MKS Instruments, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the same 2009 periods. Unaudited figures below are in USD millions, except per-share data and percentages.
Business context
MKS supplies instruments, subsystems and process-control solutions for advanced manufacturing, with semiconductor equipment and device customers a major market. The company reports as one operating segment. It sold Ion Systems in May and Yield Dynamics in August 2010, classifying both businesses as discontinued operations.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $221.3 | $102.0 | $634.1 | $249.9 |
| Gross profit / margin | $98.5 / 44.5% | $37.9 / 37.1% | $281.3 / 44.4% | $70.6 / 28.3% |
| Operating income (loss) | $54.9 | $2.6 | $147.1 | ($191.6) |
| Continuing-operations income (loss) | $36.6 | ($2.4) | $98.7 | ($163.8) |
| Net income (loss) | $38.6 | ($4.0) | $106.6 | ($227.6) |
| Diluted EPS | $0.76 | ($0.08) | $2.10 | ($4.62) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $76.3 | ($4.3) |
Q3 revenue grew 116.9% year over year; nine-month revenue grew 153.7%. Product revenue was the main driver: semiconductor capital-equipment and device customers’ product revenue rose 193.6% in Q3 and 313.2% year to date. Gross-margin improvement reflected higher volumes and fixed-cost absorption, favorable product mix and lower excess-inventory charges compared with 2009.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $130.0 at September 30, 2010; short-term investments were $213.7. Combined, these totaled $343.7, versus $271.8 at December 31, 2009.
- Total assets were $935.6 and stockholders’ equity was $801.7. Current assets were $707.9 against current liabilities of $110.2.
- Short-term borrowings were $9.6, down from $12.9 at year-end 2009; no long-term debt is presented. Japanese subsidiary credit arrangements allowed borrowings of up to $29.9 and generally renewed every three months.
- Nine-month investing cash outflow was $55.7, including net purchases of investments and $11.4 in capital expenditures, partly offset by $15.6 of divestiture proceeds. Financing cash outflow was $1.2.
- Receivables rose to $155.6 from $94.2 and inventories to $152.1 from $118.0, reflecting higher business activity. Management attributed operating cash generation partly to higher accrued liabilities and accounts payable.
Changes, outlook and risks
- The 2010 recovery contrasted with 2009, when the company recorded substantial goodwill and asset impairment charges and restructuring costs. The 2009 nine-month loss included $143.0 of continuing-operations impairment charges; discontinued operations also included impairment charges. This makes year-over-year earnings comparisons unusually affected by prior-year items.
- The Ion and YDI sales generated $15.6 of net proceeds and a combined $4.4 pretax gain. Discontinued operations contributed $7.9 of nine-month net income in 2010.
- Management said demand had improved across served markets; sales to other markets, including LED, medical, biopharm, environmental, thin-film and solar, grew year over year. It expected these markets to grow and represent a larger share of revenue. However, management cautioned that semiconductor equipment demand can shift rapidly and that timing and extent of further demand or weakness were uncertain.
- No specific earnings or revenue guidance was provided. Management believed cash and available borrowings would cover working capital and planned capital expenditures for at least the next 12 months.
- One customer represented 16% of revenue in both Q3 and the nine-month 2010 period. International sales were 43.1% of Q3 revenue and 42.2% year to date.
- Brooks Instruments filed three lawsuits alleging patent infringement, breach of contract and trade-secret violations; it seeks injunctive relief and damages but specified no dollar amount. MKS denies wrongdoing and filed counterclaims. Management viewed the cases as early-stage and did not expect the matters, overall, to materially adversely affect results, financial condition or cash flows.
- Gross unrecognized tax benefits were $11.8, excluding interest and penalties; the company noted that tax-authority outcomes could differ materially from its estimates. Foreign-exchange exposure is managed in part with forward contracts; their net fair value was a $3.3 liability at quarter-end.
Key facts for investors to verify
- Whether rapid revenue growth and stronger gross margins continued after Q3, particularly given the semiconductor industry’s demand volatility.
- How receivables and inventory growth convert to cash, and whether operating cash flow remains strong as working-capital needs evolve.
- Actual revenue contribution and profitability of semiconductor customers versus emerging and other markets, including the impact of the 16% customer concentration.
- Any developments in the Brooks litigation, uncertain tax positions, or the renewing Japanese credit arrangements.
- Comparability of reported earnings: prior-year impairment and restructuring charges, the 2010 divestiture gains, and the reclassification of Ion and YDI results to discontinued operations.