MKS Instruments, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2012. MKS supplies instruments, subsystems and process-control solutions used in advanced manufacturing, particularly semiconductor production and other thin-film markets. Semiconductor equipment and device customers represented about 64% of nine-month revenue. The company reported four segments beginning in Q2 2012.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2011 period.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $141.4 | $194.5 | $509.7 | $650.8 |
| Gross profit / margin | $56.6 / 40.0% | $87.7 / 45.1% | $216.9 / 42.5% | $299.0 / 45.9% |
| Operating income / margin | $6.4 / 4.5% | $41.1 / 21.1% | $67.6 / 13.3% | $154.9 / 23.8% |
| Net income | $2.6 | $30.4 | $43.9 | $107.0 |
| Diluted EPS | $0.05 | $0.57 | $0.82 | $2.03 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $113.8 | $104.6 |
- Revenue fell 27.3% in Q3 and 21.7% year to date. Q3 product revenue declined 31.4%; service revenue declined 2.1%. Nine-month service revenue increased 5.4%.
- Q3 gross margin fell 5.1 percentage points. Management cited lower product volumes and unfavorable mix, alongside higher service overhead; nine-month product gross profit was also pressured by warranty and excess-inventory charges.
- Nine-month operating cash flow increased despite lower net income, supported by working-capital reductions, including a $34.0 million decrease in receivables. Cash and cash equivalents were $285.0 million at September 30.
- Cash, cash equivalents and short-term investments totaled $583.6 million, versus $565.5 million at December 31, 2011. Total current assets were $852.9 million and current liabilities $89.2 million.
- Debt was limited: $4.2 million short-term and $0.3 million long-term. Stockholders’ equity was $1,015.2 million.
Material changes and notable items
- Semiconductor market revenue weakened amid economic uncertainty, slowing consumer spending and lower investment in production capacity. Nine-month revenue from semiconductor equipment and device customers declined 18% year over year.
- Revenue from other advanced markets declined 28% for the first nine months, principally due to a 65% decline in solar and LED markets as customers worked through prior inventory.
- On August 29, MKS acquired Korean RF plasma systems maker Plasmart for $24.4 million net of cash acquired. The preliminary allocation included $9.6 million goodwill and $10.9 million intangible assets; the allocation remained subject to final valuation. Acquisition costs were $1.3 million year to date.
- Operating results included a $5.3 million litigation settlement charge. MKS said it settled a long-running shareholder dispute involving a former subsidiary primarily to avoid future legal costs.
- The nine-month effective tax rate was 35.7%, versus 31.3% in 2011; the Q3 rate was 61.3%. Management attributed the higher 2012 rate mainly to a revised full-year rate forecast and non-deductible acquisition costs, partly offset by international tax-rate mix.
- The company paid $24.3 million in dividends and repurchased $7.0 million of stock during the first nine months. It declared a further $0.16-per-share dividend for payment in December 2012.
Outlook, risks and contingencies
- Management said Q4 2012 revenue could be lower than Q3, citing weakening semiconductor orders and sales. The filing provides no specific revenue or earnings guidance and says the timing and extent of future semiconductor demand are uncertain.
- MKS expected cash and available borrowings to cover working-capital and planned capital-expenditure needs for the next 12 months and foreseeable future.
- A U.S. government investigation concerns alleged export-license violations involving an employee of the Shanghai subsidiary and certain pressure transducers. MKS stated that it was not a target, was cooperating, and had implemented additional compliance procedures; outcomes could include further violations, fines, penalties or export restrictions.
- Gross unrecognized tax benefits were approximately $39.7 million, excluding interest and penalties; $17.9 million could affect the effective tax rate if recognized. The IRS began examining U.S. federal filings for open tax years through 2009.
- Management said other ordinary-course legal matters were not expected to materially adversely affect results, financial condition or cash flows. It reported no material change in market-risk exposure and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether semiconductor demand and Q4 revenue developed as management anticipated, and whether the expected decline persisted.
- How lower volumes, product mix, warranty costs and inventory provisions affect gross margins and cash generation.
- Plasmart’s post-acquisition contribution, integration progress and final purchase-price allocation.
- Developments in the Shanghai export investigation and any effect on sales, compliance or export permissions.
- Changes in uncertain tax positions, the IRS examination and the effective tax rate.
- Whether the reported working-capital benefit and strong operating cash flow are sustainable as business conditions change.