UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
90 Industrial Way, Wilmington, Massachusetts 01887
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 284-4000
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
Number of shares outstanding of the issuer's common stock as of April 28, 2004:
53,508,276
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003
Consolidated Statements of Operations -
Three months ended March 31, 2004 and 2003
Consolidated Statements of Cash Flows -
Three months ended March 31, 2004 and 2003
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
ITEM 4. CONTROLS AND PROCEDURES.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, 2004 December 31, 2003
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 91,932 $ 74,660
Short-term investments ................................... 76,136 54,518
Trade accounts receivable, net ........................... 87,991 65,454
Inventories .............................................. 94,878 82,013
Other current assets ..................................... 8,151 5,631
-------- --------
Total current assets ................................. 359,088 282,276
Long-term investments .................................... 13,313 13,625
Property, plant and equipment, net ....................... 77,280 76,121
Goodwill, net ............................................ 260,041 259,924
Acquired intangible assets, net .......................... 52,445 56,192
Other assets ............................................. 4,083 4,724
-------- --------
Total assets ......................................... $766,250 $692,862
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .................................... $ 20,158 $ 17,736
Current portion of long-term debt ........................ 2,491 2,460
Accounts payable ......................................... 34,341 25,302
Accrued compensation ..................................... 11,809 7,711
Other accrued expenses ................................... 28,834 18,599
-------- --------
Total current liabilities ............................ 97,633 71,808
Long-term debt ............................................... 8,460 8,924
Other liabilities ............................................ 4,127 3,820
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; none issued and outstanding .............. --- ---
Common Stock, no par value, 200,000,000 shares authorized;
53,482,844 and 52,040,019 issued and outstanding at
March 31, 2004 and December 31, 2003, respectively ... 113 113
Additional paid-in capital ............................... 622,334 587,910
Retained earnings ........................................ 24,944 12,238
Accumulated other comprehensive income ................... 8,639 8,049
-------- --------
Total stockholders' equity ........................... 656,030 608,310
-------- --------
Total liabilities and stockholders' equity ........... $766,250 $692,862
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
3
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2004 2003
---- ----
Net sales ....................................... $132,985 $ 72,777
Cost of sales ................................... 78,756 47,371
-------- --------
Gross profit .................................... 54,229 25,406
Research and development ........................ 14,336 11,232
Selling, general and administrative ............. 20,152 17,819
Amortization of acquired intangible assets ...... 3,693 3,778
Restructuring charges ........................... 437 ---
-------- --------
Income (loss) from operations ................... 15,611 (7,423)
Interest expense ................................ 152 288
Interest income ................................. 424 568
-------- --------
Income (loss) before income taxes ............... 15,883 (7,143)
Provision for income taxes ...................... 3,177 287
-------- --------
Net income (loss) ............................... $ 12,706 $ (7,430)
======== ========
Net income (loss) per share:
Basic ....................................... $ 0.24 $ (0.14)
======== ========
Diluted ..................................... $ 0.23 $ (0.14)
======== ========
Weighted average common shares outstanding:
Basic ....................................... 53,255 51,380
======== ========
Diluted ..................................... 55,085 51,380
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
4
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
2004 2003
---- ----
Cash flows from operating activities:
Net income (loss) ........................................................................ $ 12,706 $ (7,430)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization ....................................................... 6,913 7,558
Other ............................................................................... 126 221
Changes in operating assets and liabilities:
Trade accounts receivable ....................................................... (21,590) (4,213)
Inventories ..................................................................... (12,276) 765
Other current assets ............................................................ (2,520) 1,059
Accrued expenses and other current liabilities .................................. 5,745 (1,023)
Accounts payable ................................................................ 8,991 2,023
Income taxes payable ............................................................ 8,631 311
-------- --------
Net cash provided by (used in) operating activities ...................................... 6,726 (729)
-------- --------
Cash flows from investing activities:
Purchases of short-term and long-term available for sale investments ............... (44,030) (24,600)
Maturities and sales of short-term and long-term available for sale investments .... 23,240 18,843
Purchases of property, plant and equipment ......................................... (4,248) (1,691)
Other .............................................................................. 802 159
-------- --------
Net cash used in investing activities .................................................... (24,236) (7,289)
-------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings ................................................ 23,452 11,789
Payments on short-term borrowings .................................................. (21,576) (12,316)
Principal payments on long-term debt ............................................... (486) (447)
Proceeds from issuance of common stock, net of issuance costs ...................... 32,529 ---
Proceeds from exercise of stock options ............................................ 1,895 90
-------- --------
Net cash provided by (used in) financing activities ...................................... 35,814 (884)
-------- --------
Effect of exchange rate changes on cash and cash equivalents ............................. (1,032) 609
-------- --------
Increase (decrease) in cash and cash equivalents ......................................... 17,272 (8,293)
Cash and cash equivalents at beginning of period ......................................... 74,660 88,820
-------- --------
Cash and cash equivalents at end of period ............................................... $ 91,932 $ 80,527
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
5
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except per share data)
1) Basis of Presentation
The terms "MKS" and the "Company" refer to MKS Instruments, Inc. and
its subsidiaries. The interim financial data as of March 31, 2004 and
for the three months ended March 31, 2004 and 2003 is unaudited;
however, in the opinion of MKS, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair statement of the results for the interim periods. The
unaudited 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 generally accepted
accounting principles. The financial statements should be read in
conjunction with the December 31, 2003 audited financial statements and
notes thereto included in the MKS Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 11, 2004.
The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including
those related to revenue recognition, accounts receivable, inventory,
intangible assets, goodwill, other long-lived assets, income taxes,
deferred tax valuation allowance, and investments. Management bases its
estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
2) Stock-Based Compensation
The Company has several stock-based employee compensation plans. The
Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense is
recorded for options issued to employees in fixed amounts with fixed
exercise prices at least equal to the fair market value of the
Company's common stock at the date of grant. The Company has adopted
the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," through disclosure only.
The following table illustrates the effect on net income (loss) and net
income (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee awards.
Three Months Ended
March 31,
2004 2003
-------- ----------
Net income (loss):
Net income (loss) as reported ........................................ $ 12,706 $ (7,430)
Deduct: Total stock-based employee compensation expense determined
under the fair-value-based method for all awards, net of tax ....... (6,074) (4,902)
-------- ----------
Pro forma net income (loss) .......................................... $ 6,632 $ (12,332)
======== ==========
Basic net income (loss) per share:
Net income (loss) as reported ........................................ $ 0.24 $ (0.14)
======== ==========
Pro forma net income (loss) .......................................... $ 0.12 $ (0.24)
======== ==========
Diluted net income (loss) per share:
Net income (loss) as reported ........................................ $ 0.23 $ (0.14)
======== ==========
Pro forma net income (loss) .......................................... $ 0.12 $ (0.24)
======== ==========
6
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
There is no tax benefit included in the stock-based employee
compensation expense determined under the fair-value-based method for
the three months ended March 31, 2004 and 2003, respectively, as the
Company established a full valuation allowance for its net deferred tax
assets.
