MKS Instruments, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2014. MKS develops, manufactures, sells and services instruments and process-control solutions used in semiconductor and other advanced manufacturing markets. Semiconductor capital-equipment and device customers accounted for approximately 73% of revenue, up from 63% a year earlier.
Key financial results
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $206.4 million | $141.6 million; up 45.7% |
| Product revenue | $181.2 million | $116.6 million; up 55.4% |
| Service revenue | $25.2 million | $25.0 million; up 0.5% |
| Gross profit and margin | $89.4 million; 43.3% | $54.7 million; 38.6% |
| Operating income and margin | $37.8 million; 18.3% | $4.7 million; 3.3% |
| Net income and diluted EPS | $31.2 million; $0.58 | $5.8 million; $0.11 |
| Operating cash flow | $9.9 million | $2.5 million |
| Cash and cash equivalents | $287.1 million at March 31 | $288.9 million at December 31, 2013 |
| Short-term investments | $306.5 million at March 31 | $300.7 million at December 31, 2013 |
All dollar amounts are U.S. dollars. The company also held $53.6 million of long-term investments at March 31, 2014. It reported no borrowings outstanding under its Japanese credit arrangements; those facilities allowed aggregate borrowing of up to approximately $22.5 million. Current assets were $895.6 million and current liabilities were $116.2 million.
Changes versus the prior comparable period
- Revenue growth was led by semiconductor-related product sales: revenue from semiconductor capital-equipment and device customers rose 67%, while product revenue to these customers increased 80.6%.
- Advanced Manufacturing Capital Equipment segment revenue rose 61.4%; Analytical Solutions Group revenue decreased 1.6%. Europe and Asia sales-and-service segment revenue rose 30.2% and 41.4%, respectively.
- Gross margin improved 4.7 percentage points, primarily as higher volumes lifted product margins. Product gross margin increased 5.2 points; service gross margin declined 1.2 points.
- Cash provided by operations increased to $9.9 million, but remained well below net income. Working-capital uses included increased inventory and receivables and decreases in accrued compensation, income taxes payable and accounts payable.
Outlook, management commentary, risks and unusual items
- Management said second-quarter semiconductor revenue could be lower than first-quarter revenue and noted that semiconductor-equipment demand shifts are difficult to predict. No numerical company-wide revenue or earnings guidance is provided.
- MKS agreed to acquire Granville-Phillips for $87 million in cash. The company expected the transaction to close in Q2 2014, subject to regulatory approval and customary closing conditions. Granville-Phillips reported approximately $30 million in 2013 sales.
- The quarter included $0.7 million of restructuring charges, primarily severance for a workforce reduction of approximately 65 people, and $0.2 million of acquisition costs. Certain Colorado facility land and buildings, valued at $1.4 million, were classified as held for sale.
- The 17.8% effective tax rate reflected, in part, a discrete release of tax reserves following settlement of a foreign tax examination and the geographic mix of earnings. Gross unrecognized tax benefits were approximately $42.8 million at quarter-end; the company cautioned that tax-authority assessments could differ materially from accrued positions.
- International revenue was 43.1% of total revenue. Two customers represented 20.3% and 13.1% of revenue, respectively. Management expects semiconductor and international markets to remain significant, leaving results exposed to demand shifts, customer concentration and foreign-exchange movements.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. The filing reported no material change in risk factors or market-risk exposure, and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the Granville-Phillips acquisition closed as expected, its final purchase accounting, and its effect on cash and future results.
- Whether semiconductor demand softened in Q2 as management cautioned, and whether revenue remains concentrated among a small number of customers.
- Whether operating cash flow improves relative to earnings, particularly as inventory and other working-capital balances change.
- Developments in uncertain tax positions, including the potential consequences of examinations and the tax implications of foreign-held cash.
- Progress and costs associated with the workforce reduction and Colorado facility disposal.