e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK ONE)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
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   (I.R.S. Employer
of incorporation or organization)   Identification No.)
     
2 Tech Drive, Suite 201, Andover, Massachusetts   01810
 
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (978) 645-5500
     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 þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company 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 þ
     As of July 29, 2011 the registrant had 52,460,897 shares of common stock outstanding.
 
 

 


 

MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
         
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    18  
 
       
    24  
 
       
    25  
 
       
       
 
       
    25  
 
       
    25  
 
       
    25  
 
       
       
 
       
EXHIBIT INDEX
       
 EX-31.1
 EX-31.2
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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PART I. FINANCIAL INFORMATION
     ITEM 1.   FINANCIAL STATEMENTS.
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
                 
    June 30, 2011   December 31, 2010
     
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 226,538     $ 162,476  
Short-term investments
    269,749       269,457  
Trade accounts receivable, net
    150,980       138,181  
Inventories
    164,450       156,429  
Deferred income taxes
    13,872       13,775  
Other current assets
    24,120       12,577  
     
Total current assets
    849,709       752,895  
 
               
Property, plant and equipment, net
    69,653       68,976  
Long-term marketable securities
    5,277        
Goodwill
    140,020       140,020  
Intangible assets, net
    1,243       1,743  
Other assets
    14,713       18,779  
     
Total assets
  $ 1,080,615     $ 982,413  
     
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Short-term borrowings
  $ 619     $  
Accounts payable
    33,754       36,427  
Accrued compensation
    29,201       29,944  
Income taxes payable
    490       5,347  
Other current liabilities
    37,919       37,968  
     
Total current liabilities
    101,983       109,686  
 
               
Other liabilities
    29,666       25,688  
Commitments and contingencies (Note 15)
               
 
               
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; 52,439,231 and 50,648,601 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    113       113  
Additional paid-in capital
    699,458       663,792  
Retained earnings
    232,372       171,356  
Accumulated other comprehensive income
    17,023       11,778  
     
Total stockholders’ equity
    948,966       847,039  
     
Total liabilities and stockholders’ equity
  $ 1,080,615     $ 982,413  
     
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 June 30,   Six Months Ended June 30,
    2011   2010   2011   2010
     
Net revenues
                               
Products
  $ 198,737     $ 198,930     $ 406,184     $ 370,001  
Services
    25,750       21,717       50,154       42,812  
     
Total net revenues
    224,487       220,647       456,338       412,813  
Cost of revenues
                               
Cost of products
    105,086       111,117       216,301       205,256  
Cost of services
    14,413       12,211       28,688       24,743  
     
Total cost of revenues
    119,499       123,328       244,989       229,999  
     
Gross profit
    104,988       97,319       211,349       182,814  
 
                               
Research and development
    15,582       16,154       32,478       31,829  
Selling, general and administrative
    31,851       30,902       64,558       58,714  
Amortization of intangible assets
    250       314       500       783  
Gain on sale of asset
                      (682 )
     
Income from operations
    57,305       49,949       113,813       92,170  
Interest income
    309       284       585       631  
Interest expense
          30       5       52  
     
Income from continuing operations before income taxes
    57,614       50,203       114,393       92,749  
Provision for income taxes
    19,013       17,059       37,749       30,607  
     
Income from continuing operations
    38,601       33,144       76,644       62,142  
Income from discontinued operations, net of taxes
          5,633             5,860  
     
Net income
  $ 38,601     $ 38,777     $ 76,644     $ 68,002  
     
 
                               
Basic income per share:
                               
Continuing operations
  $ 0.74     $ 0.66     $ 1.48     $ 1.24  
Discontinued operations
          0.11             0.12  
     
Net income
  $ 0.74     $ 0.77     $ 1.48     $ 1.36  
     
 
                               
Diluted income per share:
                               
Continuing operations
  $ 0.73     $ 0.65     $ 1.46     $ 1.22  
Discontinued operations
          0.11             0.12  
     
Net income
  $ 0.73     $ 0.76     $ 1.46     $ 1.34  
     
 
                               
Cash dividends per common share
  $ 0.15     $     $ 0.30     $  
     
 
                               
Weighted average common shares outstanding:
                               
Basic
    52,346       50,067       51,877       49,834  
     
Diluted
    52,906       50,870       52,646       50,735  
     
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)
                 
    Six Months Ended
    June 30,
    2011   2010
     
Cash flows from operating activities:
               
Net income
  $ 76,644     $ 68,002  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    6,374       7,037  
Stock-based compensation
    6,048       4,310  
Provision for excess and obsolete inventory
    6,458       4,926  
Gain on disposal of discontinued operations
          (4,228 )
Deferred income taxes
    2,485       2,280  
Excess tax benefits from stock-based compensation
    (5,218 )     (640 )
Other
    299       (722 )
Changes in operating assets and liabilities:
               
Trade accounts receivable
    (10,953 )     (57,994 )
Inventories
    (12,880 )     (28,280 )
Income taxes
    (365 )     3,519  
Other current assets
    (9,885 )     (696 )
Accrued expenses and other current liabilities
    2,614       27,700  
Accounts payable
    (2,897 )     13,959  
     
Net cash provided by operating activities
    58,724       39,173  
     
Cash flows from investing activities:
               
Purchases of short-term and long-term available-for-sale investments
    (197,574 )     (111,767 )
Maturities, sales and settlements of short-term and long-term available-for-sale investments
    192,944       104,544  
Purchases of property, plant and equipment
    (6,265 )     (6,627 )
Proceeds from sale of assets
    4       2,113  
Net proceeds from sales of discontinued operations
          15,097  
Other
    (170 )     (1,438 )
     
Net cash (used in) provided by investing activities
    (11,061 )     1,922  
     
Cash flows from financing activities:
               
Proceeds from short-term borrowings
    13,404       71,795  
Payments on short-term borrowings
    (12,791 )     (72,319 )
Net proceeds related to employee stock-based compensation
    24,662       2,265  
Dividend payments to common stockholders
    (15,628 )      
Excess tax benefits from stock-based compensation
    5,218       640  
     
Net cash provided by financing activities
    14,865       2,381  
     
Effect of exchange rate changes on cash and cash equivalents
    1,534       (2,963 )
     
Increase in cash and cash equivalents
    64,062       40,513  
Cash and cash equivalents at beginning of period
    162,476       111,009  
     
Cash and cash equivalents at end of period
  $ 226,538     $ 151,522  
     
The accompanying notes are an integral part of the consolidated financial statements.

