MKS Instruments, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. Dollar amounts below are in millions unless otherwise noted.
Business context and reporting period
MKS supplies instruments, subsystems and process-control solutions used in semiconductor and other advanced manufacturing markets. Semiconductor capital-equipment and device customers represented approximately 65% of six-month sales, versus 62% in the prior-year period; international sales were approximately 49%, versus 52%. The company changed from one to four reportable segments in Q2 2012, which investors should consider when comparing segment disclosures.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $177.4 | $224.5 | $368.3 | $456.3 |
| Gross profit | $76.5 | $105.0 | $160.3 | $211.3 |
| Gross margin | 43.1% | 46.8% | 43.5% | 46.3% |
| Operating income | $27.8 | $57.3 | $61.2 | $113.8 |
| Net income | $18.6 | $38.6 | $41.3 | $76.6 |
| Diluted EPS | $0.35 | $0.73 | $0.78 | $1.46 |
- Revenue fell 21.0% in Q2 and 19.3% for the first half year over year. Product revenue declined 25.1% and 22.9%, respectively, while service revenue grew 10.9% and 9.5%.
- Operating margin was 15.7% in Q2 versus 25.5% a year earlier, and 16.6% for the first half versus 25.0%. Lower volumes, higher inventory-related charges and overhead, and unfavorable foreign exchange pressured product margins.
- Six-month operating cash flow was $82.0, compared with $58.7 in 2011. Management attributed 2012 cash generation primarily to net income, non-cash charges and an $18.0 decrease in working capital.
- Cash, cash equivalents and short-term investments totaled $605.6 at June 30, 2012, versus $565.5 at December 31, 2011. Current assets were $891.6 and current liabilities $84.6. No borrowings were outstanding at quarter-end; a Japanese subsidiary had credit lines available up to approximately $31.5 at an average rate of 0.65%.
- Six-month capital expenditures were $8.0; dividends paid were $15.8; and $5.0 was spent repurchasing shares. The board declared a subsequent quarterly dividend of $0.16 per share, up from $0.15.
Material changes and management commentary
- Management cited worldwide economic uncertainty, slower consumer spending and lower electronics demand as factors weakening semiconductor orders and sales. Six-month semiconductor-market revenue declined 14%; management said the timing and extent of future demand were uncertain.
- Revenue in other advanced markets declined 27% for the first half, primarily due to solar and LED markets, which together fell 62% as manufacturers used existing capacity. Non-semiconductor markets excluding solar and LED declined 6%.
- Advanced Manufacturing Capital Equipment revenue fell 29.0% in Q2; Europe Sales and Service fell 40.0%. Analytical Solutions Group revenue increased 12.1%, with management citing sales to semiconductor device manufacturers.
- Management said current cash and available borrowings should cover working capital and planned capital expenditures for the next 12 months and foreseeable future. No specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- An employee of the Shanghai subsidiary was arrested in May 2012 in a U.S. government investigation involving alleged export-license violations for certain pressure transducers. The company said it was not a target, was cooperating and conducting its own investigation; possible outcomes include fines, penalties or export restrictions, and disruption could affect the Shanghai sales office.
- The IRS began examining U.S. federal tax filings for open years through 2009. Gross unrecognized tax benefits were approximately $37.5 at June 30, 2012; the company noted that outcomes could differ materially from recorded positions.
- A former shareholder of a former subsidiary sued the company and affiliates, seeking unspecified damages and equitable relief. Management intends to defend the case and did not expect a material effect on financial position or liquidity, but could not rule out a material loss in an individual reporting period.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Investor facts to verify
- Whether semiconductor demand, product volumes and gross margins stabilized after the reported Q2 weakness.
- Developments and any financial or operating consequences from the Shanghai export investigation.
- Resolution of the IRS examination and uncertain tax positions, including potential effects on the effective tax rate.
- Progress and potential outcomes of the former-shareholder lawsuit.
- Cash conversion and inventory charges: six-month operating cash flow improved despite sharply lower earnings, while the filing reports an $8.4 inventory-obsolescence provision.