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:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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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Accelerated filer |
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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 October 29, 2024, 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 share and per share data)
(Unaudited)
ASSETS |
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September 30, 2024 |
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December 31, 2023 |
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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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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 (loss) income |
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( |
) |
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( |
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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 INCOME (LOSS)
(in millions, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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2024 |
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2023 |
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2024 |
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2023 |
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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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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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Fees and expenses related to amendments to the Term Loan Facility |
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Amortization of intangible assets |
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Goodwill and intangible asset impairments |
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Gain on sale of long-lived assets |
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( |
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( |
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Income (loss) from operations |
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( |
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Interest income |
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( |
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( |
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( |
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( |
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Interest expense |
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Loss on extinguishment of debt |
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Other expense (income), net |
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( |
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Income (loss) before income taxes |
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( |
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(Benefit) provision for income taxes |
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( |
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( |
) |
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( |
) |
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Net income (loss) |
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$ |
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$ |
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$ |
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$ |
( |
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Other comprehensive income (loss), 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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$ |
( |
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$ |
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Foreign currency translation adjustments |
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( |
) |
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( |
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Change in net investment hedge |
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( |
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Unrealized gain (loss) on investments |
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( |
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Net unrecognized pension (loss) gain |
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( |
) |
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( |
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Total comprehensive (loss) income |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
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Net income (loss) per share: |
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Basic |
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$ |
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$ |
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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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$ |
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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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(Loss) Income |
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Equity |
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Balance at December 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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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 income (loss) |
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Other comprehensive (loss) income |
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( |
) |
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( |
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Balance at March 31, 2024 |
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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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Purchase of capped calls related to Convertible Notes |
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( |
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( |
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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 income (loss) |
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Other comprehensive (loss) income |
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( |
) |
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( |
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Balance at June 30, 2024 |
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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 (loss) (net of tax): |
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Net income (loss) |
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Other comprehensive income (loss) |
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Balance at September 30, 2024 |
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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) 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) income |
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( |
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( |
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Other comprehensive income (loss) |
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Balance at March 31, 2023 |
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Net issuance under stock-based plans |
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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) income |
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( |
) |
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( |
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Other comprehensive (loss) income |
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( |
) |
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( |
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Balance at June 30, 2023 |
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( |
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Net issuance under stock-based plans |
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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 income (loss) |
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Other comprehensive (loss) income |
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( |
) |
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( |
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Balance at September 30, 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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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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Nine Months Ended September 30, |
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|||||
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|
2024 |
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2023 |
|
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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$ |
( |
) |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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Goodwill and intangible asset impairments |
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Unrealized loss (gain) 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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Loss on extinguishment of debt |
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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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|
( |
) |
|
|
( |
) |
Other |
|
|
|
|
|
|
||
Changes in operating assets and liabilities |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( |
) |
|
|
|
|
Inventories |
|
|
|
|
|
( |
) |
|
Other current and non-current assets |
|
|
|
|
|
|
||
Accounts payable |
|
|
( |
) |
|
|
( |
) |
Accrued compensation |
|
|
( |
) |
|
|
( |
) |
Income taxes payable |
|
|
|
|
|
( |
) |
|
Other current and non-current liabilities |
|
|
( |
) |
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
||
Proceeds from sale of long-lived assets |
|
|
|
|
|
|
||
Purchases of property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from borrowings |
|
|
|
|
|
|
||
Payments of borrowings |
|
|
( |
) |
|
|
( |
) |
Purchase of capped calls related to Convertible Notes |
|
|
( |
) |
|
|
|
|
Payments of deferred financing fees |
|
|
( |
) |
|
|
|
|
Dividend payments |
|
|
( |
) |
|
|
( |
) |
Net payments related to employee stock awards |
|
|
( |
) |
|
|
( |
) |
Other financing activities |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
( |
) |
|
Decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
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 September 30, 2024, and for the three and nine months ended September 30, 2024, 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, 2023 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, 2023 filed with the U.S. Securities and Exchange Commission on February 27, 2024.
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, allowance for doubtful accounts, inventory valuation, warranty costs, pension plan valuations, 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.
The Company has three reportable segments: the Vacuum Solutions Division (“VSD”), the Photonics Solutions Division (“PSD”) and the Materials Solutions Division (“MSD”) as described in Note 15. During the quarter ended March 31, 2024, the Company moved its Optical Sensing Products (“OSP”) product line from the PSD segment to the VSD segment. The purpose of this realignment was to group the OSP products with related semiconductor products within the VSD segment. Prior periods have been recast to reflect this change.
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires a public entity to disclose significant segment expenses and other segment items on an annual and interim basis and provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Additionally, it requires a public entity to disclose the title and position of the Chief Operating Decision Maker (“CODM”). The ASU does not change how a public entity identifies its operating segments, aggregates them, or applies the quantitative thresholds to determine its reportable segments. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. A public entity should apply the amendments in this ASU retrospectively to all prior periods presented in the financial statements. The Company continues to assess the effect on the Company’s consolidated financial statement disclosures; however, adoption will not impact the consolidated financial statements.
Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on the rate reconciliation and income taxes paid. ASU No. 2023-09 requires a public business entity (“PBE”) to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local and foreign and by jurisdiction if the amount is at least
7
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
payments, net of refunds received. For PBEs, the new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all periods presented. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses
In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the notes to financial statements. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
Contract assets as of September 30, 2024 and December 31, 2023 were $
|
|
Nine Months Ended |
|
|||||
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||
Beginning balance, January 1(1) |
|
$ |
|
|
$ |
|
||
Additions to deferred revenue and customer advances |
|
|
|
|
|
|
||
Amount of deferred revenue and customer advances recognized in income |
|
|
( |
) |
|
|
( |
) |
Ending balance, September 30(2) |
|
$ |
|
|
$ |
|
||
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.
Disaggregation of Revenue
The following tables summarize product and service revenue from contracts with customers in MKS’
|
|
Three Months Ended September 30, 2024 |
|
|||||||||||||
|
|
VSD |
|
|
PSD |
|
|
MSD |
|
|
Total |
|
||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Three Months Ended September 30, 2023 |
|
|||||||||||||
|
|
VSD |
|
|
PSD |
|
|
MSD |
|
|
Total |
|
||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
8
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
|
|
Nine Months Ended September 30, 2024 |
|
|||||||||||||
|
|
VSD |
|
|
PSD |
|
|
MSD |
|
|
Total |
|
||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Nine Months Ended September 30, 2023 |
|
|||||||||||||
|
|
VSD |
|
|
PSD |
|
|
MSD |
|
|
Total |
|
||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table summarizes revenue from contracts with customers in the Company’s three end markets: Semiconductor, Electronics and Packaging, and Specialty Industrial.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Semiconductor |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Electronics and Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Specialty Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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.
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 September 30, 2024 and are summarized as follows:
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|||||||||
Description |
|
September 30, 2024 |
|
|
Quoted Prices in |
|
Significant |
|
|
Significant |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Time deposits |
|
|
|
|
|
|
|
|
|
|
|
||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
||||
Group insurance contracts |
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange forward contracts |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swaps - current |
|
|
|
|
|
|
|
|
|
|
— |
|
|||
Interest rate swaps - non-current |
|
|
|
|
|
|
|
|
|
|
|
||||
Pension and deferred compensation plan assets |
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange forward contracts-current |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Interest rate swaps - current |
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
|||||
Reported as follows: |
|
|
|
|
|
|
|
|
|
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents(1) |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
||||
Total current assets |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Other assets |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
||||
Other current liabilities |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
(1) The cash and cash equivalents amount presented in the table above does not include cash of $
10
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, 2023 and are summarized as follows:
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
||||||||||
Description |
|
December 31, 2023 |
|
|
Quoted Prices in |
|
|
Significant |
|
|
Significant |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Time deposits |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Group insurance contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange forward contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate caps - current |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swaps - non-current |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pension and deferred compensation plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange forward contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Reported as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total current assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other current liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(1) The cash and cash equivalents amount presented in the table above does not include cash of $
Other Fair Value Disclosures
The estimated carrying value and fair value of the Company’s debt as of September 30, 2024 and December 31, 2023 are as follows:
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
||||
Term Loan Facility |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Convertible Notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The estimated carrying value and fair value of the Company’s Term Loan Facility, as defined and further described in Note 8, 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. The estimated fair value of the Company’s Convertible Notes, as defined and further described in Note 8, was determined based on the last traded price of the Convertible Notes for the period ended September 30, 2024, and falls under Level 2 of 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 employee retirement benefits of certain of the Company’s subsidiaries.
11
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
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 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 months, using foreign exchange forward contracts accounted for as cash-flow hedges. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria, changes in the derivatives’ fair value are not included in current earnings but are included in other comprehensive income (“OCI”) in stockholders’ equity. These changes in fair value will subsequently be reclassified into earnings as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded in earnings in the period it occurs. The cash flows resulting from foreign exchange forward contracts are classified in the condensed consolidated statements of cash flows as part of cash flows from operating activities. The Company does not enter into derivative instruments for trading or speculative purposes.
