UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM

10-Q

(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

2020

or

or

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

For the transition period from

to

Commission file number

0-23621

MKS INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

Massachusetts

04-2277512

Massachusetts
04-2277512

(State or other jurisdiction

(I.R.S. Employer

of
incorporation or organization)

(I.R.S. Employer

Identification No.)

2 Tech Drive, Suite 201, Andover, Massachusetts

01810

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code

(978) 645-5500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange
on

which registered

Common Stock, 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  

    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File

required
to
be
submitted pursuant
to
Rule
405
of
Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post
such files
)files).    
Yes
    No  

Indicate 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

12b-2
of the Exchange Act).    Yes  
    No  

As of October

30
, 2019,27, 2020, the registrant had 54,510,35555,137,088 shares of common stock outstanding.



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

 

(Unaudited)
         
  
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

 

(Unaudited)
                 
 
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
(
income
)
 
expense, net
  
(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
 
                 
(1)
Tax (benefit) expense was $(242) and $49 for the three months ended September 30, 2019 and 2018, respectively. Tax (benefit) expense was $(2,635) and $2,304 for the nine months ended
September
 30, 2019 and 2018, respectively
.
(2)
Tax expense was $31 and $7 for the three months ended September 30, 2019 and 2018, respectively. Tax expense (benefit) was $51 and $(17) for the nine months ended September 30, 2019 and 2018, respectively
.
(3)
Tax expense was $6 and $17 for the three months ended September 30, 2019 and 2018, respectively. Tax (benefit) was $(40) and $(22) for the nine months ended September 30, 2019 and 2018, respectively.

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

 

(Unaudited)
                         
 
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

 

(Unaudited)
 
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

 

(Unaudited)
         
 
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.


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

10-Q
and do not include all of the information and note disclosures required by United States generally accepted accounting principles (“U.S. GAAP”). The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the MKS Annual Report on Form
10-K
for the year ended December 31, 20182019 filed with the Securities and Exchange Commission on February 26, 2019.
28, 2020.

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

on-going
basis, management evaluates its estimates and judgments, including those related to revenue recognition, stock-based compensation, inventory, intangible assets, goodwill and other long-lived assets, warranty liabilities, pension liabilities, acquisition expenses,lease liabilities and income taxes and investments.taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditionsconditions.

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 Pronouncements

Pronouncements

In October 2018,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

2018-16,
“Derivatives and Hedging No. 2020-04, “Reference Rate Reform (Topic 815).848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard permits the use of the Overnight Index Swap Rate (“OIS”) basedprovides temporary optional expedients and exceptions to accounting guidance on the Secured Overnight Financing Rate as a U.S. benchmark interest rate forcontract modifications and hedge accounting purposes under Topic 815 in addition to ease entities’ financial reporting burdens as the interest rates on direct treasury obligations of the U.S. government,market transitions from the London Interbank Offered Rate (“LIBOR”) swap rate,and other interbank offered rates to alternative reference rates. The standard was effective upon issuance and generally can be applied through December 31, 2022. The Company is in the OIS rate basedprocess of evaluating the requirements of this standard and has not yet determined the impact of adoption on its consolidated financial statements.

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.

The Company does not expect that the impact of this ASU will be material to its financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU

2018-15,
“Intangibles-Goodwill “Intangibles-Goodwill and
Other-Internal-Use
Software (Subtopic
350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This standard aligns 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 obtain
internal-use
software (and hosting arrangements that include an
internal-use
software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments to this update. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the requirements of this ASU and
the impact of pending
adoption on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU
2017-12,
“Derivatives and Hedging (Topic 815).” This standard better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The provisions of this ASU are effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this ASU during the first quarter of 20192020 and the adoption of this ASU did not have a material impact on the Company’s consolidatedits financial statements.
In February 2016, the FASB issued ASU
2016-02,
“Leases”. This standard requires the recognitionposition, results of lease assetsoperations and liabilities for all leases, with certain exceptions, on the balance sheet. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted ASU
2016-02
on January 1, 2019, and used the effective date as its date of initial application. As such, the Company did not adjust prior period amounts. The Company also elected to adopt the package of practical expedients upon transition, which permits companies to not reassess lease identification, classification, and initial direct costs for leases that commenced prior to the effective date.

cash flows.

8


MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands,millions, except share and per share data)

The Company implemented internal controls and a lease accounting information system to enable preparation on adoption. Upon adoption, the Company recorded a cumulative effect of initially applying this new standard, resulting in the addition of $71,042 of
right-of-use
assets and $20,192 and $54,147 of short-term and long-term lease liabilities, respectively. The
right-of-use
asset is net of the deferred rent liability, prepaid rent and a net favorable lease asset which were
re-classified
to the
right-of-use
asset upon adoption of the standard. For additional information on the required disclosures related to the impact of adopting this standard, see Note 3 to the Consolidated Condensed Financial Statements.

In June 2016, the FASB issued ASU

2016-13,
“Financial “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard introduced the expected credit losses methodology for the measurement of credit losses on financial assets that are not measured at fair value through net income and replaces today’s “incurred loss” model with an “expected credit loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. There have been several consequential subsequent amendments to this standard. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluatingadopted this ASU during the requirementsfirst quarter of 2020 and the adoption of this ASU and
thedid not have a material impact on its financial position, results of pending
operations and cash flows.

adoption on the Company’s consolidated financial statements.

3)

Leases

The Company has various operating leases for real estate and

non-real
estate items. The
non-real
estate leases are mainly comprised of automobiles but also include copiers, printersoffice equipment and other lower-valued items. The Company does not have any finance leases.

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

non-lease
components, has elected to account forextend the lease and
non-lease
components asterm typically between 1 to 10 years. When determining the lease term, renewal options reasonably certain of being exercised are included in the lease term. When determining if a single lease component, and has allocated allrenewal option is reasonably certain of being exercised, the contract considerationCompany considers several economic factors, including but not limited to, the significance of leasehold improvements made to the property, whether the physical space is difficult to replace, underlying contractual obligations, and specific characteristics unique to that particular lease component only. Thethat would make it reasonably certain that the Company has existing net leases in whichwould exercise such an option.

During the

non-lease
components (e.g. common area maintenance, maintenance, consumables, etc.) are paid separately from rent based on actual costs incurred. Therefore,
non-lease
components are not included in nine months ended September 30, 2020, the
Company recorded $127.2 of additional right-of-use
asset assets and lease liabilityliabilities related to three new leases that commenced and are reflected as expenses intwo existing leases that were extended during the periods incurred.
period.

The Company has existing leases that include variable lease and

non-lease
components that are not included in the
right-of-use
asset and lease liability, and are reflected as expenses in the periods incurred. Such payments primarily include common area maintenance charges and increases in rent payments that are driven by factors such as future changes in an index (e.g., the Consumer Price Index).
A
right-of-use
asset of $67,632, short-term lease liability of $20,575 and long-term lease liability of $47,294 were reflected on the balance sheet as of September 30, 2019.

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
 
Ended
September 30,
 
2019
  
Nine Months
 
Ended
September 30,
 
2019
 
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

3.8
% 3.0% and
5.0
15 years, respectively, for the period endedas of September 
30,
,
2019
. 2020. The weighted average discount rate and weighted average remaining lease term were 3.8% and 5.0 years, respectively, as of September 30, 2019. Operating cash flows used for operating leases for the nine months ended September 
30,
,
2020 and September 30, 2019
was $
17,444
.
were $15.4 and $17.4, respectively.

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

non-cancelable
leases as of September 30, 20192020 are detailed as follows:

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
 
     
Minimum

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. 