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED 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 June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 are 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 consolidated balance sheet presented as of December 31, 2010 has been derived from the audited consolidated financial statements as of that date. 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 United States generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the MKS Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on February 25, 2011.
    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, stock-based compensation, inventory, intangible assets, goodwill and other long-lived assets, acquisition expenses, income taxes 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)   Recently Issued Accounting Pronouncements
    In June 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The ASU requires changes in presentation only and the Company does not expect it will have a material effect on its consolidated financial statements.
    In May 2011, the FASB issued an ASU which applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. The amendments do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP. The amendments change the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the ASU clarifies the FASB’s intent about the application of existing fair value measurements. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company does not expect the new ASU to have a material effect on its financial position, results of operations or cash flows.
    In October 2009, the FASB issued an ASU that established new accounting and reporting provisions for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also established a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU were effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. The Company adopted the new ASU in the first quarter of 2011, and the adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
    In October 2009, the FASB issued an ASU that changed the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scoped these products out of current software revenue guidance. The new ASU includes factors to help companies determine what software elements are considered “essential to the functionality.” The amendments now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU were effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. The Company adopted the new ASU in the first quarter of 2011, and the adoption did not have a material impact on the Company’s financial position, results of operations or cash flows.
3)   Cash and Cash Equivalents and Investments
    The fair value of short-term available-for-sale investments with maturities or estimated lives of less than one year consists of the following:
                 
    June 30, 2011   December 31, 2010
     
Time deposits and drafts
  $ 1,597     $ 15,716  
Equity mutual funds
    517       491  
U.S. treasury and agency obligations
    267,635       253,250  
     
 
  $ 269,749     $ 269,457  
     
    The fair value of long-term available-for-sale investments with maturities or estimated lives of more than one year consists of the following:
                 
    June 30, 2011   December 31, 2010
     
U.S. treasury and agency obligations
  $ 5,277     $  
     
    The following table shows the gross unrealized gains and (losses) aggregated by investment category:
                                 
            Gross   Gross    
            Unrealized   Unrealized    
    Cost   Gains   (Losses)   Estimated Fair Value
     
As of June 30, 2011:
                               
Money market funds
  $ 16,792     $     $     $ 16,792  
Time deposits and drafts
    31,053                   31,053  
Equity mutual funds
    659             (142 )     517  
U.S. treasury and agency obligations
    347,865       60       (15 )     347,910  
     
 
  $ 396,369     $ 60     $ (157 )   $ 396,272  
     
Reported as follows:
                               
Cash and cash equivalents (1)
  $ 121,245     $ 1     $     $ 121,246  
Short-term investments
    269,846       58       (155 )     269,749  
Long-term marketable securities
    5,278       1       (2 )     5,277  
     
 
  $ 396,369     $ 60     $ (157 )   $ 396,272  
     
                                 
            Gross   Gross    
            Unrealized   Unrealized    
    Cost   Gains   (Losses)   Estimated Fair Value
     
As of December 31, 2010:
                               
Money market funds
  $ 7,032     $     $     $ 7,032  
Time deposits and drafts
    18,554                   18,554  
Equity mutual funds
    659             (168 )     491  
U.S. treasury and agency obligations
    298,034       42       (35 )     298,041  
     
 
  $ 324,279     $ 42     $ (203 )   $ 324,118  
     
Reported as follows:
                               
Cash and cash equivalents (1)
  $ 54,664     $     $ (3 )   $ 54,661  
Short-term investments
    269,615       42       (200 )     269,457  
     
 
  $ 324,279     $ 42     $ (203 )   $ 324,118  
     

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
 
(1)   The cash and cash equivalent amounts presented in the tables above do not include cash amounts of $105,292,000 and $107,815,000 as of June 30, 2011 and December 31, 2010, respectively.
    Interest income is accrued as earned. Dividend income is recognized as income on the date the stock trades “ex-dividend.” The cost of marketable securities sold is determined by the specific identification method and realized gains or losses are reflected in income and were not material for the three and six months ended June 30, 2011 and 2010.
4)   Fair Value Measurements
    In accordance with the provisions of fair value accounting, a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.
    The fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
  Level 1   Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 assets and liabilities include money market funds and debt and equity securities.
 
  Level 2   Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain time deposits, time drafts and non-exchange traded derivative contracts.
 
  Level 3   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
    The following tables provide a summary of assets and liabilities of the Company measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:
                                 
            Fair Value Measurements at Reporting Date Using
            Quoted Prices in           Significant
            Active Markets for   Significant Other   Unobservable
            Identical Assets   Observable Inputs   Inputs
Description   June 30, 2011   (Level 1)   (Level 2)   (Level 3)
 
Assets:
                               
Available-for-sale securities:
                               
Money market funds
  $ 16,792     $ 16,792     $     $  
Time deposits and drafts
    31,053             31,053        
Equity mutual funds
    517       517              
U.S. treasury and agency obligations
    347,910       347,910              
Derivatives — currency forward contracts
    74             74        
     
Total assets
  $ 396,346     $ 365,219     $ 31,127     $  
     
 
                               
Liabilities:
                               
     
Derivatives — currency forward contracts
  $ 3,301     $     $ 3,301     $  
     

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
                                 
            Fair Value Measurements at Reporting Date Using
            Quoted Prices in           Significant
            Active Markets for   Significant Other   Unobservable
            Identical Assets   Observable Inputs   Inputs
Description   June 30, 2011   (Level 1)   (Level 2)   (Level 3)
 
Reported as follows:
                               
Assets:
                               
Cash and cash equivalents
  $ 121,246     $ 91,790     $ 29,456     $  
Short-term investments
    269,749       268,152       1,597        
Long-term marketable securities
    5,277       5,277              
Other current assets
    74             74        
     
 
  $ 396,346     $ 365,219     $ 31,127     $  
     
Liabilities:
                               
     
Other current liabilities
  $ 3,301     $     $ 3,301     $  
     
                                 
            Fair Value Measurements at Reporting Date Using
            Quoted Prices in   Significant Other   Significant
            Active Markets for   Observable   Unobservable
            Identical Assets   Inputs   Inputs
Description   December 31, 2010   (Level 1)   (Level 2)   (Level 3)
 
Assets:
                               
Available-for-sale securities:
                               
Money market funds
  $ 7,032     $ 7,032     $     $  
Time deposits and drafts
    18,554             18,554        
Equity mutual funds
    491       491              
U.S. treasury and agency obligations
    298,041       298,041              
Derivatives — currency forward contracts
    369             369        
     
Total assets
  $ 324,487     $ 305,564     $ 18,923     $  
     
 
                               
Liabilities:
                               
     
Derivatives — currency forward contracts
  $ 3,463     $     $ 3,463     $  
     
 
                               
Reported as follows:
                               
Assets:
                               
Cash and cash equivalents
  $ 54,661     $ 51,823     $ 2,838     $  
Short-term investments
    269,457       253,741       15,716        
Other current assets
    369             369        
     
 
  $ 324,487     $ 305,564     $ 18,923     $  
     
Liabilities:
                               
     
Other current liabilities
  $ 3,463     $     $ 3,463     $  
     
    Money market funds
    As of June 30, 2011 and December 31, 2010, this asset class consisted mainly of a money market portfolio that comprises Federal government agency and U.S. treasury securities. The asset class is classified within Level 1 of the fair value hierarchy because its underlying investments are valued using quoted market prices in active markets for identical assets.
    Time deposits and drafts
    As of June 30, 2011, this asset class consisted primarily of time deposits denominated in the Euro currency and time drafts guaranteed by a financial institution. As of December 31, 2010, this asset class consisted of time deposits denominated in the Euro currency. The asset class is valued using other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities and are classified within Level 2 of the fair value hierarchy.

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
    Equity mutual funds
    As of June 30, 2011 and December 31, 2010, this asset class consisted of certain U.S. and international equity mutual funds, classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in an active market for identical assets. The equity mutual funds are associated with the Company’s supplemental defined contribution retirement obligations.
    U.S. treasury and agency obligations
    As of June 30, 2011 and December 31, 2010, this asset class consisted of U.S. treasury and agency obligations classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in an active market for identical assets.
    Derivatives
    As a result of the Company’s global operating activities, the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect its operating results and financial position. When deemed appropriate, the Company minimizes its risks from foreign currency exchange rate fluctuations through the use of derivative financial instruments. The principal market in which the Company executes its foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. The forward foreign currency exchange contracts are valued using broker quotations, or market transactions and are classified within Level 2 of the fair value hierarchy.
5)   Derivatives
    The Company enters into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments and those utilized as economic hedges. The Company operates internationally and, in the normal course of business, is exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. The Company has used derivative instruments, such as forward contracts, to manage certain foreign currency exposure.
    By nature, all financial instruments involve market and credit risks. The Company enters into derivative instruments with major investment grade financial institutions and no collateral is required. The Company has policies to monitor the credit risk of these counterparties. While there can be no assurance, the Company does not anticipate any material non-performance by any of these counterparties.
    The Company hedges a portion of its forecasted foreign currency denominated intercompany sales of inventory, over a maximum period of eighteen months, using forward foreign exchange contracts accounted for as cash-flow hedges related to Japanese, South Korean, British and European currencies. To the extent these derivatives are effective in off-setting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria, changes in the derivatives’ fair value are not included in current earnings but are included in other comprehensive income (“OCI”) in stockholders’ equity. These changes in fair value will subsequently be reclassified into earnings, as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs. The cash flows resulting from forward exchange contracts are classified in the consolidated statements of cash flows as part of cash flows from operating activities. The Company does not enter into derivative instruments for trading or speculative purposes.
    To the extent the hedge accounting criteria is not met, the related foreign currency forward contracts are considered as economic hedges and changes in the fair value of these contracts are recorded immediately in earnings in the period in which they occur. These include hedges that are used to reduce exchange rate risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (i.e., payables, receivables) and other economic hedges where the hedge accounting criteria were not met.

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
    As of June 30, 2011 and December 31, 2010, the Company had outstanding forward foreign exchange contracts with gross notional values of $70,244,000 and $87,666,000, respectively. The following tables provide a summary of the primary net hedging positions and corresponding fair values held as of June 30, 2011 and December 31, 2010:
                 
    June 30, 2011
    Gross Notional    
Currency Hedged (Buy/Sell)   Value   Fair Value (1)
 
U.S. Dollar/Japanese Yen
  $ 33,626     $ (1,632 )
U.S. Dollar/South Korean Won
    21,123       (1,296 )
U.S. Dollar/Euro
    9,462       (294 )
U.S. Dollar/U.K. Pound Sterling
    6,033       (5 )
     
Total
  $ 70,244     $ (3,227 )
     
                 
    December 31, 2010
    Gross Notional    
Currency Hedged (Buy/Sell)   Value   Fair Value (1)
 
U.S. Dollar/Japanese Yen
  $ 50,104     $ (2,876 )
U.S. Dollar/South Korean Won
    27,574       (563 )
U.S. Dollar/Euro
    6,934       305  
U.S. Dollar/U.K. Pound Sterling
    3,054       40  
     
Total
  $ 87,666     $ (3,094 )
     
 
(1)   Represents the net receivable (payable) amount included in the consolidated balance sheets.
    The following table provides a summary of the fair value amounts of the Company’s derivative instruments:
                 
Derivatives Designated as Hedging Instruments   June 30, 2011   December 31, 2010
 
Derivative assets:
               
Forward exchange contracts
  $ 74     $ 369  
Derivative liabilities:
               
Forward exchange contracts
    (3,301 )     (3,463 )
     
Total net derivative liability designated as hedging instruments (1)
  $ (3,227 )   $ (3,094 )
     
 
(1)   The derivative asset of $74,000 and derivative liability of $3,301,000 are classified in other current assets and other current liabilities, respectively, in the consolidated balance sheet as of June 30, 2011. The derivative asset of $369,000 and derivative liability of $3,463,000 are classified in other current assets and other current liabilities, respectively, in the consolidated balance sheet as of December 31, 2010.
    The following table provides a summary of the gains (losses) on derivatives designated as hedging instruments:
                                 
Derivatives Designated as Cash Flow Hedging Relationships   Three Months Ended   Six Months Ended
    June 30,   June 30,   June 30,   June 30,
Forward exchange contracts:   2011   2010   2011   2010
 
Net (loss) recognized in OCI (1)
  $ (157 )   $ (1,097 )   $ (319 )   $ (741 )
Net (loss) gain reclassified from OCI into income (2)
    (949 )     371       (1,475 )     384  
 
(1)   Net change in the fair value of the effective portion classified in OCI.
 
(2)   Classified in selling, general and administrative.

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
6)   Inventories
    Inventories consist of the following:
                 
    June 30, 2011   December 31, 2010
     
Raw materials
  $ 81,967     $ 82,012  
Work-in-process
    22,606       21,891  
Finished goods
    59,877       52,526  
     
 
  $ 164,450     $ 156,429  
     
7)   Goodwill and Intangible Assets
    Goodwill
    The Company tests goodwill for impairment on an annual basis, which has been determined to be as of October 31 of each fiscal year. The Company also tests goodwill between annual tests if an event occurs or circumstances change that indicate that the fair value of a reporting unit may be below its carrying value.
    Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. In performing the first step, the Company determines the fair value of a reporting unit using a discounted cash flow (“DCF”) analysis. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates, and the amount and timing of expected future cash flows. Discount rates are based on a weighted average cost of capital (“WACC”), which represents the average rate a business must pay its providers of debt and equity. The WACC used to test goodwill was derived from a group of comparable companies. The cash flows employed in the DCF analysis were derived from internal earnings and forecasts and external market forecasts. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed.
    The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with its carrying amount of goodwill to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, whereby the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
    As of October 31, 2010, the Company performed its annual impairment assessment of goodwill and determined that no impairment charges were required, as the fair value of each reporting unit exceeded its book value.
    The changes in the carrying amount of goodwill and accumulated impairment losses during the six months ended June 30, 2011 and twelve months ended December 31, 2010 were as follows:
                                                 
