MKS Instruments, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Financial amounts below are in millions of dollars unless noted. MKS supplies instruments, subsystems and process-control solutions, serving semiconductor equipment and other advanced manufacturing markets through its Vacuum & Analysis and Light & Motion segments.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $486.3 | $380.7 | $1,404.2 | $890.2 |
| Gross profit / margin | $228.0 / 46.9% | $168.4 / 44.2% | $653.1 / 46.5% | $382.2 / 42.9% |
| Operating income / margin | $110.2 / 22.6% | $53.0 / 13.9% | $286.6 / 20.4% | $94.8 / 10.6% |
| Net income | $76.0 | $32.5 | $261.5 | $59.3 |
| Diluted EPS | $1.38 | $0.60 | $4.75 | $1.10 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $274.4 | $127.4 |
- Q3 revenue increased about 28% year over year; nine-month revenue increased about 58%. Semiconductor customer volume growth was a key driver. The nine-month comparison is affected by Newport being included for only five months in 2016.
- Q3 product gross margin rose to 48.2% from 45.2%; service margin declined to 35.8% from 37.4%. Management attributed product-margin improvement mainly to volume and material costs, while service margin was pressured by mix.
- Nine-month net income included a $74.9 million pretax gain on the sale of the Data Analytics Solutions business. The gain makes reported year-to-date earnings less representative of recurring operations.
Financial position, cash flow and capital
- At September 30, cash and cash equivalents were $306.0 million and short-term investments were $228.6 million, totaling $534.6 million, up from $418.1 million at December 31, 2016. Current assets were $1,195.2 million and current liabilities $282.6 million.
- Operating cash flow for the first nine months was $274.4 million. Investing activities provided $16.0 million, including $72.5 million of net proceeds from the business sale; financing activities used $216.4 million, mainly for term-loan repayments and dividends.
- Term-loan principal outstanding was $448.5 million at September 30, after $175 million of repayments during the first nine months and $325 million in cumulative prepayments. The balance-sheet carrying amount of long-term debt was $435.7 million, net of deferred financing costs. The $50 million asset-based revolver was undrawn; MKS reported compliance with debt covenants.
- MKS paid dividends of $0.175 per share in each of the first three quarters. On October 30, the board declared a $0.18 quarterly dividend, payable December 8, 2017. No shares were repurchased in the first nine months of 2017.
Management commentary, outlook and risks
- Management described semiconductor demand as subject to rapid and difficult-to-predict shifts and said the timing and extent of future demand, including potential industry weakness, were uncertain. It expects to continue significant R&D investment and notes that product design wins and changing customer requirements are important to results.
- Semiconductor capital equipment and device manufacturers represented about 60% of nine-month revenue. Two customers each exceeded 10% of revenue: Applied Materials (13%) and Lam Research (12%). International sales were approximately 50% of nine-month revenue.
- No numerical revenue or earnings guidance is provided in the filing. Management said it believes U.S. cash and short-term investments are adequate for domestic operating needs and foreseeable requirements, while noting that substantially all foreign-subsidiary cash would be subject to U.S. tax if repatriated.
- In April 2017, MKS sold Data Analytics Solutions for $72.5 million net proceeds and recorded a $74.9 million pretax gain. It did not classify the sale as a discontinued operation. Nine-month charges also included $6.7 million of asset impairment and $2.6 million of restructuring, primarily associated with a product-line discontinuation and manufacturing-plant consolidation.
- A Newport shareholder lawsuit continues against former Newport directors; MKS and Newport agreed to dismissal from the amended action. Management said ordinary-course legal matters are not expected to materially affect results, financial condition or cash flows. The filing reported no material changes to previously disclosed risk factors or market-risk exposures; disclosure controls were deemed effective.
- MKS planned to adopt the new revenue standard in Q1 2018 using the modified retrospective method. Preliminary analysis identified repair revenue and customized products as areas where recognition may shift to over time; management did not expect a material effect on revenue timing or amount.
Important facts for investors to verify
- How much of the reported earnings growth reflects sustained operating performance versus the $74.9 million business-sale gain and prior-year Newport acquisition-comparison effects.
- Whether semiconductor demand, customer concentration and international exposure remain supportive, and how inventory growth affects working capital and cash conversion.
- Debt repayment pace, interest expense and covenant or dividend restrictions; confirm the term-loan balance and available revolving capacity in subsequent filings.
- Realized effects of the 2018 revenue-recognition transition, including any changes to repair and customized-product revenue timing.
- Progress and costs associated with restructuring and manufacturing consolidation, along with the resolution of the Newport-related litigation.