2016-02
were as follows:
     
  
Operating
 
Leases
 
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

.
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
 
Ended
September 30,
 
2019
 
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
 
income
  
(38,787
)
     
Ending balance, September 30
(2)
 $
25,238
 
     

(1)

Beginning deferred revenue and customer advances as of January 1, 20192020 included $

8,134
$12.4 of current deferred revenue, $
3,228
$3.3 of long-term deferred revenue and $
6,112
$9.1 of current customer advances.

(2)

Ending deferred revenue and customer advances as of September 30, 20192020 included $

14,161
$19.7 of current deferred revenue, $
2,874
$5.1 of long-term deferred revenue and $
8,202
$10.7 of current customer advances.

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

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.

geography.

5)

Investments

The fair value of investments classified as short-term consists of the following:
         
 
September 30,
 
2019
   
December 31,
 
2018
 
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
 
         
Investments classified as long-term consist of the following:
         
 
September 30,
 
2019
  
December 31,
 
2018
 
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
 
         

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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

available-for-sale

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

 

investments:

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

available-for-sale
investments as of September 30, 20192020 and December 31, 2018,2019, reflect the inclusion within short-term investments of investments with contractual maturities greater than one year from the date of purchase. Management has the ability, if necessary, to liquidate any of its investments in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying balance sheets.

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.



MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

Interest income is accrued as earned. Dividend income is recognized as income on the date the ​​​​​​​stocksecurity trades

“ex-dividend. “ex-dividend.
The cost of marketable securities sold is determined by the specific identification method. Realized gains or losses are reflected in income and were not material for the three and nine months ended September 30, 20192020 and 2018.
September 30, 2019.

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

.
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 assessed as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

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.


MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

Assets and liabilities of the Company are measured at fair value on a recurring basis as of 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)

(1)

The cash and cash equivalent amounts presented in the table above do not include cash of $307,011$423.5 as of September 30, 2019.2020.

(2)
The long-term investments presented in the table above do not include the Company’s minority interest investment in a private company, which is accounted for under the cost method.

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)

(1)

The cash and cash equivalent amounts presented in the table above do not include cash of $456,940$349.4 as of December 31, 2018.2019.

(2)The long-term investments presented in the table above do not include the Company’s minority interest investment in a private company, which is accounted for under the cost method.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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

Available-for-sale

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

available-for-sale
investments are classified within Level 2 of the fair value hierarchy.

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.

Cost Method Investments
The Company has a
non-controlling
equity investment in a privately held company. The Company elected the measurement alternative for this investment without readily determinable fair values and for which the Company does not have the ability to exercise significant influence. This investment is accounted for under the cost method of accounting. Under the cost method of accounting, the
non-marketable
equity securities are carried at cost less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which is recorded within the statement of operations. The Company holds $4,400 without readily determinable fair values both at September 30, 2019 and December 31, 2018, respectively. This investment is included in other assets on the consolidated balance sheet.
Derivatives
As a result of the Company’s global operating activities, the Company is exposed to market risks from changes in foreign currency exchange rates and variable interest rates, which may adversely affect its operating results and financial position. When deemed appropriate, the Company minimizes its risks from foreign currency exchange rate and interest rate fluctuations through the use of derivative financial instruments. The principal market in which the Company executes its foreign currency contracts and interest rate swaps is the institutional market in an
over-the-counter
environment with a relatively high level of price transparency. The market participants usually are large commercial banks. The forward foreign currency exchange contracts and interest rate hedge are valued using broker quotations or market transactions and 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

non-performance
by any of these counterparties.

Interest Rate Swap Agreements

On September 30, 2016,

the Company entered into an interest rate swap agreement, which had a maturity date of September 30, 2020, to fix the rate on approximately
50
% 50% of its then-outstanding balance under the 2016 Term Loan Facility, as described further in Note 11. This hedge fixesfixed the interest rate paid on the hedged debt at
1.198
% 1.198% per annum plus the applicable credit spread, which was
1.75
% 1.75% as of September 30, 2019, through
2020. This interest rate swap matured on September 30, 2020
.
2020. At September 30,December 31, 2019, the notional amount of this transaction was
$
250,000
$250.0 and
it
had a fair value asset of $
1,180
. At December 31, 2018, the notional amount of this transaction was $
290,000
and
it 
had a fair value asset of $
6,083
.
16

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
$0.8.

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

wa
s was fixed at 2.309% per annum plus the applicable credit spread, which was 1.75% at September 30, 2019.2020. At  September 30, 2020, the notional amount of this transaction was $300.0 and had a fair value liability of $14.0. At December 31, 2019, the notional amount of this transaction was $300,000$300.0 and
it 
had a fair value liability of $8,088.
$6.5.

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

off-setting
the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria, changes in the derivatives’ fair value are not included in current earnings but are included in OCI in stockholders’ equity. These changes in fair value will subsequently be reclassified into earnings, as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs. The cash flows resulting from forward exchange contracts are classified in the consolidated statements of cash flows as part of cash flows from operating activities. The Company does not enter into derivative instruments for trading or speculative purposes
.
purposes.

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.

The following tables provide a summary of the primary net hedging positions and corresponding fair values held as of September 30, 20192020 and December 31, 2018:2019:

 

 

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
 
Notional
Value
  
Fair
 
Value
(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
 
Notional
Value
  
Fair
 
Value
(1)
 
U.S. Dollar/Japanese Yen
 $
43,770
  $
(478
)
U.S. Dollar/South Korean Won
  
59,149
   
570
 
U.S. Dollar/Euro
  
23,515
   
688
 
U.S. Dollar/U.K. Pound Sterling
  
11,827
   
323
 
U.S. Dollar/Taiwan Dollar
  
21,133
   
214
 
         
Total
 $
159,394
  $
1,317
 
         
(1)

(1)

Represents the(payable) receivable (payable) amount included in the consolidated balance sheet

.
sheet.

17

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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,
 
2019
  
December 31,
 
2018
 
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
 
instruments
 $
(2,984
) $
7,400
 
         
(1)

(1)

The derivative assetsasset of $4,232$0.1 and $2,485 asderivative liability of September 30, 2019 and December 31, 2018, respectively,$2.2 related to the forward foreign exchange contracts and are classified in other current assets and other current liabilities in the condensed consolidated balance sheet. The derivative liabilities of $308 and $1,168sheet as of September 30, 20192020. The derivative asset of $1.1 and December 31, 2018, respectively,derivative liability of $1.3 related to the forward foreign exchange contracts are classified in other current assets and other current liabilities in the condensed consolidated balance sheet.sheet as of December 31, 2019. These forward foreign exchange contracts are subject to a master netting agreement with one financial institution. However, the Company has elected to record these contracts on a gross basis in the balance sheet.

(2)

The interest rate hedge liability of $
6,908
as of September 30, 2019 is classified in other liabilities in the consolidated balance sheet.

(2)

The interest rate hedge asset of $

6,083
$0.8 is classified in other current assets in the condensed consolidated balance sheet as of December 31, 2018 is2019. The interest rate hedge liabilities of $14.0 and $6.5 are classified in other assets in the consolidated balance sheetnon-current liabilities as of September 30, 2020 and December 31, 2019, respectively.

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
 
Ended
September 30,
  
Nine Months
 
Ended
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)

(1)

Net change in the fair value of the effective portion classified in accumulated OCI.

(2)

(2)

Effective portion classified in cost of products for the three and nine months ended September 30, 20192020 and 2018.2019. The tax effect of the gains or losses reclassified from accumulated OCI into income is immaterial.

