MKS Instruments, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Unless noted otherwise, amounts are in U.S. dollars and millions. MKS supplies instruments, systems, subsystems, and process-control solutions to semiconductor and other advanced manufacturing markets.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $535.7 | $463.6 | +15.6% |
| Gross profit / margin | $239.6 / 44.7% | $198.1 / 42.7% | Margin +2.0 points |
| Operating income / margin | $89.9 / 16.8% | $23.1 / 5.0% | Margin +11.8 points |
| Net income | $69.1 | $12.5 | — |
| Diluted EPS | $1.25 | $0.23 | — |
| Operating cash flow | $74.9 | $29.1 | — |
Revenue growth was primarily driven by semiconductor customers. Semiconductor-related sales rose $92.3, while sales to advanced markets fell $20.1. Products generated $461.2 of revenue and services $74.5. The company’s two largest customers, Applied Materials and Lam Research, represented 11% and 10% of revenue, respectively; neither reached 10% in Q1 2019.
Revenue by segment: Vacuum & Analysis $319.3 (up $84.9); Light & Motion $165.4 (down $28.6); Equipment & Solutions $51.0 (up $15.8). Equipment & Solutions’ comparison includes three months of 2020 revenue versus two months in 2019 following the ESI acquisition.
Cash, debt, and liquidity
- Cash and cash equivalents were $442.0 at March 31, 2020; short-term investments were $61.4, for combined cash and short-term investments of $503.4, down from $524.0 at year-end.
- Current assets were $1,456.6 and current liabilities $321.6. Long-term debt, net, was $820.4 and short-term debt $14.3. Term-loan principal outstanding was $840.1, with a 3.35% stated interest rate and maturity in February 2026.
- Operating cash flow of $74.9 reflected net income of $69.1 and a reported net working-capital increase of $40.3, including higher receivables and inventory and lower accrued compensation.
- Investing activities provided $38.0, primarily from net investment sales and maturities, partly offset by $10.0 of capital expenditures. Financing activities used $81.5, including debt repayments, employee-award tax payments, and dividends.
- MKS had not borrowed under its $100.0 asset-based revolving credit facility and reported compliance with term-loan covenants. The quarterly dividend was $0.20 per share.
Material changes and unusual items
- Gross margin improved, principally with higher revenue volumes. The prior-year comparison included $5.1 of acquired inventory fair-value step-up expense; excluding it, Q1 2019 Equipment & Solutions gross margin would have been 35.1%, versus 45.6% in Q1 2020.
- Operating income also benefited from lower acquisition and integration costs ($2.2 versus $30.2) and no term-loan repricing fees ($0 versus $5.8). Q1 2020 included a $1.2 long-lived-asset impairment tied to a pending facility closure.
- Interest expense was $8.9, compared with $9.1; net interest expense was $8.2 versus $7.4, principally reflecting lower interest income.
- Q1 2020 included $0.9 of restructuring charges, primarily duplicate facility costs. The company also recorded a $0.5 insurance reimbursement related to a Newport acquisition legal settlement.
Outlook, commentary, and risks
The filing gives no numerical revenue or earnings guidance. Management said COVID-19’s Q1 financial impact was minimal, supported by strong semiconductor demand, but operations and results in some areas were already affected. The company cautioned that a longer pandemic could have a more material adverse effect. Disclosed concerns include government restrictions, manufacturing and workforce disruption, supply interruptions, customer order cancellations or inventory build-ups, and weaker global demand. Some facilities operated at diminished capacity; suppliers in Malaysia and Mexico faced capacity constraints.
Management also identified new U.S. export-license requirements, published April 28, 2020, that may apply to certain products shipped to some China customers. License denials or delays could reduce sales and impair competitiveness. Other risks include semiconductor capital-spending volatility, customer concentration, integration and growth of ESI, rapid technology change, and reliance on key suppliers. The Newport shareholder litigation had been dismissed as to MKS; former-director defendants obtained summary judgment, which plaintiffs appealed. Management did not expect ordinary-course legal matters to materially affect results, financial condition, or cash flows.
Most important facts for investors to verify
- Whether semiconductor demand and the Q1 revenue mix persisted, and whether customer inventory builds could lead to order reductions.
- The duration and operational and financial effects of COVID-19, including supplier capacity, employee availability, and research-market disruption.
- Exposure to the new China export-license rules and any effect on shipments, customer relationships, or sales.
- Debt repayment progress, variable-rate exposure, covenant headroom, and the capacity of the undrawn ABL facility.
- Whether reported margin and earnings improvement is sustainable, given prior-year acquisition costs and inventory step-up effects, and current impairment and facility-closure items.