MKS Instruments, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; dollar amounts in millions except per-share data. MKS supplies instruments, systems, subsystems, and process-control solutions for semiconductor and other advanced manufacturing markets.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $749.9 | $544.3 | $1,443.8 | $1,080.0 |
| Gross profit / margin | $355.2 / 47.4% | $246.3 / 45.3% | $677.3 / 46.9% | $485.9 / 45.0% |
| Operating income / margin | $186.3 / 24.8% | $100.8 / 18.6% | $341.8 / 23.7% | $190.7 / 17.7% |
| Net income / margin | $146.5 / 19.5% | $73.7 / 13.5% | $268.8 / 18.6% | $142.8 / 13.2% |
| Diluted EPS | $2.63 | $1.33 | $4.83 | $2.58 |
| Operating cash flow | — | $292.1 | $213.9 |
- Q2 revenue increased 37.8% year over year; six-month revenue rose 33.7%. Growth reflected higher product and service sales, particularly to semiconductor and advanced-market customers.
- Q2 revenue by segment: Vacuum & Analysis $457.7; Light & Motion $192.9; Equipment & Solutions $99.3. Each segment grew year over year.
- Gross margin improved 2.1 percentage points in Q2 and 1.9 points for the six-month period. Management attributed improvement primarily to higher volumes and favorable mix/absorption, partly offset by higher freight and duty costs and consumable expenses.
- Six-month operating cash flow of $292.1 included a $71.8 net working-capital use, notably higher receivables and inventory and lower income taxes payable. Investing cash use was $99.9, including $42.8 capital expenditures; financing cash use was $40.5, including $23.3 of dividends. Cash and cash equivalents increased $146.9.
- At June 30, cash and cash equivalents were $755.2 and short-term investments $283.8, totaling $1,039.0. Current assets were $2,121.7 versus current liabilities of $420.3.
- Debt: term-loan principal was $828.9 at a 1.8% interest rate; balance-sheet short- and long-term debt totaled $820.5 net of deferred financing costs. The term loan matures in 2026. The $100.0 ABL facility was undrawn; the company reported covenant compliance.
Material changes and unusual items
- Q2 other expense, net rose to $7.5 from $1.5, mainly due to a $7.5 fair-value loss on a Canadian-dollar hedge for the Photon Control purchase. The hedge was not designated for hedge accounting.
- Acquisition and integration costs increased to $6.0 in Q2 and $12.2 for six months, largely for Photon Control and Atotech transactions; the six-month amount also included costs for a proposed Coherent acquisition.
- On July 15, 2021, after quarter-end, MKS completed the Photon Control acquisition for approximately $309.5 cash, funded from available cash. Photon Control joins Light & Motion.
- On July 1, 2021, MKS agreed to acquire Atotech for approximately $5.1 billion in cash and stock, with closing expected in Q4 2021 subject to approvals and other conditions. The agreement is not subject to a financing condition. Committed financing included a $5.3 billion term loan and a $500 million revolving facility, subject to customary conditions.
- Q2 dividends were $0.22 per share; the board declared another $0.22 quarterly dividend on July 26, payable September 10, 2021.
Outlook, risks, and contingencies
- MKS gave qualitative rather than numerical near-term outlook in the filing. It expected global supply-chain disruptions and component shortages to continue and potentially negatively affect semiconductor-market revenue in Q3 2021. It expected advanced-market revenue to decline in Q3, primarily due to normal seasonality in flexible-PCB laser systems.
- Key risks include semiconductor-capital-equipment spending fluctuations, customer demand and concentration, supply constraints, international operations, and acquisition execution. Two customers, Lam Research and Applied Materials, each accounted for more than 10% of six-month revenue.
- The proposed Atotech acquisition would materially increase debt and interest burden. MKS highlighted financing, integration, regulatory, environmental-liability, and business-disruption risks, as well as its lack of experience in Atotech’s chemicals-technology business.
- Management said pending legal matters, including an appeal in the Newport shareholder litigation, were not expected to have a material adverse effect. The appeal remained undecided.
- Effective tax rates were 15.1% for Q2 and 16.2% for six months. MKS noted a proposed U.S. corporate tax-rate increase could materially increase tax expense if enacted in its current form.
Investor verification priorities
- Track whether supply constraints affect Q3 shipments, revenue, margins, and inventory conversion.
- Verify Atotech closing conditions, final consideration and financing terms, resulting leverage, interest costs, and integration progress.
- Assess post-quarter liquidity after the $309.5 million Photon Control cash payment and any subsequent acquisition funding.
- Monitor customer concentration and semiconductor-market exposure, as well as the expected seasonal decline in flexible-PCB systems.
- Review debt covenants, tax exposures, and developments in the Newport litigation appeal.