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
 
Ended
September 30,
  
Nine Months
 
Ended
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)

(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

18

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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,
 
2019
  
December 31,
 
2018
 
Raw materials
 $
291,613
  $
235,593
 
Work-in-process
  
84,814
   
61,908
 
Finished goods
  
86,836
   
87,188
 
         
 $
463,263
  $
384,689
 
         
9)       
Acquisitions

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 aggregate consideration was $1,032,671, which excludes related transaction fees and expenses, and
non-cash
consideration related to the exchange of share-based awards of $30,630, for a total purchase consideration of $1,063,301.

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)

(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)

(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.

19

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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
 
     
During the
second quarter of
2019, the Company recorded an increase in

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
write-up
of acquired finished goods inventory was $7,624,$7.6, the amount of which will bewas expensed over the period during which the acquired inventory iswas sold.
F
orFor the
nine
months ended
September
 30, 2019, the Company recorded $7,624 
$7.6 of incremental cost of sales chargescharge associated with the fair value
write-up
of inventory acquired in the ESI Merger.

The fair value

write-up of acquired property, plant and equipment of $
39,267
$39.3 will be amortized over the estimated useful life of the applicable assets, excluding the fair value
write-up
in the value of land. Property, plant and equipment is valued at its
value-in-use,
unless there was a known plan to dispose of the asset.

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

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
 
 
year
 
  $
316,200
     
While the Company uses its best estimates

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.

per share data)

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


MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Company’s operating results in the period in which the adjustments are determined. The size and breadth of the ESI Merger will necessitate the use of this measurement period to adequately analyze and assess a number of the factors used in establishing the fair value of certain tangible and intangible assets acquired and liabilities assumedthat was available as of the acquisition date and the related tax impactsexpectations and assumptions that have been deemed reasonable by the Company’s management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of any changes made. Any potential adjustments made could be material in relationtangible and intangible assets, the excess amount of which was allocated to the preliminary values presented above.
goodwill. The Company believes the amount of goodwill relative to identifiable intangible assets relates to several factors, including broadening its position in key industrial end markets to complementary solutions, and leveraging component and systems expertise to provide robust solutions to meet customer evolving technology needs.

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

September
 30, 2019 associated with these severance provisions. The restricted stock units and stock appreciation rights that were eligible for accelerated vesting if the executive exercised his or her rights but were not issued as of each reporting
period-end,
were excluded from the computation of basic earnings per share and included in the computation of diluted earnings per share for such reporting period.
The Company’s consolidated net revenue and earnings for the three and nine months ended September 30, 2019 include the following amounts of revenue and earnings of ESI since the acquisition date:
 
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.

21
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

(3)

Incremental interest expense related to the Company’s 2019 Incremental Term Loan Facility, as defined and discussed in Note 11.Facility.

(4)

The exclusion of acquisition costs and inventory

and demonstration inventory step-up
amortization from the three and nine month periodsmonths ended September 30, 2019 and the addition of these items to the three and nine month periods ended September 30, 2018.
2019.

(5)

The exclusion of debt issuance costs due to the modification of the 2019 Incremental Term Loan Facility from the three and nine month periodsmonths ended September 30, 2019 and the addition of this item to the three and nine month periods ended September 30, 2018.2019.

(6)

The estimated tax impact of the above adjustments.

During the third quarter of 2019, the Company identified adjustments related to our unaudited pro forma disclosures that were reported during the first

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.

per share data)

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.

Effective July 1, 2018, the Company reassigned goodwill to certain reporting units within the Light & Motion reportable segment resulting from a reorganization of the composition of goodwill reporting units. The goodwill was reassigned to the reporting units affected using the relative fair value approach. In conjunction with this goodwill reassignment, the Company performed an interim quantitative impairment test as of July 1, 2018 for all of its reporting units and concluded that the fair values of each reporting unit exceeded their respective carrying values.
Effective January 1, 2019, the Company reassigned goodwill to certain reporting units within the Light & Motion reportable segment resulting from a reorganization of the composition of goodwill reporting units. The goodwill was reassigned to the reporting units affected using the relative fair value approach. The Company also concluded that the fair value of each reporting unit exceeded its respective carrying value.

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
 
September 30, 2019
  
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
 
                         
(1)During the nine months ended September 30, 2019, the Company recorded $
471,727
of goodwill related to the ESI Merger.
22

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

Intangible Assets

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

As of September 30, 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)

(1)

During the nine months ended September 30, 2019, the Company recorded $316,200$316.2 of separately identified intangible assets related to the ESI Merger, of which $274,000$274.0 was completed technology, $25,400$25.4 was customer relationships and $16,800$16.8 was trademarks, trade names and backlog. Separately, on January 1,

(2)

During 2019, the Company reclassified $6,428$6.4 of gross favorable lease assets and $3,445$3.4 of related accumulated amortization from patents, trademarks, trade names and other to the

right-of-use
asset line in the balance sheet.

                     
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.

Aggregate net amortization expense related to acquired intangible assets for future years is as follows:

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

Facility

In connection with the completion of the acquisition of Newport Corporation (“Newport”) in 2016 (the “Newport Merger”), the Company entered into a term loan credit agreement (the “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

and 2019 Term Loan Refinancing Facility (each
as defined below),
23

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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 FacilityFacility​​​​​​​ bear interest per annum at one of the following rates selected by the Company: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in
The Wall Street Journal
, (3) a LIBORLondon Interbank Offer Rate (“LIBOR”) rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of 1.75%, plus, in each case, an applicable margin; or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a LIBOR rate floor of 0.0%, plus an applicable margin. The Company has elected the interest rate as described in clause (b). of the foregoing sentence. The Term Loan Credit Agreement provides that, unless an alternate rate of interest is agreed, all loans will be determined by reference to the
b
ase
r
ate base rate if the LIBOR rate cannot be ascertained, if regulators impose material restrictions on the authority of a lender to make LIBOR rate loans, or for other reasons. The 2016 Term Loan Facility was issued with original issue discount of 1.00%1.00​​​​​​​% of the principal amount thereof.

The Company subsequently entered into

4
 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, the Company entered into an interest raterate​​​​​​​ swap agreement, which hashad a maturity date of

September 30, 2020,
, to fix the rate on $335,000$335.0 of the then-outstanding balance of the 2016 Term Loan Facility. The rate
wa
s was fixed at 1.198% per annum plus the applicable credit spread, which was
1.75
% 1.75% at September 30, 2019. At2020. This interest rate swap matured on September 30, 2019, the notional amount of this transaction was $250,000 and
it 
had a fair value asset of $1,180.
2020.

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

B-5
term loan commitment in the
original
principal amount of $650,000$650.0 (the “2019 Incremental Term Loan Facility”), all of which was drawn down in connection with the closing of the ESI Merger. Pursuant to Amendment No. 5, the Company also effectuated certain amendments to the Term Loan Credit Agreement which make certain of the negative covenants and other provisions less restrictive. Prior to the effectiveness of Amendment No. 6 (as defined below), the 2019 Incremental Term Loan Facility had a maturity date of February 1, 2026 and bore 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 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The 2019 Incremental Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.

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

wa
s 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 $300,000$300.0 and
it
had a fair value liability of $8,088.
$14.0.

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

B-6
term loan commitment in the original principal amount of $896,839$896.8 (“2019 Term Loan Refinancing Facility”). Each lender of the Existing Term Loans whothat elected to participate in the 2019 Term Loan Refinancing Facility was deemed to have exchanged the aggregate outstanding principal amount of its Existing Term Loans outstanding under the Credit Agreement for an equal aggregate principal amount of tranche
B-6
term loans under the 2019 Term Loan Refinancing Facility. On the effective date of Amendment No. 6 and immediately prior to the exchanges described above, the Company made a voluntary prepayment of $50,000,$50.0, which was applied to
the
Existing Term Loans on a pro rata basis.
24

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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.

2020.