3) Goodwill and Intangible Assets
Intangible Assets
Acquired amortizable intangible assets consisted of the following as of
March 31, 2004:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Completed technology ........................ $ 72,505 $(30,732) $ 41,773
Customer relationships ...................... 6,640 (2,892) 3,748
Patents, trademarks, tradenames and other ... 12,394 (5,470) 6,924
-------- -------- --------
$ 91,539 $(39,094) $ 52,445
======== ======== ========
Acquired amortizable intangible assets consisted of the following as of
December 31, 2003:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Completed technology......................... $ 72,563 $(27,654) $ 44,909
Customer relationships....................... 6,640 (2,663) 3,977
Patents, trademarks, tradenames and other.... 12,394 (5,088) 7,306
-------- -------- --------
$ 91,597 $(35,405) $ 56,192
======== ======== ========
Aggregate amortization expense related to acquired intangibles for the
three months ended March 31, 2004 and 2003 was $3,693,000 and
$3,778,000, respectively. Estimated amortization expense related to
acquired intangibles for the remainder of 2004 and each of the four
succeeding fiscal years is as follows:
Year Amount
---- ------
2004 $11,074
2005 13,864
2006 11,763
2007 11,129
2008 2,759
Goodwill
The change in the carrying amount of goodwill during the three months
ended March 31, 2004 was not material.
7
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
4) Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share:
Three Months Ended
March 31,
2004 2003
---- ----
Numerator
Net income (loss) ........................................... $ 12,706 $ (7,430)
======== ========
Denominator
Shares used in net income (loss) per common share - basic .... 53,255 51,380
Effect of dilutive securities:
Stock options and employee stock purchase plan ......... 1,830 --
-------- --------
Shares used in net income (loss) per common share - diluted .. 55,085 51,380
Net income (loss) per common share
Basic ........................................................ $ 0.24 $ (0.14)
======== ========
Diluted ...................................................... $ 0.23 $ (0.14)
======== ========
For purposes of computing diluted earnings per share, weighted average
common share equivalents do not include stock options with an exercise
price greater than the average market price of the common shares, which
totaled 2,543,000 shares in the three months ended March 31, 2004. All
options outstanding during the three months ended March 31, 2003 are
excluded from the calculation of diluted net loss per common share
because their inclusion would be anti-dilutive. There were options to
purchase approximately 9,111,000 and 8,242,000 shares of the Company's
common stock outstanding as of March 31, 2004 and 2003, respectively.
5) Cash and Cash Equivalents and Investments
All highly liquid investments with an original maturity of three months
or less at the date of purchase are considered to be cash equivalents.
Cash and cash equivalents consists of the following:
March 31, December 31,
2004 2003
---- ----
Cash and money market instruments ...................... $56,407 $60,869
Commercial paper ....................................... 34,126 12,645
Federal government and government agency obligations ... 1,399 876
Corporate obligations .................................. -- 270
------- -------
$91,932 $74,660
======= =======
The fair value of short-term available-for-sale investments maturing
within one year consists of the following:
March 31, December 31,
2004 2003
---- ----
Federal government and government agency obligations.... $55,882 $41,566
Commercial paper........................................ 18,463 10,449
Corporate obligations................................... 1,791 2,503
------- -------
$76,136 $54,518
======= =======
8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
The fair value of long-term available-for-sale investments with
maturities of 1 to 5 years consists of the following:
March 31, December 31,
2004 2003
---- ----
Corporate obligations................................... $ 7,039 $ 5,499
Federal government and government agency obligations.... 6,274 4,807
Commercial paper........................................ -- 3,319
------- -------
$13,313 $13,625
======= =======
The appropriate classification of investments in securities is
determined at the time of purchase. Debt securities that the Company
does not have the intent and ability to hold to maturity are classified
as "available-for-sale" and are carried at fair value. Unrealized gains
and losses on securities classified as available-for-sale are included
in accumulated other comprehensive income in consolidated stockholders'
equity. Gross unrealized gains and gross unrealized losses on
available-for-sale investments were not material at March 31, 2004 and
December 31, 2003.
6) Inventories
Inventories consist of the following:
March 31, December 31,
2004 2003
---- ----
Raw material............................................ $40,998 $36,834
Work in process......................................... 21,067 15,786
Finished goods.......................................... 32,813 29,393
------- -------
$94,878 $82,013
======= =======
7) Stockholders' Equity
Comprehensive Income (Loss)
Components of comprehensive income (loss) were as follows:
Three Months Ended
March 31,
2004 2003
---- ----
Net income (loss)........................................... $12,706 $(7,430)
Other comprehensive income, net of applicable taxes of $0:
Changes in value of financial instruments designated
as hedges of currency and interest rate exposures.... 510 1
Foreign currency translation adjustment................. 54 770
Unrealized gain (loss) on investments................... 26 (97)
------- -------
Other comprehensive income, net of taxes.................... 590 674
------- -------
Total comprehensive income (loss)........................... $13,296 $(6,756)
======= =======
Common Stock Offering
On January 21, 2004, the Company issued 1,142,857 shares of its common
stock at $26.25 per share through a public offering. Estimated proceeds
of the offering, net of underwriters discount and estimated offering
expenses, were approximately $28,231,000. On January 23, 2004, the
underwriters exercised their over-allotment option and therefore, the
Company issued an additional 171,429 shares of its common stock, which
generated net proceeds of approximately $4,298,000.
9
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
8) Income Taxes
The Company records income taxes using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective income tax bases, and operating loss and tax
credit carryforwards. The Company evaluates the realizability of its
net deferred tax assets and assesses the need for a valuation allowance
on a quarterly basis. The future benefit to be derived from its
deferred tax assets is dependent upon its ability to generate
sufficient future taxable income to realize the assets. The Company
records a valuation allowance to reduce its net deferred tax assets to
the amount that may be more likely than not to be realized. To the
extent the Company establishes a valuation allowance, an expense will
be recorded within the provision for income taxes line on the statement
of income.