    2011     2010  
    Gross     Accumulated             Gross     Accumulated        
    Carrying     Impairment             Carrying     Impairment        
    Amount     Loss     Net     Amount     Loss     Net  
         
Beginning balance at January 1
  $ 279,434     $ (139,414 )   $ 140,020     $ 337,765     $ (193,254 )   $ 144,511  
Acquired goodwill (1)
                      2,292             2,292  
Sale of discontinued operations (2)
                      (60,623 )     53,840       (6,783 )
         
Ending balance at June 30, 2011 and December 31, 2010
  $ 279,434     $ (139,414 )   $ 140,020     $ 279,434     $ (139,414 )   $ 140,020  
         
 
(1)   In November 2010, the Company purchased a technology company for $2,447,000 to enhance its product portfolio. The Company recorded $2,292,000 of goodwill in connection with the acquisition.

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)

 
(2)   In May 2010, the Company sold its Ion Systems, Inc. (“Ion”) business and in August 2010 it sold the assets of its Yield Dynamics, LLC (“YDI”) business and as a result charged the related net goodwill to the gain on sale of discontinued operations.
    Intangible Assets
    Components of the Company’s intangible assets are comprised of the following:
                         
            Accumulated        
    Gross     Amortization     Net  
     
As of June 30, 2011:
                       
Completed technology
  $ 76,829     $ (76,536 )   $ 293  
Customer relationships
    8,940       (8,228 )     712  
Patents, trademarks, trade names and other
    24,638       (24,400 )     238  
     
 
  $ 110,407     $ (109,164 )   $ 1,243  
     
                         
            Accumulated        
    Gross     Amortization     Net  
     
As of December 31, 2010
                       
Completed technology
  $ 76,829     $ (76,230 )   $ 599  
Customer relationships
    8,940       (8,083 )     857  
Patents, trademarks, trade names and other
    24,638       (24,351 )     287  
     
 
  $ 110,407     $ (108,664 )   $ 1,743  
     
    Aggregate amortization expense related to intangible assets for the three and six months ended June 30, 2011 was $250,000 and $500,000, respectively. Aggregate amortization expense related to intangible assets for the three and six months ended June 30, 2010 was $314,000 and $783,000, respectively. Estimated amortization expense for each of the three remaining fiscal years is as follows:
         
Year
  Amount
2011 (remaining)
  $ 488  
2012
    389  
2013
    366  
8)   Debt
    The Company’s Japanese subsidiary has lines of credit and short-term borrowing arrangements with two financial institutions which provide for aggregate borrowings as of June 30, 2011 of up to an equivalent of $30,941,000 U.S. dollars, which generally expire and are renewed at three month intervals. At June 30, 2011 total borrowings outstanding under these arrangements were $619,000 at an interest rate of 0.68%. There were no borrowings outstanding at December 31, 2010.
9)   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 shipment volume, 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. The product warranty liability is included in other current liabilities in the consolidated balance sheets.
    Product warranty activities were as follows:
                 
    Six Months Ended June 30,
    2011   2010
     
Balance at January 1
  $ 9,865     $ 6,560  
Provision for product warranties
    3,638       4,731  
Direct charges to warranty liability
    (3,832 )     (2,309 )
     
Balance at June 30
  $ 9,671     $ 8,982  
     

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
10)   Income Taxes
    The Company’s effective tax rate for both the three and six months ended June 30, 2011 was 33.0%. The Company’s effective tax rate for the three and six months ended June 30, 2010 was 34.0% and 33.0%, respectively. The effective tax rates for the six months ended June 30, 2011 and 2010, and the related income tax provisions were lower than the U.S. statutory tax rate primarily due to the geographic mix of income and profits earned by the Company’s international subsidiaries being taxed at rates lower than the U.S. statutory rate.
    At June 30, 2011, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $16,749,000. At December 31, 2010, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $15,270,000. The net increase from December 31, 2010 was primarily attributable to an increase in reserves for existing uncertain tax positions. If these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of $12,789,000, excluding interest and penalties, would impact the Company’s effective tax rate. The Company accrues interest expense and, if applicable, penalties for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. At June 30, 2011 and December 31, 2010, the Company had accrued interest on unrecognized tax benefits of approximately $1,253,000 and $986,000, respectively.
    The Company and its subsidiaries are subject to examination by federal, state and foreign tax authorities. The statute of limitations for the Company’s tax filings varies by tax jurisdiction between fiscal years 2001 through present.
    While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from the Company’s accrued positions as a result of uncertain and complex application of tax regulations. Additionally, the recognition and measurement of certain tax benefits include estimates and judgment by management and inherently includes subjectivity. Accordingly, the Company could record additional provisions or benefits due to U.S. federal, state, and foreign tax-related matters in the future as it revises estimates or settles or otherwise resolves the underlying matters.
11)   Discontinued Operations
    During the second quarter of 2010, the Company committed to a plan to divest two product lines, as their growth potential no longer met the Company’s long-term strategic objectives. The Company completed the sale of Ion on May 17, 2010 for $15,097,000 of net cash proceeds after expenses and recorded a pre-tax gain on the sale of $4,228,000. As a result of committing to a plan to divest a second product line and, therefore, meeting the asset held for sale criteria, during the second quarter of 2010, the Company performed a fair value analysis of its YDI business in order to measure it at the lower of its carrying value or fair value less cost to dispose. Based on the analysis, the Company determined that the carrying value was less than the fair value, less costs to dispose, and therefore, no impairment charge was required. The YDI business was considered held for sale of June 30, 2010. The Company completed the sale of the assets of its YDI business on August 11, 2010 for $490,000 of net cash proceeds after expenses and recorded a pre-tax gain on the sale of $224,000.
    The two product lines have been accounted for as discontinued operations. Accordingly, their results of operations have been reclassified to discontinued operations in the consolidated statements of operations for all periods presented. The assets and liabilities of these discontinued businesses have not been reclassified or segregated in the consolidated balance sheets or consolidated statements of cash flows due to their immaterial amounts. Net revenues and income from discontinued operations for the three and six months ended June 30, 2011 and 2010 are below:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
     
Net revenues
  $     $ 3,881     $     $ 9,784  
     
Income from discontinued operations before income taxes
  $     $ 786     $     $ 1,219  
Gain from disposal of discontinued operations before income taxes
          4,228             4,228  
Income tax benefit
          (619 )           (413 )
     
Income from discontinued operations
  $     $ 5,633     $     $ 5,860  
     

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
12)   Net Income Per Share
    The following table sets forth the computation of basic and diluted net income per share:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
     
Numerator:
                               
