MKS Instruments, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. MKS supplies instruments, subsystems, process-control products, and services for semiconductor and other advanced manufacturing markets. Unless noted otherwise, amounts are in millions of U.S. dollars.
Financial highlights
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $183.7 | $213.8 | -14.1% |
| Gross profit / margin | $77.9 / 42.4% | $97.0 / 45.4% | Margin down 3.0 points |
| Operating income / margin | $22.6 / 12.3% | $47.0 / 22.0% | -52.0% |
| Net income | $17.6 | $33.8 | -48.0% |
| Diluted EPS | $0.33 | $0.63 | Down $0.30 |
| Operating cash flow | $23.2 | $19.6 | +$3.6 |
| Capital expenditures | $2.2 | $2.5 | Down $0.3 |
- Product revenue fell 17.5% to $153.6; service revenue rose 8.4% to $30.1. Gross margins declined for both products and services, each by 2.6 percentage points.
- Operating expenses increased, including $2.5 of Newport-related acquisition costs (versus $0.03 a year earlier); SG&A rose 10.0% and R&D rose 3.3%. No restructuring charge was recorded in Q1 2016, compared with $0.8 in Q1 2015.
- Cash and cash equivalents were $357.9 and short-term investments were $308.8 at March 31, for combined liquidity of $666.6, versus $658.2 at year-end. Current assets were $959.1 and current liabilities $97.9. No borrowings were outstanding under the Japanese credit lines; the filing reports no other debt at March 31.
- Operating cash flow included a $7.0 net working-capital increase, principally higher receivables and lower accrued compensation. Investing cash flow was positive $120.9, mainly due to investment sales and maturities; financing cash flow was negative $13.0, including $9.1 of dividends and $1.5 of share repurchases.
Changes, outlook, and significant developments
- Revenue from semiconductor capital-equipment and device customers was down 11% year over year, but up 18% from Q4 2015 as MKS reported a recent improvement in the semiconductor market. Management cautioned that demand shifts are difficult to predict and future demand remains uncertain.
- Revenue from other advanced markets declined 22% year over year and 16% sequentially, with decreases in medical, thin-film, coating and data-storage, and LED markets. International revenue was 48.7% of sales, compared with 43.8% a year earlier.
- Semiconductor-related customers generated approximately 73% of revenue. Applied Materials represented 18.8% and Lam Research 17.1% of Q1 revenue.
- No specific financial guidance is provided in the supplied filing text. Management expects significant ongoing R&D investment and notes that product design wins, customer requirements, semiconductor demand, and foreign-exchange movements can affect results.
- Subsequent acquisition and debt: On April 29, 2016, MKS completed its acquisition of Newport Corporation for approximately $905 million, excluding transaction fees and repayment of approximately $93 million of Newport debt. Funding included available cash and a new $780 million senior secured term loan. A senior secured ABL facility provides up to $50 million, subject to borrowing-base limits; none had been drawn at the time disclosed. The term loan has scheduled quarterly amortization and a seven-year final maturity, along with covenants and prepayment requirements.
- MKS invested $9.3 million for a minority interest in Reno Sub-Systems on April 27, 2016. Two putative shareholder class actions challenged the Newport merger; plaintiffs did not pursue a preliminary injunction at that time. MKS said it considered the claims without merit and intended to defend them. Management stated that other ordinary-course legal matters were not expected to have a material adverse effect.
- The board declared a $0.17 quarterly dividend on May 2, 2016. Future dividends may be restricted under the new credit facilities. The filing also reports approximately $331.0 million of cash and short-term investments held by foreign subsidiaries, substantially all of which would be subject to U.S. tax if repatriated.
Most important facts for investors to verify
- Post-acquisition leverage, term-loan interest costs, covenant headroom, repayment schedule, and the extent of cash used to fund Newport.
- Newport’s preliminary purchase-price allocation, integration performance, and contribution to revenue and earnings; the filing says the allocation was not yet available.
- Whether the reported sequential semiconductor recovery persists, given the company’s market and major-customer concentration.
- Drivers of the year-over-year gross-margin and operating-income declines, and whether margins recover as volumes and product mix change.
- Developments in the Newport-related litigation and any material tax, foreign-exchange, or liquidity changes.