As a result of incurring significant operating losses from 2001 through
2003, the Company determined that it is more likely than not that its
deferred tax assets may not be realized. During the fourth quarter of
2002, the Company established a full valuation allowance for its net
deferred tax assets. At March 31, 2004 and December 31, 2003, the
Company continued to believe that it is more likely than not that all
of its deferred tax assets may not be realized. If the Company
generates sustained future taxable income against which these tax
attributes may be applied, some portion or all of the valuation
allowance would be reversed. If the valuation allowance were reversed,
a portion would be recorded as a reduction of goodwill, an additional
amount would be recorded as an increase to additional paid in capital,
and the remainder would be recorded as a reduction to income tax
expense.
During the first quarter of 2004, the U.S. taxable income was offset by
U.S. operating loss carryforwards. The Company did not record a
deferred tax benefit from the net operating loss incurred in the three
months ended March 31, 2003. The provision for income taxes for the
three months ended March 31, 2004 and 2003 is comprised of tax expense
from foreign operations and state taxes.
9) Segment Information and Significant Customer
The Company operates in one segment for the development, manufacturing,
sales and servicing of products that measure, control, power and
monitor critical parameters of semiconductor and other advanced
manufacturing processes. The Company's chief decision-maker reviews
operating results to make decisions about allocating resources and
assessing performance for the entire Company.
Information about the Company's operations in different geographic
regions is presented in the tables below. Net sales to unaffiliated
customers are based on the location in which the sale originated.
Transfers between geographic areas are at negotiated transfer prices
and have been eliminated from consolidated net sales.
Three Months Ended
March 31,
2004 2003
---- ----
Geographic net sales:
United States ........ $ 84,976 $ 43,125
Japan ................ 21,355 13,676
Europe ............... 11,521 9,336
Asia ................. 15,133 6,640
-------- --------
$132,985 $ 72,777
======== ========
10
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
March 31, December 31,
2004 2003
---- ----
Long-lived assets:
United States ........ $ 66,518 $ 65,977
Japan ................ 6,109 5,978
Europe ............... 5,397 5,541
Asia ................. 3,339 3,349
-------- --------
$ 81,363 $ 80,845
======== ========
The Company had one customer comprising 20% and 17% of net sales for
the three months ended March 31, 2004 and 2003, respectively.
10) Commitments and Contingencies
On January 12, 2004, Gas Research Institute ("GRI") brought suit in
federal district court in Illinois against the Company, On-Line
Technologies, Inc., which was acquired by MKS in April 2001, and
another defendant for breach of contract, misappropriation of trade
secrets and related claims relating to certain infra-red gas analysis
technology allegedly developed under a January 1995 Contract for
Research and incorporated into certain of the Company's products. GRI
has made claims for damages, exemplary damages, attorney's fees and
costs and injunctive relief. The Company is currently evaluating the
merits of the claims. MKS cannot be certain of the outcome of this
litigation, but plans to oppose the claims against the Company
vigorously.
On April 3, 2003, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against MKS in federal district court in Colorado ("Colorado
Action"), seeking a declaratory judgment that Advanced Energy's Xstream
product does not infringe three patents held by the Company's
subsidiary Applied Science and Technology, Inc. ("ASTeX"). On May 14,
2003, MKS brought suit in federal district court in Delaware against
Advanced Energy for infringement of five ASTeX patents, including the
three patents at issue in the Colorado Action. The Company seeks
injunctive relief and damages for Advanced Energy's infringement. On
December 24, 2003, the Colorado court granted the Company's motion to
transfer Advanced Energy's Colorado suit to Delaware and on February 9,
2004, the Delaware court denied Advanced Energy's motion to dismiss or
transfer the Company's Delaware case back to Colorado. Fact discovery
has now closed, and the case is scheduled for trial in July 2004.
On November 3, 1999, On-Line Technologies, Inc. ("On-Line), brought
suit in federal district court in Connecticut against Perkin-Elmer,
Inc. and certain other defendants for infringement of On-Line's patent
related to its FTIR spectrometer product. The suit sought injunctive
relief and damages for infringement. Perkin-Elmer, Inc. filed a
counterclaim seeking invalidity of the patent, costs, and attorneys'
fees. In June 2002, the defendants filed a motion for summary judgment.
In April 2003, the court granted the motion and dismissed the case. The
Company has appealed this decision and is awaiting a date for argument
in the federal circuit court of appeals.
The Company is subject to other legal proceedings and claims, which
have arisen in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company's results of
operations, financial condition or cash flows.
11
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
11) Restructuring, Asset Impairment and Other Charges
During the first quarter of 2004, the Company completed its planned
consolidation of acquisitions initiated in 2002 to accelerate product
development, rationalize manufacturing operations and reduce operating
costs. The Company recorded restructuring charges of $437,000 related
to lease costs of exited facilities.
The following table sets forth the activity in the restructuring
reserves from December 31, 2003 to March 31, 2004:
Workforce Facility
Reductions Consolidations Total
---------- -------------- -----
Balance as of December 31, 2003 ............ $ 199 $ 1,831 $ 2,030
Restructuring provision in first quarter ... -- 437 437
Charges utilized in first quarter .......... (15) (226) (241)
------- ------- -------
Balance as of March 31, 2004 ............... $ 184 $ 2,042 $ 2,226
======= ======= =======
The remaining accruals for workforce reductions are expected to be paid
by the end of 2004. The facilities consolidation charges will be paid
over the respective lease terms, the latest of which ends in 2008. The
accrual for severance costs and lease payments is recorded in Other
accrued expenses and Other liabilities.
12) Product Warranties
The Company provides for the estimated costs to fulfill customer
warranty obligations upon the recognition of the related revenue. While
the Company engages in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of
its component suppliers, the Company's warranty obligation is affected
by product failure rates, utilization levels, material usage, and
supplier warranties on parts delivered to the Company. Should actual
product failure rates, utilization levels, material usage, or supplier
warranties on parts differ from the Company's estimates, revisions to
the estimated warranty liability would be required.
Product warranty activity for the three months ended March 31 were as
follows:
2004 2003
---- ----
Balance at beginning of year ........................................ $ 5,804 $ 6,921
Provisions for product warranties during first quarter .............. 1,704 315
Direct charges to the warranty liability during the first quarter ... (1,146) (1,052)
------- -------
Balance at the end of the first quarter ............................. $ 6,362 $ 6,184
======= =======
12
MKS INSTRUMENTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
We believe that this Quarterly Report on Form 10-Q contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. When used herein, the words "believes,"
"anticipates," "plans," "expects," "estimates" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements reflect management's current opinions and are subject to certain
risks and uncertainties that could cause results to differ materially from those
stated or implied. We assume no obligation to update this information. Risks and
uncertainties include, but are not limited to, those discussed in the section
entitled "Factors That May Affect Future Results."
