e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
    (MARK ONE)
 
x   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   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)
     
Massachusetts
  04-2277512
 
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
   
90 Industrial Way, Wilmington, Massachusetts
  01887
 
(Address of principal executive offices)
  (Zip Code)
 
   
Registrant’s telephone number, including area code
  (978) 284-4000
 
   
     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 issuer’s common stock as of April 28, 2006: 55,807,825
 
 

 


Table of Contents

MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
                 
 
               
PART I.   FINANCIAL INFORMATION        
 
               
  FINANCIAL STATEMENTS.        
 
               
 
      Consolidated Balance Sheets —
March 31, 2006 and December 31, 2005
    3  
 
               
 
      Consolidated Statements of Operations —
Three months ended March 31, 2006 and 2005
    4  
 
               
 
      Consolidated Statements of Cash Flows —
Three months ended March 31, 2006 and 2005
    5  
 
               
 
      Notes to Consolidated Financial Statements     6  
 
               
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.     17  
 
               
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.     23  
 
               
  CONTROLS AND PROCEDURES.     23  
 
               
PART II.   OTHER INFORMATION
       
 
               
  LEGAL PROCEEDINGS.     24  
 
               
  RISK FACTORS.     24  
 
               
  EXHIBITS.     31  
 
               
       
 
               
EXHIBIT INDEX
       
 EX-10.1 Restricted Stock Unit Agreement
 EX-31.1 Section 302 Certification of CEO
 EX-31.2 Section 302 Certification of CFO
 EX-32.1 Section 906 Certification of CEO & CFO

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PART I.       FINANCIAL INFORMATION
     ITEM 1.       FINANCIAL STATEMENTS.
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
                 
    March 31, 2006     December 31, 2005  
    (Unaudited)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 156,821     $ 220,573  
Short-term investments
    57,039       72,046  
Trade accounts receivable, net
    106,672       82,610  
Inventories
    111,967       98,242  
Deferred income taxes
    16,285       15,165  
Other current assets
    12,585       10,511  
 
           
Total current assets
    461,369       499,147  
Property, plant and equipment, net
    80,083       78,726  
Long-term investments
    696       857  
Goodwill, net
    322,761       255,243  
Acquired intangible assets, net
    54,923       27,422  
Other assets
    2,583       2,345  
 
           
Total assets
  $ 922,415     $ 863,740  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Short-term borrowings
  $ 18,727     $ 16,966  
Current portion of long-term debt
          1,429  
Current portion of capital lease obligations
    613       491  
Accounts payable
    38,756       27,955  
Accrued compensation
    15,470       13,583  
Income taxes payable
    12,810       9,564  
Other accrued expenses
    23,413       19,099  
 
           
Total current liabilities
    109,789       89,087  
Long-term debt
    5,000       5,238  
Long-term portion of capital lease obligations
    935       914  
Deferred income taxes
    11,383       2,153  
Other liabilities
    3,931       3,505  
Commitments and contingencies (Note 10)
               
 
               
Stockholders’ equity:
               
Preferred Stock, $0.01 par value, 2,000,000 shares authorized; none issued and outstanding
           
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
    113       113  
Additional paid-in capital
    651,779       639,152  
Retained earnings
    132,077       116,642  
Accumulated other comprehensive income
    7,408       6,936  
 
           
Total stockholders’ equity
    791,377       762,843  
 
           
Total liabilities and stockholders’ equity
  $ 922,415     $ 863,740  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

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MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
                 
    Three Months Ended  
    March 31,  
    2006     2005  
Net sales
  $ 179,061     $ 127,407  
Cost of sales
    105,316       78,045  
 
           
Gross profit
    73,745       49,362  
 
               
Research and development
    16,057       14,549  
Selling, general and administrative
    29,765       23,849  
Amortization of acquired intangible assets
    5,254       3,690  
Purchase of in-process technology
    800        
Restructuring charges
          454  
 
           
Income from operations
    21,869       6,820  
Interest expense
    203       174  
Interest income
    1,633       1,272  
 
           
Income before income taxes
    23,299       7,918  
Provision for income taxes
    7,864       2,460  
 
           
Net income
  $ 15,435     $ 5,458  
 
           
 
               
Net income per share:
               
Basic
  $ 0.28     $ 0.10  
 
           
Diluted
  $ 0.28     $ 0.10  
 
           
 
               
Weighted average common shares outstanding:
               
Basic
    54,660       53,878  
 
           
Diluted
    55,269       54,393  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

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MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
                 
    Three Months Ended  
    March 31,  
    2006     2005  
Cash flows from operating activities:
               
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        
Other
    645       107  
Changes in operating assets and liabilities, net of businesses acquired:
               
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  
 
           
 
               
Cash flows from investing activities:
               
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  
 
           
 
               
Supplemental cash flow disclosure:
               
Income taxes paid
  $ 3,178     $ 2,617  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

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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.
 
    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.
 
2)   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 Company’s 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”).
 
    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 Company’s common stock became exercisable on January 7, 2005. No compensation expense was recorded in the Company’s 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 Company’s compensation expense in periods subsequent to the adoption of SFAS 123R, “Share-Based Payment” (“SFAS 123R”).
 