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

Refinanci
ng 
Refinancing Facility with the balance due on
February 2, 2026
. If, on or prior to the date that is six months after the closing date of Amendment No. 
6
, the Company prepays any loans under the 2019 Term Loan
Refinancing 
Facility in connection with a repricing transaction, the Company must pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid.
2026.

As of

September 30, 2019,2020, after
total principal prepayments of $525,000$575.0 (which includes a $50,000$50.0 prepayment made during the threenine months ended September 30, 2019)2020) and
regularly scheduled principal payments of $10,403,$19.4, the total outstanding
principal balance
of
the
Term Loan Facility was $894,597$835.6 and the interest rate was 3.59%1.9%.

Under the Term Loan Credit Agreement, the Company is required to prepay outstanding term loans,

, subject to certain exceptions, with portions of its annual excess cash flow as well as with the net cash proceeds of certain
of its
asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. As a result of the Company’s
current 
t
otal
l
everage
r
atio, it was not required to make a prepayment of excess cash flow for the
period
ended
September
 3
0
, 201
9
.

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.

S
enior

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.

$25.0.

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

The Wall Street Journal
, (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% and (4) a floor of 0.00%; and (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, with a floor of 0.00%. The initial applicable margin for borrowings under the ABL Facility is 0.50% with respect to base rate borrowings and 1.50% with respect to LIBOR borrowings.
25

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.

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.

The Company incurred $785

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. 

(a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base and (b) $8.5 until the time when the Company has excess availability equal to or greater than the greater of (a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base and (b) $8.5 for 30 consecutive days, or during the continuance of an event of default, the ABL Credit Agreement requires the Company to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) tested on the last day of each fiscal quarter of at least 1.0 to 1.0.

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

One of the

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.

The Company has various revolving lines of credit and a financing facility. These revolving lines of credit and financing facility have no expiration date and as of September 30, 2019, provided for aggregate borrowings of up to an equivalent of $11,581. These lines of credit have a base interest rate of 1.24% plus a Japanese Yen overnight LIBOR rate.$31.7 U.S. dollars. Total borrowings outstanding under these arrangements were $3,655$3.0 and $3,389$3.1 at September 30, 20192020  and December 31, 2018,2019, 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,
 
2019
   
December 31,
 
2018
 
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,
 
2019
  
December 31,
 
2018
 
Long-term debt:
      
Other debt
 $
       79
  $
86
 
Term Loan Facility, net
(1)
  
873,371
   
343,756
 
         
 $
873,450
  $
343,842
 
         
(1)

(1)

Net of deferred financing fees, original issuanceissue discount and repricing feefees of $12,258$9.8 and $4,708$11.8 as of September 30, 20192020  and December 31, 2018, respectively

.
2019, respectively.

The Company recognized interest expense of $13,542 and $35,335 for the
three and
nine months ended September 30, 2019
, respectively. The Company recognized interest expense of $3,719 and $13,071 for the three and nine months
ended September 30, 2018, respectively.
26

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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
 
September 30,
 
 
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)

(1)

As of September 30, 2019,2020, short-term product warranty of $12,028$13.0 and long-term product warranty of $3,039$3.1 were included within other ​​​​​​​current liabilities and other non-current liabilities, respectively, within the accompanying condensed consolidated balance sheet. As of September 30, 2018,2019, short-term product warranty of $10,067$12.0 and long-term product warranty of $413$3.1 were included within other current liabilities and other non-current liabilities, respectively, within the accompanying condensed consolidated balance sheet

.
sheet.

13
)

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%,

respectively. The effective tax rates for the three and nine months ended September 30, 2019, and related income tax expense, were lower than the U.S. statutory tax rate due to the deduction for foreign derived intangible income, the geographic mix of income earned by the Company’s international subsidiaries being taxed at rates lower than the U.S. statutory tax rate and the impact of various tax credits, offset by the tax effects of the global intangible
low-taxed
income inclusion along with the correction of an
out-of-period
error with respect to deferred tax assets related to limitations on the deduction of executive compensation in the amount of $5,023. $5.0. This correction, which was recorded during the quarterthree months ended June 30, 2019, but should have been recorded during the three months ended September 30, 2018, increased the Company’s effective tax rate for the three and six months ended June 30, 2019 and the nine months ended September 30, 2019 by 9.8%, 7.5% and
3.8%
respectively
.respectively. The error and subsequent
adjus
t
ment
adjustment were not material to prior or current interim and annual financial statements.
The Company’s effective tax rates for

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

,
offset by the tax effects of the global intangible low
-
taxed income inclusion and state income taxes.
As of September 30, 2019, thehave a material impact on its financial statements.

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

2
7

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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 $33,415,$39.2, excluding interest and penalties, would impact the Company’s effective tax rate. The Company accrues interest expense, and if applicable, penalties, for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of September 30, 20192020 and December 31, 2018,2019, the Company had accrued interest on unrecognized tax benefits of approximately $581$0.6 and $568,$0.5, respectively.

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
 
September 30,
  
Nine Months Ended
 
September 30,
 
 
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

204,000
and
165,000
weighted-average RSUs,restricted stock units, respectively, that would have had an anti-dilutive effect on EPS, and would thus need to bewere excluded from the computation of diluted weighted-average shares.

For the three and nine months ended September 30, 2018, there were approximately
159,800
and
68,800
weighted-average RSUs, respectively, that would have had an anti-dilutive effect on EPS, and would thus need to be excluded from the computation of diluted weighted-average shares.
28

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

15)

Stock-Based Compensation

The Company grants

RSUs
to employees and directors under the 2014 Stock Incentive Plan (the “2014 Plan”). The 2014 Plan is administered by the Compensation Committee of the Company’s Board of Directors. The 2014 Plan is intended to attract and retain employees and directors, and to provide an incentive for these individuals to assist the Company to achieve long-range performance goals and to enable these individuals to participate in the long-term growth of the
Company.

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 RSUs that vest based solely on the satisfaction of service conditions, granted under any ESI equity plan, arrangement or agreement (“ESI Plan”)

all SARs granted under any ESI Plan, whether vested or unvested, 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 and held by an individual who was a service provider of ESI as of the date on which the effective time of the ESI Merger occurred.

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 of the ESI Merger and held by an individual who was a service provider of ESI as of the date on which the effective time of the ESI Merger occurred
.

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)

such

SAR
s
SARs were converted automatically into
SARs
with respect to 12,78713,000 shares of the Company’s common stock (the “Assumed SARs”).

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

S-8.
These shares are in addition to the 18,000,000 shares of the Company’s common stock reserved for issuance under the Company’s 2014 Plan and previously registered under the Securities Act of 1933 on the Registration Statement on Form
S-8.
During the nine months ended September 30, 2019, the Company granted 417,335 RSUs with a weighted average grant date fair value of $86.18. During the nine months ended
September
 30, 2018, the Company granted 260,341 RSUs with a weighted average grant date fair value of $112.49. There were 0 SARs granted during the nine months ended September 30, 2019 or 2018.

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
 
September 30,
  
Nine Months Ended
 
September 30,
 
 
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.

2
9

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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.

During the three and nine months ended September 30, 2018, the Company repurchased approximately 818,000 shares of its common stock for $75,000, or an average of $91.67 per share
.

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

Term Loan Facility and ABL Facility, the Company may be restricted from paying dividends under certain circumstances.
30

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

17)

Business Segment, Geographic Area,

Product/Service Offerings and
Product Significant Customer Information

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,

sub-micron
positioning, optics, precision motion control, vibration control optics and laser-based manufacturing systems solutions. The Company also provides services relating to the maintenance and repair of its products, installation services and training. The Company’s primary served markets include semiconductor, industrial technologies, life and health sciences, and research and defense.

The Company’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,

sub-micron
positioning, vibration optics, precision motion control and optics.
vibration control.

