e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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(MARK ONE) |
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x |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
or
o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-23621
MKS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
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Massachusetts
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04-2277512 |
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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90 Industrial Way, Wilmington, Massachusetts
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01887 |
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(Address of principal executive offices)
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(Zip Code) |
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Registrants telephone number, including area code
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(978) 284-4000 |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act. Yes o No x
Number of shares outstanding of the issuers common stock as of April 28, 2006:
55,807,825
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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March 31, 2006 |
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December 31, 2005 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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|
|
|
|
|
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Cash and cash equivalents |
|
$ |
156,821 |
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|
$ |
220,573 |
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Short-term investments |
|
|
57,039 |
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|
72,046 |
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Trade accounts receivable, net |
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|
106,672 |
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|
|
82,610 |
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Inventories |
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111,967 |
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|
98,242 |
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Deferred income taxes |
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16,285 |
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|
15,165 |
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Other current assets |
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12,585 |
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|
|
10,511 |
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|
|
|
|
|
|
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Total current assets |
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|
461,369 |
|
|
|
499,147 |
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Property, plant and equipment, net |
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|
80,083 |
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|
|
78,726 |
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Long-term investments |
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|
696 |
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|
|
857 |
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Goodwill, net |
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322,761 |
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|
255,243 |
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Acquired intangible assets, net |
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|
54,923 |
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|
27,422 |
|
Other assets |
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|
2,583 |
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|
|
2,345 |
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|
|
|
|
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Total assets |
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$ |
922,415 |
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$ |
863,740 |
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|
|
|
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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|
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Short-term borrowings |
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$ |
18,727 |
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$ |
16,966 |
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Current portion of long-term debt |
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|
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1,429 |
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Current portion of capital lease obligations |
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613 |
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|
491 |
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Accounts payable |
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|
38,756 |
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|
27,955 |
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Accrued compensation |
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|
15,470 |
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|
13,583 |
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Income taxes payable |
|
|
12,810 |
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|
9,564 |
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Other accrued expenses |
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23,413 |
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19,099 |
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|
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|
|
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Total current liabilities |
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109,789 |
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|
89,087 |
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Long-term debt |
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|
5,000 |
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|
|
5,238 |
|
Long-term portion of capital lease obligations |
|
|
935 |
|
|
|
914 |
|
Deferred income taxes |
|
|
11,383 |
|
|
|
2,153 |
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Other liabilities |
|
|
3,931 |
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|
3,505 |
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Commitments and contingencies (Note 10) |
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Stockholders equity: |
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Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; none issued and outstanding |
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Common Stock, no par value, 200,000,000 shares authorized;
55,598,386 and 54,397,267 issued and outstanding at
March 31, 2006 and December 31, 2005, respectively |
|
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113 |
|
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|
113 |
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Additional paid-in capital |
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651,779 |
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639,152 |
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Retained earnings |
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132,077 |
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116,642 |
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Accumulated other comprehensive income |
|
|
7,408 |
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|
6,936 |
|
|
|
|
|
|
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Total stockholders equity |
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791,377 |
|
|
|
762,843 |
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|
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Total liabilities and stockholders equity |
|
$ |
922,415 |
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$ |
863,740 |
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|
|
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The accompanying notes are an integral part of the consolidated financial statements.
3
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
|
Net sales |
|
$ |
179,061 |
|
|
$ |
127,407 |
|
Cost of sales |
|
|
105,316 |
|
|
|
78,045 |
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|
|
|
|
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Gross profit |
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73,745 |
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|
49,362 |
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|
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|
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Research and development |
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16,057 |
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14,549 |
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Selling, general and administrative |
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29,765 |
|
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|
23,849 |
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Amortization of acquired intangible assets |
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5,254 |
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3,690 |
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Purchase of in-process technology |
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|
800 |
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|
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Restructuring charges |
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|
|
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|
454 |
|
|
|
|
|
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Income from operations |
|
|
21,869 |
|
|
|
6,820 |
|
Interest expense |
|
|
203 |
|
|
|
174 |
|
Interest income |
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|
1,633 |
|
|
|
1,272 |
|
|
|
|
|
|
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Income before income taxes |
|
|
23,299 |
|
|
|
7,918 |
|
Provision for income taxes |
|
|
7,864 |
|
|
|
2,460 |
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|
|
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|
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Net income |
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$ |
15,435 |
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$ |
5,458 |
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Net income per share: |
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Basic |
|
$ |
0.28 |
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|
$ |
0.10 |
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Diluted |
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$ |
0.28 |
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$ |
0.10 |
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|
|
|
|
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|
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Weighted average common shares outstanding: |
|
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|
|
|
|
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Basic |
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|
54,660 |
|
|
|
53,878 |
|
|
|
|
|
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Diluted |
|
|
55,269 |
|
|
|
54,393 |
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The accompanying notes are an integral part of the consolidated financial statements.
4
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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2006 |
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|
2005 |
|
Cash flows from operating activities: |
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|
|
|
|
|
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|
Net income |
|
$ |
15,435 |
|
|
$ |
5,458 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
8,522 |
|
|
|
6,713 |
|
Non-cash stock-based compensation |
|
|
2,666 |
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|
|
|
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Other |
|
|
645 |
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|
107 |
|
Changes in operating assets and liabilities, net of businesses acquired: |
|
|
|
|
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Trade accounts receivable |
|
|
(18,038 |
) |
|
|
(1,785 |
) |
Inventories |
|
|
(9,723 |
) |
|
|
699 |
|
Other current assets |
|
|
(321 |
) |
|
|
(547 |
) |
Accrued expenses and other current liabilities |
|
|
1,962 |
|
|
|
(2,646 |
) |
Accounts payable |
|
|
6,391 |
|
|
|
1,802 |
|
Income taxes payable |
|
|
1,975 |
|
|
|
84 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
9,514 |
|
|
|
9,885 |
|
|
|
|
|
|
|
|
|
|
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|
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|
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Cash flows from investing activities: |
|
|
|
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|
|
|
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Acquisitions of businesses, net of cash acquired |
|
|
(96,615 |
) |
|
|
|
|
Purchases of short-term and long-term available for sale investments |
|
|
(25,973 |
) |
|
|
(45,434 |
) |
Maturities and sales of short-term and long-term available for sale
investments |
|
|
41,389 |
|
|
|
51,937 |
|
Purchases of property, plant and equipment |
|
|
(2,064 |
) |
|
|
(2,342 |
) |
Other |
|
|
(287 |
) |
|
|
366 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(83,550 |
) |
|
|
4,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings |
|
|
18,727 |
|
|
|
21,067 |
|
Payments on short-term borrowings |
|
|
(17,024 |
) |
|
|
(22,982 |
) |
Principal payments on long-term debt and capital lease obligations |
|
|
(1,788 |
) |
|
|
(390 |
) |
Proceeds from exercise of stock options and employee stock purchase plan |
|
|
7,963 |
|
|
|
746 |
|
Gross tax windfall from stock-based compensation |
|
|
1,964 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
9,842 |
|
|
|
(1,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
442 |
|
|
|
(1,009 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(63,752 |
) |
|
|
11,844 |
|
Cash and cash equivalents at beginning of period |
|
|
220,573 |
|
|
|
138,389 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
156,821 |
|
|
$ |
150,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Supplemental cash flow disclosure: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
3,178 |
|
|
$ |
2,617 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
5
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
1) |
|
Basis of Presentation
The terms MKS and the Company refer to MKS Instruments, Inc. and its subsidiaries. The
interim financial data as of March 31, 2006 and for the three months ended March 31, 2006 and
2005 is unaudited; however, in the opinion of MKS, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement of the
results for the interim periods. The unaudited consolidated financial statements presented
herein have been prepared in accordance with the instructions to Form 10-Q and do not include
all of the information and note disclosures required by generally accepted accounting
principles. The consolidated financial statements should be read in conjunction with the
December 31, 2005 audited consolidated financial statements and notes thereto included in the
MKS Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16,
2006. |
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The preparation of these consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related to revenue
recognition, accounts receivable, inventory, intangible assets, goodwill, other long-lived
assets, income taxes, deferred tax valuation allowance and investments. Management bases its
estimates and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. |
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2) |
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Stock-Based Compensation
Effect of Adoption of SFAS 123R, Share-Based Payment
Prior to January 1, 2006, the Company accounted for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations (APB 25).
Accordingly, no compensation expense was recorded for options issued to employees in fixed
amounts with fixed exercise prices at least equal to the fair market value of the Companys
common stock at the date of grant. The Company had adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, (SFAS 123). |
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|
On January 7, 2005, the Company accelerated the vesting of outstanding stock options granted
to employees and officers with an exercise price of $23.00 per share or greater. As a result
of this action, options to purchase approximately 1.6 million shares of the Companys common
stock became exercisable on January 7, 2005. No compensation expense was recorded in the
Companys consolidated statement of operations for the three months ended March 31, 2005
related to this action as these options had no intrinsic value on January 7, 2005. For
purposes of the SFAS 123 proforma calculation below, the expense related to the options that
were accelerated was $16,886,000, net of tax, for the three months ended March 31, 2005. The
reason that the Company accelerated the vesting of the identified stock options was to reduce
the Companys compensation expense in periods subsequent to the adoption of SFAS 123R,
Share-Based Payment (SFAS 123R). |
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|
As of January 1, 2006, the Company adopted SFAS 123R using the modified prospective method.
SFAS 123R requires companies to recognize compensation cost for all stock-based awards based
upon the grant-date fair value of those awards and to recognize the expense over the
requisite service period for awards expected to vest. Using the modified prospective method
of adopting SFAS 123R, MKS began recognizing compensation expense for equity-based awards
granted after January 1, 2006 plus unvested awards granted prior to January 1, 2006. Under
this method of implementation, prior periods were not restated.
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6
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
The Company recognized the full impact of its share-based payment plans in the consolidated
statements of operations for the three months ended March 31, 2006 under SFAS 123R and did
not capitalize any such costs on the consolidated balance sheets, as such costs that
qualified for capitalization were not material. The following table reflects the effect of
recording stock-based compensation for the three months ended March 31, 2006 in accordance
with SFAS 123R:
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Three Months Ended |
|
|
|
March 31, 2006 |
|
Stock-based compensation expense by type of award: |
|
|
|
|
Employee stock options |
|
$ |
1,967 |
|
Restricted stock |
|
|
527 |
|
Employee stock purchase plan |
|
|
172 |
|
|
|
|
|
Total stock-based compensation |
|
|
2,666 |
|
Tax effect on stock-based compensation |
|
|
(935 |
) |
|
|
|
|
Net effect on net income |
|
$ |
1,731 |
|
|
|
|
|
Effect on: |
|
|
|
|
Tax benefit from equity awards |
|
|
1,960 |
|
Gross tax windfall from stock-based compensation |
|
|
(1,964 |
) |
|
|
|
|
Cash flows from operations |
|
$ |
(4 |
) |
|
|
|
|
Cash flows from financing activities |
|
$ |
1,964 |
|
|
|
|
|
Effect on earnings per share: |
|
|
|
|
Basic |
|
$ |
(0.03 |
) |
|
|
|
|
Diluted |
|
$ |
(0.03 |
) |
|
|
|
|
Valuation Assumptions
In connection with the adoption of SFAS 123R, the Company reassessed its valuation
technique and related assumptions. The Company determines the fair value of restricted stock
based on the number of shares granted and the closing market price of the Companys common
stock on the date of the award, and estimates the fair value of stock options and employee
stock purchase rights using the Black-Scholes valuation model, which is consistent with our
valuation techniques previously utilized for options in footnote disclosures required under
SFAS 123. Such values are recognized as expense on a straight-line basis over the requisite
service periods, net of estimated forfeitures. The estimation of stock-based awards that will
ultimately vest requires significant judgment. We consider many factors when estimating
expected forfeitures, including types of awards and historical experience. Actual results,
and future changes in estimates, may differ substantially from our current estimates.
