MKS Instruments, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in millions of dollars, except per-share data. The filing is unaudited.
Business context and results
MKS supplies technology and process solutions for semiconductor manufacturing, electronics and packaging, and specialty industrial markets. Its three reporting segments are Vacuum Solutions (VSD), Photonics Solutions (PSD), and Materials Solutions (MSD), which includes Atotech, acquired in August 2022.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,003 | $765 | $1,797 | $1,507 |
| Gross profit / margin | $470 / 46.9% | $338 / 44.2% | $806 / 44.8% | $672 / 44.6% |
| Operating income (loss) | $(1,696) | $164 | $(1,696) | $336 |
| Net income (loss) | $(1,769) | $130 | $(1,812) | $273 |
| Diluted EPS | $(26.47) | $2.32 | $(27.14) | $4.89 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $(22) | $146 |
Q2 revenue rose 31% year over year and 26% from Q1 2023 ($794). The quarter-over-quarter increase reflected shipments of orders delayed by the ransomware incident. Six-month revenue growth was primarily attributable to Atotech; VSD and PSD faced lower volumes amid softer semiconductor and electronics demand. Q2 segment revenue was VSD $426, PSD $279, and MSD $298.
The reported losses were driven mainly by a $1,827 non-cash impairment charge: $1,626 for goodwill and $201 for intangible assets. Excluding that charge, the filing does not present a single adjusted earnings figure. Q2 interest expense was $88 versus $7 a year earlier, reflecting acquisition-related borrowing; six-month interest expense was $173 versus $13.
Cash, debt, and liquidity
- June 30 cash and cash equivalents were $757, with $1 of short-term investments, down from $909 and $1, respectively, at year-end 2022.
- Six-month cash flows were $(22) from operations, $(34) from investing (including $35 capital expenditures), and $(78) from financing. Cash declined $152 to $757.
- Balance-sheet debt was $88 short-term and $4,819 long-term, net of financing costs. Outstanding principal was $5,086, with a 7.7% weighted-average interest rate. No revolving-facility borrowings were outstanding; $500 of revolving commitments were available.
- Current assets were $2,728 and current liabilities $835. Inventory was $1,036, up from $977 at December 31, 2022.
- The company paid $29 in dividends during the first half ($0.22 per share in each quarter). Management said cash, borrowing capacity, and expected operating cash flow should cover estimated needs for at least 12 months and the foreseeable future. Future dividends remain subject to board approval and credit-agreement restrictions.
Material changes and unusual items
- During Q2, weaker demand—particularly in personal computers and smartphones—triggered impairment tests for MSD’s electronics and general metal finishing units and PSD’s equipment solutions unit. Goodwill impairments were $826, $428, and $372, respectively; intangible-asset impairments were $49 and $152 in the electronics and equipment solutions units.
- The Atotech acquisition contributed $602 of first-half revenue from MSD and increased amortization and interest expense. MKS recorded $157 of intangible amortization in the first half versus $30 a year earlier.
- The February 2023 ransomware event temporarily disrupted VSD and PSD operations. MKS estimated it reduced Q1 revenue by about $160, of which approximately $120 was recovered through Q2 shipments. The incident generated about $7 of Q2 net costs; the company expects no material revenue impact in the second half, as most delayed orders have shipped.
- Restructuring charges were $12 in the first half, mainly severance from global cost-saving initiatives.
Outlook, risks, and controls
- No consolidated revenue or earnings guidance is provided. MKS reported softened semiconductor demand and expects U.S. export restrictions to reduce annualized revenue by $250–$350; it currently expects the impact toward the lower end of that range.
- Management identified ongoing risks from substantial acquisition debt and variable interest rates, integration and acquisition execution, market and customer demand, supply-chain constraints, international operations and China-related restrictions, and cybersecurity and litigation exposure.
- The ransomware event has led to class-action lawsuits; the company said it cannot predict their timing or outcome and may face further claims or inquiries.
- Disclosure controls were deemed ineffective as of June 30, 2023 because a previously reported material weakness in IT controls over financial reporting had not been remediated. The weakness involved access authentication, intrusion detection and response, and backup and restoration. MKS reported that it had not caused a financial-statement misstatement and described remediation work as ongoing.
- MKS stated it was in compliance with credit-agreement covenants at June 30, 2023. The agreement includes leverage tests in specified circumstances and restrictions on, among other things, additional debt, dividends, and share repurchases.
Most important facts for investors to verify
- Whether semiconductor demand and export-control impacts develop in line with management’s expectations.
- Progress in restoring effective financial-reporting IT controls and any developments in ransomware-related litigation or costs.
- Cash generation, inventory levels, and the company’s ability to service and reduce its approximately $5.1 billion of debt at a 7.7% weighted-average rate.
- Whether the Q2 impairment assumptions remain appropriate and whether further asset impairments or acquisition-related adjustments arise.
- Whether the expected second-half shipment recovery and management’s liquidity assessment are borne out by subsequent results.