MKS Instruments, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Financial statement amounts below are in millions of dollars unless otherwise noted.
Business context
MKS supplies instruments, subsystems and process-control solutions for advanced manufacturing, including semiconductor equipment, thin-film applications, LEDs and solar. The company reports as one operating segment. Semiconductor capital-equipment and device customers accounted for an estimated 59% of Q1 sales. In 2010, MKS sold its Ion and YDI product lines; their prior-period results are presented as discontinued operations.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $231.9 | $192.2 |
| Gross profit / margin | $106.4 / 45.9% | $85.5 / 44.5% |
| Operating income / margin | $56.5 / 24.4% | $42.2 / 22.0% |
| Net income | $38.0 | $29.2 |
| Diluted EPS | $0.73 | $0.58 |
| Cash from operations | $26.8 | $16.7 |
- Revenue grew 20.7%; product revenue rose 21.3% and service revenue 15.7%. Other advanced markets grew 33.5%, including sales to a thin-film solar customer in China; semiconductor-related revenue increased 13.6%.
- Gross margin improved 1.4 percentage points. Management cited favorable product mix, higher volumes and foreign exchange, partly offset by higher overhead spending and excess/obsolete inventory charges.
- At March 31, cash and cash equivalents were $259.2; short-term investments $219.9; long-term marketable securities $1.3. Total cash and investments were $480.4, versus $431.9 at December 31, 2010.
- Current assets were $823.6 and current liabilities $110.1. Japanese subsidiary borrowings were $1.5 at 1.475%; available credit lines totaled about $30.2. No borrowings were outstanding at year-end 2010.
- Q1 investing cash flow was $46.4, principally reflecting net investment sales; capital expenditures were $2.3. Financing cash flow was $21.5, including stock-award proceeds and a $7.8 dividend payment.
Changes, outlook and risks
- Compared with Q1 2010, earnings and margins improved alongside higher demand; Q1 2010 included a $0.7 gain on facility sales and $0.2 of after-tax income from discontinued operations.
- The board authorized a $0.15-per-share quarterly dividend in February and again on May 2, 2011. The May dividend was payable June 17 to holders of record June 1. Future dividends remain subject to board approval.
- No quantitative revenue or earnings guidance is provided. Management said business improved with the global economy, but semiconductor equipment demand can shift rapidly and the timing and extent of future demand or weakness are uncertain. Management expects advanced markets to grow and represent a larger share of revenue.
- Management believes cash and available borrowings will meet working-capital and planned capital-expenditure needs for at least the next 12 months and the foreseeable future.
- Risks include reliance on semiconductor-related customers, demand cyclicality, international exposure (52.3% of Q1 revenue), and dependence on product development and customer design wins. Currency-forward contracts had $75.9 notional value and a $2.4 net liability at quarter-end.
- Gross unrecognized tax benefits were approximately $16.0, excluding interest and penalties; tax examinations and uncertain positions could affect future tax expense. Brooks-related patent, contract and trade-secret litigation was settled in February 2011; management said other ordinary-course legal matters are not expected to have a material adverse effect.
- The company adopted two revenue-accounting updates in Q1; neither materially affected its financial position, results or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Assess how much growth depends on semiconductor demand and the large China solar customer; the filing does not quantify that customer’s revenue concentration.
- Track receivables and inventory, which increased with business levels, and conversion of earnings into operating cash flow.
- Review the composition and liquidity of the $480.4 million cash-and-investment balance, including investment and foreign-exchange exposures.
- Monitor uncertain tax positions, future dividend decisions, and any developments in other legal proceedings.