The fair values of options and employee stock purchase rights at the date of grant were
estimated using the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Stock option plans: |
|
|
|
|
|
|
|
|
Expected life (years) |
|
|
5.0 |
|
|
|
4.3 |
|
Risk-free interest rate |
|
|
4.3 |
% |
|
|
3.7 |
% |
Expected volatility |
|
|
51.0 |
% |
|
|
55.0 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Employee stock purchase rights: |
|
|
|
|
|
|
|
|
Expected life (years) |
|
|
0.5 |
|
|
|
0.5 |
|
Risk-free interest rate |
|
|
4.3 |
% |
|
|
2.4 |
% |
Expected volatility |
|
|
34.0 |
% |
|
|
55.0 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
7
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
Expected volatilities are based on a combination of implied and historical volatilities of
our common stock; the expected life represents the weighted average period of time that
options granted are expected to be outstanding giving consideration to vesting schedules and
our historical exercise patterns; and the risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant for periods corresponding with the
expected life of the option.
Prior to the adoption of SFAS 123R
The following table illustrates the effect on net income and net income per share for the
quarter ended March 31, 2005 if the Company had applied the fair value recognition provisions
of SFAS 123 to stock-based employee awards.
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
Net income as reported |
|
$ |
5,458 |
|
Deduct: Total stock-based employee
compensation expense determined under the
fair-value-based method for all awards, net
of tax |
|
|
(18,890 |
) |
|
|
|
|
Pro forma net loss |
|
$ |
(13,432 |
) |
|
|
|
|
Basic net income (loss) per share: |
|
|
|
|
As reported |
|
$ |
0.10 |
|
|
|
|
|
Pro forma |
|
$ |
(0.25 |
) |
|
|
|
|
Diluted net income (loss) per share: |
|
|
|
|
As reported |
|
$ |
0.10 |
|
|
|
|
|
Pro forma |
|
$ |
(0.25 |
) |
|
|
|
|
Equity Incentive Plans
The Companys equity incentive plans (the Plans) are intended to attract and retain
employees and to provide an incentive for them to assist the Company to achieve long-range
performance goals and to enable them to participate in the long-term growth of the Company.
The Plans consist of plans under which employees may be granted restricted stock, options to
purchase shares of the Companys stock and other equity incentives. In addition, certain of
the Plans provide for the automatic grant of stock options to non-employee directors and
permit the grant of equity-based awards to consultants. Under the Plans, stock options
generally have a vesting period of 25% after one year and 6.25% per quarter thereafter, are
exercisable for a period not to exceed 10 years from the date of grant and are granted at
prices equal to 100% of the fair market value of our common stock at the grant date.
Generally, options granted to non-employee directors, under the Plans, vest at the earliest of (1)
the next annual meeting, (2) 13 months from date of grant, or (3) the effective date of an
acquisition. Restricted stock awards generally vest three years from the date of grant. At March 31, 2006,
there were 6,161,818 shares authorized for issuance and 5,136,553 shares available for future
grants of the Companys common stock under the Plans.
The Company also has two Employee Stock Purchase Plans (ESPPs) for the United States and
international employees, respectively, which enable the Companys employees to purchase MKS
common stock. As of March 31, 2006, there were 1,500,000 shares authorized for issuance and
730,543 shares reserved for future issuance under the ESPPs.
8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
Stock Option and Restricted Stock Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Restricted Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Number of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Shares |
|
|
Fair Value |
|
Outstanding options/non-vested
restricted stock at December 31, 2004 |
|
|
10,023,717 |
|
|
$ |
20.25 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
316,500 |
|
|
$ |
16.93 |
|
|
|
|
|
|
|
|
|
Exercised options/vested restricted stock |
|
|
(382,211 |
) |
|
$ |
10.70 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(498,735 |
) |
|
$ |
23.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options/non-vested
restricted stock at December 31, 2005 |
|
|
9,459,271 |
|
|
$ |
20.36 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
10,000 |
|
|
$ |
18.55 |
|
|
|
628,165 |
|
|
$ |
22.01 |
|
Exercised options/vested restricted stock |
|
|
(611,854 |
) |
|
$ |
13.02 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(32,316 |
) |
|
$ |
19.05 |
|
|
|
(1,400 |
) |
|
$ |
22.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options/non-vested
restricted stock at March 31, 2006 |
|
|
8,825,101 |
|
|
$ |
20.87 |
|
|
|
626,765 |
|
|
$ |
22.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of stock options and restricted stock awards that vested during the
quarter ended March 31, 2006 and 2005 was approximately $1,965,000 and $1,428,000,
respectively. As of March 31, 2006, the unrecognized compensation cost related to non-vested
stock options and the unrecognized compensation cost related to restricted stock was approximately $12,550,000 and $12,597,000,
respectively, and will be recognized over an estimated weighted average amortization period
of 2.1 years and 2.9 years, respectively.
The following table summarizes information with respect to options outstanding and
exercisable under the Plans at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
|
|
|
Average |
|
|
Intrinsic |
|
|
|
Number of |
|
|
Exercise |
|
|
Life |
|
|
Value (in |
|
|
Number of |
|
|
Exercise |
|
|
Value (in |
|
|
|
Shares |
|
|
Price |
|
|
(In Years) |
|
|
thousands) |
|
|
Shares |
|
|
Price |
|
|
thousands) |
|
$4.43 - $8.92 |
|
|
439,163 |
|
|
$ |
6.18 |
|
|
|
1.94 |
|
|
$ |
7,574 |
|
|
|
439,163 |
|
|
$ |
6.18 |
|
|
$ |
7,574 |
|
$10.86 - $19.00 |
|
|
3,745,762 |
|
|
$ |
15.90 |
|
|
|
6.97 |
|
|
|
28,223 |
|
|
|
2,275,764 |
|
|
$ |
16.28 |
|
|
|
16,271 |
|
$19.18 - $29.50 |
|
|
3,684,826 |
|
|
$ |
24.78 |
|
|
|
6.11 |
|
|
|
636 |
|
|
|
3,655,792 |
|
|
$ |
24.81 |
|
|
|
575 |
|
$29.93 - $61.50 |
|
|
955,350 |
|
|
$ |
32.06 |
|
|
|
5.37 |
|
|
|
|
|
|
|
955,350 |
|
|
$ |
32.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.43 - $61.50 |
|
|
8,825,101 |
|
|
$ |
20.87 |
|
|
|
6.19 |
|
|
$ |
36,433 |
|
|
|
7,326,069 |
|
|
$ |
21.99 |
|
|
$ |
24,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of options exercisable was 5.78 years at
March 31, 2006.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value,
based on the Companys closing stock price of $23.43 as of March 31, 2006, which would have
been received by the option holders had all option holders exercised their options as of that
date. The total number of in-the-money options exercisable as of March 31, 2006 was
2,938,620.
The weighted average grant date fair value of options granted during the three months
ended March 31, 2006 and March 31, 2005, as determined under SFAS 123R and SFAS 123, was
$9.14 and $6.95 per share, respectively. The total intrinsic value of options exercised
during the three month period ended March 31, 2006 and March 31, 2005 was approximately
$5,521,000 and $773,000, respectively.
The total cash received from employees as a result of employee stock option exercises during
the three months ended March 31, 2006 and March 31, 2005 was approximately $7,963,000 and
$746,000, respectively. In
9
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
|
|
connection with these exercises, the net tax benefits realized by the Company for the three
months ended March 31, 2006 and March 31, 2005 was approximately $1,960,000 and $297,000,
respectively. |
|
|
|
The Company settles employee stock option exercises with newly issued common shares. |
|
3) |
|
Acquisitions
On January 3, 2006, the Company completed its acquisition of Ion Systems, Inc. (Ion), a
leading provider of electrostatic management solutions located in Alameda, California,
pursuant to an Agreement and Plan of Merger dated November 25, 2005. Ions ionization
technology controls electrostatic charge to reduce process contamination and improve yields,
which complements the Companys process monitoring and control technologies. The aggregate
purchase price consisted of $73,129,000 in cash and $807,000 in acquisition related costs. |
|
|
|
The following table summarizes the preliminary estimated fair value of the assets acquired
and liabilities assumed at the date of the acquisition. The purchase price allocation is
preliminary, pending the final determination of fair values of intangible assets and certain
assumed assets and liabilities: |
|
|
|
|
|
Current assets |
|
$ |
15,962 |
|
Intangible assets |
|
|
25,800 |
|
Other assets |
|
|
3,322 |
|
Goodwill |
|
|
45,443 |
|
|
|
|
|
Total assets acquired |
|
|
90,527 |
|
|
|
|
|
|
Current liabilities |
|
|
(7,193 |
) |
Deferred tax liability |
|
|
(9,398 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(16,591 |
) |
|
|
|
|
|
|
|
|
|
Total purchase price including acquisition costs |
|
$ |
73,936 |
|
|
|
|
|
|
|
The goodwill and other intangible assets associated with the acquisition are not
deductible for tax purposes. Of the $25,800,000 of acquired intangible assets, the following
table reflects the allocation of the acquired intangible assets and related estimates of
useful lives: |
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
12,200 |
|
|
8-year useful life
|
Current developed technology |
|
|
9,900 |
|
|
6-year useful life
|
Tradenames |
|
|
2,300 |
|
|
8-year useful life
|
Order backlog |
|
|
1,000 |
|
|
3 months
|
In-process research and development |
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
This transaction resulted in an amount of purchase price that exceeded the estimated
fair values of tangible and intangible assets, which was allocated to goodwill. The Company
believes that the amount of goodwill relative to identifiable intangible assets relates
to several factors including: (1) potential buyer-specific synergies related to market
opportunities for a combined product offering and (2) potential to leverage the Companys
sales force and intellectual property to attract new customers and revenue.
On January 3, 2006, the Company completed its acquisition of Umetrics, AB (Umetrics), a
leader in multivariate data analysis and modeling software located in Umea, Sweden, pursuant
to a Sale and Purchase Agreement dated December 15, 2005. Umetrics multivariate data
analysis and modeling software converts process data into useable information for yield
improvement when linked with the Companys open and modular
10
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
platform of process sensors and data collection, integration, data storage, and visualization
capabilities. The purchase price consisted of $30,003,000 in cash and $334,000 in
acquisition related costs.
The following table summarizes the preliminary estimated fair value of the assets acquired
and liabilities assumed at the date of the acquisition. The purchase price allocation is
preliminary pending, the final determination of fair values of intangible assets and certain
assumed assets and liabilities:
|
|
|
|
|
Current assets |
|
$ |
4,243 |
|
Intangible assets |
|
|
7,650 |
|
Other assets |
|
|
400 |
|
Goodwill |
|
|
22,002 |
|
|
|
|
|
Total assets acquired |
|
|
34,295 |
|
|
|
|
|
|
Current liabilities |
|
|
(1,928 |
) |
Deferred tax liability |
|
|
(2,030 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(3,958 |
) |
|
|
|
|
|
|
|
|
|
Total purchase price including acquisition costs |
|
$ |
30,337 |
|
|
|
|
|
The goodwill and other intangible assets associated with the acquisition are not
deductible for tax purposes. Of the $7,650,000 of acquired intangible assets, the following
table reflects the allocation of the acquired intangible assets and related estimates of
useful lives:
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
2,300 |
|
|
8-year useful life
|
Current developed technology |
|
|
4,150 |
|
|
4-6-year useful life
|
Tradenames |
|
|
800 |
|
|
8-year useful life
|
In-process research and development |
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
This transaction resulted in an amount of purchase price that exceeded the estimated fair
values of tangible and intangible assets, which was allocated to goodwill. The Company
believes that the amount of goodwill relative to identifiable intangible assets relates
to several factors including: (1) being a provider of multivariate software
technology which will be increasingly important to solution providers for semiconductor and
other industrial customers and (2) enhanced ability to combine Umetrics software products
with MKS traditional hardware products.
Ions ionization technology and Umetrics multivariate data analysis technology both
complement our process control and monitoring technologies and will support the Companys
mission to improve process performance and productivity.
The results of these acquisitions were included in the Companys consolidated operations
beginning in January 2006. The pro forma consolidated statements reflecting the operating
results of Ion and Umetrics, had they been acquired as of January 1, 2005, would not differ
materially from the operating results of the Company as reported for the three months ended
March 31, 2005.