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

.
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 
                 
31

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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.

32

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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)

(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 assets, excluding long-term tax relatedtax-related accounts.

3
3

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)

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
 
         
Worldwide Product Information
The

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
 
                 
Advanced manufacturing components are comprised of product revenues from the Company’s Vacuum & Analysis and Light & Motion segments. Global service is comprised of total service revenueshad 2 customers that each accounted for all three10% or more of the Company’s reportable segments. Advanced manufacturing systems is comprisedtotal net revenues. Net revenues from LAM Research Corporation constituted 14.1% and 12.3%, of productthe Company’s total net revenues for the three and nine month periods ended September 30, 2020, respectively, and net revenues from Applied Materials, Inc. constituted 11.0% and 10.8% of the Company’s Equipment & Solutions segment.
total net revenues for the same periods. For the three and nine months ended September 30, 2019, 0 single customer accounted for 10% or more of the Company’s total net revenues.

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

September
30, 2018,2020, respectively, primarily related to severanceduplicate facility costs.

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.

Restructuring activities were as follows:
         
 
Nine Months Ended
 
September 30,
 
 
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
 
         
Other
Wethe acquisition of Newport. The Company recorded a charge of $1,700$1.7 during the nine months ended September 30, 2019 related to a
this legal settlement from a
contractual obligation we
assumed
as part of our acquisition of Newport
.
We recorded $1,000 of environmental costs during the nine months ended September 30, 2018 related to a U.S. Environmental Protection Agency-designated Superfund site as part of
our acquisition of
Newport
.
34

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
settlement.

19)

Commitments and Contingencies

Newport Litigation

In 2016, two putative class actions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.

A-16-733154-C,
and Hubert C. Pincon v. Newport Corp., et al., Case No.
A-16-734039-B,
were filed in the District Court, Clark County, Nevada on behalf of a putative class of stockholders of Newport for claims related to the merger agreement (“Newport Merger Agreement”) between the Company, Newport, and a wholly-owned subsidiary of the Company (“Merger Sub”). The lawsuits named as defendants the Company, Newport, Merger Sub, and certain then current and former members of Newport’s board of directors. Both complaints alleged that Newport directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices and by omitting material information from the proxy statement. The complaints also alleged that the Company, Newport and Merger Sub aided and abetted the directors’ alleged breaches of their fiduciary duties. The Court consolidated the actions, and plaintiffs later filed an amended complaint captioned In re Newport Corporation Shareholder Litigation, Case No.
A-16-733154-B,
in the District Court, Clark County, Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Newport Merger Agreement. The amended complaint alleged Newport’s former board of directors breached their fiduciary duties to Newport’s stockholders and that the Company, Newport and Merger Sub had aided and abetted those breaches. Itthese breaches and sought monetary damages, including
pre-
and post-judgment interest. In June 2017, the Court granted defendants’ motion to dismiss and dismissed the amended complaint against all defendants but granted plaintiffs leave to amend.

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

 pre-
 and post-judgment interest. The Court granted a motion for class certification on September 27, 2018, appointing Mr. Pincon and Locals 302 and 612 of the International Union of Operating Engineers
-
Employers Construction Industry Retirement Trust as class representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily dismissed from the litigation. On May 1, 2019, the Court granted the defendants’ motion to strike plaintiffs’ jury demand and determined that the case will be tried by the Court, and not a jury.
Discovery in the action is complete. On August 9, 2019, plaintiffs filed a motion for leave to file a third amended complaint,
which was denied on October 10, 2019. On
August 23, 2019, defendants filed a motion for summary judgment.
A On January 23, 2020, the court entered its findings of fact, conclusions of law, and order granting defendants’ motion for summary judgment. On February 18, 2020, plaintiffs filed a notice of appeal from the court’s order granting defendants’ motion for summary judgment, as well as from the court’s prior orders granting defendants’ motion for a bench trial is scheduledand denying plaintiffs’ motion for
January
 2020.
leave to file an amended complaint. On March 20, 2020, plaintiffs filed a motion to retax and settle costs, and defendants filed a motion for costs, interest, and attorneys’ fees. On August 4, 2020, the court issued a bench ruling granting in part and denying in part defendants’ motion for costs, interest, and attorneys’ fees, and granting in part and denying in part plaintiffs’ motion to retax and settle costs.

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

.
20)
Sale-Leaseback of Long-Lived Assets
In August of 2019, 
the Company sold two of its buildings in Boulder, Colorado and has leased-back both buildings for a period of approximately 15 months, and also sold its three buildings in Portland, Oregon and has leased-back these three buildings with various expiration dates through 2020 and 2021. Total net cash proceeds received for these two transactions was
 $41,179 and the Company recognized a net gain on the sale of these long-lived assets of $6,773.
flows.


ITEM 2.

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

This Quarterly Report on Form

10-Q
contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended (the “Exchange Act”). When used herein,regarding the future financial performance, business prospects and growth of MKS. These statements are only predictions based on current assumptions and expectations. Any statements that are not statements of historical fact (including statements containing the words “will,” “projects,” “intends,” “believes,” “anticipates,“plans,“plans,“anticipates,” “expects,” “estimates,” “would,“forecasts,“will,” “intends”“continues” and similar expressions are intendedexpressions) should be considered to identifybe forward-looking statements. TheseActual events or results may differ materially from those in the forward-looking statements reflect management’s current opinions and are subject to certain risks and uncertaintiesset forth herein. Among the important factors that could cause resultsactual events to differ materially from those stated or implied. While we may elect to update forward looking statements in the future,forward-looking statements are the conditions affecting the markets in which MKS operates, including the fluctuations in capital spending in the semiconductor industry and other advanced manufacturing markets, fluctuations in sales to our major customers, the impact of the COVID-19 pandemic on the global economy and financial markets, including any restrictions on MKS’ operations and the operations of MKS’ customers and suppliers resulting from public health requirements and government mandates, the terms of our Term Loan Facility, competition from larger or more established companies in MKS’ markets, MKS’ ability to successfully grow its business and particularly that of ESI’s business, the challenges, risks and costs involved with integrating the operations of the companies we specifically disclaim any obligation to do so even if our estimates or expectations change. Riskshave acquired, potential fluctuations in quarterly results, dependence on new product development, rapid technological and uncertainties include, but are not limited to those discussedmarket change, acquisition strategy, manufacturing and sourcing risks, volatility of stock price, international operations, financial risk management, and the other factors described in ourMKS’ most recent Annual Report on Form
10-K
for the year ended December 31, 20182019 and inany subsequent Quarterly Reports on Form 10-Q, as filed with the section entitled “Risk Factors”U.S. Securities and Exchange Commission (the “SEC”). MKS is under no obligation to, and expressly disclaims any obligation to, update or alter these forward-looking statements, whether as referenced in Part II, Item 1A “Risk Factors”a result of new information, future events or otherwise after the date of this Quarterly Reportpresentation.

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

10-Q.
our Consolidated Financial Statements. This section provides an analysis of our financial results for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019.

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,

sub-micron
positioning, optics, precision motion control, vibration control optics and laser-based manufacturing systems solutions. We also provide services relating to the maintenance and repair of our products, installation services and training. Our primary served markets include semiconductor, industrial technologies, life and health sciences, research and defense.
Acquisition

Recent Events

Impact of Electro Scientific Industries, Inc.

On February 1, 2019,COVID-19

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

non-cash
consideration related to the exchange of share-based awards of approximately $31 million for a total purchase consideration of approximately $1.063 billion. We funded the payment of the aggregate consideration with a combination of our available cash on hand and the proceedschanging demand from our senior secured term loan facility as described below.
Segmentscustomers for our products and Markets
Effective February 1, 2019, in conjunction with our acquisition of ESI,services.

