MKS Instruments, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Amounts are in millions of dollars, except per-share data and percentages.
Business context
MKS supplies instruments, systems and process-control solutions for advanced manufacturing, with semiconductor, industrial, life-sciences, research and defense markets. Its reportable segments are Vacuum & Analysis, Light & Motion, and Equipment & Solutions. Management said first-half results were minimally affected by COVID-19, principally because semiconductor customers maintained strong demand.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $544.3 | $474.1 | $1,080.0 | $937.7 |
| Gross profit / margin | $246.3 / 45.3% | $211.0 / 44.5% | $485.9 / 45.0% | $409.2 / 43.6% |
| Operating income / margin | $100.8 / 18.6% | $63.9 / 13.5% | $190.7 / 17.7% | $87.0 / 9.3% |
| Net income | $73.7 | $37.7 | $142.8 | $50.2 |
| Diluted EPS | $1.33 | $0.69 | $2.58 | $0.91 |
| Operating cash flow | Not separately presented | Not separately presented | $213.9 | $106.6 |
Q2 revenue increased 14.8% year over year and first-half revenue increased 15.2%. First-half cash used in investing was $99.4, including $30.9 of capital expenditures; financing used $98.2. Operating cash flow less capital expenditures was $183.0 for the first half, compared with $78.4 a year earlier (calculated from reported figures).
At June 30, cash and cash equivalents were $428.9 and short-term investments were $178.1, totaling $607.0, versus $524.0 at year-end 2019. Current assets were $1,569.8 and current liabilities $351.6. Long-term debt, net, was $818.6; short-term debt was $11.3. Term-loan principal outstanding was $837.9, at a 1.9% interest rate. The $100.0 asset-based revolving facility was undrawn, and MKS reported compliance with term-loan covenants.
Material changes and drivers
- Semiconductor demand was the main growth driver: semiconductor-related revenue rose $107.5 in Q2 and $199.7 in the first half. Vacuum & Analysis revenue grew to $314.5 in Q2 from $235.7 and to $633.8 for the first half from $470.0.
- Advanced-market revenue weakened amid industrial-market slowing and university and research-lab closures. Light & Motion revenue declined to $166.0 in Q2 from $182.5 and to $331.4 for the first half from $376.6.
- Equipment & Solutions revenue was $63.8 in Q2 versus $55.9 and $114.8 for the first half versus $91.1. The year-over-year first-half comparison includes six months of this segment in 2020 but only five months in 2019 following the ESI acquisition.
- Product gross margin improved, attributed mainly to higher volume; service gross margin declined, attributed to unfavorable absorption and repair mix. Lower interest expense also supported results.
- First-half acquisition and integration costs fell to $2.9 from $33.4, while 2019 included substantial ESI-related charges. Q2 and first-half 2020 results included $1.2 of net COVID-related credits; first-half restructuring charges were $4.2 and an asset impairment charge was $1.2.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management said pandemic effects remain uncertain and could become more adverse the longer COVID-19 continues; semiconductor capital spending and demand can shift rapidly. Advanced markets, supply-chain continuity, customer and supplier operations, international exposure, and integration of acquired businesses are also relevant risks.
Two customers each represented at least 10% of revenue: LAM Research accounted for 12% in Q2 and 11% in the first half; Applied Materials accounted for 11% in both periods. New U.S. export controls affect China-related shipments; MKS said rules in effect had not had, and were not expected to have, a material impact based on information then available, while warning that future restrictions or countermeasures could harm sales and competitiveness.
A Newport merger-related shareholder case had been dismissed as to MKS; the court granted summary judgment for the remaining defendants, and plaintiffs appealed. Management said ordinary-course legal matters were not expected to have a material adverse effect. The board declared a $0.20-per-share quarterly dividend on July 27, payable September 4, 2020.
Important facts for investors to verify
- Whether semiconductor demand can sustain growth if capital spending or customer orders weaken, and how much advanced-market weakness persists.
- Cash conversion and working-capital needs: receivables and inventory increased during the first half.
- Debt paydown, interest-rate exposure, covenant requirements and the implications of LIBOR transition; the company had a $15.3 interest-rate-swap liability at quarter-end.
- Revenue concentration in LAM Research and Applied Materials, and the eventual effect of U.S.–China export rules.
- COVID-19 operational and financial effects, including the durability of reported credits and the absence of formal forward guidance.