OVERVIEW
We are a leading worldwide provider of instruments, components,
subsystems and process control solutions that measure, control, power and
monitor critical parameters of semiconductor and other advanced manufacturing
processes.
We are managed as one operating segment which is organized around three
product groups: Instruments and Control Systems, Power and Reactive Gas
Products, and Vacuum Products. Our products are derived from our core
competencies in pressure measurement and control, materials delivery, gas and
thin-film composition analysis, control and information management, power and
reactive gas generation and vacuum technology. Our products are used to
manufacture semiconductors and thin film coatings for diverse markets such as
flat panel displays, optical and magnetic storage media, architectural glass,
and electro-optical products. We also provide technologies for medical imaging
equipment.
Our customers include semiconductor capital equipment manufacturers,
semiconductor device manufacturers, industrial manufacturing companies, medical
equipment manufacturers and university, government and industrial research
laboratories. For the three months ended March 31, 2004 and the full year ended
December 31, 2003, we estimate that approximately 78% and 69% of our net sales,
respectively, were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers.
The semiconductor capital equipment market experienced a significant
downturn from the beginning of 2001 through the third quarter of 2003. As a
result, we experienced a significant reduction in demand for products from our
semiconductor capital equipment manufacturer and semiconductor device
manufacturer customers during this period. In the fourth quarter of 2003 and
first quarter of 2004, we experienced a significant increase in orders and
shipments. The semiconductor capital equipment industry has been very cyclical,
and we cannot determine how long this recent improvement will last.
A portion of our sales is to operations in international markets.
International sales include sales by our foreign subsidiaries, but exclude
direct export sales. For the three months ended March 31, 2004 and 2003,
international sales accounted for approximately 36% and 41% of net sales,
respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported. There have been no material changes in our critical
accounting policies since December 31, 2003. See the discussion of critical
accounting policies in our Annual Report on Form 10-K for the year ended
December 31, 2003.
13
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of total net sales of certain line items included in MKS' consolidated statement
of operations data.
Three months ended
March 31,
2004 2003
---- ----
Net sales ................................... 100.0% 100.0%
Cost of sales ............................... 59.2 65.1
------ ------
Gross profit ................................ 40.8 34.9
Research and development .................... 10.8 15.4
Selling, general and administrative ......... 15.2 24.5
Amortization of acquired intangible assets... 2.8 5.2
Restructuring charges ....................... 0.3 --
------ ------
Income (loss) from operations ............... 11.7 (10.2)
Interest income, net ........................ 0.2 0.4
------ ------
Income (loss) before income taxes ........... 11.9 (9.8)
Provision for income taxes .................. 2.3 0.4
------ ------
Net income (loss) ........................... 9.6% (10.2)%
====== ======
Net Sales. Net sales increased $60.2 million or 82.7% to $133.0 million
for the three months ended March 31, 2004 from $72.8 million for the three
months ended March 31, 2003. The increase was due mainly to stronger worldwide
demand from our semiconductor capital equipment manufacturer and semiconductor
device manufacturer customers, which increased $55.3 million or 115% compared to
the prior year. International net sales were $48.0 million for the three months
ended March 31, 2004 or 36.1% of net sales and $29.7 million for the same period
of 2003 or 40.7% of net sales.
Gross Profit. Gross profit as a percentage of net sales increased to
40.8% for the three months ended March 31, 2004 from 34.9% for the three months
ended March 31, 2003. The increase was primarily due to higher overhead
absorption from significantly higher net sales.
Research and Development. Research and development expense increased
$3.1 million or 27.6% to $14.3 million or 10.8% of net sales for the three
months ended March 31, 2004 from $11.2 million or 15.4% of net sales for the
three months ended March 31, 2003. The increase was primarily due to increased
compensation expense of $1.3 million as a result of higher staffing levels,
restored compensation levels, salary increases and incentive compensation, and
$1.0 million of higher project materials.
Selling, General and Administrative. Selling, general and
administrative expenses increased $2.3 million or 13.1% to $20.1 million or
15.2% of net sales for the three months ended March 31, 2004 from $17.8 million
or 24.5% of net sales for the three months ended March 31, 2003. The increase
was primarily due to higher compensation expense of $1.7 million as a result
of restored compensation levels, salary increases, incentive compensation and
higher sales commissions, which were partially offset by lower headcount, and a
$0.5 million increase in professional fees.
Amortization of Acquired Intangible Assets. Amortization expense of
$3.7 million and $3.8 million for the three months ended March 31, 2004 and
2003, respectively, represents the amortization of the identifiable intangibles
resulting from the acquisitions completed by MKS.
Restructuring Charges. During the first quarter of 2004, we completed
our consolidation of acquisitions initiated in 2002 to accelerate product
development, rationalize manufacturing operations and reduce operating costs. We
recorded restructuring charges of $0.4 million related to lease costs of exited
facilities.
14
The following table sets forth the activity in the restructuring
reserves from December 31, 2003 to March 31, 2004:
Workforce Facility
Reductions Consolidations Total
---------- -------------- -----
(in thousands)
Balance as of December 31, 2003 ............ $ 199 $ 1,831 $ 2,030
Restructuring provision in first quarter ... -- 437 437
Charges utilized in first quarter .......... (15) (226) (241)
------- ------- -------
Balance as of March 31, 2004 ............... $ 184 $ 2,042 $ 2,226
======= ======= =======
The remaining accruals for workforce reductions are expected to be paid
by the end of 2004. The facilities consolidation charges will be paid over the
respective lease terms, the latest of which ends in 2008. The accrual for
severance costs and lease payments is recorded in Other accrued expenses and
Other liabilities.
Interest Income, Net. Net interest income of $0.3 million for the three
months ended March 31, 2004 remained constant compared to the $0.3 million for
the three months ended March 31, 2003.
Provision for Income Taxes. We recorded a provision for income taxes of
$3.2 million for the three months ended March 31, 2004, as compared to a
provision of $0.3 million for the three months ended March 31, 2003. During the
first quarter of 2004, the U.S. taxable income was offset by U.S. operating loss
carryforwards. We did not record a deferred tax benefit from the net operating
loss incurred in the three months ended March 31, 2003. The provisions in both
years are comprised of tax expense from foreign operations and state taxes.
