MKS Instruments, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Figures below are in millions of dollars unless stated otherwise. The company provides instruments, subsystems, and process-control products and services for advanced manufacturing, including semiconductor and thin-film markets.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $220.6 | $75.6 | $412.8 | $147.9 |
| Gross profit / margin | $97.3 / 44.1% | $24.3 / 32.1% | $182.8 / 44.3% | $32.8 / 22.2% |
| Operating income (loss) | $49.9 | $(155.5) | $92.2 | $(194.2) |
| Continuing-operations income (loss) | $33.1 | $(146.3) | $62.1 | $(161.3) |
| Net income (loss) | $38.8 | $(207.1) | $68.0 | $(223.6) |
| Diluted EPS, net income (loss) | $0.76 | $(4.20) | $1.34* | $(4.55) |
- Q2 product revenue was $198.9 million and service revenue $21.7 million. Six-month product revenue rose 212.9% year over year; service revenue rose 44.4%.
- Operating cash flow was $39.2 million for the first half, versus cash used of $5.9 million in the prior-year period. Investing cash flow was $1.9 million and financing cash flow $2.4 million.
- Cash and cash equivalents were $151.5 million and short-term investments $171.9 million at June 30, totaling $323.4 million. Current assets were $665.7 million versus current liabilities of $108.1 million.
- Short-term borrowings were $13.0 million, primarily at the Japanese subsidiary; the filing reports interest rates of 0.73%–1.47%. No borrowings were outstanding on the separate $5 million HSBC line, which expired without renewal on July 31, 2010.
Changes, outlook, and material items
- Revenue recovery reflected stronger demand across markets, especially semiconductor capital-equipment and device customers. Their product revenue increased 432% for the first half; product revenue to other markets rose 82%. Management cautioned that semiconductor-equipment demand can shift rapidly and that the timing and extent of further demand or weakness are uncertain.
- Gross margin improved substantially, principally from higher volumes, favorable product mix, and lower excess-inventory charges than in 2009. The comparison is affected by the prior-year downturn, including substantial goodwill and asset impairments and restructuring charges; there were no impairment charges in the first half of 2010.
- Research and development and selling, general and administrative expenses rose year over year, including higher compensation and incentive costs as benefits were restored and business improved.
- During Q2 the company sold Ion for $15.1 million net cash proceeds and recorded a $4.2 million pretax gain. It also committed to divest a second product line, classified as held for sale; management reported no impairment was required. Results of both businesses are presented as discontinued operations.
- Management said available cash and borrowings should meet working-capital and planned capital-expenditure needs for at least 12 months. No numerical revenue or earnings guidance was provided. The company expected continued significant R&D investment.
- Risks include rapid semiconductor-market demand changes, customer concentration (one customer represented 17% of revenue in both Q2 and the first half), international and foreign-exchange exposure, product-development and design-win risks, and uncertain tax positions. Gross unrecognized tax benefits were approximately $10.7 million; accrued interest was approximately $0.9 million. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material change in market-risk exposure or disclosed risk factors was reported.
- The filing says disclosure controls were effective at the reasonable-assurance level and reports no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- EPS inconsistency: The statements of operations report first-half diluted net EPS of $1.34, while Note 13 reports $1.24; the note’s diluted continuing-operations EPS of $1.22 plus discontinued-operations EPS of $0.12 sums to $1.34. Verify against the filed financial statements and XBRL.
- Track whether the second product-line divestiture closes, its proceeds and any resulting gain, loss, or impairment.
- Monitor receivables and inventory growth: first-half operating cash flow included increases of $58.0 million in receivables and $28.3 million in inventory, amid rapidly rising sales.
- Assess how much revenue growth and margin improvement depend on semiconductor demand, the major customer, and favorable product mix.
- Review the resolution and possible financial effects of uncertain tax positions, and the renewal and availability of the Japanese subsidiary’s short-term borrowing facilities.
*The filing’s EPS figures are inconsistent as noted above. The 2009 comparison also reflects material impairment charges; 2009 cash-flow figures were revised to correct immaterial errors related to stock-based compensation tax benefits.