MKS Instruments, Inc. — Q2 2013 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. MKS supplies instruments, subsystems and process-control solutions for advanced manufacturing, with significant exposure to semiconductor markets. About 65% of revenue in each first-half period came from semiconductor capital-equipment and device customers.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $156.9m | $177.4m | $298.6m | $368.3m |
| Gross profit / margin | $62.0m / 39.5% | $76.5m / 43.1% | $116.7m / 39.1% | $160.3m / 43.5% |
| Operating income / margin | $10.4m / 6.7% | $27.8m / 15.7% | $15.1m / 5.1% | $61.2m / 16.6% |
| Net income | $7.3m | $18.6m | $13.1m | $41.3m |
| Diluted EPS | $0.14 | $0.35 | $0.25 | $0.78 |
| Operating cash flow | — | $5.6m | $82.0m |
- Q2 revenue fell 11.5% year over year; first-half revenue fell 18.9%. Product revenue declined 11.0% in Q2 and 20.5% in the first half; service revenue declined 14.6% and 10.0%, respectively.
- Profitability weakened: gross margin fell 3.6 percentage points in Q2 and 4.4 points in the first half. Management attributed product-margin pressure mainly to unfavorable mix; service margins also faced lower volume, mix, foreign-exchange and overhead impacts.
- First-half operating cash flow was $5.6m, versus $82.0m a year earlier. Receivables, inventory and other current assets absorbed cash as business levels increased. Capital expenditures were $6.4m, so operating cash flow less capital expenditures was negative $0.7m.
- At June 30, cash and cash equivalents were $235.7m and short-term investments $346.7m, totaling $582.4m, versus $615.2m at year-end 2012. Current assets were $861.7m against current liabilities of $79.6m. No borrowings were outstanding; acquired-company debt facilities were paid off and terminated in Q2.
- Total assets were $1.13bn and stockholders’ equity $1.00bn. The company paid $17.0m in first-half dividends and repurchased $2.9m of shares. A further $0.16-per-share quarterly dividend was declared after quarter-end.
Changes and management commentary
- Semiconductor customer revenue declined 20% in the first half year over year. Management said semiconductor revenue increased sequentially in both Q1 and Q2 after stabilizing in late 2012, but emphasized that industry demand shifts are difficult to predict.
- Revenue from other advanced markets declined 18% in the first half; solar revenue fell 76%, which management linked to industry oversupply. Japan’s lower volumes and a weaker yen contributed to lower international revenue. International revenue was 45.9% of first-half sales, compared with 49.4% in 2012.
- Q2 segment revenue declined year over year across the reported segments: Advanced Manufacturing Capital Equipment 7.2%, Analytical Solutions Group 19.2%, Europe Sales & Service 5.2%, and Asia Sales & Service 22.3%.
- Management provided no specific revenue or earnings guidance. It expects continued significant investment in R&D and stated that future demand in semiconductor equipment markets remains uncertain.
Unusual items, risks and contingencies
- Q2 included a $1.1m insurance recovery related to a 2012 litigation settlement. The company also recorded $0.2m of restructuring charges, primarily severance for consolidating two sites.
- Alter Power Systems was acquired in March 2013 for a net purchase price of approximately $2.4m. The acquisition added microwave-power technology and products; remaining payment is subject to a holdback condition.
- First-half effective tax rate was 16.2%, versus 32.9% in 2012, partly due to geographic income mix and tax incentives recognized in Q1. Gross unrecognized tax benefits were approximately $42.0m; the company disclosed an IRS examination of 2007–2009 federal tax filings and uncertainty over the resolution of tax positions.
- Foreign-exchange exposure is managed in part with forward contracts. Management reported no material change in market-risk exposure from year-end 2012. The filing reported no material changes to previously disclosed risk factors and no material adverse effect expected from ordinary-course legal proceedings.
- Management stated that U.S. cash and short-term investments were adequate for domestic operating needs and foreseeable dividends and repurchases. Approximately $260m of cash and short-term investments were held by foreign subsidiaries and would be substantially subject to U.S. tax if repatriated.
Important facts for investors to verify
- Whether sequential semiconductor-market improvement continued and translated into stronger orders and revenue, given the company’s demand uncertainty and customer concentration.
- Whether revenue declines and weaker gross margins stabilized, particularly in Asia and solar-exposed markets.
- Whether working-capital investment continues to suppress operating cash flow despite substantial cash and investment balances.
- How tax audits and uncertain tax positions resolve, including the potential effective-tax-rate impact.
- Whether the Alter acquisition and site consolidation deliver the expected benefits without additional costs.