstanding loans and/or cash collateralize letters of credit with the cash that it is required to deposit daily in a collection account maintained with the accompanying consolidated balance sheet and are being amortized to interest expense over the contractual term of five years ofadministrative agent under the ABL Facility. AsDuring a result of a prior asset-based facility being terminated concurrently with our entry intoCash Dominion Period, the Company may make borrowings under the ABL Facility subject to the satisfaction of customary funding conditions.
There is no scheduled amortization under the ABL Facility. The principal amount outstanding under the ABL Facility is due and payable in full on the fifth anniversary of the closing date.
All obligations under the ABL Facility are guaranteed by certain of the Company’s domestic subsidiaries and are collateralized by substantially all of the Company’s assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
From the time when the Company wrote off $216has excess availability less than the greater of previously capitalized debt issuance costs.
23
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor. The Company has not borrowed against thisthe ABL Facility to date.
Lines of Credit and Short-Term Borrowing Arrangements
The Company’s Japanese subsidiaries hashave lines of credit and short-term borrowing arrangementsa financing facility with twovarious financial institutions, many of which arrangements generally expire and are renewed at three-month intervals. intervals with the remaining having no expiration date. The lines of credit and financing facility provided for aggregate borrowings as of September 30, 20192020 of up to an equivalent of $21,308. One of the borrowing arrangements has an interest rate based on the Tokyo Interbank Offer Rate at the time of borrowing and the other has an interest rate based on the Japanese Short-Term Prime Lending Rate. There were no borrowings outstanding under these arrangements at September 30, 2019 and December 31, 2018, respectively.
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Short-term debt: |
|
|
|
|
|
|
|
|
Japanese lines of credit |
| $ | 3.0 |
|
| $ | 2.5 |
|
Japanese receivables financing facility |
|
| — |
|
|
| 0.6 |
|
Term Loan Facility |
|
| 9.0 |
|
|
| 9.0 |
|
|
| $ | 12.0 |
|
| $ | 12.1 |
|
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Long-term debt: |
|
|
|
|
|
|
|
|
Term Loan Facility, net(1) |
| $ | 816.8 |
|
| $ | 871.6 |
|
Other debt |
|
| — |
|
|
| 0.1 |
|
|
| $ | 816.8 |
|
| $ | 871.7 |
|
September 30, | December 31, | |||||||
Short-term debt: | ||||||||
Japanese lines of credit | $ | 3,627 | $ | 2,724 | ||||
Japanese receivables financing facility | 28 | 665 | ||||||
Other debt | — | 597 | ||||||
Term Loan Facility | 8,968 | — | ||||||
| $ | 12,623 | $ | 3,986 | |||||
September 30, | December 31, | |||||||
Long-term debt: | ||||||||
Other debt | $ | 79 | $ | 86 | ||||
Term Loan Facility, net (1) | 873,371 | 343,756 | ||||||
| $ | 873,450 | $ | 343,842 | |||||
(1) | Net of deferred financing fees, original |
Contractual maturities of the Company’s debt obligations as of September 30, 20192020 are as follows:
Year |
| Amount |
| |
2020 (remaining) |
| $ | 5.3 |
|
2021 |
|
| 9.0 |
|
2022 |
|
| 9.0 |
|
2023 |
|
| 9.0 |
|
2024 |
|
| 9.0 |
|
2025 |
|
| 9.0 |
|
Thereafter |
|
| 788.3 |
|
| Year | Amount | |||
2019 (remaining) | $ | 5,897 | ||
2020 | 9,037 | |||
2021 | 8,979 | |||
2022 | 8,968 | |||
2023 | 8,968 | |||
2024 | 8,968 | |||
Thereafter | 847,514 | |||
12) | Product Warranties |
The Company recordsprovides for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by shipment volume, product failure rates, utilization levels, material usage and supplier warranties on parts delivered to the Company. Should actual product failure rates, utilization levels, material usage, or supplier warranties on parts differ from the Company’s estimates, revisions to the estimated warranty liability would be required.
24
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
Product warranty activities were as follows:
|
| Nine Months Ended September 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Beginning of period |
| $ | 14.9 |
|
| $ | 10.4 |
|
Assumed product warranty liability from ESI Merger |
|
| — |
|
|
| 7.2 |
|
Provision for product warranties |
|
| 20.2 |
|
|
| 18.7 |
|
Charges to warranty liability |
|
| (19.0 | ) |
|
| (21.2 | ) |
End of period(1) |
| $ | 16.1 |
|
| $ | 15.1 |
|
Nine Months Ended | ||||||||
2019 | 2018 | |||||||
Beginning of period | $ | 10,399 | | $ | 10,104 | |||
Assumed product warranty liability from ESI Merger | 7,177 | — | ||||||
Provision for product warranties | 18,700 | 11,448 | ||||||
Direct and other charges to warranty liability | (21,209 | ) | (11,072 | ) | ||||
End of period (1) | $ | 15,067 | $ | 10,480 | ||||
(1) | As of September 30, |
13) | Income Taxes |
The Company’s effective tax rates for the three and nine months ended September 30, 2020 were 15.7 % and 17.0%, respectively. The effective tax rates for the three and nine months ended September 30, 2020, and related income tax expense, were 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, windfall benefits of stock compensation, and the deduction for foreign derived intangible income offset by the tax effects of the global intangible low taxed income inclusion and the write-off of deferred tax assets related to certain foreign net operating losses.
The Company’s effective tax rates for the three and nine months ended September 30, 2019 were 14.4% and 20.4%,
On March 27, 2020, the threeUnited States enacted the Coronavirus Aid, Relief, and nine months ended September 30, 2018 were 18.5% and 17.6%, respectively. The effective tax rates for the three and nine months ended September 30, 2018, and relatedEconomic Security (CARES) Act which contains numerous income tax expense, were lower thanprovisions among other tax and non-tax provisions. Some of these income tax provisions have retroactive effect on years before the U.S. statutorydate of enactment. The Company has evaluated the CARES Act legislation in relation to income taxes and does not expect the CARES Act income tax rate mainly dueprovisions 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, windfall benefits of stock compensation, and the deduction for foreign derived intangible income
The total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $41,170. At$47.5 and $43.5 as of September 30, 2020 and December 31, 2018, the total amount2019, respectively. As of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $32,684. The net increase was primarily attributable to the addition of historical gross unrecognized tax benefits for ESI as a result of the ESI Merger during the quarter ended March 31, 2019. As of
Over the next 12 months, it is reasonably possible that the Company may recognize approximately $1,225$0.9 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 U.S. Internal Revenue Service commenced an examination of the Company’s U.S. federal income tax filings for tax years 2015 and 2016 during the quarter ended September 30, 2017. This audit was effectively settled during the quarter ended March 31, 2018, and the impact was not material. Also during the quarter ended March 31, 2018 the Company received notification from the U.S. Internal Revenue Service of their intent to audit its U.S. subsidiary, Newport, for tax year 2015. This audit commenced during the quarter ended June 30, 2018 and was effectively settled during the quarter ended June 30, 2019 with a no change result. The U.S. statute of limitations remains open for tax years 2016 through the present. The statute of limitations for the Company’s tax filings in other jurisdictions varies between fiscal years 20132014 through present. The Company also has certain foreign, federal credit carry-forwards and state tax loss and credit carry-forwards that are open to examination for tax years 2000 through the present.
25
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
14) | 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, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 91.7 |
|
| $ | 47.4 |
|
| $ | 234.5 |
|
| $ | 97.6 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per common share – basic |
|
| 55,173,000 |
|
|
| 54,945,000 |
|
|
| 55,060,000 |
|
|
| 54,636,000 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units and stock appreciation rights |
|
| 226,000 |
|
|
| 259,000 |
|
|
| 241,000 |
|
|
| 409,000 |
|
Shares used in net income per common share – diluted |
|
| 55,399,000 |
|
|
| 55,204,000 |
|
|
| 55,301,000 |
|
|
| 55,045,000 |
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.66 |
|
| $ | 0.86 |
|
| $ | 4.26 |
|
| $ | 1.79 |
|
Diluted |
| $ | 1.66 |
|
| $ | 0.86 |
|
| $ | 4.24 |
|
| $ | 1.77 |
|
Three Months Ended | Nine Months Ended | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 47,428 | $ | 93,277 | $ | 97,622 | $ | 321,260 | ||||||||
Denominator: | ||||||||||||||||
Shares used in net income per common share – basic | 54,945,000 | 54,476,000 | 54,636,000 | 54,539,000 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Restricted stock units, stock appreciation rights and shares issued under employee stock purchase plan | 259,000 | 478,000 | 409,000 | 632,000 | ||||||||||||
Shares used in net income per common share – diluted | 55,204,000 | 54,954,000 | 55,045,000 | 55,171,000 | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.86 | $ | 1.71 | $ | 1.79 | $ | 5.89 | ||||||||
Diluted | $ | 0.86 | $ | 1.70 | $ | 1.77 | $ | 5.82 | ||||||||
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 (restricted stock units (“RSUs”) and stock appreciation rights (“SARs”)) had been converted to such common shares, and if such assumed conversion is dilutive.
For the three and nine months ended September 30, 2020 there were approximately 2,600 and 900 weighted-average restricted stock units, respectively, that would have had an anti-dilutive effect on EPS, and were excluded from the computation of diluted weighted-average shares.
For the three and nine months ended September 30, 2019, there were approximately
15) | Stock-Based Compensation |
The Company grants
In connection with the completion of the ESI Merger, the Company assumed:
• | all RSUs that vest based solely on the satisfaction of service conditions, granted under any ESI equity plan, arrangement or agreement (“ESI Plan”) that were outstanding immediately prior to the effective time of the ESI Merger, and as to which shares of ESI common stock were not fully distributed in connection with the closing of the ESI Merger, |
• | all RSUs that were granted subject to vesting based on both the achievement of performance goals and the satisfaction of service conditions granted under any ESI Plan that were outstanding immediately prior to the effective time of the ESI Merger, and |
• | all SARs granted under any ESI Plan, whether vested or unvested, that were outstanding immediately prior to the effective time |
As of the effective time of the ESI Merger, based on a formula in the ESI Merger Agreement, (a) such RSUs were converted automatically into RSUs with respect to 736,133736,000 shares of the Company’s common stock (the “Assumed RSUs”), and (b)
26
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
suchSAR
Included in the total number of assumedAssumed RSUs are 326,283326,000 shares of the Company’s common stock for employees and outside directors that are part of the ESI Deferred Compensation plan (the “ESI DC Plan”). These shares 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 Plan.
