MKS Instruments, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated financial statements; dollar amounts below are in millions except per-share data.
Business context
MKS develops, manufactures, sells and services instruments and process-control solutions used in advanced manufacturing. Semiconductor capital-equipment and semiconductor-device customers accounted for approximately 71% of revenue in both first-half 2015 and first-half 2014. The company reorganized its reportable segments in 2015, separating worldwide service and revising regional/product groupings; consolidated results were unchanged.
Key financial results
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $218.0 | $184.7 | $431.8 | $391.1 |
| Gross profit | $98.8 | $79.6 | $195.8 | $169.0 |
| Operating income | $46.0 | $30.7 | $93.0 | $68.4 |
| Net income | $33.2 | $21.2 | $67.0 | $52.5 |
| Diluted EPS | $0.62 | $0.40 | $1.25 | $0.98 |
| Gross margin | 45.3% | 43.1% | 45.3% | 43.2% |
| Operating margin | 21.1% | 16.6% | 21.5% | 17.5% |
| Net margin | 15.2% | 11.5% | 15.5% | 13.4% |
- Q2 revenue increased 18.0% year over year; first-half revenue rose 10.4%. Product revenue grew 19.6% and 10.6%, respectively; service revenue grew 9.0% and 9.6%.
- First-half operating cash flow was $58.2, versus $27.8 a year earlier. Capital expenditures were $5.3, implying operating cash flow less capital expenditures of approximately $52.9, compared with $20.6 in 2014.
- At June 30, cash and cash equivalents were $178.3; short-term investments were $177.4 and long-term investments $256.9. Current assets were $687.7 and current liabilities $112.0. Cash plus short-term investments totaled $355.8, down from $435.0 at year-end 2014.
- No borrowings were outstanding. A Japanese subsidiary had available credit lines of up to approximately $18.8. The filing reports no material off-balance-sheet arrangements.
- Dividends paid in the first half totaled $17.9. The board declared a $0.17-per-share quarterly dividend on July 27, payable September 11, 2015. First-half repurchases totaled $4.3 for approximately 116,000 shares.
Changes and management commentary
- Q2 revenue growth was led by semiconductor-related customers; semiconductor capital-equipment and device customer revenue increased 22% for the quarter and 10% for the first half. Management also cited first-half growth of 11% in other advanced markets, including solar, data storage and analysis metrology.
- Product gross margin improved, principally from higher volumes and sales of inventory previously written down, partly offset by foreign exchange and product mix. Service margin was broadly stable. Asia Region Sales and Other segment margins declined, attributed mainly to foreign exchange and unfavorable mix, respectively.
- Cash from operations improved year over year, but working capital absorbed $32.6 in the first half, primarily from increased receivables and inventory associated with higher business activity. Investing cash outflow was $162.7, mainly reflecting net investment purchases, the Precisive acquisition and capital expenditures.
- Management described semiconductor demand as difficult to predict and subject to rapid shifts; it provided no specific numerical revenue or earnings guidance in the supplied filing text. Management expects continued significant R&D investment and says international revenue will remain a significant share of sales.
Outlook, risks and unusual items
- On March 17, 2015, MKS acquired Precisive for $12.1 net of cash acquired, adding optical gas-analysis technology. Its post-acquisition revenue and earnings through June 30 were immaterial. Purchase accounting included $7.0 of goodwill and $5.1 of identifiable intangibles.
- Restructuring charges were $1.0 for the first half, primarily severance associated with a workforce reduction of about 123 people and outsourcing a non-core manufacturing process.
- Two customers each exceeded 10% of revenue: together they represented 31.3% of Q2 revenue and 30.5% of first-half revenue. International revenue was approximately 44% of first-half sales.
- The IRS began examining U.S. federal tax years 2011–2013. Gross unrecognized tax benefits were approximately $19.5 at June 30; management said about $0.95 of net benefits could be recognized over the next 12 months, though timing is uncertain.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect and reported no material changes to the risk factors in the 2014 Form 10-K. Key business risks include semiconductor-market cyclicality, customer concentration, international exposure and the need for successful product development and design wins.
- MKS was evaluating the new revenue-recognition standard and had not selected a transition method or determined its financial-statement impact. Management expected the new going-concern disclosure standard to have no impact.
Important facts for investors to verify
- Whether semiconductor demand and the recent revenue growth continue, given management’s warning that industry demand can shift rapidly.
- Receivables, inventory and working-capital trends, and whether cash conversion remains strong as activity increases.
- Customer concentration and the sustainability of margins, particularly in Asia Region Sales and Other.
- Precisive integration and the assumptions supporting acquired goodwill and intangible assets.
- Potential tax-audit outcomes, unrecognized tax benefits and the effect of geographic income mix on future tax rates.