MKS Instruments, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The unaudited quarter and six months ended June 30, 2017 cover MKS’s Vacuum & Analysis and Light & Motion segments. Comparisons with 2016 are affected by Newport, acquired April 29, 2016: 2016 results included only about two months of Newport revenue in each comparable period. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $480.8M | $325.9M | $917.9M | $509.5M |
| Gross profit / margin | $219.6M / 45.7% | $135.9M / 41.7% | $425.1M / 46.3% | $213.8M / 42.0% |
| Operating income / margin | $92.9M / 19.3% | $19.2M / 5.9% | $176.5M / 19.2% | $41.7M / 8.2% |
| Net income | $120.4M | $9.2M | $185.5M | $26.8M |
| Diluted EPS | $2.19 | $0.17 | $3.37 | $0.50 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $175.5M | $51.8M |
- Q2 revenue grew about 47.5% year over year; six-month revenue grew about 80.1%. Management attributed much of the increase to higher semiconductor-related volumes and, particularly for Light & Motion, the longer period of Newport contribution.
- Q2 gross margin improved 4.0 percentage points. Management cited favorable volumes and material costs; the 2016 comparison included $10.1M of Newport inventory step-up expense. Six-month service margin also benefited from a material-cost adjustment that management did not expect to recur.
- Q2 net income included a $74.9M pretax gain on the sale of Data Analytics Solutions. The gain is not recurring operating revenue; operating income was $92.9M. The business generated $12.7M of revenue in 2016 and was not presented as discontinued operations.
Liquidity, debt and other key metrics
- At June 30, cash and cash equivalents were $422.8M and short-term investments were $149.0M, totaling $571.8M; current assets were $1.202B and current liabilities $258.3M. Cash and short-term investments were $418.1M at December 31, 2016.
- Six-month investing cash flow was $103.7M, including $72.5M net proceeds from the business sale and net investment maturities/sales; financing cash flow was an $86.2M outflow. Capital expenditures were $9.7M.
- Term-loan principal outstanding was $573.5M at June 30 ($551.8M reported long-term debt, net of financing costs, plus $6.3M current term-loan portion, alongside other short-term debt). MKS prepaid a further $50.0M on July 10, reducing term-loan principal to $523.5M. The ABL facility, with up to $50.0M capacity subject to borrowing-base limits, was undrawn. MKS reported compliance with debt covenants at quarter-end.
- Inventory was $304.7M, up from $275.9M at year-end; receivables were $268.5M, up from $248.8M. Management attributed working-capital use principally to increased inventory and receivables with higher business activity.
- Six-month dividends totaled $18.9M ($0.35 per share). A $0.175-per-share dividend was declared July 31 for payment in September, subject to the board’s determination and debt restrictions.
Material changes, outlook and risks
- Revenue from semiconductor capital-equipment and device customers rose 69% in Q2 and 80% for the first six months, according to management, primarily from volume increases. Semiconductor-related sales represented approximately 61% of six-month revenue in both 2017 and 2016. Management cautioned that semiconductor capital-equipment demand can shift rapidly and future demand timing and extent are uncertain.
- Two customers exceeded 10% of Q2 revenue: Applied Materials at 13.0% and Lam Research at 10.8%. Approximately half of six-month revenue was international; $336.5M of cash and short-term investments was held by foreign subsidiaries and substantially all of that foreign-held amount would be subject to U.S. tax if repatriated.
- MKS recorded $6.7M of asset impairment and $2.1M of restructuring expense in Q2, related primarily to discontinuing a product line and consolidating two manufacturing plants. The six-month restructuring charge was $2.6M; plant consolidation was expected to finish by December 31, 2017. Goodwill impairment was $4.9M and intangible-asset impairment $1.5M for the six months.
- On July 6, the company repriced its term loan, lowering applicable margins subject to leverage thresholds. The filing provides no revenue or earnings guidance for upcoming periods. Management expects continued significant R&D investment and notes product-development, customer-design-win, competitive and rapidly changing demand risks.
- Management expected to complete its assessment of the new revenue-recognition standard and potential financial impact by the end of Q3 2017; it planned modified-retrospective adoption in Q1 2018. The impact had not yet been determined.
- In the Newport shareholder litigation, the court dismissed the amended complaint against all defendants on June 22, 2017, with leave to amend. Plaintiffs later amended claims against Newport directors; MKS and Newport agreed to a stipulation under which plaintiffs agreed not to assert claims against either company and to dismiss them from the action. Other ordinary-course legal matters were not expected by management to have a material adverse effect.
Investor verification priorities
- Separate recurring operating performance from the $74.9M sale gain when evaluating Q2 and six-month earnings.
- Assess the sustainability of semiconductor-driven growth and margin improvement, including the effect of Newport comparison-period differences and nonrecurring 2016 inventory step-up costs.
- Track inventory, receivables and operating cash conversion as sales expand.
- Verify post-quarter debt repayment, repricing terms, covenant headroom and restrictions on dividends.
- Review customer concentration, semiconductor-cycle exposure, foreign-held cash and the eventual impact of revenue-standard adoption.