The 748,920749,000 shares of the Company’s common stock that are issuable pursuant to the Assumed RSUs and the Assumed SARs under the Company’s 2014 Plan were registered under the Securities Act of 1933 on the Registration Statement on Form
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, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Cost of revenues |
| $ | 1.2 |
|
| $ | 0.8 |
|
| $ | 3.1 |
|
| $ | 1.9 |
|
Research and development expense |
|
| 1.0 |
|
|
| 1.0 |
|
|
| 3.0 |
|
|
| 2.8 |
|
Selling, general and administrative expense |
|
| 5.1 |
|
|
| 4.0 |
|
|
| 15.9 |
|
|
| 16.2 |
|
Acquisition and integration related expense |
|
| 0.1 |
|
|
| 1.2 |
|
|
| 0.7 |
|
|
| 20.8 |
|
Restructuring related expense |
|
| — |
|
|
| 0.4 |
|
|
| — |
|
|
| 0.4 |
|
Total pre-tax stock-based compensation expense |
| $ | 7.4 |
|
| $ | 7.4 |
|
| $ | 22.7 |
|
| $ | 42.1 |
|
Three Months Ended | Nine Months Ended | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cost of revenues | $ | 818 | $ | 170 | $ | 1,876 | $ | 2,664 | ||||||||
Research and development expense | 971 | 708 | 2,842 | 2,249 | ||||||||||||
Selling, general and administrative expense | 4,009 | 4,335 | 16,253 | 17,092 | ||||||||||||
Acquisition and integration related expense | 1,202 | — | 20,796 | — | ||||||||||||
Restructuring related expense | 373 | — | 373 | — | ||||||||||||
Total pre-tax stock-based compensation expense | $ | 7,373 | $ | 5,213 | $ | 42,140 | $ | 22,005 | ||||||||
At September 30, 2019,2020, the total compensation expense related to unvested stock-based awards granted to employees and directors under the 2014 Plan that had not been recognized was $30,795, net of estimated forfeitures.$37.7. The future compensation expense for time-based awards is recognized on a straight-line basis and the future compensation expense for performance-based awards is recognized using the accelerated graded vesting method, both of which expense over the requisite service period, net of estimated forfeitures, except for retirement eligible employees, in which case the Company expenses the fair value of the grant in the period the grant is issued. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience. Actual results and future changes in estimates may differ substantially from the Company’s current estimates.
The following table presents the activity for RSUs under the 2014 Plan:
|
| Nine Months Ended September 30, 2020 |
| |||||
|
| Outstanding RSUs |
|
| Weighted Average Grant Date Fair Value |
| ||
RSUs – beginning of period |
|
| 1,102,534 |
|
| $ | 85.93 |
|
Accrued dividend shares |
|
| 535 |
|
| $ | 107.82 |
|
Granted |
|
| 305,610 |
|
| $ | 98.25 |
|
Vested |
|
| (732,416 | ) |
| $ | 85.32 |
|
Forfeited |
|
| (63,094 | ) |
| $ | 85.40 |
|
RSUs – end of period |
|
| 613,169 |
|
| $ | 92.87 |
|
Nine Months Ended September 30, 2019 | ||||||||
Outstanding RSUs | Weighted Average Grant Date Fair Value | |||||||
RSUs – beginning of period | 647,394 | $ | 74.04 | |||||
Assumed shares from ESI Merger | 736,133 | $ | 84.10 | |||||
Accrued dividend shares | 4,307 | $ | 79.20 | |||||
Granted | 417,335 | $ | 86.18 | |||||
Vested | (533,007 | ) | $ | 69.11 | ||||
Forfeited | (134,833 | ) | $ | 89.58 | ||||
RSUs – end of period | 1,137,329 | $ | 85.50 | |||||
The following table presents the activity for SARs under the 2014 Plan:
|
| Nine Months Ended September 30, 2020 |
| |||||
|
| Outstanding SARs |
|
| Weighted Average Grant Date Fair Value |
| ||
SARs – beginning of period |
|
| 108,854 |
|
| $ | 29.05 |
|
Exercised |
|
| (49,492 | ) |
| $ | 27.42 |
|
Forfeited or expired |
|
| (1,400 | ) |
| $ | 22.39 |
|
SARs – end of period |
|
| 57,962 |
|
| $ | 30.61 |
|
Nine Months Ended September 30, 2019 | ||||||||
Outstanding SARs | Weighted Average Grant Date Fair Value | |||||||
SARs – beginning of period | 177,538 | $ | 28.52 | |||||
Assumed SARs from ESI Merger | 12,787 | $ | 17.38 | |||||
Exercised | (46,414 | ) | $ | 27.07 | ||||
Forfeited or expired | (3,998 | ) | $ | 23.00 | ||||
SARs o utstanding – end of period | 139,913 | $ | 28.18 | |||||
27
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
16) | Stockholders’ Equity |
Share Repurchase Program
On July 25, 2011, the Company’s Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of $200,000$200 of its outstanding common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased will dependdepends 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. The Company has repurchased approximately 2,588,000 shares of common stock for approximately $127,000$127 pursuant to the program since its adoption. During the three and nine months ended September 30, 2020 and 2019, there were 0 repurchases of common stock.
Cash Dividends
Holders of the Company’s common stock are entitled to receive dividends when they are declared by the Company’s Board of Directors. In addition, the Company accrues dividend equivalents on the RSUs the Company assumed in the ESI Merger described in Note 15 above when dividends are declared by the Company’s Board of Directors. The Company’s Board of Directors declared a cash dividend of $0.20 per share during each of the first, second and third quarters of 2019,2020, which totaled $32,621$33.0, or $0.60 per share. The Company’s Board of Directors declared a cash dividend of $0.18 per share during the first quarter of 2018 and $0.20 per share during each of the first, second and third quarters of 2018,2019, which totaled $31,608$32.6, or $0.58$0.60 per share.
On October 28, 2019,26, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid on December 6, 20194, 2020 to shareholdersstockholders of record as of November 25, 2019. 23, 2020.
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. In addition, under the
17) | Business Segment, Geographic Area, |
The Company is a global provider of instruments, systems, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for its customers. The Company’s products are derived from its core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection,electronic control technology, ozonereactive gas generation and delivery, power reactive gas generation and delivery, vacuum technology, lasers, photonics,
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. Effective February 1, 2019, in conjunction with its acquisition of ESI, the Company created a third reportable segment known as the Equipment & Solutions segment in addition to its 2 then-existing reportable segments: the Vacuum & Analysis segment and the Light & Motion segment.
The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection,electronic control technology, ozone generation and delivery, RF & DC power, reactive gas generation and delivery, power generation and delivery and vacuum technology.
The Light & Motion segment provides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in lasers, photonics,
The Equipment & Solutions segment provides laser-based manufacturing systems solutions for the micro-machining industry that enable customers to optimize production. The Equipment & Solutions segment’s market is composed primarily ofprimary served markets include flexible and rigid PCB processing/fabrication, semiconductor wafer processing, and passive component manufacturing & test.and testing. The Equipment & Solutions segment’s systems incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.
28
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
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.
