MKS Instruments, Inc. — Q2 2011 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2011, compared with the same 2010 periods. MKS supplies instruments, subsystems and process-control products and services for advanced manufacturing, including semiconductor equipment, thin films, solar and other markets. It reports as one operating segment.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $224.5 | $220.6 | $456.3 | $412.8 |
| Gross profit | $105.0 | $97.3 | $211.3 | $182.8 |
| Operating income | $57.3 | $49.9 | $113.8 | $92.2 |
| Continuing-operations income | $38.6 | $33.1 | $76.6 | $62.1 |
| Net income | $38.6 | $38.8 | $76.6 | $68.0 |
| Diluted EPS | $0.73 | $0.76 | $1.46 | $1.34 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $58.7 | $39.2 |
- Revenue increased 1.7% in Q2 and 10.5% year to date. Q2 product revenue was essentially flat; service revenue grew 18.6%. Six-month product and service revenue increased 9.8% and 17.1%, respectively.
- Gross margin improved to 46.8% from 44.1% in Q2 and to 46.3% from 44.3% for the six-month period. Operating margin rose to 25.5% from 22.6% in Q2 and to 25.0% from 22.4% year to date.
- Q2 continuing-operations income rose about 16%, while net income slipped about 0.5% and diluted EPS declined from $0.76 to $0.73. The 2010 comparison included $5.6 million of after-tax discontinued-operations income; there was none in 2011. Six-month continuing income increased about 23% and net income about 13%.
- Six-month operating cash flow was $58.7 million, up from $39.2 million. Net income and non-cash charges were partly offset by a $34.4 million working-capital increase, principally higher inventory, receivables and other current assets. Capital expenditures were $6.3 million.
- Cash, cash equivalents and short- and long-term investments totaled $501.6 million at June 30, 2011, versus $431.9 million at December 31, 2010. Current assets were $849.7 million and current liabilities $102.0 million. Borrowings were $0.6 million, at 0.68%, under a Japanese subsidiary’s credit arrangements; no borrowings were outstanding at year-end 2010.
- Cash dividends were $0.15 per share in each of Q1 and Q2 2011. Stockholders’ equity was $949.0 million at June 30, up from $847.0 million at year-end.
Changes, outlook and risks
- Management attributed the six-month improvement to a stronger global economy and broader demand. Semiconductor capital-equipment and device-related revenue increased 7.4% year over year for the first half; other advanced-market product revenue increased 13.8%, including a significant first-quarter contribution from a thin-film solar customer in China.
- Management reported that semiconductor customers’ order rates had recently moderated and said the timing and extent of future industry demand or weakness were uncertain. No numerical revenue or earnings guidance is provided.
- Semiconductor capital-equipment and device customers represented an estimated 62% of first-half sales. International sales were 51.6% of first-half revenue, with significant exposure to Japan and China. Management expects international sales to remain significant.
- Management cited product mix and favorable foreign exchange as drivers of gross-margin improvement, partly offset by higher overhead and excess-and-obsolete inventory charges. SG&A increased 10% for the first half, including higher compensation and professional fees.
- At July 25, 2011, the board approved a share-repurchase program of up to $200 million and authorized a $0.15-per-share quarterly dividend payable September 16, 2011. Repurchases may be started, paused or stopped at the company’s discretion.
- The company said available cash and borrowings should meet working-capital and planned capital-expenditure needs for at least 12 months. Management considered ordinary-course legal proceedings not likely to have a material adverse effect; no significant change in contractual obligations was reported.
- Gross unrecognized tax benefits were $16.7 million at June 30, including a $12.8 million net amount that would affect the effective tax rate if recognized; timing is not estimable. Management cautioned that tax-authority outcomes may differ from accrued positions. The company also uses foreign-exchange forwards to hedge exposures.
Important facts for investors to verify
- Whether the reported moderation in semiconductor customer orders continues and how it affects future revenue and margins.
- The sustainability of margin gains given product mix, inventory provisions, overhead and foreign-exchange movements.
- How much first-half growth depended on the China solar customer, and whether non-semiconductor market growth is recurring.
- Working-capital trends, particularly inventory, receivables and value-added-tax receivables, and their effect on cash conversion.
- The potential cash use and execution timing of the $200 million repurchase authorization alongside ongoing dividends.
- Developments in uncertain tax positions, including the unrecognized benefits and accrued interest.