e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK ONE)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the transition period from to
Commission file number 0-23621
MKS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
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Massachusetts
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04-2277512 |
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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90 Industrial Way, Wilmington, Massachusetts
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01887 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (978) 284-4000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of
the Exchange Act.
Yes o No þ
Number of shares outstanding of the issuers common stock as of July 30, 2007: 57,537,258
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
2
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PART I. |
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FINANCIAL INFORMATION |
ITEM 1. FINANCIAL STATEMENTS.
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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June 30, 2007 |
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December 31, 2006 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
221,153 |
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$ |
215,208 |
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Short-term investments |
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114,923 |
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74,749 |
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Trade accounts receivable, net |
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125,910 |
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123,658 |
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Inventories |
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163,713 |
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149,820 |
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Deferred income taxes |
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16,376 |
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16,787 |
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Other current assets |
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15,652 |
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11,216 |
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Total current assets |
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657,727 |
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591,438 |
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Property, plant and equipment, net |
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80,130 |
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79,463 |
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Long-term investments |
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6,729 |
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2,816 |
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Goodwill |
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322,712 |
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323,973 |
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Acquired intangible assets, net |
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35,998 |
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43,104 |
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Other assets |
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2,376 |
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2,926 |
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Total assets |
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$ |
1,105,672 |
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$ |
1,043,720 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Short-term borrowings |
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$ |
24,038 |
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$ |
21,845 |
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Current portion of capital lease obligations |
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1,383 |
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1,176 |
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Accounts payable |
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37,938 |
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38,541 |
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Accrued compensation |
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17,642 |
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26,685 |
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Income taxes payable |
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16,619 |
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Other accrued expenses |
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30,534 |
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25,031 |
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Total current liabilities |
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111,535 |
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129,897 |
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Long-term debt |
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5,000 |
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5,000 |
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Long-term portion of capital lease obligations |
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1,135 |
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1,113 |
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Deferred income taxes |
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2,727 |
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1,535 |
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Other liabilities |
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17,412 |
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4,956 |
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Commitments and contingencies (Note 8) |
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Stockholders equity: |
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Preferred Stock, $0.01 par value, 2,000,000 shares authorized; none issued
and outstanding |
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Common Stock, no par value, 200,000,000 shares authorized; 57,687,601 and
56,671,625 shares issued and outstanding at June 30, 2007 and December 31,
2006, respectively |
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113 |
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113 |
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Additional paid-in capital |
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714,034 |
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680,164 |
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Retained earnings |
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243,479 |
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210,877 |
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Accumulated other comprehensive income |
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10,237 |
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10,065 |
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Total stockholders equity |
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967,863 |
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901,219 |
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Total liabilities and stockholders equity |
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$ |
1,105,672 |
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$ |
1,043,720 |
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The accompanying notes are an integral part of the consolidated financial statements.
3
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30 |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Net sales |
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$ |
203,978 |
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$ |
198,351 |
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$ |
415,410 |
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$ |
377,412 |
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Cost of sales |
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117,948 |
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111,850 |
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236,518 |
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217,166 |
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Gross profit |
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86,030 |
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86,501 |
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178,892 |
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160,246 |
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Research and development |
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18,351 |
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17,663 |
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36,650 |
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33,720 |
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Selling, general and administrative |
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35,928 |
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30,300 |
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70,504 |
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60,065 |
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Amortization of acquired intangible assets |
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4,108 |
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4,086 |
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8,215 |
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9,340 |
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Purchase of in-process technology |
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800 |
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Income from operations |
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27,643 |
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34,452 |
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63,523 |
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56,321 |
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Interest expense |
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216 |
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228 |
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433 |
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|
431 |
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Interest income |
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3,797 |
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2,162 |
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7,319 |
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3,795 |
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Income before income taxes |
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31,224 |
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36,386 |
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70,409 |
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59,685 |
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Provision for income taxes |
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8,697 |
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12,012 |
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20,592 |
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19,876 |
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Net income |
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$ |
22,527 |
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$ |
24,374 |
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$ |
49,817 |
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$ |
39,809 |
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Net income per share: |
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Basic |
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$ |
0.40 |
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$ |
0.44 |
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$ |
0.88 |
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$ |
0.72 |
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Diluted |
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$ |
0.39 |
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$ |
0.44 |
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$ |
0.86 |
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$ |
0.72 |
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Weighted average common shares outstanding: |
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Basic |
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56,820 |
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55,338 |
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56,587 |
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54,999 |
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Diluted |
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57,939 |
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55,907 |
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57,633 |
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55,588 |
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The accompanying notes are an integral part of the consolidated financial statements.
4
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2007 |
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2006 |
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Cash flows from operating activities: |
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Net income |
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$ |
49,817 |
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$ |
39,809 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization |
|
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15,435 |
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|
15,882 |
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Stock-based compensation |
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6,895 |
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|
5,980 |
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Tax benefit from stock-based compensation |
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2,511 |
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|
3,865 |
|
Excess tax benefit from stock-based compensation |
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|
(1,025 |
) |
|
|
(1,829 |
) |
Other |
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|
1,504 |
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|
829 |
|
Changes in operating assets and liabilities, net of businesses acquired: |
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Trade accounts receivable |
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(2,739 |
) |
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|
(28,351 |
) |
Inventories |
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|
(14,154 |
) |
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|
(23,999 |
) |
Other current assets |
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(4,825 |
) |
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|
(517 |
) |
Accrued expenses and other current liabilities |
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|
8,983 |
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|
11,596 |
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Accounts payable |
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(560 |
) |
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|
4,427 |
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Income taxes payable |
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(16,671 |
) |
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(2,924 |
) |
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Net cash provided by operating activities |
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45,171 |
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24,768 |
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Cash flows from investing activities: |
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Acquisitions of businesses, net of cash acquired |
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(96,672 |
) |
Purchases of short-term and long-term available for sale investments |
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(113,809 |
) |
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(45,064 |
) |
Maturities and sales of short-term and long-term available for sale investments |
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69,721 |
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|
65,280 |
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Purchases of property, plant and equipment |
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(6,898 |
) |
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(4,210 |
) |
Other |
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|
557 |
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(756 |
) |
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Net cash used in investing activities |
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(50,429 |
) |
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(81,422 |
) |
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Cash flows from financing activities: |
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Proceeds from short-term borrowings |
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56,992 |
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|
42,417 |
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Payments on short-term borrowings |
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(53,943 |
) |
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(36,357 |
) |
Repurchases of common stock |
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(31,719 |
) |
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Principal payments on long-term debt and capital lease obligations |
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(640 |
) |
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(1,933 |
) |
Proceeds from exercise of stock options and employee stock purchase plan |
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38,968 |
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|
16,560 |
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Excess tax benefit from stock-based compensation |
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1,025 |
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|
1,829 |
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Net cash provided by financing activities |
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10,683 |
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22,516 |
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Effect of exchange rate changes on cash and cash equivalents |
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520 |
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|
862 |
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Increase (decrease) in cash and cash equivalents |
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5,945 |
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(33,276 |
) |
Cash and cash equivalents at beginning of period |
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215,208 |
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|
220,573 |
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Cash and cash equivalents at end of period |
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$ |
221,153 |
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$ |
187,297 |
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Supplemental cash flow disclosure: |
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Income taxes paid |
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$ |
24,108 |
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$ |
17,858 |
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The accompanying notes are an integral part of the consolidated financial statements.