    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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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:
         
    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 Company’s 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 %

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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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.

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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 Company’s 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

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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. Ion’s ionization technology controls electrostatic charge to reduce process contamination and improve yields, which complements the Company’s 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 Company’s 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 Company’s open and modular

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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.
Ion’s ionization technology and Umetrics’ multivariate data analysis technology both complement our process control and monitoring technologies and will support the Company’s mission to improve process performance and productivity.
The results of these acquisitions were included in the Company’s 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:

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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.

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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 Company’s 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  
 
           

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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 Company’s 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 Company’s 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 Company’s chief decision-maker reviews consolidated operating results to make decisions about allocating resources and assessing performance for the entire Company.

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MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
Information about the Company’s 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-Line’s 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 court’s 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-Line’s 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

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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 Company’s 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 Company’s 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 Company’s 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  
 
           

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MKS INSTRUMENTS, INC.
     ITEM 2.   MANAGEMENT’S 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 management’s 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. Ion’s 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

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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 management’s 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.

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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%  

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     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        

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     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.

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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.

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     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 Management’s 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

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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 SEC’s 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 company’s 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-Line’s 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 court’s 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-Line’s 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

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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:
    the timing of the receipt of orders from major customers;
 
    shipment delays;
 
    disruption in sources of supply;
 
    seasonal variations of capital spending by customers;
    production capacity constraints; and
 
    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.

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     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:
    our ability to maintain relationships with existing key customers;
    our ability to attract new customers;
 
    our ability to introduce new products in a timely manner for existing and new customers; and
 
    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 supplier’s 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.

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     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:
    historical customer relationships;
 
    product quality, performance and price;
 
    breadth of product line;
 
    manufacturing capabilities; and
 
    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.

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     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:
    political and economic instability;
 
    fluctuations in the value of currencies and high levels of inflation, particularly in Asia and Europe;
 
    changes in labor conditions and difficulties in staffing and managing foreign operations, including, but not limited to, labor unions;
 
    reduced or less certain protection for intellectual property rights;
 
    greater difficulty in collecting accounts receivable and longer payment cycles;
 
    burdens and costs of compliance with a variety of foreign laws;
 
    increases in duties and taxation;
 
    imposition of restrictions on currency conversion or the transfer of funds;
 
    changes in export duties and limitations on imports or exports;
 
    expropriation of private enterprises; and
 
    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

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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:
    we will be able to protect our technology adequately;
 
    competitors will not be able to develop similar technology independently;
 
    any of our pending patent applications will be issued;
 
    domestic and international intellectual property laws will protect our intellectual property rights; or
 
    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

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class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of our management’s 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:
    the potential inability to obtain an adequate supply of required components;
 
    reduced control over pricing and timing of delivery of components; and
 
    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:
    we could be subject to fines;
 
    our production could be suspended; or
 
    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

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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.
     
Exhibit No.
  Exhibit Description
3.1(1)
  Restated Articles of Organization
3.2(2)
  Articles of Amendment, as filed with the Secretary of State of Massachusetts on May 18, 2001
3.3(3)
  Articles of Amendment, as filed with the Secretary of State of Massachusetts on May 16, 2002
3.4(4)
  Amended and Restated By-Laws
10.1
  Form of Restricted Stock Unit Agreement Granted Under the 2004 Stock Incentive Plan
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
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
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
 
(1)   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.
 
(2)   Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
 
(3)   Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
 
(4)   Incorporated by reference to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on January 28, 1999, as amended.

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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.
         
  MKS INSTRUMENTS, INC.
 
 
May 8, 2006  By:   /s/ Ronald Weigner    
    Ronald C. Weigner   
    Vice President and Chief Financial Officer (Principal Financial Officer)   

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.   I have reviewed this report on Form 10-Q of MKS Instruments, Inc.;
 
2.   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;
 
3.   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;
 
4.   The registrant’s 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:
  a)   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;
 
  b)   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;
 
  c)   Evaluated the effectiveness of the registrant’s 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
 
  d)   Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   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 registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control and financial reporting.
         
     
Date: May 8, 2006  /s/ Leo Berlinghieri    
  Leo Berlinghieri   
  Chief Executive Officer and President
(Principal Executive Officer) 
 

 

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.   I have reviewed this report on Form 10-Q of MKS Instruments, Inc.;
 
2.   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;
 
3.   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;
 
4.   The registrant’s 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:
  a)   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;
 
  b)   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;
 
  c)   Evaluated the effectiveness of the registrant’s 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
 
  d)   Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   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 registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control and financial reporting.
         
     
Date: May 8, 2006  /s/ Ronald Weigner    
  Ronald C. Weigner   
  Vice President and Chief Financial Officer (Principal Financial Officer)   

 

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:
  (1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Dated: May 8, 2006  /s/ Leo Berlinghieri    
  Leo Berlinghieri   
  Chief Executive Officer and President   
 
     
Dated: May 8, 2006  /s/ Ronald Weigner    
  Ronald C. Weigner   
  Vice President and Chief Financial Officer