MKS Instruments, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; interim financial statements are unaudited. Unless noted, amounts below are in U.S. dollars.
Business context
MKS supplies instruments, subsystems, process-control solutions and related services for advanced manufacturing. It reports as one operating segment, with products grouped into Instruments and Control Systems, Power and Reactive Gas Products, and Vacuum Products. Semiconductor capital-equipment and device customers represented approximately 61% of nine-month sales.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $194.5m | $221.3m | $650.8m | $634.1m |
| Gross profit / margin | $87.7m / 45.1% | $98.5m / 44.5% | $299.0m / 45.9% | $281.3m / 44.4% |
| Operating income / margin | $41.1m / 21.1% | $54.9m / 24.8% | $154.9m / 23.8% | $147.1m / 23.2% |
| Net income | $30.4m | $38.6m | $107.0m | $106.6m |
| Diluted EPS | $0.57 | $0.76 | $2.03 | $2.10 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $104.6m | $76.3m |
- Q3 product revenue fell 16.2% year over year to $167.1m, while service revenue rose 24.7% to $27.4m. Nine-month revenue increased 2.6%; product revenue was nearly flat and service revenue grew 19.7%.
- Q3 gross margin improved 0.6 percentage points, but operating margin declined 3.7 points. SG&A rose 13.2% to $32.0m, including higher consulting/professional costs and an unfavorable foreign-exchange impact.
- Nine-month net income was nearly unchanged despite higher continuing-operations income: 2010 included $7.9m of after-tax discontinued-operations income, versus none in 2011. Q3 2010 likewise included $2.0m from discontinued operations.
- Nine-month operating cash flow increased to $104.6m. Investing used $58.6m, primarily net investment purchases and capital spending; financing provided $8.9m, including employee equity proceeds, partly offset by dividends.
Financial position and capital allocation
- At September 30, cash and cash equivalents were $216.1m, short-term investments $309.7m, and long-term marketable securities $9.3m—$535.1m combined, versus $431.9m at year-end 2010.
- Current assets were $850.3m and current liabilities $82.9m. Borrowings were $1.3m, under Japanese short-term facilities with up to $32.6m available; no borrowings were outstanding at December 31, 2010.
- The company paid $23.5m in dividends during the first nine months ($0.45 per share) and approved a further $0.15-per-share quarterly dividend for December 2011. A $200m repurchase authorization was approved in July; 22,000 shares were repurchased for $0.5m through September 30.
- Management said available cash and borrowing capacity should cover working capital, dividends and planned capital expenditures for at least 12 months.
Outlook, commentary and risks
- Management reported weakening orders and sales beginning late in Q2, mainly in semiconductor markets. Sales to capital-equipment customers fell 26% sequentially in Q3 after rising 4% in Q2. The company said demand timing and the extent of any further industry weakness were uncertain; no quantified forward guidance was provided.
- Other advanced-market revenue was flat sequentially in Q3 and up 11% year over year for the first nine months, partly reflecting a Chinese thin-film solar customer in Q1. Some solar project inventory was built ahead of customer-delayed projects.
- International revenue represented 54.1% of Q3 sales and 52.3% of nine-month sales. One customer accounted for 12% of Q3 revenue and 14% of nine-month revenue.
- Gross unrecognized tax benefits were approximately $18.1m, excluding interest and penalties; $15.6m, if recognized, would affect the effective tax rate. Tax-authority outcomes and timing are uncertain. Ordinary-course legal matters were not expected by management to materially affect results, financial condition or cash flows.
- The company uses foreign-currency forwards; outstanding contracts had $55.1m gross notional value and a $1.2m net liability at quarter-end. Management reported no material change in market-risk exposure from year-end 2010.
Most important facts to verify
- Whether semiconductor customer order declines continued after quarter-end and how they affected subsequent revenue and margins.
- Whether delayed solar projects converted to sales, and whether inventory levels or obsolescence charges increased.
- Cash and investment balances, working-capital movements, and actual use of the $200m repurchase authorization and dividend program.
- Developments in uncertain tax positions and the effect of any resolution on cash taxes and the effective tax rate.
- Customer concentration and the sustainability of service-revenue growth as product demand weakened.