MKS Instruments, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited. Dollar amounts are in millions unless stated otherwise. MKS supplies instruments, systems, subsystems and process-control solutions, serving semiconductor, industrial technology, life and health sciences, research and defense markets through Vacuum & Analysis, Light & Motion, and Equipment & Solutions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $589.8 | $462.5 | $1,669.8 | $1,400.1 |
| Gross profit / margin | $262.0 / 44.4% | $205.0 / 44.3% | $747.9 / 44.8% | $614.1 / 43.9% |
| Operating income / margin | $116.4 / 19.8% | $66.8 / 14.4% | $307.1 / 18.4% | $153.8 / 11.0% |
| Net income | $91.7 | $47.4 | $234.5 | $97.6 |
| Diluted EPS | $1.66 | $0.86 | $4.24 | $1.77 |
| Operating cash flow | Not separately provided | Not separately provided | $366.0 | $167.3 |
- Q3 revenue increased 27.5% year over year; net income increased 93.5%. Nine-month revenue rose 19.3% and net income rose 140.3%.
- Q3 revenue by segment: Vacuum & Analysis $361.3; Light & Motion $175.9; Equipment & Solutions $52.6. Nine-month segment revenue was $995.1, $507.3 and $167.4, respectively.
- Cash and cash equivalents were $493.3 and short-term investments $222.4 at quarter-end, totaling $715.7, compared with $524.0 at December 31, 2019. Current assets were $1,669.7 versus current liabilities of $364.3.
- Debt carrying value was $828.8: $12.0 short-term and $816.8 long-term, net. Term-loan principal was $835.6 at 1.9% interest, with maturity in February 2026; MKS reported covenant compliance. The $100.0 asset-based revolving facility was undrawn.
- Nine-month investing cash outflow was $172.3, including $112.4 net purchases of investments and $59.9 capital expenditures. Financing cash outflow was $115.3, including $77.0 net debt repayments and $33.0 dividends.
Changes versus the prior comparable period
- Growth was led by semiconductor demand: semiconductor-related revenue increased $136.1 (61%) in Q3 and $335.9 (51%) for nine months, driven by foundry, logic and memory manufacturing activity. Semiconductor customers accounted for about 60% of nine-month revenue, versus 52% in 2019.
- Advanced-market revenue declined 4% in Q3 and 9% for nine months, amid slower industrial activity and research/university closures. Nine-month Light & Motion revenue fell $41.7, principally from these markets.
- Product gross margin improved, while service gross margin declined: Q3 product margin was 44.6% (+0.6 percentage points) and service margin 43.2% (-2.8 points). Management attributed product improvement mainly to volume and absorption; service weakness mainly to unfavorable absorption.
- Lower interest expense and reduced amortization also supported operating results. Nine-month acquisition and integration costs fell to $3.4 from $35.5, while the 2019 comparison included a $6.8 gain on property sales and $7.6 of ESI inventory step-up expense.
- Cash and short-term investments rose $191.7 from year-end; reported long-term debt, net, declined from $871.7 to $816.8.
Outlook, commentary and risks
- No specific numerical revenue, earnings or margin guidance is provided in this filing. Management said COVID-19’s financial impact through September was minimal, largely because of strong semiconductor demand, but warned that a prolonged pandemic could materially adversely affect the business, financial condition and results.
- Management identifies volatile semiconductor capital spending, rapid demand shifts, customer concentration, competition, product-development and technology risks, manufacturing and supply-chain exposure, international operations, and acquisition integration as important risks. International revenue was about 55% of nine-month sales.
- Two customers exceeded 10% of Q3 revenue: Lam Research at 14.1% and Applied Materials at 11.0%; neither reached 10% in Q3 2019. The filing also references China export-license risks disclosed in the prior-quarter report.
- Unusual current-period items included a $1.2 asset impairment related to a planned European facility closure, a $1.2 net COVID-related credit, and $6.8 of restructuring and other costs for nine months, including duplicate-facility costs. A $300.0 interest-rate swap had a $14.0 liability at quarter-end; another swap matured September 30, 2020.
- A Newport merger-related shareholder case remained on appeal after summary judgment for defendants; the court ruled on costs and fees motions in August 2020. Management says ordinary-course legal matters are not expected to have a material adverse effect.
- The Board declared a $0.20-per-share quarterly dividend on October 26, 2020, payable December 4, 2020, subject to applicable debt restrictions. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Investor verification checklist
- Whether semiconductor demand and customer spending remain strong, and the degree to which top-customer concentration persists.
- How quickly advanced markets recover from industrial weakness and pandemic-related research closures.
- Cash conversion and working-capital needs: inventories increased $47.1 and receivables $20.9 in the first nine months.
- Debt repayment, interest-rate exposure, loan covenants and dividend capacity, including the remaining swap exposure.
- Potential effects of COVID-19, China export-license requirements, supply disruptions and the pending litigation appeal.
- Whether reported earnings growth is sustainable after considering prior-year acquisition costs, property-sale gains, inventory step-up charges and current-period credits or restructuring items.