4) |
|
Goodwill and Intangible Assets |
Intangible Assets
Acquired amortizable intangible assets consisted of the following as of March 31, 2006:
11
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Completed technology |
|
$ |
86,576 |
|
|
$ |
(54,681 |
) |
|
$ |
31,895 |
|
Customer relationships |
|
|
21,140 |
|
|
|
(5,149 |
) |
|
|
15,991 |
|
Patents, trademarks, tradenames and other |
|
|
16,495 |
|
|
|
(9,458 |
) |
|
|
7,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
124,211 |
|
|
$ |
(69,288 |
) |
|
$ |
54,923 |
|
|
|
|
|
|
|
|
|
|
|
Acquired amortizable intangible assets consisted of the following as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Completed technology |
|
$ |
72,421 |
|
|
$ |
(51,520 |
) |
|
$ |
20,901 |
|
Customer relationships |
|
|
6,640 |
|
|
|
(4,481 |
) |
|
|
2,159 |
|
Patents, trademarks, tradenames and other |
|
|
12,395 |
|
|
|
(8,033 |
) |
|
|
4,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91,456 |
|
|
$ |
(64,034 |
) |
|
$ |
27,422 |
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense related to acquired intangibles for the three months ended
March 31, 2006 and 2005 was $5,254,000 and $3,690,000, respectively. Estimated amortization
expense related to acquired intangibles for the remainder of 2006 and in total for the year
is $12,143,000 and $17,397,000, respectively. Estimated amortization expense for 2007 and
for each of the three succeeding fiscal years is as follows:
|
|
|
Year |
|
Amount |
2007
|
|
$15,713 |
2008
|
|
7,852 |
2009
|
|
5,788 |
2010
|
|
4,695 |
Goodwill
The changes in the carrying amount of goodwill during the three months ended March 31, 2006
were as follows:
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
255,243 |
|
Goodwill acquired during 2006 |
|
|
67,445 |
|
Foreign currency translation |
|
|
73 |
|
|
|
|
|
|
|
$ |
322,761 |
|
|
|
|
|
The change in the carrying amount of goodwill during the three months ended March 31, 2005
was not material.
12
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
5) |
|
Net Income Per Share |
|
|
The following table sets forth the computation of basic and diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Numerator |
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,435 |
|
|
$ |
5,458 |
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
Shares used in net income per common share basic |
|
|
54,660 |
|
|
|
53,878 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options, restricted stock and employee stock purchase plan |
|
|
609 |
|
|
|
515 |
|
|
|
|
|
|
|
|
Shares used in net income per common share diluted |
|
|
55,269 |
|
|
|
54,393 |
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.28 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
For purposes of computing diluted net income per common share, 4,707,690 and 7,164,024
outstanding options for the three months ended March 31, 2006 and 2005, respectively, were
excluded from the calculation as their inclusion would be anti-dilutive. There were options
to purchase approximately 8,825,101 and 9,938,150 shares of the Companys common stock
outstanding as of March 31, 2006 and 2005, respectively. |
|
6) |
|
Inventories
Inventories consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw material |
|
$ |
56,500 |
|
|
$ |
48,235 |
|
Work in process |
|
|
20,484 |
|
|
|
18,283 |
|
Finished goods |
|
|
34,983 |
|
|
|
31,724 |
|
|
|
|
|
|
|
|
|
|
$ |
111,967 |
|
|
$ |
98,242 |
|
|
|
|
|
|
|
|
7) |
|
Stockholders Equity
Comprehensive Income
Components of comprehensive income were as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
15,435 |
|
|
$ |
5,458 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Changes in value of financial instruments designated as cash flow
hedges (net of taxes (tax benefit) of $(263) and $515, respectively) |
|
|
(470 |
) |
|
|
856 |
|
Foreign currency translation adjustment |
|
|
870 |
|
|
|
(2,078 |
) |
Unrealized gain (loss) on investments (net of tax (tax
benefit) of $40 and $(38), respectively) |
|
|
72 |
|
|
|
(62 |
) |
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
472 |
|
|
|
(1,284 |
) |
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
15,907 |
|
|
$ |
4,174 |
|
|
|
|
|
|
|
|
13
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
8) |
|
Income Taxes
The Company records income taxes using the asset and liability method. Deferred income tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statement carrying amounts of existing assets
and liabilities and their respective income tax bases, and operating loss and tax credit
carryforwards. The Company evaluates the realizability of its net deferred tax assets and
assesses the need for a valuation allowance on a quarterly basis. The future benefit to be
derived from its deferred tax assets is dependent upon its ability to generate sufficient
future taxable income to realize the assets. The Company records a valuation allowance to
reduce its net deferred tax assets to the amount that may be more likely than not to be
realized. To the extent the Company establishes a valuation allowance, an expense will be
recorded within the provision for income taxes line on the consolidated statements of
operations. |
|
|
|
At March 31, 2006, the Company continued to maintain a valuation allowance for certain state
tax credits for which it is more likely than not that they will not be realized. |
|
|
|
The Companys effective tax rate for the quarter ending March 31, 2006 was 33.8%. The
effective tax rate is less than the statutory tax rate primarily due to the profits of the
Companys international subsidiaries being taxed at rates lower than the U.S. statutory tax
rate. |
|
|
|
Through March 31, 2006, the Company had not provided deferred income taxes on the
undistributed earnings of its foreign subsidiaries because such earnings were intended to be
permanently reinvested outside the U.S. Determination of the potential deferred income tax
liability on these undistributed earnings is not practicable because such liability, if any,
is dependent on circumstances existing if and when remittance occurs. At March 31, 2006, the
Company had $90,110,368 of undistributed earnings in its foreign subsidiaries. |
|
|
|
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3 Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards, The Company
has elected to adopt the alternative transition method provided in the FASB Staff Position
for calculating the tax effects of stock-based compensation pursuant to SFAS 123R. The
alternative transition method includes simplified methods to establish the beginning balance
of the additional paid-in capital pool (APIC pool) related to the tax effects of employee
stock-based compensation, and to determine the subsequent impact on the APIC pool and
consolidated statements of cash flows of the tax effects of employee stock-based compensation
awards that are outstanding upon adoption of SFAS 123R. |
|
|
|
In the normal course of business, the Company and its subsidiaries are examined by various
tax authorities, including the Internal Revenue Service (IRS). Any such examination could
result in an unfavorable settlement of any particular issue and may require the use of cash.
Unfavorable or favorable resolution of any such examination could
result in an increase or a reduction, respectively, to our effective tax
rate in the quarter of resolution. Although the Company believes that its tax positions are consistent with applicable U.S. federal
and state and international laws, certain tax reserves are maintained at March 31, 2006 should
these positions be challenged by the applicable tax authority and additional tax assessed on audit. |
|
9) |
|
Geographic, Product and Significant Customer Information
The Company operates in one segment for the development, manufacturing, sales and servicing
of products that measure, control, power and monitor critical parameters of advanced
manufacturing processes. The Companys chief decision-maker reviews consolidated operating
results to make decisions about allocating resources and assessing performance for the entire
Company. |
14
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
Information about the Companys operations in different geographic regions is presented in
the tables below. Net sales to unaffiliated customers are based on the location in which the
sale originated. Transfers between geographic areas are at negotiated transfer prices and
have been eliminated from consolidated net sales.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Geographic net sales |
|
|
|
|
|
|
|
|
United States |
|
$ |
125,133 |
|
|
$ |
77,917 |
|
Japan |
|
|
22,533 |
|
|
|
21,062 |
|
Europe |
|
|
14,532 |
|
|
|
14,897 |
|
Asia |
|
|
16,863 |
|
|
|
13,531 |
|
|
|
|
|
|
|
|
|
|
$ |
179,061 |
|
|
$ |
127,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Long-lived assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
67,925 |
|
|
$ |
66,588 |
|
Japan |
|
|
5,632 |
|
|
|
5,679 |
|
Europe |
|
|
4,483 |
|
|
|
4,311 |
|
Asia |
|
|
4,626 |
|
|
|
4,493 |
|
|
|
|
|
|
|
|
|
|
$ |
82,666 |
|
|
$ |
81,071 |
|
|
|
|
|
|
|
|
The Company groups its products into three product groups. Net sales for these product
groups are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Instruments and Control Systems |
|
$ |
83,908 |
|
|
$ |
60,850 |
|
Power and Reactive Gas Products |
|
|
76,584 |
|
|
|
52,359 |
|
Vacuum Products |
|
|
18,569 |
|
|
|
14,198 |
|
|
|
|
|
|
|
|
|
|
$ |
179,061 |
|
|
$ |
127,407 |
|
|
|
|
|
|
|
|
|
|
The Company had two customers comprising 22% and 12%, respectively, of net sales for the
three months ended March 31, 2006 and two customers comprising 15% and 10%, respectively, of
net sales for the three months ended March 31, 2005. |
|
10) |
|
Commitments and Contingencies
On November 3, 1999, On-Line Technologies, Inc. (On-Line), which was acquired by MKS in
2001, brought suit in federal district court in Connecticut against Perkin-Elmer, Inc. and
certain other defendants (Perkin-Elmer) for infringement of On-Lines patent related to its
FTIR spectrometer product and related claims. The suit sought injunctive relief and damages
for infringement. Perkin-Elmer filed a counterclaim seeking invalidity of the patent, costs
and attorneys fees, and in June 2002, filed a motion for summary judgment. In April 2003,
the court granted the motion and dismissed the case. MKS appealed this decision to the
federal circuit court of appeals, which, on October 13, 2004, reversed the lower courts
dismissal of certain claims in the case. Accordingly, the case has been remanded to the
United States District Court in Connecticut for further proceedings on the merits of the
remaining claims. On March 11, 2005, Perkin-Elmer submitted to the court a stipulation
agreeing that they have infringed a specified claim of On-Lines patent. Perkin-Elmer also
filed a motion for summary judgment that such patent claim is invalid, but that motion was
denied on March 23, 2006. Perkin-Elmer then filed a |
15
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
|
|
motion for reconsideration of that decision, which motion is currently pending. The case is
currently scheduled to be tried on October 16, 2006. |
|
|
|
The Company is subject to other legal proceedings and claims, which have arisen in the
ordinary course of business. |
|
|
|
In the opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the Companys results of operations, financial condition or cash
flows. |
|
11) |
|
Restructuring Charges
During the three months ended March 31, 2005, the Company initiated a restructuring plan
related to its Berlin, Germany location. This consolidation of activities included the
reduction of 16 employees. The total restructuring charge related to this consolidation was
$454,000, which consisted of $251,000 related to the repayment of a government grant and
$203,000 in severance costs. |
|
|
|
There were no material restructuring activities during the three months ended March 31, 2006. |
|
12) |
|
Product Warranties
The Company provides for the estimated costs to fulfill customer warranty obligations upon
the recognition of the related revenue. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating the quality of
its component suppliers, the Companys warranty obligation is affected by product failure
rates, utilization levels, material usage, and supplier warranties on parts delivered to the
Company. Should actual product failure rates, utilization levels, material usage, or
supplier warranties on parts differ from the Companys estimates, revisions to the estimated
warranty liability would be required. |
|
|
|
Product warranty activities for the three months ended March 31 were as follows: |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Balance at the beginning of the year |
|
$ |
7,766 |
|
|
$ |
7,601 |
|
Fair value of warranty liabilities acquired during the first quarter |
|
|
562 |
|
|
|
|
|
Provisions for product warranties during the first quarter |
|
|
3,432 |
|
|
|
2,083 |
|
Direct charges to the warranty liability during the first quarter |
|
|
(2,272 |
) |
|
|
(1,970 |
) |
|
|
|
|
|
|
|
Balance at the end of the first quarter |
|
$ |
9,488 |
|
|
$ |
7,714 |
|
|
|
|
|
|
|
|
16
MKS INSTRUMENTS, INC.
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. |
We believe that this Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. When used herein, the
words believes, anticipates, plans, expects, estimates and similar expressions are
intended to identify forward-looking statements. These forward-looking statements reflect
managements current opinions and are subject to certain risks and uncertainties that could cause
results to differ materially from those stated or implied. We assume no obligation to update this
information. Risks and uncertainties include, but are not limited to, those discussed in the
section in this Report entitled Risk Factors.
