UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
or
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
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code
(978 ) 645-5500
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 Yes ☒ No ☐
and post
such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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☒ |
Accelerated filer |
☐ | |||
| Non-accelerated filer |
☐ |
Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). Yes ☐
No As of October 54,510,355 shares of common stock outstanding.
30
, 2019, the registrant had MKS INSTRUMENTS, INC.
FORM
10-Q
INDEX
| ITEM 1. |
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| 3 |
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| 4 |
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| 5 |
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| 7 |
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| 8 |
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| ITEM 2. |
36 |
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| ITEM 3. |
48 |
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| ITEM 4. |
48 |
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| ITEM 1. |
49 |
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| ITEM 1A. |
49 |
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| ITEM 6. |
50 |
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| 51 |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. |
FINANCIAL STATEMENTS. |
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
| |
September 30, 2019 |
December 31, 2018 |
||||||
| ASSET S |
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| ||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | |
$ | |
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| Short-term investments |
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|
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| Trade accounts receivable, net of allowance for doubtful accounts of $ |
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| Inventories |
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| Other current assets |
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| Total current assets |
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| Property, plant and equipment, net |
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||||||
| Right-of-use asset |
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— |
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| Goodwill |
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| Intangible assets, net |
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| Long-term investments |
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| Other assets |
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| Total assets |
$ | |
$ | |
||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
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| Current liabilities: |
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| Short-term debt |
$ | |
$ | |
||||
| Accounts payable |
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| Accrued compensation |
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| Income taxes payable |
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| Lease liability |
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— |
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| Deferred revenue and customer advances |
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| Other current liabilities |
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| Total current liabilities |
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| Long-term debt, net |
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| Non-current deferred taxes |
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| Non-current accrued compensation |
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| Non-current lease liability |
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— |
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| Other liabilities |
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| Total liabilities |
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| Commitments and contingencies (Note 19) |
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| Stockholders’ equity: |
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| Preferred Stock, $ |
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— |
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| Common Stock, |
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| Additional paid-in capital |
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| Retained earnings |
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||||||
| Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
| Total stockholders’ equity |
|
|
||||||
| Total liabilities and stockholders’ equity |
$ | |
$ | |
||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| Net revenues: |
||||||||||||||||
| Products |
$ | |
$ | |
$ | |
$ | |
||||||||
| Services |
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||||||||||||
| Total net revenues |
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| Cost of revenues: |
||||||||||||||||
| Cost of products |
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| Cost of services |
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| Total cost of revenues (exclusive of amortization shown separately below) |
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| Gross profit |
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| Research and development |
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| Selling, general and administrative |
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| Fees and expenses related to term loan |
|
— |
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||||||||||||
| Acquisition and integration costs |
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( |
) | |||||||||||
| Restructuring and other |
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| Amortization of intangible assets |
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| Gain on sale of long-lived assets |
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( |
) |
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— |
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|
( |
) |
|
|
— |
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| Income from operations |
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| Interest income |
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| Interest expense |
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| Other ( expense, net income ) |
( |
) | |
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| Income before income taxes |
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||||||||||||
| Provision for income taxes |
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||||||||||||
| Net income |
$ | |
$ | |
$ | |
$ | |
||||||||
| Other comprehensive income: |
||||||||||||||||
| Changes in value of financial instruments designated as cash flow hedges, net of tax (benefit) expense (1) |
$ | ( |
) | $ | |
$ | ( |
) | $ | |
||||||
| Foreign currency translation adjustments, net of tax of $ |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Unrecognized pension gain (loss), net of tax expense (benefit) (2) |
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( |
) | |||||||||||
| Unrealized gain (loss) on investments, net of tax expense (benefit) (3) |
|
|
( |
) | ( |
) | ||||||||||
| Total comprehensive income |
$ | |
$ | |
$ | |
$ | |
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| Net income per share: |
||||||||||||||||
| Basic |
$ |
|
$ | |
$ |
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$ | |
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| Diluted |
$ |
|
$ | |
$ |
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$ | |
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| Weighted average common shares outstanding: |
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| Basic |
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| Diluted |
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(1) |
Tax (benefit) expense was $( September . |
(2) |
Tax expense was $ . |
(3) |
Tax expense was $ |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share data)
(Unaudited)
| Common Stock |
Additional |
Accumulated Other |
Total |
|||||||||||||||||||||
| Shares |
Amount |
Paid-In Capital |
Retained Earnings |
Comprehensive Loss |
Stockholders’ Equity |
|||||||||||||||||||
| Balance at December 31, 2018 |
|
$ | |
$ | |
$ | |
$ | ( |
) | $ | |
||||||||||||
| Net issuance under stock-based plans |
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| Stock-based compensation |
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| Cash dividend ($ |
( |
) | ( |
) | ||||||||||||||||||||
| Comprehensive income (net of tax): |
||||||||||||||||||||||||
| Net income |
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|
||||||||||||||||||||||
| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||
| Balance at March 31, 2019 |
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( |
) | |
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| Net issuance under stock-based plans |
|
( |
) | ( |
) | |||||||||||||||||||
| Stock-based compensation |
|
|
||||||||||||||||||||||
| Cash dividend ($ |
( |
) | ( |
) | ||||||||||||||||||||
| Stock dividends accrued |
|
( |
) | — |
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| Comprehensive income (net of tax): |
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| Net income |
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|
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| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||
| Balance at June 30, 2019 |
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( |
) | |
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| Net issuance under stock-based plan s |
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( |
) |
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( |
) | ||||
| Stock-based compensation |
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| Cash dividend ($ |
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( |
) |
( |
) | |||||||||||||||||||
| Stock dividends accrued |
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( |
) |
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— | ||||||||||||||||||
| Other |
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( |
) | ( |
) | |||||||||||||||||||
| Comprehensive income (net of tax): |
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| Net income |
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|
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| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||
| Balance at September 30, 2019 |
|
$ | |
$ | |
$ | |
$ | ( |
) | $ | |
||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in thousands, except per share data)
(Unaudited)
Common Stock |
Additional |
Accumulated Other |
Total |
|||||||||||||||||||||
Shares |
Amount |
Paid-In Capital |
Retained Earnings |
Comprehensive Income/(Loss) |
Stockholders’ Equity |
|||||||||||||||||||
Balance at December 31, 2017 |
$ | $ | $ | $ | $ | |||||||||||||||||||
Net issuance under stock-based plans |
( |
) | ( |
) | ||||||||||||||||||||
Stock-based compensation |
||||||||||||||||||||||||
Cash dividend ($ |
( |
) | ( |
) | ||||||||||||||||||||
Accounting Standards Codification Topic 606 adjustment |
||||||||||||||||||||||||
Comprehensive income (net of tax): |
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Net income |
||||||||||||||||||||||||
Other comprehensive gain |
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Balance at March 31, 2018 |
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Net issuance under stock-based plans |
( |
) | ( |
) | ||||||||||||||||||||
Stock-based compensation |
||||||||||||||||||||||||
Cash dividend ($ |
( |
) | ( |
) | ||||||||||||||||||||
Accounting Standards Codification Topic 606 adjustment |
( |
) | ( |
) | ||||||||||||||||||||
Comprehensive income (net of tax): |
||||||||||||||||||||||||
Net income |
||||||||||||||||||||||||
Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||
Balance at June 30, 2018 |
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Net issuance under stock-based plans |
( |
) | ( |
) | ||||||||||||||||||||
Stock-based compensation |
||||||||||||||||||||||||
Cash dividend ($ |
( |
) | ( |
) | ||||||||||||||||||||
Stock repurchase |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||
Accounting Standards Codification Topic 606 adjustment |
( |
) | ( |
) | ||||||||||||||||||||
Comprehensive income (net of tax): |
||||||||||||||||||||||||
Net income |
||||||||||||||||||||||||
Other comprehensive loss |
( |
) |
( |
) | ||||||||||||||||||||
Balance at September 30, 2018 |
$ | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| Nine Months Ended September 30, |
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| 2019 |
2018 |
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| Cash flows provided by operating activities: |
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| Net income |
$ | |
$ | |
||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
|
|
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| Amortization of inventory step-up adjustment to fair value |
|
— |
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| Amortization of debt issuance costs, original issue discount, and soft call premium |
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| Stock-based compensation |
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| Provision for excess and obsolete inventory |
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| Provision for doubtful accounts |
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| Deferred income taxes |
( |
) | ( |
) | ||||
| Gain on sale of long-lived asset |
( |
) | — |
|||||
| Other |
|
|
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| Changes in operating assets and liabilities, net of business acquired: |
||||||||
| Trade accounts receivable |
|
( |
) | |||||
| Inventories |
( |
) | ( |
) | ||||
| Income taxes |
( |
) | ( |
) | ||||
| Other current and non-current assets |
( |
) | ( |
) | ||||
| Accrued compensation |
( |
) | ( |
) | ||||
| Other current and non-current liabilities |
|
|
||||||
| Accounts payable |
( |
) | ( |
) | ||||
| Net cash provided by operating activities |
|
|
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| Cash flows used in investing activities: |
||||||||
| Acquisition of business, net of cash acquired |
( |
) | — |
|||||
| Purchases of investments |
( |
) | ( |
) | ||||
| Maturities of investments |
|
|
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| Sales of investments |
|
|
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| Proceeds from sale of assets |
|
— |
||||||
| Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows provided by (used in) financing activities: |
||||||||
| Repurchase of common stock |
— |
( |
) | |||||
| Net proceeds from short and long-term borrowings |
|
|
||||||
| Payments on short-term borrowings |
( |
) | ( |
) | ||||
| Payments on long-term borrowings |
( |
) | ( |
) | ||||
| Net payments related to employee stock awards |
( |
) | ( |
) | ||||
| Dividend payments to common stockholders |
( |
) | ( |
) | ||||
| Net cash provided by (used in) financing activities |
|
( |
) | |||||
| Effect of exchange rate changes on cash and cash equivalents |
( |
) | |
|||||
| (Decrease) increase in cash and cash equivalents |
( |
) | |
|||||
| Cash and cash equivalents at beginning of period |
|
|
||||||
| Cash and cash equivalents at end of period |
$ | |
$ | |
||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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. All intercompany accounts and transactions have been eliminated in consolidation. The interim financial data as of September 30, 2019, and for the three and nine months ended September 30, 2019 are unaudited; however, in the opinion of MKS, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The condensed consolidated balance sheet presented as of December 31, 2018 has been derived from the consolidated audited financial statements as of that date. The unaudited condensed 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 unaudited condensed 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, 2018 filed with the Securities and Exchange Commission on February 26, 2019. The preparation of these unaudited condensed 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 unaudited condensed 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, warranty liabilities, pension liabilities, 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 October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-16,
“Derivatives and Hedging (Topic 815).” This standard permits the use of the Overnight Index Swap Rate (“OIS”) based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct treasury obligations of the U.S. government, the London Interbank Offered Rate (“LIBOR”) swap rate, the OIS rate based on the Federal Funds Effective Rate and the Securities Industry and Financial Markets Association Municipal Swap Rate. This standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this ASU during the first quarter of 2019 and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.In August 2018, the FASB issued ASU
2018-15,
“Intangibles-Goodwill and Other-Internal-Use
Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software (and hosting arrangements that include an internal-use
software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments to this update. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the requirements of this ASU and the impact of pending
adoption on the Company’s consolidated financial statements.In August 2017, the FASB issued ASU
2017-12,
“Derivatives and Hedging (Topic 815).” This standard better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The provisions of this ASU are effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this ASU during the first quarter of 2019 and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.In February 2016, the FASB issued ASU
2016-02,
“Leases”. This standard requires the recognition of lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted ASU 2016-02
on January 1, 2019, and used the effective date as its date of initial application. As such, the Company did not adjust prior period amounts. The Company also elected to adopt the package of practical expedients upon transition, which permits companies to not reassess lease identification, classification, and initial direct costs for leases that commenced prior to the effective date.8
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The Company implemented internal controls and a lease accounting information system to enable preparation on adoption. Upon adoption, the Company recorded a cumulative effect of initially applying this new standard, resulting in the addition of $71,042 of 20,192 and $54,147 of short-term and long-term lease liabilities, respectively. The
right-of-use
assets and $right-of-use
asset is net of the deferred rent liability, prepaid rent and a net favorable lease asset which were re-classified
to the right-of-use
asset upon adoption of the standard. For additional information on the required disclosures related to the impact of adopting this standard, see Note 3 to the Consolidated Condensed Financial Statements.In June 2016, the FASB issued ASU
2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard introduced the expected credit losses methodology for the measurement of credit losses on financial assets that are not measured at fair value through net income and replaces today’s “incurred loss” model with an “expected credit loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. There have been several consequential subsequent amendments to this standard. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the requirements of this ASU and the impact of pending
adoption on the Company’s consolidated financial statements.
| 3) | Leases |
The Company has various operating leases for real estate and
non-real
estate items. The non-real
estate leases are mainly comprised of automobiles but also include copiers, printers and other lower-valued items. The Company does not have any finance leases.The Company has lease arrangements with lease and
non-lease
components, has elected to account for the lease and non-lease
components as a single lease component, and has allocated all of the contract consideration to the lease component only. The Company has existing net leases in which the non-lease
components (e.g. common area maintenance, maintenance, consumables, etc.) are paid separately from rent based on actual costs incurred. Therefore, non-lease
components are not included in the right-of-use
asset and lease liability and are reflected as expenses in the periods incurred.The Company has existing leases that include variable lease and
non-lease
components that are not included in the right-of-use
asset and lease liability, and are reflected as expenses in the periods incurred. Such payments primarily include common area maintenance charges and increases in rent payments that are driven by factors such as future changes in an index (e.g., the Consumer Price Index).A 67,632 , short-term lease liability of $20,575 and long-term lease liability of $47,294 were reflected on the balance sheet as of September 30, 2019.
right-of-use
asset of $The elements of lease expense were as follows:
| Three Months September 30, |
Nine Months September 30, |
|||||||
| Lease Cost: |
||||||||
| Operating lease cost |
$ | |
$ | |
||||
The weighted average discount rate and the weighted average remaining lease term were
% and
years, respectively, for the period ended September
30,
2019. Operating cash flows used for operating leases for the nine months ended September
30,
2019 was $
.
9
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Future lease payments under
non-cancelable
leases as of September 30, 2019 are detailed as follows:| |
Amount |
|||
| Year Ending December 31, |
|
|
| |
| 2019 (remaining) |
$ | |
||
| 2020 |
|
|||
| 2021 |
|
|||
| 2022 |
|
|||
| 2023 |
|
|||
| Thereafter |
|
|||
| Total lease payments |
|
|||
| Less:imputed interest |
|
|||
| Total operating lease liabilities |
$ | |
||
Minimum lease payments under operating leases prior to adoption of ASU
2016-02
were as follows:| |
Operating |
|||
| Year Ending December 31, |
|
|
| |
| 2019 |
$ | |
||
| 2020 |
|
|||
| 2021 |
|
|||
| 2022 |
|
|||
| 2023 |
|
|||
| Thereafter |
|
|||
| Total minimum lease payments |
$ | |
||
4) |
Revenue from Contracts with Customers |
Contract assets as of September 30, 2019 and December 31, 2018 were $3,405 and $3,624 , respectively, and included in other current assets
.
