MKS INC annual report, FY2011

MKS Instruments, Inc. — FY2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone fourth-quarter filing. MKS supplies instruments, subsystems and process-control solutions for semiconductor and other advanced manufacturing markets, and reports as one operating segment.

Financial performance and liquidity

MetricFY2011FY2010
Net sales$822.5 million$853.1 million
Gross profit / gross margin$375.0 million / 45.6%$378.6 million / 44.4%
Operating income / margin$184.9 million / 22.5%$195.5 million / 22.9%
Net income$129.7 million$142.6 million
Diluted EPS$2.45$2.80
Cash from operations$156.0 million$163.5 million
  • Revenue declined 3.6% year over year. Product revenue fell 5.8%, while service revenue grew 15.4% to $103.5 million.
  • Semiconductor capital-equipment and device customers represented approximately 61% of sales, down from 64% in 2010; sales to those customers declined 8%. Other advanced-market sales grew 4%.
  • International sales were $431.4 million, or 52.5% of revenue, compared with 43.2% in 2010. Sales growth in China, including a thin-film solar customer, partly offset domestic and semiconductor-related weakness.
  • Gross margin improved 1.2 percentage points, principally due to favorable product mix, foreign exchange and a prior-year duties refund. Higher overhead, inventory charges and lower product volume partially offset those gains.
  • Year-end cash and cash equivalents were $312.9 million; short-term investments were $252.6 million and long-term investments $7.9 million. Working capital was $788.5 million. Total assets were $1.119 billion and stockholders’ equity $990.0 million.
  • Debt was limited: $1.9 million of Japanese short-term borrowings at a 0.65% average rate, against available credit lines of up to $32.2 million. No long-term obligations were reported.
  • Operating cash flow was $156.0 million; investing activities used $6.1 million, including $15.6 million of capital expenditures; financing activities provided $2.4 million. Cash and short-term investments rose $133.6 million year over year.

Material changes and quarterly pattern

  • After record first-half revenue of $456.3 million, management reported weakening orders beginning late in the second quarter. Quarterly sales declined through 2011, from $231.9 million in Q1 to $171.7 million in Q4.
  • Q4 2011 sales were $171.7 million versus $219.0 million in Q4 2010; net income was $22.7 million versus $35.9 million. Annual net income also declined, despite a higher gross margin.
  • Other advanced markets increased as a share of sales, but remained smaller than semiconductor-related markets. Solar and general industrial product sales rose, while film, LED, medical and other markets declined.
  • MKS paid $0.60 per share in dividends during 2011; none were paid in 2010. It authorized a $200 million share-repurchase program and repurchased about 86,000 shares for $2.0 million during 2011.

Outlook, risks and unusual items

  • No quantified revenue or earnings guidance is provided. Management said semiconductor demand timing and extent were uncertain, while it expected other advanced markets to grow and account for a larger share of revenue. It expected cash, borrowing capacity and operating cash generation to cover planned needs, dividends and repurchases for at least the next 12 months.
  • Key risks include semiconductor-industry cyclicality, limited order visibility and low backlog, dependence on major customers, global economic and regional exposure, foreign-exchange movements, supplier constraints, competition, and the need to qualify products for successive equipment generations.
  • Applied Materials accounted for approximately 14% of 2011 sales; the top ten customers accounted for approximately 41%. No major customer is obligated to purchase minimum quantities.
  • Inventory charges for excess and obsolete stock were $14.9 million, up from $13.2 million in 2010. Inventory included products for solar projects whose shipment customers had delayed.
  • Gross unrecognized tax benefits were $35.2 million at year-end; management said $2.8–$3.4 million might be recognized over the next 12 months as audits conclude or statutes expire. The Israeli tax holiday expired December 31, 2011.
  • A 2010 divestiture of Ion Systems and Yield Dynamics generated $15.6 million net proceeds and a $4.4 million pre-tax gain; there were no discontinued-operation results in 2011. The 2009 impairment and restructuring charges were not repeated in 2011.
  • Brooks Instrument litigation concerning mass-flow controllers and pressure sensors was settled in February 2011, with all cases dismissed. Management said other ordinary-course legal matters were not expected to materially affect results, financial condition or cash flows.
  • Management and the independent auditor reported effective disclosure controls and internal control over financial reporting at year-end. The auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  • Whether semiconductor customer orders and quarterly sales stabilized after the Q4 2011 decline.
  • Whether deferred solar shipments were completed and whether inventory levels and obsolescence charges remain manageable.
  • How customer concentration and the continuing semiconductor dependence affect revenue and margins in a downturn.
  • Tax-audit outcomes, uncertain tax positions and the effect of the expired Israeli tax holiday on future tax rates.
  • Actual capital allocation under the $200 million repurchase authorization and whether dividends are maintained; future dividends are discretionary.
  • Performance and cost of the phased global ERP implementation, which management identified as a potential source of operational disruption and additional expense.