Overview
We are a leading worldwide provider of instruments, components, subsystems and process control
solutions that measure, control, power and monitor critical parameters of semiconductor and other
advanced manufacturing processes.
We are managed as one operating segment which is organized around three product groups:
Instruments and Control Systems, Power and Reactive Gas Products, and Vacuum Products. Our
products are derived from our core competencies in pressure measurement and control, materials
delivery, gas and thin-film composition analysis, electrostatic charge control, control and
information management, power and reactive gas generation and vacuum technology. Our products are
used to manufacture semiconductors and thin film coatings for diverse markets such as flat panel
displays, optical and magnetic storage media, architectural glass, and electro-optical products.
We also provide technologies for other markets, including the medical imaging equipment market.
Our customers include semiconductor capital equipment manufacturers, semiconductor device
manufacturers, industrial and biopharmaceutical manufacturing companies, medical equipment
manufacturers and university, government and industrial research laboratories. For the three
months ended March 31, 2006 and the full year ended December 31, 2005, we estimate that
approximately 73% and 71% of our net sales, respectively, were to semiconductor capital equipment
manufacturers and semiconductor device manufacturers. We expect that sales to the semiconductor
capital equipment manufacturers and semiconductor device manufacturers will continue to account for
a substantial majority of our sales.
During the fourth quarter of 2005 and continuing through the first quarter of 2006, we
experienced significant increases in customer orders, which caused our first quarter 2006 sales to
increase significantly from 2005 quarterly levels. We currently expect our second quarter 2006
sales could be higher than the first quarter of 2006. However, the semiconductor capital equipment
industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain
how long these sales levels may be maintained or the timing or extent of any future downturn or
upturn in the semiconductor capital equipment industry.
A portion of our sales is to operations in international markets. For the three months ended
March 31, 2006 and full year ended December 31, 2005, international sales accounted for
approximately 30% and 37% of net sales, respectively.
On January 3, 2006, we completed our acquisition of Ion Systems, Inc. (Ion), a leading
provider of electrostatic management solutions located in Alameda, California, pursuant to an
Agreement and Plan of Merger dated November 25, 2005. Ions ionization technology controls
electrostatic charges to reduce process contamination and improve yields, which complements our
process monitoring and control technologies. The aggregate purchase price consisted of $73.1
million in cash and $0.8 million in acquisition related costs.
Additionally, on January 3, 2006, we completed our acquisition of Umetrics, AB (Umetrics), a
leader in multivariate data analysis and modeling software located in Umea, Sweden, pursuant to a
Sale and Purchase Agreement dated December 15, 2005. Umetrics multivariate data analysis and
modeling software converts process data into useable information for yield improvement, when linked
with our open and modular platform of process sensors and data
17
collection, integration, data storage, and visualization capabilities. The purchase price
consisted of $30.0 million in cash and $0.3 million in acquisition related costs.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America requires management
to make judgments, assumptions and estimates that affect the amounts reported. Management believes that other than the adoption of Statement of Financial Accounting Standards No.
123R, Share-Based Payment (SFAS 123R), there have been no significant changes in our critical
accounting policies since December 31, 2005. See the discussion
of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31,
2005.
Stock-Based Compensation Expense
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R,
using the modified prospective transition method, and therefore have not restated prior periods
results. Under this method we recognize compensation expense for all equity-based awards granted
after January 1, 2006 as well as awards granted prior to but not yet vested as of January 1, 2006,
in accordance with SFAS 123R. Under the fair value recognition provisions of SFAS 123R, we
recognize stock-based compensation net of an estimated forfeiture rate and only recognize
compensation cost for those shares expected to vest on a straight-line basis over the requisite
service period of the award. The adoption of this standard reduced our net income by $1.7 million
for the three months ended March 31, 2006. Prior to SFAS 123R adoption, we accounted for
share-based payments under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) and accordingly, generally recognized compensation expense only when we
granted options with a discounted exercise price.
Determining the appropriate fair value model and calculating the fair value of share-based
payment awards require the input of highly subjective assumptions, including the expected life of
the share-based payment awards and stock price volatility. Management determined that blended
volatility, a combination of historical and implied volatility, is more reflective of market
conditions and a better indicator of expected volatility than historical or implied volatility.
Therefore, expected volatility for the quarter ended March 31, 2006 was based on a blended
volatility. The assumptions used in calculating the fair value of share-based payment awards
represent managements best estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if factors change and we use different
assumptions, our stock-based compensation expense could be materially different in the future. In
addition, we are required to estimate the expected forfeiture rate and only recognize expense for
those shares expected to vest. If our actual forfeiture rate is materially different from our
estimate, the stock-based compensation expense could be significantly different from what we have
recorded in the current period. See Note 2 to the consolidated financial statements for a further
discussion on stock-based compensation.
18
Results of Operations
The following table sets forth for the periods indicated the percentage of total net sales of
certain line items included in MKS consolidated statements of operations data.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
58.8 |
|
|
|
61.3 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
41.2 |
|
|
|
38.7 |
|
Research and development |
|
|
9.0 |
|
|
|
11.4 |
|
Selling, general and administrative |
|
|
16.6 |
|
|
|
18.7 |
|
Amortization of acquired intangible assets |
|
|
2.9 |
|
|
|
2.9 |
|
Purchase of in-process technology |
|
|
0.5 |
|
|
|
|
|
Restructuring, asset impairment and other charges |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
Income from operations |
|
|
12.2 |
|
|
|
5.3 |
|
Interest income, net |
|
|
0.8 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
13.0 |
|
|
|
6.2 |
|
Provision for income taxes |
|
|
4.4 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
Net income |
|
|
8.6 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
Net Sales (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
|
|
Net sales |
|
$ |
179.1 |
|
|
$ |
127.4 |
|
|
|
40.5 |
% |
Net sales increased $51.7 million mainly due to an increase in worldwide demand from our
semiconductor capital equipment manufacturer and semiconductor device manufacturer customers, which
increased $38.9 million or 42.5% compared to the same period for the prior year. During the
first quarter of 2006, we acquired Ion and Umetrics. These acquisitions increased our net sales by
approximately $10.1 million for the quarter ended March 31, 2006 compared to the same period in the
prior year. International net
sales were approximately $53.9 million for the three months ended March 31, 2006 or 30.1% of net
sales and $49.5 million for the three months ended
March 31, 2005 or 38.8% of net sales.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Points Change |
|
|
|
|
Gross profit as percentage of net sales |
|
|
41.2 |
% |
|
|
38.7 |
% |
|
|
2.5 |
|
Gross profit increased mainly due to overhead costs decreasing as a percentage of sales. In
the first quarter of 2006, gross profit reflected a favorable impact of overhead absorption
compared to the first quarter of 2005. This was primarily due to a sequential increase in sales
and inventory during the three months ended March 31, 2006, related to a significant increase in
demand. Inventory increased by $13.7 million from $98.2 million at December 31, 2005 to $112.0
million at March 31, 2006 and decreased by $2.0 million during the same period in 2005.
Research and Development (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
|
|
Research and development expenses |
|
$ |
16.1 |
|
|
$ |
14.5 |
|
|
|
10.4% |
|
19
Research and development expense increased $1.5 million mainly due to increased compensation
expense of $1.4 million, as a result of higher staffing levels, $0.6 million of compensation costs
from companies acquired at the beginning of the quarter and $0.7 million in stock-based
compensation expenses recorded during the current quarter, partially offset by a decrease in
project material costs of $1.0 million.
Our research and development is primarily focused on developing and improving our instruments,
components, subsystems and process control solutions to improve process performance and
productivity.
We have hundreds of products and our research and development efforts primarily consist of a
large number of projects related to these products, none of which is individually material to us.
Current projects typically have a duration of 12 to 30 months depending upon whether the product is
an enhancement of existing technology or a new product. Our current initiatives include projects to
enhance the performance characteristics of older products, to develop new products and to integrate
various technologies into subsystems. These projects support in large part the transition in the
semiconductor industry to larger wafer sizes and smaller integrated circuit geometries, which
require more advanced process control technology. Research and development expenses consist
primarily of salaries and related expenses for personnel engaged in research and development, fees
paid to consultants, material costs for prototypes and other expenses related to the design,
development, testing and enhancement of our products.
We believe that the continued investment in research and development and ongoing development
of new products are essential to the expansion of our markets, and expect to continue to make
significant investment in research and development activities. We are subject to risks if products
are not developed in a timely manner, due to rapidly changing customer requirements and competitive
threats from other companies and technologies. Our success primarily depends on our products being
designed into new generations of equipment for the semiconductor industry. We develop products that
are technologically advanced so that they are positioned to be chosen for use in each successive
generation of semiconductor capital equipment. If our products are not chosen to be designed into
our customers products, our net sales may be reduced during the lifespan of those products.
Selling, General and Administrative (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
|
|
Selling, general and administrative expenses |
|
$ |
29.8 |
|
|
$ |
23.8 |
|
|
|
24.8 |
% |
Selling, general and administrative expenses increased $5.9 million for the three months ended
March 31, 2006 mainly due to a $4.0 million increase in compensation costs primarily from companies
acquired at the beginning of the quarter and $1.5 million in stock-based compensation expenses
recorded during the current quarter.
Amortization of Acquired Intangible Assets (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
|
|
Amortization of acquired intangible assets |
|
$ |
5.3 |
|
|
$ |
3.7 |
|
|
|
42.4 |
% |
Amortization expense for the three months ended March 31, 2006 increased $1.6 million due to
the amortization related to $32.6 million in acquired intangible assets related to the acquisition
of Ion and Umetrics, principally from a $1.0 million order
backlog intangible asset, which was being amortized over 3
months.
Purchase of in-process technology (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
|
|
Purchase of in-process technology |
|
$ |
0.8 |
|
|
$ |
0.0 |
|
|
|
|
|
20
In-process research and development of $0.8 million for the three months ended March 31, 2006
arose from the acquisitions of Ion and Umetrics, which we made during the first quarter of 2006.
The purchase price of these acquisitions was allocated to the assets acquired, including intangible
assets, based on estimated fair values. The intangible assets include approximately $0.8 million
for acquired in-process technology for projects, generally expected to have durations of 12 months,
which did not have alternative future uses. Accordingly, these costs were expensed during the
three months ended March 31, 2006.
Restructuring Charges (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
|
|
Restructuring charges |
|
$ |
0.0 |
|
|
$ |
0.5 |
|
|
|
|
|
During the three months ended March 31, 2005, we initiated a restructuring plan related to our
Berlin, Germany location. This consolidation of activities included the reduction of 16 employees.
The total restructuring charge related to this consolidation was $0.5 million, which consisted of
$0.3 million related to the repayment of a government grant and $0.2 million in severance costs.
There were no material restructuring activities during the three months ended March 31, 2006.
Interest Income, Net (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
% Change |
|
|
|
|
Interest income, net |
|
$ |
1.4 |
|
|
$ |
1.1 |
|
|
|
30.2 |
% |
Interest income increased $0.3 million mainly related to higher interest rates
in 2006.
Provision for Income Taxes (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
Provision for income taxes |
|
$ |
7.9 |
|
|
$ |
2.5 |
|
Our effective tax rate for the periods ending March 31, 2006 and March 31, 2005 was 33.8% and
31.1%, respectively. The effective tax rate is less than the statutory tax rate primarily due to
the profits of our international subsidiaries being taxed at rates lower than the U.S. statutory
tax rate.
In the normal course of business, the Company and our subsidiaries are examined by various tax
authorities, including the Internal Revenue Service (IRS). Any such examination could result in
an unfavorable settlement of any particular issue and may require the
use of cash. Unfavorable or favorable
resolution of any such examination could result in an increase or a
reduction, respectively, to our effective tax rate in the
quarter of resolution. Although the Company believes that its tax positions are consistent with applicable U.S. federal
and state and international laws, certain tax reserves are maintained at March 31, 2006 should
these positions be challenged by the applicable tax authority and additional tax assessed on audit.