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) expense, net.
The following table summarizes the net notional values of foreign exchange forward contracts outstanding as of September 30, 2024 and December 31, 2023:
|
|
Net Notional Value |
|
|||||
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
||
Foreign exchange forward contracts-cash flow hedges |
|
$ |
|
|
$ |
|
||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
||
Foreign exchange forward contracts-balance sheet hedges |
|
$ |
|
|
$ |
|
||
For both periods presented in the table, the Japanese yen and the South Korean won were the largest notional contracts for designated cash flow hedges, and the Euro was the largest notional contract for balance sheet hedges not designated as a hedging instrument.
Net Investment Hedges
On January 1, 2023, the Company designated certain Euro-denominated debt as a net investment hedge to hedge a portion of its net investments in certain of its entities with functional currencies denominated in the Euro. On January 22, 2024, the Company prepaid its USD Tranche A in full using, in part, a €
12
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
component of OCI. Recognition in earnings of amounts previously recorded in accumulated OCI is limited to circumstances such as complete or substantially complete liquidation or sale of the net investment in the hedged foreign operations.
Interest Rate Agreements
The Company has various interest rate swap agreements maturing through January 31, 2029, that exchange a forward-looking term rate based on the variable secured overnight financing rate (“Term SOFR”) paid on the outstanding balance of its Term Loan Facility, as defined and further described in Note 8, to a fixed rate. The notional value of the agreements was $
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, the hedging relationship will be discontinued and changes in the fair value of the hedging instruments from the last assessment period that were effective up to the current period will be recorded immediately in earnings. Amounts previously recorded in OCI will remain in OCI and will be reclassified to earnings when the interest payments impact consolidated earnings. If the Company determines that the interest payments are unlikely to occur, amounts previously recorded in OCI will be reclassified to earnings immediately. Changes in the fair value of interest rate caps were recorded immediately in earnings, as the Company did not designate these instruments as hedges and therefore these instruments did not qualify for hedge accounting. The cash flows resulting from interest rate agreements are classified in cash flows from operating activities.
The following table summarizes the net gains (losses) on derivatives designated as cash flow hedging instruments:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Foreign exchange forward contracts-cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (losses) gains recognized in accumulated OCI |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||
Net gains (losses) reclassified from accumulated OCI into cost of revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest rate hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (losses) gains recognized in accumulated OCI |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Net gains (losses) reclassified from accumulated OCI into interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
We expect an immaterial amount to be reclassified from OCI into cost of revenues during the next twelve months related to foreign exchange forward contracts. We expect a gain of approximately $
The following table summarizes the net gains (losses) on derivatives not designated as hedging instruments:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Foreign exchange forward contracts-balance sheet hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net gains (losses) recognized in other (income) expense, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Interest rate caps: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net gains (losses) recognized in income |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
13
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Derivative instruments are subject to master netting arrangements. However, the Company has elected to record these contracts on a gross basis in the condensed consolidated balance sheet. The location and fair value amounts of derivative instruments reported in the condensed consolidated balance sheet is disclosed in Note 4.
Inventories consist of the following:
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work-in-process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Goodwill
The Company’s methodology for allocating the purchase price of an acquisition 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 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. To measure impairment, the Company compares the fair value of the reporting unit to its carrying amount, which includes goodwill. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment exists. If the fair value of the reporting unit is less than the carrying value of the reporting unit, a goodwill impairment is recorded.
Amortizable intangible assets and other long-lived assets are also subject to an impairment test if there is an indicator of impairment. When the Company determines that the carrying value of intangible assets or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, the Company uses the projected undiscounted cash flow method to determine whether an impairment exists, and then measures the impairment using discounted cash flows.
The process of evaluating the potential impairment of goodwill, intangible assets and other long-lived 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. The Company’s stock price and any estimated control premium are factors affecting the assessment of the fair value of the Company’s underlying reporting units for purposes of performing any goodwill impairment assessment.
The changes in the carrying amount of goodwill and accumulated impairment loss during the nine months ended September 30, 2024 were as follows:
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|||
Beginning balance, January 1, 2024 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Foreign currency translation and measurement period adjustments |
|
|
|
|
|
|
|
|
|
|||
Ending balance, September 30, 2024 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
14
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
During the quarter ended June 30, 2023, the Company noted softer industry demand, particularly in the personal computer and smartphone markets, and concluded there was a triggering event at each of its electronics and general metal finishing reporting units, which together constitute MSD, and the equipment solutions reporting unit of PSD.
For each of the three reporting units, the Company performed a quantitative assessment of goodwill using an equal weighting of the income approach and market approach. The income approach was based upon projected future cash flows that were discounted to present value and an assumed terminal growth rate. The key underlying assumptions included forecasted revenues, which incorporated external market data, gross profit and operating expenses, as well as an applicable discount rate for each reporting unit. The market approach for each of the three reporting units incorporated observed multiples of guideline public companies. The market approach for the electronics and general metal finishing reporting units also incorporated multiples from guideline transactions.
Fair value estimates are based on a complex set of judgments about future events and uncertainties and rely heavily on estimates and assumptions that have been deemed reasonable by the Company's management. There are inherent uncertainties and management judgment required in these determinations.
This quantitative assessment for the quarter ended June 30, 2023 resulted in the following:
Reporting Unit |
|
Goodwill Impairment |
|
|
Remaining Goodwill |
|
||
Electronics |
|
$ |
|
|
$ |
|
||
General Metal Finishing |
|
|
|
|
|
|
||
Equipment Solutions |
|
|
|
|
|
|
||
In addition, the Company used an income approach to determine the fair value of the long-lived and indefinite-lived intangible assets within these reporting units (Level 3 within the fair value hierarchy). These valuations resulted in a $
For the completed technology valuation within the equipment solutions reporting unit, the forecasted future undiscounted cash flows were consistent with the Company’s goodwill analysis, using an approximate
Intangible Assets
The Company’s intangible assets are comprised of the following:
As of September 30, 2024: |
|
Gross |
|
|
Impairment Charges |
|
|
Accumulated Amortization |
|
|
Foreign Currency Translation |
|
|
Net |
|
|||||
Completed technology |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Patents, trademarks, trade names and other |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
||
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
As of December 31, 2023: |
|
Gross |
|
|
|
|
|
Accumulated |
|
|
Foreign Currency Translation and Measurement Period Adjustments |
|
|
Net |
|
|||||
Completed technology |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Patents, trademarks, trade names and other |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
||
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
During the nine months ended September 30, 2023, $
15
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Aggregate amortization expense related to acquired intangible assets for the nine months ended September 30, 2024 and 2023 was $
Aggregate net amortization expense related to acquired intangible assets for future years is as follows:
Year |
|
Amount |
|
|
2024 (remaining) |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
Thereafter |
|
|
|
|
The Company excluded from the above table intangible assets of $
The Company’s outstanding debt is as follows:
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Short-term debt: |
|
|
|
|
|
|
||
Term Loan Facility |
|
$ |
|
|
$ |
|
||
Long-term debt: |
|
|
|
|
|
|
||
Term Loan Facility |
|
$ |
|
|
$ |
|
||
Debt issuance costs - Term Loan Facility |
|
|
( |
) |
|
|
( |
) |
Term Loan Facility, net |
|
|
|
|
|
|
||
Convertible Notes |
|
|
|
|
|
|
||
Debt issuance costs - Convertible Notes |
|
|
( |
) |
|
|
|
|
Convertible Notes, net |
|
|
|
|
|
|
||
Total long-term debt, net |
|
$ |
|
|
$ |
|
||
Credit Facilities
In connection with the completion of the Atotech Acquisition, on
16
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
In addition to paying interest on outstanding principal under the Credit Facilities, the Company is required to pay a commitment fee in respect of the unutilized commitments under the Revolving Facility. The commitment fee is subject to adjustment based on the Company’s first lien net leverage ratio as of the end of the preceding fiscal quarter. The Company must also pay customary letter of credit fees and agency fees. As of September 30, 2024, the commitment fee was
On October 3, 2023 (the “First Amendment Effective Date”), the Company entered into the First Amendment to Credit Agreement (the “First Amendment”), which refinanced all of the $
On January 22, 2024 (the “Second Amendment Effective Date”), the Company entered into the Second Amendment to Credit Agreement (the “Second Amendment”), pursuant to which the Company (i) borrowed additional USD Tranche B loans in an aggregate principal amount of $
On February 13, 2024, the Company entered into the Third Amendment to Credit Agreement (the “Third Amendment”), pursuant to which the Company increased the available borrowing capacity under the Revolving Facility by $
On July 23, 2024 (the “Fourth Amendment Effective Date”), the Company entered into the Fourth Amendment to Credit Agreement (the “Fourth Amendment”), pursuant to which the Company
On July 23, 2024, immediately prior to the effectiveness of the Fourth Amendment, the Company made a voluntary prepayment of $
The USD Tranche B and the Euro Tranche B were issued on the Effective Date with original issue discount of
The Company incurred $
17
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The Company incurred $
The Company incurred $
The Company recorded a $
Under the Credit Agreement, the Company is required to prepay outstanding term loans, subject to certain exceptions, with portions of its annual excess cash flow as well as with the net cash proceeds of certain of its asset sales, certain casualty and condemnation events and the incurrence or 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 Revolving Facility exceeds the aggregate commitments under the 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 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 six months after the Fourth Amendment Effective Date, 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
Prior to the repayment in full of the USD Tranche A, the Company was required to make scheduled quarterly payments each equal to
There is no scheduled amortization under the Revolving Facility. Any principal amount outstanding under the Revolving Facility is due and payable in full on the fifth anniversary of the Effective Date.
All obligations under the 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 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 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 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.
18
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The 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.
The 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 Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the Credit Facilities and all actions permitted to be taken by a secured creditor. As of September 30, 2024, the Company was in compliance with all covenants under the Credit Agreement.
The Company paid certain customary fees to and expenses of (i) JPMorgan Chase Bank, N.A., Barclays Bank PLC, BofA Securities, Inc., Citibank, N.A., HSBC Securities (USA) Inc. and Mizuho Bank, Ltd. in their respective capacities as lead arrangers and bookrunners in connection with the Credit Facilities on the Effective Date, (ii) JPMorgan Chase Bank, N.A. in its capacity as lead arranger in connection with each of the First Amendment, the Second Amendment, the Third Amendment and the Fourth Amendment and (iii) the lenders providing the Incremental Revolving Commitments pursuant to the Third Amendment.
As described further below under “Convertible Notes,” on May 16, 2024, the Company completed a private offering of convertible senior notes. A significant portion of the net proceeds from the offering was used to repay approximately $
As of September 30, 2024, the weighted average interest rate of the Term Loan Facility was
Convertible Notes
On May 16, 2024, the Company completed a private offering of $
The aggregate principal amount of the Convertible Notes sold in the offering was $
The net proceeds from the offering were approximately $
Indenture and the Convertible Notes
On May 16, 2024, the Company entered into an indenture (the “Indenture”) with respect to the Convertible Notes with U.S. Bank Trust Company, National Association, as trustee (the “Trustee”). Under the Indenture, the Convertible Notes are senior unsecured obligations of the Company and bear interest at a coupon rate of
19
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
Subject to certain conditions, on or after June 5, 2027, the Company may redeem for cash all or any portion of the Convertible Notes at a redemption price equal to
Upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. Prior to March 1, 2030, noteholders may convert all or any portion of their Convertible Notes only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the second scheduled trading day immediately preceding the maturity date.
If the Company undergoes a fundamental change (as defined in the Indenture) prior to the maturity date of the Convertible Notes, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to
The Indenture contains customary terms and covenants, including that upon certain events of default that are occurring and continuing, either the Trustee or the holders of at least
As of September 30, 2024, the Convertible Notes are classified as a long-term liability, net of issuances costs, on the condensed consolidated balance sheet. The Convertible Notes were issued at par and costs associated with the issuance of the Convertible Notes are amortized to interest expense over the contractual term of the Convertible Notes. As of September 30, 2024, the effective interest rate of the Convertible Notes was
Capped Call Transactions
On May 13, 2024, in connection with the pricing of the Convertible Notes, and on May 14, 2024, in connection with the exercise in full by the initial purchasers of their option to purchase additional Convertible Notes, the Company entered into privately negotiated capped call transactions with certain of the initial purchasers of the Convertible Notes or their respective affiliates and other financial institutions. The capped call transactions are expected generally to reduce the potential dilution to the Company’s common stock upon conversion of any Convertible Notes and/or offset any cash payments that the Company is required to make in excess of the principal amount of any converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap initially equal to $
The Company evaluated the capped call transactions and determined that they should be accounted for separately from the Convertible Notes. The cost of $
20
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The Company’s interest expense is as follows:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Term Loan Facility: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contractual interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Amortization of debt issuance costs as interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest expense on Term Loan Facility |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Convertible Notes: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contractual interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Amortization of debt issuance costs as |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest expense on Convertible Notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other interest expense, net (1) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Total interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(1) Other interest expense, net primarily consists of interest (income) expense related to the Company’s interest rate swap and interest rate cap agreements.
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 September 30, 2024 are as follows:
Year |
|
Amount |
|
|
2024 (remaining) |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
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.
Product warranty activities were as follows:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Beginning of period |
|
$ |
|
|
$ |
|
||
Provision for product warranties |
|
|
|
|
|
|
||
Charges to warranty liability |
|
|
( |
) |
|
|
( |
) |
End of period |
|
$ |
|
|
$ |
|
||
21
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
As of September 30, 2024, short-term product warranties of $
Other current liabilities consisted of the following:
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Accrued compensation and other employee-related obligations |
|
$ |
|
|
$ |
|
||
Deferred revenue and customer advances |
|
|
|
|
|
|
||
Income taxes payable |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Other |
|
|
|
|
|
|
||
Total other current liabilities |
|
$ |
|
|
$ |
|
||
The Company’s effective tax rates for the three and nine months ended September 30, 2024 were (
The Company’s effective tax rates for the three and nine months ended September 30, 2023 were (
The following table sets forth the computation of basic and diluted net income (loss) per share:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shares used in net income (loss) per common share – basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shares used in net income (loss) per common share – diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period.
Diluted net income (loss) per common share is computed by dividing the diluted net income (loss) available to common shareholders by the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. The dilutive effect of equity awards is calculated based on the average stock price for the relevant period, using the treasury stock method. In periods in which a net loss is recognized, the impact of restricted stock
22
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
units (“RSUs”) is not included as they are antidilutive. The dilutive effect of the Convertible Notes is calculated under the if-converted method.
For the three and nine months ended September 30, 2024, the Company had an immaterial quantity of RSUs that were antidilutive and were excluded from the computation of diluted weighted-average shares. For the three and nine months ended September 30, 2024, the Convertible Notes 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.
The total stock-based compensation expense included in the Company’s condensed consolidated statements of operations and comprehensive income (loss) was as follows:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Cost of revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
At September 30, 2024, 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:
|
|
Nine Months Ended September 30, 2024 |
|
|||||
|
|
Quantity |
|
|
Weighted Average |
|
||
RSUs – beginning of period |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested or forfeited |
|
|
( |
) |
|
$ |
|
|
RSUs – end of period |
|
|
|
|
$ |
|
||
23
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 three quarters of 2024 and 2023, the Company’s Board of Directors declared a cash dividend of $
On
Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of the Company’s Board of Directors.
The Company has
Reportable Segments
VSD delivers foundational technology solutions to leading edge semiconductor manufacturing, electronics and packaging and specialty industrial applications. VSD products are derived from the Company’s 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, temperature sensing, and vacuum technology.
PSD provides a full range of solutions including lasers, beam measurement and profiling, precision motion control, vibration isolation systems, photonics instruments, opto-mechanical components, optical elements, laser-based systems for flexible printed circuit board (“PCB”) processing, and laser-based systems for high density interconnect PCB and package substrate manufacturing.
MSD develops leading process and manufacturing technologies for advanced surface modification, electroless and electrolytic plating, and surface finishing. Applying a comprehensive systems-and-solutions approach, MSD’s portfolio includes chemistry, equipment, 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
During the quarter ended March 31, 2024, the Company moved its OSP product line from the PSD segment to the VSD segment. The purpose of this realignment was to better align the OSP products with semiconductor related products within the VSD segment. Prior periods have been recast to reflect this change.