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.

Markets

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,

sub-micron
positioning, vibration optics, precision motion control and optics.
vibration control.

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.

Approximately 48% and 56% of our net

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.

We expect the relative split in our net revenues between sales tomanufacture customers in our advanced markets and sales to customers in our semiconductor capital equipment manufacturer and semiconductor device manufacturer markets will be relatively consistent for the foreseeable future, excluding the impact of any future acquisitions.


Net revenues from customers in our advanced markets increased by $12$136.1 million, or 5%61%, for the three months ended September 30, 2019,2020, compared to the same period in the prior year, primarily due to an increase of $42$125.1 million from our Equipment & Solutions segment as a result of the ESI Merger. This increase was offset by a decrease of $21 million and $9 million in revenue from customers in our advanced markets, primarily in our industrial technologies market, in our Light & Motion and Vacuum & Analysis segments, respectively.
segment. Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers in our advanced markets increased by $38$335.9 million, or 5%51%, for the nine months ended September 30, 2019,2020, compared to the same period in the prior year, primarily due to an increase of $123$305.9 million from our Equipment & Solutions segment as a result of the ESI Merger. This increase was offset by a decrease of $49 million and $36 million in revenue from customers in our advanced markets, primarily in our industrial technologies market, in our Light & Motion and Vacuum & Analysis segments, respectively.
Net revenues from semiconductor capital equipment manufacturesegment. These increases were primarily driven by broad-based demand across foundry, logic and semiconductor device manufacture customers decreased by $37 million, or 14%, for the three months ended September 30, 2019, compared to the same period in the prior year. This decrease was comprised of a volume decrease in net semiconductor revenues of $37 million and $7 million in the Vacuum & Analysis and Light & Motion segments, respectively, offset by an increase of $7 million from our Equipment & Solutions segment as a result of the ESI Merger.
Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers decreased by $252 million, or 28%, for the nine months ended September 30, 2019, compared to the same period in the prior year. This decrease was comprised of a volume decrease in net semiconductor revenues of $255 million and $14 million in the Vacuum & Analysis and Light & Motion segments, respectively, offset by an increase of $17 million from our Equipment & Solutions segment as a result of the ESI Merger.
The semiconductor capital equipment industry has been experiencing a moderation in capital spending in the past twelve months and we have seen a similar effect on our semiconductor revenue over the same period. However, while the timing of a full market recovery remains uncertain, we are seeing improving market conditions.memory manufacturing activities. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we cannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry.

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

tax-related
accounts. The increase in long-lived assets in the United States, comparing September 30, 2020 to December 31, 2019, was primarily related to an increase in the right-of-use asset for new facility leases. Long-lived assets located outside of the United States were $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
tax-related
accounts.

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.

Leases
In February 2016,impact on the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Leases, (“ASU
2016-02”),
business to enhance the transparency and comparability of financial reporting related to leasing arrangements. We adopted ASU
2016-02
on January 1, 2019, or the effective date, and used the effective date as our date of initial application.
At the inception ofCOVID-19 pandemic has triggered the need to perform an arrangement,impairment test on goodwill, we determine whetherwill continue to assess the arrangement is or contains a lease based on the facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as
right-of-use
assets, short-term lease liabilities and long-term lease liabilities. We have elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and their corresponding
right-of-use
assets are recorded based on the present value of lease payments over the expected remaining fixed lease term. Certain adjustments to the
right-of-use
asset may be required for items such as incentives received. In calculating the present value of future lease payments, we utilize our incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We have elected to utilize a single blended interest rate based on currencies, geographies and lease terms that comprise the lease portfolio.
37

Although separation of lease and
non-lease
components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and
non-lease
components. We have elected to account for the lease and
non-lease
components of each of our operating leases as a single lease component and allocate allimpact of the contract consideration to the lease component only. The lease component results in an operating
right-of-use
asset being recordedpandemic on the balance sheet and amortized on a straight-line basis as lease expense.
Many of our leases contain options to renew and extend lease terms, and options to terminate leases early. We do not recognize the
right-of-use
asset or lease liability for renewal or termination periods unless we are reasonably certain to exercise the option at lease inception.
business.

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

10-K
for the year ended December 31, 20182019 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”


Results of Operations

The following table sets forth for the periods indicated the percentage of total net revenues of certain line items included in our 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.



respectively.

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.

Total internationalrespectively. These increases were primarily attributed to increases in net revenues including productin South Korea and service, were $251.3China.

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.

The following table sets forth our net revenues by reportable segment:
                 
 
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 Vacuum & Analysis segment decreased $45.4 million and $292.0 million for the three and nine months ended September 30, 2019,2020, respectively, compared to the same periods in the prior year, due to decreasesvolume increases in net revenues from semiconductor customers of $36.0$125.1 million and $255.5$305.9 million for the three and nine months ended September 30, 2019,2020, respectively, andoffset by decreases in net revenues from customers in our advanced markets of $9.4$4.5 million and $36.5$21.5 million for the same periods, respectively, primarily from customers in our industrial technologies market.

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 Light & Motion segment decreased $28.6 million and $62.9 million for the three and nine months ended September 30, 2019,2020, respectively, compared to the same periods in the prior year. The decreases were primarilydecrease for the nine months ended September 30, 2020 was attributed to decreasesa decrease in revenues from customers in our advanced markets of $62.8 million, primarily from customers in our industrial technologies and research and defense markets, offset by an increase of $21.1 million in net revenues from semiconductor customers.  

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.

Gross Profit
                         
 
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 profit as a percentage of net product revenues decreased by 4.5 percentage points for both the three and nine months ended September 30, 2019, compared to the same periods in the prior year, primarily due to lower factory utilization and lower revenue volumes, partially offset by favorable product mix.
Gross profit as a percentage of net service revenues increased by 5.1 percentage points and 0.8 percentage points for the three and nine month periods ended September 30, 2019,2020, respectively, compared to the same periods in the prior year, primarily due to favorable absorptionhigher revenue volumes and favorable product mix,absorption, partially offset by unfavorable product mix and higher materiallogistics costs.


The following table sets forth gross profit

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
)%
                         
Gross profit for our Vacuum & Analysis segment decreased by 3.72.8 and 3.52.7 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 material costs and lower revenue volumes.unfavorable absorption partially offset by favorable mix of products serviced.

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.

mix and higher excess and obsolete inventory charges.

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

step-up
adjustment to fair value from purchase accounting of $7.6 million.million for the nine months ended September 30, 2019. Excluding this adjustment, the gross margin for our Equipment & Solutions segment for the nine months ended September 30, 2019 would have been 43.6% for this period.
.

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.

materials. Research and development expenses increased $19.1$5.3 million for the nine months ended September 30, 2019,2020, compared to the same period in the prior year,year. The increase was primarily duerelated to $18.7an increase of $6.8 million from the ESI Merger, which primarily included $12.2in compensation-related costs, mainly related to variable compensation, $1.1 million in professional fees, $1.1 million in software maintenance, partially offset by a decrease of compensation-related expenses, $2.4$3.3 million ofin project materials $2.2 million of depreciation expense and $1.0 million of occupancy costs, and an increase of $1.8 million of project materials related to the legacy MKS business.in travel costs.


Our research and development efforts are primarily focused on developing and improving our instruments, components, subsystems and process control solutions to improve process performance and productivity.

We have thousands of products and our research and development efforts primarily consist of a large number of projects related to these products, none of which is individually material to us. Current projects typically have durations of 3 to 30 months depending upon whether the product is an enhancement of existing technology or a new product. Our current initiatives include projects to enhance the performance characteristics of older products, to develop new products and to integrate various technologies into subsystems. These projects support, in large part, the transition in the semiconductor industry to smaller integrated circuit geometries and in the flat panel display and solar markets to larger substrate sizes, which require more advanced process control technology. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, fees paid to consultants, material costs for prototypes and other expenses related to the design, development, testing and enhancement of our products.