5
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
1) |
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Basis of Presentation |
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The terms MKS and the Company refer to MKS Instruments, Inc. and its subsidiaries. The
interim financial data as of June 30, 2007 and for the three and six months ended June 30,
2007 and 2006 is unaudited; however, in the opinion of MKS, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods. The unaudited consolidated financial statements
presented herein have been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and note disclosures required by accounting principles
generally accepted in the United States of America. The consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and notes
thereto included in the MKS Annual Report on Form 10-K for the year ended December 31, 2006
filed with the Securities and Exchange Commission on February 28, 2007. |
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The preparation of these consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related to revenue
recognition, stock-based compensation, inventory, intangible assets, goodwill and other
long-lived assets, in-process research and development expenses, merger expenses, income
taxes and investments. Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. |
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Certain amounts in prior periods have been reclassified to be consistent with the current
period presentation. |
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2) |
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Goodwill and Intangible Assets |
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Intangible Assets |
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Acquired amortizable intangible assets consisted of the following as of June 30, 2007: |
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Gross Carrying |
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Accumulated |
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Net Carrying |
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Amount |
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Amortization |
|
|
Amount |
|
Completed technology |
|
$ |
87,706 |
|
|
$ |
(69,584 |
) |
|
$ |
18,122 |
|
Customer relationships |
|
|
21,242 |
|
|
|
(8,487 |
) |
|
|
12,755 |
|
Patents, trademarks, tradenames and other |
|
|
16,674 |
|
|
|
(11,553 |
) |
|
|
5,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
125,622 |
|
|
$ |
(89,624 |
) |
|
$ |
35,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired amortizable intangible assets consisted of the following as of December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Completed technology |
|
$ |
87,087 |
|
|
$ |
(63,570 |
) |
|
$ |
23,517 |
|
Customer relationships |
|
|
20,932 |
|
|
|
(7,139 |
) |
|
|
13,793 |
|
Patents, trademarks, tradenames and other |
|
|
16,494 |
|
|
|
(10,700 |
) |
|
|
5,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
124,513 |
|
|
$ |
(81,409 |
) |
|
$ |
43,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense related to acquired intangibles for the three and six months
ended June 30, 2007 was $4,108,000 and $8,215,000, respectively. Aggregate amortization
expense related to acquired intangibles for the three and six months ended June 30, 2006 was
$4,086,000 and $9,340,000, respectively. Estimated amortization expense related to acquired
intangibles for the remainder of 2007 and in total for the year is $7,554,000 and
$15,769,000, respectively. Estimated amortization expense for 2008 and for each of the three
succeeding fiscal years is as follows: |
|
|
|
|
|
Year |
|
Amount |
2008 |
|
$ |
8,096 |
|
2009 |
|
|
5,835 |
|
2010 |
|
|
4,742 |
|
2011 |
|
|
4,327 |
|
6
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
|
|
Goodwill |
|
|
|
The changes in the carrying amount of goodwill during the six months ended June 30, 2007 were
not material. |
3) |
|
Net Income Per Share |
|
|
|
The following table sets forth the computation of basic and diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,527 |
|
|
$ |
24,374 |
|
|
$ |
49,817 |
|
|
$ |
39,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per common share basic |
|
|
56,820 |
|
|
|
55,338 |
|
|
|
56,587 |
|
|
|
54,999 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, restricted stock units and employee stock
purchase plan |
|
|
1,119 |
|
|
|
569 |
|
|
|
1,046 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per common share diluted |
|
|
57,939 |
|
|
|
55,907 |
|
|
|
57,633 |
|
|
|
55,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.40 |
|
|
$ |
0.44 |
|
|
$ |
0.88 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.39 |
|
|
$ |
0.44 |
|
|
$ |
0.86 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of computing diluted net income per common share, 1,997,191 and 2,744,392
outstanding options for the three and six months ended June 30, 2007, respectively, and
4,783,409 and 4,745,550 outstanding options for the three and six months ended June 30, 2006,
respectively, were excluded from the calculation as their inclusion would be anti-dilutive.