The following table sets forth net revenues by reportable segment:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Vacuum & Analysis |
| $ | 361.3 |
|
| $ | 240.7 |
|
| $ | 995.1 |
|
| $ | 710.7 |
|
Light & Motion |
|
| 175.9 |
|
|
| 172.4 |
|
|
| 507.3 |
|
|
| 549.0 |
|
Equipment & Solutions |
|
| 52.6 |
|
|
| 49.4 |
|
|
| 167.4 |
|
|
| 140.4 |
|
|
| $ | 589.8 |
|
| $ | 462.5 |
|
| $ | 1,669.8 |
|
| $ | 1,400.1 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 201 8 | |||||||||||||
Vacuum & Analysis | $ | 240,681 | $ | 286,038 | $ | 710,691 | $ | 1,002,710 | ||||||||
Light & Motion | 172,460 | 201,114 | 549,027 | 611,857 | ||||||||||||
Equipment & Solutions | 49,310 | — | 140,404 | — | ||||||||||||
| $ | 462,451 | $ | 487,152 | $ | 1,400,122 | $ | 1,614,567 | |||||||||
The following table sets forth a reconciliation of segment gross profit to consolidated net incomeincome:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Gross profit by reportable segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacuum & Analysis |
| $ | 163.5 |
|
| $ | 102.8 |
|
| $ | 444.1 |
|
| $ | 303.0 |
|
Light & Motion |
|
| 76.0 |
|
|
| 79.9 |
|
|
| 227.8 |
|
|
| 257.6 |
|
Equipment & Solutions |
|
| 22.5 |
|
|
| 22.3 |
|
|
| 76.0 |
|
|
| 53.5 |
|
Total gross profit by reportable segment |
|
| 262.0 |
|
|
| 205.0 |
|
|
| 747.9 |
|
|
| 614.1 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 42.5 |
|
|
| 41.7 |
|
|
| 127.7 |
|
|
| 122.3 |
|
Selling, general and administrative |
|
| 87.0 |
|
|
| 82.1 |
|
|
| 260.3 |
|
|
| 247.8 |
|
Acquisition and integration costs |
|
| 0.5 |
|
|
| 2.1 |
|
|
| 3.4 |
|
|
| 35.5 |
|
Restructuring and other |
|
| 3.1 |
|
|
| 1.5 |
|
|
| 6.8 |
|
|
| 4.7 |
|
Amortization of intangible assets |
|
| 12.5 |
|
|
| 17.0 |
|
|
| 42.6 |
|
|
| 50.3 |
|
Asset impairment |
|
| — |
|
|
| — |
|
|
| 1.2 |
|
|
| — |
|
COVID-19 related net credits |
|
| — |
|
|
| — |
|
|
| (1.2 | ) |
|
| — |
|
Fees and expenses related to repricing of Term Loan Facility |
|
| — |
|
|
| 0.6 |
|
|
| — |
|
|
| 6.5 |
|
Gain on sale of long-lived assets |
|
| — |
|
|
| (6.8 | ) |
|
| — |
|
|
| (6.8 | ) |
Income from operations |
|
| 116.4 |
|
|
| 66.8 |
|
|
| 307.1 |
|
|
| 153.8 |
|
Interest and other expense, net |
|
| 7.6 |
|
|
| 11.4 |
|
|
| 24.6 |
|
|
| 31.2 |
|
Income before income taxes |
|
| 108.8 |
|
|
| 55.4 |
|
|
| 282.5 |
|
|
| 122.6 |
|
Provision for income taxes |
|
| 17.1 |
|
|
| 8.0 |
|
|
| 48.0 |
|
|
| 25.0 |
|
Net income |
| $ | 91.7 |
|
| $ | 47.4 |
|
| $ | 234.5 |
|
| $ | 97.6 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Gross profit by reportable segment: | ||||||||||||||||
Vacuum & Analysis | $ | 102,826 | $ | 132,835 | $ | 303,060 | $ | 462,418 | ||||||||
Light & Motion | 79,873 | 99,025 | 257,562 | 307,174 | ||||||||||||
Equipment & Solutions | 22,305 | — | 53,527 | — | ||||||||||||
Total gross profit by reportable segment | 205,004 | 231,860 | 614,149 | 769,592 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 41,566 | 31,898 | 122,354 | 103,259 | ||||||||||||
Selling, general and administrative | 82,101 | 70,822 | 247,792 | 229,952 | ||||||||||||
Fees and expenses related to term loan | 642 | — | 6,489 | 378 | ||||||||||||
Acquisition and integration costs | 2,103 | 36 | 35,510 | (1,132 | ) | |||||||||||
Restructuring and other | 1,525 | 1,364 | 4,690 | 4,374 | ||||||||||||
Amortization of intangible assets | 17,020 | 10,695 | 50,299 | 32,786 | ||||||||||||
Gain on sale of long-lived assets | (6,773 | ) | — | (6,773 | ) | — | ||||||||||
Income from operations | 66,820 | 117,045 | 153,788 | 399,975 | ||||||||||||
Interest and other expense, net | 11,398 | 2,529 | 31,167 | 10,173 | ||||||||||||
Income before income taxes | 55,422 | 114,516 | 122,621 | 389,802 | ||||||||||||
Provision for income taxes | 7,994 | 21,239 | 24,999 | 68,542 | ||||||||||||
Net income | $ | 47,428 | $ | 93,277 | $ | 97,622 | $ | 321,260 | ||||||||
The following table sets forth capital expenditures by reportable segment for the three and nine months ended September 30, 20192020 and 2018:2019:
|
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Total |
| ||||
Three Months Ended September 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| $ | 9.7 |
|
| $ | 12.9 |
|
| $ | 6.4 |
|
| $ | 29.0 |
|
Nine Months Ended September 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| $ | 28.8 |
|
| $ | 21.4 |
|
| $ | 9.7 |
|
| $ | 59.9 |
|
Three Months Ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| $ | 7.4 |
|
| $ | 6.8 |
|
| $ | 2.3 |
|
| $ | 16.5 |
|
Nine Months Ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| $ | 21.6 |
|
| $ | 16.9 |
|
| $ | 6.2 |
|
| $ | 44.7 |
|
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
Three Months Ended September 30, 2019: | ||||||||||||||||
Capital expenditures | $ | 7,461 | $ | 6,767 | $ | 2,271 | $ | 16,499 | ||||||||
Nine Months Ended September 30, 2019: | ||||||||||||||||
Capital expenditures | $ | 21,649 | $ | 16,859 | $ | 6,245 | $ | 44,753 | ||||||||
Three Months Ended September 30, 2018: | ||||||||||||||||
Capital expenditures | $ | 9,532 | $ | 5,535 | $ | — | $ | 15,067 | ||||||||
Nine Months Ended September 30, 2018: | ||||||||||||||||
Capital expenditures | $ | 22,701 | $ | 14,184 | $ | — | $ | 36,885 | ||||||||
29
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
The following table sets forth depreciation and amortization by reportable segment for the three and nine months ended September 30, 20192020 and 2018:2019:
|
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Total |
| ||||
Three Months Ended September 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 5.1 |
|
| $ | 9.6 |
|
| $ | 8.6 |
|
| $ | 23.3 |
|
Nine Months Ended September 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 15.1 |
|
| $ | 33.5 |
|
| $ | 27.2 |
|
| $ | 75.8 |
|
Three Months Ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 4.2 |
|
| $ | 13.0 |
|
| $ | 10.0 |
|
| $ | 27.2 |
|
Nine Months Ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 12.2 |
|
| $ | 40.4 |
|
| $ | 27.3 |
|
| $ | 79.9 |
|
Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | |||||||||||||
Three Months Ended September 30, 2019: | ||||||||||||||||
Depreciation and amortization | $ | 4,222 | $ | 12,992 | $ | 9,994 | $ | 27,208 | ||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||
Depreciation and amortization | $ | 12,208 | $ | 40,424 | $ | 27,231 | $ | 79,863 | ||||||||
Three Months Ended September 30, 2018: | ||||||||||||||||
Depreciation and amortization | $ | 5,083 | $ | 14,446 | $ | — | $ | 19,529 | ||||||||
Nine Months Ended September 30, 2018: | ||||||||||||||||
Depreciation and amortization | $ | 15,180 | $ | 44,726 | $ | — | $ | 59,906 | ||||||||
Total income tax expense is not presented by reportable segment because the necessary information is not available ornor used by the CODM.
The following table sets forth segment assets by reportable segment:
September 30, 2020 |
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Corporate, Eliminations & Other |
|
| Total |
| |||||
Segment assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net |
| $ | 202.9 |
|
| $ | 143.7 |
|
| $ | 42.5 |
|
| $ | (25.2 | ) |
| $ | 363.9 |
|
Inventory, net |
|
| 261.0 |
|
|
| 169.9 |
|
|
| 64.6 |
|
|
| (1.3 | ) |
|
| 494.2 |
|
Total segment assets |
| $ | 463.9 |
|
| $ | 313.6 |
|
| $ | 107.1 |
|
| $ | (26.5 | ) |
| $ | 858.1 |
|
December 31, 2019 |
| Vacuum & Analysis |
|
| Light & Motion |
|
| Equipment & Solutions |
|
| Corporate, Eliminations & Other |
|
| Total |
| |||||
Segment assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net |
| $ | 185.9 |
|
| $ | 147.2 |
|
| $ | 40.1 |
|
| $ | (32.1 | ) |
| $ | 341.1 |
|
Inventory, net |
|
| 224.8 |
|
|
| 163.7 |
|
|
| 73.5 |
|
|
| 0.1 |
|
|
| 462.1 |
|
Total segment assets |
| $ | 410.7 |
|
| $ | 310.9 |
|
| $ | 113.6 |
|
| $ | (32.0 | ) |
| $ | 803.2 |
|
September 30, 2019: | Vacuum & Analysis | Light & Motion | Equipment & Solutions | Corporate, Eliminations & Other | Total | |||||||||||||||
Segment assets: | ||||||||||||||||||||
Trade accounts receivable | $ | 156,066 | $ | 159,061 | $ | 40,289 | $ | (27,433 | ) | $ | 327,983 | |||||||||
Inventories | 221,182 | 168,597 | 73,449 | 35 | 463,263 | |||||||||||||||
Total segment assets | $ | 377,248 | $ | 327,658 | $ | 113,738 | $ | (27,398 | ) | $ | 791,246 | |||||||||
December 31, 2018: | Vacuum & Analysis | Light & Motion | Equipment & Solutions | Corporate, Eliminations & Other | Total | |||||||||||||||
Segment assets: | ||||||||||||||||||||
Trade accounts receivable | $ | 171,604 | $ | 140,658 | $ | — | $ | (16,808 | ) | $ | 295,454 | |||||||||
Inventories | 222,965 | 161,658 | — | 66 | 384,689 | |||||||||||||||
Total segment assets | $ | 394,569 | $ | 302,316 | $ | — | $ | (16,742 | ) | $ | 680,143 | |||||||||
The following is a reconciliation of segment assets to consolidated total assets:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Total segment assets |
| $ | 858.1 |
|
| $ | 803.2 |
|
Cash and cash equivalents |
|
| 493.3 |
|
|
| 414.6 |
|
Short-term investments |
|
| 222.4 |
|
|
| 109.4 |
|
Other current assets |
|
| 95.9 |
|
|
| 106.3 |
|
Property, plant and equipment, net |
|
| 267.9 |
|
|
| 241.9 |
|
Right-of-use asset |
|
| 180.1 |
|
|
| 64.5 |
|
Goodwill and intangible assets, net |
|
| 1,585.4 |
|
|
| 1,623.1 |
|
Other assets and long-term investments |
|
| 47.8 |
|
|
| 53.3 |
|
Consolidated total assets |
| $ | 3,750.9 |
|
| $ | 3,416.3 |
|
September 30, 2019 | December 31, 2018 | |||||||
Total segment assets | $ | 791,246 | $ | 680,143 | ||||
Cash and cash equivalents and investments | 485,274 | 728,461 | ||||||
Other current assets | 94,011 | 65,790 | ||||||
Property, plant and equipment, net | 236,124 | 194,367 | ||||||
Right-of-use asset | 67,632 | — | ||||||
Goodwill and intangible assets, net | 1,634,971 | 906,803 | ||||||
Other assets | 45,286 | 38,682 | ||||||
Consolidated total assets | $ | 3,354,544 | $ | 2,614,246 | ||||
30
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
Geographic
Information about the Company’s operations in different geographic regions is presented in the tables below. Net revenues to unaffiliated customers are based on the location in which the sale originated.
