MKS Instruments, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statement amounts below are in millions of dollars unless otherwise stated; the statements are unaudited.
Business context
MKS supplies instruments, subsystems, and process-control products and services for semiconductor and other advanced manufacturing markets. Semiconductor capital-equipment and device customers generated approximately 71% of first-half 2014 revenue, up from 65% in the comparable 2013 period. International revenue represented approximately 42% of first-half revenue, versus 46% a year earlier.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $184.7 | $156.9 | $391.1 | $298.6 |
| Gross profit | $79.6 | $62.0 | $169.0 | $116.7 |
| Gross margin | 43.1% | 39.5% | 43.2% | 39.1% |
| Operating income | $30.7 | $10.4 | $68.4 | $15.1 |
| Net income | $21.2 | $7.3 | $52.5 | $13.1 |
| Diluted EPS | $0.40 | $0.14 | $0.98 | $0.25 |
| Operating cash flow | Not separately stated | Not separately stated | $27.8 | $5.6 |
Q2 revenue increased 17.7% year over year; first-half revenue rose 31.0%. Product revenue drove most of the increase. First-half gross margin improvement reflected higher product volumes and favorable product mix; operating expenses were lower year over year. The six-month effective tax rate was 23.9%, including a benefit from releasing tax reserves after settlement of a foreign tax examination. Q2 effective tax rate was 31.3%.
Liquidity, debt, and capital allocation
At June 30, cash and cash equivalents were $262.8 million, short-term investments $202.1 million, and long-term investments $80.9 million. Cash plus short-term investments totaled $464.9 million, down from $589.6 million at year-end 2013. Current assets were $763.0 million and current liabilities $92.8 million. The company reported no borrowings outstanding; its Japanese subsidiary had available credit arrangements of up to approximately $22.6 million.
First-half investing cash outflow was $15.9 million, including $87.0 million for the Granville-Phillips acquisition, partly offset by net investment sales and maturities. Financing cash outflow was $37.8 million, mainly share repurchases of $20.8 million and dividends of $17.3 million. The company repurchased approximately 728,000 shares in the first half. A $0.165-per-share dividend was declared after quarter-end.
Material changes, outlook, and risks
- Acquisition: MKS acquired Granville-Phillips, a vacuum measurement and control instruments business, on May 30 for $87 million. The preliminary allocation included $39.1 million of identifiable intangible assets and $41.4 million of goodwill. GP had 2013 sales of approximately $30 million; its inclusion in reported results began on the acquisition date.
- Market conditions: First-half revenue from semiconductor capital-equipment and device customers increased 43% year over year. Management reported a Q2 pause in semiconductor spending, with semiconductor revenue declining $23 million sequentially from Q1, and stated that the timing and extent of future demand were uncertain.
- Customer and market concentration: Two customers each exceeded 10% of revenue; together they represented about 33% of Q2 revenue. Management expects semiconductor-related customers to remain a substantial portion of sales.
- Other notable items: First-half restructuring charges were $0.7 million, primarily severance associated with a workforce reduction of approximately 75 people. Q2 2013 included a $1.1 million insurance reimbursement that did not recur. The company repaid a former CEO through a retirement-related payment, contributing to lower accrued compensation and operating cash flow.
- Guidance and accounting: The filing provides no quantified revenue or earnings guidance. MKS was evaluating the new revenue-recognition standard (ASU 2014-09), had not selected a transition method, and had not determined its financial-statement impact.
- Risks and contingencies: Management cited unpredictable semiconductor demand, product-development and design-win risks, foreign-exchange exposure, and tax uncertainty. Gross unrecognized tax benefits were approximately $42.8 million at June 30. Ordinary-course legal matters were not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors or market-risk exposure were reported.
Most important facts for investors to verify
- Whether semiconductor spending stabilizes after the sequential Q2 slowdown, and how that affects revenue, utilization, and margins.
- How much growth and earnings contribution Granville-Phillips produces after acquisition, alongside integration costs and acquired-intangible amortization.
- Whether the improved gross margin and operating cash flow are sustainable, given working-capital outflows and the retirement-related payment.
- Exposure to the two largest customers and semiconductor end markets, plus the implications of international cash being substantially subject to U.S. tax if repatriated.
- Developments in uncertain tax positions, the revenue-standard assessment, and the company’s continued share repurchases and dividend payments.