There were options to purchase approximately 5,393,854 and 8,208,548 shares of the Companys
common stock outstanding as of June 30, 2007 and 2006, respectively. |
|
4) |
|
Inventories |
|
|
|
Inventories consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Raw material |
|
$ |
83,513 |
|
|
$ |
82,007 |
|
Work in process |
|
|
31,041 |
|
|
|
26,943 |
|
Finished goods |
|
|
49,159 |
|
|
|
40,870 |
|
|
|
|
|
|
|
|
|
|
$ |
163,713 |
|
|
$ |
149,820 |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
Components of comprehensive income were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
22,527 |
|
|
$ |
24,374 |
|
|
$ |
49,817 |
|
|
$ |
39,809 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in value of financial
instruments designated as cash flow
hedges (net of tax of $90 and $0 for
the three months ended June 30,
respectively, and net of tax benefit
of $91 and $271 for the six months
ended June 30, respectively) |
|
|
148 |
|
|
|
|
|
|
|
(154 |
) |
|
|
(452 |
) |
Foreign currency translation adjustment |
|
|
(95 |
) |
|
|
960 |
|
|
|
255 |
|
|
|
1,830 |
|
Unrealized gain on investments (net of
tax of $26 and $1 for the three months
ended June 30, respectively, and net
of tax of $42 and $34 for the six
months ended June 30, respectively) |
|
|
44 |
|
|
|
3 |
|
|
|
71 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
97 |
|
|
|
963 |
|
|
|
172 |
|
|
|
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
22,624 |
|
|
$ |
25,337 |
|
|
$ |
49,989 |
|
|
$ |
41,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
|
|
Stock Repurchase Program |
|
|
|
On February 12, 2007, MKS Board of Directors approved a share repurchase program (the
Program) for the repurchase of up to $300 million of its outstanding stock over the
subsequent two years. The repurchases may be made from time to time on the open market or
through privately negotiated transactions. The timing and amount of any shares repurchased
under the Program will depend on a variety of factors, including price, corporate and
regulatory requirements, capital availability, and other market conditions. The Program may
be discontinued at any time at the discretion of the Company and its Board of Directors.
During the three months ended June 30, 2007, we repurchased 690,765 shares of common stock
for $18,844,288 for an average price of $27.28 and during the six months ended June 30, 2007,
we repurchased 1,200,765 shares of common stock for $31,719,084 for an average price of
$26.42. |
|
|
|
|
Share-Based Compensation |
|
|
|
At June 30, 2007, total unrecognized estimated compensation cost related to non-vested stock
options, restricted stock and restricted stock units (collectively stock-based shares)
granted prior to that date was approximately $27,334,564, which is expected to be recognized
over a weighted-average period of 2.1 years. Net stock-based shares, after forfeitures and
cancellations, granted during the six months ended June 30, 2007 and 2006 represented 1.0%
and 1.1%, respectively, of outstanding shares as of the beginning of each fiscal period and
represented 1.0% and 1.1%, respectively, of outstanding shares as of the end of each fiscal
period. |
|
6) |
|
Income Taxes |
|
|
|
The Company has adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes
(FIN 48), as of January 1, 2007. As a result of the implementation of FIN 48, the Company
recognized no adjustment in the liability for unrecognized income tax benefits. At the
adoption date of January 1, 2007, the total amount of gross unrecognized tax benefits, which
excludes interest and penalties discussed below, was approximately $10,500,000. If these
benefits were recognized in a future period, the timing of which is not estimable, the net
unrecognized tax benefit of approximately $10,100,000 would impact the Companys effective
tax rate. The total amount of gross unrecognized tax benefits at June 30, 2007 was
approximately $11,700,000. The increase from January 1, 2007 was primarily attributable to
tax positions taken by the Company in the current year. |
|
|
|
MKS and its subsidiaries are subject to U.S. federal income tax as well as the income tax of
multiple state and foreign jurisdictions. The Company has concluded all U.S. federal income
tax matters for years through 2002. At June 30, 2007, there were ongoing audits in various
other tax jurisdictions. The Company does not expect any material changes to the returns as
filed from these open audits. |
|
|
|
Within the next four quarters, the statute of limitations will close on the 2001 and 2002 tax
returns filed in various foreign jurisdictions. As a result, it is reasonably expected that
net unrecognized tax benefits from these foreign jurisdictions may be recognized within the
next four quarters. The recognition of these tax benefits is not expected to have a material
impact on the Companys financial statements. The Company does not reasonably expect any
other significant changes in the next four quarters. The following tax years, in the major
tax jurisdictions noted, are open for assessment or refund: U.S. Federal: 2003 to 2006,
Germany: 2002 to 2006, Korea: 2005 and 2006, Japan: 2001 to 2006, and the United Kingdom:
2005 and 2006. |
|
|
|
The Company will accrue interest and, if applicable, penalties, for any uncertain tax
positions. This interest and penalty expense will be a component of income tax expense. At
the date of adoption of FIN 48 and at June 30, 2007, the Company had approximately $700,000
and $1,000,000, respectively, accrued for interest on unrecognized tax benefits. |
|
|
|
The Companys effective tax rate for the three and six months ended June 30, 2007 was 27.9%
and 29.2%, respectively. The effective tax rate is less than the statutory tax rate
primarily due to the profits of the Companys international subsidiaries being taxed at rates
lower than the U.S. statutory tax rate and the benefit from U.S. research and development
credits. |
|
7) |
|
Geographic, Product and Significant Customer Information |
|
|
|
The Company operates in one segment for the development, manufacturing, sales and servicing
of products that measure, control, power and monitor critical parameters of advanced
manufacturing processes. The Companys chief decision-maker reviews consolidated operating
results to make decisions about allocating resources and assessing performance for the entire
Company. |
8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
|
|
Information about the Companys operations in different geographic regions is presented
in the tables below. Net sales to unaffiliated customers are based on the location in which
the sale originated. Transfers between geographic areas are at negotiated transfer prices
and have been eliminated from consolidated net sales. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
127,505 |
|
|
$ |
133,376 |
|
|
$ |
257,852 |
|
|
$ |
258,509 |
|
Japan |
|
|
27,897 |
|
|
|
23,947 |
|
|
|
53,943 |
|
|
|
46,105 |
|
Europe |
|
|
22,009 |
|
|
|
17,339 |
|
|
|
42,936 |
|
|
|
31,871 |
|
Asia |
|
|
26,567 |
|
|
|
23,689 |
|
|
|
60,679 |
|
|
|
40,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
203,978 |
|
|
$ |
198,351 |
|
|
$ |
415,410 |
|
|
$ |
377,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Long-lived assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
66,841 |
|
|
$ |
68,393 |
|
Japan |
|
|
5,758 |
|
|
|
5,479 |
|
Europe |
|
|
4,667 |
|
|
|
4,908 |
|
Asia |
|
|
5,240 |
|
|
|
3,609 |
|
|
|
|
|
|
|
|
|
|
$ |
82,506 |
|
|
$ |
82,389 |
|
|
|
|
|
|
|
|
|
|
The Company groups its products into three product groups. Net sales for these product
groups are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Instruments and Control Systems |
|
$ |
97,338 |
|
|
$ |
94,316 |
|
|
$ |
198,529 |
|
|
$ |
178,224 |
|
Power and Reactive Gas Products |
|
|
86,813 |
|
|
|
83,645 |
|
|
|
172,380 |
|
|
|
160,229 |
|
Vacuum Products |
|
|
19,827 |
|
|
|
20,390 |
|
|
|
44,501 |
|
|
|
38,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
203,978 |
|
|
$ |
198,351 |
|
|
$ |
415,410 |
|
|
$ |
377,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had one customer comprising 21% of net sales for the three months ended June 30,
2007 and one customer comprising 20% of net sales for the six months ended June 30, 2007.