Transfers between geographic areas are at tax transfer prices and have been eliminated from consolidated net revenues.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 281.2 |
|
| $ | 211.1 |
|
| $ | 757.7 |
|
| $ | 653.0 |
|
South Korea |
|
| 65.8 |
|
|
| 41.3 |
|
|
| 206.8 |
|
|
| 116.0 |
|
China |
|
| 67.6 |
|
|
| 46.7 |
|
|
| 192.5 |
|
|
| 140.5 |
|
Japan |
|
| 39.9 |
|
|
| 32.4 |
|
|
| 117.1 |
|
|
| 105.5 |
|
Israel |
|
| 34.3 |
|
|
| 26.4 |
|
|
| 98.3 |
|
|
| 76.6 |
|
Germany |
|
| 29.4 |
|
|
| 36.4 |
|
|
| 94.3 |
|
|
| 111.9 |
|
Other |
|
| 71.6 |
|
|
| 68.2 |
|
|
| 203.1 |
|
|
| 196.6 |
|
|
| $ | 589.8 |
|
| $ | 462.5 |
|
| $ | 1,669.8 |
|
| $ | 1,400.1 |
|
Long-lived assets:(1) |
| September 30, 2020 |
|
| December 31, 2019 |
| ||
United States |
| $ | 353.1 |
|
| $ | 208.3 |
|
Europe |
|
| 37.3 |
|
|
| 41.4 |
|
Asia |
|
| 88.7 |
|
|
| 89.6 |
|
|
| $ | 479.1 |
|
| $ | 339.3 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net revenues: | ||||||||||||||||
United States | $ | 211,116 | $ | 243,273 | $ | 653,012 | $ | 801,811 | ||||||||
China | 46,679 | 35,554 | 140,469 | 98,631 | ||||||||||||
Korea | 41,313 | 43,468 | 116,011 | 164,462 | ||||||||||||
Japan | 32,388 | 38,964 | 105,485 | 151,325 | ||||||||||||
Other Asia | 77,360 | 69,782 | 213,325 | 215,282 | ||||||||||||
Europe | 53,595 | 56,111 | 171,820 | 183,056 | ||||||||||||
| $ | 462,451 | $ | 487,152 | $ | 1,400,122 | $ | 1,614,567 | |||||||||
Long-lived assets: (1) | September 30, 2019 | December 31, 2018 | ||||||
United States | $ | 171,324 | $ | 146,687 | ||||
Europe | 30,514 | 26,794 | ||||||
Asia | 60,072 | 50,572 | ||||||
| $ | 261,910 | $ | 224,053 | |||||
(1) | Long-lived assets include property, plant and equipment, net, right-of-use assets, and certain other assets, and exclude goodwill, intangible assets and long-term |
Goodwill associated with each of the Company’s reportable segments is as follows:follows:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Reportable segment: |
|
|
|
|
|
|
|
|
Vacuum & Analysis |
| $ | 196.5 |
|
| $ | 196.7 |
|
Light & Motion |
|
| 391.7 |
|
|
| 388.5 |
|
Equipment & Solutions |
|
| 473.9 |
|
|
| 473.3 |
|
Total goodwill |
| $ | 1,062.1 |
|
| $ | 1,058.5 |
|
September 30, 2019 | December 31, 2018 | |||||||
Reportable segment: | ||||||||
Vacuum & Analysis | $ | 195,431 | $ | 197,126 | ||||
Light & Motion | 386,848 | 389,870 | ||||||
Equipment & Solutions | 471,812 | — | ||||||
Total goodwill | $ | 1,054,091 | $ | 586,996 | ||||
Major Customers
For the three and nine months ended September 30, 2020, the Company groups its product offerings into 3 groups based upon the similarity of product function as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Advanced Manufacturing Components | $ | 353,639 | $ | 426,255 | $ | 1,084,107 | $ | 1,432,931 | ||||||||
Global Service | 76,278 | 60,897 | 215,260 | 181,636 | ||||||||||||
Advanced Manufacturing Systems | 32,534 | — | 100,755 | — | ||||||||||||
| $ | 462,451 | $ | 487,152 | $ | 1,400,122 | $ | 1,614,567 | |||||||||
18) | Restructuringand Other |
Restructuring
The Company recorded restructuring charges of $1,525$0.8 and $2,990$1.4 during the three and nine months ended September 30, 2020, related to the pending closure of a facility in Europe and costs related to the exit of certain product groups.
The Company recorded restructuring charges of $1.5 and $3.0 during the three and nine months ended September 30, 2019, respectively, primarily related to severance costs as a result of an organization-wide reduction in workforce, the consolidation of service functions in Asia and the movement of certain products to low cost regions.
31
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share and per share data)
Restructuring activities were as follows:
|
| Nine Months Ended September 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Beginning of period restructuring accrual |
| $ | 3.7 |
|
| $ | 2.6 |
|
Charged to expense |
|
| 1.4 |
|
|
| 3.0 |
|
Payments and adjustments |
|
| (3.8 | ) |
|
| (3.1 | ) |
End of period restructuring accrual |
| $ | 1.3 |
|
| $ | 2.5 |
|
Other
The Company recorded restructuring charges of $1,364$2.3 and $3,374$5.9 during the three and nine months ended
The Company received an insurance reimbursement of $0.5 during the nine months ended September 30, 2020 for costs recorded on a legal settlement from a contractual obligation assumed as a resultpart of streamlining and consolidating certain administrative functions.
Nine Months Ended | ||||||||
2019 | 2018 | |||||||
Beginning of period restructuring accrual | $ | 2,632 | $ | 3,244 | ||||
Charged to expense | 2,990 | 3,374 | ||||||
Payments and adjustments | (3,074 | ) | (3,963 | ) | ||||
End of period restructuring accrual | $ | 2,548 | $ | 2,655 | ||||
19) | Commitments and Contingencies |
In 2016, two putative class actions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.
On July 27, 2017, plaintiffs filed a second amended complaint containing substantially similar allegations but naming only Newport’s former directors as defendants. On August 8, 2017, the Court dismissed the Company and Newport from the action. The second amended complaint seeks monetary damages, including
The Company is subject to various legal proceedings and claims, which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
This Quarterly Report on Form
The Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes principal factors affecting the results of our operations, financial condition and liquidity, as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on Form
Overview
We are a global provider of instruments, systems, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for our customers. Our products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection,electronic control technology, ozonereactive gas generation and delivery, power reactive gas generation and delivery, vacuum technology, lasers, photonics,
Recent Events
Impact of Electro Scientific Industries, Inc.
The World Health Organization formally declared the outbreak of COVID-19 a pandemic in March 2020. This pandemic has impacted the global economy and we completedhave devoted considerable resources to address the impact to our acquisition of Electro Scientific Industries, Inc. (“ESI”) pursuantemployees and manufacturing capacity, as well as how to an Agreement and Plan of Merger, dated as of October 29, 2018 (the “ESI Merger”). At the effective time of the ESI Merger and pursuantmanage government mandates reacting to the termspandemic, supply chain disruptions, and conditions of the merger agreement, each share of ESI’s common stock that was issued and outstanding immediately prior to the effective time of the ESI Merger was converted into the right to receive $30.00 in cash, without interest and subject to deduction of any required withholding tax. We paid the former ESI stockholders aggregate consideration of approximately $1.033 billion, excluding related transaction fees and expenses, and
In January 2020, we created a third reportable segment known asglobal COVID-19 task force which oversees our corporate activities in response to the Equipment & Solutions segmentpandemic. Our response has focused on:
Health and Safety of our Workforce
• | Expediting social distancing and facility sanitation measures |
• | Establishing work-from-home policy and return to work policies |
• | Implementing and applying key safety precautions |
Continuity of Operations
• | Securing critical components amidst disruptions to supply chain |
• | Addressing rapid changes in workforce availability to ensure timely response to customer needs |
• | Harnessing our global services footprint to respond to the repair and maintenance needs of our customers |
While our operations and financial performance in additioncertain areas of our business have been negatively impacted by the COVID-19 pandemic, the impact to our two then-existing reportable segments: the Vacuum & Analysis segment and the Light & Motion segment. ESI provides laser-based manufacturing solutionsfinancial results for the micro-machining industrythree and nine months ended September 30, 2020 has been minimal due to strong demand for our products from our semiconductor customers. However, the situation remains dynamic and there remains significant uncertainty as to the length and severity of the pandemic, the actions that enablemay be taken by government authorities, the impact to the business of our customers and suppliers, the long-term economic implications and other factors identified in Part II, Item IA “Risk Factors” in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, which was filed with the SEC on May 6, 2020. We believe the longer the COVID-19 pandemic continues, the more material the adverse impact could be on our business, financial condition and operating results. We will continue to optimize production. ESI’s primary served markets include flexibleevaluate the nature and rigid PCB processing/fabrication, semiconductor wafer processingextent of the impact to our business, financial condition and passive component manufacturingoperating results.
Segments and testing. ESI solutions incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.
The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection,electronic control technology, ozone generation and delivery, RF & DC power, reactive gas generation and delivery, power generation and delivery, and vacuum technology.
The Light & Motion segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in lasers, photonics,
The Equipment & Solutions segment was created in conjunction with the completion of our acquisition of Electro Scientific Industries, Inc. on February 1, 2019 (the “ESI Merger”). The Equipment & Solutions segment provides laser-based manufacturing systems solutions for the micro-machining industry that enable customers to optimize production. The primary served markets for the Equipment & Solutions segment include flexible and rigid printed circuit board (“PCB”) processing/fabrication, semiconductor wafer processing and passive component manufacturing and testing. The Equipment & Solutions segment’s systems incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.
We have a diverse base of customers. Approximately 52%60% and 44%52% of our net revenues, for the nine months ended September 30, 2020 and 2019, respectively, were from sales to semiconductor capital equipment manufacturers and 2018,semiconductor device manufacturers.
Approximately 40% and 48% of our net revenues, for the nine months ended September 30, 2020 and 2019, respectively, were from sales to customers in our advanced markets. These include, but are not limited to, industrial technologies, life and health sciences, and research and defense.
Net revenues for the nine months ended September 30, 2019 and 2018, respectively, were from sales to semiconductor capital equipment manufacturersmanufacture and semiconductor device manufacturers.
Net revenues from customers in our advanced markets decreased by $8.7 million, or 4%, for the three months ended September 30, 2020, compared to the same period in the prior year, primarily due to a decrease of $6.2 million from our Light & Motion segment. Net revenues from customers in our advanced markets decreased by $66.1 million, or 9%, for the nine months ended September 30, 2020, compared to the same period in the prior year, primarily due to a decrease of $62.8 million from our Light & Motion segment. Our advanced markets experienced an overall decline for the nine months ended September 30, 2020 driven by a general slowdown in our industrial markets as well as in our research market which was negatively impacted by university and research lab closures resulting from the COVID-19 pandemic.