As a result of incurring significant operating losses from 2001 through
2003, we determined that it is more likely than not that our deferred tax assets
may not be realized, and since the fourth quarter of 2002 have established a
full valuation allowance for our net deferred tax assets. If we generate
sustained future taxable income against which these tax attributes may be
applied, some portion or all of the valuation allowance would be reversed. If
the valuation allowance were reversed, a portion would be recorded as a
reduction of goodwill, an additional amount would be recorded as an increase to
additional paid in capital, and the remainder would be recorded as a reduction
to income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term marketable securities totaled $168.1
million at March 31, 2004 compared to $129.2 million at December 31, 2003. This
increase is mainly due to our public offering of common stock in the first
quarter, which generated net proceeds of approximately $32.5 million.
Net cash provided by operating activities of $6.7 million for the three
months ended March 31, 2004, resulted mainly from net income of $12.7 million,
non-cash depreciation and amortization expenses of $6.9 million and an increase
in operating liabilities of $23.4 million, partially offset by an increase in
operating assets of $36.4 million. The increase in operating assets consisted
mainly of an increase in accounts receivable of $21.6 million due to the higher
shipments in the first quarter of 2004 as compared to the fourth quarter of
2003, and an increase in inventory of $12.3 million as a result of higher
production volumes in the first quarter of 2004 and expected shipments in the
second quarter of 2004. The increase in operating liabilities consisted
primarily of an increase in accounts payable, accrued expenses and other current
liabilities of $14.7 million resulting from increased production activity in the
first quarter, as well as an $8.6 million increase in income tax payable
consisting mainly of state and foreign taxes payable. Net cash used in operating
activities of $0.7 million for the three months ended March 31, 2003 resulted
mainly from a net loss of $7.4 million and an increase in accounts receivable of
$4.2 million, partially offset by non-cash charges of $7.6 million for
depreciation and amortization, an increase in accounts payable of $2.0 million
and decreases in other assets of $1.1 million and inventories of $0.8 million.
15
Net cash used in investing activities of $24.2 million for the three months
ended March 31, 2004 resulted from the net purchases of $20.8 million of
available for sale investments mainly from the net proceeds received from our
stock offering in the first quarter, and the purchase of property, plant and
equipment of $4.2 million for investments in manufacturing test equipment and
for consolidation of our IT infrastructure. Net cash used in investing
activities of $7.3 million for the three months ended March 31, 2003 consisted
mainly of net purchases of short-term and long-term available for sale
investments of $5.8 million and purchases of property, plant and equipment of
$1.7 million.
Net cash provided by financing activities of $35.8 million for the three
months ended March 31, 2004 consisted primarily of $32.5 million in net proceeds
received from our common stock offering, $1.9 million in proceeds from the
exercise of stock options and purchases under the employee stock purchase plan,
and net proceeds of $1.9 million from short-term borrowings, partially offset by
$0.5 million of principal payments on long-term debt. Net cash used in financing
activities of $0.9 million for the three months ended March 31, 2003 consisted
mainly of $0.5 million in net payments on short-term borrowings and principal
payments of $0.4 million on long-term debt.
We believe that our working capital, together with the cash anticipated
to be generated from operations and funds available from existing credit
facilities, will be sufficient to satisfy our estimated working capital and
planned capital expenditure requirements through at least the next twelve
months.
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 other contractually
narrow or limited purposes. Accordingly, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had such relationships.
FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR BUSINESS DEPENDS SUBSTANTIALLY ON CAPITAL SPENDING IN THE SEMICONDUCTOR
INDUSTRY WHICH IS CHARACTERIZED BY PERIODIC FLUCTUATIONS THAT MAY CAUSE A
REDUCTION IN DEMAND FOR OUR PRODUCTS.
We estimate that approximately 78% of our net sales for the quarter
ended March 31, 2004 and 69%, 70% and 64% of our net sales for the years ended
December 31, 2003, 2002 and 2001, respectively, were to semiconductor capital
equipment manufacturers and semiconductor device manufacturers, and we expect
that sales to such customers will continue to account for a substantial majority
of our sales. Our business depends upon the capital expenditures of
semiconductor device manufacturers, which in turn depend upon the demand for
semiconductors. Periodic reductions in demand for the products manufactured by
semiconductor capital equipment manufacturers and semiconductor device
manufacturers may adversely affect our business, financial condition and results
of operations. Historically, the semiconductor market has been highly cyclical
and has experienced periods of overcapacity, resulting in significantly reduced
demand for capital equipment. Most recently, in 2001 and 2002, we experienced a
significant reduction in demand from OEM customers, and lower gross margins due
to reduced absorption of manufacturing overhead. In addition, many semiconductor
manufacturers have operations and customers in Asia, a region that in recent
years has experienced serious economic problems including currency devaluations,
debt defaults, lack of liquidity and recessions. We cannot be certain that
semiconductor downturns will not continue or recur. A decline in the level of
orders as a result of any future downturn or slowdown in the semiconductor
capital equipment industry could have a material adverse effect on our business,
financial condition and results of operations.
OUR QUARTERLY OPERATING RESULTS HAVE VARIED, AND ARE LIKELY TO CONTINUE TO VARY
SIGNIFICANTLY. THIS MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR COMMON
STOCK.
A substantial portion of our shipments occurs shortly after an order is
received and therefore we operate with a low level of backlog. As a result, a
decrease in demand for our products from one or more customers could occur with
limited advance notice and could have a material adverse effect on our results
of operations in any particular period. A significant percentage of our expenses
are relatively fixed and based in part on expectations of future net sales. The
16
inability to adjust spending quickly enough to compensate for any shortfall
would magnify the adverse impact of a shortfall in net sales on our results of
operations. Factors that could cause fluctuations in our net sales include:
- the timing of the receipt of orders from major customers;
- shipment delays;
- disruption in sources of supply;
- seasonal variations of capital spending by customers;
- production capacity constraints; and
- specific features requested by customers.
In addition, our quarterly operating results may be adversely affected
due to charges incurred in a particular quarter, for example, relating to
inventory obsolescence, bad debt or asset impairments.
As a result of the factors discussed above, it is likely that we may in
the future experience quarterly or annual fluctuations and that, in one or more
future quarters, our operating results may fall below the expectations of public
market analysts or investors. In any such event, the price of our common stock
could decline significantly.
THE LOSS OF NET SALES TO ANY ONE OF OUR MAJOR CUSTOMERS WOULD LIKELY HAVE A
MATERIAL ADVERSE EFFECT ON US.
Our top ten customers accounted for approximately 42%, 49% and 39% of
our net sales for the years ended December 31, 2003, 2002 and 2001,
respectively. The loss of a major customer or any reduction in orders by these
customers, including reductions due to market or competitive conditions, would
likely have a material adverse effect on our business, financial condition and
results of operations. During the years ended December 31, 2003, 2002 and 2001,
one customer, Applied Materials, accounted for approximately 18%, 23% and 18%,
respectively, of our net sales. None of our significant customers, including
Applied Materials, has entered into an agreement requiring it to purchase any
minimum quantity of our products. The demand for our products from our
semiconductor capital equipment customers depends in part on orders received by
them from their semiconductor device manufacturer customers.