We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets. 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.

41

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.

expense.

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.

Fees and Expenses Related to Incremental Term Loan Facility
                 
 
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
 
We recorded fees and expenses during the three and nine months ended September 30, 2019, related to Amendment No. 6 which included the fifth repricing of our Term Loan Facility and the combinationin travel costs, mainly as a result of the two existing tranches of our Term Loan Facility with a maturity date in February 2026. We also recorded fees and expenses during the nine months ended September 30, 2019 related to Amendment No. 5, which established a second tranche for our term loan commitment in the original principal amount of $650 million. We recorded fees and expenses during the nine months ended September 30, 2018 related to the fourth repricing of our 2016 Term Loan Facility.
COVID-19 pandemic.

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.

During the three and nine months ended September 30, 2018, we reversed a portion of acquisition and integration costs recognized during previous periods related to the acquisition of Newport Corporation in April 2016 (the “Newport Merger”), related to severance agreement provisions that were not met.
42

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

 


We recorded restructuring

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.

Restructuring costs during the three and nine months ended September 30, 2018 were primarily comprised of severance costs related to transferring a portion of our shared services functions to a third party as well as the consolidation of certain shared service functions in Asia. We also recorded environmental costs during the nine months ended September 30, 2018, related to an Environmental Protection Agency-designated Superfund site, which was acquired 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

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in millions)

 

2020

 

 

2019

 

 

2020

 

 

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

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in millions)

 

2020

 

 

2019

 

 

2020

 

 

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

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in millions)

 

2020

 

 

2019

 

 

2020

 

 

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

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in millions)

 

2020

 

 

2019

 

 

2020

 

 

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,

 

 

Nine Months Ended

September 30,

 

(dollars in millions)

 

2020

 

 

2019

 

 

2020

 

 

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.

Other Expense, Net
                 
 
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
 
The changes in other (income) expense, net, 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 interest expense as a result of lower interest rates and lower average debt balances as a result of various debt prepayments made in 2019 and the nine months ended September 30, 2020.

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,

 

 

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

low-taxed
income inclusion and a correction of an
out-of-period
error with respect to deferred tax assets related to limitations on the deduction of executive compensation in the amount of $5.0 million. This correction, which was recorded during the
43

quarter ended June 30, 2018, but should have been recorded during the three months ended September 30, 2018, increased our effective tax rate for the three and six months ended June 30, 2019 and the nine months ended September 30, 2019 by 9.8%, 7.5% and 3.8%, respectively. The error and subsequent adjustment were not material to prior or current interim and annual financial statements.
Our effective tax rates for the three and nine months ended September 30, 2018 were 18.5% and 17.6%, respectively. Our effective tax rates for the three and nine months September 30, 2018, and related income tax expense, were lower than the U.S. statutory rate due to foreign earnings taxed at lower rates, windfall benefits of stock compensation, and the deduction for foreign derived intangible income offset by the tax effecteffects of the provision for global intangible low taxed income inclusion and state income taxes.
the write-off of deferred tax assets related to certain foreign net operating losses.

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.

We are subject to examination by U.S. federal, state and foreign tax authorities. The U.S. Internal Revenue Service commenced an examination of our U.S. federal income tax filings for tax years 2015 and 2016 during the quarter ended September 30, 2017. This audit was effectively settled during the quarter ended March 31, 2018, and the impact was not material. Also during the quarter ended March 31, 2018 we received notification from the U.S. Internal Revenue Service of their intent to audit our U.S. subsidiary, Newport Corporation, 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.

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

low-taxed
income provision, as well as the geographic composition of our
pre-tax
income, the results of tax audits and changes in income tax reserves for unrecognized tax benefits.  We monitor these factors and timely adjust our estimates of the effective tax rate accordingly. We expect that the geographic mix of
pre-tax
income will continue to have a favorable impact on our effective tax rate, however the geographic mix of
pre-tax
income can change based on multiple factors resulting in changes to the effective tax rate in future periods.  While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax law and regulations. Additionally, the recognition and measurement of certain tax benefits include estimates and judgment by management. Accordingly, we could record additional provisions or benefits for U.S. federal, state, and foreign tax matters in future periods as new information becomes available.

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.

from operations.

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

non-cash
charges of $139.5$122.7 million, offset byand a net increasedecrease in working capital of $69.9$8.8 million. The net increasedecrease in working capital was primarily due to an increase in inventoriesother current and non-current liabilities of $25.8, million, a decreasean increase in accounts payable of $24.0$24.5 million an increase in income taxes of $21.4 and a decrease in other current and
non-current
assets of $18.2$10.9, offset by an increase in inventories of $47.1 million, an increase in trade accounts receivable of $20.9 million and a decrease in accrued compensation of $13.4 million, a decrease$5.8 million. The increases in income taxes of $0.8 million, offset by a decrease in trade accounts receivable, inventory and accounts payable are all the result of $9.3 million and an increase in other current and
non-current
liabilities of $3.0 million.
44

increased business levels during the nine months ended September 30, 2020.

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

non-cash
charges of $99.1 million, offset by a net increase in working capital of $142.1 million. The net increase in working capital was primarily due to an increase in inventoriesnet purchases of $80.4 million, an increase in accounts receivableshort-term investments of $23.1$112.4 million and an increase in other current and
non-current
assetsthe purchases of $17.7 million, related to an increase in business activities, a decrease in accrued compensationproduction-related equipment of $15.5 million, a decrease in income taxes of $13.9 million and a decrease in accounts payable $0.4$59.9 million. These increases in working capital were offset by an increase in other current and
non-current
liabilities of $8.9 million.

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. 

Net cash provided by financing activities was $490.0 million for the nine months ended September 30, 2019 and was primarily from net proceeds of $534.3 million, mainly from our 2019 Incremental Term Loan Facility, as described below, used to finance the ESI Merger, offset by dividend payments made to common stockholders of $32.6$33.0 million and net payments related to tax payments foron the vesting of employee stock awards of $11.7$25.4 million. Net cash used in financing activities was $167.5 million for the nine months ended September 30, 2018, and resulted from the repurchase of common stock of $75.0 million, partial repayment of our Term Loan Facility of $50.0 million, dividend payments made to common stockholders of $31.6 million and net payments related to tax payments for employee stock awards of $13.6 million,These uses were partially offset by net proceeds from short-term borrowings relating to our lines of credit of $2.7$20.1 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

Facility

In connection with the completion of the acquisition of Newport MergerCorporation (“Newport”) in April 2016 (the “Newport Merger”), we entered into a term loan credit agreement (the “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 

The Wall Street Journal
, (3) a LIBORLondon Interbank Offer Rate (“LIBOR”) rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of 1.75%, plus, in each case, an applicable margin; or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a LIBOR rate floor of 0.0%, plus an applicable margin. The Company hasWe have elected the interest rate as described in clause (b). of the foregoing sentence. The Term Loan Credit Agreement provides that, unless an alternate rate of interest is agreed, all loans will be determined by reference to the base rate if the LIBOR rate cannot be ascertained, if regulators impose material restrictions on the authority of a lender to make LIBOR rate loans, or for other reasons. The 2016 Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.
45

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.

2020.