A significant portion of our net revenues is from sales to customers in international markets. For the nine months ended September 30, 20192020 and 2018,2019, international net revenues accounted for approximately 53%55% and 50%53%, respectively, of our total net revenues, respectively.revenues. A significant portion of our international net revenues was from China, South Korea, GermanyChina, Japan, Israel and Japan.Germany. We expect that international net revenues will continue to represent a significant percentage of our total net revenues. Long-lived assets located in the
United States were $177$353.1 million and $147$208.3 million, as of September 30, 20192020 and December 31, 2018,2019, respectively, excluding goodwill, and intangibles,intangible assets, and long-term$91$126.0 million and $77$131.0 million, as of September 30, 20192020 and December 31, 2018,2019, respectively, excluding goodwill, and intangibles,intangible assets, and long-term
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 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, 2018, other than2019.
While we do not believe that the adoption of ASC 842 as outlined below.
For further information about our critical accounting policies, including our revenue recognition policy, please see the discussion of critical accounting policies in our Annual Report on Form
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 condensed consolidated statements of operations and comprehensive income data.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
| 85.9 | % |
|
| 83.5 | % |
|
| 86.3 | % |
|
| 84.6 | % |
Services |
|
| 14.1 |
|
|
| 16.5 |
|
|
| 13.7 |
|
|
| 15.4 |
|
Total net revenues |
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues |
|
| 47.6 |
|
|
| 46.8 |
|
|
| 47.6 |
|
|
| 48.0 |
|
Cost of service revenues |
|
| 8.0 |
|
|
| 8.9 |
|
|
| 7.6 |
|
|
| 8.1 |
|
Total cost of revenues (exclusive of amortization shown separately below) |
|
| 55.6 |
|
|
| 55.7 |
|
|
| 55.2 |
|
|
| 56.1 |
|
Gross profit |
|
| 44.4 |
|
|
| 44.3 |
|
|
| 44.8 |
|
|
| 43.9 |
|
Research and development |
|
| 7.2 |
|
|
| 9.0 |
|
|
| 7.7 |
|
|
| 8.8 |
|
Selling, general and administrative |
|
| 14.7 |
|
|
| 17.8 |
|
|
| 15.6 |
|
|
| 17.7 |
|
Acquisition and integration costs |
|
| 0.1 |
|
|
| 0.5 |
|
|
| 0.2 |
|
|
| 2.5 |
|
Restructuring and other |
|
| 0.5 |
|
|
| 0.3 |
|
|
| 0.4 |
|
|
| 0.3 |
|
Amortization of intangible assets |
|
| 2.1 |
|
|
| 3.7 |
|
|
| 2.5 |
|
|
| 3.6 |
|
Asset impairment |
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
COVID-19 related net credits |
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
Fees and expenses related to repricing of Term Loan |
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| 0.5 |
|
Gain on sale of long-lived assets |
|
| — |
|
|
| (1.5 | ) |
|
| — |
|
|
| (0.5 | ) |
Income from operations |
|
| 19.8 |
|
|
| 14.4 |
|
|
| 18.4 |
|
|
| 11.0 |
|
Interest income |
|
| — |
|
|
| 0.3 |
|
|
| 0.1 |
|
|
| 0.3 |
|
Interest expense |
|
| 1.1 |
|
|
| 2.9 |
|
|
| 1.4 |
|
|
| 2.5 |
|
Other expense (income), net |
|
| 0.2 |
|
|
| (0.2 | ) |
|
| 0.2 |
|
|
| — |
|
Income before income taxes |
|
| 18.5 |
|
|
| 12.0 |
|
|
| 16.9 |
|
|
| 8.8 |
|
Provision for income taxes |
|
| 2.9 |
|
|
| 1.7 |
|
|
| 2.9 |
|
|
| 1.8 |
|
Net income |
|
| 15.6 | % |
|
| 10.3 | % |
|
| 14.0 | % |
|
| 7.0 | % |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net revenues: | ||||||||||||||||
Product | 83.5 | % | 87.5 | % | 84.6 | % | 88.7 | % | ||||||||
Services | 16.5 | 12.5 | 15.4 | 11.3 | ||||||||||||
Total net revenues | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of product revenues | 46.8 | 45.0 | 48.0 | 46.3 | ||||||||||||
Cost of service revenues | 8.9 | 7.4 | 8.1 | 6.0 | ||||||||||||
Total cost of revenues (exclusive of amortization shown separately below) | 55.7 | 52.4 | 56.1 | 52.3 | ||||||||||||
Gross profit | 44.3 | 47.6 | 43.9 | 47.7 | ||||||||||||
Research and development | 9.0 | 6.5 | 8.8 | 6.4 | ||||||||||||
Selling, general and administrative | 17.8 | 14.5 | 17.7 | 14.2 | ||||||||||||
Fees and expenses related to term loan | 0.1 | — | 0.5 | — | ||||||||||||
Acquisition and integration costs | 0.5 | — | 2.5 | (0.1 | ) | |||||||||||
Restructuring and other | 0.3 | 0.3 | 0.3 | 0.3 | ||||||||||||
Amortization of intangible assets | 3.7 | 2.2 | 3.6 | 2.0 | ||||||||||||
Gain on sale of long-lived assets | (1.5 | ) | — | (0.5 | ) | — | ||||||||||
Income from operations | 14.4 | 24.1 | 11.0 | 24.9 | ||||||||||||
Interest income | 0.3 | 0.3 | 0.3 | 0.2 | ||||||||||||
Interest expense | 2.9 | 0.8 | 2.5 | 0.8 | ||||||||||||
Other (income) expense, net | (0.2 | ) | 0.1 | — | 0.1 | |||||||||||
Income from operations before income taxes | 12.0 | 23.5 | 8.8 | 24.2 | ||||||||||||
Provision for income taxes | 1.7 | 4.4 | 1.8 | 4.3 | ||||||||||||
Net income | 10.3 | % | 19.1 | % | 7.0 | % | 19.9 | % | ||||||||
Net Revenues
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Product |
| $ | 506.8 |
|
| $ | 386.2 |
|
| $ | 1,441.0 |
|
| $ | 1,184.9 |
|
Service |
|
| 83.0 |
|
|
| 76.3 |
|
|
| 228.8 |
|
|
| 215.2 |
|
Total net revenues |
| $ | 589.8 |
|
| $ | 462.5 |
|
| $ | 1,669.8 |
|
| $ | 1,400.1 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Product | $ | 386.2 | $ | 426.3 | $ | 1,184.9 | $ | 1,432.9 | ||||||||
Service | 76.3 | 60.9 | 215.2 | 181.7 | ||||||||||||
Total net revenues | $ | 462.5 | $ | 487.2 | $ | 1,400.1 | $ | 1,614.6 | ||||||||
Product revenues decreased $40.1increased $120.6 million and $248.0$256.1 million during the three and nine months ended September 30, 2019,2020, respectively, compared to the same periods in the prior year. These decreasesincreases were primarily attributed to a decreaseincreases in net product revenues from our semiconductor customers, primarily due to lowerhigher volume, of $33.9$128.5 million and $247.0$326.5 million, respectively, for thethese same periods, andrespectively, partially offset by a decrease in net product revenues from customers in our advanced markets of $6.2$7.9 million and $1.0$70.4 million, for the same periods. The decreases in product revenues from semiconductor customers for the MKS business, excluding the impact of the ESI Merger (the “legacy MKS business”), for the three and nine months ended September 30, 2019, were $40.8 million, compared to thethese same periods, in the prior year and $264.1 million, respectively, offset by increases in product revenues from our semiconductor customers of $6.9 million and $17.1 million, respectively, for the same periods, from the Equipment & Solutions segment as a result of the ESI Merger. The decreases in product revenues from customers in advanced markets for the legacy MKS business for the three and nine month periods ended September 30, 2019, compared to the same periods in the prior year, were $31.9 million and $84.6 million, respectively, mainly due to decreases in the industrial technologies market, which we believe has been negatively impacted by the general trade tensions between the U.S. and China as a result of increasing tariffs and other trade restrictions and a softening in consumer electronics demand. These decreases were offset by increases in product revenues from customers in our advanced markets of $25.7 million and $83.6 million, for the three and nine months ended September 30, 2019, respectively, from the Equipment & Solutions segment as a result of the ESI Merger.
Service revenues consisted mainly of fees for services related to the maintenance and repair of our products, sales of spare parts, and installation and training. Service revenues increased $15.4$6.7 million and $33.5$13.5 million during the three and nine month periodsmonths ended September 30, 2019, respectively,2020, compared to the same periods in the prior year. These increases wereThe increase in service revenues for the three months ended September 30, 2020 was primarily attributed to increasesan increase in service revenues from customers in our semiconductor market in our Vacuum & Analysis and Light & Motion segments. The increase in service revenues for the nine months ended September 30, 2020, was primarily attributed to an increase in service revenues from customers in our advanced markets of $16.8in our Equipment & Solutions segment and from customers in our semiconductor market in our Vacuum & Analysis segment.
Total international net revenues, including product and service, were $308.6 million and $39.6$912.1 million for the three and nine months ended September 30, 2020, respectively, compared to $251.3 million and $747.1 million for the three and nine months ended September 30, 2019, respectively, from the Equipment & Solutions segment as a result of the ESI Merger.
The following table sets forth our net revenues by reportable segment:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacuum & Analysis |
| $ | 361.3 |
|
| $ | 240.7 |
|
| $ | 995.1 |
|
| $ | 710.7 |
|
Light & Motion |
|
| 175.9 |
|
|
| 172.5 |
|
|
| 507.3 |
|
|
| 549.0 |
|
Equipment & Solutions |
|
| 52.6 |
|
|
| 49.3 |
|
|
| 167.4 |
|
|
| 140.4 |
|
Total net revenues |
| $ | 589.8 |
|
| $ | 462.5 |
|
| $ | 1,669.8 |
|
| $ | 1,400.1 |
|
Net revenues from our Vacuum & Analysis segment increased $120.6 million and $747.1$284.4 million for the three and nine months ended September 30, 2019, respectively, compared to $243.9 million and $812.8 million for the three and nine months ended September 30, 2018, respectively. The increase of $7.4 million for the three months ended September 30, 2019, compared to the same period in the prior year, was primarily due to an increase in net revenues from China, primarily as a result of the ESI Merger. The decrease of $65.7 million for the nine months ended September 30, 2019, was primarily due to decreases in net revenues in South Korea and Japan, primarily due to decreases in semiconductor revenues for our Vacuum & Analysis segment, partially offset by an increase in net revenues from China, as a result of the ESI Merger.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net revenues: | ||||||||||||||||
Vacuum & Analysis | $ | 240.7 | $ | 286.1 | $ | 710.7 | $ | 1,002.7 | ||||||||
Light & Motion | 172.5 | 201.1 | 549.0 | 611.9 | ||||||||||||
Equipment & Solutions | 49.3 | — | 140.4 | — | ||||||||||||
Total net revenues | $ | 462.5 | $ | 487.2 | $ | 1,400.1 | $ | 1,614.6 | ||||||||
Net revenues from our Light & Motion segment increased $3.4 million and decreased $41.7 million for the three and nine months ended September 30, 2019, respectively, primarily from customers in our industrial technologies market.
