MKS Instruments, Inc. — FY2015 Form 10-K
Business context and reporting period
Reports the fiscal year ended December 31, 2015; amounts are in U.S. dollars. MKS supplies instruments, subsystems, process-control solutions, and related services for advanced manufacturing. Semiconductor capital-equipment and device customers generated about 69% of revenue. The company reorganized reportable segments effective January 1, 2015, separating Global Service and Asia Region Sales; prior-year segment figures were recast for comparison.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $813.5 million | $780.9 million | +4.2% |
| Gross profit / margin | $362.9 million / 44.6% | $337.8 million / 43.3% | Margin +1.3 points |
| Operating income / margin | $156.6 million / 19.3% | $135.1 million / 17.3% | +15.9% |
| Net income | $122.3 million | $115.8 million | +5.6% |
| Diluted EPS | $2.28 | $2.16 | +5.6% |
| Operating cash flow | $138.3 million | $101.9 million | +$36.4 million |
- Product revenue rose 3.5% to $697.1 million; service revenue rose 8.8% to $116.4 million. Product gross margin improved to 46.4%; service gross margin fell to 34.0% from 35.6%.
- Cash and cash equivalents were $227.6 million and short-term investments $430.7 million at year-end, totaling $658.2 million, up $66.0 million year over year. Working capital was $848.5 million.
- Operating cash flow of $138.3 million was partly offset by $167.4 million of investing outflows, including net investment purchases, the Precisive acquisition, and $12.4 million of capital expenditures. Financing outflows were $47.1 million, mainly dividends and share repurchases.
- No borrowings were outstanding under Japanese credit lines at year-end; the balance sheet reports no short-term obligations. Total liabilities were $112.5 million, and stockholders’ equity was $1.16 billion.
- 2015 dividends were $0.675 per share ($36.0 million); the board declared a further $0.17-per-share quarterly dividend in February 2016.
Material changes versus comparable periods
- Annual revenue growth slowed to 4.2% in 2015 from 16.7% in 2014. Semiconductor customer revenue increased about 3% in 2015 versus 19% in 2014.
- Revenue weakened notably in the second half: semiconductor revenue declined from $154 million in Q2 to $143 million in Q3 and $114 million in Q4. Total Q4 revenue was $172.4 million, down from $209.3 million in Q3 2015 and $203.0 million in Q4 2014. Q4 net income was $25.5 million versus $34.2 million a year earlier.
- Other advanced-market revenue increased 6% for the year, led by solar and data storage, but fell 12% sequentially in Q4. Annual international revenue was $355.2 million, or 43.7% of total revenue.
- Gross and operating margins improved year over year, mainly from product mix, higher volume, and lower inventory charges. Service margin and gross margins in the Asia and Other segments weakened.
- The effective tax rate rose to 23.3% from 15.1% in 2014. Both years benefited from releases of tax reserves; 2015 included a $7.3 million net tax benefit related mainly to settlement of a U.S. tax audit, compared with larger tax benefits in 2014.
Outlook, risks, contingencies, and unusual items
- Management expects semiconductor-related sales to remain a substantial portion of revenue, but cites unpredictable, cyclical industry spending and uncertainty about the timing and extent of future demand. The filing provides no specific revenue or earnings guidance.
- On February 23, 2016, after year-end, MKS agreed to acquire Newport Corporation for approximately $980 million in cash, with closing expected in Q2 2016 subject to customary approvals and conditions. Funding is intended to combine cash on hand with up to $800 million of committed debt financing; a $50 million asset-based revolver was also committed for working capital. The transaction is not subject to a financing condition, but financing and completion remain subject to conditions.
- Key risks include semiconductor cyclicality, limited order visibility and low backlog, customer concentration (Applied Materials 17.8% and Lam Research 13.4% of FY2015 revenue), supply interruptions, competition, foreign exchange and international operations, and acquisition integration and added leverage.
- 2015 restructuring charges were $2.1 million, associated mainly with a reduction of about 266 employees and manufacturing outsourcing/consolidation. Inventory obsolescence charges were $13.6 million. Goodwill and intangible assets totaled $243.7 million; management reported no goodwill or intangible impairment in 2015.
- Purchase commitments totaled $121.8 million, mostly due within one year; operating lease obligations totaled $27.6 million. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. The auditor and management reported effective internal control over financial reporting.
Important facts for investors to verify
- Newport transaction status, final financing terms, debt levels, integration costs, and realized synergies.
- Whether the Q4 semiconductor and other-market slowdowns continued after year-end, and the company’s exposure to major customers.
- Underlying earnings and cash generation apart from tax-reserve releases and other unusual items.
- Inventory levels, obsolescence charges, segment margin trends, and working-capital requirements.
- Availability and repatriation implications of overseas cash: $329.8 million was held by foreign subsidiaries, with substantially all potentially subject to U.S. tax if returned.