The U.S. Research and Development Tax Credit expired at the end of
2005 and, as a result, we have not taken any benefit for this credit
in the period ending March 31, 2006. Congress is
considering proposals to extend this Tax Credit, retroactively to January 1, 2006. If such
legislation is enacted, any impact would be recorded in future quarters.
At March 31, 2006, we continued to maintain a valuation allowance for certain state tax
credits for which it was more likely than not that they will not be realized.
21
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments totaled $213.9 million at March 31, 2006
compared to $292.6 million at December 31, 2005. The primary source of funds for the first three
months of fiscal 2006 was cash provided by operating activities of $9.5 million.
Net cash provided by operating activities of $9.5 million for the three months ended March 31,
2006, resulted mainly from net income of $15.4 million, a $10.3 million increase in operating
liabilities and non-cash charges of $8.5 million for depreciation and amortization and $2.7
million for stock-based compensation, offset by an increase in net operating assets of $28.1
million. The net increase in operating liabilities is mainly caused by an increase of $6.4 million
in accounts payable, primarily as a result of inventory procurement activities, an increase of $2.0
million in accrued expenses and other current liabilities, primarily as a result of higher accrued
warranty costs, and an increase of $2.0 million in income taxes payable. The $28.1 million increase
in operating assets consisted primarily of an $18.0 million increase in accounts receivable as a
result of higher revenue and a $9.7 million increase in inventory. Net cash provided by operating
activities of $9.9 million for the three months ended March 31, 2005, resulted mainly from net
income of $5.5 million and non-cash charges of $6.7 million for depreciation and amortization,
offset by an increase in net operating assets and liabilities of $2.4 million. The net increase in
operating assets and liabilities is mainly caused by a $1.8 million increase in accounts receivable
and a decrease of $2.6 million in accrued expenses and other current liabilities, primarily as a
result of lower accrued compensation, offset by an increase in accounts payable of $1.8 million.
Net cash used in investing activities of $83.6 million for the three months ended March 31,
2006, resulted primarily from the purchase of two technology companies for $96.6 million, offset by
the net maturities of $15.4 million of available for sale investments. Net cash provided by
investing activities of $4.5 million for the three months ended March 31, 2005, resulted primarily
from the net maturities of $6.5 million of available for sale investments, offset by the purchase
of property, plant and equipment of $2.3 million primarily for investment in manufacturing
equipment and for the consolidation of our IT infrastructure.
Net cash provided by financing activities of $9.8 million for the three months ended March 31,
2006, consisted primarily of $8.0 million in proceeds from the exercise of stock options and
purchases under our employee stock purchase plan. Net cash used in financing activities of $1.6
million for the three months ended March 31, 2005, consisted primarily of $1.9 million in net
payments for short-term borrowings.
We believe that our working capital, together with the cash anticipated to be generated from
operations, will be sufficient to satisfy our estimated working capital and planned capital
expenditure requirements through at least the next 12 months.
To the extent permitted by Massachusetts law, our Restated Articles of Organization, as
amended, require us to indemnify any of our current or former officers or directors or any person
who has served or is serving in any capacity with respect to any of our employee benefit plans.
Because no claim for indemnification has been pursued by any person covered by the relevant
provisions of our Restated Articles of Organization, we believe that the estimated exposure for
these indemnification obligations is currently minimal. Accordingly, we have no liabilities
recorded for these requirements as of March 31, 2006.
We also enter into agreements in the ordinary course of business which include indemnification
provisions. Pursuant to these agreements, we indemnify, hold harmless and agree to reimburse the
indemnified party, generally our customers, for losses suffered or incurred by the indemnified
party in connection with any patent, any other intellectual property infringement claim, and, in
some instances, other claims, by any third party with respect to our products. The term of these
indemnification obligations is generally perpetual after execution of the agreement. The maximum
potential amount of future payments we could be required to make under these indemnification
agreements is, in some instances, unlimited. We have never incurred costs to defend lawsuits or
settle claims related to these indemnification obligations. As a result, we believe the estimated
fair value of these obligations is minimal. Accordingly, we have no liabilities recorded for these
obligations as of March 31, 2006.
22
When as part of an acquisition, we acquire all of the stock or all of the assets and
liabilities of another company, we assume liability for certain events or occurrences that took
place prior to the date of acquisition. The maximum potential amount of future payments we could
be required to make for such obligations is undeterminable at this time. Other than obligations
recorded as liabilities at the time of the acquisitions, historically we have not made significant
payments for these indemnifications. Accordingly, no liabilities have been recorded for these
obligations.
In conjunction with certain asset sales, we may provide routine indemnifications whose terms
range in duration and often are not explicitly defined. Where appropriate, an obligation for such
indemnifications is recorded as a liability. Because the amount of liability under these types of
indemnifications are not explicitly stated, the overall maximum amount of the obligation under such
indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at
the time of the asset sale, historically we have not made significant payments for these
indemnifications.
Off-Balance Sheet Arrangements
We do not have any financial partnerships with unconsolidated entities, such as entities often
referred to as structured finance, special purpose entities or variable interest entities, which
are often established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. Accordingly, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had such relationships.
Recently Issued Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS 154). SFAS
154 provides guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes, unless impracticable, retrospective application as the required method
for reporting a change in accounting principle in the absence of explicit transition requirements
specific to the newly adopted accounting principle. SFAS 154 also provides guidance for determining
whether retrospective application of a change in accounting principle is impracticable and for
reporting a change when retrospective application is impracticable. The provisions of this
statement are effective for accounting changes and corrections of errors made in fiscal periods
beginning after December 15, 2005. We adopted the provisions of SFAS 154 in the first quarter of
2006 and it did not have a material impact on our financial position or results of operations.
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151,
Inventory Costs (SFAS 151). SFAS 151 amends ARB No. 43, Chapter 4, Inventory Pricing. This
statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material, and requires that those items be recognized as current period charges
regardless of whether they meet the criterion of so abnormal. In addition, this statement
requires that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. We adopted the provisions of SFAS 151 in the first quarter of
2006 and it did not have a material impact on our financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information concerning market risk is contained in the Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 16, 2006. There were no material changes in
our exposure to market risk from December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES.
a) Effectiveness of disclosure controls and procedures.
MKS management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and
23
procedures as of March 31,
2006. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and
other procedures of a company that are designed to ensure that information required to be disclosed
by the company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the companys management,
including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. On January 3, 2006,
we acquired Umetrics, AB and Ion Systems, Inc., along with the
subsidiaries thereof. We do not anticipate that our evaluation of the
internal controls of these acquired companies will be complete by
December 31, 2006 and, as permitted, we expect to exclude these
companies from our report on disclosure controls and procedures at
December 31, 2006. Based on the evaluation of our disclosure
controls and procedures as of March 31, 2006, our chief executive officer and chief financial
officer concluded that, as of such date, MKS disclosure controls and procedures were effective at
the reasonable assurance level.
b) Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31,
2006 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On November 3, 1999, On-Line Technologies, Inc. (On-Line), which we acquired in 2001,
brought suit in federal district court in Connecticut against Perkin-Elmer, Inc. and certain other
defendants (Perkin-Elmer) for infringement of On-Lines patent related to its FTIR spectrometer
product and related claims. The suit sought injunctive relief and damages for infringement. Perkin-Elmer filed a counterclaim seeking invalidity of
the patent, costs and attorneys fees, and in June 2002, filed a motion for summary judgment. In
April 2003, the court granted the motion and dismissed the case. We appealed this decision to the
federal circuit court of appeals, which, on October 13, 2004, reversed the lower courts dismissal
of certain claims in the case. Accordingly, the case has been remanded to the United States
District Court in Connecticut for further proceedings on the merits of the remaining claims. On
March 11, 2005, Perkin-Elmer submitted to the court a stipulation agreeing that they have infringed
a specified claim of On-Lines patent. Perkin-Elmer also filed a motion for summary judgment that
such patent claim is invalid, but that motion was denied on March 23, 2006. Perkin-Elmer then
filed a motion for reconsideration of that decision, which motion is currently pending. The case is
currently scheduled to be tried on October 16, 2006.
We are subject to other legal proceedings and claims, which have arisen in the ordinary
course of business.
In the opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on our results of operations, financial condition or cash flows.
ITEM
1A. RISK FACTORS.
Our business depends substantially on capital spending in the semiconductor industry which is
characterized by periodic fluctuations that may cause a reduction in demand for our products.
We estimate that approximately 73% of our net sales for the quarter ended March 31, 2006 and
71%, 74% and 69%, of our net sales for the years ended December 31, 2005, 2004 and 2003,
respectively, were to semiconductor capital equipment manufacturers and semiconductor device
manufacturers, and we expect that sales to such customers will continue to account for a
substantial majority of our sales. Our business depends upon the capital expenditures of
24
semiconductor device manufacturers, which in turn depend upon the demand for semiconductors.
Periodic reductions in demand for the products manufactured by semiconductor capital equipment
manufacturers and semiconductor device manufacturers may adversely affect our business, financial
condition and results of operations.
Historically, the semiconductor market has been highly cyclical and has experienced periods of
overcapacity, resulting in significantly reduced demand for capital equipment. For example, in
2001 through the first half of 2003, we experienced a significant reduction in demand from OEM
customers, and lower gross margins due to reduced absorption of manufacturing overhead. In
addition, many semiconductor manufacturers have operations and customers in Asia, a region that in
past years has experienced serious economic problems including currency devaluations, debt
defaults, lack of liquidity and recessions. We cannot be certain that semiconductor downturns will
not continue or recur. A decline in the level of orders as a result of any downturn or slowdown in
the semiconductor capital equipment industry could have a material adverse effect on our business,
financial condition and results of operations.
Our quarterly operating results have fluctuated, and are likely to continue to vary
significantly, which may result in volatility in the market price of our common stock.
A substantial portion of our shipments occurs shortly after an order is received and therefore
we operate with a low level of backlog. As a result, a decrease in demand for our products from
one or more customers could occur with limited advance notice and could have a material adverse
effect on our results of operations in any particular period. A significant percentage of our
expenses is relatively fixed and based in part on expectations of future net sales. The inability
to adjust spending quickly enough to compensate for any shortfall would magnify the adverse impact
of a shortfall in net sales on our results of operations. Factors that could cause fluctuations in
our net sales include:
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the timing of the receipt of orders from major customers; |
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shipment delays; |
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disruption in sources of supply; |
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seasonal variations of capital spending by customers; |
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production capacity constraints; and |
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|
specific features requested by customers. |
In addition, our quarterly operating results may be adversely affected due to charges incurred
in a particular quarter, for example, relating to inventory obsolescence, bad debt or asset
impairments.
As a result of the factors discussed above, it is likely that we may in the future experience
quarterly or annual fluctuations and that, in one or more future quarters, our operating results
may fall below the expectations of public market analysts or investors. In any such event, the
price of our common stock could decline significantly.
The loss of net sales to any one of our major customers would likely have a material adverse
effect on us.
Our top ten customers accounted for approximately 48%, 49% and 42% of our net sales for the
years ended December 31, 2005, 2004 and 2003, respectively. The loss of a major customer or any
reduction in orders by these customers, including reductions due to market or competitive
conditions, would likely have a material adverse effect on our business, financial condition and
results of operations. During the years ended December 31, 2005, 2004 and 2003, one customer,
Applied Materials, accounted for approximately 18%, 20% and 18%, respectively, of our net sales.
None of our significant customers, including Applied Materials, has entered into an agreement
requiring it to purchase any minimum quantity of our products. The demand for our products from
our semiconductor capital equipment customers depends in part on orders received by them from their
semiconductor device manufacturer customers.
25
Attempts to lessen the adverse effect of any loss or reduction of net sales through the rapid
addition of new customers could be difficult because prospective customers typically require
lengthy qualification periods prior to placing volume orders with a new supplier. Our future
success will continue to depend upon:
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our ability to maintain relationships with existing key customers; |
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our ability to attract new customers; |
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our ability to introduce new products in a timely manner for existing and new customers; and |
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the success of our customers in creating demand for their capital equipment
products which incorporate our products. |
As part of our business strategy, we have entered into and may enter into or seek to enter
into business combinations and acquisitions that may be difficult and costly to integrate, may be
disruptive to our business, may dilute stockholder value or may divert management attention.