24
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 September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
VSD |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
PSD |
|
|
|
|
|
|
|
|
|
|
|
|
||||
MSD |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table reconciles gross profit by reportable segment to net income (loss):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Gross profit by reportable segment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
VSD |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
PSD |
|
|
|
|
|
|
|
|
|
|
|
|
||||
MSD |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total gross profit by reportable segment |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Acquisition and integration costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restructuring and other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fees and expenses related to amendments to the Term Loan Facility |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Goodwill and intangible asset impairments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gain on sale of long-lived assets |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Income (loss) from operations |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Interest income |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other expense (income), net |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
(Benefit) provision for income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Net income (loss) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Interest income, interest expense and income tax (benefit) provision 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:
September 30, 2024 |
|
Accounts |
|
|
Inventories |
|
|
Total |
|
|||
VSD |
|
$ |
|
|
$ |
|
|
$ |
|
|||
PSD |
|
|
|
|
|
|
|
|
|
|||
MSD |
|
|
|
|
|
|
|
|
|
|||
Total segment assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
December 31, 2023 |
|
Accounts |
|
|
Inventories |
|
|
Total |
|
|||
VSD |
|
$ |
|
|
$ |
|
|
$ |
|
|||
PSD |
|
|
|
|
|
|
|
|
|
|||
MSD |
|
|
|
|
|
|
|
|
|
|||
Total segment assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
25
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The following table reconciles total segment assets to total assets:
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Total segment assets |
|
$ |
|
|
$ |
|
||
Cash and cash equivalents |
|
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
|
||
Property, plant and equipment, net |
|
|
|
|
|
|
||
Right-of-use assets, net |
|
|
|
|
|
|
||
Goodwill and intangible assets, net |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
Goodwill associated with each of the Company’s reportable segments is as follows:
|
|
VSD |
|
|
PSD |
|
|
MSD |
|
|
Total |
|
||||
Reportable segment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross goodwill, at December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Foreign currency translation |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Gross goodwill, at September 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accumulated goodwill impairment, at December 31, 2023 and September 30, 2024 |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Goodwill, net of accumulated impairment and foreign currency translation, at September 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Geographic Area
Information about the Company’s operations by geographic area is presented in the tables below. Starting in the second quarter of 2024, the Company changed its basis of reporting geographical net revenues from the location in which the sale originated to the shipped-to location of the end customer. Prior periods have been recast to reflect this change, which was made to better align with how management reviews geographic net revenues.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
Net revenues: |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
China |
|
|
|
|
|
|
|
|
|
|
|
|
||||
South Korea |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Taiwan |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Japan |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Singapore |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Long-lived assets include property, plant and equipment, net, right-of-use assets, net and certain other assets.
Long-lived assets: |
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
United States |
|
$ |
|
|
$ |
|
||
China |
|
|
|
|
|
|
||
Germany |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
26
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per share data)
The Company recorded restructuring and other charges of $
The activity related to the Company’s restructuring accrual is shown below:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Restructuring accrual, beginning of period |
|
$ |
|
|
$ |
|
||
Charged to expense |
|
|
|
|
|
|
||
Payments and adjustments |
|
|
( |
) |
|
|
( |
) |
Restructuring accrual, end of period |
|
$ |
|
|
$ |
|
||
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.
On October 23, 2024, the Company made a voluntary prepayment of €
27
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”). 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 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 level and terms of our substantial indebtedness and our ability to service such debt; our entry into the chemicals technology business through our acquisition of Atotech Limited (“Atotech”) in August 2022 (the “Atotech Acquisition”) which may expose us to significant additional liabilities; the risk that we are unable to integrate Atotech successfully or realize the anticipated synergies, cost savings and other benefits of the Atotech Acquisition; legal, reputational, financial and contractual risks resulting from the ransomware event we identified in February 2023, 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, including through growth of the Atotech business and growth of the Electro Scientific Industries, Inc. business, 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; the impact of a pandemic or other widespread health crisis; risks associated with doing business internationally, including geopolitical conflicts, such as the conflict in the Middle East, 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; 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 global 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 under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission on February 27, 2024 (“Annual Report”) and any subsequent Quarterly Reports 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, cash flows 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, and is intended to better allow investors to view the Company from management’s perspective. This section focuses on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of our future operating results or our future financial condition. This section provides an analysis of our financial results for the three months ended September 30, 2024 compared to the three months ended June 30, 2024, and the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. 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.
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
28
connectivity. Our solutions are also critical to addressing ever-increasing performance requirements across a wide array of specialty industrial applications.
Segments
We have three divisions which are our reportable segments, Vacuum Solutions Division (“VSD”), Photonics Solutions Division (“PSD”) and Materials Solutions Division (“MSD”).
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, temperature sensing and vacuum technology.
PSD provides a full range of solutions including lasers, beam measurement and profiling, precision motion control, vibration isolation systems, photonics instruments, opto-mechanical components, optical elements, laser-based systems for flexible printed circuit board (“PCB”) processing, and laser-based systems for high density interconnect PCB and package substrate manufacturing. During the quarter ended March 31, 2024, we moved our Optical Sensing Products (“OSP”) product line from the PSD segment to the VSD segment. The purpose of this realignment was to better align the OSP products with semiconductor related products within the VSD segment. Prior periods have been recast to reflect this change.
MSD develops leading process and manufacturing technologies for advanced surface modification, electroless and electrolytic plating, and surface finishing. Applying a comprehensive systems-and-solutions approach, MSD’s portfolio includes chemistry, equipment and services for innovative and high-technology applications in a wide variety of end markets.
Markets
Net Revenues by End Market
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
% Total |
|
|
June 30, 2024 |
|
|
% Total |
|
|
September 30, 2024 |
|
|
% Total |
|
|
September 30, 2023 |
|
|
% Total |
|
||||||||
Semiconductor |
|
$ |
378 |
|
|
|
42 |
% |
|
$ |
369 |
|
|
|
42 |
% |
|
$ |
1,098 |
|
|
|
41 |
% |
|
$ |
1,117 |
|
|
|
41 |
% |
Electronics and Packaging |
|
|
231 |
|
|
|
26 |
% |
|
|
229 |
|
|
|
26 |
% |
|
|
669 |
|
|
|
25 |
% |
|
|
691 |
|
|
|
25 |
% |
Specialty Industrial |
|
|
287 |
|
|
|
32 |
% |
|
|
289 |
|
|
|
33 |
% |
|
|
885 |
|
|
|
33 |
% |
|
|
922 |
|
|
|
34 |
% |
Total net revenues |
|
$ |
896 |
|
|
|
100 |
% |
|
$ |
887 |
|
|
|
100 |
% |
|
$ |
2,652 |
|
|
|
100 |
% |
|
$ |
2,730 |
|
|
|
100 |
% |
Semiconductor Market
MKS is a critical solutions provider for semiconductor manufacturing. Our products are used in major semiconductor processing steps, such as deposition, 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 (“WFE”) ecosystem and address over 85% of the market. We characterize our broad and unique offering as Surround the Wafer® to reflect the technology enablement we provide across almost every major process in semiconductor manufacturing today.
The semiconductor market 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 softening in the semiconductor capital equipment industry. In addition to these rapid demand shifts, the semiconductor capital equipment industry is subject to significant trade restrictions, especially in China.
For the three months ended September 30, 2024, net revenues in our semiconductor market increased by $9 million, or 3%, compared to the prior quarter primarily due to strong in-quarter demand conversion within VSD.
For the nine months ended September 30, 2024, net revenues in our semiconductor market decreased by $19 million, or 2%, compared to the same period in the prior year. This decrease was mainly due to continued softened demand for semiconductor capital equipment related to deposition and etching, partially offset by an increase in sales of our lithography, metrology and inspection products.
29
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, and critical to wafer level packaging (“WLP”) applications. Similar to the semiconductor industry, the PCB, package substrate and WLP industries demand smaller features, greater density, and better performance. In addition, the electronics and packaging market also includes sales of our vacuum and photonics solutions for display manufacturing applications. 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.
For the three months ended September 30, 2024, net revenues in our electronics and packaging market increased by $2 million, or 1%, compared to the prior quarter primarily due to an increase in chemistry sales within MSD.
For the nine months ended September 30, 2024, net revenues in our electronics and packaging market decreased by $22 million, or 3%, compared to the same period in the prior year. This decrease was primarily due to lower revenue within MSD mainly as a result of lower palladium prices that are passed through to our customers, which were partially offset by volume growth in chemistry sales.
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 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 September 30, 2024, net revenues in our specialty industrial market decreased by $2 million, or 1%, compared to the prior quarter mainly due to lower revenue in our material processing and defense markets within PSD.
For the nine months ended September 30, 2024, net revenues in our specialty industrial market decreased by $37 million, or 4%, compared to the same period in the prior year. This decrease was mainly due to lower revenue in general industrial and solar markets within VSD.
International Markets
Starting in the second quarter of 2024, we changed our basis of reporting geographical net revenues from the location in which the sale originated to the shipped-to location of the end customer. Prior periods have been recast to reflect this change, which was made to better align with how management reviews geographic net revenues.
A significant portion of our net revenues is from sales to customers in international markets. For the nine months ended September 30, 2024 and 2023, international net revenues accounted for approximately 77% and 75%, respectively, of our total net revenues. A significant portion of our international net revenues was generated from sales to customers in China, South Korea, Japan, Taiwan and Singapore. We expect international net revenues will continue to account for a significant percentage of total net revenues for the foreseeable future.
30
Long-lived assets located outside of the United States accounted for approximately 61% and 58% of our total long-lived assets as of September 30, 2024 and December 31, 2023. Long-lived assets include property, plant and equipment, net, right-of-use assets, net and certain other assets.
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, 2023.
