MKS Instruments, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results; amounts in U.S. dollars unless noted.
Business context
MKS supplies instruments, systems and process-control solutions for semiconductor, industrial technology, life and health sciences, and research and defense markets. It reports three segments: Vacuum & Analysis (V&A), Light & Motion (L&M), and Equipment & Solutions (E&S). Semiconductor customers generated approximately 61% of revenue in the first nine months of 2021. Lam Research represented 18.4% of Q3 revenue; Applied Materials represented 10.6%.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $741.9m | $589.8m | $2,185.7m | $1,669.8m |
| Gross profit / margin | $348.4m / 47.0% | $262.0m / 44.4% | $1,025.7m / 46.9% | $747.9m / 44.8% |
| Operating income / margin | $175.3m / 23.6% | $116.4m / 19.8% | $517.1m / 23.7% | $307.1m / 18.4% |
| Net income | $132.4m | $91.7m | $401.2m | $234.5m |
| Diluted EPS | $2.38 | $1.66 | $7.21 | $4.24 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $445.2m | $366.0m |
| Capital expenditures | $20.5m | $29.0m | $63.3m | $59.9m |
Q3 revenue increased 26% year over year and nine-month revenue increased 31%. Net income rose 44% and 71%, respectively. Q3 gross margin expanded 2.6 percentage points; management attributed improvement mainly to volume and favorable product mix, partly offset by higher freight, duties, consumables and unfavorable overhead absorption.
At September 30, cash and cash equivalents were $633.3m and short-term investments were $246.3m, totaling $879.6m. Current assets were $1,994.9m versus current liabilities of $437.1m. Debt carrying value was $818.7m ($9.0m short-term and $809.7m long-term, net); stated Term Loan principal was $826.7m, at 1.8% interest, with maturity in February 2026. The company reported compliance with loan covenants and no ABL borrowings. Nine-month operating cash flow was $445.2m; investing cash outflow was $351.2m and financing cash outflow was $61.7m. Cash increased $25.0m from year-end 2020.
Material changes and unusual items
- Revenue growth was led by V&A: Q3 revenue was $483.1m versus $361.3m a year earlier. L&M generated $208.7m versus $175.9m; E&S declined to $50.1m from $52.6m. For nine months, all segments grew, with V&A the largest contributor.
- Product and service gross margins improved year over year. Operating expenses also increased: nine-month acquisition and integration costs were $20.8m versus $3.4m, and R&D was $148.9m versus $127.7m.
- Other expense was $11.5m for the first nine months, including a $10.3m fair-value loss on Canadian-dollar hedges related to the Photon Control purchase.
- MKS completed its Photon Control acquisition on July 15, 2021, paying $302.7m in cash, funded from existing cash. Photon Control contributed $14.8m of L&M revenue during Q3 and was not material to reported results overall.
- Dividends declared totaled $0.64 per share in the first nine months, versus $0.60 in the comparable 2020 period. No shares were repurchased.
Outlook, risks and contingencies
- The filing gives no quantified revenue or earnings guidance. Management expected supply-chain disruptions and component shortages to continue in the near term and said they could negatively affect revenue in the quarter ending December 31, 2021.
- MKS agreed to acquire Atotech for approximately $5.1bn in cash and stock, subject to regulatory, court and shareholder approvals; it expected closing by year-end 2021. The transaction was not subject to a financing condition. A $5.3bn term-loan commitment and $500m revolving commitment were arranged; the term-loan syndication was completed October 22, after quarter-end. The expected debt load, financing terms, integration, execution and entry into chemicals technology were identified risks.
- Other disclosed risks include semiconductor-capital-spending volatility, customer concentration, international operations, rapid technology change, supply constraints, acquisition integration and the ability to meet demand. Foreign sales were approximately 58% of nine-month revenue.
- A class-action appeal related to the 2016 Newport merger remained pending, with oral argument scheduled for December 15, 2021. Management stated that the legal matters were not expected to have a material adverse effect.
- Management noted that a proposed U.S. corporate tax-rate increase, if enacted as described, could materially increase income tax expense.
Important facts for investors to verify
- Whether semiconductor demand and supply-chain constraints affected Q4 shipments, margins and working capital.
- Atotech closing status, final financing terms, resulting leverage and debt-service capacity.
- Photon Control purchase-accounting estimates, integration costs and contribution to future results.
- Customer concentration and exposure to semiconductor capital-spending cycles, especially Lam Research.
- Developments in the Newport litigation appeal, tax proposals and any changes to the company’s outlook.