We made several acquisitions in the years 2000 through 2002 and, more recently, in January
2006. As a part of our business strategy, we may enter into additional business combinations and
acquisitions. Acquisitions are typically accompanied by a number of risks, including the
difficulty of integrating the operations, technology and personnel of the acquired companies, the
potential disruption of our ongoing business and distraction of management, expenses related to the
acquisition and potential unknown liabilities associated with acquired businesses. If we are not
successful in completing acquisitions that we may pursue in the future, we may be required to
reevaluate our growth strategy, and we may incur substantial expenses and devote significant
management time and resources in seeking to complete proposed acquisitions that will not generate
benefits for us.
In addition, with future acquisitions, we could use substantial portions of our available cash
as all or a portion of the purchase price. We could also issue additional securities as
consideration for these acquisitions, which could cause significant stockholder dilution. Our
prior acquisitions and any future acquisitions may not ultimately help us achieve our strategic
goals and may pose other risks to us.
As a result of our previous acquisitions, we have added several different decentralized
operating and accounting systems, resulting in a complex reporting environment. We expect that we
will need to continue to modify our accounting policies, internal controls, procedures and
compliance programs to provide consistency across all our operations. In order to increase
efficiency and operating effectiveness and improve corporate visibility into our decentralized
operations, we are currently implementing a new worldwide Enterprise Resource Planning (ERP)
system. We completed our first site implementation in October 2005 and we expect to continue to
implement the ERP system by converting our remaining operations in phases over the next few years.
Although we have a plan to accomplish the ERP implementation, we may risk potential disruption of
our operations during the conversion periods and the implementation could require significantly
more management time and we could incur significantly higher implementation costs than currently
estimated.
An inability to convince semiconductor device manufacturers to specify the use of our products
to our customers that are semiconductor capital equipment manufacturers would weaken our
competitive position.
The markets for our products are highly competitive. Our competitive success often depends
upon factors outside of our control. For example, in some cases, particularly with respect to mass
flow controllers, semiconductor device manufacturers may direct semiconductor capital equipment
manufacturers to use a specified suppliers product in their equipment. Accordingly, for such
products, our success will depend in part on our ability to have semiconductor device manufacturers
specify that our products be used at their semiconductor fabrication facilities. In addition, we
may encounter difficulties in changing established relationships of competitors that already have a
large installed base of products within such semiconductor fabrication facilities.
26
If our products are not designed into successive generations of our customers products, we
will lose significant net sales during the lifespan of those products.
New products designed by semiconductor capital equipment manufacturers typically have a
lifespan of five to ten years. Our success depends on our products being designed into new
generations of equipment for the semiconductor industry. We must develop products that are
technologically advanced so that they are positioned to be chosen for use in each successive
generation of semiconductor capital equipment. If customers do not choose our products, our net
sales may be reduced during the lifespan of our customers products. In addition, we must make a
significant capital investment to develop products for our customers well before our products are
introduced and before we can be sure that we will recover our capital investment through sales to
the customers in significant volume. We are thus also at risk during the development phase that
our products may fail to meet our customers technical or cost requirements and may be replaced by
a competitive product or alternative technology solution. If that happens, we may be unable to
recover our development costs.
The semiconductor industry is subject to rapid demand shifts which are difficult to predict.
As a result, our inability to expand our manufacturing capacity in response to these rapid shifts
may cause a reduction in our market share.
Our ability to increase sales of certain products depends in part upon our ability to expand
our manufacturing capacity for such products in a timely manner. If we are unable to expand our
manufacturing capacity on a timely basis or to manage such expansion effectively, our customers
could implement our competitors products and, as a result, our market share could be reduced.
Because the semiconductor industry is subject to rapid demand shifts which are difficult to
foresee, we may not be able to increase capacity quickly enough to respond to a rapid increase in
demand. Additionally, capacity expansion could increase our fixed operating expenses and if sales
levels do not increase to offset the additional expense levels associated with any such expansion,
our business, financial condition and results of operations could be materially adversely affected.
We operate in a highly competitive industry.
The market for our products is highly competitive. Principal competitive factors include:
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historical customer relationships; |
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product quality, performance and price; |
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breadth of product line; |
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manufacturing capabilities; and |
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customer service and support. |
Although we believe that we compete favorably with respect to these factors, we may not be
able to continue to do so. We encounter substantial competition in most of our product lines.
Certain of our competitors may have greater financial and other resources than we have. In some
cases, competitors are smaller than we are, but well established in specific product niches. We
may encounter difficulties in changing established relationships of competitors with a large
installed base of products at such customers fabrication facilities. In addition, our competitors
can be expected to continue to improve the design and performance of their products. Competitors
may develop products that offer price or performance features superior to those of our products.
If our competitors develop superior products, we may lose existing customer and market share.
27
Sales to foreign markets constitute a substantial portion of our net sales; therefore, our net
sales and results of operations could be adversely affected by downturns in economic conditions in
countries outside of the United States.
International sales include sales by our foreign subsidiaries, but exclude direct export
sales. International sales accounted for approximately 37%, 34% and 41%, of net sales for the
years ended December 31, 2005, 2004 and 2003, respectively, a significant portion of which were
sales to Japan.
We anticipate that international sales will continue to account for a significant portion of
our net sales. In addition, certain of our key domestic customers derive a significant portion of
their revenues from sales in international markets. Therefore, our sales and results of operations
could be adversely affected by economic slowdowns and other risks associated with international
sales.
We have significant foreign operations, and outsource certain operations offshore, which pose
significant risks.
We have significant international sales, service, engineering and manufacturing operations in
Europe and Asia, and have outsourced a portion of our manufacturing to Mexico. We may expand the
level of manufacturing and certain other operations that we do offshore in order to take advantage
of cost efficiencies available to us in those countries. However, we may not achieve the
significant cost savings or other benefits that we anticipate from this program. These foreign
operations expose us to operational and political risks that may harm our business, including:
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political and economic instability; |
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fluctuations in the value of currencies and high levels of inflation, particularly in Asia and Europe; |
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changes in labor conditions and difficulties in staffing and managing foreign
operations, including, but not limited to, labor unions; |
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reduced or less certain protection for intellectual property rights; |
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greater difficulty in collecting accounts receivable and longer payment cycles; |
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burdens and costs of compliance with a variety of foreign laws; |
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increases in duties and taxation; |
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imposition of restrictions on currency conversion or the transfer of funds; |
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changes in export duties and limitations on imports or exports; |
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expropriation of private enterprises; and |
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unexpected changes in foreign regulations. |
If any of these risks materialize, our operating results may be adversely affected.
Unfavorable currency exchange rate fluctuations may lead to lower operating margins or may
cause us to raise prices, which could result in reduced sales.
Currency exchange rate fluctuations could have an adverse effect on our net sales and results
of operations and we could experience losses with respect to our hedging activities. Unfavorable
currency fluctuations could require us to increase prices to foreign customers, which could result
in lower net sales by us to such customers. Alternatively, if we
28
do not adjust the prices for our
products in response to unfavorable currency fluctuations, our results of operations could be
adversely affected. In addition, most sales made by our foreign subsidiaries are denominated in the
currency of the country in which these products are sold and the currency they receive in payment
for such sales could be less valuable at the time of receipt as a result of exchange rate
fluctuations. We enter into forward foreign exchange contracts and may enter into local currency
purchased options to reduce currency exposure arising from intercompany sales of inventory.
However, we cannot be certain that our efforts will be adequate to protect us against significant
currency fluctuations or that such efforts will not expose us to additional exchange rate risks.
Key personnel may be difficult to attract and retain.
Our success depends to a large extent upon the efforts and abilities of a number of key
employees and officers, particularly those with expertise in the semiconductor manufacturing and
similar industrial manufacturing industries. The loss of key employees or officers could have a
material adverse effect on our business, financial condition and results of operations. We believe
that our future success will depend in part on our ability to attract and retain highly skilled
technical, financial, managerial and marketing personnel. We cannot be certain that we will be
successful in attracting and retaining such personnel.
Our proprietary technology is important to the continued success of our business. Our failure
to protect this proprietary technology may significantly impair our competitive position.
As of December 31, 2005, we owned 253 U.S. patents, 170 foreign patents and had 104 pending
U.S. patent applications. Although we seek to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we cannot be certain that:
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we will be able to protect our technology adequately; |
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competitors will not be able to develop similar technology independently; |
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any of our pending patent applications will be issued; |
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domestic and international intellectual property laws will protect our intellectual property rights; or |
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third parties will not assert that our products infringe patent, copyright or trade secrets of such parties. |
Protection of our intellectual property rights may result in costly litigation.
Litigation may be necessary in order to enforce our patents, copyrights or other intellectual
property rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. We are, from time to
time, involved in lawsuits enforcing or defending our intellectual property rights and may be
involved in such litigation in the future. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our business, financial
condition and results of operations.
We may need to expend significant time and expense to protect our intellectual property
regardless of the validity or successful outcome of such intellectual property claims. If we lose
any litigation, we may be required to seek licenses from others or change, stop manufacturing or
stop selling some of our products.
The market price of our common stock has fluctuated and may continue to fluctuate for reasons
over which we have no control.
The stock market has from time to time experienced, and is likely to continue to experience,
extreme price and volume fluctuations. Prices of securities of technology companies have been
especially volatile and have often fluctuated for reasons that are unrelated to the operating
performance of the companies. The market price of shares of our common stock has fluctuated
greatly since our initial public offering and could continue to fluctuate due to a variety of
factors. In the past, companies that have experienced volatility in the market price of their
stock have been the objects of securities
29
class action litigation. If we were the object of
securities class action litigation, it could result in substantial costs and a diversion of our
managements attention and resources.
Our dependence on sole, limited source suppliers, and international suppliers, could affect
our ability to manufacture products and systems.
We rely on sole, limited source suppliers and international suppliers for a few of our
components and subassemblies that are critical to the manufacturing of our products. This reliance
involves several risks, including the following:
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the potential inability to obtain an adequate supply of required components; |
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reduced control over pricing and timing of delivery of components; and |
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the potential inability of our suppliers to develop technologically advanced
products to support our growth and development of new systems. |
We believe that in time we could obtain and qualify alternative sources for most sole, limited
source and international supplier parts. Seeking alternative sources of the parts could require us
to redesign our systems, resulting in increased costs and likely shipping delays. We may be unable
to redesign our systems, which could result in further costs and shipping delays. These increased
costs would decrease our profit margins if we could not pass the costs to our customers. Further,
shipping delays could damage our relationships with current and potential customers and have a
material adverse effect on our business and results of operations.
We are subject to governmental regulations. If we fail to comply with these regulations, our
business could be harmed.
We are subject to federal, state, local and foreign regulations, including environmental
regulations and regulations relating to the design and operation of our products. We must ensure
that the affected products meet a variety of standards, many of which vary across the countries in
which our systems are used. For example, the European Union has published directives specifically
relating to power supplies. In addition, the European Union has issued directives relating to
regulation of recycling and hazardous substances, which may be applicable to our products, or to
which some customers may voluntarily elect to adhere to. We must comply with any applicable
regulation adopted in connection with these directives in order to ship affected products into
countries that are members of the European Union. We believe we are in compliance with current applicable regulations, directives and standards and have
obtained all necessary permits, approvals, and authorizations to conduct our business. However,
compliance with future regulations, directives and standards, or customer demands beyond such
requirements, could require us to modify or redesign certain systems, make capital expenditures or
incur substantial costs. If we do not comply with current or future regulations, directives and
standards:
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we could be subject to fines; |
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our production could be suspended; or |
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we could be prohibited from offering particular systems in specified markets. |
Certain stockholders have a substantial interest in us and may be able to exert substantial
influence over our actions.