Income from continuing operations
  $ 38,601     $ 33,144     $ 76,644     $ 62,142  
Income from discontinued operations, net of tax
          5,633             5,860  
     
Net income
  $ 38,601     $ 38,777     $ 76,644     $ 68,002  
     
Denominator:
                               
Shares used in net income per common share — basic
    52,346,000       50,067,000       51,877,000       49,834,000  
Effect of dilutive securities:
                               
Stock options, restricted stock and employee stock purchase plan
    560,000       803,000       769,000       901,000  
     
Shares used in net income per common share — diluted
    52,906,000       50,870,000       52,646,000       50,735,000  
     
Basic income per common share:
                               
Continuing operations
  $ 0.74     $ 0.66     $ 1.48     $ 1.24  
Discontinued operations
          0.11             0.12  
     
Net income
  $ 0.74     $ 0.77     $ 1.48     $ 1.36  
     
Diluted income per common share:
                               
Continuing operations
  $ 0.73     $ 0.65     $ 1.46     $ 1.22  
Discontinued operations
          0.11             0.12  
     
Net income
  $ 0.73     $ 0.76     $ 1.46     $ 1.34  
     
    Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding (using the treasury stock method) if securities containing potentially dilutive common shares (stock options and restricted stock units) had been converted to such common shares, and if such assumed conversion is dilutive.
    As of June 30, 2011, stock options and restricted stock units relating to an aggregate of approximately 1,638,000 shares were outstanding. For the three and six months ended June 30, 2011, the potential dilutive effect of 331,000 and 256,000 weighted-average shares, respectively, of restricted stock units and stock options were excluded from the computation of diluted weighted-average shares outstanding as the shares would have an anti-dilutive effect on EPS.
    As of June 30, 2010, stock options and restricted stock units relating to an aggregate of approximately 3,637,000 shares were outstanding. For the three and six months ended June 30, 2010, the potential dilutive effect of 1,201,000 and 1,295,000 weighted-average shares, respectively, of restricted stock units and stock options were excluded from the computation of diluted weighted-average shares outstanding as the shares would have an anti-dilutive effect on EPS.

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
13)   Comprehensive Income
    Components of comprehensive income were as follows:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
     
Net income
  $ 38,601     $ 38,777     $ 76,644     $ 68,002  
Other comprehensive income (loss):
                               
Changes in value of financial instruments designated as cash flow hedges (net of tax)
    (517 )     (905 )     (123 )     (690 )
Foreign currency translation adjustments
    2,207       (2,953 )     5,331       (4,921 )
Unrealized (loss) gain on investments (net of tax)
    (8 )     (40 )     37       (74 )
     
Other comprehensive income (loss)
    1,682       (3,898 )     5,245       (5,685 )
     
Total comprehensive income
  $ 40,283     $ 34,879     $ 81,889     $ 62,317  
     
14)   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.
    Information about the Company’s operations in different geographic regions is presented in the tables below. Net revenues 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 revenues.
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
     
Geographic net revenues:
                               
United States
  $ 110,412     $ 128,011     $ 221,015     $ 240,813  
Japan
    27,551       30,704       52,190       61,300  
Europe
    30,852       22,423       60,556       42,719  
Asia (excluding Japan)
    55,672       39,509       122,577       67,981  
     
 
  $ 224,487     $ 220,647     $ 456,338     $ 412,813  
     
                 
    June 30, 2011   December 31, 2010
     
Long-lived assets (1):
               
United States
  $ 53,891     $ 54,840  
Japan
    4,073       4,273  
Europe
    5,404       4,970  
Asia (excluding Japan)
    8,385       8,597  
     
 
  $ 71,753     $ 72,680  
     
 
(1)   Long-lived assets include property, plant and equipment, net and certain other assets.

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MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)
    The Company groups its products into three product groups. Net product and service revenues for these product groups are as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
     
Instruments and Control Systems
  $ 119,553     $ 114,249     $ 231,689     $ 203,345  
Power and Reactive Gas Products
    83,523       87,693       180,005       173,464  
Vacuum Products
    21,411       18,705       44,644       36,004  
     
 
  $ 224,487     $ 220,647     $ 456,338     $ 412,813  
     
15)   Commitments and Contingencies
    The Company is subject to various 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.
    The Company reviewed its contractual obligations and commercial commitments as of June 30, 2011 and determined that there were no significant changes from the ones set forth in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
16)   Subsequent Events
    Stock Repurchase Program
    On July 25, 2011, MKS’ Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of $200,000,000 of its common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions and business development activities, including but not limited to merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any time without prior notice.
    Cash Dividend
    On July 25, 2011, MKS’ Board of Directors authorized a quarterly cash dividend of $0.15 per share, payable on September 16, 2011 to shareholders of record as of September 1, 2011. Future dividend declarations, as well as the record and payment dates for such dividends, are subject to the final determination of the Company’s Board of Directors.

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MKS INSTRUMENTS, INC.
     ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
     This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. When used herein, the words “believes,” “anticipates,” “plans,” “expects,” “estimates,” “would,” “will,” “intends” 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. While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates or expectations change. Risks and uncertainties include, but are not limited to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2010 in the section entitled “Risk Factors” as referenced in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.
Overview
     We are a leading global provider of instruments, subsystems and process control solutions that measure, control, power, monitor and analyze critical parameters of advanced manufacturing processes to improve process performance and productivity. We also provide services relating to the maintenance and repair of our products, software maintenance, installation services and training.
     Our products are used in diverse markets, applications and processes. The primary markets we serve are manufacturers of capital equipment for semiconductor devices and for other thin film applications including flat panel displays, light emitting diodes (“LEDs”), solar cells, data storage media and other advanced coatings. We also leverage our technology into other markets with advanced manufacturing applications including medical equipment, pharmaceutical manufacturing, energy generation and environmental monitoring.
     We are managed as one operating segment. We group our products into 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 composition analysis, control and information technology, power and reactive gas generation and vacuum technology.
     We have a diverse base of customers that includes manufacturers of semiconductor capital equipment and semiconductor devices, thin film capital equipment used in the manufacture of flat panel displays, LEDs, solar cells, data storage media, and other coating applications; and industrial, medical, pharmaceutical manufacturing, energy generation, environmental monitoring and other advanced manufacturing companies, as well as university, government and industrial research laboratories. For the six months ended June 30, 2011 and the full year ended December 31, 2010, we estimate that 62% and 64% of our net sales, respectively, were to semiconductor capital equipment manufacturers and semiconductor device manufacturers. We expect that sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers will continue to account for a substantial portion of our sales.
     Through the second quarter of 2011, we saw an improvement in the global economy, which contributed to an increase in our business, financial condition and results of operations for the six months ended June 30, 2011 compared to the same period for the prior year. As a result of the improved global economy, our net revenues to semiconductor capital equipment manufacturers and semiconductor device manufacturers increased 7% for the six months ended June 30, 2011 compared to the same period for the prior year. Although our business levels increased for the six months ended June 30, 2011 compared to the same period for the prior year, the semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry. As we recently reported, we have recently begun to see a moderation in our semiconductor capital equipment manufacture and semiconductor devise manufacture customers’ order rates.
     Our net revenues sold to other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications, increased 18% for the six months ended June 30, 2011 compared to the same period for the prior year. The increase was mainly due to product revenues from a thin film solar customer in China during the first quarter of 2011. These advanced and growing markets include LED, medical, biopharm, environmental, thin films, solar and other markets and we anticipate that these markets will continue to grow and will represent a larger portion of our revenue.
     A significant portion of our net sales is to customers in international markets. International net sales include sales by our foreign subsidiaries, but exclude direct export sales. For the six months ended June 30, 2011 and the year ended December 31, 2010, international net sales accounted for approximately 52% and 43% of our net sales, respectively. A significant portion of our international net sales were in Japan and China. We expect that international net sales will continue to represent a significant percentage of our total net sales.