For further information about our critical accounting policies, please see the discussion of critical accounting policies in our Annual Report in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total net revenues of certain line items included in our condensed consolidated statements of operations and comprehensive income (loss) data:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
|
86.6 |
% |
|
|
86.8 |
% |
|
|
86.8 |
% |
|
|
88.5 |
% |
Services |
|
|
13.4 |
|
|
|
13.2 |
|
|
|
13.2 |
|
|
|
11.5 |
|
Total net revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of product revenues |
|
|
45.8 |
|
|
|
46.4 |
|
|
|
46.0 |
|
|
|
48.6 |
|
Cost of service revenues |
|
|
6.0 |
|
|
|
6.3 |
|
|
|
6.2 |
|
|
|
6.3 |
|
Total cost of revenues (exclusive of amortization shown separately below) |
|
|
51.8 |
|
|
|
52.8 |
|
|
|
52.2 |
|
|
|
54.9 |
|
Gross profit |
|
|
48.2 |
|
|
|
47.3 |
|
|
|
47.8 |
|
|
|
45.1 |
|
Research and development |
|
|
7.8 |
|
|
|
7.4 |
|
|
|
7.8 |
|
|
|
8.0 |
|
Selling, general and administrative |
|
|
18.6 |
|
|
|
18.2 |
|
|
|
18.8 |
|
|
|
18.8 |
|
Acquisition and integration costs |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.5 |
|
Restructuring and other |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.5 |
|
Fees and expenses related to amendments to the Term Loan Facility |
|
|
0.2 |
|
|
|
— |
|
|
|
0.2 |
|
|
|
— |
|
Amortization of intangible assets |
|
|
6.8 |
|
|
|
6.9 |
|
|
|
6.9 |
|
|
|
8.2 |
|
Goodwill and intangible asset impairments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
66.9 |
|
Gain on sale of long-lived assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
Income (loss) from operations |
|
|
14.3 |
|
|
|
14.4 |
|
|
|
13.7 |
|
|
|
(57.8 |
) |
Interest income |
|
|
(0.7 |
) |
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
(0.4 |
) |
Interest expense |
|
|
7.1 |
|
|
|
8.9 |
|
|
|
8.7 |
|
|
|
9.7 |
|
Loss on extinguishment of debt |
|
|
0.6 |
|
|
|
4.3 |
|
|
|
2.0 |
|
|
|
— |
|
Other (income) expense, net |
|
|
0.6 |
|
|
|
(0.8 |
) |
|
|
(0.1 |
) |
|
|
0.5 |
|
Income (loss) before income taxes |
|
|
6.7 |
|
|
|
2.6 |
|
|
|
3.8 |
|
|
|
(67.7 |
) |
Provision (benefit) for income taxes |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(2.8 |
) |
Net income (loss) |
|
|
6.9 |
% |
|
|
2.6 |
% |
|
|
3.7 |
% |
|
|
(64.9 |
%) |
Net revenues
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Products |
|
$ |
776 |
|
|
$ |
770 |
|
|
$ |
2,301 |
|
|
$ |
2,416 |
|
Services |
|
|
120 |
|
|
|
117 |
|
|
|
351 |
|
|
|
314 |
|
Total net revenues |
|
$ |
896 |
|
|
$ |
887 |
|
|
$ |
2,652 |
|
|
$ |
2,730 |
|
For the three months ended September 30, 2024, net product revenues increased $6 million compared to the prior quarter primarily due to higher volume of sales at VSD.
For the nine months ended September 30, 2024, net product revenues decreased $115 million compared to the same period in the prior year as a result of decreases in sales in all three of our end markets. The decrease in product revenues in the
31
semiconductor market was mainly due to volume decreases related to continued softened demand for semiconductor capital equipment related to deposition and etching products at VSD, partially offset by volume increases in sales of our lithography, metrology and inspection products at PSD. The decrease in product revenues in our electronics and packaging market was mainly due to lower equipment sales at MSD. The decrease in product revenues in our specialty industrial market was mainly due to lower solar and general industrial sales at VSD.
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 September 30, 2024, net service revenues increased $3 million compared to the prior quarter mainly in our semiconductor market.
For the nine months ended September 30, 2024, net service revenues increased $37 million compared to the same period in the prior year primarily due to an increase in net service revenues in our semiconductor market, mainly at VSD, and an increase of net service revenues in our electronics and packaging market, mainly at MSD.
The following table sets forth our net revenues by reportable segment:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
VSD |
|
$ |
345 |
|
|
$ |
335 |
|
|
$ |
1,012 |
|
|
$ |
1,092 |
|
PSD |
|
|
251 |
|
|
|
254 |
|
|
|
759 |
|
|
|
724 |
|
MSD |
|
|
300 |
|
|
|
298 |
|
|
|
881 |
|
|
|
914 |
|
Total net revenues |
|
$ |
896 |
|
|
$ |
887 |
|
|
$ |
2,652 |
|
|
$ |
2,730 |
|
For the three months ended September 30, 2024, net revenues from VSD increased $10 million compared to the prior quarter mainly due to volume increases in the semiconductor market. For the nine months ended September 30, 2024, net revenues from VSD decreased $80 million compared to the same period in the prior year mainly due to a decrease in revenues from customers in the semiconductor market as a result of continued softened demand for semiconductor capital equipment in the deposition and etching tool markets.
For the three months ended September 30, 2024, net revenues from PSD decreased $3 million compared to the prior quarter. For the nine months ended September 30, 2024, net revenues from PSD increased $35 million compared to the same period in the prior year, primarily as a result of an increase in sales of our lithography, metrology and inspection products in our semiconductor market, and an increase in sales of our data communications and research and defense products in our specialty industrial market.
For the three months ended September 30, 2024, net revenues from MSD increased $2 million compared to the prior quarter. For the nine months ended September 30, 2024, revenues from MSD decreased $33 million compared to the same period in the prior year primarily due to lower equipment revenue as customers postponed certain investment decisions, and a small decrease in chemistry sales, primarily due to lower palladium prices, which are passed on to our customers, offset by an increase in chemistry volumes.
Gross margin
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||
|
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
% Points |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
|
% Points |
|
||||||
Gross margin as a percentage of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Products |
|
|
47.2 |
% |
|
|
46.6 |
% |
|
|
0.6 |
% |
|
|
47.0 |
% |
|
|
45.1 |
% |
|
|
1.9 |
% |
Services |
|
|
54.7 |
% |
|
|
51.9 |
% |
|
|
2.8 |
% |
|
|
53.0 |
% |
|
|
44.9 |
% |
|
|
8.1 |
% |
Total gross margin |
|
|
48.2 |
% |
|
|
47.3 |
% |
|
|
0.9 |
% |
|
|
47.8 |
% |
|
|
45.1 |
% |
|
|
2.7 |
% |
Gross margin for our products increased for the three months ended September 30, 2024 compared to the prior quarter, mainly as a result of lower warranty and scrap costs as well as better absorption on higher revenue volumes.
Gross margin for our products increased for the nine months ended September 30, 2024 compared to the same period in the prior year primarily due to favorable product mix, higher factory utilization and lower excess and obsolete inventory charges, partially offset by higher warranty costs and lower revenue volumes.
Gross margin for our services increased for the three months ended September 30, 2024 compared to the prior quarter mainly as a result of favorable product mix partially offset by higher excess and obsolete inventory charges and warranty costs for service parts.
32
Gross margin for our services increased for the nine months ended September 30, 2024 compared to the same period in the prior year primarily due to favorable product mix, better absorption on higher revenue volumes and lower direct labor and overhead costs.
The following table sets forth gross margin as a percentage of net revenues by reportable segment:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||
|
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
% Points |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
|
% Points |
|
||||||
Gross margin as a percentage of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
VSD |
|
|
43.0 |
% |
|
|
42.4 |
% |
|
|
0.6 |
% |
|
|
42.6 |
% |
|
|
41.8 |
% |
|
|
0.8 |
% |
PSD |
|
|
44.9 |
% |
|
|
43.2 |
% |
|
|
1.7 |
% |
|
|
44.8 |
% |
|
|
42.9 |
% |
|
|
1.9 |
% |
MSD |
|
|
57.0 |
% |
|
|
56.2 |
% |
|
|
0.8 |
% |
|
|
56.3 |
% |
|
|
50.9 |
% |
|
|
5.4 |
% |
Total gross margin |
|
|
48.2 |
% |
|
|
47.3 |
% |
|
|
0.9 |
% |
|
|
47.8 |
% |
|
|
45.1 |
% |
|
|
2.7 |
% |
Gross margin for VSD increased for the three months ended September 30, 2024 compared to the prior quarter primarily due to lower material costs, favorable product mix and higher revenue volumes, partially offset by higher variable compensation costs. Gross margin for VSD increased for the nine months ended September 30, 2024 compared to the same period in the prior year primarily due to higher factory utilization and lower material costs, partially offset by lower revenue volumes, unfavorable product mix and higher warranty costs.
Gross margin for PSD increased for the three months ended September 30, 2024 compared to the prior quarter primarily due to favorable product mix and lower material costs, partially offset by unfavorable factory utilization. Gross margin for PSD increased for the nine months ended September 30, 2024 compared to the same period in the prior year primarily due to higher revenue volumes, lower freight and duty costs and lower excess and obsolete inventory charges, partially offset by unfavorable product mix and lower factory utilization.