Attempts to lessen the adverse effect of any loss or reduction of net
sales through the rapid addition of new customers could be difficult because
prospective customers typically require lengthy qualification periods prior to
placing volume orders with a new supplier. Our future success will continue to
depend upon:
- our ability to maintain relationships with existing key customers;
- our ability to attract new customers;
- our ability to introduce new products in a timely manner for
existing and new customers; and
- the success of our customers in creating demand for their capital
equipment products which incorporate our products.
AS PART OF OUR BUSINESS STRATEGY, WE HAVE ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT
TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION.
We have made several acquisitions since 2000. As a part of our business
strategy, we may enter into additional business combinations and acquisitions.
Acquisitions are typically accompanied by a number of risks, including the
difficulty of integrating the operations and personnel of the acquired
companies, the potential disruption of our ongoing business and distraction of
management, expenses related to the acquisition and potential unknown
liabilities associated with acquired businesses.
17
As a result of our acquisitions, we have added several different
decentralized accounting systems, resulting in a complex reporting environment.
We expect that we will need to continue to modify our accounting policies,
internal controls, procedures and compliance programs to provide consistency
across all our operations.
If we are not successful in completing acquisitions that we may pursue
in the future, we may be required to reevaluate our growth strategy, and we may
incur substantial expenses and devote significant management time and resources
in seeking to complete proposed acquisitions that will not generate benefits for
us.
In addition, with future acquisitions, we could use substantial
portions of our available cash as all or a portion of the purchase price. We
could also issue additional securities as consideration for these acquisitions,
which could cause significant stockholder dilution. Our recent acquisitions and
any future acquisitions may not ultimately help us achieve our strategic goals
and may pose other risks to us.
AN INABILITY TO CONVINCE SEMICONDUCTOR DEVICE MANUFACTURERS TO SPECIFY THE USE
OF OUR PRODUCTS TO OUR CUSTOMERS, THAT ARE SEMICONDUCTOR CAPITAL EQUIPMENT
MANUFACTURERS, WOULD WEAKEN OUR COMPETITIVE POSITION.
The markets for our products are highly competitive. Our competitive
success often depends upon factors outside of our control. For example, in some
cases, particularly with respect to mass flow controllers, semiconductor device
manufacturers may direct semiconductor capital equipment manufacturers to use a
specified supplier's product in their equipment. Accordingly, for such products,
our success will depend in part on our ability to have semiconductor device
manufacturers specify that our products be used at their semiconductor
fabrication facilities. In addition, we may encounter difficulties in changing
established relationships of competitors that already have a large installed
base of products within such semiconductor fabrication facilities.
IF OUR PRODUCTS ARE NOT DESIGNED INTO SUCCESSIVE GENERATIONS OF OUR CUSTOMERS'
PRODUCTS, WE WILL LOSE SIGNIFICANT NET SALES DURING THE LIFESPAN OF THOSE
PRODUCTS.
New products designed by semiconductor capital equipment manufacturers
typically have a lifespan of five to ten years. Our success depends on our
products being designed into new generations of equipment for the semiconductor
industry. We must develop products that are technologically current so that they
are positioned to be chosen for use in each successive generation of
semiconductor capital equipment. If customers do not choose our products, our
net sales may be reduced during the lifespan of our customers' products. In
addition, we must make a significant capital investment to develop products for
our customers well before our products are introduced and before we can be sure
that we will recover our capital investment through sales to the customers in
significant volume. We are thus also at risk during the development phase that
our products may fail to meet our customers' technical or cost requirements and
may be replaced by a competitive product or alternative technology solution. If
that happens, we may be unable to recover our development costs.
THE SEMICONDUCTOR INDUSTRY IS SUBJECT TO RAPID DEMAND SHIFTS WHICH ARE DIFFICULT
TO PREDICT. AS A RESULT, OUR INABILITY TO EXPAND OUR MANUFACTURING CAPACITY IN
RESPONSE TO THESE RAPID SHIFTS MAY CAUSE A REDUCTION IN OUR MARKET SHARE.
Our ability to increase sales of certain products depends in part upon
our ability to expand our manufacturing capacity for such products in a timely
manner. If we are unable to expand our manufacturing capacity on a timely basis
or to manage such expansion effectively, our customers could implement our
competitors' products and, as a result, our market share could be reduced.
Because the semiconductor industry is subject to rapid demand shifts which are
difficult to foresee, we may not be able to increase capacity quickly enough to
respond to a rapid increase in demand in the semiconductor industry.
Additionally, capacity expansion could increase our fixed operating expenses and
if sales levels do not increase to offset the additional expense levels
associated with any such expansion, our business, financial condition and
results of operations could be materially adversely affected.
18
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY.
The market for our products is highly competitive. Principal
competitive factors include:
- historical customer relationships;
- product quality, performance and price;
- breadth of product line;
- manufacturing capabilities; and
- customer service and support.
Although we believe that we compete favorably with respect to these
factors, there can be no assurance that we will continue to do so. We encounter
substantial competition in most of our product lines. Certain of our competitors
may have greater financial and other resources than we have. In some cases,
competitors are smaller than we are, but well established in specific product
niches. We may encounter difficulties in changing established relationships of
competitors with a large installed base of products at such customers'
fabrication facilities. In addition, our competitors can be expected to continue
to improve the design and performance of their products. There can be no
assurance that competitors will not develop products that offer price or
performance features superior to those of our products.
SALES TO FOREIGN MARKETS CONSTITUTE A SUBSTANTIAL PORTION OF OUR NET SALES;
THEREFORE, OUR NET SALES AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED
BY DOWNTURNS IN ECONOMIC CONDITIONS IN COUNTRIES OUTSIDE OF THE UNITED STATES.
International sales include sales by our foreign subsidiaries, but
exclude direct export sales, which were less than 10% of our total net sales for
each of the years ended December 31, 2003, 2002 and 2001. International sales
accounted for approximately 41%, 36% and 31% of net sales for the years ended
December 31, 2003, 2002 and 2001, respectively, a significant portion of which
were sales to Japan.
We anticipate that international sales will continue to account for a
significant portion of our net sales. In addition, certain of our key domestic
customers derive a significant portion of their revenues from sales in
international markets. Therefore, our sales and results of operations could be
adversely affected by economic slowdowns and other risks associated with
international sales.