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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. There have been no material changes in our critical accounting policies since December 31, 2010. For further information, please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2010 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”
Results of Operations
     The following table sets forth, for the periods indicated, the percentage of total net revenues of certain line items included in MKS’ consolidated statements of operations data.
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
     
Net revenues:
                               
Product
    88.5 %     90.2 %     89.0 %     89.6 %
Services
    11.5       9.8       11.0       10.4  
     
Total net revenues
    100.0       100.0       100.0       100.0  
Cost of revenues:
                               
Cost of product revenues
    46.8       50.4       47.4       49.7  
Cost of service revenues
    6.4       5.5       6.3       6.0  
     
Total cost of revenues
    53.2       55.9       53.7       55.7  
     
Gross profit
    46.8       44.1       46.3       44.3  
Research and development
    6.9       7.3       7.1       7.7  
Selling, general and administrative
    14.2       14.0       14.1       14.2  
Amortization of intangible assets
    0.1       0.2       0.1       0.2  
Gain on sale of asset
                      (0.2 )
     
Income from operations
    25.5       22.6       25.0       22.4  
Interest income, net
    0.1       0.1       0.1       0.1  
     
Income from continuing operations before income taxes
    25.7       22.7       25.1       22.5  
Provision for income taxes
    8.5       7.7       8.3       7.4  
     
Income from continuing operations
    17.2       15.0       16.8       15.1  
Income from discontinued operations, net of taxes
          2.6             1.4  
     
Net income
    17.2 %     17.6 %     16.8 %     16.5 %
     
Net Revenues (dollars in millions)
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   % Change   2011   2010   % Change
     
Net Revenues:
                                               
Product
  $ 198.7     $ 198.9       (0.1 )%   $ 406.2     $ 370.0       9.8 %
Service
    25.8       21.7       18.6       50.1       42.8       17.1  
     
Total net revenues
  $ 224.5     $ 220.6       1.7 %   $ 456.3     $ 412.8       10.5 %
     
     Product revenues decreased $0.2 million and increased $36.2 million during the three and six months ended June 30, 2011, respectively, compared to the same periods for the prior year. For the three months ended June 30, 2011 our product revenues related to our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers increased by $2.9 million, or 2.3%. Although we have seen a recovery in the global economy since late 2009, which has contributed to an increase in demand for our products in many of the markets we serve, we have recently seen a moderation in our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers’ order rates. Our product revenues sold to other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications decreased $3.1 million, or 4.3%, during the three months ended June 30, 2011 compared to the same period for the prior year primarily due to a reduction in product sales to the solar market.
     For the six months ended June 30, 2011 our product revenues related to our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers increased by $17.3 million, or 7.4%. Our product revenues sold to other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications increased $18.9 million, or 13.8% during the

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six months ended June 30, 2011 compared to the same period for the prior year. The increase in demand in our other markets included the LED, biopharm, environmental, thin films, solar and other markets. A significant portion of this increase was due to product revenues from a thin film solar customer in China during the first quarter of 2011.
     Service revenues consisted mainly of fees for services relating to the maintenance and repair of our products, software maintenance, installation services and training. Service revenues increased $4.1 million, or 18.6%, and $7.3 million, or 17.1%, during the three and six months ended June 30, 2011, respectively, compared to the same periods for the prior year, as a result of the improvement in the global economy, increase in product sales and due to our investment to grow our service business in Asia.
     Total international net revenues, including product and service, were $114.1 million, and $235.3 million, or 50.8% and 51.6% of net revenues for the three and six months ended June 30, 2011, respectively. Total international net revenues, including product and service, were $92.6 million, and $172.0 million, or 42.0% and 41.7% of net revenues, for the three and six months ended June 30, 2010, respectively. The increases are due to a general increase in worldwide demand from many of the markets we serve as a result of improvement in the global economy. A significant portion of the increase in international net revenues for the six months ended June 30, 2011 was due to product revenues from a thin film solar customer in China during the first quarter of 2011.
Gross Profit
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   % Points
Change
  2011   2010   % Points
Change
     
Gross profit as percentage of net revenues:
                                               
Product
    47.1 %     44.1 %     3.0 %     46.8 %     44.5 %     2.3 %
Service
    44.0       43.8       0.2       42.8       42.2       0.6  
     
Total gross profit percentage
    46.8 %     44.1 %     2.7 %     46.3 %     44.3 %     2.0 %
     
     Gross profit on product revenues increased by 3.0 percentage points for the three months ended June 30, 2011, compared to the same period for the prior year. The increase is due to an increase of 4.8 percentage points due to favorable product mix and an increase of 1.0 percentage points from favorable foreign exchange fluctuations. These increases were partially offset by 1.8 percentage points due to higher overhead and 1.4 percentage points related to higher excess and obsolete inventory related net charges. The higher overhead spending is due to higher salary and fringe related costs for additional personnel due to the higher business levels and an increase in incentive compensation.
     Gross profit on product revenues increased by 2.3 percentage points for the six months ended June 30, 2011, compared to the same period for the prior year. The increase is due to an increase of 4.4 percentage points due to favorable product mix, and an increase of 0.9 percentage points from favorable foreign exchange fluctuations. These increases were partially offset by 1.9 percentage points due to higher overhead and 1.0 percentage points related to higher excess and obsolete inventory related net charges. The higher overhead spending is due to higher salary and fringe related costs for additional personnel due to the higher business levels and an increase in incentive compensation.
     Cost of service revenues consists primarily of costs of providing services for repair and training which includes salaries and related expenses and other fixed costs. Service gross profit increased by 0.2 percentage points and 0.6 percentage points for the three and six months ended June 30, 2011, respectively, compared to the same periods for the prior year. The increase is mainly a result of higher service revenues since a majority of our overhead costs are fixed.
Research and Development (dollars in millions)
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   % Change   2011   2010   % Change
     