Gross margin for MSD increased for the three months ended September 30, 2024 compared to the prior quarter primarily due to favorable product mix and lower warranty costs, partially offset by higher excess and obsolete charges. Gross margin for MSD increased for the nine months ended September 30, 2024 compared to the same period in the prior year primarily due to lower palladium prices and favorable product mix, partially offset by higher warranty costs.
Research and development
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Research and development |
|
$ |
70 |
|
|
$ |
66 |
|
|
$ |
206 |
|
|
$ |
218 |
|
For the three months ended September 30, 2024, research and development expenses increased $4 million compared to the prior quarter, primarily due to an increase of $4 million in compensation-related costs, including salaries, fringe and variable compensation expenses. Research and development expenses decreased $12 million for the nine months ended September 30, 2024 compared to the same period in the prior year, mainly due to decreases of $7 million in compensation-related costs, including salaries, fringe and variable compensation expenses, $3 million in test equipment and $1 million in project material costs.
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 three to thirty-six months but may be extended for development of new products.
We continue to make product advancements designed to meet our customers’ evolving needs. We have developed, and continue to develop, new products designed to address industry trends, such as the rising demand for more complex hardware architecture related to increasing investments in artificial intelligence, 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
33
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 seek to 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 |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Selling, general and administrative |
|
$ |
167 |
|
|
$ |
161 |
|
|
$ |
498 |
|
|
$ |
514 |
|
For the three months ended September 30, 2024, selling, general and administrative expenses increased $6 million, compared to the prior quarter, primarily due to an increase of $6 million in compensation-related costs mainly related to variable compensation.
For the nine months ended September 30, 2024, selling, general and administrative expenses decreased $16 million compared to the same period in the prior year primarily as a result of decreases of $21 million in compensation-related costs, mainly related to salaries, fringe and variable compensation and $13 million in net costs incurred in the 2023 period as a result of the ransomware event in February 2023, partially offset by increases of $9 million in information technology investments, $6 million in software maintenance and $2 million in consulting and professional fees.
Acquisition and integration costs
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Acquisition and integration costs |
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
6 |
|
|
$ |
14 |
|
Acquisition and integration costs incurred during the three and nine months ended September 30, 2024 and 2023 were related to consulting and professional fees related to the Atotech Acquisition.
Restructuring and other
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Restructuring and other |
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
6 |
|
|
$ |
13 |
|
Restructuring and other charges during the three and nine months ended September 30, 2024 and three months ended June 30, 2024, primarily related to severance costs as a result of a global cost-saving initiative implemented in the fourth quarter of 2023. Restructuring and other charges during the nine months ended September 30, 2023 primarily related to severance costs as a result of a global cost-saving initiative implemented in each of the first and second quarters of 2023.
Fees and expenses related to amendments to the Term Loan Facility
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Fees and expenses related to amendments to the Term Loan Facility |
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
5 |
|
|
$ |
— |
|
During the three months ended September 30, 2024, we recorded fees and expenses related to the Fourth Amendment to Credit Agreement, dated as of July 23, 2024, by and among us as parent borrower, the other loan parties party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and each lender party thereto (the “Fourth Amendment”). During the
34
nine months ended September 30, 2024, we recorded fees and expenses related to the Fourth Amendment and the Second Amendment to Credit Agreement, dated as of January 22, 2024, by and among us as parent borrower, the other loan parties party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and each lender party thereto (the “Second Amendment”).
Amortization of intangible assets
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Amortization of intangible assets |
|
$ |
61 |
|
|
$ |
61 |
|
|
$ |
184 |
|
|
$ |
225 |
|
For the three months ended September 30, 2024, amortization of intangible assets was flat compared to the prior quarter. For the nine months ended September 30, 2024, amortization of intangible assets decreased by $41 million compared to the same period in the prior year primarily due to the backlog intangible asset related to MSD being fully amortized in the three months ended December 31, 2023, and the write-off of completed technology at our equipment solutions business (“ESB”) reporting unit of PSD in the second quarter of 2023.
Goodwill and intangible asset impairments
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Goodwill and intangible asset impairments |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,827 |
|
During the nine months ended September 30, 2023, as a result of softer industry demand, particularly in the personal computer and smartphone markets, we concluded there was a triggering event in the three months ended June 30, 2023 at our electronics (“EL”) and general metal finishing (“GMF”) reporting units, which together constitute MSD, and the ESB reporting unit of PSD.
For the EL, GMF and ESB reporting units, we performed a quantitative assessment of goodwill using a combination of market approach and the income approach. Fair value estimates are based on a complex set of judgments about future events and uncertainties and rely heavily on estimates and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations.
This quantitative assessment resulted in a non-cash goodwill impairment of $826 million for the EL reporting unit, $428 million for the GMF reporting unit and $372 million for the ESB reporting unit. In addition, we recorded a $49 million impairment of in-process research and development allocated to the EL reporting unit and a $152 million impairment related to completed technology allocated to the ESB reporting unit.
We will continue to monitor and evaluate the carrying value of goodwill and intangible assets. If market and economic conditions or business performance deteriorate, the likelihood that we would record an impairment charge would increase, which could materially and adversely affect our financial condition and operating results.
We have concluded there were no triggering events across our reporting units through the nine months ended September 30, 2024.
Interest expense, net
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Interest expense, net |
|
$ |
58 |
|
|
$ |
74 |
|
|
$ |
213 |
|
|
$ |
256 |
|
For the three months ended September 30, 2024, interest expense, net decreased $16 million compared to the prior quarter primarily as a result of our entering into the Fourth Amendment, which decreased the applicable margin for both the USD Tranche B loan and the EUR Tranche B loan (each as defined and described further below under “Credit Facilities”) by 0.25%. In addition, in July 2024, we made a voluntary prepayment of $110 million aggregate principal amount of the Term Loan Facility (as defined and described further below under “Credit Facilities”) consisting of $69 million principal amount of the USD Tranche B loan and €38 million principal amount of the Euro Tranche B loan (the “July 2024 Prepayment”).
For the nine months ended September 30, 2024, interest expense, net decreased by $43 million compared to the same period in the prior year. In addition to the impact of the Fourth Amendment and the July 2024 Prepayment, in May 2024, we issued $1.4 billion of Convertible Notes (as defined and described further below under “Convertible Notes,”) at a coupon rate of
35
1.25% and used $1.2 billion of the proceeds to pay down our loans under the Term Loan Facility, which had an interest rate of approximately 7.8%. In addition to the foregoing, interest expense, net for the nine months ended September 30, 2024, was lower as compared to the same period in the prior year as a result of the voluntary prepayments of $100 million in October 2023, $50 million in February 2024 and $50 million in April 2024 on loans under the Term Loan Facility.
Loss on extinguishment of debt
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Loss on extinguishment of debt |
|
$ |
5 |
|
|
$ |
38 |
|
|
$ |
52 |
|
|
$ |
— |
|
For the three months ended September 30, 2024, in connection with the July 2024 Prepayment and the Fourth Amendment, we recorded a loss on extinguishment of debt as a result of the acceleration of deferred financing and original issue discounts associated with our loans under the Term Loan Facility. For the three months ended June 30, 2024, in connection with the issuance of the Convertible Notes in May 2024, we recorded a loss on extinguishment of debt as a result of the acceleration of deferred financing and original issue discount costs associated with our loans under the Term Loan Facility.
For the nine months ended September 30, 2024, in addition to the loss on extinguishment of debt related to the Fourth Amendment and the July 2024 Prepayment, and the issuance of the Convertible Notes in May 2024, we recorded a loss on extinguishment of debt as a result of the acceleration of deferred financing costs associated with the extinguishment of our senior secured tranche A term loan using proceeds from borrowing additional USD Tranche B and additional Euro Tranche B loans pursuant to the Second Amendment.
Other expense (income), net
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Other expense (income), net |
|
$ |
5 |
|
|
$ |
(7 |
) |
|
$ |
(3 |
) |
|
$ |
14 |
|
Other expense (income), net, for the three and nine months ended September 30, 2024, three months ended June 30, 2024 and nine months ended September 30, 2023, consisted primarily of net foreign exchange and fair value gains and losses.
(Benefit) provision for income taxes
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(dollars in millions) |
|
September 30, 2024 |
|
|
June 30, 2024 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
(Benefit) provision for income taxes |
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
(76 |
) |
Our effective tax rates for the three months ended September 30, 2024 and June 30, 2024 were (4.0)% and (3.6%), respectively. Our effective tax rates for the three months ended September 30, 2024 and June 30, 2024 were lower than the U.S. statutory tax rate primarily due to the tax benefit related to the earnings mix, an increase in the U.S. deduction for foreign derived intangibles income (“FDII”) and a one-time increase in research and development credits due to the filing of prior year amended returns for 2020 and 2021, partially offset by an expected increase in foreign withholding taxes and a waiver of deductions related to U.S. base erosion payments.