A rollforward of the Company’s deferred revenue and customer advances is as follows:
| Nine Months September 30, |
||||
| Beginning balance, January 1 (1) |
$ | |
||
| Deferred revenue and customer advances assumed in ESI Merger |
|
|||
| Additions to deferred revenue and customer advances |
|
|||
| Amount of deferred revenue and customer advances recognized in |
( |
) | ||
| Ending balance, September 30 (2) |
$ | |
||
(1) |
Beginning deferred revenue and customer advances as of January 1, 2019 included $ |
(2) |
Ending deferred revenue as of September 30, 2019 included $ |
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers:
| Three Months Ended September 30, 2019 |
||||||||||||||||
| Vacuum & Analysis |
Light & Motion |
Equipment & Solutions |
Total |
|||||||||||||
| Net revenues: |
||||||||||||||||
| Products |
$ | |
$ | |
$ | |
$ | |
||||||||
| Services |
|
|
|
|
||||||||||||
| Total net revenues |
$ | |
$ | |
$ | |
$ | |
||||||||
| 10 |
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
| Three Months Ended September 30, 201 8 |
||||||||||||||||
| Vacuum & Analysis |
Light & Motion |
Equipment & Solutions |
Total |
|||||||||||||
| Net revenues: |
||||||||||||||||
| Products |
$ | |
$ | |
$ | — |
$ | |
||||||||
| Services |
|
|
— |
|
||||||||||||
| Total net revenues |
$ | |
$ | |
$ | — |
$ | |
||||||||
| Nine Months Ended September 30, 2019 |
||||||||||||||||
| Vacuum & Analysis |
Light & Motion |
Equipment & Solutions |
Total |
|||||||||||||
| Net revenues: |
||||||||||||||||
| Products |
$ | |
$ | |
$ | |
$ | |
||||||||
| Services |
|
|
|
|
||||||||||||
| Total net revenues |
$ | |
$ | |
$ | |
$ | |
||||||||
| Nine Months Ended September 30, 2018 |
||||||||||||||||
| Vacuum & Analysis |
Light & Motion |
Equipment & Solutions |
Total |
|||||||||||||
| Net revenues: |
||||||||||||||||
| Products |
$ | |
|
$ | — |
$ | |
|||||||||
| Services |
|
|
— |
|
||||||||||||
| Total net revenues |
$ | |
$ | |
$ | — |
$ | |
||||||||
Product revenue, excluding revenue from certain custom products, is recorded at a point in time, while the majority of the service revenue and revenue from certain custom products is recorded over time.
Refer to Note 17 for revenue by reportable segment, geography and groupings of similar products.
| 5) | Investments |
The fair value of investments classified as short-term consists of the following:
| September 30, |
|
December 31, |
||||||
| Available-for-sale investments: |
||||||||
| Time deposits and certificates of deposit |
$ | |
$ | |
||||
| Bankers’ acceptance drafts |
|
|
||||||
| Asset-backed securities |
— |
|
||||||
| Commercial paper |
|
|
||||||
| Corporate obligations |
— |
|
||||||
| U.S. treasury obligations |
|
|
||||||
| U.S. agency obligations |
|
|
||||||
| $ | |
$ | |
|||||
Investments classified as long-term consist of the following:
| September 30, |
December 31, |
|||||||
| Available-for-sale investments: |
||||||||
| Group insurance contracts |
$ | |
$ | |
||||
| Cost method investments: |
||||||||
| Minority interest in a private company |
|
|
||||||
| $ | |
$ | |
|||||
11
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The following tables show the gross unrealized gains and (losses) aggregated by investment category for
available-for-sale
investments:As of September 30 , 2019: |
Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
||||||||||||
Short-term investments: |
||||||||||||||||
Available-for-sale investments: |
||||||||||||||||
Time deposits and certificates of deposit |
$ | $ | $ | — |
$ | |||||||||||
Bankers’ acceptance drafts |
— |
— |
||||||||||||||
Commercial paper |
— |
( |
) | |||||||||||||
U.S. treasury obligations |
— |
|||||||||||||||
U.S. agency obligations |
( |
) | ||||||||||||||
| $ | $ | $ | ( |
) | $ | |||||||||||
As of September 30 , 2019: |
Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
||||||||||||
Long-term investments: |
||||||||||||||||
Available-for-sale investments: |
||||||||||||||||
Group insurance contracts |
$ |
$ | $ | — |
$ | |||||||||||
As of December 31 , 2018: |
Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
||||||||||||
Short-term investments: |
||||||||||||||||
Available-for-sale investments: |
||||||||||||||||
Time deposits and certificates of deposit |
$ | $ | — |
$ | — |
$ | ||||||||||
Bankers’ acceptance drafts |
— |
— |
||||||||||||||
Asset-backed securities |
( |
) | ||||||||||||||
Commercial paper |
— |
( |
) | |||||||||||||
Corporate obligations |
— |
( |
) | |||||||||||||
U.S. treasury obligations |
— |
|||||||||||||||
U.S. agency obligations |
( |
) | ||||||||||||||
| $ | $ | $ | ( |
) | $ | |||||||||||
As of December 31 , 2018: |
Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Estimated Fair Value |
||||||||||||
Long-term investments: |
||||||||||||||||
Available-for-sale investments: |
||||||||||||||||
Group insurance contracts |
$ |
$ | $ | — |
$ | |||||||||||
The tables above, which show the gross unrealized gains and (losses) aggregated by investment category for
available-for-sale
investments as of September 30, 2019 and December 31, 2018, reflect the inclusion within short-term investments of investments with contractual maturities greater than one year from the date of purchase. Management has the ability, if necessary, to liquidate any of its investments in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying balance sheets.The Company reviews and evaluates its investments for any indication of possible impairment. Based on this review, the Company has determined that the unrealized losses related to these investments at September 30, 2019 and December 31, 2018 were temporary.
12
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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. Realized gains or losses are reflected in income and were not material for the nine months ended September 30, 2019 and 2018.6) |
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 assessed 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 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 or securities or derivative contracts that are valued using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. | |||||||
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. | |||||||
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company categorizes such assets and liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
13
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Assets and liabilities of the Company are measured at fair value on a recurring basis as of September 30, 2019 and are summarized as follows:
Fair Value Measurements at Reporting Date Using |
||||||||||||||||
Description |
September 30, 2019 |
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets: |
||||||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
$ | $ | $ | — |
$ | — |
||||||||||
Time deposits and certificates of deposit |
— |
— |
||||||||||||||
Commercial paper |
— |
— |
||||||||||||||
U.S. treasury obligations |
— |
— |
||||||||||||||
U.S. agency obligations |
— |
— |
||||||||||||||
Restricted cash – money market funds |
— |
— |
||||||||||||||
Available-for-sale investments: |
||||||||||||||||
Time deposits and certificates of deposit |
— |
— |
||||||||||||||
Bankers’ acceptance drafts |
— |
— |
||||||||||||||
Commercial paper |
— |
— |
||||||||||||||
U.S. treasury obligations |
— |
— |
||||||||||||||
U.S. agency obligations |
— |
— |
||||||||||||||
Group insurance contracts |
— |
— |
||||||||||||||
Derivatives – currency forward contracts |
— |
— |
||||||||||||||
Funds in investments and other assets: |
||||||||||||||||
Israeli pension assets |
— |
— |
||||||||||||||
Deferred compensation plan assets: |
||||||||||||||||
Mutual funds and exchange traded funds |
— |
— |
||||||||||||||
Money market securities |
— |
— |
||||||||||||||
Total assets |
$ | $ | $ | $ | — |
|||||||||||
Liabilities: |
||||||||||||||||
Derivatives – currency forward contracts |
$ | $ | — |
$ | $ | — |
||||||||||
Derivatives – interest rate hedge – non-current |
— |
— |
||||||||||||||
Total liabilities |
$ | $ | — |
$ | $ | — |
||||||||||
Reported as follows: |
||||||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents, including restricted cash (1) |
$ | $ | $ | $ | — |
|||||||||||
Short-term investments |
— |
— |
||||||||||||||
Other current assets |
— |
— |
||||||||||||||
Total current assets |
$ | $ | $ | $ | — |
|||||||||||
Long-term investments (2) |
$ | $ | — |
$ | $ | — |
||||||||||
Other assets |
— |
— |
||||||||||||||
Total long-term assets |
$ | $ | — |
$ | $ | — |
||||||||||
Liabilities: |
||||||||||||||||
Other current liabilities |
$ | $ | — |
$ | $ | — |
||||||||||
Other liabilities |
$ | $ | — |
$ | $ | — |
||||||||||
(1) |
The cash and cash equivalent amounts presented in the table above do not include cash of $ |
(2) |
The long-term investments presented in the table above do not include the Company’s minority interest investment in a private company, which is accounted for under the cost method. |
14
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Assets and liabilities of the Company are measured at fair value on a recurring basis as of December 31, 2018 and are summarized as follows:
Fair Value Measurements at Reporting Date Using |
||||||||||||||||
Description |
December 31, 2018 |
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets: |
||||||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
$ | $ | $ | — |
$ | — |
||||||||||
Time deposits and certificates of deposit |
— |
— |
||||||||||||||
Commercial paper |
— |
— |
||||||||||||||
U.S. agency obligations |
— |
— |
||||||||||||||
Restricted cash – money market funds |
— |
— |
||||||||||||||
Available-for-sale investments: |
||||||||||||||||
Time deposits and certificates of deposit |
— |
— |
||||||||||||||
Bankers’ acceptance drafts |
— |
— |
||||||||||||||
Asset-backed securities |
— |
— |
||||||||||||||
Commercial paper |
— |
— |
||||||||||||||
Corporate obligations |
— |
— |
||||||||||||||
U.S. treasury obligations |
— |
— |
||||||||||||||
U.S. agency obligations |
— |
— |
||||||||||||||
Group insurance contracts |
— |
— |
||||||||||||||
Derivatives – currency forward contracts |
— |
— |
||||||||||||||
Funds in investments and other assets: |
||||||||||||||||
Israeli pension assets |
— |
— |
||||||||||||||
Derivatives – interest rate hedge – non-current |
— |
— |
||||||||||||||
Total assets |
$ | $ | $ | $ | — |
|||||||||||
Liabilities: |
||||||||||||||||
Derivatives – currency forward contracts |
$ | $ | — |
$ | $ | — |
||||||||||
Reported as follows: |
||||||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents, including restricted cash (1) |
$ | $ | $ | $ | — |
|||||||||||
Short-term investments |
— |
— |
||||||||||||||
Other current assets |
— |
— |
||||||||||||||
Total current assets |
$ | $ | $ | $ | — |
|||||||||||
Long-term investments (2) |
$ | $ | — |
$ | $ | — |
||||||||||
Other assets |
— |
— |
||||||||||||||
Total long-term assets |
$ | $ | — |
$ | $ | — |
||||||||||
Liabilities: |
||||||||||||||||
Other current liabilities |
$ | $ | — |
$ | $ | — |
||||||||||
(1) |
The cash and cash equivalent amounts presented in the table above do not include cash of $ |
(2) |
The long-term investments presented in the table above do not include the Company’s minority interest investment in a private company, which is accounted for under the cost method. |
15
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Money Market Funds
Money market funds are cash and cash equivalents and are classified within Level 1 of the fair value hierarchy.
Available-For-Sale Investments
Available-for-sale
investments consisted of time deposits, certificates of deposit, bankers’ acceptance drafts, asset-backed securities (which include auto loans, credit card receivables and equipment trust receivables), commercial paper, corporate obligations, U.S. treasury obligations, U.S. agency obligations and group insurance contracts.The Company measures its debt and equity investments at fair value. The Company’s
available-for-sale
investments are classified within Level 2 of the fair value hierarchy.Israeli Pension Assets
Israeli pension assets represent investments in mutual funds, government securities and other time deposits. These investments are set aside for the retirement benefit of the employees at the Company’s Israeli subsidiaries. These funds are classified within Level 2 of the fair value hierarchy.
Cost Method Investments
The Company has a 4,400
non-controlling
equity investment in a privately held company. The Company elected the measurement alternative for this investment without readily determinable fair values and for which the Company does not have the ability to exercise significant influence. This investment is accounted for under the cost method of accounting. Under the cost method of accounting, the non-marketable
equity securities are carried at cost less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which is recorded within the statement of operations. The Company holds $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 and variable interest rates, which may adversely affect its operating results and financial position. When deemed appropriate, the Company minimizes its risks from foreign currency exchange rate and interest rate fluctuations through the use of derivative financial instruments. The principal market in which the Company executes its foreign currency contracts and interest rate swaps 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 and interest rate hedge are valued using broker quotations or market transactions and are classified within Level 2 of the fair value hierarchy. | 7) | 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 foreign currency exchange contracts, to manage certain foreign currency exposure, and interest rate swaps to manage interest rate exposure.
By nature, all financial instruments involve market and credit risks. The Company enters into derivative instruments with major investment grade financial institutions, for which 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.Interest Rate Swap Agreements
On September 30, 2016,
At September 30, 2019, the notional amount of this transaction was
$
and
it
had a fair value asset of $
. At December 31, 2018, the notional amount of this transaction was $
and
it
had a fair value asset of $
.
16
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
On April 3, 2019, the Company entered into an interest rate swap agreement, which has a maturity date of March 31, 2023, to fix the rate on $300,000 of the then-outstanding balance of the 2019 Incremental Term Loan Facility, as described further in Note 11. The rate 2.309 % per annum plus the applicable credit spread, which was 1.75 % at September 30, 2019. At September 30, 2019, the notional amount of this transaction was $300,000 and 8,088 .
wa
s fixed at it
had a fair value liability of $The interest rate swaps are recorded at fair value on the balance sheet and changes in the fair value are recognized in other comprehensive income (loss) (“OCI”). To the extent that these arrangements are no longer an effective hedge, any ineffectiveness measured in the hedging relationships is recorded currently in earnings in the period it occurs.
Foreign Exchange Contracts
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, Euro and Taiwanese 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 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.
As of September 30, 2019 and December 31, 2018, the Company had outstanding forward foreign exchange contracts with gross notional values of $142,789 and $159,394 , respectively. The following tables provide a summary of the primary net hedging positions and corresponding fair values held as of September 30, 2019 and December 31, 2018:
| September 30, 2019 |
||||||||
| Currency Hedged (Buy/Sell) |
Gross Value |
Fair (1) |
||||||
| U.S. Dollar/Japanese Yen |
$ | |
$ | ( |
) | |||
| U.S. Dollar/South Korean Won |
|
|
||||||
| U.S. Dollar/Euro |
|
|
||||||
| U.S. Dollar/U.K. Pound Sterling |
|
|
||||||
| U.S. Dollar/Taiwan Dollar |
|
|
||||||
| Total |
$ | |
$ | |
||||
| December 31, 2018 |
||||||||
| Currency Hedged (Buy/Sell) |
Gross Value |
Fair (1) |
||||||
| U.S. Dollar/Japanese Yen |
$ | |
$ | ( |
) | |||
| U.S. Dollar/South Korean Won |
|
|
||||||
| U.S. Dollar/Euro |
|
|
||||||
| U.S. Dollar/U.K. Pound Sterling |
|
|
||||||
| U.S. Dollar/Taiwan Dollar |
|
|
||||||
| Total |
$ | |
$ | |
||||
(1) |
Represents the receivable (payable) amount included in the consolidated balance sheet . |
17
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The following table provides a summary of the fair value amounts of the Company’s derivative instruments:
| September 30, |
December 31, |
|||||||
| Derivative assets: |
||||||||
| Foreign exchange contracts (1) |
$ | |
$ | |
||||
| Interest rate hedge (2) |
— |
|
||||||
| Derivative liabilities: |
||||||||
| Foreign exchange contracts (1) |
( |
) | ( |
) | ||||
| Interest rate hedge (2) |
( |
) | — |
|||||
| Total net derivative (liability) |
$ | ( |
) | $ | |
|||
(1) |
The derivative assets of $ |
(2) |
The interest rate hedge liability of $ |
The net amount of existing gains as of September 30, 2019 that the Company expects to reclassify from OCI into earnings within the next twelve months is immaterial.
The following table provides a summary of the gains (losses) on derivatives designated as cash flow hedging instruments:
| Three Months September 30, |
Nine Months September 30, |
|||||||||||||||
| Derivatives Designated as Cash Flow Hedging Instruments |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Forward exchange contracts: |
||||||||||||||||
| Net gain (loss) recognized in OCI (1) |
$ | ( |
) | $ | |
$ | ( |
) | $ | |
||||||
| Net gain (loss) reclassified from accumulated OCI into income (2) |
$ | |
$ | |
$ | |
$ | ( |
) | |||||||
(1) |
Net change in the fair value of the effective portion classified in OCI. |
(2) |
Effective portion classified in cost of products for the three and nine months ended September 30, 2019 and 2018. The tax effect of the gains or losses reclassified from accumulated OCI into income is immaterial. |
The following table provides a summary of the gain (loss) on derivatives not designated as hedging instruments:
| Three Months September 30, |
Nine Months September 30, |
|||||||||||||||
| Derivatives Not Designated as Hedging Instruments |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Forward exchange contracts: |
||||||||||||||||
| Net gain (loss) recognized in income (1) |
$ | |
$ | ( |
) | $ | ( |
) | $ | |
||||||
(1) |
The Company enters into foreign exchange contracts to hedge against changes in the balance sheet for certain subsidiaries to mitigate the risk associated with certain foreign currency transactions in the ordinary course of business. These derivatives are not designated as hedging instruments and gains or losses from these derivatives are recorded immediately in other (expense) income. |
18
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
8)
Inventories
Inventories consist of the following:
| September 30, |
December 31, |
|||||||
| Raw materials |
$ | |
$ | |
||||
| Work-in-process |
|
|
||||||
| Finished goods |
|
|
||||||
| $ | |
$ | |
|||||
9)
Acquisitions
Electro Scientific Industries, Inc.
On February 1, 2019, the Company completed its acquisition of Electro Scientific Industries, Inc. (“ESI”) pursuant to an Agreement and Plan of Merger, dated as of October 29, 2018 (the “Merger Agreement”), by and among the Company, EAS Equipment, Inc., formerly a Delaware corporation and a wholly-owned subsidiary of the Company, and ESI (the “ESI Merger”). At the effective time of the ESI Merger and pursuant to the terms and conditions of the Merger Agreement, each share of ESI’s common stock that was issued and outstanding immediately prior to the effective time of the ESI Merger was converted into the right to receive $30.00 in cash, without interest and subject to deduction of any required withholding tax.
The aggregate consideration was $1,032,671 , which excludes related transaction fees and expenses, and 30,630 , for a total purchase consideration of $1,063,301 . The Company funded the payment of the aggregate consideration with a combination of the Company’s available cash on hand and the proceeds from the Company’s senior secured term loan facility described in Note 11.
non-cash
consideration related to the exchange of share-based awards of $ESI provides laser-based manufacturing solutions for the micro-machining industry that enable customers to optimize production. It’s market is composed primarily of flexible and rigid PCB processing/fabrication, semiconductor wafer processing and passive component manufacturing and testing. ESI solutions incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.
The purchase price of ESI consisted of the following:
| Cash paid for outstanding shares(1) |
$ | |
||
| Settlement of share-based compensation awards(2) |
|
|||
| Total purchase price |
|
|||
| Less: Cash and cash equivalents acquired |
( |
) | ||
| Total purchase price, net of cash and cash equivalents acquired |
$ | |
||
(1) |
Represents cash paid of $ |
(2) |
Represents the vested but not issued portion of ESI share-based compensation awards as of the acquisition date of February 1, 2019. |
Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of ESI based on their fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The Company expects that none of such goodwill and intangible assets will be deductible for tax purposes.
19
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The following table summarizes the allocation of the preliminary purchase price to the fair values assigned to assets acquired and liabilities assumed at the date of the ESI Merger:
| Current assets (excluding inventory) |
$ | |
||
| Inventory |
|
|||
| Intangible assets |
|
|||
| Goodwill |
|
|||
| Property, plant and equipment |
|
|||
| Long-term assets |
|
|||
| |
||||
| Total assets acquired |
|
|||
| |
||||
| Current liabilities |
|
|||
| Non-current deferred taxes |
|
|||
| Other long-term liabilities |
|
|||
| |
||||
| Total liabilities assumed |
|
|||
| |
||||
| Fair value of assets acquired and liabilities assumed |
|
|||
| |
||||
| Less: Cash and cash equivalents acquired |
( |
) | ||
| |
||||
| Total purchase price, net of cash and cash equivalents acquired |
$ | |
||
During the
second quarter of
2019, the Company recorded an increase in fair value of approximately $12,600 to property, plant and equipment, based upon the final valuation for land and three ESI facilities located in Portland, Oregon. The Company also recorded a reduction in fair value of approximately $9,800 to inventories relating to three product lines. These adjustments also resulted in an adjustment to intangible assets of $2,400 and goodwill of $1,300 and the related impact to the deferred tax line items.
The fair value 7,624 , the amount of which will be expensed over the period during which the acquired inventory is sold. 30, 2019, the Company recorded $7,624
write-up
of acquired finished goods inventory was $F
or the nine
months ended September
of incremental cost of sales charges associated with the fair value
write-up
of inventory acquired in the ESI Merger.The fair value 39,267
of acquired property, plant and equipment of $
will be amortized over the estimated useful life of the applicable assets, excluding the fair value
write-up
in the value of land. Property, plant and equipment is valued at its
value-in-use,
unless there was a known plan to dispose of the asset.
The acquired intangible assets are being amortized on a straight-line basis, which approximates the economic use of the asset.
The following table reflects the allocation of the acquired intangible assets and related estimate of useful lives:
Completed technology - Laser |
$ | ||||||||
Completed technology - Non-Laser |
|||||||||
Trademarks and trade names |
|||||||||
Customer relationships |
|||||||||
Backlog |
|||||||||
$ |
|||||||||
While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement.
The net fair value of the acquired intangibles was determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations. The finalization of the purchase accounting assessment will result in a change in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company’s results of operations and financial position. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill to reflect additional information received about facts and circumstances which existed at the date of acquisition. The Company records adjustments to the assets acquired and liabilities assumed subsequent to the purchase price allocation period in the
20
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Company’s operating results in the period in which the adjustments are determined. The size and breadth of the ESI Merger will necessitate the use of this measurement period to adequately analyze and assess a number of the factors used in establishing the fair value of certain tangible and intangible assets acquired and liabilities assumed as of the acquisition date and the related tax impacts of any changes made. Any potential adjustments made could be material in relation to the preliminary values presented above.
The Company believes the amount of goodwill relative to identifiable intangible assets relates to several factors, including broadening its position in key industrial end markets to complementary solutions, and leveraging component and systems expertise to provide robust solutions to meet customer evolving technology needs.
The results of this acquisition were included in the Company’s consolidated statement of operations beginning on February 1, 2019. ESI constitutes the Company’s Equipment & Solutions reportable segment (see Note 17).
Certain executives from ESI had severance provisions in their respective ESI employment agreements. The agreements included terms that were accounted for as dual-trigger arrangements. Through the Company’s acquisition accounting, the expense relating to these benefits was recognized in the combined entity’s financial statements. The Company recorded costs of $2,701 and $14,023 in acquisition and integration costs as compensation expense and stock-based compensation expense, respectively, for the nine months ended
September
30, 2019 associated with these severance provisions. The restricted stock units and stock appreciation rights that were eligible for accelerated vesting if the executive exercised his or her rights but were not issued as of each reporting period-end,
were excluded from the computation of basic earnings per share and included in the computation of diluted earnings per share for such reporting period.The Company’s consolidated net revenue and earnings for the three and nine months ended September 30, 2019 include the following amounts of revenue and earnings of ESI since the acquisition date:
Three Months Ended September 30, 2019 |
Nine Months Ended September 30, 2019 |
|||||||
Total net revenues |
$ | $ | ||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Net loss per share: |
||||||||
Basic |
$ | ( |
) | $ | ( |
) | ||
Diluted |
$ | ( |
) | $ | ( |
) | ||
Pro Forma Results
The following unaudited pro forma financial information presents the combined results of operations of the Company as if the ESI Merger had occurred on January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of what the Company’s condensed consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined Company.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Total net revenues |
$ | $ |
$ | $ |
||||||||||||
Net income |
$ | $ |
$ | $ |
||||||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | $ |
$ | $ |
||||||||||||
Diluted |
$ | $ |
$ | $ |
||||||||||||
The unaudited pro forma financial information above gives effect primarily to the following:
(1) |
Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment, respectively, from the purchase price allocation. |
(2) |
Revenue and cost of goods sold adjustments as a result of the reduction in deferred revenue and the cost related to their estimated fair value. |
21
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(3) |
Incremental interest expense related to the Company’s 2019 Incremental Term Loan Facility, as defined and discussed in Note 11. |
(4) |
The exclusion of acquisition costs and inventory step-up amortization from the three and nine month periods ended September 30, 2019 and the addition of these items to the three and nine month periods ended September 30, 2018. |
(5) |
The exclusion of debt issuance costs due to the modification of the 2019 Incremental Term Loan Facility from the three and nine month periods ended September 30, 2019 and the addition of this item to the three and nine month periods ended September 30, 2018. |
(6) |
The estimated tax impact of the above adjustments. |
During the third quarter of 2019, the Company identified adjustments related to our unaudited pro forma disclosures that were reported during the first and second quarters of 2019. The impact of these adjustments has been revised for all periods presented above.
10) |
Goodwill and Intangible Assets |
Goodwill
The Company’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. The Company assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment. The Company regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.
Effective July 1, 2018, the Company reassigned goodwill to certain reporting units within the Light & Motion reportable segment resulting from a reorganization of the composition of goodwill reporting units. The goodwill was reassigned to the reporting units affected using the relative fair value approach. In conjunction with this goodwill reassignment, the Company performed an interim quantitative impairment test as of July 1, 2018 for all of its reporting units and concluded that the fair values of each reporting unit exceeded their respective carrying values.
Effective January 1, 2019, the Company reassigned goodwill to certain reporting units within the Light & Motion reportable segment resulting from a reorganization of the composition of goodwill reporting units. The goodwill was reassigned to the reporting units affected using the relative fair value approach. The Company also concluded that the fair value of each reporting unit exceeded its respective carrying value.
The changes in the carrying amount of goodwill and accumulated impairment loss during the nine months ended September 30, 2019 and year ended December 31, 2018 were as follows:
| Nine Months Ended |
Twelve Months Ended December 31, 2018 |
|||||||||||||||||||||||
| Gross Carrying Amount |
Accumulated Impairment Loss |
Net |
Gross Carrying Amount |
Accumulated Impairment Loss |
Net |
|||||||||||||||||||
| Beginning balance at January 1 |
$ | |
$ | ( |
) | $ | |
$ | |
$ | ( |
) | $ | |
||||||||||
| Acquired goodwill (1) |
|
— |
|
— |
— |
— |
||||||||||||||||||
| Foreign currency translation |
( |
) | — |
( |
) | ( |
) | — |
( |
) | ||||||||||||||
| Ending balance at September 30 and December 31 |
$ | |
$ | ( |
) | $ | |
$ | |
$ | ( |
) | $ | |
||||||||||
(1) |
During the nine months ended September 30, 2019, the Company recorded $ |
22
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Intangible Assets
Components of the Company’s intangible assets are comprised of the following:
| As of September 30, 2019 : |
Gross |
Accumulated Impairment Charges |
Accumulated Amortization |
Foreign Currency Translation |
Net |
|||||||||||||||
| Completed technology (1) |
$ | |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |
|||||||
| Customer relationships (1) |
|
( |
) | ( |
) | ( |
) | |
||||||||||||
| Patents, trademarks, trade names and other (1) |
|
— |
( |
) | |
|
||||||||||||||
| $ | |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |
||||||||
(1) |
During the nine months ended September 30, 2019, the Company recorded $ right-of-use asset line in the balance sheet. |
| As of December 31, 2018 : |
Gross |
Accumulated Impairment Charges |
Accumulated Amortization |
Foreign Currency Translation |
Net |
|||||||||||||||
| Completed technology |
$ | |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |
|||||||
| Customer relationships |
|
( |
) | ( |
) | ( |
) | |
||||||||||||
| Patents, trademarks, trade names and other |
|
— |
( |
) | ( |
) | |
|||||||||||||
| $ | |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |
||||||||
Aggregate amortization expense related to acquired intangibles for the nine months ended September 30, 2019 and 2018 was $50,299 and $32,786 , respectively. Aggregate net amortization expense related to acquired intangible assets for future years is as follows:
| Year |
Amount |
|||
| 2019 (remaining) |
$ | |
||
| 2020 |
|
|||
| 2021 |
|
|||
| 2022 |
|
|||
| 2023 |
|
|||
| 2024 |
|
|||
| Thereafter |
|
|||
| 11) | Debt |
Term Loan Credit Agreement
In connection with the completion of the acquisition of Newport Corporation (“Newport”) in 2016 (the “Newport Merger”), the Company entered into a term loan credit agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto (the “Lenders”), that provided senior secured financing in the original principal amount of $780,000 (the “2016 Term Loan Facility”), subject to increase at the Company’s option and subject to receipt of lender commitments in accordance with the Credit Agreement (the 2016 Term Loan Facility, together with the 2019 Incremental Term Loan Facility
and 2019 Term Loan Refinancing Facility (each
as defined below),23
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
the “Term Loan Facility”). April 29, 2023 . 0.50 %, (2) the “prime rate” quoted in (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00 %, and (4) a floor of 1.75 %, plus, in each case, an applicable margin; or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a LIBOR rate floor of 0.0 %, plus an applicable margin. The Company has elected the interest rate as described in clause (b). The Credit Agreement provides that, unless an alternate rate of interest is agreed, all loans will be determined by reference to the 1.00 % of the principal amount thereof.