As of March 31, 2006, John R. Bertucci, our Executive Chairman, and certain members of his
family, in the aggregate, beneficially owned approximately 15% of our outstanding common stock. As
a result, these stockholders, acting together, may be able to exert substantial influence over our
actions. Pursuant to the acquisition of the ENI Business of Emerson Electric Co. (Emerson), we
issued approximately 12,000,000 shares of common stock to Emerson and its wholly owned subsidiary,
Astec America, Inc. Emerson owned approximately 15% of our outstanding common
30
stock as of March
31, 2006, and a representative of Emerson is a member of our board of directors. Accordingly,
Emerson may be able to exert substantial influence over our actions.
Some provisions of our restated articles of organization, as amended, our amended and restated
by-laws and Massachusetts law could discourage potential acquisition proposals and could delay or
prevent a change in control of us.
Anti-takeover provisions could diminish the opportunities for stockholders to participate in
tender offers, including tender offers at a price above the then current market price of the common
stock. Such provisions may also inhibit increases in the market price of the common stock that
could result from takeover attempts. For example, while we have no present plans to issue any
preferred stock, our board of directors, without further stockholder approval, may issue preferred
stock that could have the effect of delaying, deterring or preventing a change in control of us.
The issuance of preferred stock could adversely affect the voting power of the holders of our
common stock, including the loss of voting control to others. In addition, our amended and
restated by-laws provide for a classified board of directors consisting of three classes. The
classified board could also have the effect of delaying, deterring or preventing a change in
control of us.
Changes in financial accounting standards may adversely affect our reported results of
operations.
A change in accounting standards or practices could have a significant effect on our reported
results and may even affect our reporting of transactions completed before the change was
effective. New accounting pronouncements and varying interpretations of existing accounting
pronouncements have occurred and may occur in the future. Such changes may adversely affect our
reported financial results or may impact our related business practice.
For example, Statement on Financial Accounting Standards No. 123R Share-Based Payment, which
requires us to measure all employee stock-based compensation awards using a fair value method and
record such expense in our consolidated financial statements, was adopted in the first quarter of
2006, and had a material adverse impact on our consolidated financial statements as reported under
generally accepted accounting principles in the United States for the first quarter of 2006 and
will adversely impact our consolidated financial statements for fiscal 2006.
ITEM 6. EXHIBITS.
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Exhibit No.
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Exhibit Description |
3.1(1)
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Restated Articles of Organization |
3.2(2)
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Articles of Amendment, as filed
with the Secretary of State of Massachusetts on May 18, 2001 |
3.3(3)
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Articles of Amendment, as filed
with the Secretary of State of Massachusetts on May 16, 2002 |
3.4(4)
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Amended and Restated By-Laws |
10.1
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Form of Restricted Stock Unit Agreement Granted Under the 2004 Stock Incentive Plan |
31.1
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Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended |
31.2
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Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended |
32.1
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
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(1) |
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Incorporated by reference to the Registration Statement on Form S-4 (File No.
333- 49738) filed with the Securities and Exchange Commission on November 13, 2000. |
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(2) |
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Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001. |
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(3) |
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Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002. |
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(4) |
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Incorporated by reference to the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on January 28, 1999, as amended. |
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MKS INSTRUMENTS, INC.
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May 8, 2006 |
By: |
/s/ Ronald Weigner
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Ronald C. Weigner |
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Vice President and Chief Financial Officer
(Principal Financial Officer) |
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32
Exhibit 10.1
MKS INSTRUMENTS, INC.
Restricted Stock Unit Agreement
Granted Under the 2004 Stock Incentive Plan
AGREEMENT made this 5th day of April 2006 (the "Grant Date"), between MKS
Instruments, Inc., a Massachusetts corporation (the "Company"), and
<> <> (the "Participant").
For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:
1. General.
The Company has granted to the Participant restricted stock units ("RSUs")
with respect to XXX shares (the "Shares") of common stock, no par value, of the
Company ("Common Stock"), subject to the terms and conditions set forth in this
Agreement and in the Company's 2004 Stock Incentive Plan (the "Plan"). The RSUs
represent a promise by the Company to deliver Shares upon vesting.
2. Vesting Period.
Subject to the terms and conditions of this Agreement (including the
Forfeiture provisions described in Section 3 below), the participant shall vest
all RSU's on the third anniversary of the date of grant (the "Vesting Date"). As
soon as practicable after the Vesting Date, but in any event, within the period
ending on the later to occur of the date that is 2 1/2 months from the end of
(i) the Participant's tax year that includes the Vesting Date, or (ii) the
Company's tax year that includes the Vesting Date, the Company shall instruct
its transfer agent to deposit the Shares subject to the RSUs into the
Participant's existing stock option account (the "Account") at Merrill Lynch, or
such other broker with which the Company has established a relationship
("Broker"),, subject to payment (through sale of a portion of the Shares, or
otherwise, in accordance with Section 7) of all applicable withholding taxes.
3. Forfeiture.
(a) Definitions. For purposes of this Agreement, "Forfeiture" shall
mean any forfeiture of RSUs pursuant to Section 3(b) below. For purposes of this
Agreement, "employ" or "employment" with the Company shall include employment
with a parent or subsidiary of the Company.
(b) Cessation of Employment. In the event that the Participant ceases
to be employed by the Company for any reason or no reason (except for death or
disability), with or without cause, prior to the Vesting Date, all of the
Participant's RSUs shall automatically be forfeited as of such cessation. In the
event that the Participant ceases to be employed by the Company by reason of
death or disability prior to the Vesting Date, then the Company shall deliver to
the Participant a pro rata portion of the Shares covered by the RSUs equal to
the percentage of the period of time between the Grant Date and the Vesting Date
that the Participant
has been employed prior to such death or disability. For the purpose of this
Section 3, "disability" shall mean disability as defined in Section 216(i)(1) of
the U.S. Social Security Act.
(c) Change in Control. Notwithstanding the foregoing, if, prior to the
Vesting Date, and within two years of the effectiveness of a Change in Control
(as defined below), the Participant is (i) terminated by the Company without
Cause (as defined below) or (ii) terminates his employment for Good Reason (as
defined below), then, 100% of the Participant's RSUs shall become immediately
and fully vested and shall no longer be subject to the Forfeiture provisions
under this Agreement. For purposes of this section "Change in Control" means the
first to occur of any of the following events: (I) any "person" (as that term is
used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934
("Exchange Act")) becomes the beneficial owner (as that term is used in Section
13(d) of the Exchange Act), directly or indirectly, of fifty percent (50%) or
more of the Company's capital stock entitled to vote in the election of
directors; (II) the shareholders of the Company approve any consolidation or
merger of the Company, other than a consolidation or merger of the Company in
which the holders of the common stock of the Company immediately prior to the
consolidation or merger hold more than fifty percent (50%) of the common stock
of the surviving corporation immediately after the consolidation or merger; or
(III) the shareholders of the Company approve the sale or transfer of all or
substantially all of the assets of the Company to parties that are not within a
"controlled group of corporations" (as defined in Code Section 1563) in which
the Company is a member. For purposes of this Agreement, "Cause" shall mean
conviction for the commission of a felony, willful failure by the Participant to
perform his responsibilities to the Company, or willful misconduct by the
Employee. For purposes of this section, "Good Reason" shall mean termination of
the Participant's employment by the Participant within 90 days following (I) a
material diminution in the Participant's positions, duties and responsibilities
from those described in this Employment Agreement, (II) a material reduction in
the Participant's base salary (other than a reduction which is part of a general
salary reduction program affecting senior executives of the Company), (III) a
material reduction in the aggregate value of the pension and welfare benefits
provided to the Participant from those in effect prior to the Change in Control
(other than a reduction which is proportionate to the reductions applicable to
other senior executives pursuant to a cost-saving plan that includes all senior
executives), (IV) a material breach of any provision of this Employment
Agreement by the Company or (V) the Company's requiring the Participant to be
based at a location that creates for the Participant a one way commute in excess
of 60 miles from his primary residence, except for required travel on the
Company's business to an extent substantially consistent with the business
travel obligations of the Participant under this Employment Agreement.
Notwithstanding the foregoing, a termination shall not be treated as a
termination for Good Reason (I) if the Participant shall have consented in
writing to the occurrence of the event giving rise to the claim of termination
for Good Reason or (II) unless the Participant shall have delivered a written
notice to the Company within 30 days of his having actual knowledge of the
occurrence of one of such events stating that he intends to terminate his
employment for Good Reason and specifying the factual basis for such
termination, and such event, if capable of being cured, shall not have been
cured within 30 days of the receipt of such notice.
4. Restrictions on Transfer.
2
The Participant shall not sell, assign, transfer, pledge, hypothecate or
otherwise dispose of, by operation of law or otherwise (collectively "transfer")
any RSUs, or any interest therein, except that the Participant may transfer such
RSUs (i) to or for the benefit of any spouse, children, parents, uncles, aunts,
siblings, grandchildren and any other relatives approved by the Board of
Directors (collectively, "Approved Relatives") or to a trust established solely
for the benefit of the Participant and/or Approved Relatives, provided that such
RSUs shall remain subject to this Agreement (including without limitation the
terms of Forfeiture and the restrictions on transfer set forth in this Section
4) and such permitted transferee shall, as a condition to such transfer, deliver
to the Company a written instrument confirming that such transferee shall be
bound by all of the terms and conditions of this Agreement.
5. Provisions of the Plan.
This Agreement is subject to the provisions of the Plan, a copy of
which is furnished to the Participant with this Agreement.
6. No Compensation Deferral. Neither the Plan nor this Agreement is
intended to provide for an elective deferral of compensation that would be
subject to Section 409A ("Section 409A ") of the U.S. Internal Revenue Code of
1986, as amended. The Company reserves the right, to the extent the Company
deems necessary or advisable in its sole discretion, to unilaterally amend or
modify the Plan and/or this Agreement to ensure that no awards (including
without limitation, the RSUs) become subject to the requirements of Section
409A.
7. Withholding Taxes.
(a) The Company's obligation to deliver Shares to the Participant upon
the vesting of the RSUs shall be subject to the satisfaction of all income tax
(including federal, state and local taxes), social insurance, payroll tax,
payment on account or other tax related withholding requirements ("Withholding
Taxes"). In order to satisfy all Withholding Taxes due upon vesting of the
Participant's RSUs, the Participant agrees to the following:
(b) As a condition to receiving any Shares upon vesting of the RSUs,
on the date of this Agreement, the Participant must execute the Irrevocable
Standing Order to Sell Shares attached hereto, which authorizes the Company and
Broker to take the actions described in this subsection 7(b) (the "Standing
Order"). The Participant authorizes Broker to sell, at the market price and on
the Vesting Date the number of Shares that the Company has instructed Broker is
necessary to obtain proceeds sufficient to satisfy the Withholding Taxes. The
Participant understands and agrees that the number of Shares that Broker will
sell will be based on the closing price of the Common Stock on the last trading
day before the Vesting Date. The Participant agrees to execute and deliver such
documents, instruments and certificates as may reasonably be required in
connection with the sale of the Shares pursuant to this Section 7.
(c) The Participant agrees that the proceeds received from the sale of
Shares pursuant to Section 7(b) will be used to satisfy the Withholding Taxes
and, accordingly, the Participant hereby authorizes Broker to pay such proceeds
to the Company for such purpose. The Participant understands that to the extent
that the proceeds obtained by such sale exceed the amount necessary to satisfy
the Withholding Taxes, such excess proceeds shall be deposited into
3
the Account. The Participant further understands that any remaining Shares shall
be deposited into the Account.
(d) The Participant acknowledges and agrees that (i) in the event that
there is not a market in the Common Stock or (ii) the Company determines in its
sole discretion that the procedure described in Section 7(b) is not advisable or
sufficient, the Company will have the right to make other arrangements to
satisfy the Withholding Taxes due upon vesting of the RSUs, including, but not
limited to, the right to deduct amounts from salary or payments of any kind
otherwise due to the Participant or withhold in Shares, provided that the
Company only withholds the amount of Shares necessary to satisfy the minimum
withholding amount.
(e) The Participant has reviewed with the Participant's own tax
advisors the federal, state, local and foreign tax consequences of this grant
and the transactions contemplated by this Agreement. The Participant is relying
solely on such advisors and not on any statements or representations of the
Company or any of its agents. The Participant understands that the Participant
(and not the Company) shall be responsible for the Participant's own tax
liability that may arise as a result of this grant or the transactions
contemplated by this Agreement.
(f) The Participant represents to the Company that, as of the date
hereof, he is not aware of any material nonpublic information about the Company
or the Common Stock. The Participant and the Company have structured this
Agreement to constitute a "binding contract" relating to the sale of Common
Stock pursuant to this Section 7, consistent with the affirmative defense to
liability under Section 10(b) of the Securities Exchange Act of 1934 under Rule
10b5-1(c) promulgated under such Act.
8. Nature of the Grant. In signing this Agreement, the Participant
acknowledges that:
(a) the Plan is established voluntarily by the Company, it is discretionary
in nature and may be modified, amended, suspended or terminated by the
Company at any time, unless otherwise provided in the Plan and this
Agreement;
(b) the grant of RSUs is voluntary and occasional and does not create any
contractual or other right to receive future awards of RSUs, or benefits in
lieu of RSUs even if RSUs have been awarded repeatedly in the past;
(c) all decisions with respect to future grants of RSUs, if any, will be at
the sole discretion of the Company;
(d) the Participant's participation in the Plan is voluntary;
(e) RSUs are an extraordinary item that do not constitute compensation of
any kind for services of any kind rendered to the Company or to the
Participant's employer, and RSUs are outside the scope of the Participant's
employment contract, if any;
(f) RSUs are not part of normal or expected compensation or salary for any
purpose, including, but not limited to, calculation of any severance,
resignation, termination,
4
redundancy, end of service payments, bonuses, long-service awards, pension
or retirement benefits or similar payments and in no event should be
considered as compensation for, or relating in any way to, past services
for the Company or the Participant's employer;
(g) the future value of the underlying Shares is unknown and cannot be
predicted with certainty;
(h) if the Participant receives Shares upon vesting, the value of such
Shares acquired on vesting of RSUs may increase or decrease in value;
(i) in consideration of the grant of RSUs, no claim or entitlement to
compensation or damages arises from termination of the RSUs or diminution
in value of the RSUs or Shares received upon vesting of RSUs resulting from
termination of the Participant's employment by the Company or the
Participant's employer (for any reason whatsoever and whether or not in
breach of local labor laws) and the Participant irrevocably releases the
Company and his or her employer from any such claim that may arise; if,
notwithstanding the foregoing, any such claim is found by a court of
competent jurisdiction to have arisen, then, by signing this Agreement, the
Participant shall be deemed irrevocably to have waived his or her
entitlement to pursue such claim; and
(j) further, if the Participant ceases to be a employee (whether or not in
breach of local labor laws), the Participant's right to receive RSUs and
vest under the Plan, if any, will terminate effective as of the date that
the Participant is no longer actively employed by the Company and will not
be extended by any notice period mandated under local law (e.g., active
employment would not include a period of "garden leave" or similar period
pursuant to local law); the Committee shall have the exclusive discretion
to determine when the Participant is no longer actively employed for
purposes of the Plan.
9. Data Privacy Notice and Consent. The Participant hereby explicitly and
unambiguously consents to the collection, use and transfer, in electronic or
other form, of his or her personal data as described in this paragraph, by and
among, as applicable, the Participant's employer and the Company and its
subsidiaries and affiliates for, among other purposes, implementing,
administering and managing the Participant's participation in the Plan. The
Participant understands that the Company and its subsidiaries hold certain
personal information about the Participant, including the Participant's name,
home address and telephone number, date of birth, social security number or
identification number, salary, nationality, job title, any Shares or
directorships held in the Company, details of all options or any other
entitlement to Shares awarded, canceled, exercised, vested, unvested or
outstanding in the Participant's favor, for the purpose of managing and
administering the Plan ("Data"). The Participant further understands that the
Company and/or its subsidiaries will transfer Data amongst themselves as
necessary for employment purposes, including implementation, administration and
management of the Participant's participation in the Plan, and that the Company
and/or any of its subsidiaries may each further transfer Data to Broker or such
other stock plan service provider or other third parties assisting the Company
with processing of Data. The Participant understands that these recipients may
be located in the United States, and that the recipient's country may have
5
different data privacy laws and protections than in the Participant's country.
The Participant authorizes them to receive, possess, use, retain and transfer
the Data, in electronic or other form, for the purposes described in this
section, including any requisite transfer to Broker or such other stock plan
service provider or other third party as may be required for the administration
of the Plan and/or the subsequent holding of Shares of stock on the
Participant's behalf. The Participant understands that he or she may, at any
time, request access to the Data, request any necessary amendments to it or
refuse or withdraw the consents herein, in any case without cost, by contacting
in writing his or her local human resources representative. The Participant
understands, however, that withdrawal of consent may affect the Participant's
ability participate in or realize benefits from the Plan. For more information
on the consequences of refusal to consent or withdrawal of consent, the
Participant understands that he or she may contact his or her local human
resources representative.
10. Miscellaneous.
(a) No Rights to Employment. The Participant acknowledges and agrees
that the vesting of the RSUs pursuant to Section 2 hereof is earned only in
accordance with the terms of such section. The Participant further acknowledges
and agrees that the transactions contemplated hereunder and the vesting schedule
set forth herein do not constitute an express or implied promise of continued
engagement as an employee or consultant for the vesting period, for any period,
or at all.
(b) Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, and each other provision of this Agreement shall be
severable and enforceable to the extent permitted by law.
(c) Waiver. Any provision for the benefit of the Company contained in
this Agreement may be waived, either generally or in any particular instance, by
the Board of Directors of the Company.
(d) Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Company and the Participant and their respective heirs,
executors, administrators, legal representatives, successors and assigns,
subject to the restrictions on transfer set forth in Section 4 of this
Agreement.
(e) Notice. All notices required or permitted hereunder shall be in
writing and deemed effectively given upon personal delivery or five days after
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party hereto at the address shown
beneath his or its respective signature to this Agreement, or at such other
address or addresses as either party shall designate to the other in accordance
with this Section 10(e).
(f) Pronouns. Whenever the context may require, any pronouns used in
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns and pronouns shall include the plural, and
vice versa.
6
(g) Language. If the Participant has received this Agreement or any
other document related to the Plan translated into a language other than English
and if the translated version is different than the English version, the English
version will control.
(h) Electronic Delivery. The Company may, in its sole discretion,
decide to deliver any documents related to participation in the Plan, RSUs
granted under the Plan or future RSUs that may be granted under the Plan by
electronic means or to request the Participant's consent to participate in the
Plan by electronic means. The Participant hereby consents to receive such
documents by electronic delivery and, if requested, to agree to participate in
the Plan through an on-line or electronic system established and maintained by
the Company or another third party designated by the Company.
(i) Entire Agreement. This Agreement and the Plan constitute the
entire agreement between the parties, and supersedes all prior agreements and
understandings, relating to the subject matter of this Agreement.
(j) Amendment. This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Participant.
(k) Governing Law. This Agreement shall be construed, interpreted and
enforced in accordance with the internal laws of the Commonwealth of
Massachusetts without regard to any applicable conflicts of laws.
(l) The Participant's Acknowledgments. The Participant acknowledges
that he or she: (i) has read this Agreement; (ii) has been represented in the
preparation, negotiation, and execution of this Agreement by legal counsel of
the Participant's own choice or has voluntarily declined to seek such counsel;
and (iii) understands the terms and consequences of this Agreement; and (iv) is
fully aware of the legal and binding effect of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MKS INSTRUMENTS, INC.
By:
-------------------------------------
Title: Chief Executive Officer &
President
90 Industrial Way
Wilmington, MA 01887
<> <>
Participants Signature:
-----------------
Address: <>, <>
<>, <> <>
<>
7
Exhibit A
IRREVOCABLE STANDING ORDER TO SELL SHARES
I, <> <>, have been granted restricted stock
units ("RSUs") with respect to 000000 shares of stock by MKS Instruments, Inc.
("MKS"), which is evidenced by a restricted stock unit agreement between me and
MKS (the "Agreement," copy attached). Provided that I remain employed by MKS (or
one of its subsidiaries) on each vesting date, the RSUs vest according to the
schedule set forth in the Agreement.
I understand that on the vesting date, MKS shares (the "Shares") will
be deposited into my account no. _____________ at Broker and that I may
recognize taxable income as a result. Pursuant to the terms of the Agreement and
as a condition of my receipt of the Shares, I understand and agree that, for
each vesting date, I must sell a number of shares sufficient to satisfy all
withholding taxes applicable to that income. Therefore, I HEREBY DIRECT Broker
TO SELL, AT THE MARKET PRICE AND ON EACH VESTING DATE (OR THE FIRST BUSINESS DAY
THEREAFTER IF A VESTING DATE SHOULD FALL ON A DAY WHEN THE MARKET IS CLOSED),
THE NUMBER OF SHARES THAT MKS INFORMS Broker IS SUFFICIENT TO SATISFY THE
APPLICABLE WITHHOLDING TAXES, WHICH SHALL BE CALCULATED BASED ON THE CLOSING
PRICE OF MKS'S COMMON STOCK ON THE LAST TRADING DAY BEFORE THE VESTING DATE. I
understand that Broker will remit the proceeds to MKS for payment of the
withholding taxes.
I hereby agree to indemnify and hold Broker harmless from and against
all losses, liabilities, damages, claims and expenses, including reasonable
attorneys' fees and court costs, arising out of any (i) negligent act, omission
or willful misconduct by MKS in carrying out actions pursuant to the third
sentence of the preceding paragraph and (ii) any action taken or omitted by
Broker in good faith reliance upon instructions herein or upon instructions or
information transmitted to Broker by MKS pursuant to the third sentence of the
preceding paragraph.
I understand and agree that by signing below, I am making an
Irrevocable Standing Order to Sell Shares which will remain in effect until all
of the RSUs have vested. I also agree that this Irrevocable Standing Order to
Sell Shares is in addition to and subject to the terms and conditions of any
existing Account Agreement that I have with Broker.
- ------------------------------------- ----------------------------------------
Signature Signature (Additional Account Holder)
Print name: Print name:
------------------------- ----------------------------
Dated: _______ __, 20__ Dated: _________ __, 20__
8
exv31w1
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Leo Berlinghieri, certify that:
1. |
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I have reviewed this report on Form 10-Q of MKS Instruments, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15(d)-15(f)) for the registrant and have: |
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a) |
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Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
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b) |
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Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles; |
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c) |
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Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and |
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d) |
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Disclosed in this report any changes in the registrants internal control
over financial reporting that occurred during the registrants most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting; and |
5. |
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The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
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a) |
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All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process, summarize
and report financial information; and |
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b) |
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Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control and
financial reporting. |
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Date: May 8, 2006 |
/s/ Leo Berlinghieri
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Leo Berlinghieri |
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Chief Executive Officer and
President (Principal Executive Officer) |
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exv31w2
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a)/RULE 15d-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Ronald C. Weigner, certify that:
1. |
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I have reviewed this report on Form 10-Q of MKS Instruments, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15(d)-15(f)) for the registrant and have: |
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a) |
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Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared; |
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b) |
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Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles; |
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c) |
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Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
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d) |
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Disclosed in this report any changes in the registrants internal control
over financial reporting that occurred during the registrants most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting; and |
5. |
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The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
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a) |
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All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process, summarize
and report financial information; and |
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b) |
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Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control and
financial reporting. |
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Date: May 8, 2006 |
/s/ Ronald Weigner
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Ronald C. Weigner |
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Vice President and Chief Financial Officer
(Principal Financial Officer) |
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exv32w1
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of MKS Instruments, Inc. (the Company)
for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the
date hereof (the Report), the undersigned, Leo Berlinghieri, Chief Executive Officer and
President of the Company, and Ronald C. Weigner, Vice President and Chief Financial Officer of the
Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, based on his knowledge:
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(1) |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
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Dated: May 8, 2006 |
/s/ Leo Berlinghieri
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Leo Berlinghieri |
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Chief Executive Officer and President |
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Dated: May 8, 2006 |
/s/ Ronald Weigner
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Ronald C. Weigner |
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Vice President and Chief Financial Officer |
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