The Company had one customer comprising 22% of net sales for the three months ended June 30,
2006, and two customers comprising 22% and 10%, respectively, of net sales for the six months
ended June 30, 2006. |
|
8) |
|
Commitments and Contingencies |
|
|
|
The Company is subject to various legal proceedings and claims, which have arisen in the
ordinary course of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Companys results of operations,
financial condition or cash flows. |
|
|
|
The Company reviewed its contractual obligations and commercial commitments as of June
30, 2007 and determined that there were no significant changes from the ones set forth in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006. However, certain
changes in the Companys obligations related to the adoption of FIN 48 are discussed in Note
6, Income Taxes, in the Notes to Consolidated Financial Statements in this Form 10-Q. |
|
9) |
|
Product Warranties |
|
|
|
The Company provides for the estimated costs to fulfill customer warranty obligations upon
the recognition of the related revenue. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating the quality of
its component suppliers, the Companys warranty obligation is affected by product failure
rates, utilization levels, material usage, and supplier warranties on parts delivered to the
Company. Should actual product failure rates, utilization levels, material usage, or
supplier warranties on parts differ from the Companys estimates, revisions to the estimated
warranty liability would be required. |
9
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tables in thousands, except share and per share data)
|
|
Product warranty activities for the six months ended June 30 were as follows: |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Balance at January 1 |
|
$ |
11,549 |
|
|
$ |
7,766 |
|
Fair value of warranty liabilities acquired during the period |
|
|
|
|
|
|
612 |
|
Provisions for product warranties during the period |
|
|
4,020 |
|
|
|
7,299 |
|
Direct charges to warranty liability during the period |
|
|
(4,211 |
) |
|
|
(4,606 |
) |
|
|
|
|
|
|
|
Balance at June 30 |
|
$ |
11,358 |
|
|
$ |
11,071 |
|
|
|
|
|
|
|
|
10) |
|
Recently Issued Accounting Pronouncements |
|
|
|
In September 2006, the Financial Accounting Standards Board (the FASB) issued SFAS
No. 157, Fair Value Measurements (SFAS 157). SFAS 157 clarifies the principle that fair
value should be based on the assumptions market participants would use when pricing an asset
or liability and establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under the standard, fair value measurements would be separately
disclosed by level within the fair value hierarchy. SFAS 157 is effective for fiscal years
beginning after November 15, 2007, with early adoption permitted. MKS is currently in the
process of evaluating any potential impact of SFAS 157. |
|
|
|
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure certain
financial instruments and certain other items at fair value and requires that unrealized
gains and losses on items for which the fair value option has been elected be reported in
earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007, although
early adoption is permitted. The Company is currently evaluating the impact of SFAS 159 and
has not yet determined its possible effect on its consolidated financial statements. |
10
MKS INSTRUMENTS, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We believe that this Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. When used herein, the words
believes, anticipates, plans, expects, estimates and similar expressions are intended to
identify forward-looking statements. These forward-looking statements reflect managements current
opinions and are subject to certain risks and uncertainties that could cause results to differ
materially from those stated or implied. We assume no obligation to update this information. Risks
and uncertainties include, but are not limited to those discussed in the section entitled Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the
Securities and Exchange Commission on February 28, 2007
Overview
We are a leading worldwide provider of instruments, components, subsystems and process control
solutions that measure, control, power, monitor and analyze critical parameters of semiconductor
and other advanced manufacturing processes.
We are managed as one operating segment which is organized around three product groups:
Instruments and Control Systems, Power and Reactive Gas Products and Vacuum Products. Our products
are derived from our core competencies in pressure measurement and control, materials delivery, gas
and thin-film composition analysis, electrostatic charge control, control and information
management, power and reactive gas generation and vacuum technology. Our products are used to
manufacture semiconductors and thin film coatings for diverse markets such as flat panel displays,
optical and magnetic storage media, architectural glass, solar panels and electro-optical products.
We also provide technologies for other markets, including the medical imaging equipment and the
energy generation and conservation markets.
Our customers include semiconductor capital equipment manufacturers, semiconductor device
manufacturers, capital equipment manufacturers of thin-film coatings used in flat panel displays,
optical and magnetic data storage media, architectural glass, solar panels and electro-optical
products, industrial and manufacturing companies, medical equipment manufacturers and university,
government and industrial research laboratories. For the six months ended June 30, 2007 and the
full year ended December 31, 2006, we estimate that approximately 70% of our net sales,
respectively, were to semiconductor capital equipment manufacturers and semiconductor device
manufacturers. We expect that sales to the semiconductor capital equipment manufacturers and
semiconductor device manufacturers will continue to account for a substantial majority of our
sales.