Prior to the effectiveness of Amendment No. 6 (as defined below), the
2016 Term Loan Facility had a maturity date of
As of September 30, 2019, borrowings
under the Term Loan Facility bear interest per annum at one of the following rates selected by the Company: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus The Wall Street Journal,
b
ase r
ate if the LIBOR rate cannot be ascertained, if regulators impose material restrictions on the authority of a lender to make LIBOR rate loans, or for other reasons. The 2016 Term Loan Facility was issued with original issue discount of The Company subsequently entered into four separate repricing amendments to the 2016 Term Loan Facility, which decreased the applicable margin for LIBOR borrowings from 4.0 % to 1.75 %, with a LIBOR rate floor of 0.75 %. As a consequence of the pricing of the 2019 Incremental Term Loan Facility (defined below), the applicable margin for the 2016 Term Loan Facility was increased to 2.00 % (from 1.75 %) with respect to LIBOR borrowings and 1.00 0.75
On September 30, 2016, the Company entered into an interest rate swap agreement, which has a maturity date of September 30, 2020 , to fix the rate on $335,000 of the then-outstanding balance of the 2016 Term Loan Facility. The rate 1.198 % per annum plus the applicable credit spread, which was 250,000 and 1,180 .
wa
s fixed at 1.75
% at September 30, 2019. At September 30, 2019, the notional amount of this transaction was $it
had a fair value asset of $The Company incurred $28,747 of deferred finance fees, original issue discount and repricing fees related to the term loans under the 2016 Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
On February 1, 2019, in connection with the completion of the ESI Merger, the Company entered into an amendment (“Amendment No. 5”) to the Credit Agreement. Amendment No. 5 provided an additional tranche 650,000 (the “2019 Incremental Term Loan Facility”), all of which was drawn down in connection with the closing of the ESI Merger. Pursuant to Amendment No. 5, the Company also effectuated certain amendments to the Credit Agreement which make certain of the negative covenants and other provisions less restrictive. Prior to the effectiveness of Amendment No. 6 (as defined below), the 2019 Incremental Term Loan Facility had a maturity date of February 1, 2026 and bore interest at a rate per annum equal to, at the Company’s option, a base rate or LIBOR rate (as described above) plus, in each case, an applicable margin equal to 1.25 % with respect to base rate borrowings and 2.25 % with respect to LIBOR borrowings. The 2019 Incremental Term Loan Facility was issued with original issue discount of 1.00 % of the principal amount thereof.
B-5
term loan commitment in the original
principal amount of $On April 3, 2019, the Company entered into an interest rate swap agreement, which has a maturity date of March 31, 2023 , to fix the rate on $300,000 of the then-outstanding balance of the 2019 Incremental Term Loan Facility. The rate 2.309 % per annum plus the applicable credit spread, which was 1.75 % at September 30, 2019. At September 30, 2019, the notional amount of this transaction was $300,000 and 8,088 .
wa
s fixed at it
had a fair value liability of $The Company incurred $11,362 of deferred finance fees and original issue discount fees related to the term loans under the 2019 Incremental Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
On September 27, 2019, the Company entered into an amendment (“Amendment No. 6”) to the Credit Agreement. Amendment No. 6 refinanced all existing loans outstanding under the 2016 Term Loan Facility and 2019 Incremental Term Loan Facility (“Existing Term Loans”) for a tranche
B-6
term loan commitment in the original principal amount of $896,839 (“2019 Term Loan Refinancing Facility”). Each lender of the Existing Term Loans who elected to participate in the 2019 Term Loan Refinancing Facility was deemed to have exchanged the aggregate outstanding principal amount of its Existing Term Loans outstanding under the Credit Agreement for an equal aggregate principal amount of tranche
B-6
term loans under the 2019 Term Loan Refinancing Facility. On the effective date of Amendment No. 6 and immediately prior to the exchanges described above, the Company made a voluntary prepayment of $50,000 , which was applied to
the
Existing Term Loans on a pro rata basis.24
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The Company incurred $2,242 of original issue discount fees related to the term loans under the 2019 Term Loan Refinancing Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
As of September 30, 2019, the remaining balance of deferred finance fees and original issue discount of the Term Loan Facility was $12,258 . A portion of the deferred finance fees and original issue discount have been accelerated in connection with the various debt prepayments and extinguishments during 2016, 2017, 2018 and 2019.
The Company is required to make scheduled quarterly payments each equal to 0.25 % of the original principal amount of the 2019 Term Loan February 2, 2026 . If, on or prior to the date that is six months after the closing date of Amendment No. 1.00 % of the aggregate principal amount of the loans so prepaid.
Refinanci
Facility with the balance due on ng
6
, the Company prepays any loans under the 2019 Term Loan Refinancing
Facility in connection with a repricing transaction, the Company must pay a prepayment premium of As of
September 30, 2019, after 10,403 , the total outstanding
total principal prepayments of $525,000 (which includes a $50,000 prepayment made during the three months ended September 30, 2019) and
regularly scheduled principal payments of $principal balance
of
the
Term Loan Facility was $894,597 and the interest rate was 3.59 %.
Under the Credit Agreement, the Company is required to prepay outstanding term loans
, subject to certain exceptions, with portions of its annual excess cash flow as well as with the net cash proceeds of certain
of its
asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. As a result of the Company’s current
t
otal l
everage r
atio, it was not required to make a prepayment of excess cash flow for the period
ended
September
3
0
, 2019
.
All obligations under the Term Loan Facility are guaranteed by certain of the Company’s domestic subsidiaries, and are collateralized by substantially all of the Company’s assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
The Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the Lenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions generally permitted to be taken by a secured creditor. At September 30, 2019, the Company was in compliance with all covenants under the Credit Agreement.
S
enior Secured Asset-Based Revolving Credit FacilityOn February 1, 2019, in connection with the completion of the ESI Merger, the Company entered into an asset-based credit agreement with Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto (the “ABL Credit Agreement”), that provides senior secured revolving credit financing of up to $100,000 , subject to a borrowing base limitation (the “ABL Facility”). On April 26, 2019, the Company entered into a First Amendment to the ABL Credit Agreement which amended the borrowing base calculation for eligible inventory prior to an initial field examination and appraisal requirements. The borrowing base for the ABL Facility at any time equals the sum of: (a) 85 % of certain eligible accounts; plus (b) prior to certain notice and field examination and appraisal requirements, the lesser of (i) 20 % of net book value of eligible inventory in the United States and (ii) 30% of the borrowing base, and after the satisfaction of such requirements, the lesser of (i) the lesser of (A) 65 % of the lower of cost or market value of certain eligible inventory and (B) 85 % of the net orderly liquidation value of certain eligible inventory and (ii) 30 % of the borrowing base; minus (c) reserves established by the administrative agent, in each case, subject to additional limitations and examination requirements for eligible accounts and eligible inventory acquired in an acquisition after February 1, 2019. The ABL Facility includes borrowing capacity in the form of letters of credit up to $25,000 .
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at the Company’s option, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50 %, (2) the “prime rate” quoted in , (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00 % and (4) a floor of 0.00 %; and (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, with a floor of 0.00%. The initial applicable margin for borrowings under the ABL Facility is 0.50 % with respect to base rate borrowings and 1.50 % with respect to LIBOR borrowings.
The Wall Street Journal
25
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.
In addition to paying interest on any outstanding principal under the ABL Facility, the Company is required to pay a commitment fee in respect of the unutilized commitments thereunder equal to 0.25 % per annum. The Company must also pay customary letter of credit fees and agency fees.
The Company incurred $785 of costs in connection with the ABL Facility, which were capitalized and included in other assets in the accompanying consolidated balance sheet and are being amortized to interest expense over the contractual term of five years of the ABL Facility. As a result of a prior asset-based facility being terminated concurrently with our entry into the ABL Facility, the Company wrote off $216 of previously capitalized debt issuance costs.
The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor. The Company has not borrowed against this ABL Facility to date.
Lines of Credit and Short-Term Borrowing Arrangements
One of the Company’s Japanese subsidiaries has lines of credit and short-term borrowing arrangements with two financial institutions, which arrangements generally expire and are renewed at three-month intervals. The lines of credit provided for aggregate borrowings as of September 30, 2019 of up to an equivalent of $21,308 . One of the borrowing arrangements has an interest rate based on the Tokyo Interbank Offer Rate at the time of borrowing and the other has an interest rate based on the Japanese Short-Term Prime Lending Rate. There were no borrowings outstanding under these arrangements at September 30, 2019 and December 31, 2018, respectively.
The Company has various revolving lines of credit and a financing facility. These revolving lines of credit and financing facility have no expiration date and as of September 30, 2019, provided for aggregate borrowings of up to an equivalent of $11,581 . These lines of credit have a base interest rate of 1.24 % plus a Japanese Yen overnight LIBOR rate. Total borrowings outstanding under these arrangements were $3,655 and $3,389 at September 30, 2019 and December 31, 2018, respectively.
| September 30, |
|
December 31, |
||||||
| Short-term debt: |
||||||||
| Japanese lines of credit |
$ | |
$ | |
||||
| Japanese receivables financing facility |
|
|
||||||
| Other debt |
— |
|
||||||
| Term Loan Facility |
|
— |
||||||
| $ | |
$ | |
|||||
September 30, |
December 31, |
|||||||
Long-term debt: |
||||||||
Other debt |
$ | $ | ||||||
Term Loan Facility, net (1) |
||||||||
| $ | $ | |||||||
(1) |
Net of deferred financing fees, original issuance discount and repricing fee of $ . |
The Company recognized interest expense of $13,542 and $35,335 for the
three and
nine months ended September 30, 2019
, respectively. The Company recognized interest expense of $3,719 and $13,071 for the three and nine months
ended September 30, 2018, respectively.
26
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Contractual maturities of the Company’s debt obligations as of September 30, 2019 are as follows:
Year |
Amount |
|||
2019 (remaining) |
$ | |||
2020 |
||||
2021 |
||||
2022 |
||||
2023 |
||||
2024 |
||||
Thereafter |
||||
| 12) | Product Warranties |
The Company records 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.
Product warranty activities were as follows:
Nine Months Ended |
||||||||
2019 |
2018 |
|||||||
Beginning of period |
$ |
|
$ |
|||||
Assumed product warranty liability from ESI Merger |
— |
|||||||
Provision for product warranties |
||||||||
Direct and other charges to warranty liability |
( |
) | ( |
) | ||||
End of period (1) |
$ | $ | ||||||
(1) |
As of September 30, 2019, short-term product warranty of $ . |
| 13 ) |
Income Taxes |
The Company’s effective tax rates for the three and nine months ended September 30, 2019 were 14.4 % and 20.4 %,
respectively. The effective tax rates for the three and nine months ended September 30, 2019, and related income tax expense, were lower than the U.S. statutory tax rate due to the deduction for foreign derived intangible income, the geographic mix of income earned by the Company’s international subsidiaries being taxed at rates lower than the U.S. statutory tax rate and the impact of various tax credits, offset by the tax effects of the global intangible 5,023 . This correction, which was recorded during the quarter ended June 30, 2019, but should have been recorded during the three months ended September 30, 2018, increased the Company’s effective tax rate for the three and six months ended June 30, 2019 and the nine months ended September 30, 2019 by 9.8 %, 7.5 % and
low-taxed
income inclusion along with the correction of an out-of-period
error with respect to deferred tax assets related to limitations on the deduction of executive compensation in the amount of $, respectively
. The error and subsequent adjus
were not material to prior or current interim and annual financial statements. t
mentThe Company’s effective tax rates for the three and nine months ended September 30, 2018 were 18.5 % and 17.6 %, respectively. The effective tax rates for the three and nine months ended September 30, 2018, and related income tax expense, were lower than the U.S. statutory tax rate mainly due to the geographic mix of income earned by the Company’s international subsidiaries being taxed at rates lower than the U.S. statutory tax rate, windfall benefits of stock compensation, and the deduction for foreign derived intangible income
,
offset by the tax effects of the global intangible low-
taxed income inclusion and state income taxes.As of September 30, 2019, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $41,170 . At December 31, 2018, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $32,684 . The net increase was primarily attributable to the addition of historical gross unrecognized tax benefits for ESI as a result of the ESI Merger during the quarter ended March 31, 2019. As of
2
7
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
September 30, 2019, if these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of $33,415 , 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. As of September 30, 2019 and December 31, 2018, the Company had accrued interest on unrecognized tax benefits of approximately $581 and $568 , respectively.
Over the next 12 months it is reasonably possible that the Company may recognize approximately $1,225 of previously net unrecognized tax benefits, excluding interest and penalties, related to various U.S. federal, state and foreign tax positions primarily as a result of the expiration of certain statutes of limitations. The Company and its subsidiaries are subject to examination by U.S. federal, state and foreign tax authorities. The U.S. Internal Revenue Service commenced an examination of the Company’s U.S. federal income tax filings for tax years 2015 and 2016 during the quarter ended September 30, 2017. This audit was effectively settled during the quarter ended March 31, 2018, and the impact was not material. Also during the quarter ended March 31, 2018 the Company received notification from the U.S. Internal Revenue Service of their intent to audit its U.S. subsidiary, Newport, for tax year 2015. This audit commenced during the quarter ended June 30, 2018 and was effectively settled during the quarter ended June 30, 2019 with a no change result. The U.S. statute of limitations remains open for tax years 2016 through present. The statute of limitations for the Company’s tax filings in other jurisdictions varies between fiscal years 2013 through present. The Company also has certain federal credit carry-forwards and state tax loss and credit carry-forwards that are open to examination for tax years 2000 through the present.
| 14) | Net Income Per Share |
The following table sets forth the computation of basic and diluted net income per share:
Three Months Ended |
Nine Months Ended |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Numerator: |
||||||||||||||||
Net income |
$ | $ | $ | $ | ||||||||||||
Denominator: |
||||||||||||||||
Shares used in net income per common share – basic |
||||||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Restricted stock units, stock appreciation rights and shares issued under employee stock purchase plan |
||||||||||||||||
Shares used in net income per common share – diluted |
||||||||||||||||
Net income per common share: |
||||||||||||||||
Basic |
$ |
$ | $ |
$ | ||||||||||||
Diluted |
$ |
$ | $ |
$ | ||||||||||||
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 (restricted stock units (“RSUs”) and stock appreciation rights (“SARs”)) had been converted to such common shares, and if such assumed conversion is dilutive.
For the three and nine months ended September 30, 2019, there were approximately 204,000 and 165,000 weighted-average RSUs, respectively, that would have had an anti-dilutive effect on EPS, and would thus need to be excluded from the computation of diluted weighted-average shares.
For the three and nine months ended September 30, 2018, there were approximately 159,800 and 68,800 weighted-average RSUs, respectively, that would have had an anti-dilutive effect on EPS, and would thus need to be excluded from the computation of diluted weighted-average shares.
28
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
| 15) | Stock-Based Compensation |
The Company grants
RSUs
to employees and directors under the 2014 Stock Incentive Plan (the “2014 Plan”). The 2014 Plan is administered by the Compensation Committee of the Company’s Board of Directors. The 2014 Plan is intended to attract and retain employees and directors, and to provide an incentive for these individuals to assist the Company to achieve long-range performance goals and to enable these individuals to participate in the long-term growth of the
Company.
In connection with the completion of the ESI Merger, the Company assumed:
• |
all RSUs that vest based solely on the satisfaction of service conditions, granted under any ESI equity plan, arrangement or agreement (“ESI Plan”) that were outstanding immediately prior to the effective time of the ESI Merger, and as to which shares of ESI common stock were not fully distributed in connection with the closing of the ESI Merger, |
• |
all RSUs that were granted subject to vesting based on both the achievement of performance goals and the satisfaction of service conditions granted under any ESI Plan that were outstanding immediately prior to the effective time of the ESI Merger, and |
• |
all SARs granted under any ESI Plan, whether vested or unvested, that were outstanding immediately prior to the effective time of the ESI Merger and held by an individual who was a service provider of ESI as of the date on which the effective time of the ESI Merger occurred . |
As of the effective time of the ESI Merger, based on a formula in the Merger Agreement, (a) such RSUs were converted automatically into RSUs with respect to 736,133 shares of the Company’s common stock (the “Assumed RSUs”), and (b) such
SAR
s
were converted automatically into
SARs
with respect to 12,787 shares of the Company’s common stock (the “Assumed SARs”).
Included in the total number of assumed RSUs are 326,283 shares of the Company’s common stock for employees and outside directors that are part of the ESI Deferred Compensation plan (the “ESI DC Plan”). These shares will not become issued shares until their respective release dates.
The shares of the Company’s common stock that are subject to the Assumed SARs and the Assumed RSUs are issuable pursuant to the Company’s 2014 Plan.
The 748,920 shares of the Company’s common stock that are issuable pursuant to the Assumed RSUs and the Assumed SARs under the Company’s 2014 Plan were registered under the Securities Act of 1933 on the Registration Statement on Form18,000,000 shares of the Company’s common stock reserved for issuance under the Company’s 2014 Plan and previously registered under the Securities Act of 1933 on the Registration Statement on Form
S-8.
These shares are in addition to the S-8.
During the nine months ended September 30, 2019, the Company granted 417,335 RSUs with a weighted average grant date fair value of $86.18 . During the nine months ended
September
30, 2018, the Company granted 260,341 RSUs with a weighted average grant date fair value of $112.49 . There were no
The total stock-based compensation expense included in the Company’s consolidated statements of income and comprehensive income was as follows:
Three Months Ended |
Nine Months Ended |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Cost of revenues |
$ | $ | $ | $ | ||||||||||||
Research and development expense |
||||||||||||||||
Selling, general and administrative expense |
||||||||||||||||
Acquisition and integration related expense |
— |
— |
||||||||||||||
Restructuring related expense |
— |
— |
||||||||||||||
Total pre-tax stock-based compensation expense |
$ | $ | $ | $ | ||||||||||||
At September 30, 2019, the total compensation expense related to unvested stock-based awards granted to employees and directors under the 2014 Plan that had not been recognized was $30,795 , net of estimated forfeitures. The future compensation expense for time-based awards is recognized on a straight-line basis and the future compensation expense for performance-based awards is recognized using the accelerated graded vesting method, both of which expense over the requisite service period, net of estimated forfeitures, except for retirement eligible employees, in which case the Company expenses the fair value of the grant in the period the grant is issued. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience. Actual results and future changes in estimates may differ substantially from the Company’s current estimates.
2
9
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The following table presents the activity for RSUs under the Plan:
Nine Months Ended September 30, 2019 |
||||||||
Outstanding RSUs |
Weighted Average Grant Date Fair Value |
|||||||
RSUs – beginning of period |
$ | |||||||
Assumed shares from ESI Merger |
$ | |||||||
Accrued dividend shares |
$ | |||||||
Granted |
$ | |||||||
Vested |
( |
) | $ | |||||
Forfeited |
( |
) | $ | |||||
RSUs – end of period |
$ | |||||||
The following table presents the activity for SARs under the Plan:
Nine Months Ended September 30, 2019 |
||||||||
Outstanding SARs |
Weighted Average Grant Date Fair Value |
|||||||
SARs – beginning of period |
$ | |||||||
Assumed SARs from ESI Merger |
$ | |||||||
Exercised |
( |
) | $ | |||||
Forfeited or expired |
( |
) | $ | |||||
SARs o utstanding – end of period |
$ | |||||||
| 16) | Stockholders’ Equity |
Share Repurchase Program
On July 25, 2011, the Company’s Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of $200,000 of its outstanding 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. The Company has repurchased approximately 2,588,000 shares of common stock for approximately $127,000 pursuant to the program since its adoption. During the three and nine months ended September 30, 2019, there were no
During the three and nine months ended September 30, 2018, the Company repurchased approximately 818,000 75,000 91.67
.
Cash Dividends
Holders of the Company’s common stock are entitled to receive dividends when they are declared by the Company’s Board of Directors. In addition, the Company accrues dividend equivalents on the RSUs the Company assumed in the ESI Merger described in Note 15 above when dividends are declared by the Company’s Board of Directors. The Company’s Board of Directors declared a cash dividend of $0.20 32,621 or $0.60 per share. The Company’s Board of Directors declared a cash dividend of $0.18 per share during the first quarter of 2018 and $0.20 31,608 or $0.58 per share.
On October 28, 2019 , the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid on December 6, 2019 to shareholders of record as of November 25, 2019 . Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of the Company’s Board of Directors. In addition, under the
Term Loan Facility and ABL Facility, the Company may be restricted from paying dividends under certain circumstances.
30
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
| 17) | Business Segment, Geographic Area and Product Information |
The Company is a global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for its customers. The Company’s products are derived from its core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, power, reactive gas generation, vacuum technology, lasers, photonics,
sub-micron
positioning, vibration control, optics and laser-based manufacturing solutions. The Company also provides services relating to the maintenance and repair of its products, installation services and training. The Company’s primary served markets include semiconductor, industrial technologies, life and health sciences, and research and defense.The Company’s Chief Operating Decision Maker (“CODM”) utilizes financial information to make decisions about allocating resources and assessing performance for the entire Company, which is used in the decision making process to assess performance. Effective February 1, 2019, in conjunction with its acquisition of ESI, the Company created a third reportable segment known as the Equipment & Solutions segment in addition to its two then-existing reportable segments: the Vacuum & Analysis segment and the Light & Motion segment.
The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, RF & DC power, reactive gas generation and vacuum technology.
The Light & Motion segment provides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in lasers, photonics,
sub-micron
positioning, vibration control, and optics.The Equipment & Solutions segment provides laser-based manufacturing solutions for the micro-machining industry that enable customers to optimize production. The segment’s market is composed primarily of flexible and rigid PCB processing/fabrication, semiconductor wafer processing and passive component manufacturing & test. Equipment & Solutions incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.
The Company derives its segment results directly from the manner in which results are reported in its management reporting system. The accounting policies that the Company uses to derive reportable segment results are substantially the same as those used for external reporting purposes. The Company does not disclose external or intersegment revenues separately by reportable segment as this information is not presented to the CODM for decision making purposes
.
The following table sets forth net revenues by reportable segment:
| Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| |||||||||||||
| 2019 |
2018 |
|
2019 | |
|
201 8 |
| |||||||||
| Vacuum & Analysis |
$ | |
$ | |
|
$ |
|
|
|
$ |
|
| ||||
| Light & Motion |
|
|
|
|
|
|
|
|
|
| ||||||
| Equipment & Solutions |
|
— |
|
|
|
|
|
|
— |
| ||||||
| |
|
|
|
|
|
|
| |||||||||
| $ | |
$ | |
|
$ |
|
|
$ |
| |||||||
| |
|
|
|
|
|
|
| |||||||||
31
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The following table sets forth a reconciliation of segment gross profit to consolidated net income
:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| Gross profit by reportable segment: |
||||||||||||||||
| Vacuum & Analysis |
$ | |
$ | |
$ | |
$ | |
||||||||
| Light & Motion |
|
|
|
|
||||||||||||
| Equipment & Solutions |
|
— |
|
— |
||||||||||||
| Total gross profit by reportable segment |
|
|
|
|
||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
|
|
|
|
||||||||||||
| Selling, general and administrative |
|
|
|
|
||||||||||||
| Fees and expenses related to term loan |
|
— |
|
|
||||||||||||
| Acquisition and integration costs |
|
|
|
( |
) | |||||||||||
| Restructuring and other |
|
|
|
|
||||||||||||
| Amortization of intangible assets |
|
|
|
|
||||||||||||
| Gain on sale of long-lived assets |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
| Income from operations |
|
|
|
|
||||||||||||
| Interest and other expense, net |
|
|
|
|
||||||||||||
| Income before income taxes |
|
|
|
|
||||||||||||
| Provision for income taxes |
|
|
|
|
||||||||||||
| Net income |
$ | |
$ | |
$ | |
$ | |
||||||||
The following table sets forth capital expenditures by reportable segment for the three and nine months ended September 30, 2019 and 2018:
| Vacuum & Analysis |
Light & Motion |
Equipment & Solutions |
Total |
|||||||||||||
| Three Months Ended September 30, 2019: |
||||||||||||||||
| Capital expenditures |
$ | |
$ | |
$ | |
$ | |
||||||||
| Nine Months Ended September 30, 2019: |
||||||||||||||||
| Capital expenditures |
$ | |
$ | |
$ | |
$ | |
||||||||
| Three Months Ended September 30, 2018: |
||||||||||||||||
| Capital expenditures |
$ | |
$ | |
$ | — |
$ | |
||||||||
| Nine Months Ended September 30, 2018: |
||||||||||||||||
| Capital expenditures |
$ | |
$ | |
$ | — |
$ | |
||||||||
The following table sets forth depreciation and amortization by reportable segment for the three and nine months ended September 30, 2019 and 2018:
Vacuum & Analysis |
Light & Motion |
Equipment & Solutions |
Total |
|||||||||||||
Three Months Ended September 30, 2019: |
||||||||||||||||
Depreciation and amortization |
$ | $ | $ | $ | ||||||||||||
Nine Months Ended September 30, 2019 |
||||||||||||||||
Depreciation and amortization |
$ | $ | $ | $ | ||||||||||||
Three Months Ended September 30, 2018: |
||||||||||||||||
Depreciation and amortization |
$ | $ | $ | — |
$ | |||||||||||
Nine Months Ended September 30, 2018: |
||||||||||||||||
Depreciation and amortization |
$ | $ | $ | — |
$ | |||||||||||
Total income tax expense is not presented by reportable segment because the necessary information is not available or used by the CODM.
32
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The following table sets forth segment assets by reportable segment:
September 30, 2019: |
Vacuum & Analysis |
Light & Motion |
Equipment & Solutions |
Corporate, Eliminations & Other |
Total |
|||||||||||||||
Segment assets: |
||||||||||||||||||||
Trade accounts receivable |
$ | $ | $ |
$ | ( |
) | $ | |||||||||||||
Inventories |
||||||||||||||||||||
Total segment assets |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
December 31, 2018: |
Vacuum & Analysis |
Light & Motion |
Equipment & Solutions |
Corporate, Eliminations & Other |
Total |
|||||||||||||||
Segment assets: |
||||||||||||||||||||
Trade accounts receivable |
$ | $ | $ | — |
$ | ( |
) | $ |
||||||||||||
Inventories |
— |
|||||||||||||||||||
Total segment assets |
$ | $ | $ | — |
$ | ( |
) | $ |
||||||||||||
The following is a reconciliation of segment assets to consolidated total assets:
September 30, 2019 |
December 31, 2018 |
|||||||
Total segment assets |
$ | $ | ||||||
Cash and cash equivalents and investments |
||||||||
Other current assets |
||||||||
Property, plant and equipment, net |
||||||||
Right-of-use asset |
— |
|||||||
Goodwill and intangible assets, net |
||||||||
Other assets |
||||||||
Consolidated total assets |
$ | $ | ||||||
Geographic
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 tax transfer prices and have been eliminated from consolidated net revenues.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Net revenues: |
||||||||||||||||
United States |
$ | $ | $ | $ | ||||||||||||
China |
||||||||||||||||
Korea |
||||||||||||||||
Japan |
||||||||||||||||
Other Asia |
||||||||||||||||
Europe |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Long-lived assets: (1) |
September 30, 2019 |
December 31, 2018 |
||||||
United States |
$ | $ | ||||||
Europe |
||||||||
Asia |
||||||||
| $ | $ | |||||||
(1) |
Long-lived assets include property, plant and equipment, net and certain other long-term assets, excluding long-term tax related accounts. |
3
3
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Goodwill associated with each of the Company’s reportable segments is as follows:
September 30, 2019 |
December 31, 2018 |
|||||||
Reportable segment: |
||||||||
Vacuum & Analysis |
$ | $ | ||||||
Light & Motion |
||||||||
Equipment & Solutions |
— |
|||||||
Total goodwill |
$ | $ | ||||||
Worldwide Product Information
The Company groups its product offerings into three groups based upon the similarity of product function as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Advanced Manufacturing Components |
$ | $ | $ | $ | ||||||||||||
Global Service |
||||||||||||||||
Advanced Manufacturing Systems |
— |
— |
||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Advanced manufacturing components are comprised of product revenues from the Company’s Vacuum & Analysis and Light & Motion segments. Global service is comprised of total service revenues for all three of the Company’s reportable segments. Advanced manufacturing systems is comprised of product revenues for the Company’s Equipment & Solutions segment.
| 18) | Restructuring and Other |
Restructuring
The Company recorded restructuring charges of $1,525 and $2,990 during the three and nine months ended September 30, 2019, respectively, primarily related to severance costs as a result of an organization-wide reduction in workforce, the consolidation of service functions in Asia and the movement of certain products to low cost regions. The Company recorded restructuring charges of $1,364 and $3,374 during the three and nine months ended
September
30, 2018, respectively, primarily related to severance costs as a result of streamlining and consolidating certain administrative functions. Restructuring activities were as follows:
| Nine Months Ended |
||||||||
| 2019 |
2018 |
|||||||
| Beginning of period restructuring accrual |
$ | |
$ |
|
||||
| Charged to expense |
|
|
||||||
| Payments and adjustments |
( |
) | ( |
) | ||||
| End of period restructuring accrual |
$ | |
$ | |
||||
Other
We recorded a charge of $1,700 during the nine months ended September 30, 2019 related to a
legal settlement from a
contractual obligation we
assumed
as part of our acquisition of Newport
.
We recorded $1,000 of environmental costs during the nine months ended September 30, 2018 related to a U.S. Environmental Protection Agency-designated Superfund site as part of
our acquisition of
Newport
.
34
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
| 19) | Commitments and Contingencies |
Newport Litigation
In 2016, two putative class actions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.
A-16-733154-C,
and Hubert C. Pincon v. Newport Corp., et al., Case No. A-16-734039-B,
were filed in the District Court, Clark County, Nevada on behalf of a putative class of stockholders of Newport for claims related to the merger agreement (“Newport Merger Agreement”) between the Company, Newport, and a wholly-owned subsidiary of the Company (“Merger Sub”). The lawsuits named as defendants the Company, Newport, Merger Sub, and certain then current and former members of Newport’s board of directors. Both complaints alleged that Newport directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices and by omitting material information from the proxy statement. The complaints also alleged that the Company, Newport and Merger Sub aided and abetted the directors’ alleged breaches of their fiduciary duties. The Court consolidated the actions, and plaintiffs later filed an amended complaint captioned In re Newport Corporation Shareholder Litigation, Case No. A-16-733154-B,
in the District Court, Clark County, Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Newport Merger Agreement. The amended complaint alleged Newport’s former board of directors breached their fiduciary duties to Newport’s stockholders and that the Company, Newport and Merger Sub had aided and abetted those breaches. It sought monetary damages, including pre-
and post-judgment interest. In June 2017, the Court granted defendants’ motion to dismiss and dismissed the amended complaint against all defendants but granted plaintiffs leave to amend. On July 27, 2017, plaintiffs filed a second amended complaint containing substantially similar allegations but naming only Newport’s former directors as defendants. On August 8, 2017, the Court dismissed the Company and Newport from the action. The second amended complaint seeks monetary damages, including
pre-
and post-judgment interest. The Court granted a motion for class certification on September 27, 2018, appointing Mr. Pincon and Locals 302 and 612 of the International Union of Operating Engineers -
Employers Construction Industry Retirement Trust as class representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily dismissed from the litigation. On May 1, 2019, the Court granted the defendants’ motion to strike plaintiffs’ jury demand and determined that the case will be tried by the Court, and not a jury. Discovery in the action is complete. On August 9, 2019, plaintiffs filed a motion for leave to file a third amended complaint,
which was denied on October 10, 2019. On
August 23, 2019, defendants filed a motion for summary judgment.
A bench trial is scheduled for January
2020.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 our results of operations, financial condition or cash flows
.
| 20) | Sale-Leaseback of Long-Lived Assets |
In August of 2019,
the Company sold two of its buildings in Boulder, Colorado and has leased-back both buildings for a period of approximately 15 months, and also sold its three buildings in Portland, Oregon and has leased-back these three buildings with various expiration dates through 2020 and 2021. Total net cash proceeds received for these two transactions was
$41,179 and the Company recognized a net gain on the sale of these long-lived assets of $6,773 .
35
| 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 of 1934, as amended (the “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 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, 2018 and 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 global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for our customers. Our products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, power, reactive gas generation, vacuum technology, lasers, photonics,
sub-micron
positioning, vibration control, optics and laser-based manufacturing solutions. We also provide services relating to the maintenance and repair of our products, installation services and training. Our primary served markets include semiconductor, industrial technologies, life and health sciences, research and defense.Acquisition of Electro Scientific Industries, Inc.
On February 1, 2019, we completed our acquisition of Electro Scientific Industries, Inc. (“ESI”) pursuant to an Agreement and Plan of Merger, dated as of October 29, 2018 (the “ESI Merger”). At the effective time of the ESI Merger and pursuant to the terms and conditions of the merger agreement, each share of ESI’s common stock that was issued and outstanding immediately prior to the effective time of the ESI Merger was converted into the right to receive $30.00 in cash, without interest and subject to deduction of any required withholding tax. We paid the former ESI stockholders aggregate consideration of approximately $1.033 billion, excluding related transaction fees and expenses, and
non-cash
consideration related to the exchange of share-based awards of approximately $31 million for a total purchase consideration of approximately $1.063 billion. We funded the payment of the aggregate consideration with a combination of our available cash on hand and the proceeds from our senior secured term loan facility as described below.Segments and Markets
Effective February 1, 2019, in conjunction with our acquisition of ESI, we created a third reportable segment known as the Equipment & Solutions segment in addition to our two then-existing reportable segments: the Vacuum & Analysis segment and the Light & Motion segment. ESI provides laser-based manufacturing solutions for the micro-machining industry that enable customers to optimize production. ESI’s primary served markets include flexible and rigid PCB processing/fabrication, semiconductor wafer processing and passive component manufacturing and testing. ESI solutions incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.
The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, RF & DC power, reactive gas generation and vacuum technology.
The Light & Motion segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in lasers, photonics,
sub-micron
positioning, vibration control, and optics.We have a diverse base of customers. Approximately 52% and 44% of our net revenues for the nine months ended September 30, 2019 and 2018, respectively, were from sales to customers in our advanced markets. These include, but are not limited to, industrial technologies, life and health sciences, and research and defense.
Approximately 48% and 56% of our net revenues for the nine months ended September 30, 2019 and 2018, respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers.
We expect the relative split in our net revenues between sales to customers in our advanced markets and sales to customers in our semiconductor capital equipment manufacturer and semiconductor device manufacturer markets will be relatively consistent for the foreseeable future, excluding the impact of any future acquisitions.
36
Net revenues from customers in our advanced markets increased by $12 million, or 5%, for the three months ended September 30, 2019, compared to the same period in the prior year, primarily due to an increase of $42 million from our Equipment & Solutions segment as a result of the ESI Merger. This increase was offset by a decrease of $21 million and $9 million in revenue from customers in our advanced markets, primarily in our industrial technologies market, in our Light & Motion and Vacuum & Analysis segments, respectively.
Net revenues from customers in our advanced markets increased by $38 million, or 5%, for the nine months ended September 30, 2019, compared to the same period in the prior year, primarily due to an increase of $123 million from our Equipment & Solutions segment as a result of the ESI Merger. This increase was offset by a decrease of $49 million and $36 million in revenue from customers in our advanced markets, primarily in our industrial technologies market, in our Light & Motion and Vacuum & Analysis segments, respectively.
Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers decreased by $37 million, or 14%, for the three months ended September 30, 2019, compared to the same period in the prior year. This decrease was comprised of a volume decrease in net semiconductor revenues of $37 million and $7 million in the Vacuum & Analysis and Light & Motion segments, respectively, offset by an increase of $7 million from our Equipment & Solutions segment as a result of the ESI Merger.
Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers decreased by $252 million, or 28%, for the nine months ended September 30, 2019, compared to the same period in the prior year. This decrease was comprised of a volume decrease in net semiconductor revenues of $255 million and $14 million in the Vacuum & Analysis and Light & Motion segments, respectively, offset by an increase of $17 million from our Equipment & Solutions segment as a result of the ESI Merger.
The semiconductor capital equipment industry has been experiencing a moderation in capital spending in the past twelve months and we have seen a similar effect on our semiconductor revenue over the same period. However, while the timing of a full market recovery remains uncertain, we are seeing improving market conditions. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we cannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry.
A significant portion of our net revenues is from sales to customers in international markets. For the nine months ended September 30, 2019 and 2018, international net revenues accounted for approximately 53% and 50% of our total net revenues, respectively. A significant portion of our international net revenues was from China, South Korea, Germany and Japan. We expect that international net revenues will continue to represent a significant percentage of our total net revenues. Long-lived assets located in the United States were $177 million and $147 million, as of September 30, 2019 and December 31, 2018, respectively, excluding goodwill and intangibles, and long-term
tax-related
accounts. Long-lived assets located outside of the United States were $91 million and $77 million, as of September 30, 2019 and December 31, 2018, respectively, excluding goodwill and intangibles, and long-term tax-related
accounts.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 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, 2018, other than the adoption of ASC 842 as outlined below.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Leases, (“ASU
2016-02”),
to enhance the transparency and comparability of financial reporting related to leasing arrangements. We adopted ASU 2016-02
on January 1, 2019, or the effective date, and used the effective date as our date of initial application.At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as
right-of-use
assets, short-term lease liabilities and long-term lease liabilities. We have elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and their corresponding right-of-use
assets are recorded based on the present value of lease payments over the expected remaining fixed lease term. Certain adjustments to the right-of-use
asset may be required for items such as incentives received. In calculating the present value of future lease payments, we utilize our incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We have elected to utilize a single blended interest rate based on currencies, geographies and lease terms that comprise the lease portfolio.37
Although separation of lease and
non-lease
components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease
components. We have elected to account for the lease and non-lease
components of each of our operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating right-of-use
asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense.Many of our leases contain options to renew and extend lease terms, and options to terminate leases early. We do not recognize the
right-of-use
asset or lease liability for renewal or termination periods unless we are reasonably certain to exercise the option at lease inception.For further information about our critical accounting policies, including our revenue recognition policy, please see the discussion of critical accounting policies in our Annual Report on Form
10-K
for the year ended December 31, 2018 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”38
Results of Operations
The following table sets forth for the periods indicated the percentage of total net revenues of certain line items included in our consolidated statements of operations and comprehensive income data.
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| Net revenues: |
||||||||||||||||
| Product |
83.5 |
% | 87.5 |
% | 84.6 |
% | 88.7 |
% | ||||||||
| Services |
16.5 |
12.5 |
15.4 |
11.3 |
||||||||||||
| Total net revenues |
100.0 |
100.0 |
100.0 |
100.0 |
||||||||||||
| Cost of revenues: |
||||||||||||||||
| Cost of product revenues |
46.8 |
45.0 |
48.0 |
46.3 |
||||||||||||
| Cost of service revenues |
8.9 |
7.4 |
8.1 |
6.0 |
||||||||||||
| Total cost of revenues (exclusive of amortization shown separately below) |
55.7 |
52.4 |
56.1 |
52.3 |
||||||||||||
| Gross profit |
44.3 |
47.6 |
43.9 |
47.7 |
||||||||||||
| Research and development |
9.0 |
6.5 |
8.8 |
6.4 |
||||||||||||
| Selling, general and administrative |
17.8 |
14.5 |
17.7 |
14.2 |
||||||||||||
| Fees and expenses related to term loan |
0.1 |
— |
0.5 |
— |
||||||||||||
| Acquisition and integration costs |
0.5 |
— |
2.5 |
(0.1 |
) | |||||||||||
| Restructuring and other |
0.3 |
0.3 |
0.3 |
0.3 |
||||||||||||
| Amortization of intangible assets |
3.7 |
2.2 |
3.6 |
2.0 |
||||||||||||
| Gain on sale of long-lived assets |
(1.5 |
) | — |
(0.5 |
) | — |
||||||||||
| Income from operations |
14.4 |
24.1 |
11.0 |
24.9 |
||||||||||||
| Interest income |
0.3 |
0.3 |
0.3 |
0.2 |
||||||||||||
| Interest expense |
2.9 |
0.8 |
2.5 |
0.8 |
||||||||||||
| Other (income) expense, net |
(0.2 |
) | 0.1 |
— |
0.1 |
|||||||||||
| Income from operations before income taxes |
12.0 |
23.5 |
8.8 |
24.2 |
||||||||||||
| Provision for income taxes |
1.7 |
4.4 |
1.8 |
4.3 |
||||||||||||
| Net income |
10.3 |
% | 19.1 |
% | 7.0 |
% | 19.9 |
% | ||||||||
Net Revenues
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Product |
$ | 386.2 |
$ | 426.3 |
$ | 1,184.9 |
$ | 1,432.9 |
||||||||
| Service |
76.3 |
60.9 |
215.2 |
181.7 |
||||||||||||
| Total net revenues |
$ | 462.5 |
$ | 487.2 |
$ | 1,400.1 |
$ | 1,614.6 |
||||||||
Product revenues decreased $40.1 million and $248.0 million during the three and nine months ended September 30, 2019, respectively, compared to the same periods in the prior year. These decreases were attributed to a decrease in net product revenues from our semiconductor customers, primarily due to lower volume, of $33.9 million and $247.0 million, respectively, for the same periods, and a decrease in net product revenues from customers in our advanced markets of $6.2 million and $1.0 million, for the same periods. The decreases in product revenues from semiconductor customers for the MKS business, excluding the impact of the ESI Merger (the “legacy MKS business”), for the three and nine months ended September 30, 2019, were $40.8 million, compared to the same periods in the prior year and $264.1 million, respectively, offset by increases in product revenues from our semiconductor customers of $6.9 million and $17.1 million, respectively, for the same periods, from the Equipment & Solutions segment as a result of the ESI Merger. The decreases in product revenues from customers in advanced markets for the legacy MKS business for the three and nine month periods ended September 30, 2019, compared to the same periods in the prior year, were $31.9 million and $84.6 million, respectively, mainly due to decreases in the industrial technologies market, which we believe has been negatively impacted by the general trade tensions between the U.S. and China as a result of increasing tariffs and other trade restrictions and a softening in consumer electronics demand. These decreases were offset by increases in product revenues from customers in our advanced markets of $25.7 million and $83.6 million, for the three and nine months ended September 30, 2019, respectively, from the Equipment & Solutions segment as a result of the ESI Merger.
39
Service revenues consisted mainly of fees for services related to the maintenance and repair of our products, sales of spare parts, and installation and training. Service revenues increased $15.4 million and $33.5 million during the three and nine month periods ended September 30, 2019, respectively, compared to the same periods in the prior year. These increases were primarily attributed to increases in service revenues from customers in our advanced markets of $16.8 million and $39.6 million for the three and nine months ended September 30, 2019, respectively, from the Equipment & Solutions segment as a result of the ESI Merger.
Total international net revenues, including product and service, were $251.3 million and $747.1 million for the three and nine months ended September 30, 2019, respectively, compared to $243.9 million and $812.8 million for the three and nine months ended September 30, 2018, respectively. The increase of $7.4 million for the three months ended September 30, 2019, compared to the same period in the prior year, was primarily due to an increase in net revenues from China, primarily as a result of the ESI Merger. The decrease of $65.7 million for the nine months ended September 30, 2019, was primarily due to decreases in net revenues in South Korea and Japan, primarily due to decreases in semiconductor revenues for our Vacuum & Analysis segment, partially offset by an increase in net revenues from China, as a result of the ESI Merger.
The following table sets forth our net revenues by reportable segment:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Net revenues: |
||||||||||||||||
| Vacuum & Analysis |
$ | 240.7 |
$ | 286.1 |
$ | 710.7 |
$ | 1,002.7 |
||||||||
| Light & Motion |
172.5 |
201.1 |
549.0 |
611.9 |
||||||||||||
| Equipment & Solutions |
49.3 |
— |
140.4 |
— |
||||||||||||
| Total net revenues |
$ | 462.5 |
$ | 487.2 |
$ | 1,400.1 |
$ | 1,614.6 |
||||||||
Net revenues from our Vacuum & Analysis segment decreased $45.4 million and $292.0 million for the three and nine months ended September 30, 2019, respectively, compared to the same periods in the prior year, due to decreases in net revenues from semiconductor customers of $36.0 million and $255.5 million for the three and nine months ended September 30, 2019, respectively, and decreases in net revenues from customers in our advanced markets of $9.4 million and $36.5 million for the three and nine months ended September 30, 2019, respectively, primarily from customers in our industrial technologies market.
Net revenues from our Light & Motion segment decreased $28.6 million and $62.9 million for the three and nine months ended September 30, 2019, respectively, compared to the same periods in the prior year. The decreases were primarily attributed to decreases in net revenues from customers in our advanced markets of $21.2 million and $49.1 million for the three and nine months ended September 30, 2019, respectively, primarily from customers in our industrial technologies market. The remainder of the decreases were attributed to decreases in net revenues from semiconductor customers of $7.4 million and $13.8 million for the three and nine months ended September 30, 2019, respectively.
Gross Profit
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
| 2019 |
2018 |
% Points Change |
2019 |
2018 |
% Points Change |
|||||||||||||||||||
| Gross profit as a percentage of net revenues: |
||||||||||||||||||||||||
| Product |
44.0 |
% | 48.5 |
% | (4.5 |
)% | 43.3 |
% | 47.8 |
% | (4.5 |
)% | ||||||||||||
| Service |
46.0 |
40.9 |
5.1 |
47.1 |
46.3 |
0.8 |
||||||||||||||||||
| Total gross profit |
44.3 |
% | 47.6 |
% | (3.3 |
)% | 43.9 |
% | 47.7 |
% | (3.8 |
)% | ||||||||||||
Gross profit as a percentage of net product revenues decreased by 4.5 percentage points for both the three and nine months ended September 30, 2019, compared to the same periods in the prior year, primarily due to lower factory utilization and lower revenue volumes, partially offset by favorable product mix.
Gross profit as a percentage of net service revenues increased by 5.1 percentage points and 0.8 percentage points for the three and nine month periods ended September 30, 2019, respectively, compared to the same periods in the prior year, primarily due to favorable absorption and favorable product mix, partially offset by higher material costs.
40
The following table sets forth gross profit as a percentage of net revenues by reportable segment:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
| 2019 |
2018 |
% Points Change |
2019 |
2018 |
% Points Change |
|||||||||||||||||||
| Gross profit as a percentage of net revenues: |
||||||||||||||||||||||||
| Vacuum & Analysis |
42.7 |
% | 46.4 |
% | (3.7 |
)% | 42.6 |
% | 46.1 |
% | (3.5 |
)% | ||||||||||||
| Light & Motion |
46.3 |
49.2 |
(2.9 |
) | 46.9 |
50.2 |
(3.3 |
) | ||||||||||||||||
| Equipment & Solutions |
45.2 |
— |
100.0 |
38.1 |
— |
100.0 |
||||||||||||||||||
| Total gross profit |
44.3 |
% | 47.6 |
% | (3.3 |
)% | 43.9 |
% | 47.7 |
% | (3.8 |
)% | ||||||||||||
Gross profit for our Vacuum & Analysis segment decreased by 3.7 and 3.5 percentage points for the three and nine months ended September 30, 2019, respectively, compared to the same periods in the prior year, primarily due to lower factory utilization, higher material costs and lower revenue volumes.
Gross profit for our Light & Motion segment decreased by 2.9 and 3.3 percentage points for the three and nine months ended September 30, 2019, respectively, compared to the same periods in the prior year, primarily due to lower factory utilization, lower revenue volumes and unfavorable product mix.
Gross profit for our Equipment & Solutions segment was 45.2% and 38.1% for the three and nine months ended September 30, 2019, respectively. The nine months ended September 30, 2019 includes the inventory
step-up
adjustment to fair value from purchase accounting of $7.6 million. Excluding this adjustment, the gross margin for the nine months ended September 30, 2019 would have been 43.6% for this period.Research and Development
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Research and development expenses |
$ | 41.6 |
$ | 31.9 |
$ | 122.4 |
$ | 103.3 |
||||||||
Research and development expenses increased $9.7 million for the three months ended September 30, 2019, compared to the same period in the prior year, primarily due to $7.2 million from the ESI Merger, which primarily included $4.5 million of compensation-related expenses, $1.1 million of project materials and $0.8 million of depreciation expense, and an increase of $2.3 million of project materials related to the legacy MKS business.
Research and development expenses increased $19.1 million for the nine months ended September 30, 2019, compared to the same period in the prior year, primarily due to $18.7 million from the ESI Merger, which primarily included $12.2 million of compensation-related expenses, $2.4 million of project materials, $2.2 million of depreciation expense and $1.0 million of occupancy costs, and an increase of $1.8 million of project materials related to the legacy MKS business.
Our research and development efforts are 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 durations 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.
We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets. We expect to continue to make significant investment in research and development activities. We are subject to risks from products not being developed in a timely manner, as well as from 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 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.
41
Selling, General and Administrative
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Selling, general and administrative expenses |
$ | 82.1 |
$ | 70.8 |
$ | 247.8 |
$ | 230.0 |
||||||||
Selling, general and administrative expenses increased by $11.3 million for the three months ended September 30, 2019, compared to the same period in the prior year. This increase was primarily attributed to $9.6 million from the ESI Merger, which primarily included $6.1 million of compensation-related expense, $1.0 million of depreciation expense, $0.7 million of travel and entertainment expense and $0.4 million of commissions expense. The increase was also attributed to an increase of $1.3 million of compensation-related expense, $0.8 million of information technology related expenses and $0.6 million of bad debt expense related to the legacy MKS business.
Selling, general and administrative expenses increased by $17.8 million for the nine months ended September 30, 2019, compared to the same period in the prior year. This increase was primarily attributed to $27.9 million from the ESI Merger, which primarily included $17.6 million of compensation-related expense, $3.1 million of depreciation expense, $1.7 million of travel and entertainment expense and $1.7 million of consulting and professional fees. The increase was also attributed to an increase of $1.5 million of information technology related expenses, partially offset by a decrease of $9.8 million of compensation-related expense and $1.7 million of depreciation expense, related to the legacy MKS business.
Fees and Expenses Related to Incremental Term Loan Facility
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Fees and expenses related to term loan |
$ | 0.6 |
$ | — |
$ | 6.5 |
$ | 0.4 |
||||||||
We recorded fees and expenses during the three and nine months ended September 30, 2019, related to Amendment No. 6 which included the fifth repricing of our Term Loan Facility and the combination of the two existing tranches of our Term Loan Facility with a maturity date in February 2026. We also recorded fees and expenses during the nine months ended September 30, 2019 related to Amendment No. 5, which established a second tranche for our term loan commitment in the original principal amount of $650 million. We recorded fees and expenses during the nine months ended September 30, 2018 related to the fourth repricing of our 2016 Term Loan Facility.
Acquisition and Integration Costs
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Acquisition and integration costs |
$ | 2.1 |
$ | — |
$ | 35.5 |
$ | (1.1 |
) | |||||||
We recorded acquisition and integration costs related to the ESI Merger, which closed on February 1, 2019, during the three and nine months ended September 30, 2019. These costs consisted primarily of compensation costs for certain executives from ESI who had change in control provisions in their respective ESI employment agreements that were accounted for as dual-trigger arrangements and other stock vesting accelerations, as well as consulting and professional fees associated with the ESI Merger.
During the three and nine months ended September 30, 2018, we reversed a portion of acquisition and integration costs recognized during previous periods related to the acquisition of Newport Corporation in April 2016 (the “Newport Merger”), related to severance agreement provisions that were not met.
42
Restructuring and Other
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Restructuring and other |
$ | 1.5 |
$ | 1.4 |
$ | 4.7 |
$ | 4.4 |
||||||||
We recorded restructuring costs during the three and nine months ended September 30, 2019, which consisted primarily of severance costs related to an organization-wide reduction in workforce, the consolidation of service functions in Asia and the movement of certain products to low cost regions. We also recorded expense during the nine months ended September 30, 2019 related to a legal settlement from a contractual obligation we assumed as part of the Newport Merger.
Restructuring costs during the three and nine months ended September 30, 2018 were primarily comprised of severance costs related to transferring a portion of our shared services functions to a third party as well as the consolidation of certain shared service functions in Asia. We also recorded environmental costs during the nine months ended September 30, 2018, related to an Environmental Protection Agency-designated Superfund site, which was acquired as part of the Newport Merger.
Amortization of Intangible Assets
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Amortization of intangible assets |
$ | 17.0 |
$ | 10.7 |
$ | 50.3 |
$ | 32.8 |
||||||||
Amortization of intangible assets increased by $6.3 million and $17.5 million during the three and nine months ended September 30, 2019, respectively, compared to the same periods in the prior year, primarily due to the amortization of intangible assets acquired as part of the ESI Merger.
Interest Expense, Net
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Interest expense, net |
$ | 12.3 |
$ | 2.2 |
$ | 31.0 |
$ | 9.0 |
||||||||
Interest expense, net, increased by $10.1 million and $22.0 million for the three and nine months ended September 30, 2019, respectively, primarily due to interest expense related to Amendment No. 5 as described below.
Other Expense, Net
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Other (income) expense, net |
$ | (0.9 |
) | $ | 0.3 |
$ | 0.2 |
$ | 1.2 |
|||||||
The changes in other (income) expense, net, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in the prior year, primarily related to changes in foreign exchange rates.
Provision for Income Taxes
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (dollars in millions) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Provision for income taxes |
$ | 8.0 |
$ | 21.2 |
$ | 25.0 |
$ | 68.5 |
||||||||
Our effective tax rates for the three and nine months ended September 30, 2019 were 14.4% and 20.4%, respectively. Our effective tax rates for the three and nine months ended September 30, 2019, and related income tax expense, were lower than the U.S. statutory tax rate due to the deduction for foreign derived intangible income, the geographic mix of income earned by our international subsidiaries being taxed at rates lower than the U.S. statutory tax rate and the impact of various tax credits, offset by the global intangible
low-taxed
income inclusion and a correction of an out-of-period
error with respect to deferred tax assets related to limitations on the deduction of executive compensation in the amount of $5.0 million. This correction, which was recorded during the43
quarter ended June 30, 2018, but should have been recorded during the three months ended September 30, 2018, increased our effective tax rate for the three and six months ended June 30, 2019 and the nine months ended September 30, 2019 by 9.8%, 7.5% and 3.8%, respectively. The error and subsequent adjustment were not material to prior or current interim and annual financial statements.
Our effective tax rates for the three and nine months ended September 30, 2018 were 18.5% and 17.6%, respectively. Our effective tax rates for the three and nine months September 30, 2018, and related income tax expense, were lower than the U.S. statutory rate due to foreign earnings taxed at lower rates, windfall benefits of stock compensation and the deduction for foreign derived intangible income, offset by the tax effect of the provision for global intangible low taxed income inclusion and state income taxes.
As of September 30, 2019, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $41.2 million. At December 31, 2018, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $32.7 million. The net increase is primarily attributable to the addition of historical gross unrecognized tax benefits for ESI as a result of the ESI Merger during the quarter ended March 31, 2019. As of September 30, 2019, excluding interest and penalties, there were approximately $33.4 million of net unrecognized tax benefits that, if recognized, would impact our annual effective tax rate. We accrue interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of September 30, 2019 and December 31, 2018, we had accrued interest on unrecognized tax benefits of approximately $0.6 million and $0.6 million, respectively.
Over the next 12 months it is reasonably possible that we may recognize approximately $1.2 million of previously net unrecognized tax benefits, excluding interest and penalties, related to federal, state and foreign tax positions as a result of the expiration of statutes of limitation. The U.S. statute of limitations remains open for tax years 2016 through present. The statute of limitations for our tax filings in other jurisdictions varies between fiscal years 2013 through the present. We also have certain federal credit carry-forwards and state tax loss and credit carry-forwards that are open to examination for tax years 2000 through the present.
We are subject to examination by U.S. federal, state and foreign tax authorities. The U.S. Internal Revenue Service commenced an examination of our U.S. federal income tax filings for tax years 2015 and 2016 during the quarter ended September 30, 2017. This audit was effectively settled during the quarter ended March 31, 2018, and the impact was not material. Also during the quarter ended March 31, 2018 we received notification from the U.S. Internal Revenue Service of their intent to audit our U.S. subsidiary, Newport Corporation, for tax year 2015. This audit commenced during the quarter ended June 30, 2018 and was effectively settled during the quarter ended June 30, 2019 with a no change result.
On a quarterly basis, we evaluate both positive and negative evidence that affects the realizability of net deferred tax assets and assess the need for a valuation allowance. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income in each jurisdiction of the right type to realize the assets.
Our future effective tax rate depends on various factors, including further interpretations and guidance from U.S. federal and state governments on the impact of the enactment of the Tax Cuts and Jobs Act, the adoption of the proposed regulations on the foreign derived intangible income and additional regulations on the global intangible
low-taxed
income provision, as well as the geographic composition of our pre-tax
income, and changes in income tax reserves for unrecognized tax benefits. We monitor these factors and timely adjust our estimates of the effective tax rate accordingly. We expect that the geographic mix of pre-tax
income will continue to have a favorable impact on our effective tax rate, however the geographic mix of pre-tax
income can change based on multiple factors resulting in changes to the effective tax rate in future periods. 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 law and regulations. Additionally, the recognition and measurement of certain tax benefits include estimates and judgment by management. Accordingly, we could record additional provisions or benefits for U.S. federal, state, and foreign tax matters in future periods as new information becomes available.Liquidity and Capital Resources
Cash and cash equivalents and short-term marketable investments totaled $475.1 million at September 30, 2019, compared to $718.2 million at December 31, 2018. This decrease primarily related to the use of $406.0 million of cash to fund the payment of a portion of the purchase price for ESI on February 1, 2019.
Net cash provided by operating activities was $167.2 million for the nine months ended September 30, 2019 and resulted from net income of $97.6 million, which included
non-cash
charges of $139.5 million, offset by a net increase in working capital of $69.9 million. The net increase in working capital was due to an increase in inventories of $25.8 million, a decrease in accounts payable of $24.0 million, an increase in other current and non-current
assets of $18.2 million, a decrease in accrued compensation of $13.4 million, a decrease in income taxes of $0.8 million, offset by a decrease in trade accounts receivable of $9.3 million and an increase in other current and non-current
liabilities of $3.0 million.44
Net cash provided by operating activities was $278.3 million for the nine months ended September 30, 2018 and resulted from net income of $321.3 million, which included
non-cash
charges of $99.1 million, offset by a net increase in working capital of $142.1 million. The net increase in working capital was due to an increase in inventories of $80.4 million, an increase in accounts receivable of $23.1 million and an increase in other current and non-current
assets of $17.7 million, related to an increase in business activities, a decrease in accrued compensation of $15.5 million, a decrease in income taxes of $13.9 million and a decrease in accounts payable $0.4 million. These increases in working capital were offset by an increase in other current and non-current
liabilities of $8.9 million.Net cash used in investing activities was $907.7 million for the nine months ended September 30, 2019 and was primarily due to the payment of a portion of the purchase price for the ESI Merger of $988.6 million and purchases of production-related equipment of $44.7 million, offset by net sales and maturities of short-term investments of $84.4 million and proceeds from the sale of long-lived assets of $41.2 million. Net cash used in investing activities was $47.4 million for the nine months ended September 30, 2018, due to the purchases of production-related equipment of $36.9 million and net purchases of short-term investments of $10.5 million.
Net cash provided by financing activities was $490.0 million for the nine months ended September 30, 2019 and was primarily from net proceeds of $534.3 million, mainly from our 2019 Incremental Term Loan Facility, as described below, used to finance the ESI Merger, offset by dividend payments made to common stockholders of $32.6 million and net payments related to tax payments for employee stock awards of $11.7 million. Net cash used in financing activities was $167.5 million for the nine months ended September 30, 2018, and resulted from the repurchase of common stock of $75.0 million, partial repayment of our Term Loan Facility of $50.0 million, dividend payments made to common stockholders of $31.6 million and net payments related to tax payments for employee stock awards of $13.6 million, partially offset by net borrowings relating to our lines of credit of $2.7 million.
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 outstanding 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 depends 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. We have repurchased approximately 2,588,000 shares of common stock for approximately $127.0 million pursuant to the program since its adoption. During the nine months ended September 30, 2019, there were no repurchases of common stock. During the three and nine months ended September 30, 2018, we repurchased approximately 818,000 shares of our common stock for $75.0 million, for an average of $91.67 per share.
Holders of our common stock are entitled to receive dividends when and if they are declared by our Board of Directors. In addition, we accrue dividend equivalents on the restricted stock units we assumed in the ESI Merger when dividends are declared by our Board of Directors. Our Board of Directors declared a cash dividend of $0.20 per share during each of the first, second and third quarters of 2019, respectively, which totaled $32.6 million, or $0.60 per share. Our Board of Directors declared a cash dividend of $0.18 per share during the first quarter of 2018 and $0.20 per share during the second and third quarters of 2018, which totaled $31.6 million, or $0.58 per share.
On October 28, 2019, our Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid on December 6, 2019 to shareholders of record as of November 25, 2019. 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. In addition, under the terms of the Term Loan Facility and ABL Facility, each as defined below, we may be restricted from paying dividends under certain circumstances.
Term Loan Credit Agreement
In connection with the completion of the Newport Merger in April 2016, we entered into a term loan credit agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto (the “Lenders”), that provided senior secured financing in the original principal amount of $780.0 million (the “2016 Term Loan Facility”), subject to increase at the Company’s option and subject to receipt of lender commitments in accordance with the Credit Agreement (the 2016 Term Loan Facility, together with the 2019 Incremental Term Loan Facility and 2019 Term Loan Refinancing Facility (each as defined below), the “Term Loan Facility”). Prior to the effectiveness of Amendment No. 6 (as defined below), the 2016 Term Loan Facility had a maturity date of April 29, 2023. As of September 30, 2019, borrowings under the Term Loan Facility bear interest per annum at one of the following rates selected by the Company: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of 1.75%, plus, in each case, an applicable margin; or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a LIBOR rate floor of 0.0%, plus an applicable margin. The Company has elected the interest rate as described in clause (b). The Credit Agreement provides that, unless an alternate rate of interest is agreed, all loans will be determined by reference to the base rate if the LIBOR rate cannot be ascertained, if regulators impose material restrictions on the authority of a lender to make LIBOR rate loans, or for other reasons. The 2016 Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.
The Wall Street Journal,
45
We subsequently entered into four separate repricing amendments to the 2016 Term Loan Facility, which decreased the applicable margin for LIBOR borrowings from 4.0% to 1.75%, with a LIBOR rate floor of 0.75%. As a consequence of the pricing of the 2019 Incremental Term Loan Facility (defined below), the applicable margin for the 2016 Term Loan Facility was increased to 2.00% (from 1.75%) with respect to LIBOR borrowings and 1.00% (from 0.75%) with respect to base rate borrowings.
On September 30, 2016, we entered into an interest rate swap agreement, which has a maturity date of September 30, 2020, to fix the rate on $335.0 million of the then-outstanding balance of the 2016 Term Loan Facility. The rate was fixed at 1.198% per annum plus the applicable credit spread, which was 1.75% at September 30, 2019. At September 30, 2019, the notional amount of this transaction was $250.0 million and it had a fair value asset of $1.2 million.
We incurred $28.7 million of deferred finance fees, original issue discount and repricing fees related to the term loans under the 2016 Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
On February 1, 2019, in connection with the completion of the ESI Merger, we entered into an amendment (“Amendment No. 5”) to the Credit Agreement. Amendment No. 5 provided an additional tranche
B-5
term loan commitment in the original principal amount of $650.0 million (the “2019 Incremental Term Loan Facility”), all of which was drawn down in connection with the closing of the ESI Merger. Pursuant to Amendment No. 5, we also effectuated certain amendments to the Credit Agreement which make certain of the negative covenants and other provisions less restrictive. Prior to the effectiveness of Amendment No. 6 (as defined below), the 2019 Incremental Term Loan Facility had a maturity date of February 1, 2026 and bore interest at a rate per annum equal to, at our option, a base rate or LIBOR rate (as described above) plus, in each case, an applicable margin equal to 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The 2019 Incremental Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.On April 3, 2019, we entered into an interest rate swap agreement, which has a maturity date of March 31, 2023, to fix the rate on $300.0 million of the then-outstanding balance of the 2019 Incremental Term Loan Facility. The rate was fixed at 2.309% per annum plus the applicable credit spread, which was 1.75% at September 30, 2019. At September 30, 2019, the notional amount of this transaction was $300.0 million and it had a fair value liability of $8.1 million.
We incurred $11.4 million of deferred finance fees and original issue discount fees related to the term loans under the 2019 Incremental Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
On September 27, 2019, we entered into an amendment (“Amendment No. 6”) to the Credit Agreement. Amendment No. 6 refinanced all existing loans outstanding under the 2016 Term Loan Facility and 2019 Incremental Term Loan Facility (“Existing Term Loans”) for a tranche
B-6
term loan commitment in the original principal amount of $896.8 million (“2019 Term Loan Refinancing Facility”). Each lender of the Existing Term Loans who elected to participate in the 2019 Term Loan Refinancing Facility was deemed to have exchanged the aggregate outstanding principal amount of its Existing Term Loans outstanding under the Credit Agreement for an equal aggregate principal amount of tranche B-6
term loans under the 2019 Term Loan Refinancing Facility. On the effective date of Amendment No. 6 and immediately prior to the exchanges described above, we made a voluntary prepayment of $50.0 million, which was applied to the Existing Term Loans on a pro rata basis.We incurred $2.2 million of original issue discount fees related to the term loans under the 2019 Term Loan Refinancing Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method.
As of September 30, 2019, the remaining balance of deferred finance fees and original issue discount of the Term Loan Facility was $12.3 million. A portion of the deferred finance fees and original issue discount have been accelerated in connection with the various debt prepayments and extinguishments during 2016, 2017, 2018 and 2019.
The 2019 Term Loan Refinancing Facility matures on February 2, 2026, and bears interest at a rate per annum equal to, at our option, a base rate or LIBOR rate (as described above) plus, in each case, an applicable margin equal to 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings. The 2019 Term Loan Refinancing Facility was issued with original issue discount of 0.25% of the principal amount thereof.
We are required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the 2019 Term Loan Refinancing Facility with the balance due on February 2, 2026. If, on or prior to the date that is six months after the closing date of Amendment No. 6, we prepay any loans under the 2019 Term Loan Refinancing Facility in connection with a repricing transaction, we must pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid.
As of September 30, 2019, after total principal prepayments of $525.0 million (which includes a $50.0 million prepayment made during the three months ended September 30, 2019) and regularly scheduled principal payments of $10.4 million, the total outstanding principal balance of the Term Loan Facility was $894.6 million and the interest rate was 3.59%.
46
Under the Credit Agreement, we are required to prepay outstanding term loans, subject to certain exceptions, with portions of our annual excess cash flow as well as with the net cash proceeds of certain of our asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. As a result of our current total leverage ratio, we are not required to make a prepayment of excess cash flow for the period ended September 30, 2019.
All obligations under the Term Loan Facility are guaranteed by certain of our domestic subsidiaries, and are collateralized by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
The Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the Lenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions generally permitted to be taken by a secured creditor. At September 30, 2019, we were in compliance with all covenants under the Credit Agreement.
Senior Secured Asset-Based Revolving Credit Facility
On February 1, 2019, in connection with the completion of the ESI Merger, we entered into an asset-based credit agreement with Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto (the “ABL Credit Agreement”), that provides senior secured revolving credit financing of up to $100.0 million, subject to a borrowing base limitation (the “ABL Facility”). On April 26, 2019, we entered into a First Amendment to the ABL Credit Agreement which amended the borrowing base calculation for eligible inventory prior to an initial field examination and appraisal requirements. The borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of certain eligible accounts; plus (b) prior to certain notice and field examination and appraisal requirements, the lesser of (i) 20% of net book value of eligible inventory in the United States and (ii) 30% of the borrowing base, and after the satisfaction of such requirements, the lesser of (i) the lesser of (A) 65% of the lower of cost or market value of certain eligible inventory and (B) 85% of the net orderly liquidation value of certain eligible inventory and (ii) 30% of the borrowing base; minus (c) reserves established by the administrative agent, in each case, subject to additional limitations and examination requirements for eligible accounts and eligible inventory acquired in an acquisition after February 1, 2019. The ABL Facility includes borrowing capacity in the form of letters of credit up to $25.0 million.
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in , (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% and (4) a floor of 0.00%; and (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, with a floor of 0.00%. The initial applicable margin for borrowings under the ABL Facility is 0.50% with respect to base rate borrowings and 1.50% with respect to LIBOR borrowings. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.
The Wall Street Journal
In addition to paying interest on any outstanding principal under the ABL Facility, we are required to pay a commitment fee in respect of the unutilized commitments thereunder equal to 0.25% per annum. We must also pay customary letter of credit fees and agency fees.
We incurred $0.8 million of costs in connection with the ABL Facility, which were capitalized and included in other assets in the accompanying consolidated balance sheet and are being amortized to interest expense over the contractual term of five years of the ABL Facility. As a result of a prior asset-based facility being terminated concurrently with our entry into the ABL Facility, we wrote off $0.2 million of previously capitalized debt issuance costs.
The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor. We have not borrowed against this ABL Facility to date.
Sale of Long-Lived Assets
In August of 2019, we sold two of our buildings in Boulder, Colorado and three of our buildings in Portland, Oregon. Total net cash proceeds received for these two transactions was $41.2 million and we recognized a net gain on the sale of these long-lived assets of $6.8 million.
47
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 to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.Contractual Obligations
Other than the 2019 Incremental Term Loan Facility for $650.0 million and the 2019 Term Loan Refinancing Facility described above, there have been no other changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form
10-K
for the year ended December 31, 2018.Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU
2018-15,
“Intangibles-Goodwill and Other-Internal-Use
Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software (and hosting arrangements that include an internal-use
software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments to this update. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the requirements of this ASU and the impact of pending adoption on our consolidated financial statements.In June 2016, the FASB issued ASU
2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard introduced the expected credit losses methodology for the measurement of credit losses on financial assets that are not measured at fair value through net income and replaces today’s “incurred loss” model with an “expected credit loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. There have been several consequential subsequent amendments to this standard. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the requirements of this ASU and the impact of pending adoption on our consolidated financial statements.| 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, 2018 filed with the Securities and Exchange Commission on February 26, 2019. As of September 30, 2019, there were no material changes in our exposure to market risk from December 31, 2018.| 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 September 30, 2019. 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 Securities and Exchange Commission’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, or persons performing similar functions 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 September 30, 2019, 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.48
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 September 30, 2019, 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. |
Newport Litigation
In 2016, two putative class actions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.
A-16-733154-C,
and Hubert C. Pincon v. Newport Corp., et al., Case No. A-16-734039-B,
were filed in the District Court, Clark County, Nevada on behalf of a putative class of stockholders of Newport Corporation (“Newport”) for claims related to the merger agreement (“Newport Merger Agreement”) between the Company, Newport, and a wholly-owned subsidiary of the Company (“Merger Sub”). The lawsuits named as defendants the Company, Newport, Merger Sub, and certain then current and former members of Newport’s board of directors. Both complaints alleged that Newport directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices and by omitting material information from the proxy statement. The complaints also alleged that the Company, Newport and Merger Sub aided and abetted the directors’ alleged breaches of their fiduciary duties. The Court consolidated the actions, and plaintiffs later filed an amended complaint captioned In re Newport Corporation Shareholder Litigation, Case No. A-16-733154-B,
in the District Court, Clark County, Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Newport Merger Agreement. The amended complaint alleged Newport’s former board of directors breached their fiduciary duties to Newport’s stockholders and that the Company, Newport and Merger Sub had aided and abetted these breaches. It sought monetary damages, including pre-
and post-judgment interest. In June 2017, the Court granted defendants’ motion to dismiss and dismissed the amended complaint against all defendants but granted plaintiffs leave to amend.On July 27, 2017, plaintiffs filed a second amended complaint containing substantially similar allegations but naming only Newport’s former directors as defendants. On August 8, 2017, the Court dismissed the Company and Newport from the action. The second amended complaint seeks monetary damages, including
pre-
and post-judgment interest. The Court granted a motion for class certification on September 27, 2018, appointing Mr. Pincon and Locals 302 and 612 of the International Union of Operating Engineers - Employers Construction Industry Retirement Trust as class representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily dismissed from the litigation. On May 1, 2019, the Court granted the defendants’ motion to strike plaintiffs’ jury demand and determined that the case will be tried by the Court, and not a jury. Discovery in the action is complete. On August 9, 2019, plaintiffs filed a motion for leave to file a third amended complaint, which was denied on October 10, 2019. On August 23, 2019, defendants filed a motion for summary judgment. A bench trial is scheduled for January 2020.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 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, 2018 in the section entitled “Risk Factors.” There have been no material changes to the risk factors as described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K
for the year ended December 31, 2018 and a supplemental risk factor described in our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2019.49
| ITEM 6. | EXHIBITS. |
| Exhibit No. |
Exhibit Description | |||
| +3.1 (1) |
||||
| +3.2 (2) |
||||
| +3.3 (3) |
||||
| +3.4 (4) |
||||
| + 10.1 (5) |
||||
| 31.1 |
||||
| 31.2 |
||||
| 32.1 |
||||
| 101.INS |
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||
| 101.SCH |
XBRL Taxonomy Extension Schema Document | |||
| 101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document | |||
| 101.LAB |
XBRL Taxonomy Extension Label Linkbase Document | |||
| 101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document | |||
| 101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document | |||
| 104 |
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | |||
| + | Previously filed |
| (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 (File No. 000-23621), filed with the Securities and Exchange Commission on August 14, 2001. |
| (3) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 000-23621), filed with the Securities and Exchange Commission on August 13, 2002. |
| (4) | Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with the Securities and Exchange Commission on May 6, 2014. |
| (5) | Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 1, 2019 |
50
SIGNATURES
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. | ||||||
| Date: November 6, 2019 |
By: |
/s/ Seth H. Bagshaw | ||||
| Seth H. Bagshaw | ||||||
| Senior Vice President, Chief Financial Officer and Treasurer | ||||||
| (Principal Financial Officer) | ||||||
51
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, Gerald G. Colella, 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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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: November 6, 2019 | /s/ Gerald G. Colella | |||||
| Gerald G. Colella | ||||||
| Chief Executive Officer | ||||||
| (Principal Executive Officer) |
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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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: November 6, 2019 | /s/ Seth H. Bagshaw | |||||
| Seth H. Bagshaw | ||||||
| Senior Vice President, Chief Financial Officer and Treasurer | ||||||
| (Principal Financial Officer) |
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 September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Gerald G. Colella, Chief Executive Officer of the Company, and Seth H. Bagshaw, Senior 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: November 6, 2019 | /s/ Gerald G. Colella | |||||
| Gerald G. Colella | ||||||
| Chief Executive Officer | ||||||
| Dated: November 6, 2019 | /s/ Seth H. Bagshaw | |||||
| Seth H. Bagshaw | ||||||
| Senior Vice President, Chief Financial Officer and Treasurer | ||||||