UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction |
(I.R.S. Employer |
of incorporation or organization) |
Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
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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.
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 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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Non-accelerated filer |
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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 May 1, 2023, the registrant had
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
(Unaudited)
ASSETS |
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March 31, 2023 |
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December 31, 2022 |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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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 assets, net |
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Goodwill |
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Intangible assets, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Short-term debt |
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$ |
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$ |
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Accounts payable |
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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 liabilities |
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Other non-current liabilities |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, par value, |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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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 (LOSS) INCOME
(in millions, except per share data)
(Unaudited)
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Three Months Ended |
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2023 |
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2022 |
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Net revenues: |
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Products |
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$ |
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$ |
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Services |
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Total net revenues |
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Cost of revenues: |
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Products |
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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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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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Income from operations |
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Interest income |
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( |
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Interest expense |
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Other income, net |
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( |
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( |
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(Loss) income before income taxes |
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( |
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(Benefit) provision for income taxes |
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( |
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Net (loss) income |
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$ |
( |
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$ |
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Other comprehensive (loss) income, net of tax: |
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Changes in value of financial instruments designated as |
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$ |
( |
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$ |
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Foreign currency translation adjustments |
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( |
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Change in net investment hedge |
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( |
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Net unrecognized pension loss |
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( |
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Total comprehensive (loss) income |
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$ |
( |
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$ |
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Net (loss) income per share: |
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Basic |
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$ |
( |
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$ |
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Diluted |
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$ |
( |
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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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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 millions, except per share data)
(Unaudited)
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income |
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Equity |
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net issuance under stock-based plans |
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( |
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( |
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Stock-based compensation |
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Cash dividend ($ |
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( |
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( |
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Comprehensive (loss) income (net of tax): |
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Net loss |
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( |
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( |
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Other comprehensive income |
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Common Stock |
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Additional |
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Retained |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net issuance under stock-based plans |
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( |
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( |
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Stock-based compensation |
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Cash dividend ($ |
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( |
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( |
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Comprehensive income (net of tax): |
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Net income |
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Other comprehensive income |
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Balance at March 31, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
MKS INSTRUMENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
( |
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$ |
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Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
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Depreciation and amortization |
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Unrealized loss on derivatives not designated as hedging instruments |
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Amortization of debt issuance costs and original issue discount |
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Gain on sale of long-lived assets |
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( |
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Stock-based compensation |
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Provision for excess and obsolete inventory |
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Deferred income taxes |
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( |
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( |
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Changes in operating assets and liabilities |
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Accounts receivable |
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( |
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Inventories |
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( |
) |
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( |
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Other current and non-current assets |
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( |
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( |
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Accounts payable |
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( |
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Accrued compensation |
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( |
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( |
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Income taxes payable |
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( |
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Other current and non-current liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Maturities of investments |
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Proceeds from sale of long-lived assets |
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Purchases of property, plant and equipment |
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( |
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( |
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Net cash (used in) provided by investing activities |
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( |
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Cash flows from financing activities: |
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Proceeds from borrowings |
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Payments of borrowings |
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( |
) |
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( |
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Dividend payments |
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( |
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( |
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Net payments related to employee stock awards |
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( |
) |
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( |
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Other financing activities |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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( |
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( |
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(Decrease) increase in cash and cash equivalents |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
6
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
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 March 31, 2023, and for the three months ended March 31, 2023, 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, 2022 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, 2022 filed with the U.S. Securities and Exchange Commission on March 14, 2023.
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, inventory valuation, warranty costs, stock-based compensation, intangible assets, goodwill, other long-lived assets and income taxes. 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. As a result of rounding, there may be immaterial differences in amounts presented and certain calculations may not sum to the total number expressed in each category or tie to a corresponding schedule.
In the first quarter of 2022, MKS was comprised of the following three divisions: the Vacuum Solutions Division (“VSD”), the Photonics Solutions Division (“PSD”) and the Equipment Solutions Division (“ESD”). During the third quarter of 2022, MKS consolidated ESD into PSD and prior periods were recast to reflect this change. On August 17, 2022, MKS completed its acquisition of Atotech Limited (“Atotech”) and the Atotech business became MKS’ new Materials Solutions Division (“MSD”). MKS’ reportable segments as of March 31, 2023 consist of its three divisions, VSD, PSD and MSD.
Contract assets as of March 31, 2023 and December 31, 2022 were $
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Three Months Ended |
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March 31, 2023 |
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March 31, 2022 |
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Beginning balance, January 1(1) |
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$ |
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$ |
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Additions to deferred revenue and customer advances |
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Amount of deferred revenue and customer advances recognized in income |
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( |
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( |
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Ending balance, March 31(2) |
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$ |
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$ |
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Revenue from certain custom products, including MSD plating equipment, and revenue from certain service contracts are recorded over time. Remaining product and services revenues are recorded at a point in time.
7
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Disaggregation of Revenue
The following tables summarize revenue from contracts with customers:
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Three Months Ended March 31, 2023 |
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VSD |
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PSD |
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MSD |
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Total |
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Net revenues: |
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Products |
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$ |
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$ |
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$ |
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$ |
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Services |
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Total net revenues |
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$ |
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$ |
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$ |
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$ |
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Three Months Ended March 31, 2022 |
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VSD |
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PSD |
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MSD |
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Total |
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Net revenues: |
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Products |
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$ |
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$ |
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$ |
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$ |
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Services |
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Total net revenues |
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$ |
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$ |
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$ |
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$ |
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The estimated fair value of our short-term, long-term, and available-for-sale investments approximates their cost. Interest income is accrued as earned. Dividend income is recognized as income on the date the security 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 in each of the periods presented.
In accordance with the provisions of fair value accounting, a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.
The fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 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.
8
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Assets and liabilities of the Company are measured at fair value on a recurring basis as of March 31, 2023 and are summarized as follows:
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Fair Value Measurements at Reporting Date Using |
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Description |
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March 31, 2023 |
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Quoted Prices in |
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Significant |
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Significant |
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Assets: |
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Cash equivalents: |
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|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
||||
Time deposits and certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
||||
Group insurance contracts |
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange forward contracts |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate hedges - non-current |
|
|
|
|
|
|
|
|
|
|
— |
|
|||
Pension and deferred compensation plan assets |
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange forward contracts |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
|||||
Reported as follows: |
|
|
|
|
|
|
|
|
|
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
||||
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
||||
Total current assets |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Other assets |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
||||
Other current liabilities |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
9
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Assets and liabilities of the Company are measured at fair value on a recurring basis as of December 31, 2022 and are summarized as follows:
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
||||||||||
Description |
|
December 31, 2022 |
|
|
Quoted Prices in |
|
|
Significant |
|
|
Significant |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Time deposits and certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Group insurance contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange forward contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate hedges-non-current |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pension and deferred compensation plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange forward contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Reported as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total current assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other current liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other Fair Value Disclosures
The estimated fair value and carrying value of the Company’s debt as of March 31, 2023 and December 31, 2022 are as follows:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
||||
Term loan principal |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The estimated fair value of the Company’s term loan principal was determined using available market information based on recent trades or activity of debt instruments with substantially similar risks, terms and maturities, which fall within Level 2 under the fair value hierarchy.
Pension and Deferred Compensation Plan Assets
The pension and deferred compensation plan assets represent investments in mutual funds, exchange traded funds, government securities and other time deposits. These investments are set aside for retirement benefits of certain of the Company’s subsidiaries.
Derivatives
As a result of the Company’s global operating activities and variable interest rate borrowings, the Company is exposed to market risks from changes in foreign currency exchange rates and 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 and interest rate contracts is the institutional market in an over-the-counter
10
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
environment with a relatively high level of price transparency. The market participants are typically large commercial banks. The contracts are valued using broker quotations or market transactions.
Foreign Exchange Forward Contracts
The Company hedges a portion of its forecasted foreign currency-denominated intercompany sales of inventory, over a maximum period of
The Company also enters into foreign exchange forward 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 cash flow hedging instruments and gains or losses from these derivatives are recorded immediately in other income, net.
The following tables summarize the primary net hedging positions and fair values of foreign exchange forward contracts outstanding as of March 31, 2023 and December 31, 2022:
|
|
March 31, 2023 |
|
|||||
Currency Hedged (Buy/Sell) |
|
Net Notional |
|
|
Fair Value Asset (Liability) |
|
||
U.S. dollar/Japanese yen |
|
$ |
|
|
$ |
|
||
U.S. dollar/South Korean won |
|
|
|
|
|
( |
) |
|
U.S. dollar/Taiwan dollar |
|
|
|
|
|
|
||
U.S. dollar/U.K. pound sterling |
|
|
|
|
|
|
||
Euro/U.S. dollar |
|
|
|
|
|
|
||
Euro/Chinese renminbi |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
|
|
December 31, 2022 |
|
|||||
Currency Hedged (Buy/Sell) |
|
Net Notional |
|
|
Fair Value Asset (Liability) |
|
||
U.S. dollar/Japanese yen |
|
$ |
|
|
$ |
|
||
U.S. dollar/South Korean won |
|
|
|
|
|
( |
) |
|
U.S. dollar/Taiwan dollar |
|
|
|
|
|
|
||
U.S. dollar/U.K. pound sterling |
|
|
|
|
|
|
||
U.S. dollar/Singapore dollar |
|
|
|
|
|
|
||
U.S. dollar/Chinese renminbi |
|
|
|
|
|
|
||
Euro/U.S. dollar |
|
|
|
|
|
|
||
Euro/Chinese renminbi |
|
|
|
|
|
|
||
U.K. pound sterling/euro |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
( |
) |
|
The following table summarizes the net (losses) gains on derivatives designated as cash flow hedging instruments:
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Foreign exchange forward contracts: |
|
|
|
|
|
|
||
(losses) gains recognized in accumulated OCI |
|
$ |
( |
) |
|
$ |
|
|
(losses) gains reclassified from accumulated OCI into income |
|
$ |
( |
) |
|
$ |
|
|
11
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The net amount of existing losses as of March 31, 2023 expected to be reclassified from OCI into earnings within the next 12 months is immaterial.
Net Investment Hedge
During the three months ended March 31, 2023, the Company designated a euro net investment hedge to offset the foreign exchange exposure of the Euro Tranche B, as defined and described further in Note 9. As a result, any mark-to-market foreign exchange impact of the Euro Tranche B is recorded in OCI.
Interest Rate Agreements
The Company has various interest rate swap agreements that exchange a forward-looking term rate based on the variable secured overnight financing rate (“Term SOFR”) paid on the outstanding balance of its New Term Loan Facility, as defined and further described in Note 9, to a fixed rate. The Company acquired USD London Interbank Offered Rate (“LIBOR”) interest rate cap agreements as a result of the Company’s August 17, 2022 acquisition of Atotech (the “Atotech Acquisition”) and is utilizing these agreements to offset Term SOFR on its New Term Loan Facility. The Company’s USD LIBOR based swaps and USD LIBOR based interest rate caps will convert to Term SOFR after LIBOR’s termination in June 2023 according to the terms of each instrument.
The following table summarizes the terms and fair values of interest rate swaps and interest rate caps outstanding at March 31, 2023 and December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|||||
Effective Date |
|
Maturity |
|
Fixed |
|
|
Notional |
|
|
Notional |
|
|
Fair |
|
|
Fair |
|
|||||
Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
% |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest Rate Caps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
Total |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
The interest rate swaps are recorded at fair value on the balance sheet and changes in the fair value are recognized in OCI. To the extent these arrangements are no longer effective hedges, any ineffectiveness measured in the hedging relationships is recorded immediately in earnings in the period it occurs. Changes in the fair value of interest rate caps are recorded immediately in earnings, as the Company has not designated these instruments as hedges and therefore these instruments do not qualify for hedge accounting.
The following table summarizes the gains on derivatives not designated as hedging instruments, consisting of balance sheet hedges and interest rate caps:
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Net gains recognized in income |
|
$ |
|
|
$ |
|
||
12
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Currency Option Agreements
In connection with financing the Atotech Acquisition, the Company issued euro denominated term loan debt. In anticipation of entering into these euro denominated loans, the Company purchased foreign currency option contracts in 2021 to fix the conversion of EUR
Inventories consist of the following:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work-in-process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
On August 17, 2022 (the “Effective Date”), the Company completed the Atotech Acquisition, through the acquisition of the entire issued share capital of Atotech by Atotech Manufacturing, Inc. (“Bidco”), a Delaware corporation and indirect wholly owned subsidiary of the Company. The Atotech Acquisition was implemented by means of a scheme of arrangement under the laws of Jersey (the “Scheme”) pursuant to the definitive agreement entered into by the Company and Atotech on July 1, 2021, as amended by the Letter Agreement dated October 29, 2021 by and among the Company, Atotech and Bidco, and as further amended by the Amendment to the Implementation Agreement dated April 1, 2022 by and among the Company, Atotech and Bidco (together, the “Implementation Agreement”).
Atotech, which the Company operates as its Materials Solutions Division, develops leading process and manufacturing technologies for advanced surface modification, electroless and electrolytic plating, and surface finishing. Applying a comprehensive systems-and-solutions approach, Atotech’s portfolio includes chemistry, equipment, software, and services for innovative and high-technology applications in a wide variety of end markets. Atotech further broadens the Company’s capabilities by bringing leadership in critical chemistry solutions for electronics and packaging and specialty industrial applications.
On the Effective Date, pursuant to the Scheme and in accordance with the terms and conditions of the Implementation Agreement, Bidco acquired each issued and outstanding ordinary share of Atotech in exchange for per share consideration of $
The purchase price of Atotech consisted of the following:
Cash consideration to Atotech stockholders, net |
|
$ |
|
|
Value of MKS shares issued |
|
|
|
|
Repayment of Atotech senior secured term loans |
|
|
|
|
Settlement of accelerated Atotech share-based awards |
|
|
|
|
Total purchase price, net of cash and cash equivalents acquired |
|
$ |
|
Under the acquisition method of accounting, the total purchase price is allocated to the estimated acquired tangible and intangible assets and assumed liabilities of Atotech based on their fair values as of the Effective Date, except for contract assets and liabilities, which remain at book value in accordance with Accounting Standards Codification Topic 606. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill and none of this goodwill or intangible assets will be deductible for tax purposes. The Company believes the amount of goodwill relative to identifiable intangible assets relates to several factors, including (1) broadening its position in key
13
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
electronics and industrial markets to offer complementary solutions, and (2) leveraging component and systems expertise to provide robust solutions to meet its customers’ evolving technology needs.
The following table summarizes the allocation of the purchase price to the preliminary fair values assigned to assets acquired and liabilities assumed at the Effective Date:
Cash and cash equivalents |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Inventories |
|
|
|
|
Other current assets |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Intangible assets |
|
|
|
|
Goodwill |
|
|
|
|
Other assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Accounts payable |
|
|
|
|
Other current liabilities |
|
|
|
|
Non-current deferred taxes |
|
|
|
|
Non-current accrued compensation |
|
|
|
|
Other non-current 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 |
|
$ |
|
The allocation of purchase consideration to the estimated acquired tangible and intangible assets and assumed liabilities of Atotech is preliminary and subject to change during the measurement period. 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 Effective Date, its estimates and assumptions are subject to refinement. The fair value of the acquired intangible assets was determined using the income approach. In performing these valuations, the key underlying assumptions used included the appropriate discount rates as well as forecasted revenue growth rates, gross profit and operating expenses. 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 may 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 Effective 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 Effective Date. The Company records adjustments to the assets acquired and liabilities assumed subsequent to the purchase price allocation period in the Company’s operating results in the period in which the adjustments are determined.
The preliminary valuations were based on the information that was available through the filing date of this Quarterly Report on Form 10-Q that existed as of the Effective Date and the expectations and assumptions that have been deemed reasonable by the Company’s management. The size and breadth of the Atotech Acquisition may necessitate the use of this one-year 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 Effective Date and the related tax impacts of any changes made. The Company is still evaluating the tax impact of the assets acquired and liabilities assumed. Any potential adjustments made could be material in relation to the preliminary values presented above.
The following table reflects the preliminary allocation of the acquired intangible assets and related estimate of useful lives at the Effective Date:
14
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Customer relationships |
|
$ |
|
|
||
Completed technology |
|
|
|
|
||
Trade names |
|
|
|
|
||
Backlog |
|
|
|
|
||
In-process research and development |
|
|
|
|
|
|
|
|
$ |
|
|
|
The acquired intangible assets are being amortized on a straight-line basis, which approximates the economic use of the assets over their estimated useful lives. Upon completion of the related projects, we expect the in-process research and development (“IPR&D”) intangible asset to be amortized over its estimated useful life of to
Pro Forma Results
The following unaudited pro forma financial information presents the combined results of operations of the Company as if the Atotech Acquisition had occurred on January 1, 2021. 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 on the assumed date. 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 |
|
|
|
|
March 31, 2022 |
|
|
Total net revenues |
|
$ |
|
|
Net income |
|
$ |
|
|
The unaudited pro forma information above give effect primarily to the following:
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. 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 or 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.
15
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The changes in the carrying amount of goodwill and accumulated impairment loss during the three months ended March 31, 2023 were as follows:
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|||
Beginning balance, January 1 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|||
Ending balance, March 31 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Intangible Assets
Components of the Company’s intangible assets are comprised of the following:
As of March 31, 2023: |
|
Gross |
|
|
Impairment Charges |
|
|
Accumulated Amortization |
|
|
Foreign |
|
|
Net |
|
|||||
Completed technology |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|||
Patents, trademarks, trade names and other |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
During the three months ended March 31, 2023, $
As of December 31, 2022: |
|
Gross |
|
|
|
|
|
Accumulated |
|
|
Foreign |
|
|
Net |
|
|||||
Completed technology |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|||
Patents, trademarks, trade names and other |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
Aggregate amortization expense related to acquired intangible assets for the three months ended March 31, 2023 and 2022 was $
Year |
|
Amount |
|
|
2023 (remaining) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
The Company excluded from the above table intangible assets of $
16
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The Company’s outstanding debt is as follows:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
Short-term debt: |
|
|
|
|
|
|
||
New Term Loan Facility |
|
$ |
|
|
$ |
|
||
Long-term debt, net: |
|
|
|
|
|
|
||
New Term Loan Facility |
|
$ |
|
|
$ |
|
||
Long-term debt is net of deferred financing fees, original issuance discount and repricing fees in the aggregate amount of $
New Credit Facilities
In connection with the completion of the Atotech Acquisition, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, Barclays Bank PLC, and the lenders from time to time party thereto (the “New Credit Agreement”). The New Credit Agreement provides for (i) a senior secured term loan facility (the “New Term Loan Facility”) comprised of three tranches: a USD
In addition to paying interest on outstanding principal under the New Credit Facilities, the Company is required to pay a commitment fee in respect of the unutilized commitments under the New Revolving Facility. The initial commitment fee is
The Company incurred $
17
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Under the New 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 incurrences or issuances of certain debt.
If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the New Revolving Facility exceeds the aggregate commitments under the New Revolving Facility, the Company is required to repay outstanding loans and/or cash collateralize letters of credit, with no reduction of the commitment amount.
The Company may voluntarily prepay outstanding loans under the New Credit Facilities from time to time, subject to certain conditions, without premium or penalty other than customary “breakage” costs with respect to Term SOFR or EURIBOR loans; provided, however, that subject to certain exceptions, if on or prior to the date that is twelve months after the closing date of the New Term Loan Facility, the Company prepays any loans under the USD Tranche B or the Euro Tranche B in connection with a repricing transaction, the Company must pay a prepayment premium of
The Company is required to make scheduled quarterly payments each equal to
There is no scheduled amortization under the New Revolving Facility. Any principal amount outstanding under the New Revolving Facility is due and payable in full on the fifth anniversary of the closing date.
The Company incurred $
All obligations under the New Credit Facilities are guaranteed by certain of the Company’s wholly-owned domestic subsidiaries and are required to be guaranteed by certain of the Company’s future wholly-owned domestic subsidiaries, and are secured by substantially all of the Company’s assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
Under the New Credit Agreement, the Company has the ability to incur additional incremental debt facilities in an amount up to (x) the greater of (1) $
Under the USD Tranche A and the New Revolving Facility, so long as any USD Tranche A loans (or commitments in respect thereof) are outstanding as of the end of any fiscal quarter, the Company may not allow its total net leverage ratio as of the end of such fiscal quarter to be greater than
In addition, in the event there are no loans outstanding under the USD Tranche A, as of the end of any fiscal quarter of the Company when the aggregate amount of loans outstanding under the New Revolving Facility (net of (a) all letters of credit (whether cash collateralized or not) and (b) unrestricted cash of the Company and its restricted subsidiaries) exceeds
The USD Tranche B and the Euro Tranche B are not subject to financial maintenance covenants.
The New Credit Agreement contains a number of negative covenants that, among other things and subject to certain exceptions, restrict the ability of the Company and each of its subsidiaries to incur additional indebtedness; pay dividends on its capital stock or redeem, repurchase or retire its capital stock or its subordinated indebtedness; make investments, loans and acquisitions; create restrictions on the payment of dividends or other amounts to the Company from the Company’s restricted subsidiaries or restrictions on the ability of the Company’s restricted subsidiaries to incur liens; engage in transactions with its affiliates; sell assets, including capital stock of its subsidiaries; materially alter the business it conducts; consolidate or merge; incur liens; and engage in sale-leaseback transactions.
18
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The New 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 New Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the New Credit Facilities and all actions permitted to be taken by a secured creditor. As of March 31, 2023, the Company was in compliance with all covenants under the New Credit Agreement.
The proceeds of the New Term Loan Facility were used on the Effective Date, among other things, to fund a portion of the consideration payable in connection with the Atotech Acquisition and to refinance the Prior Term Loan Facility and the Prior ABL Credit Facility and certain indebtedness of Atotech. The Company also paid certain customary fees and expenses of JPMorgan Chase Bank, N.A., Barclays Bank PLC, BofA Securities Inc., Citigroup Global Markets Inc., HSBC Securities (USA) Inc. and Mizuho Bank, Ltd. in their respective capacities as lead arrangers and bookrunners in connection with the New Credit Facilities.
On the Effective Date, in connection with the entry into the New Credit Agreement described above, the Company terminated and prepaid the prior term loan credit facility under that certain Term Loan Credit Agreement, dated as of April 29, 2016, by and among the Company, Barclays Bank PLC and the other financial institutions from time to time party thereto (as amended, the “Prior Term Loan Credit Agreement” and the term loan credit facility thereunder, the “Prior Term Loan Facility”) and terminated the prior revolving credit facility under that certain ABL Credit Agreement, dated as of February 1, 2019, by and among the Company, Barclays Bank PLC and the other financial institutions from time to time party thereto (as amended, the “Prior ABL Credit Agreement” and the revolving credit facility thereunder, the “Prior ABL Credit Facility”).
As of March 31, 2023, the outstanding principal amount of the New Term Loan Facility was $
Lines of Credit and Borrowing Arrangements
Certain of the Company’s Japanese subsidiaries have lines of credit and a financing facility with various financial institutions, many of which generally expire and are renewed at
Contractual maturities of the Company’s debt obligations as of March 31, 2023 are as follows:
Year |
|
Amount |
|
|
2023 (remaining) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
The Company provides for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. The Company’s warranty obligations are affected by shipment volume, product failure rates, utilization levels, material usage and supplier warranties on parts delivered to the Company. Should actual product failure rates, utilization levels, material usage, or supplier warranties on parts differ from the Company’s estimates, revisions to the estimated warranty liability would be required. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers.
19
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Product warranty activities were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Beginning of period |
|
$ |
|
|
$ |
|
||
Provision for product warranties |
|
|
|
|
|
|
||
Charges to warranty liability |
|
|
( |
) |
|
|
( |
) |
End of period |
|
$ |
|
|
$ |
|
||
As of March 31, 2023, short-term product warranties of $
Other current liabilities consisted of the following:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
Accrued compensation and other employee-related obligations |
|
$ |
|
|
$ |
|
||
Deferred revenue and customer advances |
|
|
|
|
|
|
||
Income taxes payable |
|
|
|
|
|
|
||
Lease liabilities |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total other current liabilities |
|
$ |
|
|
$ |
|
||
The Company’s effective tax rates for the three months ended March 31, 2023 and 2022 were
The Company’s effective tax rate for the three months ended March 31, 2022 was lower than the U.S. statutory tax rate mainly due to the U.S. deduction for FDII and the geographic mix of income earned by the Company’s international subsidiaries being taxed at lower rates than the U.S. statutory rate, offset by the U.S. global intangible low-taxed income inclusion.
The following table sets forth the computation of basic and diluted net income per share:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Numerator: |
|
|
|
|
|
|
||
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
Denominator: |
|
|
|
|
|
|
||
Shares used in net (loss) income per common share – basic |
|
|
|
|
|
|
||
Effect of dilutive securities |
|
|
|
|
|
|
||
Shares used in net (loss) income per common share – diluted |
|
|
|
|
|
|
||
Net (loss) income per common share: |
|
|
|
|
|
|
||
Basic |
|
$ |
( |
) |
|
$ |
|
|
Diluted |
|
$ |
( |
) |
|
$ |
|
|
20
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Basic earnings per share (“EPS”) is computed by dividing (loss) 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 had been converted to such common shares, and if such assumed conversion is dilutive. In periods in which a net loss is recognized, the impact of restricted stock units (“RSUs”) is not included as they are antidilutive.
For the three months ended March 31, 2022, the Company had an immaterial quantity of RSUs that were antidilutive and were excluded from the computation of diluted weighted-average shares.
Prior to May 10, 2022, the Company granted RSUs to employees and directors under the 2014 Stock Incentive Plan (the “2014 Plan”). Following shareholder approval of the 2022 Stock Incentive Plan (the “2022 Plan” and, together with the 2014 Plan, the “Plans”) on May 10, 2022, the Company discontinued granting RSUs to employees and directors under the 2014 Plan and began granting them under the 2022 Plan. The Plans are administered by the Compensation Committee of the Company’s Board of Directors. The Plans are 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 enable these individuals to participate in the long-term growth of the Company.
In connection with the Atotech Acquisition, all Atotech time-based RSUs and performance-based RSU awards outstanding immediately prior to the acquisition were cancelled and replaced with the Company’s time-based RSUs under the 2022 Plan in accordance with the Implementation Agreement. Based on a formula in the Implementation Agreement, such cancelled RSUs were replaced with the Company’s RSUs, which are subject to the terms and conditions of the 2022 Plan and the related RSU agreements.
The total stock-based compensation expense included in the Company’s condensed consolidated statements of operations and comprehensive income was as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cost of revenues |
|
$ |
|
|
$ |
|
||
Research and development |
|
|
|
|
|
|
||
Selling, general and administrative |
|
|
|
|
|
|
||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
||
At March 31, 2023, the total compensation expense related to unvested stock-based awards granted to employees and directors under the Plans that had not been recognized was $
The following table presents the activity for RSUs under the Plans:
|
|
Three Months Ended March 31, 2023 |
|
|||||
|
|
Quantity |
|
|
Weighted Average |
|
||
RSUs – beginning of period |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested or forfeited |
|
|
( |
) |
|
$ |
|
|
RSUs – end of period |
|
|
|
|
$ |
|
||
21
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
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 $
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. During each of the first quarters of 2023 and 2022, the Company’s Board of Directors declared a cash dividend of $
The Company has
Reportable Segments
VSD delivers foundational technology solutions to leading edge semiconductor manufacturing, advanced electronics and specialty industrial applications. VSD products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, and vacuum technology.
PSD provides a full range of solutions including lasers, beam measurement and profiling, precision motion control, vibration isolation systems, photonics instruments, temperature sensing, opto-mechanical components, optical elements, laser-based systems for flexible PCB processing, laser-based systems for high density interconnect PCB and package substrate manufacturing, and high-speed multilayer ceramic capacitor testing.
MSD develops leading process and manufacturing technologies for advanced surface modification, electroless and electrolytic plating, and surface finishing. Atotech is a brand within MSD. Applying a comprehensive systems-and-solutions approach, MSD’s portfolio includes chemistry, equipment, software, and services for innovative and high-technology applications in a wide variety of end markets.
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 groups similar products within its
22
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The following table sets forth net revenues by reportable segment:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Vacuum Solutions Division |
|
$ |
|
|
$ |
|
||
Photonics Solutions Division |
|
|
|
|
|
|
||
Materials Solutions Division |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
The following table reconciles gross profit by reportable segment to net (loss) income:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Gross profit by reportable segment: |
|
|
|
|
|
|
||
Vacuum Solutions Division |
|
$ |
|
|
$ |
|
||
Photonics Solutions Division |
|
|
|
|
|
|
||
Materials Solutions Division |
|
|
|
|
|
|
||
Total gross profit by reportable segment |
|
|
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
||
Research and development |
|
|
|
|
|
|
||
Selling, general and administrative |
|
|
|
|
|
|
||
Acquisition and integration costs |
|
|
|
|
|
|
||
Restructuring and other |
|
|
|
|
|
|
||
Amortization of intangible assets |
|
|
|
|
|
|
||
Gain on sale of long-lived assets |
|
|
|
|
|
( |
) |
|
Income from operations |
|
|
|
|
|
|
||
Interest income |
|
|
( |
) |
|
|
|
|
Interest expense |
|
|
|
|
|
|
||
Other income, net |
|
|
( |
) |
|
|
( |
) |
(Loss) income before income taxes |
|
|
( |
) |
|
|
|
|
(Benefit) provision for income taxes |
|
|
( |
) |
|
|
|
|
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
Interest income, interest expense and income tax (benefit) expense are not presented by reportable segment because the necessary information is not classified within the segments nor used by the CODM.
The following table sets forth segment assets by reportable segment:
March 31, 2023 |
|
Accounts |
|
|
Inventories |
|
|
Total |
|
|||
Vacuum Solutions Division |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Photonics Solutions Division |
|
|
|
|
|
|
|
|
|
|||
Materials Solutions Division |
|
|
|
|
|
|
|
|
|
|||
Corporate, Eliminations & Other |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Total segment assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
December 31, 2022 |
|
Accounts |
|
|
Inventories |
|
|
Total |
|
|||
Vacuum Solutions Division |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Photonics Solutions Division |
|
|
|
|
|
|
|
|
|
|||
Materials Solutions Division |
|
|
|
|
|
|
|
|
|
|||
Corporate, Eliminations & Other |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Total segment assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
23
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The following table reconciles segment assets to total assets:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
Total segment assets |
|
$ |
|
|
$ |
|
||
Cash and cash equivalents and short-term investments |
|
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
|
||
Property, plant and equipment, net |
|
|
|
|
|
|
||
Right-of-use assets, net |
|
|
|
|
|
|
||
Goodwill and intangible assets, net |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
Geographic Area
Information about the Company’s operations by geographic area is presented in the tables below. Net revenues from unaffiliated customers are based on the location in which the sale originated.
|
|
Three Months Ended March 31, |
|
|||||
Net revenues: |
|
2023 |
|
|
2022 |
|
||
United States |
|
$ |
|
|
$ |
|
||
China |
|
|
|
|
|
|
||
South Korea |
|
|
|
|
|
|
||
Germany |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Long-lived assets include property, plant and equipment, net, right-of-use assets, net and certain other assets, and exclude goodwill, intangible assets and long-term tax-related accounts.
Long-lived assets: |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
United States |
|
$ |
|
|
$ |
|
||
Germany |
|
|
|
|
|
|
||
China |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Goodwill associated with each of the Company’s reportable segments is as follows:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
Reportable segment: |
|
|
|
|
|
|
||
Vacuum Solutions Division |
|
$ |
|
|
$ |
|
||
Photonics Solutions Division |
|
|
|
|
|
|
||
Materials Solutions Division |
|
|
|
|
|
|
||
Total goodwill |
|
$ |
|
|
$ |
|
||
Litigation
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
24
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 of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding the future financial performance, business prospects and growth of MKS Instruments, Inc. (“MKS”, the “Company,” “our,” or “we”), and the impact of the ransomware event we identified on February 3, 2023, including our ability to fulfill orders that were delayed by the ransomware event, and the expected impact on our revenues as a result of fulfilling such delayed orders. These statements are only predictions based on current assumptions and expectations. Any statements that are not statements of historical fact (including statements containing the words “will,” “projects,” “intends,” “believes,” “plans,” “anticipates,” “expects,” “estimates,” “forecasts,” “continues” and similar expressions) should be considered to be forward-looking statements. Actual events or results may differ materially from those in the forward-looking statements set forth herein.
Among the important factors that could cause actual events to differ materially from those in the forward-looking statements that we make are the need to generate sufficient cash flows to service and repay the substantial indebtedness we incurred in connection with our acquisition of Atotech Limited (“Atotech” and such transaction, the “Atotech Acquisition”), which we completed in August 2022; the terms of our existing credit facilities under which we incurred such debt; our entry into the chemicals technology business through the Atotech Acquisition, in which we do not have experience and which may expose us to significant additional liabilities; the risk that we are unable to integrate the Atotech Acquisition successfully or realize the anticipated synergies, cost savings and other benefits of the Atotech Acquisition; the ongoing assessment of the ransomware event we identified on February 3, 2023, including legal, reputational, financial and contractual risks resulting from the incident, including assessments with respect to recovery of unfulfilled orders, and other risks related to cybersecurity, data privacy and intellectual property; competition from larger, more advanced or more established companies in our markets; the ability to successfully grow our business and the businesses of Atotech and Electro Scientific Industries, Inc., which we acquired in February 2019 and financial risks associated with those and potential future acquisitions, including goodwill and intangible asset impairments; manufacturing and sourcing risks, including those associated with limited and sole source suppliers and the impact and duration of supply chain disruptions, component shortages, and price increases; changes in global demand and the impact of COVID-19 or any other pandemic, including with respect to such supply chain disruptions, component shortages and price increases; risks associated with doing business internationally, including trade compliance, regulatory restrictions on our products, components or markets, particularly the semiconductor market, and unfavorable currency exchange and tax rate fluctuations, which risks become more significant as we grow our business internationally and in China specifically; conditions affecting the markets in which we operate, including fluctuations in capital spending in the semiconductor, electronics manufacturing and automotive industries, and fluctuations in sales to our major customers or disruptions or delays from third-party service providers upon which our operations may rely; the ability to anticipate and meet customer demand; the challenges, risks and costs involved with integrating or transitioning local and international operations of the companies we have acquired; risks associated with the attraction and retention of key personnel; potential fluctuations in quarterly results; dependence on new product development; rapid technological and market change; acquisition strategy; volatility of stock price; risks associated with chemical manufacturing and environmental regulation compliance; risks related to defective products; financial and legal risk management; and the other important factors described in Part II, Item 1A of this Quarterly Report on Form 10-Q. We are under no obligation to, and expressly disclaim any obligation to, update or alter these forward-looking statements, whether as a result of new information, future events or otherwise, even if subsequent events cause our views to change.
The Management’s Discussion and Analysis of Financial Condition and Results of Operations describes principal factors affecting the results of operations, financial condition and liquidity, as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on our condensed consolidated financial statements. This section provides an analysis of our financial results for the three months ended March 31, 2023 compared to the three months ended December 31, 2022 and the three months ended March 31, 2022.
Overview
We enable technologies that transform our world. We deliver foundational technology solutions to leading edge semiconductor manufacturing, electronics and packaging, and specialty industrial applications. We apply our broad science and engineering capabilities to create instruments, subsystems, systems, process control solutions and specialty chemicals technology that improve process performance, optimize productivity and enable unique innovations for many of the world's leading technology and industrial companies. Our solutions are critical to addressing the challenges of miniaturization and complexity in advanced device manufacturing by enabling increased power, speed, feature enhancement and optimized connectivity. Our solutions are also critical to addressing ever-increasing performance requirements across a wide array of specialty industrial applications.
25
Recent Events
Ransomware Event
On February 3, 2023, we identified that we had become subject to a ransomware event. We took immediate action to activate our incident response and business continuity protocols to contain the incident, including engaging appropriate incident response professionals and notifying law enforcement authorities. We then initiated the recovery phase, contained the incident, and have since reopened our affected manufacturing and service operations and completed restoration of virtually all of our information technology (“IT”) systems, including our enterprise resource planning systems.
Based on our investigation, we concluded ransomware actors encrypted certain of our systems by deploying malware. This incident required us to temporarily suspend operations at certain of our facilities and had a material impact in the first quarter of 2023 on our ability to process orders, ship products and provide service to our Vacuum Solutions Division and Photonics Solutions Division customers. As a result of our inability to fulfill orders, we estimate the ransomware event negatively impacted our revenue in the first quarter of 2023 by approximately $160 million, which was lower than our initial expectation of at least $200 million. Please see “—Markets—Semiconductor Market,” “—Markets—Electronics and Packaging Market” and “—Markets—Specialty Industrial” for a discussion of the estimated impact of the ransomware event on our revenue by end market in the first quarter of 2023 as well as on our ability to fulfill orders that were delayed by the ransomware event. The incident did not impact the operations of our Materials Solutions Division.
We engaged security specialists to assist in the review, assessment and remediation of our IT controls and strengthened access requirements and unauthorized access detection. We are also implementing procedures to facilitate more timely restoration of our financial reporting systems.
We incurred approximately $7 million of net costs in the first quarter of 2023 and expect to continue to incur costs, which may be significant, in connection with this incident. In the first quarter, these costs were primarily comprised of various third-party consulting services, including forensic experts, restoration experts, legal counsel, and other IT and accounting professional expenses, enhancements to our cybersecurity measures, costs to restore our systems and access our data, and employee-related expenses, including with respect to increased overtime. We expect to incur these and other costs related to this incident in the future. As a result of the incident, we may be subject to subsequent investigations, claims or actions, in addition to other costs, fines, penalties, or other obligations related to impacted data, whether or not such data is misused. In addition, we are subject to class action lawsuits arising from this ransomware event. We are unable to predict at this time the potential timing and outcome of these claims and whether we may be subject to further private litigation or inquiries and proceedings by various government agencies, law enforcement and other governmental authorities. For additional information on the risks we face related to this incident and other cybersecurity incidents, refer to “Risk Factors—Risks Related to Cybersecurity, Data Privacy and Intellectual Property Protection” and “Risk Factors—Legal, Tax, Regulatory and Compliance Risks” in Part I, Item 1A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2023.
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, 2022.
For further information about our critical accounting policies, please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2022 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting – Policies and Estimates.”
Segments
The Vacuum Solutions Division (“VSD”) delivers foundational technology solutions to leading edge semiconductor manufacturing, electronics and packaging and specialty industrial applications. VSD products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, and vacuum technology.
The Photonics Solutions Division (“PSD”) provides a full range of solutions including lasers, beam measurement and profiling, precision motion control, vibration isolation systems, photonics instruments, temperature sensing, opto-mechanical components, optical elements, laser-based systems for flexible printed circuit board (“PCB”) processing, laser-based systems
26
for high density interconnect PCB and package substrate manufacturing, and high-speed multi-layer ceramic capacitor testing.
The Materials Solutions Division (“MSD”) develops leading process and manufacturing technologies for advanced surface modification, electroless and electrolytic plating, and surface finishing. Atotech is a brand within MSD. Applying a comprehensive systems-and-solutions approach, MSD’s portfolio includes chemistry, equipment, software, and services for innovative and high-technology applications in a wide variety of end markets.
Markets
Net Revenues by End Market
|
|
Three Months Ended |
|
|||||||||||||||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
% Total |
|
|
December 31, 2022 |
|
|
% Total |
|
|
March 31, 2022 |
|
|
% Total |
|
||||||
Semiconductor |
|
$ |
309 |
|
|
|
39 |
% |
|
$ |
503 |
|
|
|
46 |
% |
|
$ |
488 |
|
|
|
66 |
% |
Electronics and Packaging |
|
|
222 |
|
|
|
28 |
% |
|
|
266 |
|
|
|
25 |
% |
|
|
60 |
|
|
|
8 |
% |
Specialty Industrial |
|
|
263 |
|
|
|
33 |
% |
|
|
316 |
|
|
|
29 |
% |
|
|
194 |
|
|
|
26 |
% |
Total net revenues |
|
$ |
794 |
|
|
|
100 |
% |
|
$ |
1,085 |
|
|
|
100 |
% |
|
$ |
742 |
|
|
|
100 |
% |
Semiconductor Market
MKS is a critical solutions provider for semiconductor manufacturing. Our products are used in major semiconductor processing steps, such as depositing thin films of material onto silicon wafer substrates, etching, cleaning, lithography, metrology, and inspection. The semiconductor industry continually faces new challenges, as products become smaller, more powerful and highly mobile. Ultra-thin layers, smaller critical dimensions, new materials, 3D structures, and the ongoing need for higher yield and productivity drive the need for tighter process measurement and control, all of which MKS supports. We believe we are the broadest critical subsystem provider in the wafer fabrication equipment ecosystem and address over 85% of the market. We have characterized our broad and unique offering as Surround the WaferSM to reflect the technology enablement we provide across almost every major process in semiconductor manufacturing today.
A significant portion of our sales is derived from products sold to semiconductor capital equipment manufacturers and semiconductor device manufacturers. While the semiconductor device manufacturing market is global, major semiconductor manufacturers are concentrated in China, Japan, South Korea, Taiwan and the United States. The semiconductor 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 industry. Currently, we are experiencing softened demand in our semiconductor market consistent with a decline in industry-wide wafer fabrication equipment spending.
For the three months ended March 31, 2023, net revenues in our semiconductor market decreased by $193 million or 38%, compared to the prior quarter and decreased $179 million or 37% compared to the same period in the prior year, primarily due to the effects of the ransomware event which resulted in lower order fulfillment as well as lower industry demand for semiconductor capital equipment.
We estimate the ransomware event negatively impacted our semiconductor market revenue by approximately $110 million for the three months ended March 31, 2023. In the second quarter of 2023, we expect to fulfill orders delayed by the ransomware event representing approximately 75% of this semiconductor market revenue, with the remainder to be fulfilled in the third quarter of 2023.
In October 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) published regulations that introduce new and novel restrictions related to end-uses in semiconductor, semiconductor manufacturing, supercomputer, and advanced computing, along with certain equipment used to develop and produce them (the “New BIS Rules”). The New BIS Rules restrict our direct and indirect sales to China and primarily impact our semiconductor market. As a result of the New BIS Rules, we initially expected an overall annualized reduction of net revenues in the range of $250 million to $350 million. We currently expect an annualized reduction of net revenues on the lower end of that range. While we continue to adjust our policies and practices to ensure compliance with these regulations, and we will seek to mitigate their impact, there can be no assurances that the New BIS Rules will not have an effect on our business that exceeds our expectations.
Electronics and Packaging Market
MKS is a foundational solutions provider for the electronics and packaging market. Our portfolio includes photonics components, laser drilling systems, electronics chemistries and plating equipment, that are critical for the manufacturing of PCBs and package substrates, as well as in wafer level packaging (“WLP”) applications. Similar to the semiconductor
27
industry, the PCB, package substrate and WLP industries demand smaller features, greater density, and better performance. We characterize our complementary offering of laser systems and chemistry solutions as Optimize the Interconnect, to reflect the unique technology enablement we provide at the Interconnect level within PCBs, package substrates and WLPs. This end market also includes our vacuum and photonics solutions for display manufacturing applications.
For the three months ended March 31, 2023, net revenues in our electronics and packaging market decreased by $44 million or 17%, compared to the prior quarter, primarily from decreases in MSD net revenues. Demand for chemistry solutions and plating equipment, which we report in MSD and flexible PCB via drilling systems, which we report in PSD, have softened due to a decline in end market demand for electronics, such as personal computers, servers and smartphones.
For the three months ended March 31, 2023, net revenues in our electronics and packaging market increased by $163 million or 273% compared to the same period in the prior year. This increase was mainly driven by the Atotech Acquisition partially offset by decreased demand for flexible PCB via drilling systems as a result of softened demand for electronics, such as personal computers, servers and smartphones. We estimate the negative impact of the ransomware event on our electronics and packaging market was nominal.
Specialty Industrial Market
MKS’ strategy in the specialty industrial market is to leverage our domain expertise and proprietary technologies across a broad array of applications in industrial technologies, life and health sciences, and research and defense markets.
Industrial Technologies
Industrial technologies encompasses a wide range of diverse applications, including chemistries for functional coatings, surface finishing and wear resistance in the automobile industry, vacuum solutions for synthetic diamond manufacturing and photonics for solar manufacturing. Other applications include, but are not limited to, vacuum and photonics solutions for light emitting diode and laser diode manufacturing.
Life and Health Sciences
Our products for life and health sciences are used in a diverse array of applications, including bioimaging, medical instrument sterilization, medical device manufacturing, analytical, diagnostic and surgical instrumentation, consumable medical supply manufacturing and pharmaceutical production.
Research and Defense
Our products for research and defense are sold to government, university and industrial laboratories for applications involving research and development in materials science, physical chemistry, photonics, optics and electronics materials. Our products are also sold for monitoring and defense applications, including surveillance, imaging and infrastructure protection.
For the three months ended March 31, 2023, net revenues in our specialty industrial market decreased by $54 million or 17% compared to the prior quarter primarily due to the effects of the ransomware event which resulted in lower order fulfillment during the quarter.
For the three months ended March 31, 2023, net revenues in our specialty industrial market increased by $69 million or 35% compared to the same period in the prior year. This increase was mainly driven by the Atotech Acquisition, partially offset by the negative impact of the ransomware event, which resulted in lower order fulfillment of VSD and PSD products during the three months ended March 31, 2023.
We estimate the ransomware event negatively impacted our specialty industrial market by approximately $45 million for the three months ended March 31, 2023. In the second quarter of 2023, we expect to fulfill orders delayed by the ransomware event representing approximately $20 million of this specialty industrial market revenue, with most of the remainder to be fulfilled in the second half of 2023.
International Markets
A significant portion of our net revenues is from sales to customers in international markets. For the three months ended March 31, 2023 and 2022, international revenues accounted for approximately 68% and 54%, respectively, of our total net revenues. A significant portion of our international net revenues was from China, South Korea and Germany. We expect international net revenues will continue to account for a significant percentage of total net revenues for the foreseeable future.
28
Long-lived assets located outside of the United States accounted for approximately 59% and 57% of our total long-lived assets as of March 31, 2023 and December 31, 2022, respectively. Long-lived assets include property, plant and equipment, net, right-of-use assets, net and certain other assets and exclude goodwill, intangible assets and long-term tax-related accounts.
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 condensed consolidated statements of operations and comprehensive (loss) income data:
|
|
Three Months Ended |
|
|||||||||
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Net revenues: |
|
|
|
|
|
|
|
|
|
|||
Products |
|
|
89.7 |
% |
|
|
88.9 |
% |
|
|
87.4 |
% |
Services |
|
|
10.3 |
|
|
|
11.1 |
|
|
|
12.6 |
|
Total net revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|||
Cost of product revenues |
|
|
51.4 |
|
|
|
48.9 |
|
|
|
48.5 |
|
Cost of service revenues |
|
|
6.3 |
|
|
|
6.4 |
|
|
|
6.5 |
|
Total cost of revenues (exclusive of amortization shown separately below) |
|
|
57.8 |
|
|
|
55.3 |
|
|
|
55.0 |
|
Gross profit |
|
|
42.2 |
|
|
|
44.7 |
|
|
|
45.0 |
|
Research and development |
|
|
9.0 |
|
|
|
6.7 |
|
|
|
7.0 |
|
Selling, general and administrative |
|
|
22.0 |
|
|
|
15.5 |
|
|
|
12.5 |
|
Acquisition and integration costs |
|
|
0.7 |
|
|
|
1.0 |
|
|
|
1.1 |
|
Restructuring and other |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.3 |
|
Amortization of intangible assets |
|
|
10.3 |
|
|
|
6.4 |
|
|
|
2.0 |
|
Gain on sale of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
(1.0 |
) |
Income from operations |
|
|
0.1 |
|
|
|
15.0 |
|
|
|
23.1 |
|
Interest income |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
— |
|
Interest expense |
|
|
10.7 |
|
|
|
7.8 |
|
|
|
0.8 |
|
Other (income) expense, net |
|
|
(0.2 |
) |
|
|
1.4 |
|
|
|
(0.8 |
) |
(Loss) income before income taxes |
|
|
(10.0 |
) |
|
|
6.0 |
|
|
|
23.1 |
|
(Benefit) provision for income taxes |
|
|
(4.7 |
) |
|
|
1.0 |
|
|
|
3.8 |
|
Net (loss) income |
|
|
(5.2 |
%) |
|
|
5.0 |
% |
|
|
19.3 |
% |
Net revenues
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Products |
|
$ |
712 |
|
|
$ |
965 |
|
|
$ |
648 |
|
Services |
|
|
82 |
|
|
|
120 |
|
|
|
94 |
|
Total net revenues |
|
$ |
794 |
|
|
$ |
1,085 |
|
|
$ |
742 |
|
29
For the three months ended March 31, 2023, net product revenues decreased $253 million compared to the prior quarter. This decrease was primarily due to lower order fulfillment as a result of the ransomware event, as well as volume decreases in our electronics and packaging market, primarily in MSD, due to decreased end market demand for electronics such as personal computers, servers and smartphones.
For the three months ended March 31, 2023, net product revenues increased $64 million compared to the same period in the prior year. This increase was mainly driven the Atotech Acquisition where MSD net product revenues totaled $291 million for the three months ended March 31, 2023, partially offset by decreases in net product revenues of $165 million and $62 million in VSD and PSD. VSD and PSD net product revenue was negatively impacted by approximately $130 million as a result of the ransomware event and volume decreases as a result of softening demand in our semiconductor and electronics and packaging markets.
Net 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. For the three months ended March 31, 2023, net service revenues decreased $38 million compared to the prior quarter and were primarily related to decreases in VSD and PSD net service revenues as a result of the ransomware event, which resulted in lower order fulfillment during the quarter.
For the three months ended March 31, 2023, net service revenues decreased $12 million compared to the same period in the prior year, primarily related to decreases in VSD and PSD net service revenues as a result of the ransomware event, which resulted in lower order fulfillment during the three months ended March 31, 2023, partially offset by the effect of the Atotech Acquisition.
The following table sets forth our net revenues by reportable segment:
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Net revenues: |
|
|
|
|
|
|
|
|
|
|||
Vacuum Solutions Division |
|
$ |
293 |
|
|
$ |
475 |
|
|
$ |
474 |
|
Photonics Solutions Division |
|
|
197 |
|
|
|
270 |
|
|
|
268 |
|
Materials Solutions Division |
|
|
304 |
|
|
|
340 |
|
|
|
— |
|
Total net revenues |
|
$ |
794 |
|
|
$ |
1,085 |
|
|
$ |
742 |
|
For the three months ended March 31, 2023, net revenues from VSD decreased $182 million compared to the prior quarter and decreased $181 million compared to the same period in the prior year. Net revenues for PSD decreased $73 million compared to the prior quarter and decreased $71 million compared to the same period in the prior year. These decreases were primarily a result of the ransomware event which resulted in lower order fulfillment during the three months ended March 31, 2023.
For the three months ended March 31, 2023, net revenues from MSD decreased $36 million compared to the prior quarter, primarily due to lower chemistry sales to customers in the electronics industry as a result of softer end market demand for electronics, such as personal computers, servers and smartphones. There were no net revenues from MSD for the three months ended March 31, 2022, as MSD was established in connection with the closing of the Atotech Acquisition in the third quarter of 2022.
Gross margin
|
|
Three Months Ended |
|
|||||||||||||||||
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
% Points |
|
|
March 31, 2022 |
|
|
% Points |
|
|||||
Gross margin as a percentage of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Products |
|
|
42.6 |
% |
|
|
45.0 |
% |
|
|
(2.4 |
)% |
|
|
44.4 |
% |
|
|
(1.8 |
)% |
Services |
|
|
38.7 |
% |
|
|
42.6 |
% |
|
|
(3.9 |
)% |
|
|
49.2 |
% |
|
|
(10.5 |
)% |
Total gross margin |
|
|
42.2 |
% |
|
|
44.7 |
% |
|
|
(2.5 |
)% |
|
|
45.0 |
% |
|
|
(2.8 |
)% |
Gross margin for our products decreased for the three months ended March 31, 2023, compared to the prior quarter and compared to the same period in the prior year. These decreases in gross margin were primarily due to lower revenue volumes, and lower direct labor and overhead absorption, partially offset by lower freight and duty costs. These changes were mainly the result of the ransomware event that occurred in the first quarter of 2023, which negatively impacted VSD and PSD operations. The decrease for the three months ended March 31, 2023 compared to the prior quarter was partially offset by lower material costs in the three months ended March 31, 2023, as the prior quarter had $13 million of step-up amortization from fair value adjustment to inventory from the Atotech Acquisition.
Gross margin for our services decreased for the three months ended March 31, 2023, compared to the prior quarter and the same period in the prior year. These decreases in gross margin were primarily due to lower revenue volumes, lower direct
30
labor and overhead absorption, and unfavorable purchase price variances. These decreases in gross margin were mainly the result of the ransomware event that occurred during the three months ended March 31, 2023. The decrease for the three months ended March 31, 2023 compared to the prior quarter was partially offset by favorable mix of the products serviced.
The following table sets forth gross margin as a percentage of net revenues by reportable segment:
|
|
Three Months Ended |
|
|||||||||||||||||
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
% Points |
|
|
March 31, 2022 |
|
|
% Points |
|
|||||
Gross margin as a percentage of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Vacuum Solutions Division |
|
|
36.7 |
% |
|
|
44.4 |
% |
|
|
(7.7 |
)% |
|
|
43.5 |
% |
|
|
(6.8 |
)% |
Photonics Solutions Division |
|
|
41.0 |
% |
|
|
47.1 |
% |
|
|
(6.1 |
)% |
|
|
47.7 |
% |
|
|
(6.7 |
)% |
Materials Solutions Division |
|
|
48.4 |
% |
|
|
43.3 |
% |
|
|
5.1 |
% |
|
|
— |
|
|
|
48.4 |
% |
Total gross margin |
|
|
42.2 |
% |
|
|
44.7 |
% |
|
|
(2.5 |
)% |
|
|
46.9 |
% |
|
|
(3.8 |
)% |
Gross margin for VSD decreased for the three months ended March 31, 2023, compared to the prior quarter and the same period in the prior year, primarily due to lower revenue volumes, and lower direct labor and overhead absorption, mainly as a result of the ransomware event, and higher excess and obsolete charges. These decreases were partially offset by favorable product mix.
Gross margin for PSD decreased for the three months ended March 31, 2023, compared to the prior quarter and the same period in the prior year, primarily due to lower revenue volumes, and lower direct labor and overhead absorption, mainly as a result of the ransomware event, and higher excess and obsolete charges. These decreases were partially offset by favorable product mix.
Gross margin for MSD increased for the three months ended March 31, 2023, compared to the prior quarter. This increase was mainly due to lower material costs in the three months ended March 31, 2023 compared to the prior quarter, which had $13 million of step-up amortization from fair value adjustment to inventory from the Atotech Acquisition. The increase was also caused by lower excess and obsolete inventory and warranty charges in the three months ended March 31, 2023 compared to the prior quarter.
Research and development
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Research and development |
|
$ |
72 |
|
|
$ |
73 |
|
|
$ |
52 |
|
For the three months ended March 31, 2023, research and development expenses were essentially flat compared to the prior quarter. For the three months ended March 31, 2023, research and development expenses increased by $20 million compared to the same period in the prior year mainly driven by the effect of the Atotech Acquisition.
Our research and development efforts are primarily focused on developing and improving our instruments, components, chemistry, subsystems, systems 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. Projects typically have a duration of 3 to 36 months but may be extended for development of new products.
31
We continue to make product advancements to meet our customers’ evolving needs. We have developed, and continue to develop, new products to address industry trends, such as the shrinking of integrated circuit critical dimensions and technology inflections, and, in the flat panel display and solar markets, the transition to larger substrate sizes, which require more advanced processing and process control technology, the continuing drive toward more complex and accurate components and devices within the handset and tablet market, the transition to 5G for both devices and infrastructure, the growth in units and via counts in the high density interconnect PCB drilling market, and the transition from internal combustion to electric vehicles. In addition, we have developed, and continue to develop, products that support the migration to new classes of materials, ultra-thin layers, and 3D structures that are used in small geometry manufacturing. In our chemistry and equipment plating businesses, a majority of our research and development investment supports existing customers' product improvement needs and their short-term research and development goals, which enables us to pioneer new high-value solutions while limiting commercial risk. 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, electronics and packaging, and specialty industrial 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 and advanced markets applications. If our products are not chosen to be designed into our customers’ products, our net revenues may be reduced during the lifespan of those products.
Selling, general and administrative
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Selling, general and administrative |
|
$ |
174 |
|
|
$ |
168 |
|
|
$ |
92 |
|
For the three months ended March 31, 2023, selling, general and administrative expenses increased $6 million compared to the prior quarter, primarily due to increases of $6 million in compensation-related costs and $7 million in net costs incurred as a result of the ransomware event, offset by decreases of $5 million in consulting and professional fees and $2 million in travel costs. For the three months ended March 31, 2023, selling, general and administrative expenses increased $82 million compared to the same period in the prior year mainly driven by the Atotech Acquisition, as well as $6 million in compensation-related costs and $7 million in net costs incurred as a result of the ransomware event in the three months ended March 31, 2023.
Acquisition and integration costs
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Acquisition and integration costs |
|
$ |
6 |
|
|
$ |
11 |
|
|
$ |
8 |
|
Acquisition and integration costs incurred during the three months ended March 31, 2023 and 2022 and the three months ended December 31, 2022 were primarily related to consulting and professional fees related to the Atotech Acquisition.
Restructuring and other
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Restructuring and other |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
Restructuring and other costs during the three months ended March 31, 2023 were related to severance costs as a result of a global cost saving initiative implemented in the first quarter of 2023. Restructuring and other costs during the three months ended December 31, 2022 were primarily related to the closure of two facilities in Europe and movement of certain products to low cost regions. Restructuring and other costs during the three months ended March 31, 2022 primarily related to the closure of a facility in Europe and the then pending closure of another facility in Europe.
32
Amortization of intangible assets
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Amortization of intangible assets |
|
$ |
81 |
|
|
$ |
69 |
|
|
$ |
15 |
|
For the three months ended March 31, 2023, amortization of intangible assets increased by $12 million compared to the prior quarter due to amortization of intangible assets from the Atotech Acquisition and the write-off of $9 million in MSD in-process research and development projects that were cancelled. The increase of $66 million in amortization expense for the three months ended March 31, 2023 compared to the same period in the prior year was related to amortization of intangible assets as a result of the Atotech Acquisition.
Gain on sale of long-lived assets
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Gain on sale of long-lived assets |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(7 |
) |
In the three months ended March 31, 2022, we recorded a gain from the sale of a minority interest investment in a private company.
Interest expense
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Interest expense |
|
$ |
85 |
|
|
$ |
85 |
|
|
$ |
6 |
|
For the three months ended March 31, 2023, interest expense was flat compared to the prior quarter. For the three months ended March 31, 2023, interest expense increased $79 million compared to the same period in the prior year, primarily due to borrowings on the New Term Loan Facility we entered into in connection with the Atotech Acquisition.
Other (income) expense, net
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
Other (income) expense, net |
|
$ |
(2 |
) |
|
$ |
15 |
|
|
$ |
(5 |
) |
Other (income) expense, net, for the three months ended March 31, 2023 and 2022, and the three months ended December 31, 2022, consist primarily of net foreign exchange and fair value gains and losses.
(Benefit) provision for income taxes
|
|
Three Months Ended |
|
|||||||||
(dollars in millions) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
|||
(Benefit) provision for income taxes |
|
$ |
(37 |
) |
|
$ |
11 |
|
|
$ |
28 |
|
Our effective tax rates for the three months ended March 31, 2023 and 2022 and the three months ended December 31, 2022 were 46.6%, 16.3% and 16.9%, respectively. Our $37 million tax benefit for the three months ended March 31, 2023 was primarily due to the application of the forecasted effective tax rate to the pre-tax loss for the three months ended March 31, 2023. Our effective tax rate for the three months ended March 31, 2023 was higher than the U.S. statutory tax rate mainly due to the geographic mix of income earned by our international subsidiaries being taxed at higher rates than the U.S. statutory rate, offset by the U.S. foreign tax credit and the U.S. deduction for foreign derived intangible income (“FDII”). Our effective tax rate for the three months ended December 31, 2022 was lower than the U.S. statutory tax rate mainly due to the U.S. deduction for FDII and the geographic mix of income earned by our international subsidiaries being taxed at rates lower than the U.S. statutory tax rate, offset by the U.S. global intangible low-taxed income (“GILTI”) inclusion. Our effective tax rate for the three months ended March 31, 2022 was lower than the U.S. statutory tax rate mainly due to the U.S. deduction for FDII and the geographic mix of income earned by our international subsidiaries being taxed at rates lower than the U.S. statutory tax rate, offset by the GILTI inclusion.
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.
33
Our future effective tax rate depends on various factors, including the impact of tax legislation, further interpretations and guidance from U.S. federal and state governments on the impact of proposed regulations issued by the Internal Revenue Service, further interpretations and guidance from foreign governments, 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 the Atotech Acquisition will continue to have an unfavorable impact on our effective tax rate as MSD operates primarily in jurisdictions with tax rates higher than the U.S. statutory 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 at March 31, 2023 and December 31, 2022 totaled $880 million and $910 million, respectively. The primary driver in our current and anticipated future cash flows is, and we expect will continue to be, cash generated from operations, consisting primarily of our net (loss) income, excluding non-cash charges and changes in operating assets and liabilities. In periods when our sales are growing, higher sales to customers will result in increased trade receivables, and inventories will generally increase as we build products for future sales. This may result in lower cash generated from operations. Conversely, in periods when our sales are declining, our accounts receivable and inventory balances will generally decrease, resulting in increased cash from operations. We believe that our current cash and investments position and available borrowing capacity, together with the cash anticipated to be generated from our operations will be sufficient to satisfy our estimated working capital, planned capital expenditure requirements, payments of debt, and any future cash dividends declared by our Board of Directors or share repurchases through at least the next 12 months and the foreseeable future.
Net cash provided by operating activities was $37 million for the three months ended March 31, 2023, resulting from a net loss of $42 million, which included non-cash charges of $154 million, offset by a net increase in working capital of $75 million. The net increase in working capital was primarily due to increases in inventory of $96 million, a decrease in accounts payable of $55 million, a decrease of $34 million in accrued compensation resulting from the payment of variable compensation, and a decrease in income taxes payable of $49 million. This net increase in working capital was partially offset by a decrease in accounts receivable of $150 million as a result of decreased revenue caused by the ransomware event in the three months ended March 31, 2023.
Net cash used in investing activities was $17 million for the three months ended March 31, 2023, consisting of $17 million in capital expenditures.
Net cash used in financing activities was $43 million for the three months ended March 31, 2023, primarily due to $23 million of payments on our New Term Loan Facility and $15 million of dividend payments.
Holders of our common stock are entitled to receive dividends when and if they are declared by our Board of Directors. Our Board of Directors declared a cash dividend of $0.22 per share for the three months ended March 31, 2023, which totaled $15 million. Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our Board of Directors. In addition, under the terms of our New Credit Facilities, as defined and described further below, we may be restricted from paying dividends under certain circumstances.
Atotech Acquisition
On August 17, 2022, we completed the Atotech Acquisition. The total net purchase price, including cash consideration, net of cash acquired, value of MKS shares issued, repayment of Atotech debt and settlement of share-based awards totaled $5.7 billion. We funded the payment of the aggregate cash consideration with a combination of cash on hand and the proceeds from the New Term Loan Facility, as defined below. As a result of the Atotech Acquisition, we issued an aggregate of 10.7 million shares of our common stock to the former Atotech shareholders. Additional information regarding the funding of the Atotech Acquisition, the entry into the New Term Loan Facility and the New Revolving Facility and the replacement of the Prior Term Loan Facility and the Prior ABL Credit Facility, is discussed below.
In connection with the completion of the Atotech Acquisition, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, Barclays Bank PLC, and the lenders from time to time party thereto (the “New Credit Agreement”). The New Credit Agreement provides for (i) a senior secured term loan facility (the “New Term Loan Facility”) comprised of three tranches: a USD 1 billion loan (the “USD Tranche A”), a USD 3.6 billion loan (the
34
“USD Tranche B”) and a EUR 600 million loan (the “Euro Tranche B”), each of which were borrowed in full on the Effective Date, and (ii) a senior secured revolving credit facility of USD 500 million (the “New Revolving Facility” and, together with the New Term Loan Facility, the “New Credit Facilities”), with the commitments under each of the foregoing facilities subject to increase from time to time subject to certain conditions.
Borrowings under the New Credit Facilities bear interest at a rate per annum equal to, at our option, any of the following, plus, in each case, an applicable margin: (a) with respect to the USD Tranche A, the USD Tranche B and the New Revolving Facility, (x) 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 The Wall Street Journal, or (3) a forward-looking term rate based on the variable secured overnight financing rate (“Term SOFR”) (plus an applicable credit spread adjustment) for an interest period of one month, plus 1.00%; and (y) a Term SOFR rate (plus an applicable credit spread adjustment) for the interest period relevant to such borrowing, subject to a rate floor of (I) with respect to the USD Tranche B, 0.50% and (II) with respect to the USD Tranche A and the New Revolving Facility, 0.0%; and (b) with respect to the Euro Tranche B, a Euro Interbank Offered Rate (“EURIBOR”) rate determined by reference to the costs of funds for Euro deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a EURIBOR rate floor of 0.0%. The USD Tranche A was issued with original issue discount of 0.25% of the principal amount thereof. The USD Tranche B and the Euro Tranche B were issued with original issue discount of 2.00% of the principal amount thereof. The applicable margin for borrowings under the USD Tranche A is 1.50% with respect to base rate borrowings and 2.50% with respect to Term SOFR borrowings. The applicable margin for borrowings under the USD Tranche B is 1.75% with respect to base rate borrowings and 2.75% with respect to Term SOFR borrowings. The applicable margin for borrowings under the Euro Tranche B is 3.00%. The initial applicable margin for borrowings under the New Revolving Facility is 1.50% with respect to base rate borrowings and 2.50% with respect to Term SOFR borrowings. Commencing with the delivery of financial statements with respect to the first quarter ending after the closing of the New Credit Agreement, the applicable margin for borrowings under the New Revolving Facility is subject to adjustment each fiscal quarter, based on our first lien net leverage ratio as of the end of the preceding quarter.
In addition to paying interest on outstanding principal under the New Credit Facilities, we are required to pay a commitment fee in respect of the unutilized commitments under the New Revolving Facility. The initial commitment fee is 0.375% per annum. Commencing with the delivery of financial statements with respect to the first quarter ending after the closing of the New Credit Agreement, the commitment fee is subject to downward adjustment based on our first lien net leverage ratio as of the end of the preceding quarter. We must also pay customary letter of credit fees and agency fees.
We incurred $242 million of deferred financing fees and original issue discount fees related to the term loans under the New Term Loan Facility, which are included in long-term debt in the accompanying condensed consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. A portion of the deferred financing fees and original issue discount has been accelerated in connection with the debt prepayment and extinguishment of the Prior Term Loan Facility (as defined below).
Under the New 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 incurrences or issuances of certain debt.
If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the New Revolving Facility exceeds the aggregate commitments under the New Revolving Facility, we are required to repay outstanding loans and/or cash collateralize letters of credit, with no reduction of the commitment amount.
We may voluntarily prepay outstanding loans under the New Credit Facilities from time to time, subject to certain conditions, without premium or penalty other than customary “breakage” costs with respect to Term SOFR or EURIBOR loans; provided, however, that subject to certain exceptions, if on or prior to the date that is twelve months after the closing date of the New Term Loan Facility, we prepay any loans under the USD Tranche B or the Euro Tranche B 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. Additionally, we may voluntarily reduce the unutilized portion of the commitment amount under the New Revolving Facility.
We are required to make scheduled quarterly payments each equal to 1.25% of the original principal amount of the USD Tranche A (increasing to 1.875% in years 3 and 4 and 2.50% in year 5) and 0.25% of the original principal amount of the USD Tranche B and the Euro Tranche B, beginning with the fiscal quarter ending December 31, 2022, with the balance due thereunder on the fifth anniversary of the closing date in the case of the USD Tranche A and the seventh anniversary of the closing date in the case of the USD Tranche B and the Euro Tranche B.
There is no scheduled amortization under the New Revolving Facility. Any principal amount outstanding under the New Revolving Facility is due and payable in full on the fifth anniversary of the closing date.
We incurred $7 million of costs in connection with the New Revolving Facility, which were capitalized and included in other assets in the accompanying condensed consolidated balance sheet and are being amortized to interest expense over the
35
estimated life of four years. As a result of our Prior ABL Credit Facility (as defined below) being terminated concurrently with our entry into the New Revolving Facility, we wrote off an immaterial amount of previously capitalized debt issuance costs.
All obligations under the New Credit Facilities are guaranteed by certain of our wholly-owned domestic subsidiaries and are required to be guaranteed by certain of our future wholly-owned domestic subsidiaries and are secured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.
Under the New Credit Agreement, we have the ability to incur additional incremental debt facilities in an amount up to (x) the greater of (1) $1.01 billion and (2) 75% of consolidated EBITDA, plus (y) an amount equal to the sum of all voluntary prepayments of term loans under the New Term Loan Facility, plus (z) an additional unlimited amount subject to pro forma compliance with certain leverage ratio tests (based on the security and priority of such incremental debt).
Under the USD Tranche A and the New Revolving Facility, so long as any USD Tranche A loans (or commitments in respect thereof) are outstanding as of the end of any fiscal quarter, we may not allow our total net leverage ratio as of the end of such fiscal quarter to be greater than 5.50 to 1.00, with an annual step-down of 0.25:1.00 and subject to a step-up of 0.50:1.00 for the four full fiscal quarter period following any material acquisition, not to exceed 5.50 to 1.00.
In addition, in the event there are no loans outstanding under the USD Tranche A, as of the end of any fiscal quarter of ours when the aggregate amount of loans outstanding under the New Revolving Facility (net of (a) all letters of credit (whether cash collateralized or not) and (b) unrestricted cash of ours and our restricted subsidiaries) exceeds 35% of the aggregate amount of all commitments under the New Revolving Facility in; effect as of such date, we may not allow our first lien net leverage ratio as of the end of each such fiscal quarter to be greater than 6.00 to 1.00.
The USD Tranche B and the Euro Tranche B are not subject to financial maintenance covenants.
The New Credit Agreement contains a number of negative covenants that, among other things and subject to certain exceptions, restrict our ability and each of our subsidiaries to incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or our subordinated indebtedness; make investments, loans and acquisitions; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries or restrictions on the ability of our restricted subsidiaries to incur liens; engage in transactions with our affiliates; sell assets, including capital stock of our subsidiaries; materially alter the business it conducts; consolidate or merge; incur liens; and engage in sale-leaseback transactions.
The New 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 New Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the New Credit Facilities and all actions permitted to be taken by a secured creditor. As of March 31, 2023, we were in compliance with all covenants under the New Credit Agreement.
The proceeds of the New Term Loan Facility were used on the Effective Date, among other things, to fund a portion of the consideration payable in connection with the Atotech Acquisition and to refinance the Prior Term Loan Facility, the Prior ABL Credit Facility and certain indebtedness of Atotech. We also paid certain customary fees and expenses of JPMorgan Chase Bank, N.A., Barclays Bank PLC, BofA Securities Inc., Citigroup Global Markets Inc., HSBC Securities (USA) Inc. and Mizuho Bank, Ltd. in their respective capacities as lead arrangers and bookrunners in connection with the New Credit Facilities.
On the Effective Date, in connection with the entry into the New Credit Agreement described above, we terminated and prepaid the prior term loan credit facility under that certain Term Loan Credit Agreement, dated as of April 29, 2016, by and among us, Barclays Bank PLC and the other financial institutions from time to time party thereto (as amended, the “Prior Term Loan Credit Agreement” and the term loan credit facility thereunder, the “Prior Term Loan Facility”) and terminated the prior revolving credit facility under that certain ABL Credit Agreement, dated as of February 1, 2019, by and among the us, Barclays Bank PLC and the other financial institutions from time to time party thereto (as amended, the “Prior ABL Credit Agreement” and the revolving credit facility thereunder, the “Prior ABL Credit Facility”).
As of March 31, 2023, the outstanding principal amount of the New Term Loan Facility was $5.1 billion and the weighted average interest rate was 7.3%. As of March 31, 2023, there were no borrowings under the New Revolving Facility.
36
Lines of Credit and Borrowing Arrangements
Certain of our Japanese subsidiaries have lines of credit and a financing facility with various financial institutions, many of which generally expire and are renewed at three-month intervals with the remaining having no expiration date. The lines of credit and financing facility provided for aggregate borrowings as of March 31, 2023 of up to an equivalent of $15 million. There were no borrowings under these arrangements at March 31, 2023 and December 31, 2022.
Derivatives
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments and those utilized as economic hedges. We operate internationally, and in the normal course of business, are exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, such as foreign exchange forward contracts and options, to manage certain foreign currency exposure, and interest rate swaps and caps to manage interest rate exposure.
By nature, all financial instruments involve market and credit risks. We enter into derivative instruments with major investment grade financial institutions and no collateral is required. We have policies to monitor the credit risk of these counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.
Interest Rate Agreements
We have various interest rate swap agreements as described further in Note 5 to the Notes to the Condensed Consolidated Financial Statements that exchange the variable Term SOFR rate to a fixed rate in order to manage the exposure to interest rate fluctuations associated with the variable Term SOFR rate paid on the outstanding balance of the New Term Loan Facility. We acquired USD London Interbank Offered Rate (“LIBOR”) interest rate cap agreements as a result of the Atotech Acquisition and we are utilizing these agreements to offset Term SOFR rate on our New Term Loan Facility. Our USD LIBOR based swaps and USD LIBOR based interest rate caps will convert to Term SOFR after LIBOR's termination in June 2023 according to the terms of each instrument.
Contractual Obligations
There have been no 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, 2022.
37
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, 2022 filed with the Securities and Exchange Commission on March 14, 2023. As of March 31, 2023, there were no material changes in our exposure to market risk from December 31, 2022.
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 March 31, 2023. 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 that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, the Company’s disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting as described below and in “Controls and Procedures” contained in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on March 14, 2023.
Based on its assessment, our management concluded that a material weakness existed as of December 31, 2022 which has not been remediated as of March 31, 2023. We did not maintain sufficient IT controls to prevent or detect, on a timely basis, unauthorized access to the Company’s financial reporting systems. Specifically, we did not design and maintain effective controls with regard to our financial reporting systems related to access authentication, intrusion detection and response capability, and backup and restoration such that recovery from a cybersecurity incident could be performed in a more timely manner. This material weakness did not result in a misstatement to the annual or interim consolidated financial statements previously filed or included in this Quarterly Report on Form 10-Q. However, this material weakness could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Plan for Material Weakness in Internal Control over Financial Reporting
We have been actively addressing the identified material weakness. Some remediation measures have been completed and actions with regard to our remediation plan are ongoing and include the following:
Though the remediation plan is subject to continual review, we expect the remediation plan described above will address the identified material weakness. The remediation plan is subject to oversight by the Audit Committee of our Board of Directors and the identified material weakness will not be considered remediated until the remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded that newly implemented controls are operating effectively.
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 March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of our material legal proceedings, see Note 17 to the Notes to the Condensed Consolidated Financial Statements contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS.
Information regarding risk factors affecting the Company’s business is discussed in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on March 14, 2023.
39
ITEM 6. EXHIBITS.
Exhibit No. |
|
Exhibit Description |
|
|
|
+3.1 (1) |
|
|
|
|
|
+3.2 (2) |
|
|
|
|
|
+3.3 (3) |
|
|
|
|
|
+3.4 (4) |
|
|
|
|
|
+10.1(5)* |
|
Form of Restricted Stock Unit Agreement for Employees under the 2022 Stock Incentive Plan for 2023 |
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
101.INS |
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Inline 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 |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
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Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
+ Previously filed
* Management contract or compensatory plan arrangement
40
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.
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MKS INSTRUMENTS, INC. |
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Date: May 5, 2023 |
By: |
/s/ Seth H. Bagshaw |
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Seth H. Bagshaw |
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Executive Vice President, Chief Financial Officer and Treasurer |
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(Principal Financial Officer) |
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41
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, John T.C. Lee, certify that:
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Dated: May 5, 2023 |
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/s/ John T.C. Lee
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John T.C. Lee President and 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:
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Dated: May 5, 2023 |
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/s/ Seth H. Bagshaw
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Seth H. Bagshaw Executive 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 March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, John T.C. Lee, President and Chief Executive Officer of the Company, and Seth H. Bagshaw, Executive 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:
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Dated: May 5, 2023 |
/s/ John T.C. Lee |
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John T.C. Lee President and Chief Executive Officer (Principal Executive Officer) |
Dated: May 5, 2023 |
/s/ Seth H. Bagshaw |
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Seth H. Bagshaw Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |