MKS Instruments, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; the ESI acquisition and related financing occurred after year-end, in February 2019.
Business context and performance
MKS supplies instruments, subsystems and process-control solutions for semiconductor manufacturing and other advanced manufacturing markets. Its 2018 reporting segments were Vacuum & Analysis and Light & Motion. Semiconductor equipment and device customers generated approximately 55% of annual revenue; international revenue was approximately 51%.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $2,075.1 million | $1,916.0 million | +8.3% |
| Gross profit / margin | $979.5 million / 47.2% | $891.5 million / 46.5% | +9.9%; +0.7 percentage points |
| Operating income / margin | $494.1 million / 23.8% | $406.6 million / 21.2% | +21.5%; +2.6 percentage points |
| Net income / diluted EPS | $392.9 million / $7.14 | $339.1 million / $6.16 | +15.9%; +15.9% |
| Cash from operations | $413.8 million | $355.2 million | +$58.6 million |
| Capital expenditures | $62.9 million | $31.3 million | +$31.6 million |
At year-end, cash and cash equivalents were $644.3 million and short-term investments were $73.8 million; working capital was $1.201 billion. Debt was $347.8 million on the balance sheet, including $344 million long-term, and term-loan principal outstanding was $348.5 million. The company reported $718.2 million of cash, cash equivalents and short-term investments combined.
Material changes and Q4 results
- Annual revenue increased $159.1 million. Advanced-market revenue grew 14%, while semiconductor-related revenue grew 4%; management attributed annual growth to strength in the first half and noted weaker semiconductor demand in the second half.
- Vacuum & Analysis revenue was $1,260.9 million, up 4.4%; Light & Motion revenue was $814.2 million, up 14.9%. Both segments reported higher gross margins.
- Fourth-quarter revenue was $460.5 million versus $511.8 million in Q4 2017, down 10.0%. Operating income was $94.1 million versus $120.0 million; net income was $71.6 million versus $77.6 million; diluted EPS was $1.32 versus $1.41.
- Operating cash flow rose year over year, but inventory increased $73.8 million and was the largest cited working-capital use. Inventory reached $384.7 million; excess and obsolete inventory charges were $22.3 million, up from $20.2 million.
Outlook, transactions and risks
- Management expected the semiconductor spending moderation seen in the second half of 2018 to continue into the first half of 2019. The filing provides no quantified earnings or revenue guidance.
- On February 1, 2019, MKS completed its approximately $1 billion cash acquisition of ESI, funded with cash and a new $650 million term-loan tranche. Total outstanding debt was approximately $998 million as of that date. MKS also replaced its $50 million asset-based facility with a secured revolving facility of up to $100 million, subject to borrowing-base limits. ESI was expected to add a third reporting segment.
- Key risks include semiconductor cyclicality and customer concentration (Applied Materials contributed 11.7% and Lam Research 10.8% of 2018 revenue), integration and realization of ESI benefits, increased leverage and variable-rate exposure, trade restrictions and tariffs, international operations, supply constraints, product warranties, and goodwill or intangible-asset impairment.
- ESI-related shareholder lawsuits were subject to a settlement in principle announced February 16, 2019; final settlement documentation and dismissal remained outstanding in the filing. Newport shareholder litigation also remained ongoing. Management said ordinary-course proceedings were not expected to materially affect results, financial condition or cash flows.
- Other notable items: 2018 included $3.6 million of restructuring costs, $3.1 million of acquisition and integration costs, and $1.0 million of environmental costs. The 2017 comparison included a $74.9 million pretax gain on the sale of the Data Analytics Solutions business. The 2018 effective tax rate was 18.3%, compared with 24.2% in 2017.
Important facts for investors to verify
- Post-acquisition debt, interest expense, covenant headroom and cash generation following the ESI financing.
- ESI integration progress, customer retention, expected synergies, purchase-price allocation and any acquired warranty or contingent liabilities.
- Whether semiconductor demand and backlog stabilize: backlog fell to $400 million from $464 million, and orders may be cancellable or delayed.
- Q1 and first-half 2019 results against management’s stated expectation of continued semiconductor-market moderation.
- Resolution and financial exposure of ESI and Newport litigation, as well as the costs associated with the Mountain View Superfund site.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported effective disclosure controls and internal controls as of December 31, 2018.