RISKS RELATING TO OUR INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
We have substantial international sales, service and manufacturing
operations in Europe and Asia, which exposes us to foreign operational and
political risks that may harm our business. Our international operations are
subject to inherent risks, which may adversely affect us, including:
- political and economic instability in countries where we have
sales, service and manufacturing operations, particularly in Asia;
- fluctuations in the value of currencies and high levels of
inflation, particularly in Asia and Europe;
- changes in labor conditions and difficulties in staffing and
managing foreign operations, including, but not limited to, labor
unions;
- greater difficulty in collecting accounts receivable and longer
payment cycles;
- burdens and costs of compliance with a variety of foreign laws;
- increases in duties and taxation;
19
- imposition of restrictions on currency conversion or the transfer
of funds;
- changes in export duties and limitations on imports or exports;
- expropriation of private enterprises; and
- unexpected changes in foreign regulations.
If any of these risks materialize, our operating results may be adversely
affected.
UNFAVORABLE CURRENCY EXCHANGE RATE FLUCTUATIONS MAY LEAD TO LOWER GROSS MARGINS,
OR MAY CAUSE US TO RAISE PRICES WHICH COULD RESULT IN REDUCED SALES.
Currency exchange rate fluctuations could have an adverse effect on our
net sales and results of operations and we could experience losses with respect
to our hedging activities. Unfavorable currency fluctuations could require us to
increase prices to foreign customers which could result in lower net sales by us
to such customers. Alternatively, if we do not adjust the prices for our
products in response to unfavorable currency fluctuations, our results of
operations could be adversely affected. In addition, most sales made by our
foreign subsidiaries are denominated in the currency of the country in which
these products are sold and the currency they receive in payment for such sales
could be less valuable at the time of receipt as a result of exchange rate
fluctuations. We enter into forward exchange contracts and local currency
purchased options to reduce currency exposure arising from intercompany sales of
inventory. However, we cannot be certain that our efforts will be adequate to
protect us against significant currency fluctuations or that such efforts will
not expose us to additional exchange rate risks.
KEY PERSONNEL MAY BE DIFFICULT TO ATTRACT AND RETAIN.
Our success depends to a large extent upon the efforts and abilities of
a number of key employees and officers, particularly those with expertise in the
semiconductor manufacturing and similar industrial manufacturing industries. The
loss of key employees or officers could have a material adverse effect on our
business, financial condition and results of operations. We believe that our
future success will depend in part on our ability to attract and retain highly
skilled technical, financial, managerial and marketing personnel. We cannot be
certain that we will be successful in attracting and retaining such personnel.
OUR PROPRIETARY TECHNOLOGY IS IMPORTANT TO THE CONTINUED SUCCESS OF OUR
BUSINESS. OUR FAILURE TO PROTECT THIS PROPRIETARY TECHNOLOGY MAY SIGNIFICANTLY
IMPAIR OUR COMPETITIVE POSITION.
As of December 31, 2003, we owned 194 U.S. patents, 123 foreign patents
and had 84 pending U.S. patent applications. Although we seek to protect our
intellectual property rights through patents, copyrights, trade secrets and
other measures, we cannot be certain that:
- we will be able to protect our technology adequately;
- competitors will not be able to develop similar technology
independently;
- any of our pending patent applications will be issued;
- intellectual property laws will protect our intellectual property
rights; or
- third parties will not assert that our products infringe patent,
copyright or trade secrets of such parties.
20
PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS MAY RESULT IN COSTLY LITIGATION.
Litigation may be necessary in order to enforce our patents, copyrights
or other intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. We have been in the past, and currently
are, involved in lawsuits enforcing and defending our intellectual property
rights and may be involved in such litigation in the future. Such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on our business, financial condition and results of
operations.
We may need to expend significant time and expense to protect our
intellectual property regardless of the validity or successful outcome of such
intellectual property claims. If we lose any litigation, we may be required to
seek licenses from others or change, stop manufacturing or stop selling some of
our products.
THE MARKET PRICE OF OUR COMMON STOCK HAS FLUCTUATED AND MAY CONTINUE TO
FLUCTUATE FOR REASONS OVER WHICH WE HAVE NO CONTROL.
The stock market has from time to time experienced, and is likely to
continue to experience, extreme price and volume fluctuations. Prices of
securities of technology companies have been especially volatile and have often
fluctuated for reasons that are unrelated to the operating performance of the
companies. The market price of shares of our common stock has fluctuated greatly
since our initial public offering and could continue to fluctuate due to a
variety of factors. In the past, companies that have experienced volatility in
the market price of their stock have been the objects of securities class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs and a diversion of our management's attention
and resources.
OUR DEPENDENCE ON SOLE, LIMITED SOURCE SUPPLIERS, AND INTERNATIONAL SUPPLIERS,
COULD AFFECT OUR ABILITY TO MANUFACTURE PRODUCTS AND SYSTEMS.
We rely on sole, limited source suppliers, and international suppliers,
for a few of our components and subassemblies that are critical to the
manufacturing of our products. This reliance involves several risks, including
the following:
- the potential inability to obtain an adequate supply of required
components;
- reduced control over pricing and timing of delivery of components;
and
- the potential inability of our suppliers to develop
technologically advanced products to support our growth and
development of new systems.
We believe that in time we could obtain and qualify alternative sources
for most sole, limited source and international supplier parts. Seeking
alternative sources of the parts could require us to redesign our systems,
resulting in increased costs and likely shipping delays. We may be unable to
redesign our systems, which could result in further costs and shipping delays.
These increased costs would decrease our profit margins if we could not pass the
costs to our customers. Further, shipping delays could damage our relationships
with current and potential customers and have a material adverse effect on our
business and results of operations.
WE ARE SUBJECT TO GOVERNMENTAL REGULATIONS. IF WE FAIL TO COMPLY WITH THESE
REGULATIONS, OUR BUSINESS COULD BE HARMED.
We are subject to federal, state, local and foreign regulations,
including environmental regulations and regulations relating to the design and
operation of our power supply products. We must ensure that these systems meet
certain safety standards, many of which vary across the countries in which our
systems are used. For example, the European Union has published directives
specifically relating to power supplies. We must comply with these directives in
order to ship our systems into countries that are members of the European Union.
We believe we are in compliance with current applicable regulations, directives
and standards and have obtained all necessary permits, approvals, and
authorizations to conduct our business. However, compliance with future
regulations, directives and standards could require us to modify or redesign
21
certain systems, make capital expenditures or incur substantial costs. If we do
not comply with current or future regulations, directives and standards:
- we could be subject to fines;
- our production could be suspended; or
- we could be prohibited from offering particular systems in
specified markets.