During 2006, we experienced significant increases in customer orders, which primarily resulted
in an increase in our net sales for 2006 to $782.8 million, which ranged quarterly from $179.1
million to $205.5 million, from 2005 net sales of $509.3 million. Orders and net sales during our
first two quarters of 2007 continued at a high level resulting in net sales of $211.4 million and
$204.0 million for the first and second quarter, respectively. For the third quarter of 2007, we
expect that our net sales could be approximately 10% lower than our second quarter 2007 net sales.
The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult
to predict, and we are uncertain how long these sales levels may be maintained or the timing or
extent of any future downturn or upturn in the semiconductor capital equipment industry.
A portion of our net sales is attributable to operations in international markets. For the six
months ended June 30, 2007 and full year ended December 31, 2006, international sales accounted for
approximately 38% and 34% of net sales, respectively.
On January 3, 2006, we completed our acquisition of Ion Systems, Inc. (Ion), a leading
provider of electrostatic management solutions located in Alameda, California, pursuant to an
Agreement and Plan of Merger dated November 25, 2005. Ions ionization technology controls
electrostatic charges to reduce process contamination and improve yields, which complements our
process monitoring and control technologies. The aggregate purchase price consisted of $68.1
million in cash, net of $5.1 million in cash acquired, and $0.8 million in acquisition related
costs.
Additionally, on January 3, 2006, we completed our acquisition of Umetrics, AB (Umetrics), a
leader in multivariate data analysis and modeling software located in Umea, Sweden, pursuant to a
Sale and Purchase Agreement dated December 15, 2005. Umetrics multivariate data analysis and
modeling software converts process data into useable information for yield improvement, when linked
with our open and modular platform of process sensors and data collection, integration, data
storage, and visualization capabilities. The purchase price consisted of $27.4 million in cash,
net of $2.6 million in cash acquired, and $0.4 million in acquisition related costs.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of America requires
management to make judgments, assumptions and estimates that affect the amounts reported. There
have been no material changes in our critical accounting policies since December 31, 2006. For
further
11
information, please see the discussion of critical accounting policies in our Annual Report
on Form 10-K for the year ended December 31, 2006.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total net sales
of certain line items included in MKS consolidated statements of operations data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
57.8 |
|
|
|
56.4 |
|
|
|
56.9 |
|
|
|
57.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
42.2 |
|
|
|
43.6 |
|
|
|
43.1 |
|
|
|
42.5 |
|
Research and development |
|
|
9.0 |
|
|
|
8.9 |
|
|
|
8.8 |
|
|
|
8.9 |
|
Selling, general and administrative |
|
|
17.6 |
|
|
|
15.3 |
|
|
|
17.0 |
|
|
|
15.9 |
|
Amortization of acquired intangible assets |
|
|
2.0 |
|
|
|
2.0 |
|
|
|
2.0 |
|
|
|
2.5 |
|
Purchase of in-process technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
13.6 |
|
|
|
17.4 |
|
|
|
15.3 |
|
|
|
14.9 |
|
Interest income, net |
|
|
1.7 |
|
|
|
1.0 |
|
|
|
1.7 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
15.3 |
|
|
|
18.4 |
|
|
|
17.0 |
|
|
|
15.8 |
|
Provision for income taxes |
|
|
4.3 |
|
|
|
6.1 |
|
|
|
5.0 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
11.0 |
% |
|
|
12.3 |
% |
|
|
12.0 |
% |
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
June 30, |
|
|
June 30, |
|
|
2007 |
|
2006 |
|
% Change |
|
|
2007 |
|
2006 |
|
% Change |
Net sales |
|
$ |
204.0 |
|
|
$ |
198.4 |
|
|
|
2.8 |
|
|
|
$ |
415.4 |
|
|
$ |
377.4 |
|
|
|
10.1 |
|
Net sales increased $5.6 million during the three month period ended June 30, 2007 mainly due
to an increase in worldwide demand from our thin-film and other non-semiconductor manufacturing
applications, which sales increased $8.1 million or 14.0% compared to the same period for the prior
year offset by a decrease in sales to our semiconductor capital equipment manufacturer and
semiconductor device manufacturer customers of $2.5 million or 1.8% compared to the same period for
the prior year. International net sales were approximately $76.5 million for the three months ended
June 30, 2007 or 37.5% of net sales compared to $65.0 million for the three months ended June 30,
2006 or 32.8% of net sales.
Net sales increased $38.0 million during the six month period ended June 30, 2007 mainly due
to an increase in worldwide demand from our semiconductor capital equipment manufacturer and
semiconductor device manufacturer customers, which sales increased $22.8 million or 8.5% compared
to the same period for the prior year and from our other non-semiconductor manufacturing
applications, which sales increased $15.0 million or 19.1% compared to the same period for the
prior year. International net sales were approximately $157.6 million for the six months ended June
30, 2007 or 37.9% of net sales compared to $118.9 million for the six months ended June 30, 2006 or
31.5% of net sales.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
% Points |
|
|
|
|
|
|
|
|
|
|
% Points |
|
|
2007 |
|
2006 |
|
Change |
|
|
2007 |
|
2006 |
|
Change |
Gross profit as a percentage of net sales |
|
|
42.2 |
% |
|
|
43.6 |
% |
|
|
(1.4 |
) |
|
|
|
43.1 |
% |
|
|
42.5 |
% |
|
|
0.6 |
|
Gross profit decreased by approximately 1.4 percentage points during the three months ended
June 30, 2007 consisting of approximately 1.3 percentage
points from higher overhead, 0.7 percentage points from higher costs related to excess and obsolete
inventory and 0.5 percentage points from changes in product mix, offset primarily by 0.9
percentage points from reduced warranty costs.
Gross profit increased by approximately 0.6 percentage points during the six months ended June
30, 2007 primarily consisting of approximately 1.1 percentage points
from increased sales volume and 0.9 percentage points from lower
warranty costs, offset by 1.2 percentage points from higher overhead, 0.5 percentage points from higher
costs related to excess and obsolete inventory and the remainder from a combination of changes in
product mix and foreign currency fluctuations.
12
Research and Development (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
June 30, |
|
|
June 30, |
|
|
2007 |
|
2006 |
|
% Change |
|
|
2007 |
|
2006 |
|
% Change |
Research and development expenses |
|
$ |
18.4 |
|
|
$ |
17.7 |
|
|
|
3.9 |
|
|
|
$ |
36.7 |
|
|
$ |
33.7 |
|
|
|
8.7 |
|
Research and development expense increased $0.7 million during the three months ended June 30,
2007 mainly due to increased compensation expense of $0.6 million, as a result of higher staffing
and compensation levels.
Research and development expense increased $3.0 million during the six months ended June 30,
2007 mainly due to increased compensation expense of $2.0 million, as a result of higher staffing
and compensation levels.
Our research and development is primarily focused on developing and improving our instruments,
components, subsystems and process control solutions to improve process performance and
productivity.
We have hundreds of products and our research and development efforts primarily consist of a
large number of projects related to these products, none of which is individually material to us.
Current projects typically have a duration of 12 to 30 months depending upon whether the product is
an enhancement of existing technology or a new product. Our current initiatives include projects to
enhance the performance characteristics of older products, to develop new products and to integrate
various technologies into subsystems. These projects support in large part the transition in the
semiconductor industry to larger wafer sizes and smaller integrated circuit geometries, which
require more advanced process control technology. Research and development expenses consist
primarily of salaries and related expenses for personnel engaged in research and development, fees
paid to consultants, material costs for prototypes and other expenses related to the design,
development, testing and enhancement of our products.
We believe that the continued investment in research and development and ongoing development
of new products are essential to the expansion of our markets, and expect to continue to make
significant investment in research and development activities. We are subject to risks if products
are not developed in a timely manner, due to rapidly changing customer requirements and competitive
threats from other companies and technologies. Our success primarily depends on our products being
designed into new generations of equipment for the semiconductor industry. We develop products that
are technologically advanced so that they are positioned to be chosen for use in each successive
generation of semiconductor capital equipment. If our products are not chosen to be designed into
our customers products, our net sales may be reduced during the lifespan of those products.
Selling, General and Administrative (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
June 30, |
|
|
June 30, |
|
|
2007 |
|
2006 |
|
% Change |
|
|
2007 |
|
2006 |
|
% Change |
Selling, general and
administrative expenses |
|
$ |
35.9 |
|
|
$ |
30.3 |
|
|
|
18.6 |
|
|
|
$ |
70.5 |
|
|
$ |
60.1 |
|
|
|
17.4 |
|
Selling, general and administrative expenses increased $5.6 million for the three months ended
June 30, 2007 due to $2.3 million in foreign exchange rate gains in 2006 that did not occur in
2007, $2.1 million of additional costs related to our ongoing enterprise resource planning system
implementation and a $1.0 million increase in compensation costs resulting from increased headcount
and compensation and benefit costs.
Selling, general and administrative expenses increased $10.4 million for the six months ended
June 30, 2007 due to $3.6 million in foreign exchange rate gains primarily occurring in 2006 that
did not occur in 2007, $4.0 million of additional costs related to our ongoing enterprise resource
planning system implementation and a $2.1 million increase in compensation costs resulting from
increased headcount and compensation and benefit costs.
Amortization of Acquired Intangible Assets (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
June 30, |
|
|
June 30, |
|
|
2007 |
|
2006 |
|
% Change |
|
|
2007 |
|
2006 |
|
% Change |
Amortization of acquired
intangible assets |
|
$ |
4.1 |
|
|
$ |
4.1 |
|
|
|
|
|
|
|
$ |
8.2 |
|
|
$ |
9.3 |
|
|
|
(12.0 |
) |
13
Amortization expense for the six months ended June 30, 2007 decreased $1.1 million primarily
as a result of certain acquired intangible assets that were fully amortized during the first
quarter of 2006.
Interest Income, Net (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
June 30, |
|
|
June 30, |
|
|
2007 |
|
2006 |
|
% Change |
|
|
2007 |
|
2006 |
|
% Change |
Interest income, net |
|
$ |
3.6 |
|
|
$ |
1.9 |
|
|
|
85.2 |
|
|
|
$ |
6.9 |
|
|
$ |
3.4 |
|
|
|
104.7 |
|
Interest income, net increased $1.7 million and $3.5 million during the three and six month
periods ended June 30, 2007, respectively, mainly as a result of higher average cash and cash
equivalent balances in 2007.
Provision for Income Taxes (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
|
2007 |
|
2006 |
Provision for income taxes |
|
$ |
8.7 |
|
|
$ |
12.0 |
|
|
|
$ |
20.6 |
|
|
$ |
19.9 |
|
Our effective tax rate for the three and six month periods ended June 30, 2007 was
27.9% and 29.2%, respectively. The effective tax rate is less than the statutory tax rate
primarily due to the profits of our international subsidiaries being taxed at rates lower than the
U.S. statutory tax rate and the benefit from U.S. research and development credits.
Our effective tax rate for the three and six month periods ended June 30, 2006 was 33.0%
and 33.3%, respectively. The effective tax rate is less than the statutory tax rate primarily due
to the profits of our international subsidiaries being taxed at rates lower than the U.S. statutory
tax rate.
We have adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN
48), as of January 1, 2007. As a result of the implementation of FIN 48, we did not recognize an
adjustment in the liability for unrecognized income tax benefits. At the adoption date of January
1, 2007, the total amount of gross unrecognized tax benefits, which excludes interest and penalties
discussed below, was $10.5 million. If these benefits were recognized in a future period, the
timing of which is not estimable, the net unrecognized tax benefit of $10.1 million would impact
our effective tax rate. The total amount of gross unrecognized tax benefits at June 30, 2007 was
approximately $11.7 million. The increase from January 1, 2007 was primarily attributable to our
tax positions taken during the current year.
MKS and its subsidiaries are subject to U.S. federal income tax as well as the income tax of
multiple state and foreign jurisdictions. We have concluded all U.S. federal income tax matters
for years through 2002. As of June 30, 2007, there were ongoing audits in various other tax
jurisdictions. We do not expect any material changes to the returns as filed from these open
audits.
Within the next four quarters, the statute of limitations will close on our 2001 and 2002 tax
returns filed in various foreign jurisdictions. As a result, it is reasonably expected that net
unrecognized tax benefits from these foreign jurisdictions may be recognized in the next four
quarters. The recognition of these tax benefits is not expected to have a material impact on our
financial statements. We do not reasonably expect any other significant changes in the next four
quarters. The following tax years, in the major tax jurisdictions noted, are open for assessment
or refund: U.S. Federal: 2003 to 2006, Germany: 2002 to 2006, Korea: 2005 and 2006, Japan: 2001 to
2006, and the United Kingdom: 2005 and 2006.
We will accrue interest and, if applicable, penalties, for any uncertain tax positions. This
interest and penalty expense will be a component of income tax expense. At the date of adoption of
FIN 48 and at June 30, 2007, we had $0.7 million and $1.0 million, respectively, accrued for
interest on unrecognized tax benefits.
The U.S. Research and Development Tax Credit expired at the end of 2005 and was not reinstated
until late in the fourth quarter of 2006. As a result, we did not take any benefit for this credit
in the three and six month periods ending June 30, 2006 and recorded a retroactive adjustment for
fiscal 2006 in the fourth quarter. The benefits taken in the three and six month periods ending
June 30, 2007 for this credit were approximately $0.5 million and $0.8 million, respectively.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments totaled $336.1 million at June 30, 2007
compared to $290.0 million at December 31, 2006. The primary source of funds for the first six
months of fiscal 2007 was cash provided by operating activities of $45.2 million.
Net cash provided by operating activities of $45.2 million for the six months ended June 30,
2007, resulted mainly from net income of $49.8 million, non-cash charges of $15.4 million for
depreciation and amortization and $8.4 million for stock-based compensation and related tax
benefits, offset by an increase in net operating assets of
$21.7 million and an $8.2 million
decrease in net operating liabilities. The
14
$21.7 million increase in net operating assets
consisted primarily of a $14.2 million increase in inventory, to support our increased revenues and
to support the increased inventory levels required for our planned China facility relocation in the
second half of 2007, and a $4.8 million increase in other current assets, primarily related to
prepaid taxes. The decrease in net operating liabilities of $8.2 million is mainly caused by a
decrease of $16.7 million in current income taxes payable, primarily due to payments of estimated
U.S. taxes, offset by an increase of $8.9 million in accrued expenses and other liabilities.
Net cash provided by operating activities of $24.8 million for the six months
ended June 30, 2006, resulted mainly from net income of $39.8 million, a $13.1 million
increase in net operating liabilities and non-cash charges of $15.9 million for depreciation and
amortization and $8.0 million for stock-based compensation and related tax benefits,
offset by an increase in net operating assets of $52.9 million. The increase in net operating
liabilities is mainly caused by an increase of $11.6 million in accrued expenses and other current
liabilities, primarily as a result of higher accrued compensation and warranty costs, an increase
of $4.4 million in accounts payable, primarily as a result of inventory procurement activities,
offset by a decrease of $2.9 million in income taxes payable. The $52.9 million increase in net
operating assets consisted primarily of a $28.4 million increase in accounts receivable as a result
of higher revenue and a $24.0 million increase in inventory as a result of increased product
demand.
Net cash used in investing activities of $50.4 million for the six months ended June 30, 2007,
resulted primarily from net purchases of $44.1 million of available for sale investments. Net
cash used in investing activities of $81.4 million for the six months ended June 30, 2006, resulted
primarily from the purchase of two technology companies for $96.7 million, offset by the net
maturities of $20.2 million of available for sale investments.
Net cash provided by financing activities of $10.7 million for the six months ended June 30,
2007, consisted primarily of $39.0 million in proceeds from the exercise of stock options and
purchases under our employee stock purchase plan, offset by repurchases of common stock
of $31.7 million. Net cash provided by financing activities of $22.5 million for the six
months ended June 30, 2006, consisted primarily of $16.6 million in proceeds from the exercise of
stock options and purchases under our employee stock purchase plan and $6.1 million in net proceeds
from short-term borrowings.
On February 12, 2007, our Board of Directors approved a share repurchase program (the
Program) for the repurchase of up to $300 million of our outstanding stock over two years. The
repurchases may be made from time to time on the open market or through privately negotiated
transactions. The timing and amount of any shares repurchased under the Program will depend on a
variety of factors, including price, corporate and regulatory requirements, capital availability,
and other market conditions. The Program may be discontinued at any time at the discretion of the
Company and our Board of Directors. During the six months ended June 30, 2007, we repurchased 1.2
million shares of common stock for $31.7 million for an average price of $26.42.
We believe that our working capital, together with the cash anticipated to be generated from
operations, will be sufficient to satisfy our estimated working capital, stock repurchase program
activity and planned capital expenditure requirements through at least the next 12 months.
To the extent permitted by Massachusetts law, our Restated Articles of Organization, as
amended, require us to indemnify any of our current or former officers or directors or any person
who has served or is serving in any capacity with respect to any of our employee benefit plans.
Because no claim for indemnification has been pursued by any person covered by the relevant
provisions of our Restated Articles of Organization, we believe that the estimated exposure for
these indemnification obligations is currently minimal. Accordingly, we have no liabilities
recorded for these requirements as of June 30, 2007.
We also enter into agreements in the ordinary course of business which include indemnification
provisions. Pursuant to these agreements, we indemnify, hold harmless and agree to reimburse the
indemnified party, generally our customers, for losses suffered or incurred by the indemnified
party in connection with certain patent or other intellectual property infringement claims, and, in
some instances, other claims, by any third party with respect to our products. The terms of these
indemnification obligations are generally perpetual after execution of the agreements. The maximum
potential amount of future payments we could be required to make under these indemnification
agreements is, in some instances, not contractually limited. We have never incurred costs to
defend lawsuits or settle claims related to these indemnification obligations. As a result, we
believe the estimated fair value of these obligations is minimal. Accordingly, we have no
liabilities recorded for these obligations as of June 30, 2007.
When, as part of an acquisition, we acquire all of the stock or all of the assets and
liabilities of another company, we assume liability for certain events or occurrences that took
place prior to the date of acquisition. The maximum potential amount of future payments we could
be required to make for such obligations is undeterminable at this time. Other than obligations
recorded as liabilities at the time of the acquisitions, historically we have not made significant
payments for these indemnifications. Accordingly, no liabilities have been recorded for these
obligations as of June 30, 2007.
In conjunction with certain asset sales, we may provide routine indemnifications whose terms
range in duration and often are not explicitly defined. Where appropriate, an obligation for such
indemnifications is recorded as a liability. Because the amounts of liability under these types of
indemnifications are not explicitly stated, the overall maximum amount of the obligation under such
indemnifications
15
cannot be reasonably estimated. Other than obligations recorded as liabilities at
the time of the asset sale, historically we have not made significant payments for these
indemnifications.
Off-Balance Sheet Arrangements
We do not have any financial partnerships with unconsolidated entities, such as entities often
referred to as structured finance, special purpose entities or variable interest entities, which
are often established for the purpose of facilitating off-balance sheet arrangements or for other
contractually narrow or limited purposes. Accordingly, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had such relationships.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 clarifies the principle that fair value should be based on the assumptions market participants
would use when pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, with early adoption permitted. We are
in the process of evaluating any potential impact of SFAS 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value and requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007, although early adoption is permitted.
We are currently evaluating the impact of SFAS 159 and have not yet determined its possible effect
on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information concerning market risk is contained in the Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the
year ended December 31, 2006 filed with the Securities and Exchange Commission on February 28,
2007. There were no material changes in our exposure to market risk from December 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES.
a) Effectiveness of disclosure controls and procedures.
MKS management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2007.
The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other
procedures of a company that are designed to ensure that information required to be disclosed by
the company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the companys management,
including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of June 30, 2007, our chief executive officer and chief financial
officer concluded that, as of such date, MKS disclosure controls and procedures were effective at
the reasonable assurance level.
b) Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30,
2007 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to various legal proceedings and claims, which have arisen in the ordinary
course of business. In the opinion of management, the ultimate disposition of these matters will
not have a material adverse effect on our results of operations, financial condition or cash flows.
ITEM 1A. RISK FACTORS.
Information regarding risk factors affecting the Companys business are discussed in the
Companys Annual Report of Form 10-K for the year ended December 31, 2006 in the section entitled
Risk Factors. As of June 30, 2007, there have been no material changes from those risk factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information about purchases by MKS during the quarter ended June
30, 2007, of equity securities that are registered by MKS pursuant to Section 12 of the Exchange
Act:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
|
|
|
|
|
|
|
|
|
(c) |
|
Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
|
|
|
|
|
|
Shares (or Units) |
|
Value) of Shares |
|
|
(a) |
|
|
|
|
|
Purchased as Part |
|
(or Units) that May |
|
|
Total Number of |
|
(b) |
|
of Publicly |
|
Yet Be Purchased |
|
|
Shares (or Units) |
|
Average Price Paid |
|
Announced Plans or |
|
Under the Plans or |
Period |
|
Purchased 1 |
|
per Share (or Unit) |
|
Programs1 |
|
Programs2 |
4/1/07 4/30/07 |
|
|
|
|
|
$ |
25.24 |
|
|
|
510,000 |
|
|
$ |
287,125,203 |
|
5/1/07 5/31/07 |
|
|
265,000 |
|
|
$ |
26.97 |
|
|
|
775,000 |
|
|
$ |
279,976,858 |
|
6/1/07 6/30/07 |
|
|
425,765 |
|
|
$ |
27.47 |
|
|
|
1,200,765 |
|
|
$ |
268,280,916 |
|
|
|
|
1) |
|
We repurchased an aggregate of 1,200,765 shares of our common stock pursuant to
the repurchase program that we publicly announced on February 12, 2007 (the Program). |
|
2) |
|
Our board of directors approved the repurchase by us of up to an aggregate of $300
million of our common stock pursuant to the Program. The expiration date of this
Program is February 11, 2009, unless terminated earlier by resolution of our board of
directors. |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Meeting of Shareholders on May 7, 2007, the following proposals were voted upon
as further specified below:
1. Election of Class II Directors:
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
Votes Withheld |
Cristina H. Amon |
|
|
52,129,867 |
|
|
|
955,233 |
|
Richard S. Chute |
|
|
36,900,159 |
|
|
|
16,184,941 |
|
2. Ratification of PricewaterhouseCoopers LLP as our independent
auditors:
|
|
|
|
|
|
|
|
|
Votes For |
|
Votes Against |
|
Votes Abstaining |
53,000,848 |
|
|
53,921 |
|
|
|
30,331 |
|
17
ITEM 6. EXHIBITS.
|
|
|
|
|
Exhibit No. |
|
Exhibit Description |
|
3.1 |
(1) |
|
Restated Articles of Organization |
|
|
|
|
|
|
3.2 |
(2) |
|
Articles of Amendment, as filed with the Secretary of State of Massachusetts on May 18, 2001 |
|
|
|
|
|
|
3.3 |
(3) |
|
Articles of Amendment, as filed with the Secretary of State of Massachusetts on May 16, 2002 |
|
|
|
|
|
|
3.4 |
(4) |
|
Amended and Restated By-Laws |
|
|
|
|
|
|
31.1 |
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended |
|
|
|
|
|
|
31.2 |
|
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference to the Registration Statement on Form S-4 (File No.
333-49738) filed with the Securities and Exchange Commission on November 13, 2000. |
|
(2) |
|
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001. |
|
(3) |
|
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002. |
|
(4) |
|
Incorporated by reference to the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on January 28, 1999, as amended. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
MKS INSTRUMENTS, INC.
|
|
August 8, 2007 |
By: |
/s/ Ronald C. Weigner
|
|
|
|
Ronald C. Weigner |
|
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
|
18