Research and development expenses
  $ 15.6     $ 16.2       (3.5 )%   $ 32.5     $ 31.8       2.0 %
     Research and development expense decreased $0.6 million during the three months ended June 30, 2011, compared to the same period for the prior year. The decrease includes a $0.4 million decrease in spending on project materials due to changes in the timeline of certain projects and a $0.2 million decrease in patent and other legal related costs.
     Research and development expense increased $0.7 million during the six months ended June 30, 2011, compared to the same period for the prior year. The increase includes a $1.2 million increase in compensation expense and a $0.2 million increase in patent and other legal related costs offset by a $0.9 million decrease in spending on project materials. The increase in compensation expense is due to higher salary costs for additional personnel and an increase in stock-based compensation costs. In addition, compensation costs increased as fringe related costs were higher as a result of increased taxes related to an incentive compensation payment and the restoration in the second quarter of 2010 of the employer match portion of the 401(k) profit-sharing plan and employee stock purchase plans.

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     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 thousands 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 3 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 smaller integrated circuit geometries and in the flat panel display and solar markets to larger substrate sizes, 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 as well as legal costs associated with maintaining and defending our intellectual property.
     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 we 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 and other advanced technology markets. 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 revenues may be reduced during the lifespan of those products.
Selling, General and Administrative (dollars in millions)
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   % Change   2011   2010   % Change
     
Selling, general and administrative expenses
  $ 31.9     $ 30.9       3.1 %   $ 64.6     $ 58.7       10.0 %
     Selling, general and administrative expenses increased $1.0 million for the three months ended June 30, 2011, compared to the same period for the prior year. The increase includes a $0.5 million increase in consulting and professional fees, a $0.5 million unfavorable impact from foreign exchange and a $0.4 million increase in stock-based compensation expense, partially offset by a $0.3 million decrease in depreciation expense.
     Selling, general and administrative expenses increased $5.9 million for the six months ended June 30, 2011, compared to the same period for the prior year. The increase includes a $2.8 million increase in compensation expense, a $2.3 million increase in consulting and professional fees, a $0.5 million increase in travel related expenses, a $0.3 million unfavorable impact from foreign exchange and a $0.3 million increase in the provision for uncollectable accounts partially offset by a $0.6 million decrease in depreciation expense. The increase in compensation expense is due to higher salary costs for additional personnel and an increase in stock-based compensation costs. In addition, fringe related costs increased as a result of increased taxes related to an incentive compensation payment and the restoration in the second quarter of 2010 of the employer match portion of the 401(k) profit-sharing plan and employee stock purchase plans.
Amortization of Intangible Assets (dollars in millions)
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   % Change   2011   2010   % Change
     
Amortization of intangible assets
  $ 0.3     $ 0.3       %   $ 0.5     $ 0.8       (36.1 )%
     Amortization expense for the six months ended June 30, 2011 decreased $0.3 million compared to the same period for the prior year as certain intangible assets became fully amortized during 2010.
Gain on Sale of Asset (dollars in millions)
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   % Change   2011   2010   % Change
     
Gain on sale of asset
  $     $       %   $     $ 0.7       (100.0 )%
     During the first quarter of 2010, we sold two vacated facilities for proceeds of $2.1 million and recorded a $0.7 million net gain on the sale.
Interest Income, Net (dollars in millions)
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   % Change   2011   2010   % Change
     
Interest income, net
  $ 0.3     $ 0.3       %   $ 0.6     $ 0.6       %

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     Interest income, net was unchanged for the three and six months ended June 30, 2011 compared to the same periods for the prior year. Although the total cash and marketable securities balance was approximately $170 million higher on average for the six months ended June 30, 2011 compared to the same period for the prior year, interest income, net was unchanged due to a reduction in interest rates and a change in the mix of the investment portfolio.
Provision for Income Taxes (dollars in millions)
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   2011   2010
     
Provision for income taxes
  $ 19.0     $ 17.1     $ 37.7     $ 30.6  
     Our effective tax rate for both the three and six months ended June 30, 2011 was 33.0%. Our effective tax rate for the three and six months ended June 30, 2010 was 34.0% and 33.0%, respectively. The effective tax rates for the six months ended June 30, 2011 and 2010, and the related income tax provisions were lower than the U.S. statutory tax rate primarily due to the geographic mix of income and profits earned by our international subsidiaries being taxed at rates lower than the U.S. statutory rate.
     At June 30, 2011, our total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $16.7 million. At December 31, 2010, our total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $15.3 million. The net increase from December 31, 2010 was primarily attributable to an increase in reserves for existing uncertain tax positions. If these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of $12.8 million, excluding interest and penalties, would impact our effective tax rate. We accrue interest expense and, if applicable, penalties for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. At June 30, 2011 and December 31, 2010, we had accrued interest on unrecognized tax benefits of approximately $1.3 million and $1.0 million, respectively.
     We and our subsidiaries are subject to examination by federal, state and foreign tax authorities. The statute of limitations for our tax filings varies by tax jurisdiction between fiscal years 2001 through present.
     Our future effective income tax rate depends on various factors, such as tax legislation and the geographic composition of our pre-tax income. We monitor these factors and timely adjust our effective tax rate accordingly. Additionally, the effective tax rate could be adversely affected by changes in the valuation of deferred tax assets and liabilities. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate sufficient future taxable income in the United States. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax regulations. Additionally, the recognition and measurement of certain tax benefits include estimates and judgment by management and inherently includes subjectivity. Accordingly, we could record additional provisions or benefits due to U.S. federal, state, and foreign tax-related matters in the future as we revise estimates or settle or otherwise resolve the underlying matters.
Discontinued Operations
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2011   2010   % Change   2011   2010   % Change
     
Income from discontinued operations, net of taxes
  $     $ 5.6       (100.0 )%   $     $ 5.9       (100.0 )%
     During the second quarter of 2010, we committed to a plan to divest two product lines as their growth potential no longer met our long-term strategic objectives. We completed the sale of Ion Systems, Inc. in May 2010 for $15.1 million of net cash proceeds after expenses and recorded a pre-tax gain on the sale of $4.2 million. We sold of the assets of our Yield Dynamics, LLC business in August 2010 for a total of $0.5 million of net cash proceeds after expenses and recorded a $0.2 million pre-tax gain on the sales.
     The two product lines have been accounted for as discontinued operations. Accordingly, their results of operations have been reclassified to discontinued operations in the consolidated statements of operations for 2010. The assets and liabilities of these discontinued product lines have not been reclassified or segregated in the consolidated balance sheets or consolidated statements of cash flows due to their immaterial amounts.