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

 B-5
term loan commitment in the original principal amount of $650.0 million (the “2019 Incremental Term Loan Facility”), all of which was drawn down in connection with the closing of the ESI Merger. Pursuant to Amendment No. 5, we also effectuated certain amendments to the Term Loan Credit Agreement which make certain of the negative covenants and other provisions less restrictive. Prior to the effectiveness of Amendment No. 6 (as defined below), the 2019 Incremental Term Loan Facility had a maturity date of February 1, 2026 and bore 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 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The 2019 Incremental Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.

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

B-6
term loan commitment in the original principal amount of $896.8 million (“2019 Term Loan Refinancing Facility”). Each lender of the Existing Term Loans whothat elected to participate in the 2019 Term Loan Refinancing Facility was deemed to have exchanged the aggregate outstanding principal amount of its Existing Term Loans outstanding under the Credit Agreement for an equal aggregate principal amount of tranche
B-6
term loans under the 2019 Term Loan Refinancing Facility. On the effective date of Amendment No. 6 and immediately prior to the exchanges described above, we made a voluntary prepayment of $50.0 million, which was applied to the Existing Term Loans on a pro rata basis.


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.

2020.

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%.

46

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

The Wall Street Journal
, (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% and (4) a floor of 0.00%; and (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, with a floor of 0.00%. The initial applicable margin for borrowings under the ABL Facility is 0.50% with respect to base rate borrowings and 1.50% with respect to LIBOR borrowings. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.

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.


We incurred $0.8 million

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. 

(a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base and (b) $8.5 million for 30 consecutive days, or during the continuance of an event of default, the ABL Credit Agreement requires us to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) tested on the last day of each fiscal quarter of at least 1.0 to 1.0.

The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor. We have not borrowed against thisthe ABL Facility to date.

Sale

Lines of Long-Lived Assets

In AugustCredit and Short-Term Borrowing Arrangements

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.

47

$3.1 million at September 30, 2020 and December 31, 2019, respectively.

Off-Balance

Sheet Arrangements

We do not have any financial partnerships with unconsolidated entities, such as entities often referred to as structured finance, special purpose entities or variable interest entities, which are often established for the purpose of facilitating

off-balance
sheet arrangements or for other contractually narrow or limited purposes. Accordingly, we have no
off-balance
sheet arrangements that have or are reasonably expected to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Contractual Obligations

Other than the 2019 Incremental Term Loan Facility for $650.0 million and the 2019 Term Loan Refinancing Facility described above, there

There have been no other changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form

10-K
for the year ended December 31, 2018.
2019.

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 ASU

2018-15,
“Intangibles-Goodwill and
Other-Internal-Use
Software (Subtopic
350-40):
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 obtain
internal-use
software (and hosting arrangements that include an
internal-use
software 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.
In June 2016, the FASB issued ASU
2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard introduced the expected credit losses methodology for the measurement of credit losses on financial assets We do not expect that are not measured at fair value through net income and replaces today’s “incurred loss” model with an “expected credit loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. There have been several consequential subsequent amendments to this standard. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the requirements of this ASU and the impact of pending adoption onthese changes will be material to our consolidated financial statements.position, results of operations and cash flows.


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

10-K
for the year ended December 31, 20182019 filed with the Securities and Exchange Commission on February 26, 2019.28, 2020. As of September 30, 2019,2020, there were no material changes in our exposure to market risk from December 31, 2018.
2019.

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

13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019,2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
48

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules

13a-15(f)
and
15d-15(f)
under the Exchange Act) during the quarter ended September 30, 2019,2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

PART II.

OTHER INFORMATION

ITEM 1.

Newport Litigation

In 2016, two putative class actions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.

A-16-733154-C,
and Hubert C. Pincon v. Newport Corp., et al., Case No.
A-16-734039-B,
were filed in the District Court, Clark County, Nevada on behalf of a putative class of stockholders of Newport Corporation (“Newport”) for claims related to the merger agreement (“Newport Merger Agreement”) between the Company, Newport, and a wholly-owned subsidiary of the Company (“Merger Sub”). The lawsuits named as defendants the Company, Newport, Merger Sub, and certain then current and former members of Newport’s board of directors. Both complaints alleged that Newport directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices and by omitting material information from the proxy statement. The complaints also alleged that the Company, Newport and Merger Sub aided and abetted the directors’ alleged breaches of their fiduciary duties. The Court consolidated the actions, and plaintiffs later filed an amended complaint captioned In re Newport Corporation Shareholder Litigation, Case No.
A-16-733154-B,
in the District Court, Clark County, Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Newport Merger Agreement. The amended complaint alleged Newport’s former board of directors breached their fiduciary duties to Newport’s stockholders and that the Company, Newport and Merger Sub had aided and abetted these breaches. Itbreaches and sought monetary damages, including
pre-
and post-judgment interest. In June 2017, the Court granted defendants’ motion to dismiss and dismissed the amended complaint against all defendants but granted plaintiffs leave to amend.
amend.

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

 pre-
 and post-judgment interest. The Court granted a motion for class certification on September 27, 2018, appointing Mr. Pincon and Locals 302 and 612 of the International Union of Operating Engineers - Employers Construction Industry Retirement Trust as class representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily dismissed from the litigation. On May 1, 2019, the Court granted the defendants’ motion to strike plaintiffs’ jury demand and determined that the case will be tried by the Court, and not a jury. Discovery in the action is complete. On August 9, 2019, plaintiffs filed a motion for leave to file a third amended complaint, which was denied on October 10, 2019. On August 23, 2019, defendants filed a motion for summary judgment. AOn January 23, 2020, the court entered its findings of fact, conclusions of law, and order granting defendants’ motion for summary judgment. On February 18, 2020, plaintiffs filed a notice of appeal from the court’s order granting defendants’ motion for summary judgment, as well as from the court’s prior orders granting defendants’ motion for a bench trial is scheduledand denying plaintiffs’ motion for January 2020.
leave to file an amended complaint. On March 20, 2020, plaintiffs filed a motion to retax and settle costs, and defendants filed a motion for costs, interest, and attorneys’ fees. On August 4, 2020, the court issued a bench ruling granting in part and denying in part defendants’ motion for costs, interest, and attorneys’ fees, and granting in part and denying in part plaintiffs’ motion to retax and settle costs.

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 FACTORS.FACTORS

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

10-K
for the year ended December 31, 2018 in2019 (the “Annual Report”), the section entitled “Risk Factors.”Factors” in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 (the “Quarterly Report for Q1 2020”), which section is incorporated by reference herein, and the section entitled “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2020 (the “Quarterly Report for Q2 2020”), which section is incorporated by reference herein. The risk factor disclosures in the Annual Report and in the Quarterly Report for Q1 2020 are updated by the information relating to certain export license requirements related to China that is described in the Quarterly Report for Q2 2020. There have been no other material changes to the risk factors as described in Part I, Item 1A, “Risk Factors,” in our Annual Report, on Form
10-K
for the year ended December 31, 2018 and a supplemental risk factor described in our Quarterly Report on Form
10-Q
for the quarter ended June 30, 2019.
Q1 2020 and our Quarterly Report for Q2 2020.

49

ITEM 6.

EXHIBITS.

Exhibit No.

Exhibit Description

   +3.1 (1)

   +3.2 (2)

   +3.3 (3)

   +3.4 (4)

   31.1

+ 10.1 (5)

    31.1

   31.2

    31.2

   32.1

    32.1

101.INS

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

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

104

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
(File (File No.
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
(File (File No.
000-23621),
filed with the Securities and Exchange Commission on May 6, 2014.


(5)Incorporated by reference to the Registrant’s Current Report on Form
8-K,
filed with the Securities and Exchange Commission on October 1, 2019
50

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 6, 2019

3, 2020

By:

By:

/s/ Seth H. Bagshaw

Seth H. Bagshaw

Senior Vice President, Chief Financial Officer and Treasurer

(Principal Financial Officer)

51

49