Net revenues from our Equipment & Solutions segment increased $3.3 million and $27.0 million for the three and nine months ended September 30, 2020, compared to the same periods in the prior year, due to increases in net revenues from customers in our advanced markets of $21.2$1.9 million and $49.1$18.1 million, respectively, and increases in net revenues from semiconductor customers of $1.4 million and $8.9 million, respectively.
Gross Margin
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| % Points Change |
|
| 2020 |
|
| 2019 |
|
| % Points Change |
| ||||||
Gross margin as a percentage of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
| 44.6 | % |
|
| 44.0 | % |
|
| 0.6 | % |
|
| 44.9 | % |
|
| 43.3 | % |
|
| 1.6 | % |
Service |
|
| 43.2 |
|
|
| 46.0 |
|
|
| (2.8 | ) |
|
| 44.4 |
|
|
| 47.1 |
|
|
| (2.7 | ) |
Total gross margin |
|
| 44.4 | % |
|
| 44.3 | % |
|
| 0.1 | % |
|
| 44.8 | % |
|
| 43.9 | % |
|
| 0.9 | % |
Gross margin as a percentage of net product revenues increased by 0.6 and 1.6 percentage points for the three and nine months ended September 30, 2019, respectively, primarily from customers in our industrial technologies market. The remainder of the decreases were attributed to decreases in net revenues from semiconductor customers of $7.4 million and $13.8 million for the three and nine months ended September 30, 2019, respectively.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | % Points Change | 2019 | 2018 | % Points Change | |||||||||||||||||||
Gross profit as a percentage of net revenues: | ||||||||||||||||||||||||
Product | 44.0 | % | 48.5 | % | (4.5 | )% | 43.3 | % | 47.8 | % | (4.5 | )% | ||||||||||||
Service | 46.0 | 40.9 | 5.1 | 47.1 | 46.3 | 0.8 | ||||||||||||||||||
Total gross profit | 44.3 | % | 47.6 | % | (3.3 | )% | 43.9 | % | 47.7 | % | (3.8 | )% | ||||||||||||
Gross margin as a percentage of net service revenues by reportable segment:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | % Points Change | 2019 | 2018 | % Points Change | |||||||||||||||||||
Gross profit as a percentage of net revenues: | ||||||||||||||||||||||||
Vacuum & Analysis | 42.7 | % | 46.4 | % | (3.7 | )% | 42.6 | % | 46.1 | % | (3.5 | )% | ||||||||||||
Light & Motion | 46.3 | 49.2 | (2.9 | ) | 46.9 | 50.2 | (3.3 | ) | ||||||||||||||||
Equipment & Solutions | 45.2 | — | 100.0 | 38.1 | — | 100.0 | ||||||||||||||||||
Total gross profit | 44.3 | % | 47.6 | % | (3.3 | )% | 43.9 | % | 47.7 | % | (3.8 | )% | ||||||||||||
The following table sets forth gross margin as a percentage of net revenues by reportable segment:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| % Points Change |
|
| 2020 |
|
| 2019 |
|
| % Points Change |
| ||||||
Gross margin as a percentage of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacuum & Analysis |
|
| 45.3 | % |
|
| 42.7 | % |
|
| 2.6 | % |
|
| 44.6 | % |
|
| 42.6 | % |
|
| 2.0 | % |
Light & Motion |
|
| 42.8 |
|
|
| 46.0 |
|
|
| (3.2 | ) |
|
| 44.7 |
|
|
| 46.5 |
|
|
| (1.8 | ) |
Equipment & Solutions |
|
| 43.0 |
|
|
| 44.5 |
|
|
| (1.5 | ) |
|
| 45.4 |
|
|
| 38.5 |
|
|
| 6.9 |
|
Total gross margin |
|
| 44.4 | % |
|
| 44.3 | % |
|
| 0.1 | % |
|
| 44.8 | % |
|
| 43.9 | % |
|
| 0.9 | % |
Gross profitmargin for our LightVacuum & MotionAnalysis segment decreasedincreased by 2.92.6 and 3.32.0 percentage points for the three and nine months ended September 30, 2019,2020, respectively, compared to the same periods in the prior year, primarily due to lower factory utilization,higher revenue volumes.
Gross margin for our Light & Motion segment decreased by 3.2 percentage points for the three months ended September 30, 2020, compared to the same period in the prior year, primarily due to unfavorable product mix and higher excess and obsolete inventory charges. Gross margin decreased by 1.8 percentage points for the nine months ended September 30, 2020 compared to the same period in the prior year primarily due to lower revenue volumes, and unfavorable product mix.
Gross profitmargin for our Equipment & Solutions segment was 45.2% and 38.1%decreased by 1.5 percentage points for the three andmonths ended September 30, 2020, compared to the same period in the prior year, mainly due to unfavorable product mix. Gross margin increased by 6.9 percentage points for the nine months ended September 30, 2019, respectively. The nine months ended September 30, 2019 includes2020, compared to the same period in the prior year, mainly as a result of an inventory
Research and Development
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Research and development expenses |
| $ | 42.5 |
|
| $ | 41.6 |
|
| $ | 127.7 |
|
| $ | 122.4 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Research and development expenses | $ | 41.6 | $ | 31.9 | $ | 122.4 | $ | 103.3 | ||||||||
Research and development expenses increased $9.7$0.9 million for the three months ended September 30, 2019,2020, compared to the same period in the prior year,year. The increase was primarily duerelated to $7.2 million from the ESI Merger, which primarily included $4.5 million of compensation-related expenses, $1.1 million of project materials and $0.8 million of depreciation expense, and an increase of $2.3$3.0 million in compensation-related costs, partially offset by a decrease of $2.2 million in project materials related to the legacy MKS business.
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. We expect to continue to make significant investment in research and development activities. We are subject to risks from products not being developed in a timely manner, as well as from rapidly changing customer requirements and competitive threats from other companies and technologies. Our success primarily depends on our products being designed into new generations of equipment for the semiconductor industry and advanced technology markets. We develop products that are technologically advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital equipment. 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, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Selling, general and administrative expenses |
| $ | 87.0 |
|
| $ | 82.1 |
|
| $ | 260.3 |
|
| $ | 247.8 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Selling, general and administrative expenses | $ | 82.1 | $ | 70.8 | $ | 247.8 | $ | 230.0 | ||||||||
Selling, general and administrative expenses increased by $11.3$4.9 million for the three months ended September 30, 2019,2020, compared to the same period in the prior year. ThisThe increase was primarily attributed to $9.6 million from the ESI Merger, which primarily included $6.1 million of compensation-related expense, $1.0 million of depreciation expense, $0.7 million of travel and entertainment expense and $0.4 million of commissions expense. The increase was also attributedrelated to an increase of $1.3$6.8 million ofin compensation-related expense, $0.8costs and $1.0 million ofin information technology related expensescosts, partially offset by a decrease of $2.2 million in travel costs, mainly as a result of the COVID-19 pandemic, and $0.6a decrease of $1.0 million ofin bad debt expense related to the legacy MKS business.
Selling, general and administrative expenses increased by $17.8$12.5 million for the nine months ended September 30, 2019,2020, compared to the same period in the prior year. ThisThe increase was primarily attributed to $27.9 million from the ESI Merger, which primarily included $17.6 million of compensation-related expense, $3.1 million of depreciation expense, $1.7 million of travel and entertainment expense and $1.7 million of consulting and professional fees. The increase was also attributedrelated to an increase of $1.5$14.1 million ofin compensation-related costs, $3.3 million in information technology related expenses,costs and $0.8 million in commissions expense, partially offset by a $6.3 million decrease of $9.8 million of compensation-related expense and $1.7 million of depreciation expense, related to the legacy MKS business.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Fees and expenses related to term loan | $ | 0.6 | $ | — | $ | 6.5 | $ | 0.4 | ||||||||
Acquisition and Integration Costs
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Acquisition and integration costs |
| $ | 0.5 |
|
| $ | 2.1 |
|
| $ | 3.4 |
|
| $ | 35.5 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Acquisition and integration costs | $ | 2.1 | $ | — | $ | 35.5 | $ | (1.1 | ) | |||||||
We recorded acquisition and integration costs related to the ESI Merger, which closed on February 1, 2019, during the three and nine months ended September 30, 2020 and 2019. TheseThe costs for the three and nine months ended September 30, 2020 consisted of cash bonus and stock-based compensation for certain ESI executives assisting in the integration process. The costs for the three and nine months ended September 30, 2019 consisted primarily of compensation costs for certain executives from ESI who had change in control provisions in their respective ESI employment agreements that were accounted for as dual-trigger arrangements and other stock vesting accelerations, as well as consulting and professional fees associated with the ESI Merger.
Restructuring and Other
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Restructuring and other | $ | 1.5 | $ | 1.4 | $ | 4.7 | $ | 4.4 | ||||||||
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Restructuring and other |
| $ | 3.1 |
|
| $ | 1.5 |
|
| $ | 6.8 |
|
| $ | 4.7 |
|
Restructuring and other related costs during the three and nine months ended September 30, 2020 primarily related to duplicate facility costs attributed to entering into new facility leases, costs related to the exit of certain product groups and costs related to the pending closure of a facility in Europe. Such costs for the nine months ended September 30, 2020 were offset by an insurance reimbursement related to a legal settlement.
Restructuring and other related costs during the three and nine months ended September 30, 2019 which consisted primarily of severance costs related to an organization-wide reduction in workforce, the consolidation of service functions in Asia and the movement of certain products to low cost regions. We also recorded expense duringDuring the nine months ended September 30, 2019, related towe also recorded a legal settlementcharge from a contractual obligation we assumed as part of the Newport Merger.
Amortization of Intangible Assets
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Amortization of intangible assets |
| $ | 12.5 |
|
| $ | 17.0 |
|
| $ | 42.6 |
|
| $ | 50.3 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Amortization of intangible assets | $ | 17.0 | $ | 10.7 | $ | 50.3 | $ | 32.8 | ||||||||
Amortization of intangible assets increaseddecreased by $6.3$4.5 million and $17.5$7.7 million during the three and nine months ended September 30, 2019,2020, respectively, compared to the same periods in the prior year, primarily due to the amortization ofcertain intangible assets acquiredin our Light & Motion segment that were fully amortized.
Asset Impairment
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| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
| ||||
Asset impairment |
| $ | — |
|
| $ | — |
|
| $ | 1.2 |
|
| $ | — |
|
We recorded an asset impairment charge during the nine months ended September 30, 2020, as parta result of the write-down of long-lived assets related to the pending closure of a facility in Europe.
COVID-19 Related Net Credits
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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(dollars in millions) |
| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
| ||||
COVID-19 related net credits |
| $ | — |
|
| $ | — |
|
| $ | (1.2 | ) |
| $ | — |
|
We recorded costs and credits related to the COVID-19 pandemic during the nine months ended September 30, 2020. The credits related to U.S. and foreign payroll-tax related credits for maintaining our workforce during the pandemic, offset by costs, which included shift premiums and bonuses.
Fees and Expenses Related to Repricing of Term Loan Facility
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| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
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| 2020 |
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| 2019 |
| ||||
Fees and expenses related to repricing of Term Loan Facility |
| $ | — |
|
| $ | 0.6 |
|
| $ | — |
|
| $ | 6.5 |
|
We recorded fees and expenses related to Amendment No. 5 and Amendment No. 6 to our Term Loan Credit Agreement, as defined and as described further below, which provided for the 2019 Incremental Term Loan Facility, as defined and as described further below, and which related to the ESI Merger.Merger, during the three and nine months ended September 30, 2019.
Gain on Sale of Long-Lived Assets
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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(dollars in millions) |
| 2020 |
|
| 2019 |
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| 2020 |
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| 2019 |
| ||||
Gain on sale of long-lived assets |
| $ | — |
|
| $ | (6.8 | ) |
| $ | — |
|
| $ | (6.8 | ) |
We recorded a net gain on the sale of two of our buildings in Boulder, Colorado and three of our buildings in Portland, Oregon during the three and nine months ended September 30, 2019.
Interest Expense, Net
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
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| 2020 |
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| 2019 |
| ||||
Interest expense, net |
| $ | 6.5 |
|
| $ | 12.3 |
|
| $ | 21.6 |
|
| $ | 31.0 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Interest expense, net | $ | 12.3 | $ | 2.2 | $ | 31.0 | $ | 9.0 | ||||||||
Interest expense, net, increaseddecreased by $10.1$5.8 million and $22.0$9.4 million for the three and nine months ended September 30, 2019, respectively, primarily due to interest expense related to Amendment No. 5 as described below.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Other (income) expense, net | $ | (0.9 | ) | $ | 0.3 | $ | 0.2 | $ | 1.2 | |||||||
Other Expense (Income), Net
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Other expense (income), net |
| $ | 1.1 |
|
| $ | (0.9 | ) |
| $ | 3.0 |
|
| $ | 0.2 |
|
The changes in other expense (income), net, for the three and nine months ended September 30, 2020 and 2019, respectively, primarily related to changes in foreign exchange rates.
Provision for Income Taxes
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Provision for income taxes |
| $ | 17.1 |
|
| $ | 8.0 |
|
| $ | 48.0 |
|
| $ | 25.0 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Provision for income taxes | $ | 8.0 | $ | 21.2 | $ | 25.0 | $ | 68.5 | ||||||||
Our effective tax rates for the three and nine months ended September 30, 20192020 were 14.4%15.7% and 20.4%17.0%, respectively. Our effective tax rates for the three and nine months ended September 30, 2019,2020 and related income tax expense, were lower than the U.S. statutory tax rate mainly due to the deduction for foreign derived intangible income, the geographic mix of income earned by ourthe international subsidiaries being taxed at rates lower than the U.S. statutory tax rate, and the impact of various tax credits, offset by the global intangible
As of September 30, 2020 and December 31, 2019, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $41.2 million. At December 31, 2018, the total amount of gross unrecognized tax benefits, which excludes interest$47.5 million and penalties, was approximately $32.7 million. The net increase is primarily attributable to the addition of historical gross unrecognized tax benefits for ESI as a result of the ESI Merger during the quarter ended March 31, 2019.$43.5 million, respectively. As of September 30, 2019,2020, if these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of $39.2 million, excluding interest and penalties, there were approximately $33.4 million of net unrecognized tax benefits that, if recognized, would impact our annual effective tax rate. We accrue interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of September 30, 2019 and December 31, 2018, we had accrued interest on unrecognized tax benefits of approximately $0.6 million and $0.6 million, respectively.
Over the next 12 months it is reasonably possible that we may recognize approximately $1.2$0.9 million of previously net unrecognized tax benefits, excluding interest and penalties, related to federal, state and foreign tax positions as a result of the expiration of statutes of limitation. The U.S. federal statute of limitations remains open for tax years 2016 through present. The statute of limitations for our tax filings in other jurisdictions varies between fiscal years 20132014 through the present. We also have certain foreign, federal credit carry-forwards and state tax loss and credit carry-forwards that are open to examination for tax years 2000 through the present.
On a quarterly basis, we evaluate both positive and negative evidence that affects the realizability of net deferred tax assets and assess the need for a valuation allowance. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income in each jurisdiction of the right type to realize the assets.
Our future effective tax rate depends on various factors, including further interpretations and guidance from U.S. federal, foreign and state governments, on the impact of the enactment of the Tax Cuts and Jobs Act, the adoption of the proposed regulations on the foreign derived intangible income and additional regulations on the global intangible
During the three months ended September 30, 2020, the U.S. Treasury Department and the U.S. Internal Revenue Service issued proposed and final regulations regarding various tax provisions of the Tax Cuts and Jobs Act of 2017 that could impact our provision for income taxes. We do not expect the impact of any changes to have a material impact on our results of operations, financial condition or cash flows.
Liquidity and Capital Resources
Cash and cash equivalents and short-term marketable investments totaled $475.1$715.7 million at September 30, 2019,2020, compared to $718.2$524.0 million at December 31, 2018.2019. The primary driver in our current and anticipated future cash flows is and will continue to be cash generated from operations, consisting primarily of our net income, excluding non-cash charges and changes in operating assets and liabilities. In periods when our sales are growing, higher sales to customers will result in increased trade receivables, and inventories will generally increase as we build products for future sales. This may result in lower cash generated from operations. Conversely, in periods when our sales are declining, our trade accounts receivable and inventory balances will generally decrease, primarily related to the use of $406.0 million ofresulting in increased cash to fund the payment of a portion of the purchase price for ESI on February 1, 2019.
Net cash provided by operating activities was $167.2$366.0 million for the nine months ended September 30, 20192020 and resulted from net income of $97.6$234.5 million, which included
Net cash provided by operatingused in investing activities was $278.3$172.3 million for the nine months ended September 30, 20182020 and resulted from net income of $321.3 million, which included
Net cash used in investingfinancing activities was $907.7$115.3 million for the nine months ended September 30, 20192020 and was primarily due to the paymentnet payments on short and long-term borrowings of a portion of the purchase price for the ESI Merger of $988.6$77.0 million, and purchases of production-related equipment of $44.7 million, offset by net sales and maturities of short-term investments of $84.4 million and proceeds from the sale of long-lived assets of $41.2 million. Net cash used in investing activities was $47.4 million for the nine months ended September 30, 2018, due to the purchases of production-related equipment of $36.9 million and net purchases of short-term investments of $10.5 million.
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 2,588,0002.6 million shares of common stock for approximately $127.0$127 million pursuant to the program since its adoption. During the nine months ended September 30, 2020 and 2019, there were no repurchases of common stock. During the three and nine months ended September 30, 2018, we repurchased approximately 818,000 shares of our common stock for $75.0 million, for an average of $91.67 per share.
Holders of our common stock are entitled to receive dividends when and if they are declared by our Board of Directors. In addition, we accrue dividend equivalents on the restricted stock units we assumed in the ESI Merger when dividends are declared by ourthe Company’s Board of Directors. Our Board of Directors declared a cash dividend of $0.20 per share during each of the first, second and third quarters of 2019, respectively,2020, which totaled $32.6$33.0 million, or $0.60 per share. Our Board of Directors declared a cash dividend of $0.18 per share during the first quarter of 2018 and $0.20 per share during each of the first, second and third quarters of 2018,2019, which totaled $31.6$32.6 million, or $0.58$0.60 per share.
On October 28, 2019,26, 2020, our Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid on December 6, 20194, 2020 to shareholdersstockholders of record as of November 25, 2019. 23, 2020.
Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our Board of Directors. In addition, under the terms of theour Term Loan Facility and ABL Facility, each as defined below, we may be restricted from paying dividends under certain circumstances.
Senior Secured Term Loan Credit Agreement
In connection with the completion of the acquisition of Newport MergerCorporation (“Newport”) in April 2016 (the “Newport Merger”), we entered into a term loan credit agreement (the “Credit“Term Loan Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto (the “Lenders”), that provided a senior secured financingterm loan credit facility in the original principal amount of $780.0 million (the “2016 Term Loan Facility”), subject to increase at the Company’sour option and subject to receipt of lender commitments in accordance with the Term Loan Credit Agreement (the 2016 Term Loan Facility, together with the 2019 Incremental Term Loan Facility and 2019 Term Loan Refinancing Facility (each as defined below), the “Term Loan Facility”). Prior to the effectiveness of Amendment No. 6 (as defined below), the 2016 Term Loan Facility had a maturity date of April 29, 2023. As of September 30, 2019,2020, borrowings under the Term Loan Facility bear interest per annum at one of the following rates selected by the Company: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
We subsequently entered into four separate repricing amendments to the 2016 Term Loan Facility, which decreased the applicable margin for LIBOR borrowings from 4.0% to 1.75%, with a LIBOR rate floor of 0.75%. As a consequence of the pricing of the 2019 Incremental Term Loan Facility (defined below), the applicable margin for the 2016 Term Loan Facility was increased to 2.00% (from 1.75%) with respect to LIBOR borrowings and 1.00% (from 0.75%) with respect to base rate borrowings.
On September 30, 2016, we entered into an interest rate swap agreement, which hashad a maturity date of September 30, 2020, to fix the rate on $335.0 million of the then-outstanding balance of the 2016 Term Loan Facility. The rate was fixed at 1.198% per annum plus the applicable credit spread, which was 1.75% at September 30, 2019. At2020. This interest rate swap matured on September 30, 2019, the notional amount of this transaction was $250.0 million and it had a fair value asset of $1.2 million.
We incurred $28.7 million of deferred finance fees, original issue discount and repricing fees related to the term loans under the 2016 Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
On February 1, 2019, in connection with the completion of the ESI Merger, we entered into an amendment (“Amendment No. 5”) to the Term Loan Credit Agreement. Amendment No. 5 provided an additional tranche
On April 3, 2019, we entered into an interest rate swap agreement, which has a maturity date of March 31, 2023, to fix the rate on $300.0 million of the then-outstanding balance of the 2019 Incremental Term Loan Facility. The rate was fixed at 2.309% per annum plus the applicable credit spread, which was 1.75% at September 30, 2019.2020. At September 30, 2019,2020, the notional amount of this transaction was $300.0 million and it had a fair value liability of $8.1$14.0 million.
We incurred $11.4 million of deferred finance fees and original issue discount fees related to the term loans under the 2019 Incremental Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
On September 27, 2019, we entered into an amendment (“Amendment No. 6”) to the Term Loan Credit Agreement. Amendment No. 6 refinanced all existing loans outstanding under the 2016 Term Loan Facility and 2019 Incremental Term Loan Facility (“Existing Term Loans”) for a tranche
We incurred $2.2 million of original issue discount fees related to the term loans under the 2019 Term Loan Refinancing Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
As of September 30, 2019,2020, the remaining balance of deferred finance fees and original issue discount of the Term Loan Facility was $12.3$9.8 million. A portion of the deferred finance fees and original issue discount have been accelerated in connection with the various debt prepayments and extinguishments duringbetween 2016 2017, 2018 and 2019.
The 2019 Term Loan Refinancing Facility matures on February 2, 2026, and bears interest at a rate per annum equal to, at our option, a base rate or LIBOR rate (as described above) plus, in each case, an applicable margin equal to 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings. The 2019 Term Loan Refinancing Facility was issued with original issue discount of 0.25% of the principal amount thereof.
We are required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the 2019 Term Loan Refinancing Facility with the balance due on February 2, 2026. If, on or prior to the date that is six months after the closing date of Amendment No. 6, we prepay any loans under the 2019 Term Loan Refinancing Facility in connection with a repricing transaction, we must pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid.
As of September 30, 2019,2020, after total principal prepayments of $525.0$575.0 million (which includes a $50.0 million prepayment made during the threenine months ended September 30, 2019)2020) and regularly scheduled principal payments of $10.4$19.4 million, the total outstanding principal balance of the Term Loan Facility was $894.6$835.6 million and the interest rate was 3.59%1.9%.
Under the Term Loan Credit Agreement, we are required to prepay outstanding term loans, subject to certain exceptions, with portions of our annual excess cash flow as well as with the net cash proceeds of certain of our asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. As a result of our current total leverage ratio, we are not required to make a prepayment of excess cash flow for the period ended September 30, 2019.
All obligations under the Term Loan Facility are guaranteed by certain of our domestic subsidiaries, and are collateralized by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
The Term Loan Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the Lenderslenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions generally permitted to be taken by a secured creditor. At September 30, 2019,2020, we were in compliance with all covenants under the Term Loan Credit Agreement.
Senior Secured Asset-Based Revolving Credit Facility
On February 1, 2019, in connection with the completion of the ESI Merger, we entered into an asset-based revolving credit agreement with Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto (the “ABL Credit Agreement”), that provides a senior secured asset-based revolving credit financingfacility of up to $100.0 million, subject to a borrowing base limitation (the “ABL Facility”). On April 26, 2019, we entered into a First Amendment to the ABL Credit Agreement which amended the borrowing base calculation for eligible inventory prior to an initial field examination and appraisal requirements. The borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of certain eligible accounts; plus (b) prior to certain notice and field examination and appraisal requirements, the lesser of (i) 20% of net book value of eligible inventory in the United States and (ii) 30% of the borrowing base, and after the satisfaction of such 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, in each case, subject to additional limitations and examination requirements for eligible accounts and eligible inventory acquired in an acquisition after February 1, 2019. The ABL Facility includes borrowing capacity in the form of letters of credit up to $25.0 million.
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in
In addition to paying interest on any outstanding principal under the ABL Facility, we are required to pay a commitment fee in respect of the unutilized commitments thereunder equal to 0.25% per annum. We must also pay customary letter of credit fees and agency fees.
If at any time the aggregate amount of costs in connection withoutstanding loans, protective advances, unreimbursed letter of credit drawings and undrawn letters of credit under the ABL Facility which were capitalizedexceeds the lesser of (a) the commitment amount and included(b) the borrowing base, we are required to repay outstanding loans and/or cash collateralize letters of credit, with no reduction of the commitment amount. During any period that the amount available under the ABL Facility is less than the greater of (i) $8.5 million and (ii) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base for three consecutive business days, until the time when excess availability has been at least the greater of (i) $8.5 million and (ii) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base, in other assetseach case, for 30 consecutive calendar days (a “Cash Dominion Period”), or during the continuance of an event of default, we are required to repay outstanding loans and/or cash collateralize letters of credit with the cash that it is required to deposit daily in a collection account maintained with the accompanying consolidated balance sheet and are being amortized to interest expense over the contractual term of five years ofadministrative agent under the ABL Facility. AsDuring a result of a prior asset-based facility being terminated concurrently with our entry intoCash Dominion Period, we may make borrowings under the ABL Facility subject to the satisfaction of customary funding conditions.
There is no scheduled amortization under the ABL Facility. The principal amount outstanding under the ABL Facility is due and payable in full on the fifth anniversary of the closing date.
All obligations under the ABL Facility are guaranteed by certain of our domestic subsidiaries, and are collateralized by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
From the time when we wrote off $0.2have excess availability less than the greater of (a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base and (b) $8.5 million, until the time when we have excess availability equal to or greater than the greater of previously capitalized debt issuance costs.
The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor. We have not borrowed against thisthe ABL Facility to date.
Lines of Long-Lived Assets
Our Japanese subsidiaries have lines of 2019, we sold twocredit and a financing facility with various financial institutions, many of our buildings in Boulder, Coloradowhich generally expire and threeare renewed at three-month intervals with the remaining having no expiration date. The lines of our buildings in Portland, Oregon.credit and financing facility provided for aggregate borrowings as of September 30, 2020 of up to an equivalent of $31.7 million U.S. dollars. Total net cash proceeds received forborrowings outstanding under these two transactions was $41.2arrangements were $3.0 million and we recognized a net gain on the sale of these long-lived assets of $6.8 million.
Off-Balance
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 facilitating
Contractual Obligations
There have been no other changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form
Recently Issued Accounting Pronouncements
In August 2018,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the LIBOR and other interbank offered rates to alternative reference rates. The standard was effective upon issuance and generally can be applied through December 31, 2022. We are in the process of evaluating the requirements of this standard and have not yet determined the impact of adoption on our consolidated financial statements.
In December 2019, the FASB issued ASU2018-15,“Intangibles-Goodwill andOther-Internal-UseSoftware (Subtopic350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. 2019-12, “Income Taxes (Topic 740).” This standard alignssimplifies the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-usesoftware (and hosting arrangements that include aninternal-usesoftware license). The accounting for income taxes by removing certain exceptions to the service elementgeneral principles in Topic 740. The amendments also improve consistent application and simplify U.S. GAAP for other areas of a hosting arrangement that is a service contract is not affectedTopic 740 by the amendments to this update.clarifying and amending existing guidance. This standard is effective for annual periods beginning after December 15, 2019,2021, including interim periods within those fiscal years.years beginning after December 15, 2022. We are currently evaluatingevaluated the requirements of this ASU and the impact of pending adoption on our consolidated financial statements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Information concerning market risk is contained in the section entitled “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report on Form
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, 2019.2020. The term “disclosure controls and procedures,” as defined in Rules
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules
PART II. | OTHER INFORMATION |
ITEM 1. | LEGAL PROCEEDINGS. |
In 2016, two putative class actions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.
On July 27, 2017, plaintiffs filed a second amended complaint containing substantially similar allegations but naming only Newport’s former directors as defendants. On August 8, 2017, the Court dismissed the Company and Newport from the action. The second amended complaint seeks monetary damages, including
The Company is subject to various legal proceedings and claims, which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.
ITEM 1A. | RISK |
Information regarding risk factors affecting the Company’s business are discussed in the section entitled “Risk Factors” in the Company’s Annual Report on Form
ITEM 6. | EXHIBITS. |
Exhibit No. | Exhibit Description | |||
+3.1 (1) | ||||
+3.2 (2) | ||||
+3.3 (3) | ||||
+3.4 (4) | ||||
31.1 | ||||
31.2 | ||||
32.1 | ||||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||
104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
+ | Previously filed |
(1) | Incorporated by reference to the Registration Statement on Form S-4 333-49738), filed with the Securities and Exchange Commission on November 13, 2000. |
(2) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (File No. 000-23621), filed with the Securities and Exchange Commission on August 14, 2001. |
(3) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 000-23621), filed with the Securities and Exchange Commission on August 13, 2002. |
(4) | Incorporated by reference to the Registrant’s Current Report on Form 8-K 000-23621), filed with the Securities and Exchange Commission on May 6, 2014. |
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. | |||||||
Date: November | By: | /s/ Seth H. Bagshaw | |||||
Seth H. Bagshaw | |||||||
Senior Vice President, Chief Financial Officer and Treasurer | |||||||
(Principal Financial Officer) | |||||||
49