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Liquidity and Capital Resources
     Cash, cash equivalents, long-term and short-term investments totaled $501.6 million at June 30, 2011 compared to $431.9 million at December 31, 2010. This increase was mainly attributable to our net cash provided by operating activities as a result of our net income and net proceeds related to employee stock awards, partially offset by dividend payments to our common shareholders and capital expenditures.
     Net cash provided by operating activities of $58.7 million for the six months ended June 30, 2011, resulted mainly from net income of $76.6 million which included non-cash charges of $18.9 million, partially offset by an increase of $34.4 million in working capital. The increase in working capital consisted primarily of a $12.9 million increase in inventory and an $11.0 million increase in trade accounts receivable, both a result of our increased business levels, and a $9.9 million increase in other current assets partially due to an increase in our value-added tax receivable.
     Net cash provided by operating activities of $39.2 million for the six months ended June 30, 2010, resulted mainly from net income of $68.0 million and non-cash charges of $16.3 million, partially offset by a $41.8 million change in working capital. The increase in working capital consisted primarily of a $58.0 million increase in trade accounts receivable and an increase of $28.3 million of inventory as a result of our increased business levels. The increase in net operating assets was partially offset by an increase of $14.0 million in accounts payable related to inventory purchases to support our increased business levels, an increase of $17.3 million in accrued compensation and an increase of $10.4 million in accrued liabilities. The increase in accrued liabilities is mainly related to an increase in non-income taxes payable.
     Net cash used in investing activities of $11.1 million for the six months ended June 30, 2011, resulted primarily from $6.3 million in purchases of production related equipment and the net purchases of $4.6 million of short-term and long-term available-for-sale investments. Net cash provided by investing activities of $1.9 million for the six months ended June 30, 2010, resulted primarily from $15.1 million in net proceeds from the sale of a discontinued operation and proceeds of $2.1 million from the sale of two vacated facilities, partially offset by $7.2 million of net purchases of available-for-sale investments and by $6.6 million in purchases of property, plant and equipment.
     Net cash provided by financing activities was $14.9 million for the six months ended June 30, 2011 and consisted primarily of $29.3 million cash received from the exercise of previously issued stock options and $5.2 million from excess tax benefits from stock-based compensation. These increases were partially offset by two dividend payments to common stockholders of an aggregate of $15.6 million and $5.1 million in taxes paid upon the vesting of restricted stock units. Net cash provided by financing activities was $2.4 million for the six months ended June 30, 2010 and consisted primarily of $2.3 million related to cash received from the exercise of previously issued stock options.
     Our Japanese subsidiary has lines of credit and short-term borrowing arrangements with two financial institutions which provide for aggregate borrowings as of June 30, 2011 of up to an equivalent of $30.9 million U.S. dollars, which generally expire and are renewed at three month intervals. At June 30, 2011 total borrowings outstanding under these arrangements were $0.6 million at an interest rate of 0.68%. There were no borrowings outstanding at December 31, 2010.
     On July 25, 2011, our Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of $200 million of our common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions and business development activities, including but not limited to merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any time without prior notice.
     On July 25, 2011, our Board of Directors authorized a quarterly cash dividend of $0.15 per share, payable on September 16, 2011 to shareholders of record as of September 1, 2011. On May 2, 2011, our Board of Directors authorized a quarterly cash dividend of $0.15 per share, paid on June 17, 2011 to shareholders of record as of June 1, 2011. Our cash payment for the dividend on June 17, 2011 was $7.9 million. On February 1, 2011, our Board of Directors authorized a quarterly cash dividend of $0.15 per share, paid on March 18, 2011 to shareholders of record as of March 1, 2011. Our cash payment for the dividend on March 18, 2011 was $7.8 million. Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our Board of Directors.
     We believe that our current cash position and available borrowings will be sufficient to satisfy our estimated working capital and planned capital expenditure requirements through at least the next 12 months and the foreseeable future.
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 for other contractually narrow or limited purposes. Accordingly, we have no off-balance sheet arrangements that have or are reasonably expected

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to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
     We reviewed our contractual obligations and commercial commitments as of June 30, 2011 and determined that there were no significant changes from the ones set forth in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.
Recently Issued Accounting Pronouncements
     In June 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The ASU requires changes in presentation only and we do not expect it will have a material effect on our consolidated financial statements.
     In May 2011, the FASB issued an ASU which applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. The amendments do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP. The amendments change the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the ASU clarifies the FASB’s intent about the application of existing fair value measurements. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. We do not expect the new ASU to have a material effect on our financial position, results of operations or cash flows.
     In October 2009, the FASB issued an ASU that established new accounting and reporting provisions for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also established a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU were effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. We adopted the new ASU in the first quarter of 2011 and the adoption did not have a material impact on our financial position, results of operations, or cash flows.
     In October 2009, the FASB issued an ASU that changed the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scoped these products out of current software revenue guidance. The new ASU includes factors to help companies determine what software elements are considered “essential to the functionality.” The amendments now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU were effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. We adopted the new ASU in the first quarter of 2011 and the adoption did not have a material impact on our financial position, results of operations, or cash flows.
     ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
     Information concerning market risk is contained in the section entitled “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on February 25, 2011. As of June 30, 2011, there were no material changes in our exposure to market risk from December 31, 2010.

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     ITEM 4. CONTROLS AND PROCEDURES.
     Evaluation of Disclosure Controls and Procedures
     Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2011. 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 an issuer that are designed to ensure that information required to be disclosed by the issuer 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 an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’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. Based on the evaluation of our disclosure controls and procedures as of June 30, 2011, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
     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) during the quarter ended June 30, 2011 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.
     We are subject to various 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.
     Information regarding risk factors affecting the Company’s business are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 in the section entitled “Risk Factors.” There have been no material changes from the risks disclosed therein.
     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
 
   
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
 
   
101*
  The following materials from MKS Instruments, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language):
 
  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Consolidated Financial Statements.

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*   Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
(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.
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.    
 
           
August 5, 2011
  By:   /s/ Seth H. Bagshaw
 
   
 
      Seth H. Bagshaw    
 
      Vice President, Chief Financial Officer and Treasurer    
 
      (Principal Financial Officer)    

26

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 Quarterly 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 15d-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 change 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 over financial reporting.
         
Date: August 5, 2011  /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, Seth H. Bagshaw, certify that:
1.   I have reviewed this Quarterly 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 15d-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 change 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 over financial reporting.
         
Date: August 5, 2011  /s/ Seth H. Bagshaw    
  Seth H. Bagshaw   
  Vice President, Chief Financial Officer and Treasurer
(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 June 30, 2011, 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 Seth H. Bagshaw, Vice President, Chief Financial Officer and Treasurer 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: August 5, 2011  /s/ Leo Berlinghieri    
  Leo Berlinghieri   
  Chief Executive Officer and President   
 
Dated: August 5, 2011  /s/ Seth H. Bagshaw    
  Seth H. Bagshaw   
  Vice President, Chief Financial Officer and Treasurer