CERTAIN STOCKHOLDERS HAVE A SUBSTANTIAL INTEREST IN US AND MAY BE ABLE TO EXERT
SUBSTANTIAL INFLUENCE OVER OUR ACTIONS.
As of January 31, 2004, John R. Bertucci, our Chairman and Chief
Executive Officer and certain members of his family, in the aggregate,
beneficially owned approximately 18% of our outstanding common stock. As a
result, these stockholders, acting together, are able to exert substantial
influence over our actions. Pursuant to the acquisition of the ENI Business of
Emerson Electric Co. ("Emerson"), we issued approximately 12,000,000 shares of
common stock to Emerson and its wholly owned subsidiary, Astec America, Inc.
Emerson owned approximately 19% of our outstanding common stock as of January
31, 2004, and James G. Berges, the President and a director of Emerson, is a
member of our board of directors. Accordingly, Emerson is able to exert
substantial influence over our actions.
SOME PROVISIONS OF OUR RESTATED ARTICLES OF ORGANIZATION, AS AMENDED, OUR
AMENDED AND RESTATED BY-LAWS AND MASSACHUSETTS LAW COULD DISCOURAGE POTENTIAL
ACQUISITION PROPOSALS AND COULD DELAY OR PREVENT A CHANGE IN CONTROL OF US.
Anti-takeover provisions could diminish the opportunities for
stockholders to participate in tender offers, including tender offers at a price
above the then current market price of the common stock. Such provisions may
also inhibit increases in the market price of the common stock that could result
from takeover attempts. For example, while we have no present plans to issue any
preferred stock, our board of directors, without further stockholder approval,
may issue preferred stock that could have the effect of delaying, deterring or
preventing a change in control of us. The issuance of preferred stock could
adversely affect the voting power of the holders of our common stock, including
the loss of voting control to others. In addition, our amended and restated
by-laws provide for a classified board of directors consisting of three classes.
The classified board could also have the effect of delaying, deterring or
preventing a change in control of us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information concerning market risk is contained in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 11, 2004. We enter into local currency purchased
options and forward exchange contracts to reduce currency exposure arising from
intercompany sales of inventory. There were no material changes in our exposure
to market risk from December 31, 2003.
We have performed an analysis to assess the potential financial effect
of reasonably possible near-term changes in interest and foreign currency
exchange rates. Based upon our analysis, the effect of such rate changes in not
expected to be material to our financial condition, results of operations or
cash flows.
ITEM 4. CONTROLS AND PROCEDURES.
a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our principal executive
officer and principal financial officer, has evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on this evaluation, our principal executive officer and principal
financial officer concluded that these disclosure controls and procedures are
effective and designed to ensure that the information required
22
to be disclosed in our reports filed or submitted under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the requisite
time periods.
While our disclosure controls and procedures provide reasonable
assurance that the appropriate information will be available on a timely basis,
this assurance is subject to limitations inherent in any control system, no
matter how well designed and administered.
b) Changes in internal controls.
There were no changes in our internal control over financial reporting
identified in connection with the evaluation of our internal control performed
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
As a result of recent acquisitions, we have added several different
decentralized accounting systems, resulting in a complex reporting environment.
We expect that we will need to continue to modify our accounting policies,
internal controls, procedures and compliance programs to provide consistency
across all of our operations.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 12, 2004, Gas Research Institute ("GRI") brought suit in
federal district court in Illinois against us, On-Line Technologies, Inc., which
was acquired by us in April 2001, and another defendant for breach of contract,
misappropriation of trade secrets and related claims relating to certain
infra-red gas analysis technology allegedly developed under a January 1995
Contract for Research and incorporated into certain of our products. GRI has
made claims for damages, exemplary damages, attorney's fees and costs and
injunctive relief. We are currently evaluating the merits of the claims. We
cannot be certain of the outcome of this litigation, but we plan to oppose the
claims against us vigorously.
On April 3, 2003, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against us in federal district court in Colorado ("Colorado Action"),
seeking a declaratory judgment that Advanced Energy's Xstream product does not
infringe three patents held by our subsidiary Applied Science and Technology,
Inc. ("ASTeX"). On May 14, 2003, we brought suit in federal district court in
Delaware against Advanced Energy for infringement of five ASTeX patents,
including the three patents at issue in the Colorado Action. We seek injunctive
relief and damages for Advanced Energy's infringement. On December 24, 2003, the
Colorado court granted our motion to transfer Advanced Energy's Colorado suit to
Delaware and on February 9, 2004, the Delaware court denied Advanced Energy's
motion to dismiss or transfer our Delaware case back to Colorado. Fact discovery
has now closed, and the case is scheduled for trial in July 2004.
On November 3, 1999, On-Line Technologies, Inc. brought suit in federal
district court in Connecticut against Perkin-Elmer, Inc. and certain other
defendants for infringement of On-Line's patent related to its FTIR spectrometer
product. The suit sought injunctive relief and damages for infringement.
Perkin-Elmer, Inc. filed a counterclaim seeking invalidity of the patent, costs,
and attorneys' fees. In June 2002, the defendants filed a motion for summary
judgment. In April 2003, the court granted the motion and dismissed the case. We
have appealed this decision and are awaiting a date for argument in the federal
circuit court of appeals.
We are subject to other legal proceedings and claims, which have arisen
in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on our results of operations, financial
condition or cash flows.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Exhibit Description
----------- -------------------
31.1 Certification of Principal Executive Officer
pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended
31.2 Certification of Principal Financial Officer
pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended
32.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On January 7, 2004, the Company filed a Current Report on Form 8-K
under Item 12 furnishing a press release announcing that the Company had raised
its guidance for the quarter ended December 31, 2003.
On January 15, 2004, the Company filed a Current Report on Form 8-K for
the purpose of filing under Item 5 and Item 7 relating to the effectiveness of
the Company's Registration Statements on Form S-3 (File Nos. 333-34450 and
333-109753) and filing the Company's press release announcing the pricing of its
common stock offering and filing the purchase agreement with its underwriters in
connection with such offering.
On January 15, 2004, the Company filed a Current Report on Form 8-K
under Item 5 disclosing that Gas Research Institute had brought suit in federal
district court in Illinois against the Company, On-Line Technologies, Inc. and
another defendant.
On February 3, 2004, the Company filed a Current Report on Form 8-K
under Item 12 furnishing a press release announcing its financial results for
the quarter ended and year ended December 31, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MKS INSTRUMENTS, INC.
May 5, 2004 By: /s/ Ronald C. Weigner
------------------------------------------
Ronald C. Weigner
Vice President and Chief Financial Officer
(Principal Financial Officer)
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