Our effective tax rates for the nine months ended September 30, 2024 and 2023 were 1.2% and 4.1%, respectively. Our effective tax rate for the nine months ended September 30, 2024 was lower than the U.S. statutory tax rate primarily due to the tax benefit related to the earnings mix, increase in the U.S. deduction for FDII and a one-time increase in research and development credits due to filing of prior year amended returns for years 2020 and 2021, partially offset by an expected increase in foreign withholding taxes and a waiver of deductions related to U.S. base erosion payments. Our effective tax rate for the nine months ended September 30, 2023 was lower than the U.S. statutory tax rate primarily due to the tax benefit related to the impairment of intangible assets and various tax credits.
On a quarterly basis, we evaluate both positive and negative evidence that affects the realizability of net deferred tax assets and assess the need for a valuation allowance. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income in each jurisdiction of the right type to realize the assets.
Our future effective tax rate depends on various factors, including 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,
36
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 includes estimates and requires judgment by management. Accordingly, we may record additional provisions or benefits for U.S. federal, state, and foreign tax matters in future periods as new information becomes available.
Many countries in which we operate have implemented or are implementing legislation and other tax changes to align their tax systems with the Organisation for Economic Co-operation and Development global minimum tax rate known as Pillar Two of the Global Anti-Base Erosion (“GloBE”) rules. The GloBE rules provide a framework for a coordinated multi-country system of taxation intended to ensure large multinational enterprise groups pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. Many jurisdictions, including many EU countries, have enacted certain provisions of the GloBE rules effective as of January 1, 2024. The Company does not expect the GloBE rules to have a material impact on its consolidated financial statements.
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 2024 and December 31, 2023 totaled $861 million and $875 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 income (loss), 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 future 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 $352 million for the nine months ended September 30, 2024, resulting from net income of $99 million, which included non-cash charges of $254 million, mainly the result of $262 million of depreciation and amortization expense and $52 million of loss on extinguishment of debt, partially offset by $168 million in deferred income taxes and a net increase in working capital of $1 million. The net increase in working capital was primarily due to a decrease in accrued compensation of $26 million, a decrease in accounts payable of $21 million and a decrease in other current and non-current liabilities of $28 million. This net increase in working capital was partially offset by increases in income taxes payable of $53 million, other current and non-current assets of $17 million and inventory of $11 million.
Net cash used in investing activities was $66 million for the nine months ended September 30, 2024, and consisted primarily of $67 million in capital expenditures.
Net cash used in financing activities was $303 million for the nine months ended September 30, 2024, primarily due to net proceeds from the issuance of Convertible Notes of $1.4 billion and incremental loans under the Term Loan Facility in an aggregate principal amount of $761 million. The proceeds of the incremental loans under the Term Loan Facility were used in part to prepay the USD Tranche A term loans outstanding under the Amended Credit Agreement (as defined and described further below under “Credit Facilities”) in full in an aggregate principal amount of $744 million and the proceeds of the Convertible Notes were used in part to prepay a portion of the USD Tranche B loans in an aggregate principal amount of $1.2 billion. In addition, there were normal quarterly debt payments and voluntary prepayments that totaled $248 million. We also made payments of $167 million to purchase a capped call option related to the Convertible Notes, $33 million for debt financing costs and $44 million for dividends.
Holders of our common stock are entitled to receive dividends when they are declared by our Board of Directors. During each of the first three quarters of 2024 and 2023, our Board of Directors declared a cash dividend of $0.22 per share. The cash dividends totaled $44 million for both the nine months ended September 30, 2024 and 2023. On November 4, 2024, our Board of Directors declared a quarterly cash dividend of $0.22 per share to be paid on December 6, 2024 to stockholders of record as of November 25, 2024. 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.
37
Credit Facilities
In connection with the completion of the Atotech Acquisition, on August 17, 2022 (the “Effective Date”) 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, which we have amended several times since (as amended, the “Amended Credit Agreement”). As of September 30, 2024, the Amended Credit Agreement provided for (i) a senior secured term loan facility comprised of two tranches: a $2.6 billion loan (the “USD Tranche B”) and a €800 million loan (the “Euro Tranche B” and together with the USD Tranche B, the “Term Loan Facility”) and (ii) a senior secured revolving credit facility of $675 million (the “Revolving Facility” and, together with the Term Loan Facility, the “Credit Facilities”), with the commitments under each of the foregoing facilities subject to increase from time to time subject to certain conditions.
As of September 30, 2024, borrowings under the Credit Facilities bore 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 B and the 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 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%. As of September 30, 2024, the applicable margins for borrowings under the Credit Facilities were (i) under the USD Tranche B and the Revolving Facility, 1.25% with respect to base rate borrowings and 2.25% with respect to Term SOFR borrowings and (ii) under the Euro Tranche B, 2.75%.
In addition to paying interest on outstanding principal under the Credit Facilities, we are required to pay a commitment fee in respect of the unutilized commitments under the Revolving Facility. The commitment fee is subject to adjustment based on our first lien net leverage ratio as of the end of the preceding fiscal quarter. We must also pay customary letter of credit fees and agency fees. As of September 30, 2024, the commitment fee was 0.25% per annum representing a downward adjustment from 0.375% as of June 30, 2024.
As of September 30, 2024, the weighted average interest rate of the Term Loan Facility was 6.9%. The Revolving Facility has a maturity date in August 2027 while the USD Tranche B and Euro Tranche B have a maturity date in August 2029. As of September 30, 2024, there were no borrowings under the Revolving Facility.
We are required to make scheduled quarterly principal payments equal to approximately $10 million with respect to the USD Tranche B and approximately €2 million with respect to the Euro Tranche B, in each case with the balance due thereunder on the seventh anniversary of the Effective Date. There is no scheduled amortization under the Revolving Facility. Any principal amount outstanding under the Revolving Facility is due and payable in full on the fifth anniversary of the Effective Date.
Under the Amended 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 its asset sales, certain casualty and condemnation events and the incurrence 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 Revolving Facility exceeds the aggregate commitments under the 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, and have voluntarily repaid, outstanding loans under the 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 and any prepayment premium that might be applicable to repayments we make prior to January 23, 2025. Additionally, we may voluntarily reduce the unutilized portion of the commitment amount under the Revolving Facility.
On October 23, 2024, we made a voluntary prepayment of €200 million principal amount, which equates to $216 million, to our Euro Tranche B loan under the Term Loan Facility.
All obligations under the 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 Amended Credit Agreement, we have the ability to incur additional incremental debt facilities in an amount up to (x) the greater of (1) $1,011 million and (2) 75% of consolidated last twelve months earnings before interest, taxes, depreciation, and amortization, plus (y) an amount equal to the sum of all voluntary prepayments of term loans under the 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).
38
The Amended Credit Agreement contains customary representations and warranties, covenants and provisions relating to events of default. As of September 30, 2024, we were in compliance with all covenants under the Amended Credit Agreement. The USD Tranche B and the Euro Tranche B are not subject to financial maintenance covenants.
On May 16, 2024, we completed a private offering of Convertible Notes. A significant portion of the net proceeds from the offering was used to repay approximately $1.2 billion of the USD Tranche B. As a result of the repayment, we recorded a $38 million loss on extinguishment of debt.
Convertible Notes
On May 16, 2024, we completed a private offering of $1.4 billion aggregate principal amount of convertible senior notes due 2030 (the “Convertible Notes”). The Convertible Notes were sold in a private placement under a purchase agreement, dated as of May 13, 2024, entered into by and among us and Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC, BofA Securities, Inc. and Mizuho Securities USA LLC, as representatives of the several initial purchasers named therein, for resale to persons reasonably believed to be qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended.
The net proceeds from the offering were approximately $1.4 billion after deducting the initial purchasers’ discounts and commissions and estimated offering expenses paid by us. We used approximately $167 million of the net proceeds from the offering to pay the cost of the capped call transactions described below. We used the remaining net proceeds from the offering to repay approximately $1.2 billion in borrowings outstanding under the USD Tranche B, together with accrued interest, as well as for general corporate purposes.
Indenture and the Convertible Notes
On May 16, 2024, we entered into an indenture (the “Indenture”) with respect to the Convertible Notes with U.S. Bank Trust Company, National Association, as trustee. Under the Indenture, the Convertible Notes are senior unsecured obligations of ours and bear interest at a coupon rate of 1.25% per annum, with interest payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2024. The Convertible Notes will mature on June 1, 2030, unless earlier converted, redeemed or repurchased in accordance with their terms.
Subject to certain conditions, on or after June 5, 2027, we may redeem for cash all or any portion of the Convertible Notes at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the trading day immediately preceding the date the notice of redemption is sent.
The conversion rate for the Convertible Notes is initially 6.4799 shares of our common stock per one thousand dollars principal amount of Notes, which is equivalent to an initial conversion price of approximately $154.32 per share. The conversion rate is subject to adjustment upon the occurrence of certain events.
