MKS Instruments, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing. Amounts below are in U.S. dollars unless stated otherwise.
Business context
MKS supplies instruments, subsystems, and process-control solutions for advanced manufacturing, with semiconductor capital-equipment and device manufacturers as its largest market. It reports four segments: Advanced Manufacturing Capital Equipment, Analytical Solutions Group, Europe Region Sales & Service, and Asia Region Sales & Service.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $669.4 million | $643.5 million |
| Gross profit / margin | $266.6 million / 39.8% | $269.5 million / 41.9% |
| Operating income / margin | $58.4 million / 8.7% | $74.2 million / 11.6% |
| Net income | $35.8 million | $48.0 million |
| Diluted EPS | $0.67 | $0.90 |
| Operating cash flow | $76.1 million | $137.2 million |
| Capital expenditures | $12.4 million | $17.7 million |
- Revenue rose 4.0% year over year as semiconductor-related revenue increased 14%; sales in other advanced markets fell 13%, including a 73% decline in solar revenue.
- Product gross margin fell to 40.6% from 42.2%; service gross margin fell to 35.3% from 40.5%. Management cited unfavorable mix, higher inventory charges, foreign exchange, and service overhead and volume effects.
- Operating cash flow declined mainly because of working-capital investment, including higher receivables and inventory as fourth-quarter business increased. Cash, cash equivalents, and short-term investments totaled $589.6 million at year-end; working capital was $748.0 million.
- No borrowings were outstanding at year-end. The company reported Japanese credit lines of up to approximately $21.9 million and stated that cash, investments, expected operating cash flow, and borrowing capacity should cover foreseeable needs.
- Total assets were $1.213 billion and stockholders’ equity was $1.022 billion. The company paid $34.0 million in dividends ($0.64 per share) and repurchased $2.9 million of stock.
Changes, outlook, and notable matters
- Fourth-quarter 2013 sales were $204.4 million, versus $133.8 million in fourth-quarter 2012; quarterly net income was $20.2 million versus $4.1 million. Management said semiconductor revenue increased sequentially in each quarter of 2013 after stabilization late in 2012.
- Despite the annual revenue recovery, operating income and net income declined, reflecting lower gross margin and higher SG&A, including variable compensation and $2.6 million of executive retirement costs related to the CEO’s December 2013 retirement. The company recorded $1.4 million in restructuring charges and a $1.1 million insurance reimbursement related to a 2012 litigation settlement.
- No specific revenue or earnings guidance is provided. Management expects semiconductor customers to remain a substantial part of sales, describes future semiconductor demand as difficult to predict, and expects continued significant R&D investment. It believes other advanced markets could grow over time.
- Solar weakness drove a $6.4 million special obsolete-inventory charge; total excess and obsolete inventory charges were $21.7 million, up from $15.0 million. The company also cited customer concentration, market cyclicality, international and currency exposure, supply-chain and capacity risks, and competition.
- Unrecognized tax benefits were $47.7 million, with approximately $12.6 million potentially recognizable over the following 12 months as audits conclude or statutes expire. The effective tax rate rose to 39.7% from 36.1%, largely because of a tax charge on accumulated Israeli earnings, partly offset by tax incentives.
- The company disclosed a U.S. government investigation concerning alleged export-license violations by a Shanghai subsidiary employee; it said the company was not a target, was cooperating, and could not predict the outcome. Potential outcomes could include fines, penalties, or export restrictions.
- A prior-period balance-sheet presentation error involving uncertain tax positions was corrected in the filing: balances had been presented net rather than gross. The company said the error was not material and did not affect prior-period income statements, cash flows, or stockholders’ equity.
- PwC issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. Alter, acquired in 2013, was excluded from the control assessment and auditor control audit because it represented less than 1% of consolidated assets and revenue.
Investor verification priorities
- Confirm whether the 2013 semiconductor recovery continued and how much growth remained concentrated in the largest customers: Applied Materials represented about 17% and Lam Research about 12% of annual sales.
- Track inventory levels, the exceptional solar-related write-down, and whether gross margins recover as product mix and volumes change.
- Assess operating cash conversion, particularly receivables and inventory growth, against the reported rise in fourth-quarter sales.
- Review the resolution and financial or operational consequences, if any, of the export investigation and significant open tax positions.
- Monitor the post-retirement leadership transition, executive retirement-benefit payments, and the integration of the Alter and Plasmart acquisitions.