MKS Instruments, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are included below where relevant. MKS supplies instruments, subsystems and process-control solutions for advanced manufacturing. Its two reportable segments are Vacuum & Analysis and Light & Motion, the latter comprising the Newport business acquired in April 2016.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $1.916 billion | $1.295 billion |
| Gross profit / margin | $891.5 million / 46.5% | $565.6 million / 43.7% |
| Operating income / margin | $406.6 million / 21.2% | $157.3 million / 12.2% |
| Net income / diluted EPS | $339.1 million / $6.16 | $104.8 million / $1.94 |
| Cash from operations | $355.2 million | $180.1 million |
| Capital expenditures | $31.3 million | $19.1 million |
| Cash, cash equivalents and short-term investments | $543.2 million | $418.1 million |
| Year-end debt | $392.97 million carrying value; $398.5 million term-loan principal | $612.2 million carrying value |
| Working capital | $946.4 million | $761.5 million |
Revenue rose about 48% year over year, reflecting semiconductor-market volume growth and a full year of Newport results versus eight months in 2016. Semiconductor-related sales were 57% of revenue, versus 56% in 2016. International revenue was 50.1% of total. Operating cash flow increased substantially; growth in receivables and inventory absorbed working capital. Cash from operations less capital expenditures was approximately $323.9 million.
Gross margin improved 2.8 percentage points. Product gross margin increased to 47.7% from 44.6%, while service gross margin declined to 36.1% from 36.9%. The company repaid $228.1 million of long-term debt during 2017, including voluntary prepayments, and ended the year in compliance with credit covenants. The $50 million asset-based revolving facility was undrawn. The company paid $0.71 per share in 2017 dividends; no shares were repurchased during the year.
Material changes and unusual items
- Revenue increased $620.6 million. Vacuum & Analysis revenue grew to $1.207 billion from $872.3 million; Light & Motion revenue was $708.5 million versus $423.1 million, with 2016 including only eight months of Newport.
- Net income included a $74.9 million pretax gain on the April 2017 sale of the Data Analytics Solutions business for $72.5 million net proceeds. The divested business had 2016 revenue of $12.7 million and was not treated as a discontinued operation.
- 2017 operating results included $6.7 million in impairment charges, $5.3 million in Newport acquisition/integration costs and $3.9 million in restructuring charges. The impairment related principally to plant consolidation and a discontinued product line.
- The effective tax rate was 24.2%, compared with 18.1% in 2016. The Tax Cuts and Jobs Act led to provisional tax accounting, including a $27.6 million transition-tax provision on approximately $560 million of foreign earnings; the company expects to pay the transition tax over eight years. Tax estimates remained subject to further analysis and regulatory guidance.
- Backlog increased to $464 million from $338 million; approximately $451 million was scheduled for shipment by December 31, 2018. Management cautions that orders may be delayed or cancelled and backlog is not necessarily indicative of future sales.
For the fourth quarter of 2017, revenue was $511.8 million, gross profit $238.3 million, operating income $120.0 million and net income $77.6 million; diluted EPS was $1.41. Fourth-quarter 2016 figures were $405.1 million, $183.4 million, $62.5 million and $45.5 million, respectively, with diluted EPS of $0.83.
Outlook, commentary and risks
- Management expects significant continued investment in research and development and states that semiconductor manufacturing will remain a substantial source of sales. The filing provides no specific revenue, earnings or margin guidance.
- Management expects available cash, investments, borrowing capacity and operating cash flow to cover working capital, planned capital expenditures and potential dividends for at least the next 12 months and the foreseeable future. This is subject to operating performance and other risks.
- The business is exposed to semiconductor-industry cyclicality, customer capital-spending swings, short order lead times, production capacity constraints and inventory risk. The top ten customers generated 43% of 2017 revenue; Applied Materials represented 12.7% and Lam Research 11.7%.
- Other material risks include integration of Newport and phased ERP implementations; international operations and foreign exchange; reliance on certain sole- or limited-source suppliers; product defects and warranty costs; and the significant goodwill and intangible-asset balance of $957.4 million, about 40% of total assets.
- Debt is secured and subject to restrictive covenants. A substantial portion bears variable interest; $305 million of term-loan principal was hedged at 1.198% plus the credit spread through September 2020, while $93.5 million remained variable-rate at year-end. Management also disclosed uncertainty over the planned phaseout of LIBOR.
- A Newport shareholder lawsuit continued against certain former Newport directors; MKS and Newport had been dismissed from the action. Management stated that ordinary-course legal matters were not expected to materially affect results, financial condition or cash flows. The company also disclosed environmental remediation obligations at a former Spectra-Physics site; future costs are difficult to predict.
- The auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Most important facts for investors to verify
- How much of 2017 earnings growth reflects recurring operations versus the $74.9 million divestiture gain and tax-related items; assess earnings excluding these items.
- Whether semiconductor demand, rising backlog and revenue growth are sustainable, while considering customer concentration and the cancellable nature of orders.
- Whether inventory and receivables growth convert into cash and whether reported cash generation remains strong after capital spending and debt payments.
- The final accounting and cash-payment schedule for the Tax Act transition tax, and any subsequent changes to provisional tax estimates.
- Term-loan maturity, interest-rate exposure, covenant flexibility and the company’s ability to maintain dividends while continuing debt reduction.
- Progress on Newport integration, ERP deployment, restructuring, and any resulting impairment, execution or cost risks.