Upon conversion, we will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. Prior to March 1, 2030, noteholders may convert all or any portion of their Convertible Notes only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the second scheduled trading day immediately preceding the maturity date.
If we undergo a fundamental change (as defined in the Indenture) prior to the maturity date of the Convertible Notes, holders may require us to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Indenture contains customary terms and covenants, including that upon certain events of default that are occurring and continuing, either the trustee or the holders of at least 25% in aggregate principal amount of the outstanding Convertible Notes may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the Convertible Notes to be due and payable.
As of September 30, 2024, the Convertible Notes are classified as a long-term liability, net of issuances costs, on the condensed consolidated balance sheet. The Convertible Notes were issued at par and costs associated with the issuance of the Convertible Notes are amortized to interest expense over the contractual term of the Convertible Notes. As of September 30, 2024, the effective interest rate of the Convertible Notes was 1.56%.
39
Capped Call Transactions
On May 13, 2024, in connection with the pricing of the Convertible Notes, and on May 14, 2024, in connection with the exercise in full by the initial purchasers of their option to purchase additional Convertible Notes, we entered into privately negotiated capped call transactions with certain of the initial purchasers of the Convertible Notes or their respective affiliates and other financial institutions. The capped call transactions are expected generally to reduce the potential dilution to our common stock upon conversion of any Convertible Notes and/or offset any cash payments that we are required to make in excess of the principal amount of any converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap initially equal to $237.42 per share (which represents a premium of 100% over the last reported sale price of $118.71 per share of our common stock on The Nasdaq Global Select Market on May 13, 2024), and is subject to customary adjustments under the terms of the capped call transactions.
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. These lines of credit and financing facility provided for aggregate borrowings as of September 30, 2024 and December 31, 2023 of up to an equivalent of $21 million and $14 million, respectively. There were no borrowings under these arrangements at September 30, 2024 and December 31, 2023.
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. These interest rate swap agreements 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 Term Loan Facility.
Contractual Obligations
There have been no changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report.
Recent Accounting Pronouncements
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires a public entity to disclose significant segment expenses and other segment items on an annual and interim basis and provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Additionally, it requires a public entity to disclose the title and position of the Chief Operating Decision Maker. The ASU does not change how a public entity identifies its operating segments, aggregates them, or applies the quantitative thresholds to determine its reportable segments. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. A public entity should apply the amendments in this ASU retrospectively to all prior periods presented in the financial statements. We do not expect the additional disclosure requirements under ASU 2023-07 to have a material impact on our consolidated financial statements.
40
Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on the rate reconciliation and income taxes paid. ASU No. 2023-09 requires a public business entity (“PBE”) to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. For PBEs, the new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all periods presented. We are currently evaluating the impact of this ASU on our consolidated financial statements and related disclosures.
Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses
In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the notes to financial statements. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements and related disclosures.
41
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. As of September 30, 2024, there were no material changes in our exposure to market risk from December 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (who served as both our principal executive officer and principal financial officer for the three months ended September 30, 2024), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. 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 (“SEC”) 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 concluded that, as of September 30, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
42
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS.
Information regarding risk factors affecting our business is discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission on February 27, 2024 and the section entitled “Risk Factors” in our Quarterly Report on Form 10-Q for the period ended June 30, 2024 filed with the U.S. Securities and Exchange Commission on August 8, 2024, which section is incorporated herein by reference.
ITEM 5. OTHER INFORMATION.
The following table describes, for the quarterly period covered by this report, each trading arrangement for the sale or purchase of Company securities adopted or terminated by our directors and officers (as defined in Rule 16a-1(f) under the Exchange Act) that is either (1) a contract, instruction or written plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (a “Rule 10b5-1 trading arrangement”) or (2) a “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c) of Regulation S-K):
Name (Title) |
Action Taken (Date of Action) |
Type of Trading Arrangement |
Nature of Trading Arrangement |
Duration of Trading Arrangement |
Aggregate Number of Securities |
Adoption ( |
Up to |
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Adoption ( |
Up to |
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ITEM 6. EXHIBITS.
Exhibit No. |
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Exhibit Description |
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+3.1(1) |
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+3.2(2) |
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+3.3(3) |
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+3.4(4) |
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10.1* |
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Employment Agreement, effective August 9, 2024, between Ramakumar Mayampurath and the Registrant |
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+10.2(5) |
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31.1 |
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31.2 |
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32.1 |
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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 with Embedded Linkbase Documents |
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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
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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: November 7, 2024 |
By: |
/s/ Ramakumar Mayampurath |
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Ramakumar Mayampurath |
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Executive Vice President, Chief Financial Officer and Treasurer |
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(Principal Financial Officer) |
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Exhibit 10.1
EMPLOYMENT AGREEMENT
MKS Instruments, Inc., a Massachusetts corporation (the “Company” or “MKS”), and Ram Mayampurath of Chandler, Arizona (“Employee”) agree, effective 9th day of August 2024 as follows:
(i) Base Salary. The Company will pay Employee, within 14 days after the General Release Agreement becomes irrevocable, a lump sum in an
amount equal to one and one-half times annual Base Salary (determined without regard to any reduction in Base Salary giving rise to “Good Reason,” as defined below).
(ii) Incentive Compensation. The Company will pay Employee, within 14 days after the General Release Agreement becomes irrevocable, a lump sum equal to one and one-half times the annual amount of incentive compensation for which Employee was eligible under any Incentive Compensation Plan of the Company then in effect for the year containing the Employment End Date. Additionally, Employee will receive a payment for target bonus, prorated for the current year.
(iii) Continuation of Benefits. For a period of 18 months after the Employment End Date, to the extent Employee is eligible for and elects to continue group medical, vision, or dental insurance coverage under COBRA and timely remits the amount of premium assessed to similarly situated active employees for comparable coverage, the Company will pay the Company’s usual share of such premiums. Benefits payable under this Section 6(g)(iii) will terminate to the extent Employee ceases to be eligible for COBRA coverage under the Company’s medical benefits plan. Notwithstanding the foregoing, the Company will not pay the contribution toward COBRA coverage described above to the extent that the Company reasonably determines that doing so would subject the Company to the excise tax under Section 4980D of the Internal Revenue Code (the “Code”) (as a result of discriminatory coverage under a group health plan).
(iv) Restricted Stock Units or Stock Appreciation Rights. Employee's unvested equity awards as of the Employment End Date will be subject to accelerated vesting to the extent provided in the respective equity award agreement issued to Employee under the then effective MKS Instruments, Inc. equity incentive plan (including the MKS Instruments, Inc. 2022 Stock Incentive Plan).
(i) commits a felony or engages in fraud, misappropriation or embezzlement;
(ii) knowingly fails or refuses to perform Employee’s duties in a material way and, to the extent that the Company determines such failure or refusal can reasonably be cured, fails or refuses to effect a cure within 10 days after the Company notifies Employee in writing of the failure or refusal;
(iii) knowingly causes, or knowingly creates a serious risk of causing, material harm to the Company’s business or reputation; or
(iv) breaches, in a material way, this Employment Agreement, the Confidential Information Agreement or any other agreement between Employee and the Company, and, to the extent that the Company determines such breach can reasonably be cured, fails or refuses to effect a cure within 10 days after the Company notifies Employee in writing of the breach.
(i) the Company materially reduces Employee’s position, duties or responsibilities;
(ii) the Company reduces Employee’s Base Salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Employment Agreement;
(iii) the Company changes Employee’s principal place of work to a location more than 50 miles from Employee’s current principal place of work.
Notwithstanding the foregoing, an action described above will not constitute Good Reason unless: (A) Employee, within 30 days after the he or she learns, or with reasonable diligence should have learned, of such action, delivers to the Company written notice identifying the action as Good Reason and demanding its correction; (B) the Company fails to correct such event within 30 days after receipt of such notice; and (C) Employee resigns for Good Reason within 90 days after the date Employee learned, or with reasonable diligence should have learned, of such action.
IN WITNESS WHEREOF, the parties hereto have executed, in the Commonwealth of Massachusetts, this Employment Agreement as a sealed instrument, all as of the day, month and year first written above.
MKS INSTRUMENTS, INC.
By: /s/ Sally Ann Bouley Title: EVP & Chief Human |
Dated: August 9, 2024 |
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/s/ Ram Mayampurath |
Dated: August 9, 2024 |
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: November 7, 2024 |
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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, Ramakumar Mayampurath, certify that:
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Dated: November 7, 2024 |
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/s/ Ramakumar Mayampurath
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Ramakumar Mayampurath 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 September 30, 2024 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 Ramakumar Mayampurath, 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: November 7, 2024 |
/s/ John T.C. Lee |
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John T.C. Lee President and Chief Executive Officer (Principal Executive Officer) |
Dated: November 7, 2024 |
/s/ Ramakumar Mayampurath |
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Ramakumar Mayampurath Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |