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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT
PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File number 0-23621
MKS INSTRUMENTS, INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Massachusetts
(State or other Jurisdiction
of
Incorporation or Organization)
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04-2277512
(IRS Employer
Identification No.)
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2 Tech Drive, Suite 201, Andover, Massachusetts
(Address of Principal
Executive Offices)
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01810
(Zip
Code)
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Registrants Telephone Number, including area code
(978) 645-5500
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Class
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Name of Each Exchange on Which Registered
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Common Stock, no par value
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o Smaller
reporting company
o
(Do not check if a smaller reporting company)
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
Aggregate market value of the voting and non-voting common
equity held by nonaffiliates of the registrant as of
June 30, 2007 based on the closing price of the
registrants Common Stock on such date as reported by the
Nasdaq Global Market: $1,252,682,585.
Number of shares outstanding of the issuers Common Stock,
no par value, as of February 15, 2008: 52,062,503
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for MKS Annual
Meeting of Stockholders to be held on May 5, 2008 are
incorporated by reference into Part III of this
Form 10-K.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
MKS management believes that this Annual Report on
Form 10-K
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
believe, anticipate, plan,
expect, estimate, intend,
may, see, will,
would 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
actual results to differ materially from those stated or
implied. MKS assumes no obligation to update this information.
Risks and uncertainties include, but are not limited to; those
discussed in the section entitled Risk Factors.
PART I
MKS Instruments, Inc. (the Company or
MKS) was founded in 1961 as a Massachusetts
corporation. We are a leading worldwide provider of instruments,
subsystems and process control solutions that measure, control,
power, monitor and analyze critical parameters to improve
process performance and productivity of advanced manufacturing
processes.
We are managed as one operating segment. We group our products
into three product groups: Instruments and Control Systems,
Power and Reactive Gas Products and Vacuum Products. Our
products are derived from our core competencies in pressure
measurement and control, materials delivery, gas composition
analysis, electrostatic charge management, control and
information technology, power and reactive gas generation and
vacuum technology.
Our products are used in diverse markets, applications and
processes. Our primary served markets are manufacturers of
capital equipment for semiconductor devices and for other thin
film applications including flat panel displays, solar cells,
data storage media and other advanced coatings. We also leverage
our technology in other markets with advanced manufacturing
applications including medical equipment, pharmaceutical
manufacturing and energy generation and environmental monitoring.
For over 45 years, we have focused on satisfying the needs
of our customers by establishing long-term, collaborative
relationships. We have a diverse base of customers that includes
manufacturers of semiconductor capital equipment and
semiconductor devices, thin film capital equipment used in the
manufacture of flat panel displays, solar cells, data storage
media and other coating applications; and other industrial,
medical and manufacturing companies, and university, government
and industrial research laboratories. Our top 10 customers for
the year ended December 31, 2007 were Applied Materials,
Hitachi, Lam Research, Novellus Systems, Oviso Manufacturing,
Philips, PSK Tech, Samsung, Tokyo Electronics and Ultra Clean
Technology.
We file reports, proxy statements and other documents with the
Securities and Exchange Commission. You may read and copy any
document we file at the SEC Headquarters at Office of Investor
Education and Assistance, 100 F Street, NE,
Washington, D.C. 20549. You should call
1-800-SEC-0330
for more information on the public reference room. Our SEC
filings are also available to you on the SECs Internet
site at
http://www.sec.gov.
Our internet address is www.mksinstruments.com. We are not
including the information contained in our website as part of,
or incorporating it by reference into, this annual report on
Form 10-K.
We make available free of charge through our web site our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to these reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, or the Exchange Act, as soon as reasonably
practicable after we electronically file such materials with the
Securities and Exchange Commission.
Markets
and Applications
We are focused on improving process performance and productivity
by measuring, controlling, powering, monitoring and analyzing
advanced manufacturing processes in semiconductor, thin film and
other market sectors.
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We estimate that approximately 68%, 70% and 71% of our net sales
for the years ended December 31, 2007, 2006 and 2005,
respectively, were to semiconductor capital equipment
manufacturers and semiconductor device manufacturers.
Approximately 8%, 8% and 8% of our net sales in the years ended
December 31, 2007, 2006 and 2005, respectively, were for
other thin-film processing equipment applications, including
flat panel displays; solar cells, data storage media, and other
thin film coatings. Approximately 24%, 22% and 21% of our net
sales in the years ended December 31, 2007, 2006 and 2005,
respectively, were for other manufacturing applications. These
include, but are not limited to, medical equipment; energy
generation and environmental monitoring processes;
pharmaceutical and other industrial manufacturing; and
university, government and industrial research laboratories.
We estimate that approximately 39%, 34% and 37% of our net sales
for the years ended December 31, 2007, 2006 and 2005,
respectively, were to customers located in international
markets. International sales include sales by our foreign
subsidiaries, but exclude direct export sales. Please refer to
Note 11 in the Notes to Consolidated Financial Statements
for further geographical sales information.
Semiconductor
Manufacturing Applications
The majority of our sales are derived from products sold to
semiconductor capital equipment manufacturers and semiconductor
device manufacturers. Our products are used in the major
semiconductor processing steps such as depositing thin films of
material onto silicon wafer substrates and etching and cleaning
circuit patterns. In addition, we provide specialized
instruments and software to monitor and analyze process
performance.
We anticipate that the semiconductor manufacturing market will
continue to account for a substantial portion of our sales.
While the semiconductor device manufacturing market is global,
major semiconductor capital equipment manufacturers are
concentrated in Japan and the United States.
Other
Thin Film Manufacturing Applications
Our products are used in the manufacture of flat panel displays,
data storage media, solar cells and other coatings including
architectural glass that require the same or similar thin film
deposition processes as semiconductor manufacturing.
Flat
Panel Display Manufacturing
Flat panel displays are used in electronic hand-held devices,
laptop computers, desktop computer monitors, and television
sets. We sell products to flat panel display equipment
manufacturers and to end-users in the flat panel display market.
Major manufacturers of flat panel displays are concentrated in
Japan, Korea and Taiwan, and major manufacturers of flat panel
display equipment are concentrated in Japan and the United
States. The transition to larger panel sizes and higher display
resolution is driving the need for improved process control to
reduce defects.
Solar
Cells
Our products are used in crystalline silicon and emerging thin
film processes to manufacture photovoltaic (PV) cells.
Crystalline silicon technology requires wafer based deposition
systems and is currently the dominant manufacturing technology.
Thin film deposition on a non-silicon substrate, such as glass,
is the emerging technology.
Data
Storage Media
Our products are used to manufacture storage media which store
and read data magnetically; optical storage media which store
and read data using laser technology; hard disks; data storage
devices; and digital video discs.
The transition to higher density storage capacity requires
manufacturing processes incorporating tighter process controls.
Major manufacturers of storage media are concentrated in Japan
and the Asia Pacific region, and major manufacturers of storage
media capital equipment are concentrated in Europe, Japan and
the United States.
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Other
Advanced Coatings
Thin film coatings for diverse applications such as
architectural glass and packaging are deposited using processes
similar to those used in semiconductor manufacturing. Thin film
processing manufacturers are concentrated in Europe, Japan and
the United States.
Other
Advanced Applications
Our products are used in other energy generation and
environmental monitoring processes such as nuclear fuel
processing, fuel cell research, greenhouse gas monitoring and
chemical agent detection; medical instrument sterilization;
consumable medical supply manufacturing and pharmaceutical
manufacturing. Our power delivery products are also incorporated
into other end-market products such as medical imaging
equipment. In addition, our products are sold to government,
university and industrial laboratories for vacuum applications
involving research and development in materials science,
physical chemistry and electronics materials. Major equipment
and process providers and research laboratories are concentrated
in Europe, Japan and the United States.
Acquisitions
We completed three acquisitions in 2006. On January 3,
2006, we completed our acquisition of Ion Systems, Inc.
(Ion), a leading provider of electrostatic
management solutions located in Alameda, California. Ions
ionization technology monitors electrostatic charges to reduce
process contamination and improve yields, which complements our
process monitoring and control technologies. 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.
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. On October 11, 2006, we
completed our acquisition of Novx Corp. (Novx), a
provider of electrostatic charge monitoring technology for
semiconductor, data storage, telecommunication, medical device
and other markets. Novxs technology expands our capability
to monitor, detect and control electrostatic charge in advanced
process environments, such as semiconductor and hard disk drive
manufacturing.
We completed one acquisition in 2007. On November 7, 2007,
we acquired Yield Dynamics, Inc. (YDI), a provider
of yield management technology located in Sunnyvale, California.
YDIs data and yield management software, along with
MKS portfolio of sensors that control critical processes,
data collection and integration hardware, and real-time fault
detection and classification software, provides a comprehensive
offering for generating, collecting and analyzing process sensor
data and correlating the data to wafers, chambers and tools
across the semiconductor fab as well as other thin film
manufacturing processes.
Product
Groups
We group our products into three product groups: Instruments and
Control Systems, Power and Reactive Gas Products and Vacuum
Products. Also, please refer to Note 11 in the Notes to
Consolidated Financial Statements for further information.
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Instruments
and Control Systems
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This product group includes pressure measurement and control,
materials delivery, gas composition analysis, electrostatic
charge management and control and information technology
products.
Pressure Measurement and Control
Products. Each of our pressure measurement
and control product lines consists of products that are designed
for a variety of pressure ranges and accuracies.
Baratron®
Pressure Measurement Products. These products are
typically used to measure the pressure of the gases being
distributed upstream of the process chambers, to measure process
chamber pressures and to measure pressures between process
chambers, vacuum pumps and exhaust lines. We believe we offer
the widest range of gas pressure measurement instruments in the
semiconductor and advanced thin-film materials processing
industries.
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Automatic Pressure and Vacuum Control
Products. These products enable precise control
of process pressure by electronically actuating valves that
control the flow of gases in and out of the process chamber to
minimize the difference between desired and actual pressure in
the chamber.
In most cases, Baratron pressure measurement instruments provide
the pressure input to the automatic pressure control device.
Together, these components create an integrated automatic
pressure control subsystem. Our pressure control products can
also accept inputs from other measurement instruments, enabling
the automatic control of gas input or exhaust based on
parameters other than pressure.
Materials Delivery Products. Each of
our materials delivery product lines consists of products that
are designed for a variety of flow ranges and accuracies.
Flow Measurement and Control Products. Flow
measurement products include gas and vapor flow measurement
products based upon thermal conductivity, pressure and direct
liquid injection technologies. The flow control products combine
the flow measurement device with valve control elements based
upon solenoid, piezo-electric and piston pump technologies.
These products measure and automatically control the mass flow
rate of gases and vapors into the process chamber.
Gas Composition Analysis Products. Gas
composition analysis instruments are sold to a variety of
industries including the semiconductor industry.
Mass Spectrometry-Based Gas Composition Analysis
Instruments. These products are based on
quadrupole mass spectrometer sensors that separate gases based
on molecular weight. These sensors include built-in electronics
and are provided with software that analyzes the composition of
background and process gases in the process chamber. These
instruments are provided both as portable laboratory systems and
as process gas monitoring systems used in the diagnosis of
semiconductor manufacturing process systems.
Fourier Transform Infra-Red (FTIR) Based Gas Composition
Analysis Products. FTIR-based products provide
information about the composition of gases by measuring the
absorption of infra-red light as it passes through the sample
being measured. Gas analysis applications include measuring the
compositions of mixtures of reactant gases; measuring the purity
of individual process gases; measuring the composition of
process exhaust gas streams to determine process health;
monitoring gases to ensure environmental health and safety and
monitoring combustion exhausts. These instruments are provided
as portable laboratory systems and as process gas monitoring
systems used in the diagnosis of manufacturing processes.
Mass spectrometry-based and FTIR-based gas monitoring systems
can indicate
out-of-bounds
conditions, such as the presence of undesirable contaminant
gases and water vapor or
out-of-tolerance
amounts of specific gases in the process, which alert operators
to diagnose and repair faulty equipment.
Leak Detection Products. Helium leak detection
is used in a variety of industries including semiconductor,
HVAC, automotive and aerospace to ensure the leak integrity of
both manufactured products and manufacturing equipment. We
believe that our products are the smallest mass
spectrometer-based helium leak detectors currently available.
Electrostatic Charge Management
Products. Semiconductor, flat panel display
and data storage industries are vulnerable to electrostatic
charge-related contamination and yield problems. We design and
manufacture products to control electrostatic attraction,
electrostatic discharge and electromagnetic interference. In
high throughput industrial applications such as plastics
manufacture and printing, ionization is used to improve process
control and productivity.
Control and Information Technology
Products. We design and manufacture a suite
of products that allow semiconductor and other manufacturing
customers to better control their processes through
computer-controlled automation. These products include digital
control network products, process chamber and system
controllers, connectivity products and data analysis/information
products.
Control Products. Digital control network
products are used to connect sensors, actuators and subsystems
to the chamber and system control computers. They support a
variety of industry-standard connection methods as well
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as conventional discrete digital and analog signals. Chamber and
system control computers process these signals in real time and
allow customers to precisely manage the process conditions.
Connecting sensors, chambers and tools to the factory network is
essential for improving quality and productivity. Our
connectivity products allow information to flow from the process
sensors and subsystems and from the process tool control
computer to the factory network. By enabling this information
flow, we believe that we help customers optimize their processes
through Advanced Process Control (APC), and diagnose
equipment problems from a remote location
(e-diagnostics).
Information Technology Products: We design
on-line and off-line software products to analyze data to
improve the quality and yield of semiconductor, thin film,
biopharmaceutical, injection molding and other manufacturing
processes.
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Power
and Reactive Gas Products
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This product group includes power delivery products and reactive
gas generation products used in semiconductor and other thin
film applications and in medical imaging equipment applications.
Power Delivery Products. We design and
manufacture microwave, DC and RF power delivery systems as well
as RF matching networks and metrology products. In the
semiconductor and thin film markets, our power supplies are used
to provide energy to various etching, stripping and deposition
processes. Our power amplifiers are also used in medical imaging
equipment.
Reactive Gas Generation Products. Reactive
gases are used to process and clean substrates and to clean
process chambers to reduce particle contamination. A reactive
gas is created when energy is added to a stable gas to break
apart its molecules. When the resulting dissociated gas comes
into contact with other matter it produces rapid chemical
reactions which result in processing of thin films (deposition
of films, etching and cleaning of films and surface
modifications) or equipment cleaning.
Processing Thin Films: Our reactive gas
products include ozone generators and subsystems used for
deposition of insulators onto semiconductor devices, ozonated
water delivery systems for advanced semiconductor wafer and flat
panel display cleaning, microwave plasma based products for
photo resist removal and a new line of remote plasma generators
which provide reactive gases for a wide range of semiconductor,
flat panel and other thin film process applications.
Equipment Cleaning: As materials are deposited
on wafers, films, or solar cells, the deposited material also
accumulates on the walls of the vacuum process chamber. Our
atomic fluorine generators are used to clean the process
chambers between deposition steps to reduce particulates and
contamination caused by accumulated build up on the chamber
walls.
This product group consists of vacuum technology products,
including vacuum gauges, effluent management subsystems, valves
and components.
Vacuum Gauging Products. We offer a wide range
of vacuum instruments consisting of vacuum measurement sensors
and associated power supply and readout units. These vacuum
gauges measure phenomena that are related to the level of
pressure in the process chamber and downstream of the process
chamber between the chamber and the pump. These gauges
complement our Baratron capacitance manometers for lower
pressure ranges and where less accuracy is required. Our
indirect pressure gauges use thermal conductivity and ionization
gauge technologies to measure pressure from atmospheric pressure
to one trillionth of atmospheric pressure.
Vacuum Valves and Process Solutions. Our
vacuum valves are used on the gas lines between the process
chamber and the pump downstream of the process chamber. Our
vacuum process solutions consist of flanges, fittings, traps and
heated lines that are used downstream from the process chamber
to control process effluent gasses by preventing condensable
materials from depositing particles near or back into the
chamber.
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Customers
Our largest customers include leading semiconductor capital
equipment manufacturers such as Applied Materials, Lam Research,
Novellus Systems, and Tokyo Electronics. Sales to our top ten
customers accounted for approximately 46%, 49% and 48% of net
sales for the years ended December 31, 2007, 2006 and 2005,
respectively. Applied Materials accounted for approximately 20%,
21% and 18% of our net sales for the years ended
December 31, 2007, 2006 and 2005, respectively.
Sales,
Marketing and Support
Our worldwide sales, marketing and support organization is
critical to our strategy of maintaining close relationships with
semiconductor capital equipment manufacturers and semiconductor
device manufacturers. We sell our products primarily through our
direct sales force. As of December 31, 2007, we had 203
sales employees worldwide, located in China, France, Germany,
Japan, Korea, the Netherlands, Singapore, Sweden, Taiwan, the
United Kingdom and the United States. We also maintain sales
representatives and agents in a number of countries, which
supplement this direct sales force. We maintain a marketing
staff that identifies customer requirements, assists in product
planning and specifications, and focuses on future trends in
semiconductor and other markets.
As semiconductor device manufacturers have become increasingly
sensitive to the significant costs of system downtime, they have
required that suppliers offer comprehensive local repair service
and close customer support. Manufacturers require close support
to enable them to repair, modify, upgrade and retrofit their
equipment to improve yields and adapt new materials or
processes. To meet these market requirements, we maintain a
worldwide sales and support organization in 17 countries.
Technical support is provided from offices in China, France,
Germany, Japan, Korea, the Netherlands, Singapore, Taiwan, the
United Kingdom and the United States. Repair and calibration
services are provided at 30 service depots located worldwide. We
typically provide warranties from one to three years, depending
upon the type of product.
Research
and Development
Our products incorporate sophisticated technologies to power,
measure, control and monitor increasingly complex gas-related
semiconductor manufacturing processes, thereby enhancing uptime,
yield and throughput for our semiconductor device manufacturing
customers. Our products have continuously advanced as we strive
to meet our customers evolving needs. We have developed,
and continue to develop, new products to address industry
trends, such as the shrinking of integrated circuit critical
dimensions to 65 nanometers and below. In addition, we have
developed, and continue to develop, products that support the
migration to new classes of materials and ultra-thin layers,
such as copper for low resistance conductors, high-k dielectric
materials for capacitors and gates and low-k dielectric
materials for low loss insulators that are used in small
geometry manufacturing. We have undertaken an initiative to
involve our marketing, engineering, manufacturing and sales
personnel in the concurrent development of new products in order
to reduce the time to market for new products. Our employees
also work closely with our customers development personnel
helping us to identify and define future technical needs on
which to focus research and development efforts. We support
research at academic institutions targeted at advances in
materials science and semiconductor process development. As of
December 31, 2007, we had 486 research and development
employees, primarily located in the United States. Our research
and development expenses were $72.2 million,
$69.7 million and $55.9 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Our
research and development efforts include numerous projects, none
of which are individually material, and generally have a
duration of 12 to 30 months.
Manufacturing
Our manufacturing facilities are located in China, Germany,
Israel, Japan, Mexico, the United Kingdom and the United States.
Manufacturing activities include the assembly and testing of
components and subassemblies, which are integrated into
products. We outsource some of our subassembly work. We purchase
a wide range of electronic, mechanical and electrical
components, some of which are designed to our specifications. We
consider our lean manufacturing techniques and responsiveness to
customers significantly fluctuating product demands to be
a competitive advantage.
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Competition
The market for our products is highly competitive. Principal
competitive factors include:
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historical customer relationships;
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product quality, performance and price;
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breadth of product line;
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manufacturing capabilities; and
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customer service and support.
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Although we believe that we compete favorably with respect to
these factors, there can be no assurance that we will continue
to do so.
We encounter substantial competition in most of our product
lines, although no single competitor competes with us across all
product lines. Certain of our competitors may have greater
financial and other resources than us. In some cases,
competitors are smaller than we are, but well established in
specific product niches. Celerity offers products that compete
with our pressure and materials delivery products. Advanced
Energy and Horiba offer materials delivery products that compete
with our product line of mass flow controllers. Nor-Cal Products
and VAT offer products that compete with our vacuum components.
Inficon offers products that compete with our vacuum measurement
and gas analysis products. Brooks Automation and Inficon offer
products that compete with our vacuum gauging products. Advanced
Energy offers products that compete with our power delivery and
reactive gas generator products.
Patents
and Other Intellectual Property Rights
We rely on a combination of patent, copyright, trademark and
trade secret laws and license agreements to establish and
protect our proprietary rights. As of December 31, 2007, we
owned 327 U.S. patents, 237 foreign patents and had 126
pending U.S. patent applications. Foreign counterparts of
certain of these applications have been filed or may be filed at
the appropriate time.
We require each of our employees, including our executive
officers, to enter into standard agreements pursuant to which
the employee agrees to keep confidential all of our proprietary
information and to assign to us all inventions while they are
employed by us.
For a discussion of litigation relating to our intellectual
property, see Item 3. Legal Proceedings.
Employees
As of December 31, 2007, we employed
2,924 persons. We believe that our ongoing
success depends upon our continued ability to attract and retain
highly skilled employees for whom competition is intense. None
of our employees are represented by a labor union or are party
to a collective bargaining agreement. We believe that our
employee relations are good.
Our
business depends substantially on capital spending in the
semiconductor industry which is characterized by periodic
fluctuations that may cause a reduction in demand for our
products.
We estimate that approximately 68%, 70% and 71% of our net sales
for the years ended December 31, 2007, 2006 and 2005, were
to semiconductor capital equipment manufacturers and
semiconductor device manufacturers, and we expect that sales to
such customers will continue to account for a substantial
majority of our sales. Our business depends upon the capital
expenditures of semiconductor device manufacturers, which in
turn depend upon the demand for semiconductors. Periodic
reductions in demand for the products manufactured by
semiconductor capital equipment manufacturers and semiconductor
device manufacturers may adversely affect our business,
financial condition and results of operations.
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Historically, the semiconductor market has been highly cyclical
and has experienced periods of overcapacity, resulting in
significantly reduced demand for capital equipment which may
result in lower gross margins due to reduced absorption of
manufacturing overhead. In addition, many semiconductor
manufacturers have operations and customers in Asia, a region
that in past years has experienced serious economic problems
including currency devaluations, debt defaults, lack of
liquidity and recessions. We cannot be certain of the timing or
magnitude of future semiconductor industry downturns. A decline
in the level of orders as a result of any downturn or slowdown
in the semiconductor capital equipment industry could have a
material adverse effect on our business, financial condition and
results of operations.
Our
quarterly operating results have fluctuated, and are likely to
continue to vary significantly, which may result in volatility
in the market price of our common stock.
A substantial portion of our shipments occurs shortly after an
order is received and therefore we operate with a low level of
backlog. As a result, a decrease in demand for our products from
one or more customers could occur with limited advance notice
and could have a material adverse effect on our results of
operations in any particular period. A significant percentage of
our expenses is relatively fixed and based in part on
expectations of future net sales. The inability to adjust
spending quickly enough to compensate for any shortfall would
magnify the adverse impact of a shortfall in net sales on our
results of operations. Factors that could cause fluctuations in
our net sales include:
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the timing of the receipt of orders from major customers;
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shipment delays;
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disruption in sources of supply;
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seasonal variations in capital spending by customers;
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production capacity constraints; and
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specific features requested by customers.
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In addition, our quarterly operating results may be adversely
affected due to charges incurred in a particular quarter, for
example, relating to inventory obsolescence, warranty or asset
impairments.
As a result of the factors discussed above, it is likely that we
may in the future experience quarterly or annual fluctuations
and that, in one or more future quarters, our operating results
may fall below the expectations of public market analysts or
investors. In any such event, the price of our common stock
could decline significantly.
The
loss of net sales to any one of our major customers would likely
have a material adverse effect on us.
Our top ten customers accounted for approximately 46%, 49% and
48% of our net sales for the years ended December 31, 2007,
2006 and 2005, respectively. The loss of a major customer or any
reduction in orders by these customers, including reductions due
to market or competitive conditions, would likely have a
material adverse effect on our business, financial condition and
results of operations. During the years ended December 31,
2007, 2006 and 2005, one customer, Applied Materials, accounted
for approximately 20%, 21% and 18%, respectively, of our net
sales. None of our significant customers, including Applied
Materials, has entered into an agreement requiring it to
purchase any minimum quantity of our products. The demand for
our products from our semiconductor capital equipment customers
depends in part on orders received by them from their
semiconductor device manufacturer customers.
Attempts to lessen the adverse effect of any loss or reduction
of net sales through the rapid addition of new customers could
be difficult because prospective customers typically require
lengthy qualification periods prior to placing volume orders
with a new supplier. Our future success will continue to depend
upon:
|
|
|
|
|
our ability to maintain relationships with existing key
customers;
|
|
|
|
our ability to attract new customers;
|
|
|
|
our ability to introduce new products in a timely manner for
existing and new customers; and
|
9
|
|
|
|
|
the successes of our customers in creating demand for their
capital equipment products that incorporate our products.
|
As
part of our business strategy, we have entered into and may
enter into or seek to enter into business combinations and
acquisitions that may be difficult and costly to integrate, may
be disruptive to our business, may dilute stockholder value or
may divert management attention.
We made several acquisitions in the years 2000 through 2002 and,
more recently in 2006 and 2007. As a part of our business
strategy, we may enter into additional business combinations and
acquisitions. Acquisitions are typically accompanied by a number
of risks, including the difficulty of integrating the
operations, technology and personnel of the acquired companies,
the potential disruption of our ongoing business and distraction
of management, possible internal control weaknesses of the
acquired companies, expenses related to the acquisition and
potential unknown liabilities associated with acquired
businesses. If we are not successful in completing acquisitions
that we may pursue in the future, we may be required to
reevaluate our growth strategy, and we may incur substantial
expenses and devote significant management time and resources in
seeking to complete proposed acquisitions that will not generate
benefits for us.
In addition, with future acquisitions, we could use substantial
portions of our available cash as all or a portion of the
purchase price. We could also issue additional securities as
consideration for these acquisitions, which could cause
significant stockholder dilution. Further, our prior
acquisitions and any future acquisitions may not ultimately help
us achieve our strategic goals and may pose other risks to us.
As a result of our previous acquisitions, we have added several
different decentralized operating and accounting systems,
resulting in a complex reporting environment. We will need to
continue to modify our accounting policies, internal controls,
procedures and compliance programs to provide consistency across
all our operations. In order to increase efficiency and
operating effectiveness and improve corporate visibility into
our decentralized operations, we are currently implementing a
worldwide Enterprise Resource Planning (ERP) system.
We expect to continue to implement the ERP system in phases over
the next few years. Although we have a plan to accomplish the
ERP implementation, we may risk potential disruption of our
operations during the conversion periods and the implementation
could require significantly more management time and higher
implementation costs than currently estimated.
An
inability to convince semiconductor device manufacturers to
specify the use of our products to our customers that are
semiconductor capital equipment manufacturers would weaken our
competitive position.
The markets for our products are highly competitive. Our
competitive success often depends upon factors outside of our
control. For example, in some cases, particularly with respect
to mass flow controllers, semiconductor device manufacturers may
direct semiconductor capital equipment manufacturers to use a
specified suppliers product in their equipment.
Accordingly, for such products, our success will depend in part
on our ability to have semiconductor device manufacturers
specify that our products be used at their semiconductor
fabrication facilities. In addition, we may encounter
difficulties in changing established relationships of
competitors that already have a large installed base of products
within such semiconductor fabrication facilities.
If our
products are not designed into successive generations of our
customers products, we will lose significant net sales
during the lifespan of those products.
New products designed by semiconductor capital equipment
manufacturers typically have a lifespan of five to ten years.
Our success depends on our products being designed into new
generations of equipment for the semiconductor industry. We must
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 customers do
not choose our products, our net sales may be reduced during the
lifespan of our customers products. In addition, we must
make a significant capital investment to develop products for
our customers well before our products are introduced and before
we can be sure that we will recover our capital investment
through sales to the customers in significant volume. We are
thus also at risk during the development phase that our products
may fail to meet our customers
10
technical or cost requirements and may be replaced by a
competitive product or alternative technology solution. If that
happens, we may be unable to recover our development costs.
The
semiconductor industry is subject to rapid demand shifts which
are difficult to predict. As a result, our inability to expand
our manufacturing capacity in response to these rapid shifts may
cause a reduction in our market share.
Our ability to increase sales of certain products depends in
part upon our ability to expand our manufacturing capacity for
such products in a timely manner. If we are unable to expand our
manufacturing capacity on a timely basis or to manage such
expansion effectively, our customers could implement our
competitors products and, as a result, our market share
could be reduced. Because the semiconductor industry is subject
to rapid demand shifts which are difficult to foresee, we may
not be able to increase capacity quickly enough to respond to a
rapid increase in demand. Additionally, capacity expansion could
increase our fixed operating expenses and if sales levels do not
increase to offset the additional expense levels associated with
any such expansion, our business, financial condition and
results of operations could be materially adversely affected.
We
operate in a highly competitive industry.
The market for our products is highly competitive. Principal
competitive factors include:
|
|
|
|
|
historical customer relationships;
|
|
|
|
product quality, performance and price;
|
|
|
|
breadth of product line;
|
|
|
|
manufacturing capabilities; and
|
|
|
|
customer service and support.
|
Although we believe that we compete favorably with respect to
these factors, we may not be able to continue to do so. We
encounter substantial competition in most of our product lines.
Certain of our competitors may have greater financial and other
resources than we have. In some cases, competitors are smaller
than we are, but well established in specific product niches. We
may encounter difficulties in changing established relationships
of competitors with a large installed base of products at such
customers fabrication facilities. In addition, our
competitors can be expected to continue to improve the design
and performance of their products. Competitors may develop
products that offer price or performance features superior to
those of our products. If our competitors develop superior
products, we may lose existing customer and market share.
Sales
to foreign markets constitute a substantial portion of our net
sales; therefore, our net sales and results of operations could
be adversely affected by downturns in economic conditions in
countries outside of the United States.
International sales include sales by our foreign subsidiaries,
but exclude direct export sales. International sales accounted
for approximately 39%, 34% and 37%, of net sales for the years
ended December 31, 2007, 2006 and 2005, respectively, a
significant portion of which were sales to Japan.
We anticipate that international sales will continue to account
for a significant portion of our net sales. In addition, certain
of our key domestic customers derive a significant portion of
their revenues from sales in international markets. Therefore,
our sales and results of operations could be adversely affected
by economic slowdowns and other risks associated with
international sales.
We
have significant foreign operations, and outsource certain
operations offshore, which pose significant risks.
We have significant international sales, service, engineering
and manufacturing operations in Europe, Israel and Asia, and
have outsourced a portion of our manufacturing to Mexico. We may
expand the level of manufacturing and certain other operations
that we do offshore in order to take advantage of cost
efficiencies available to
11
us in those countries. However, we may not achieve the
significant cost savings or other benefits that we anticipate
from this program. These foreign operations expose us to
operational and political risks that may harm our business,
including:
|
|
|
|
|
political and economic instability;
|
|
|
|
fluctuations in the value of currencies and high levels of
inflation, particularly in Asia and Europe;
|
|
|
|
changes in labor conditions and difficulties in staffing and
managing foreign operations, including, but not limited to,
labor unions;
|
|
|
|
reduced or less certain protection for intellectual property
rights;
|
|
|
|
greater difficulty in collecting accounts receivable and longer
payment cycles;
|
|
|
|
burdens and costs of compliance with a variety of foreign laws;
|
|
|
|
increases in duties and taxation;
|
|
|
|
costs associated with compliance programs for import and export
regulations;
|
|
|
|
imposition of restrictions on currency conversion or the
transfer of funds;
|
|
|
|
changes in export duties and limitations on imports or exports;
|
|
|
|
expropriation of private enterprises; and
|
|
|
|
unexpected changes in foreign regulations.
|
If any of these risks materialize, our operating results may be
adversely affected.
Unfavorable
currency exchange rate fluctuations may lead to lower operating
margins or may cause us to raise prices, which could result in
reduced sales.
Currency exchange rate fluctuations could have an adverse effect
on our net sales and results of operations and we could
experience losses with respect to our hedging activities.
Unfavorable currency fluctuations could require us to increase
prices to foreign customers, which could result in lower net
sales by us to such customers. Alternatively, if we do not
adjust the prices for our products in response to unfavorable
currency fluctuations, our results of operations could be
adversely affected. In addition, most sales made by our foreign
subsidiaries are denominated in the currency of the country in
which these products are sold and the currency they receive in
payment for such sales could be less valuable at the time of
receipt as a result of exchange rate fluctuations. We enter into
forward foreign exchange contracts and may enter into local
currency purchased options to reduce currency exposure arising
from intercompany sales of inventory. However, we cannot be
certain that our efforts will be adequate to protect us against
significant currency fluctuations or that such efforts will not
expose us to additional exchange rate risks.
Key
personnel may be difficult to attract and retain.
Our success depends to a large extent upon the efforts and
abilities of a number of key employees and officers,
particularly those with expertise in the semiconductor
manufacturing and similar industrial manufacturing industries.
The loss of key employees or officers could have a material
adverse effect on our business, financial condition and results
of operations. We believe that our future success will depend in
part on our ability to attract and retain highly skilled
technical, financial, managerial and marketing personnel. We
cannot be certain that we will be successful in attracting and
retaining such personnel.
12
Our
proprietary technology is important to the continued success of
our business. Our failure to protect this proprietary technology
may significantly impair our competitive position.
As of December 31, 2007, we owned 327 U.S. patents,
237 foreign patents and had 126 pending U.S. patent
applications. Although we seek to protect our intellectual
property rights through patents, copyrights, trade secrets and
other measures, we cannot be certain that:
|
|
|
|
|
we will be able to protect our technology adequately;
|
|
|
|
competitors will not be able to develop similar technology
independently;
|
|
|
|
any of our pending patent applications will be issued;
|
|
|
|
domestic and international intellectual property laws will
protect our intellectual property rights; or
|
|
|
|
third parties will not assert that our products infringe patent,
copyright or trade secrets of such parties.
|
Protection
of our intellectual property rights may result in costly
litigation.
Litigation may be necessary in order to enforce our patents,
copyrights or other intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of
infringement. We are, from time to time, involved in lawsuits
enforcing or defending our intellectual property rights and may
be involved in such litigation in the future. Such litigation
could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, financial
condition and results of operations.
We may need to expend significant time and expense to protect
our intellectual property regardless of the validity or
successful outcome of such intellectual property claims. If we
lose any litigation, we may be required to seek licenses from
others or change, stop manufacturing or stop selling some of our
products.
The
market price of our common stock has fluctuated and may continue
to fluctuate for reasons over which we have no
control.
The stock market has from time to time experienced, and is
likely to continue to experience, extreme price and volume
fluctuations. Prices of securities of technology companies have
been especially volatile and have often fluctuated for reasons
that are unrelated to the operating performance of the
companies. The market price of shares of our common stock has
fluctuated greatly since our initial public offering and could
continue to fluctuate due to a variety of factors. In the past,
companies that have experienced volatility in the market price
of their stock have been the objects of securities class action
litigation. If we were the object of securities class action
litigation, it could result in substantial costs and a diversion
of our managements attention and resources.
Our
dependence on sole, limited source suppliers, and international
suppliers, could affect our ability to manufacture products and
systems.
We rely on sole, limited source suppliers and international
suppliers for a few of our components and subassemblies that are
critical to the manufacturing of our products. This reliance
involves several risks, including the following:
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|
|
|
|
the potential inability to obtain an adequate supply of required
components;
|
|
|
|
reduced control over pricing and timing of delivery of
components; and
|
|
|
|
the potential inability of our suppliers to develop
technologically advanced products to support our growth and
development of new systems.
|
We believe that in time we could obtain and qualify alternative
sources for most sole, limited source and international supplier
parts. Seeking alternative sources of the parts could require us
to redesign our systems, resulting in increased costs and likely
shipping delays. We may be unable to redesign our systems, which
could result in further costs and shipping delays. These
increased costs would decrease our profit margins if we could
not
13
pass the costs to our customers. Further, shipping delays could
damage our relationships with current and potential customers
and have a material adverse effect on our business and results
of operations.
We are
subject to governmental regulations. If we fail to comply with
these regulations, our business could be harmed.
We are subject to federal, state, local and foreign regulations,
including environmental regulations and regulations relating to
the design and operation of our products. We must ensure that
the affected products meet a variety of standards, many of which
vary across the countries in which our systems are used. For
example, the European Union has published directives
specifically relating to power supplies. In addition, the
European Union has issued directives relating to regulation of
recycling and hazardous substances, which may be applicable to
our products, or to which some customers may voluntarily elect
to adhere to. In addition, China has adopted, and certain other
Asian countries have indicated an intention to adopt, similar
regulations. We must comply with any applicable regulation
adopted in connection with these types of directives in order to
ship affected products into countries that adopt these types of
regulations. We believe we are in compliance with current
applicable regulations, directives and standards and have
obtained all necessary permits, approvals, and authorizations to
conduct our business. However, compliance with future
regulations, directives and standards, or customer demands
beyond such requirements, could require us to modify or redesign
certain systems, make capital expenditures or incur substantial
costs. If we do not comply with current or future regulations,
directives and standards:
|
|
|
|
|
we could be subject to fines;
|
|
|
|
our production could be suspended; or
|
|
|
|
we could be prohibited from offering particular systems in
specified markets.
|
Certain
stockholders have a substantial interest in us and may be able
to exert substantial influence over our actions.
As of December 31, 2007, John R. Bertucci, our Chairman,
and certain members of his family, in the aggregate,
beneficially owned approximately 8% of our outstanding common
stock. As a result, these stockholders, acting together, may be
able to exert substantial influence over our actions.
Some
provisions of our restated articles of organization, as amended,
our amended and restated by-laws and Massachusetts law could
discourage potential acquisition proposals and could delay or
prevent a change in control of us.
Anti-takeover provisions could diminish the opportunities for
stockholders to participate in tender offers, including tender
offers at a price above the then current market price of the
common stock. Such provisions may also inhibit increases in the
market price of the common stock that could result from takeover
attempts. For example, while we have no present plans to issue
any preferred stock, our board of directors, without further
stockholder approval, may issue preferred stock that could have
the effect of delaying, deterring or preventing a change in
control of us. The issuance of preferred stock could adversely
affect the voting power of the holders of our common stock,
including the loss of voting control to others. In addition, our
amended and restated by-laws provide for a classified board of
directors consisting of three classes. The classified board
could also have the effect of delaying, deterring or preventing
a change in control of us.
Changes
in financial accounting standards may adversely affect our
reported results of operations.
A change in accounting standards or practices could have a
significant effect on our reported results and may even affect
our reporting of transactions completed before the change was
effective. New accounting pronouncements and varying
interpretations of existing accounting pronouncements have
occurred and may occur in the future. Such changes may adversely
affect our reported financial results or may impact our related
business practice.
For example, Statement on Financial Accounting Standards
No. 123R Share-Based Payment
(SFAS 123R), which requires us to measure all
employee stock-based compensation awards using a fair value
method and record such expense in our consolidated financial
statements, was adopted in the first quarter of 2006, and had a
material adverse impact on our consolidated financial statements
as reported under generally accepted accounting principles in
the United States for the first quarter of 2006 and adversely
impacted our consolidated financial statements for fiscal 2006.
14
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
The following table provides information concerning MKS
principal and certain other owned and leased facilities as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
Lease
|
Location
|
|
Sq. Ft.
|
|
|
Activity
|
|
Manufactured
|
|
Expires
|
|
Alameda, California
|
|
|
48,300
|
|
|
Manufacturing and Research & Development
|
|
Electrostatic Management Programs and Systems
|
|
March 31, 2011
|
Andover, Massachusetts
|
|
|
82,000
|
|
|
Manufacturing and Research & Development
|
|
Pressure Measurement and Control Products
|
|
(1)
|
Andover, Massachusetts
|
|
|
36,270
|
|
|
Corporate Headquarters
|
|
Not applicable
|
|
May 31, 2018
|
Austin, Texas
|
|
|
20,880
|
|
|
Manufacturing, Sales, Customer Support, Service and Research
& Development
|
|
Control & Information Management Products
|
|
May 31, 2012
|
Berlin, Germany
|
|
|
20,750
|
|
|
Manufacturing, Customer Support, Service and Research &
Development
|
|
Reactive Gas Generation Products
|
|
March 31, 2009
|
Boulder, Colorado
|
|
|
124,000
|
|
|
Manufacturing, Customer Support, Service and Research &
Development
|
|
Vacuum Products
|
|
(2)
|
Carmiel, Israel
|
|
|
7,000
|
|
|
Manufacturing and Research & Development
|
|
Control & Information Management Products
|
|
December 31, 2007
|
Cheshire, United Kingdom
|
|
|
13,000
|
|
|
Manufacturing, Sales, Customer Support and Service
|
|
Materials Delivery Products
|
|
(3)
|
Colorado Springs, Colorado
|
|
|
24,000
|
|
|
Customer Support, Service and Research & Development
|
|
Power Delivery Products
|
|
(1)
|
Fukuoka, Japan
|
|
|
14,700
|
|
|
Customer Support and Service
|
|
Pressure Measurement and Control Products
|
|
October 18, ,2008
|
Lawrence, Massachusetts
|
|
|
40,000
|
|
|
Manufacturing
|
|
Pressure Measurement and Control Products
|
|
(1)
|
Methuen, Massachusetts
|
|
|
85,000
|
|
|
Manufacturing, Customer Support, Service and Research &
Development
|
|
Pressure Measurement and Control Products; Materials Delivery
Products
|
|
(1)
|
Munich, Germany
|
|
|
14,000
|
|
|
Manufacturing, Sales, Customer Support, Service and Research
& Development
|
|
Pressure Measurement and Control Products; Materials Delivery
Products
|
|
(1)
|
Nogales, Mexico
|
|
|
36,700
|
|
|
Manufacturing
|
|
Pressure Measurement and Control Products; Reactive Gas
Generation Products
|
|
March 31, 2009
|
Richardson, Texas
|
|
|
8,800
|
|
|
Sales, Customer Support and Service
|
|
Not applicable
|
|
November 30, 2012
|
Rochester, New York
|
|
|
156,000
|
|
|
Manufacturing, Sales, Customer Support, Service and Research
& Development
|
|
Power Delivery Products
|
|
(4)
|
San Jose, California
|
|
|
32,000
|
|
|
Sales, Customer Support and Service
|
|
Not applicable
|
|
April 30, 2009
|
Seoul, Korea
|
|
|
10,300
|
|
|
Sales, Customer Support and Service
|
|
Not applicable
|
|
May 31, 2008
|
Shenzhen, China
|
|
|
130,000
|
|
|
Manufacturing
|
|
Power Delivery Products
|
|
December 31, 2007
|
Shenzhen, China
|
|
|
242,000
|
|
|
Manufacturing
|
|
Power Delivery Products
|
|
May 31, 2017
|
Umea, Sweden
|
|
|
7,000
|
|
|
Sales, Customer Support and Research & Development
|
|
Control & Information Management Products
|
|
August 31, 2009
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
Lease
|
Location
|
|
Sq. Ft.
|
|
|
Activity
|
|
Manufactured
|
|
Expires
|
|
Sunnyvale, California
|
|
|
10,000
|
|
|
Sales, Customer Support and Research & Development
|
|
Control & Information Management Products
|
|
July 7, 2010
|
Shropshire, United Kingdom
|
|
|
25,000
|
|
|
Manufacturing
|
|
Vacuum Products
|
|
October 18, 2010
|
|
|
|
|
|
|
|
|
|
|
|
Hsinchu, Taiwan
|
|
|
19,300
|
|
|
Sales, Customer Support and Service
|
|
Not applicable
|
|
August 25, 2008
|
Tokyo, Japan
|
|
|
48,230
|
|
|
Manufacturing, Sales, Customer Support, Service and Research
& Development
|
|
Materials Delivery Products
|
|
(5)
|
Wilmington, Massachusetts
|
|
|
118,000
|
|
|
Manufacturing, Sales, Customer Support, Service and Research
& Development
|
|
Reactive Gas Generation Products; Power Delivery Products
|
|
(1)
|
|
|
|
(1) |
|
This facility is owned by MKS. |
|
(2) |
|
MKS leases two facilities, one has 39,000 square feet of
space and the other has 38,000 square feet of space. Both
leases expire on May 31, 2015. MKS also owns a third and
fourth facility with 27,000 and 20,000 square feet of
space, respectively. |
|
(3) |
|
MKS leases two facilities, one has 2,000 square feet of
space and a lease term which expires October 5, 2009 and
the second has 11,000 square feet of space and a lease term
which expires November 30, 2009. |
|
(4) |
|
MKS owns this facility and has an Industrial Development Revenue
Bond of $5.0 million, due in 2014, that is collateralized
by the building. |
|
(5) |
|
MKS leases two facilities, one has 20,600 square feet of
space with a lease term that expires April 30, 2008 and the
second has 10,500 square feet of space and a lease term
that expires on September 30, 2011. MKS owns a third
facility of 6,600 square feet. |
In addition to manufacturing and other operations conducted at
the foregoing leased or owned facilities, MKS provides worldwide
sales, customer support and services from various other leased
facilities throughout the world not listed in the table above.
See Business Sales, Marketing and
Support.
|
|
Item 3.
|
Legal
Proceedings
|
We are subject to other 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 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2007 through the solicitation of proxies
or otherwise.
16
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock is traded on the NASDAQ Global Market under the
symbol MKSI. On February 15, 2008, the closing price of our
common stock, as reported on the NASDAQ Global Market, was
$20.15 per share. The following table sets forth for the periods
indicated the high and low bid prices per share of our common
stock as reported by the NASDAQ Global Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Price Range of Common Stock
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
26.00
|
|
|
$
|
21.11
|
|
|
$
|
23.75
|
|
|
$
|
17.05
|
|
Second Quarter
|
|
|
28.47
|
|
|
|
25.46
|
|
|
|
24.97
|
|
|
|
18.66
|
|
Third Quarter
|
|
|
28.15
|
|
|
|
18.91
|
|
|
|
23.60
|
|
|
|
17.84
|
|
Fourth Quarter
|
|
|
21.71
|
|
|
|
16.94
|
|
|
|
23.36
|
|
|
|
19.54
|
|
On February 15, 2008, we had approximately 196 stockholders
of record.
Dividend
Policy
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain earnings, if any, to
support our growth strategy and do not anticipate paying cash
dividends in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including
our financial condition, operating results and current and
anticipated cash needs.
17
Comparative
Stock Performance
The following graph compares the cumulative total shareholder
return (assuming reinvestment of dividends) from investing $100
on December 31, 2002, and plotted at the last trading day
of each of the fiscal years ended December 31, 2003, 2004,
2005, 2006 and 2007, in each of (i) the Companys
Common Stock; (ii) an industry group index of semiconductor
equipment/material manufacturers (the Hemscott Group
Index), compiled by Hemscott, Inc. (Hemscott);
and (iii) the NASDAQ Market Index of companies (the
NASDAQ Market Index). The graph was compiled by
Hemscott. The stock price performance on the graph below is not
necessarily indicative of future price performance. The
Companys Common Stock is listed on the NASDAQ Global
Market under the ticker symbol MKSI.
Performance
Graph
COMPARISON
OF CUMULATIVE TOTAL RETURN OF
ONE OR MORE COMPANIES, PEER GROUPS,
INDUSTRY INDEXES AND/OR BROAD MARKETS
Assumes
$100 invested on December 31, 2002
Assumes dividends reinvested
Fiscal Year Ending December 31, 2007
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
2003
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
|
MKS Instruments, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
176.51
|
|
|
|
$
|
112.90
|
|
|
|
$
|
108.89
|
|
|
|
$
|
137.43
|
|
|
|
$
|
116.49
|
|
Hemscott Group Index
|
|
|
$
|
100.00
|
|
|
|
$
|
181.44
|
|
|
|
$
|
142.39
|
|
|
|
$
|
149.72
|
|
|
|
$
|
168.58
|
|
|
|
$
|
160.31
|
|
NASDAQ Market Index
|
|
|
$
|
100.00
|
|
|
|
$
|
150.36
|
|
|
|
$
|
163.00
|
|
|
|
$
|
166.58
|
|
|
|
$
|
183.68
|
|
|
|
$
|
201.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
The information included under the heading Performance
Graph in Item 5 of this Annual Report on
Form 10-K
is furnished and not filed and shall not
be deemed to be soliciting material or subject to
Regulation 14A, shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the Exchange Act), or otherwise
subject to the liabilities of that section, nor shall it be
deemed incorporated by reference in any filing under the
Securities Act of 1933, as amended, or the Exchange Act.
18
Purchases
of Equity Securities
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 the next 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 our discretion and the discretion of
our Board of Directors. During the year ended December 31,
2007, we repurchased 4,779,000 shares of common stock for
$101.2 million for an average price of $21.17 per share.
The following table provides information about purchases by the
Company during the quarter ended December 31, 2007 of
equity securities that are registered by the Company pursuant to
Section 12 of the Exchange Act:
PURCHASES
OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
since Adoption of
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
Program as
|
|
|
Shares that May
|
|
|
|
Total Number of
|
|
|
|
|
|
Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
Shares Purchased
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
Under the Plans or
|
|
Period
|
|
during Period(1)
|
|
|
Paid per Share
|
|
|
or Programs(2)
|
|
|
Programs
|
|
|
10/01/07-10/31/07
|
|
|
330,455
|
|
|
$
|
20.09
|
|
|
|
2,279,220
|
|
|
$
|
244,393,000
|
|
11/01/07-11/30/07
|
|
|
1,138,121
|
|
|
$
|
17.94
|
|
|
|
3,417,341
|
|
|
$
|
223,978,000
|
|
12/01/07-12/31/07
|
|
|
1,361,291
|
|
|
$
|
18.46
|
|
|
|
4,778,632
|
|
|
$
|
198,843,000
|
|
|
|
|
(1) |
|
We repurchased an aggregate of 4,778,632 shares of our
common stock pursuant to the repurchase program that we publicly
announced on February 12, 2007 (the Program).
During the three months ended December 31, 2007, we
repurchased a total of 2,829,867 shares of our common stock
pursuant to 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. |
19
|
|
Item 6.
|
Selected
Financial Data
|
Selected
Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
780,487
|
|
|
$
|
782,801
|
|
|
$
|
509,294
|
|
|
$
|
555,080
|
|
|
$
|
337,291
|
|
Gross profit
|
|
|
331,487
|
|
|
|
338,122
|
|
|
|
200,434
|
|
|
|
219,371
|
|
|
|
118,109
|
|
Income (loss) from operations(1)
|
|
|
106,985
|
|
|
|
122,541
|
|
|
|
40,548
|
|
|
|
59,913
|
|
|
|
(15,717
|
)
|
Net income (loss)(2)
|
|
$
|
86,360
|
|
|
$
|
94,235
|
|
|
$
|
34,565
|
|
|
$
|
69,839
|
|
|
$
|
(16,385
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.53
|
|
|
$
|
1.70
|
|
|
$
|
0.64
|
|
|
$
|
1.30
|
|
|
$
|
(0.32
|
)
|
Diluted
|
|
$
|
1.51
|
|
|
$
|
1.68
|
|
|
$
|
0.63
|
|
|
$
|
1.28
|
|
|
$
|
(0.32
|
)
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
223,968
|
|
|
$
|
215,208
|
|
|
$
|
220,573
|
|
|
$
|
138,389
|
|
|
$
|
74,660
|
|
Short-term investments
|
|
|
99,797
|
|
|
|
74,749
|
|
|
|
72,046
|
|
|
|
97,511
|
|
|
|
54,518
|
|
Working capital
|
|
|
514,235
|
|
|
|
461,541
|
|
|
|
410,060
|
|
|
|
347,700
|
|
|
|
210,468
|
|
Long-term investments
|
|
|
|
|
|
|
2,816
|
|
|
|
857
|
|
|
|
4,775
|
|
|
|
13,625
|
|
Total assets
|
|
|
1,076,260
|
|
|
|
1,043,720
|
|
|
|
863,740
|
|
|
|
828,677
|
|
|
|
692,032
|
|
Short-term obligations
|
|
|
20,203
|
|
|
|
23,021
|
|
|
|
18,886
|
|
|
|
24,509
|
|
|
|
20,196
|
|
Long-term obligations, less current portion
|
|
|
5,871
|
|
|
|
6,113
|
|
|
|
6,152
|
|
|
|
6,747
|
|
|
|
8,810
|
|
Stockholders equity
|
|
|
954,009
|
|
|
|
901,219
|
|
|
|
762,843
|
|
|
|
726,634
|
|
|
|
608,310
|
|
|
|
|
(1) |
|
Income from operations for the years ended December 31,
2007 and 2006 includes stock-based compensation of
$12.9 million and $13.1 million, respectively, as a
result of adopting SFAS 123R in 2006. Income from
operations for the year ended December 31, 2005 includes
income from a litigation settlement of $3.0 million. |
|
(2) |
|
Net income for the years ended December 31, 2007 and 2006
includes stock-based compensation of $8.4 million and
$8.7 million, net of tax, respectively. Net income for the
year ended December 31, 2004 includes a gain from the
collection of a note receivable of $5.0 million which had
been written off in 2002. During the year ended
December 31, 2003, a valuation allowance against net
deferred tax assets was maintained. Net loss for the year ended
December 31, 2003 includes tax expense which is comprised
primarily of state and foreign taxes. During 2004, the valuation
allowance was reduced against the net deferred tax assets and
net income for the year ended December 31, 2004 includes a
deferred tax benefit of $10.2 million. See Note 9 of
the Notes to the Consolidated Financial Statements. |
20
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a leading worldwide provider of instruments, subsystems
and process control solutions that measure, control, power,
monitor and analyze critical parameters to improve process
performance and productivity of advanced manufacturing processes.
We are managed as one operating segment. We group our products
into three product groups: Instruments and Control Systems,
Power and Reactive Gas Products and Vacuum Products. Our
products are derived from our core competencies in pressure
measurement and control, materials delivery, gas composition
analysis, electrostatic charge management, control and
information technology, power and reactive gas generation and
vacuum technology. Our products are used in diverse markets,
applications and processes. Our primary served markets are
manufacturers of capital equipment for semiconductor devices,
and for other thin film applications including flat panel
displays, solar cells, data storage media and other advanced
coatings. We also leverage our technology in other markets with
advanced manufacturing applications including medical equipment,
pharmaceutical manufacturing, and energy generation and
environmental monitoring.
We have a diverse base of customers that includes manufacturers
of semiconductor capital equipment and semiconductor devices,
thin film capital equipment used in the manufacture of flat
panel displays, solar cells, data storage media, and other
coating applications; and other industrial, medical and
manufacturing companies, and university, government and
industrial research laboratories. During the years ended
December 31, 2007, 2006 and 2005, we estimate that
approximately 68%, 70% and 71% of our net sales, respectively,
were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers. We expect that sales to
semiconductor capital equipment manufacturers and semiconductor
device manufacturers will continue to account for a substantial
majority of our sales.
Revenues for the full year 2007 were comparable with 2006,
however quarterly revenues in both years fluctuated
significantly as we experienced significant changes in customer
orders. We currently expect that our first quarter 2008 net
sales could be approximately the same as our fourth quarter
2007 net sales. However, 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 significant portion of our net sales is to operations in
international markets. International net sales include sales by
our foreign subsidiaries, but exclude direct export sales.
International net sales accounted for approximately 39%, 34% and
37% of net sales for the years ended December 31, 2007,
2006 and 2005, respectively, a significant portion of which were
sales in Japan. We expect that international net sales will
continue to represent a significant percentage of our total net
sales.
Recent
Acquisitions
On November 7, 2007, we acquired Yield Dynamics, Inc.
(YDI), a provider of yield management technology
located in Sunnyvale, California. YDIs data and yield
management software, along with MKS portfolio of sensors
that control critical processes, data collection and integration
hardware, and real-time fault detection and classification
software, provides a comprehensive offering for generating,
collecting and analyzing process sensor data and correlating the
data to wafers, chambers and tools across the semiconductor fab
as well as other thin film manufacturing processes. The purchase
price consisted of $23.7 million in cash, net of
$0.7 million in cash acquired, and $0.4 million in
acquisition related costs. The purchase agreement includes
contingent payments of up to $10.0 million based upon
achieving specific annual and cumulative revenue targets between
2008 and 2010.
On October 11, 2006, we completed our acquisition of Novx
Corp. (Novx), a provider of electrostatic charge
monitoring technology for semiconductor, data storage,
telecommunication, medical device and other markets. Novxs
technology expands our capability to monitor, detect and control
electrostatic charge in advanced process environments, such as
semiconductor and hard disk drive manufacturing. The total
purchase price was $2.6 million.
21
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
monitors 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
Managements Discussion and Analysis of Financial Condition
and Results of Operations discusses our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these 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 financial statements
and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, we evaluate our
estimates and judgments, including those related to revenue
recognition and allowance for doubtful accounts, inventory,
warranty costs, stock-based compensation expense, intangible
assets, goodwill and other long-lived assets, in-process
research and development and income taxes. We base our 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.
We believe the following critical accounting policies affect the
most significant judgments, assumptions and estimates we use in
preparing our consolidated financial statements:
Revenue recognition and Accounts Receivable
Allowances. Revenue from product sales is
recorded upon transfer of title and risk of loss to the customer
provided that there is evidence of an arrangement, the sales
price is fixed or determinable, and collection of the related
receivable is reasonably assured. In most transactions, we have
no obligations to our customers after the date products are
shipped other than pursuant to warranty obligations. In some
instances, we provide installation, training, support and
services to customers after the product has been shipped. We
defer the fair value of any undelivered elements until the
undelivered element is delivered. Fair value is the price
charged when the element is sold separately. Shipping and
handling fees billed to customers, if any, are recognized as
revenue. The related shipping and handling costs are recognized
in cost of sales.
We monitor and track the amount of product returns, provide for
accounts receivable allowances and reduce revenue at the time of
shipment for the estimated amount of such future returns, based
on historical experience. While product returns have
historically been within our expectations and the provisions
established, there is no assurance that we will continue to
experience the same return rates that we have in the past. Any
significant increase in product return rates could have a
material adverse impact on our operating results for the period
or periods in which such returns materialize.
While we maintain a credit approval process, significant
judgments are made by management in connection with assessing
our customers ability to pay at the time of shipment.
Despite this assessment, from time to time, our customers are
unable to meet their payment obligations. We continuously
monitor our customers credit worthiness, and use our
judgment in establishing a provision for estimated credit losses
based upon our historical experience and any specific customer
collection issues that we have identified. While such credit
losses have historically been within our expectations and the
provisions established, there is no assurance that we will
continue to experience the same credit loss rates that we have
in the past. A significant change in the liquidity or financial
position of our
22
customers could have a material adverse impact on the
collectability of accounts receivable and our future operating
results.
Inventory. We value our inventory at the lower
of cost
(first-in,
first-out method) or market. We regularly review inventory
quantities on hand and record a provision to write down excess
and obsolete inventory to our estimated net realizable value, if
less than cost, based primarily on our estimated forecast of
product demand. Demand for our products can fluctuate
significantly. A significant increase in the demand for our
products could result in a short-term increase in the cost of
inventory purchases as a result of supply shortages or a
decrease in the cost of inventory purchases as a result of
volume discounts, while a significant decrease in demand could
result in an increase in the charges for excess inventory
quantities on hand. In addition, our industry is subject to
technological change, new product development and product
technological obsolescence that could result in an increase in
the amount of obsolete inventory quantities on hand. Therefore,
any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our
inventory and our reported operating results.
Warranty costs. We provide for the estimated
costs to fulfill customer warranty obligations upon the
recognition of the related revenue. We provide warranty coverage
for our products ranging from 12 to 36 months, with the
majority of our products ranging from 12 to 24 months. We
estimate the anticipated costs of repairing our products under
such warranties based on the historical costs of the repairs and
any known specific product issues. The assumptions we use to
estimate warranty accruals are reevaluated periodically in light
of actual experience and, when appropriate, the accruals are
adjusted. Our determination of the appropriate level of warranty
accrual is based upon estimates. Should product failure rates
differ from our estimates, actual costs could vary significantly
from our expectations.
Stock-Based Compensation Expense. Effective
January 1, 2006, we adopted the fair value recognition
provisions of SFAS 123R, using the modified prospective
transition method, and therefore have not restated prior
periods results. Under this method we recognize
compensation expense for all equity-based awards granted after
January 1, 2006 as well as awards granted prior to but not
yet vested as of January 1, 2006, in accordance with
SFAS 123R. Under the fair value recognition provisions of
SFAS 123R, we recognize stock-based compensation net of an
estimated forfeiture rate and only recognize compensation cost
for those shares expected to vest on a straight-line basis over
the requisite service period of the award. The adoption of this
standard reduced our net income by $7.2 million and
$8.5 million, for the years ended December 31, 2007
and 2006, respectively. Prior to SFAS 123R adoption, we
accounted for share-based payments under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and accordingly, generally
recognized compensation expense only when we granted options
with a discounted exercise price.
Determining the appropriate fair value model and calculating the
fair value of share-based payment awards require the input of
highly subjective assumptions, including the expected life of
the share-based payment awards and stock price volatility.
Management determined that blended volatility, a combination of
historical and implied volatility, is more reflective of market
conditions and a better indicator of expected volatility than
historical or implied volatility. Therefore, expected volatility
for the years ended December 31, 2007 and 2006 were based
on a blended volatility. The assumptions used in calculating the
fair value of share-based payment awards represent
managements best estimates, but these estimates involve
inherent uncertainties and the application of management
judgment. As a result, if factors change and we use different
assumptions, our stock-based compensation expense could be
materially different in the future. In addition, we are required
to estimate the expected forfeiture rate and only recognize
expense for those shares expected to vest. If our actual
forfeiture rate is materially different from our estimate, the
stock-based compensation expense could be significantly
different from what we have recorded in the current period. See
Note 2 to the consolidated financial statements for a
further discussion on stock-based compensation.
Intangible assets, goodwill and other long-lived
assets. We review intangible assets and other
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets
may not be recoverable. Factors we consider important, which
could indicate an impairment, include significant under
performance relative to expected historical or projected future
operating results, significant changes in the manner of our use
of the asset or the strategy for our overall business and
significant and negative industry or
23
economic trends. When we determine that the carrying value of
the asset may not be recoverable based upon the existence of one
or more of the above indicators of impairment, we compare the
undiscounted cash flows to the carrying value of the asset. If
impairment is possible and indicated, the asset is written down
to its estimated fair value. Intangible assets, such as
purchased technology, are generally recorded in connection with
a business acquisition. The fair value initially assigned to
intangible assets is determined based on estimates and judgment
regarding expectations for the success and life cycle of
products and technology acquired. If actual product acceptance
differs significantly from the estimates, we may be required to
record an impairment charge to write down the asset to its
estimated fair value.
We assess goodwill for impairment at least annually, or more
frequently when events and circumstances occur indicating that
the recorded goodwill at the reporting unit level may be
impaired. Reporting units are defined as operating segments or
one level below an operating segment, referred to as a
component. We have determined that our reporting units are
components of our one operating segment. We allocate goodwill to
reporting units at the time of acquisition and base that
allocation on which reporting units will benefit from the
acquired assets and liabilities. If the book value of a
reporting unit exceeds its fair value, the implied fair value of
goodwill is compared with the carrying amount of goodwill. If
the carrying amount of goodwill exceeds the implied fair value,
an impairment loss is recorded in an amount equal to that
excess. The fair value of a reporting unit is estimated using
the discounted cash flow approach, and is dependent on estimates
and judgments related to future cash flows and discount rates.
If actual cash flows differ significantly from the estimates
used by management, we may be required to record an impairment
charge to write down the goodwill to its estimated fair value.
In-process research and development. We value
tangible and intangible assets acquired through our business
acquisitions, including in-process research and development
(IPR&D), at fair value. We determine IPR&D
through established valuation techniques for various projects
for the development of new products and technologies and expense
IPR&D when technical feasibility is not reached. The value
of IPR&D is determined using the income approach, which
discounts expected future cash flows from projects under
development to their net present value. Each project is analyzed
and estimates and judgments are made to determine the
technological innovations included in the utilization of core
technology, the complexity, cost and time to complete
development, any alternative future use or current technological
feasibility and the stage of completion. If we acquire other
companies with IPR&D in the future, we will value the
IPR&D through established valuation techniques and will
incur future IPR&D charges if those products under
development have not reached technical feasibility.
Income taxes. We evaluate the realizability of
our net deferred tax assets and assess the need for a valuation
allowance on a quarterly basis. The future benefit to be derived
from our deferred tax assets is dependent upon our ability to
generate sufficient future taxable income to realize the assets.
We record a valuation allowance to reduce our net deferred tax
assets to the amount that may be more likely than not to be
realized. To the extent we established a valuation allowance, an
expense is recorded within the provision for income taxes line
in the statement of operations. As of December 31, 2005,
the Company had a valuation allowance of $3.5 million for
its state tax credit carryforwards. During the fourth quarter of
2006, the Company determined that it would begin utilizing these
aforementioned state tax credits and reduced the valuation
allowance to reflect the amount of the state tax credits that
are more likely than not expected to be utilized. The remaining
valuation allowance at December 31, 2006 is
$0.3 million, relating to the remaining state tax credits
acquired with the purchase of Ion. During 2007, the Company
increased the valuation allowance for the state tax loss
carryforwards and state credits acquired in the purchase of YDI.
The valuation allowance is $0.5 million at
December 31, 2007. In future periods, if we were to
determine that it was more likely than not that we would not be
able to realize the recorded amount of our remaining net
deferred tax assets, an adjustment to the valuation allowance
would be recorded as an increase to income tax expense in the
period such determination was made.
24
Results
of Operations
The following table sets forth, for the periods indicated, the
percentage of total net sales of certain line items included in
our consolidated statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
57.5
|
|
|
|
56.8
|
|
|
|
60.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42.5
|
|
|
|
43.2
|
|
|
|
39.4
|
|
Research and development
|
|
|
9.3
|
|
|
|
8.9
|
|
|
|
11.0
|
|
Selling, general and administrative
|
|
|
17.3
|
|
|
|
16.3
|
|
|
|
18.3
|
|
Amortization of acquired intangible assets
|
|
|
2.1
|
|
|
|
2.2
|
|
|
|
2.7
|
|
Purchase of in-process technology
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
Income from litigation settlement
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
13.7
|
|
|
|
15.7
|
|
|
|
8.0
|
|
Interest income, net
|
|
|
1.9
|
|
|
|
1.0
|
|
|
|
1.2
|
|
Impairment of investments
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15.4
|
|
|
|
16.7
|
|
|
|
9.2
|
|
Provision for income taxes
|
|
|
4.3
|
|
|
|
4.7
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11.1
|
%
|
|
|
12.0
|
%
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended 2007 Compared to 2006 and 2005
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
in 2007
|
|
|
in 2006
|
|
|
Net sales
|
|
$
|
780.5
|
|
|
$
|
782.8
|
|
|
$
|
509.3
|
|
|
|
(0.3
|
)
|
|
|
53.7
|
|
Net sales decreased $2.3 million during the year ended
December 31, 2007 mainly due to a decrease in worldwide
demand from our semiconductor capital equipment manufacturer
customers compared to the same period for the prior year.
International net sales were $302.7 million for the year
ended December 31, 2007 or 38.8% of net sales compared to
$266.9 million for the same period of 2006 or 34.1% of net
sales.
Net sales increased $273.5 million during the year ended
December 31, 2006 mainly due to an increase in worldwide
demand from our semiconductor capital equipment manufacturer and
semiconductor device manufacturer customers, which increased
$188.6 million or 52.3% compared to the same period for the
prior year. Additionally, net sales for thin-film and other
non-semiconductor manufacturing applications increased
$84.9 million or 57.1% compared to the same period for the
prior year. During 2006, we acquired three companies. These
acquisitions increased our total net sales by approximately
$38.5 million for the year ended December 31, 2006
compared to the same period for the prior year. International
net sales were $266.9 million for the year ended
December 31, 2006 or 34.1% of net sales compared to
$188.5 million for the same period of 2005 or 37.0% of net
sales.
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Points Change in
|
|
|
% Points Change in
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
Gross profit as a percentage of sales
|
|
|
42.5
|
%
|
|
|
43.2
|
%
|
|
|
39.4
|
%
|
|
|
(0.7
|
)
|
|
|
3.8
|
|
25
Gross profit decreased slightly during the year ended
December 31, 2007 mainly due to unfavorable product mix and
other costs, including higher charges for excess inventory as a
result of flattened sales and slightly higher overhead cost,
offset by lower warranty cost in 2007.
Gross profit increased during the year ended December 31,
2006 mainly due to higher production volumes, which reduced
overhead costs as a percentage of sales by 3.0 percentage
points. In addition, the positive impact of gross profit margins
from our three acquisitions in 2006, favorable product mix and
other reduced manufacturing costs increased our overall margin
by approximately 0.8 percentage points during the year
ended December 31, 2006.
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
in 2007
|
|
|
in 2006
|
|
|
Research and development expenses
|
|
$
|
72.2
|
|
|
$
|
69.7
|
|
|
$
|
55.9
|
|
|
|
3.5
|
|
|
|
24.7
|
|
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.
Research and development expense increased $2.5 million
during the year ended December 31, 2007 mainly due to
$1.9 million in increased compensation, resulting from
increased headcount, and $1.8 million in consulting
expenses, primarily offset by $0.8 million in lower project
materials costs as compared to the same period in the prior year.
Research and development expense increased $13.8 million
during the year ended December 31, 2006 mainly due to
expenses of $5.4 million from the companies acquired in
2006, $4.9 million in increased compensation, resulting
from increased incentive compensation, headcount and salaries,
and $3.3 million in stock-based compensation expenses
recorded during the current year.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
in 2007
|
|
|
in 2006
|
|
|
Selling, general and administrative expenses
|
|
$
|
135.2
|
|
|
$
|
127.7
|
|
|
$
|
93.1
|
|
|
|
5.9
|
|
|
|
37.3
|
|
Selling, general and administrative expenses increased
$7.5 million during the year ended December 31, 2007
primarily due to $3.8 million of increased IT spending to
support current and future initiatives including the
26
implementation of an ERP system, $0.7 million in increased
compensation, $0.9 million increase in costs of operating
facilities mainly in Asia, and by $1.1 million in foreign
currency exchange losses as compared to the same period in the
prior year.
Selling, general and administrative expenses increased
$34.7 million during the year ended December 31, 2006
primarily due to expenses of $15.8 million from the
companies acquired in 2006, $11.3 million in increased
compensation, resulting from increased incentive compensation,
headcount and salaries, $7.6 million in stock-based
compensation expenses recorded during the current year and
higher costs of $2.1 million for our ERP implementation and
other IT investments , offset by $2.6 million in foreign
currency exchange gains as compared to the same period in the
prior year.
Amortization
of Acquired Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
in 2007
|
|
|
in 2006
|
|
|
Amortization of acquired intangible assets
|
|
$
|
16.2
|
|
|
$
|
17.4
|
|
|
$
|
13.9
|
|
|
|
(6.9
|
)
|
|
|
25.3
|
|
Amortization expense for the year ended December 31, 2007
decreased $1.2 million primarily related to intangible
assets from previous acquisitions that became fully amortized
during 2007.
Amortization expense for the year ended December 31, 2006
increased $3.5 million primarily due to the amortization
related to $33.6 million in acquired intangible assets from
the acquisitions in 2006, which included a $1.0 million
order backlog intangible asset that was amortized over
3 months during the first quarter of 2006.
Purchase
of in-process technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Purchase of in-process technology
|
|
$
|
0.9
|
|
|
$
|
0.8
|
|
|
|
|
|
In-process research and development amounts related to our
acquisition of YDI in 2007 and Ion and Umetrics in 2006. The
purchase price of the acquisitions was allocated to the assets
acquired, including intangible assets, based on estimated fair
values. The intangible assets included acquired in-process
technology for projects, generally expected to have durations of
12 months, which did not have alternative future uses.
Accordingly, these costs were expensed in the year of
acquisition.
Income
from Litigation Settlement
During the fourth quarter of 2005, we executed a settlement
agreement with Advanced Energy Industries, Inc. (Advanced
Energy) in connection with the patent infringement suit we
had brought against Advanced Energy in federal district court in
Delaware. Pursuant to the settlement agreement, Advanced Energy
paid us $3.0 million in cash in October 2005.
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
% Change
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
in 2007
|
|
|
in 2006
|
|
|
Interest income, net
|
|
$
|
14.5
|
|
|
$
|
8.4
|
|
|
$
|
6.5
|
|
|
|
72.5
|
|
|
|
30.1
|
|
Net interest income increased $6.1 million during the year
ended December 31, 2007 mainly related to higher average
outstanding cash and investment balances in 2007 and higher
average rates.
Net interest income increased $1.9 million during the year
ended December 31, 2006 mainly related to higher interest
rates in 2006.
27
Impairment
of Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Impairment of Investment
|
|
$
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
During the fourth quarter of 2007, we determined that declines
in the fair value of our investments in certain commercial paper
were
other-than-temporary.
This commercial paper was issued by two structured investment
vehicles (SIVs) that entered into receivership during the fourth
quarter of 2007 and they failed to make payments at maturity.
Due to the mortgage-related assets these issuers held, they were
exposed to adverse market conditions that affected the value of
their collateral and their ability to access short-term funding.
These investments are not currently trading on active markets,
and therefore, have no readily determinable market value. As a
result of our evaluation as of December 31, 2007, we
recorded a $1.5 million impairment charge to earnings,
based upon the Company receiving contemporaneous quotes from
established third-party pricing services.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Provision for income taxes
|
|
$
|
33.7
|
|
|
$
|
36.7
|
|
|
$
|
12.4
|
|
The provision for income taxes in 2007, 2006 and 2005 are
comprised of federal, state and foreign income taxes.
Our effective tax rate for the years ended December 31,
2007, 2006 and 2005 was 28.0%, 28.0% and 26.5%, respectively.
The effective tax rate for 2007 is less than the statutory tax
rate primarily due to the benefit from federal research and
development credits and the profits of our international
subsidiaries being taxed at rates lower than the
U.S. statutory tax rate.
The effective tax rate in 2006 is less than the statutory tax
rate primarily due to certain discrete tax matters related to
our international operations, the benefit from the federal
research and development credits, the reduction in the valuation
allowance for state tax credits, and the profits of our
international subsidiaries being taxed at rates lower than the
U.S. statutory tax rate.
The effective tax rate in 2005 is less than the statutory tax
rate primarily due to a tax benefit recorded as the result of
the completion of the Internal Revenue Service (IRS)
examination (see below), the benefit from federal research and
development credits and the profits of our international
subsidiaries being taxed at rates lower than the
U.S. statutory tax rate.
We 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
$11.6 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 December 31, 2007 was approximately
$16.1 million, excluding penalties and interest. The
increase from January 1, 2007 was primarily attributable to
our tax positions taken during the current year. At
December 31, 2007, if these benefits were recognized in a
future period, the timing of which is not estimable, the net
unrecognized tax benefit of approximately $13.2 million
would impact our effective tax rate.
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. The 2003 federal tax year
remains open to the extent of the loss carryforward to 2004 and
2005. As of December 31, 2007, there were ongoing audits in
various other tax jurisdictions.
Over the next 12 months it is reasonably possible that the
Company may recognize $4.3 million to $4.8 million of
previously unrecognized tax benefits related to various federal,
state and foreign tax positions as a result of the
28
conclusion of various audits and the expiration of the statute
of limitations. The following tax years, in the major tax
jurisdictions noted, are open for assessment or refund:
U.S. Federal: 2003 to 2006, Germany: 2001 to 2006, Korea:
2005 to 2006, Japan: 2000 to 2006 and the United Kingdom: 2005
and 2006.
We accrue interest and penalties, if applicable, for any
uncertain tax positions. This interest and penalty expense is a
component of income tax expense. At the date of adoption of
FIN 48 and at December 31, 2007, we had
$0.7 million and $1.5 million, respectively, accrued
for interest on unrecognized tax benefits.
For the year ended December 31, 2007, the Company amended
prior federal tax returns to reflect revised estimates for
qualifying federal research and development costs that allowed
the Company to claim additional research tax credits. As a
result of this claim, the Company recorded a benefit to income
tax expense of $1.8 million.
During the year ended December 31, 2006, we received a
notification letter from the Israeli Ministry of Industry Trade
and Labor (MITL) indicating that our Israeli
operations were in compliance with requirements relating to the
tax holiday granted to our manufacturing operations in Israel in
2001. This tax holiday is anticipated to expire in 2011 and is
subject to meeting continued investment, employment and other
requirements under the guidelines of the MITL. Additionally, we
recorded the impact of both a change in German tax rules
allowing interest deductions on certain loans and an adjustment
relating to transfer pricing. As a result of these items we
recorded a net benefit to income tax expense of
$1.6 million for the year ended December 31, 2006.
During 2005, the IRS completed its examination of our federal
tax returns for the tax years 1999 through 2002. As a result of
this examination, during the year ended December 31, 2005,
we recorded a benefit to income tax expense of $1.9 million
and a $0.6 million reduction of goodwill related to a
previous acquisition.
Liquidity
and Capital Resources
Cash, cash equivalents and short-term marketable securities
totaled $323.8 million at December 31, 2007 compared
to $290.0 million at December 31, 2006. This increase
is mainly due to an increase of $119.1 million of cash
generated from operations offset primarily by $58.7 million
of cash used in financing activities and $24.0 million of
cash used for the acquisition of YDI in November 2007. The
primary driver in our current and anticipated future cash flows
is and will continue to be cash generated from operations,
consisting mainly of our net income 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 trade accounts receivable and inventory
balances will generally decrease, resulting in increased cash
from operations.
Net cash provided by operating activities of $119.1 million
for the year ended December 31, 2007, resulted mainly from
net income of $86.4 million, a $26.1 million decrease
in operating liabilities and non-cash charges of
$30.6 million for depreciation and amortization and
$12.9 million for stock-based compensation, and a decrease
in net operating assets of $20.2 million and a deferred tax
benefit of $10.3 million. The $26.1 million net
decrease in operating liabilities is mainly caused by a decrease
of $18.9 million in accounts payable primarily as a result
of inventory procurement activities and a decrease of
$6.6 million in accrued expenses and other current
liabilities primarily as a result of lower accrued compensation
and warranty costs. The $20.2 million decrease in operating
assets consisted primarily of an $18.3 million decrease in
accounts receivable as a result of lower sales in the last two
months of 2007 compared to 2006. Net cash provided by operating
activities of $78.2 million for the year ended
December 31, 2006, resulted mainly from net income of
$94.2 million, a $27.7 million increase in operating
liabilities and non-cash charges of $31.3 million for
depreciation and amortization and $13.1 million for
stock-based compensation, offset by an increase in net operating
assets of $77.4 million and a deferred tax benefit of
$11.5 million. The $27.7 million net increase in
operating liabilities is mainly caused by an increase of
$15.4 million in accrued expenses and other current
liabilities primarily as a result of higher accrued compensation
and warranty costs, an increase of $6.5 million in taxes
payable as a result of higher net income and an increase of
$5.7 million in accounts payable primarily as a result of
inventory procurement activities. The $13.1 million for
stock-based compensation resulted from the adoption of
FAS 123R as of January 1, 2006. The $77.4 million
increase in operating assets consisted primarily of a
$33.6 million increase in accounts receivable as a result
of higher revenue and a $46.0 million increase in inventory
as a result of increased product demand.
29
Net cash used in investing activities of $60.9 million for
the year ended December 31, 2007, resulted primarily from
the purchase of one technology company for $24.0 million,
purchases of property, plant and equipment of
$15.1 million, including approximately $6.3 million
related to our new China facility and net purchases of
$23.7 million of available for sale investments. Net cash
used in investing activities of $114.3 million for the year
ended December 31, 2006, resulted primarily from the
purchase of three technology companies for $98.7 million,
purchases of property, plant and equipment of $10.7 million
and net purchases of $4.6 million of available for sale
investments.
Net cash used in financing activities of $58.7 million for
the year ended December 31, 2007, resulted from
$101.2 million used to repurchase common stock and
$4.1 million in net repayment of short-term borrowings,
offset primarily by $45.3 million in proceeds from the
exercises of stock options and purchases under our employee
stock purchase plan. Net cash provided by financing activities
of $30.5 million for the year ended December 31, 2006,
consisted primarily of $23.3 million in proceeds from the
exercise of stock options and purchases under our employee stock
purchase plan and $5.2 million in net proceeds from
short-term borrowings.
On August 1, 2007, we renewed an unsecured short-term LIBOR
based loan agreement with a bank to be utilized primarily by our
Japanese subsidiary for short-term liquidity purposes. The
credit line, which expires on July 31, 2008, allows us to
borrow, in multiple currencies, up to an equivalent of
$35.0 million U.S. dollars. At December 31, 2007,
we had outstanding borrowings of $8.9 million
U.S. dollars, payable on demand, at an interest rate of
1.62%, with $26.1 million available for future borrowings.
Our Japanese subsidiary also has credit lines and short-term
borrowing arrangements with a financial institution, which
provide for aggregate borrowings as of December 31, 2007 of
up to $22.4 million, which generally expire and are renewed
in three-month intervals. At December 31, 2007, total
borrowings outstanding under these arrangements was
$10.0 million, at an interest rate ranging from 1.24% to
1.875%, with $12.4 million available for future borrowings.
We have provided financial guarantees for certain unsecured
borrowings and have standby letters of credit, some of which do
not have fixed expiration dates. At December 31, 2007, our
maximum exposure as a result of these standby letters of credit
and performance bonds was approximately $1.1 million.
Future payments due under debt, lease and purchase commitment
obligations as of December 31, 2007 (in thousands) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
After 5 years
|
|
|
Other
|
|
|
Debt Obligations
|
|
$
|
5,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,000
|
|
|
$
|
|
|
Operating Lease Obligations
|
|
|
38,802
|
|
|
|
8,431
|
|
|
|
11,383
|
|
|
|
6,886
|
|
|
|
12,102
|
|
|
|
|
|
Purchase Obligations(1)
|
|
|
132,042
|
|
|
|
115,080
|
|
|
|
11,410
|
|
|
|
5,552
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligations
|
|
|
2,107
|
|
|
|
1,236
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities Reflected on the Balance Sheet under
GAAP(2)
|
|
|
20,634
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
7,674
|
|
|
|
12,782
|
|
Contingent Purchase Consideration in Connection with
Acquisitions(3)
|
|
|
10,000
|
|
|
|
2,500
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
208,585
|
|
|
$
|
127,425
|
|
|
$
|
31,164
|
|
|
$
|
12,438
|
|
|
$
|
24,776
|
|
|
$
|
12,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The majority of the outstanding inventory purchase commitments
of approximately $104.0 million at December 31, 2007
are to be purchased within the next 12 months.
Additionally, approximately $21.0 million represents a
commitment, as of December 31, 2007, to a third party
engaged to provide certain computer equipment, IT network
services and IT support. This contract is for a period of
approximately six years that began in September 2004 and has a
significant penalty for early termination. The actual timing of
payments and |
30
|
|
|
|
|
amounts may vary based on equipment deployment dates. However,
the amount noted represents our expected obligation based on
anticipated deployment. |
|
(2) |
|
We adopted FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes (FIN 48) as of
January 1, 2007. According to FIN 48, this represents
estimated liabilities for income taxes due for tax positions
taken in a tax return that may not be sustained upon
examination, based on the technical merits of the position. |
|
(3) |
|
In connection with the YDI acquisition, additional purchase
consideration may be payable upon the achievement of specific
annual and cumulative revenue targets between 2008 and 2010. |
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 and planned capital
expenditure requirements through at least the next
12 months.
On February 12, 2007, our Board of Directors approved a
share repurchase program (the Program) for the
repurchase of up to $300.0 million of our outstanding stock
over the next 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 our discretion and the discretion of
our Board of Directors. During the year ended December 31,
2007, we repurchased 4,779,000 shares of common stock for
$101.2 million for an average price of $21.17 per share.
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
December 31, 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 December 31, 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.
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 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.
Derivatives
We conduct our operations globally. Consequently, the results of
our operations are exposed to movements in foreign currency
exchange rates. We hedge a portion of our forecasted foreign
currency denominated intercompany sales of inventory, over a
maximum period of 15 months, using forward foreign exchange
contracts (forward
31
exchange contracts) primarily related to Japanese, Korean
and European currencies. These derivatives are designated as
cash-flow hedges, and changes in their fair value are carried in
accumulated other comprehensive income in our consolidated
statements of stockholders equity until the hedged
transaction affects earnings. When the hedged transaction
affects earnings, the appropriate gain or loss from the
derivative designated as a hedge of the transaction is
reclassified from accumulated other comprehensive income to cost
of sales in the consolidated statements of operations. As of
December 31, 2007, the amount that will be reclassified
from accumulated other comprehensive income to cost of sales
over the next twelve months is immaterial. The ineffective
portions of the derivatives are recorded in cost of sales and
were immaterial in 2007, 2006 and 2005, respectively.
We also hedge certain intercompany and other payables with
forward exchange contracts. Typically, as these derivatives
hedge existing amounts that are denominated in foreign
currencies, the derivatives do not qualify for hedge accounting.
The foreign exchange gain or loss on these derivatives was
immaterial in 2007, 2006 and 2005.
Realized and unrealized gains and losses on forward exchange
contracts that do not qualify for hedge accounting are
recognized immediately in earnings. The cash flows resulting
from forward exchange contracts that qualify for hedge
accounting are classified in our consolidated statements of cash
flows as part of cash flows from operating activities. Cash
flows resulting from forward exchange contracts that do not
qualify for hedge accounting are classified in our statements of
cash flows as investing activities. We do not hold or issue
derivative financial instruments for trading purposes.
We had forward exchange contracts with notional amounts totaling
$66.7 million outstanding at December 31, 2007, of
which, $39.9 million were outstanding to exchange Japanese
yen for U.S. dollars. We had forward exchange contracts
with notional amounts totaling $20.3 million outstanding at
December 31, 2006, of which, $14.6 million were
outstanding to exchange Japanese yen for U.S. dollars. We had
forward exchange contracts with notional amounts totaling
$35.3 million outstanding at December 31, 2005 of
which $28.5 million were outstanding to exchange Japanese
yen for U.S. dollars.
Gains and losses on forward exchange contracts that qualify for
hedge accounting are classified in cost of goods sold, which
totaled a gain of $1.3 million, $1.9 million and
$0.8 million for the years ended December 31, 2007,
2006 and 2005, respectively.
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 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 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. We
do not believe that SFAS 157 will have a material impact on
our consolidated financial statements. Certain portions of
SFAS 157 have been deferred for one year.
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
do not believe that SFAS 159 will have a material impact on
our consolidated financial statements.
32
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, which replaces
SFAS No. 141. This revised standard requires assets,
liabilities and non-controlling interests acquired to be
measured at fair value and requires that costs incurred to
effect the acquisition be recognized separately from the
business combination. In addition, this statement expands the
scope to include all transactions and other events in which one
entity obtains control over one or more businesses. This
statement is effective for all business combinations for which
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. We are in the process of evaluating whether the adoption
of this standard will have a material effect on our consolidated
financial results.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51
(SFAS No. 160). This statement establishes
accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement is effective for fiscal years
beginning on or after December 15, 2008. We are in the
process of evaluating whether the adoption of this standard will
have a material effect on our consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market
Risk and Sensitivity Analysis
Our primary exposures to market risks include fluctuations in
interest rates on our investment portfolio, short and long-term
debt as well as fluctuations in foreign currency exchange rates.
Foreign
Exchange Rate Risk
We enter into forward exchange contracts to reduce currency
exposure arising from intercompany sales of inventory.
There were forward exchange contracts with notional amounts
totaling $66.7 million and $20.3 million outstanding
at December 31, 2007 and 2006, respectively. Of such
forward exchange contracts, $39.9 million and
$14.6 million, respectively, were outstanding to exchange
Japanese yen for U.S. dollars with the remaining amounts
relating to contracts to exchange the British pound, Korean Won
and Euro for U.S. dollars. The potential fair value loss
for a hypothetical 10% adverse change in the currency exchange
rate on our forward exchange contracts at December 31, 2007
and 2006 would be $6.7 million and $2.0 million,
respectively. The potential losses in 2007 and 2006 were
estimated by calculating the fair value of the forward exchange
contracts at December 31, 2007 and 2006 and comparing that
with those calculated using the hypothetical forward currency
exchange rates.
At December 31, 2007 and 2006 we had $134.3 million
and $11.7 million, respectively, in loans outstanding
between subsidiaries that were subject to foreign exchange
exposure. The majority of the intercompany loans were related to
our UK subsidiary, which were incurred in late December 2007 and
were repaid in January 2008. At December 31, 2007 and 2006
a hypothetical 10% adverse change in foreign exchange rates
would result in a net transaction loss of $14.9 million and
$1.3 million, respectively, which would be recorded in
current earnings.
At December 31, 2007 and 2006, we had
$19.0 million and $21.8 million, respectively,
related to short-term borrowings and current portion of
long-term debt denominated in Japanese yen. The carrying value
of these short-term borrowings approximates fair value due to
their short period to maturity. Assuming a hypothetical 10%
adverse change in the Japanese yen to U.S. dollar year-end
exchange rate, the fair value of these short-term borrowings
would increase by $2.1 million and $2.4 million,
respectively. The potential increase in fair value was estimated
by calculating the fair value of the short-term borrowings at
December 31, 2007 and 2006, respectively, and comparing
that with the fair value using the hypothetical year-end
exchange rate.
33
Interest
Rate Risk
Due to its short-term duration, the fair value of our cash and
investment portfolio at December 31, 2007 and 2006
approximated its carrying value. Interest rate risk was
estimated as the potential decrease in fair value resulting from
a hypothetical 10% increase in interest rates for securities
contained in the investment portfolio. The resulting
hypothetical fair value was not materially different from the
year-end carrying values.
Our total long-term debt outstanding, including the current
portion, at December 31, 2007 and 2006 was
$5.0 million, respectively, and consisted of a mortgage
note and industrial development revenue bond. The interest rate
on these debt instruments was 4.0% at December 31, 2007 and
was 3.95% at December 31, 2006. Due to the immaterial
amounts of the outstanding debt, a hypothetical change of 10% in
interest rates would not have a material effect on our near-term
financial condition or results of operations.
From time to time, MKS has outstanding short-term borrowings
with variable interest rates, primarily denominated in Japanese
yen. At December 31, 2007 and 2006, we had
$19.0 million and $21.8 million, respectively,
outstanding related to these short-term borrowings at interest
rates ranging from 1.24% to 1.875% and 1.45% to 1.50%,
respectively. Due to the short-term nature and amount of this
short-term debt, a hypothetical change of 10% in interest rates
would not have a material effect on our near-term financial
condition or results of operations.
34
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Board of Directors and Shareholders of
MKS Instruments, Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)1 present fairly, in
all material respects, the financial position of MKS
Instruments, Inc. and its subsidiaries at December 31, 2007
and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)2 presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for stock-based compensation in 2006, and as discussed in
Note 9, the manner in which it accounts for uncertain tax
positions in 2007.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
35
As described in Managements Report on Internal Control
over Financial Reporting, management has excluded Yield
Dynamics, Inc. (YDI) from its assessment of internal
control over financial reporting as of December 31, 2007
because YDI was acquired by the Company in a purchase business
combination during 2007. We have also excluded YDI from our
audit of internal control over financial reporting. YDI is a
wholly-owned subsidiary whose total assets and total revenues
represent approximately 3% and less than 1%, respectively, of
the related consolidated financial statement amounts as of and
for the year ended December 31, 2007.
Boston, Massachusetts
February 28, 2008
36
MKS
INSTRUMENTS, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
223,968
|
|
|
$
|
215,208
|
|
Short-term investments
|
|
|
99,797
|
|
|
|
74,749
|
|
Trade accounts receivable, net of allowances of $2,379 and
$4,533 at December 31, 2007 and 2006, respectively
|
|
|
107,504
|
|
|
|
123,658
|
|
Inventories
|
|
|
150,731
|
|
|
|
149,820
|
|
Deferred income taxes
|
|
|
17,984
|
|
|
|
16,787
|
|
Other current assets
|
|
|
9,996
|
|
|
|
11,216
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
609,980
|
|
|
|
591,438
|
|
Property, plant and equipment, net
|
|
|
81,365
|
|
|
|
79,463
|
|
Long-term investments
|
|
|
|
|
|
|
2,816
|
|
Goodwill
|
|
|
337,473
|
|
|
|
323,973
|
|
Acquired intangible assets, net
|
|
|
36,141
|
|
|
|
43,104
|
|
Other assets
|
|
|
11,301
|
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,076,260
|
|
|
$
|
1,043,720
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
18,967
|
|
|
$
|
21,845
|
|
Current portion of capital lease obligations
|
|
|
1,236
|
|
|
|
1,176
|
|
Accounts payable
|
|
|
28,683
|
|
|
|
38,541
|
|
Accrued compensation
|
|
|
17,842
|
|
|
|
26,685
|
|
Income taxes payable
|
|
|
3,649
|
|
|
|
16,619
|
|
Other accrued expenses
|
|
|
25,368
|
|
|
|
25,031
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
95,745
|
|
|
|
129,897
|
|
Long-term debt
|
|
|
5,000
|
|
|
|
5,000
|
|
Long-term portion of capital lease obligations
|
|
|
871
|
|
|
|
1,113
|
|
Deferred income taxes
|
|
|
|
|
|
|
1,535
|
|
Other liabilities
|
|
|
20,635
|
|
|
|
4,956
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common Stock, no par value, 200,000,000 shares authorized;
54,261,947 and 56,671,625 shares issued and outstanding at
December 31, 2007 and 2006, respectively
|
|
|
113
|
|
|
|
113
|
|
Additional paid-in capital
|
|
|
685,465
|
|
|
|
680,164
|
|
Retained earnings
|
|
|
255,244
|
|
|
|
210,877
|
|
Accumulated other comprehensive income
|
|
|
13,187
|
|
|
|
10,065
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
954,009
|
|
|
|
901,219
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,076,260
|
|
|
$
|
1,043,720
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
37
MKS
INSTRUMENTS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
780,487
|
|
|
$
|
782,801
|
|
|
$
|
509,294
|
|
Cost of sales
|
|
|
449,000
|
|
|
|
444,679
|
|
|
|
308,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
331,487
|
|
|
|
338,122
|
|
|
|
200,434
|
|
Research and development
|
|
|
72,170
|
|
|
|
69,702
|
|
|
|
55,916
|
|
Selling, general and administrative
|
|
|
135,249
|
|
|
|
127,703
|
|
|
|
93,106
|
|
Amortization of acquired intangible assets
|
|
|
16,183
|
|
|
|
17,376
|
|
|
|
13,864
|
|
Purchase of in-process technology
|
|
|
900
|
|
|
|
800
|
|
|
|
|
|
Income from litigation settlement
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
106,985
|
|
|
|
122,541
|
|
|
|
40,548
|
|
Interest expense
|
|
|
(806
|
)
|
|
|
(974
|
)
|
|
|
(810
|
)
|
Interest income
|
|
|
15,294
|
|
|
|
9,374
|
|
|
|
7,269
|
|
Impairment of investments
|
|
|
(1,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
120,016
|
|
|
|
130,941
|
|
|
|
47,007
|
|
Provision for income taxes
|
|
|
33,656
|
|
|
|
36,706
|
|
|
|
12,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
86,360
|
|
|
$
|
94,235
|
|
|
$
|
34,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.53
|
|
|
$
|
1.70
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.51
|
|
|
$
|
1.68
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
56,349
|
|
|
|
55,395
|
|
|
|
54,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
57,173
|
|
|
|
55,961
|
|
|
|
54,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
38
MKS
INSTRUMENTS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2004
|
|
|
53,839,098
|
|
|
$
|
113
|
|
|
$
|
631,760
|
|
|
$
|
82,077
|
|
|
$
|
12,684
|
|
|
|
|
|
|
$
|
726,634
|
|
Net issuance under stock-based plans
|
|
|
558,169
|
|
|
|
|
|
|
|
6,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,058
|
|
Tax benefit from stock-based plans
|
|
|
|
|
|
|
|
|
|
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,102
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
Comprehensive income (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,565
|
|
|
|
|
|
|
$
|
34,565
|
|
|
|
34,565
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in value of financial instruments designated as cash
flow hedges and unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,663
|
|
|
|
1,663
|
|
|
|
1,663
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,411
|
)
|
|
|
(7,411
|
)
|
|
|
(7,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
54,397,267
|
|
|
$
|
113
|
|
|
$
|
639,152
|
|
|
$
|
116,642
|
|
|
$
|
6,936
|
|
|
|
|
|
|
$
|
762,843
|
|
Net issuance under stock-based plans
|
|
|
2,274,358
|
|
|
|
|
|
|
|
23,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,255
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
13,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,143
|
|
Tax benefit from stock-based plans
|
|
|
|
|
|
|
|
|
|
|
4,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,614
|
|
Comprehensive income (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,235
|
|
|
|
|
|
|
|
94,235
|
|
|
|
94,235
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in value of financial instruments designated as cash
flow hedges and unrealized (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
(43
|
)
|
|
|
(43
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,172
|
|
|
|
3,172
|
|
|
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
56,671,625
|
|
|
$
|
113
|
|
|
$
|
680,164
|
|
|
$
|
210,877
|
|
|
$
|
10,065
|
|
|
|
|
|
|
$
|
901,219
|
|
Net issuance under stock-based plans
|
|
|
2,368,954
|
|
|
|
|
|
|
|
45,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,266
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
12,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,918
|
|
Tax benefit from stock-based plans
|
|
|
|
|
|
|
|
|
|
|
5,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,712
|
|
Stock purchases
|
|
|
(4,778,632
|
)
|
|
|
|
|
|
|
(59,165
|
)
|
|
|
(41,993
|
)
|
|
|
|
|
|
|
|
|
|
|
(101,158
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
570
|
|
Comprehensive income (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,360
|
|
|
|
|
|
|
|
86,360
|
|
|
|
86,360
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in value of financial instruments designated as cash
flow hedges and unrealized (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(622
|
)
|
|
|
(622
|
)
|
|
|
(622
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,744
|
|
|
|
3,744
|
|
|
|
3,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
89,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
54,261,947
|
|
|
$
|
113
|
|
|
$
|
685,465
|
|
|
$
|
255,244
|
|
|
$
|
13,187
|
|
|
|
|
|
|
$
|
954,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
39
MKS
INSTRUMENTS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
86,360
|
|
|
$
|
94,235
|
|
|
$
|
34,565
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
30,644
|
|
|
|
31,348
|
|
|
|
26,215
|
|
Stock-based compensation
|
|
|
12,918
|
|
|
|
13,143
|
|
|
|
|
|
Tax benefit from stock-based compensation
|
|
|
5,712
|
|
|
|
4,614
|
|
|
|
1,102
|
|
Excess tax benefit from stock-based compensation
|
|
|
(2,688
|
)
|
|
|
(4,469
|
)
|
|
|
|
|
Deferred taxes
|
|
|
(10,283
|
)
|
|
|
(11,518
|
)
|
|
|
303
|
|
Impairment of investments
|
|
|
1,457
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
888
|
|
|
|
562
|
|
|
|
467
|
|
Changes in operating assets and liabilities, net of effects of
businesses acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
18,263
|
|
|
|
(33,555
|
)
|
|
|
(4,702
|
)
|
Inventories
|
|
|
1,206
|
|
|
|
(46,013
|
)
|
|
|
(1,829
|
)
|
Other current assets
|
|
|
708
|
|
|
|
2,213
|
|
|
|
307
|
|
Accrued expenses
|
|
|
(6,615
|
)
|
|
|
15,437
|
|
|
|
(2
|
)
|
Accounts payable
|
|
|
(18,855
|
)
|
|
|
5,731
|
|
|
|
6,362
|
|
Income taxes payable
|
|
|
(596
|
)
|
|
|
6,483
|
|
|
|
1,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
119,119
|
|
|
|
78,211
|
|
|
|
64,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
(24,021
|
)
|
|
|
(98,671
|
)
|
|
|
|
|
Purchases of short-term and long-term
available-for-sale
investments
|
|
|
(183,927
|
)
|
|
|
(108,944
|
)
|
|
|
(215,551
|
)
|
Maturities and sales of short-term and long-term
available-for-sale
investments
|
|
|
160,269
|
|
|
|
104,302
|
|
|
|
244,736
|
|
Purchases of property, plant and equipment
|
|
|
(15,090
|
)
|
|
|
(10,690
|
)
|
|
|
(10,281
|
)
|
Proceeds from sale of assets
|
|
|
370
|
|
|
|
578
|
|
|
|
241
|
|
Other
|
|
|
1,451
|
|
|
|
(827
|
)
|
|
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(60,948
|
)
|
|
|
(114,252
|
)
|
|
|
20,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
137,656
|
|
|
|
89,547
|
|
|
|
79,005
|
|
Payments on short-term borrowings
|
|
|
(141,749
|
)
|
|
|
(84,381
|
)
|
|
|
(81,729
|
)
|
Repurchases of common stock
|
|
|
(101,158
|
)
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
|
|
|
|
(1,667
|
)
|
|
|
(2,036
|
)
|
Principal payments on capital lease obligations
|
|
|
(1,426
|
)
|
|
|
(754
|
)
|
|
|
(377
|
)
|
Proceeds from exercise of stock options and employee stock
purchase plan
|
|
|
45,266
|
|
|
|
23,255
|
|
|
|
6,058
|
|
Excess tax benefit from stock-based compensation
|
|
|
2,688
|
|
|
|
4,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(58,723
|
)
|
|
|
30,469
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
9,312
|
|
|
|
207
|
|
|
|
(2,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
8,760
|
|
|
|
(5,365
|
)
|
|
|
82,184
|
|
Cash and cash equivalents at beginning of period
|
|
|
215,208
|
|
|
|
220,573
|
|
|
|
138,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
223,968
|
|
|
$
|
215,208
|
|
|
$
|
220,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
830
|
|
|
$
|
880
|
|
|
$
|
784
|
|
Income taxes
|
|
$
|
27,116
|
|
|
$
|
35,922
|
|
|
$
|
10,213
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment capital leases
|
|
$
|
1,244
|
|
|
$
|
1,638
|
|
|
$
|
1,666
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
40
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Table in
thousands, except share and per share data)
|
|
1)
|
Description
of Business
|
MKS Instruments, Inc. was founded in 1961 and is a leading
worldwide provider of instruments, subsystems and process
control solutions that measure, control, power, monitor and
analyze critical parameters to improve process performance and
productivity of advanced manufacturing processes. MKS is managed
as one operating segment which is organized around three product
groups: Instruments and Control Systems, Power and Reactive Gas
Products and Vacuum Products. MKS products are derived
from its core competencies in pressure measurement and control,
materials delivery, gas composition analysis, electrostatic
change management, control and information technology, power and
reactive gas generation and vacuum technology.
|
|
2)
|
Summary
of Significant Accounting Policies
|
Basis of
Presentation
The consolidated financial statements include the accounts of
MKS Instruments, Inc. and its wholly owned subsidiaries
(collectively, the Company). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Net
Income Per Share
Basic earnings per share is based on the weighted average number
of common shares outstanding, and diluted earnings per share is
based on the weighted average number of common shares
outstanding and all dilutive potential common equivalent shares
outstanding. The dilutive effect of options is determined under
the treasury stock method using the average market price for the
period. Common equivalent shares are included in the per share
calculations when the effect of their inclusion would be
dilutive.
The following is a reconciliation of basic to diluted net income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
86,360
|
|
|
$
|
94,235
|
|
|
$
|
34,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per common share basic
|
|
|
56,349,000
|
|
|
|
55,395,000
|
|
|
|
54,067,000
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, restricted stock and employee stock purchase plan
|
|
|
824,000
|
|
|
|
566,000
|
|
|
|
566,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per common share diluted
|
|
|
57,173,000
|
|
|
|
55,961,000
|
|
|
|
54,633,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$
|
1.53
|
|
|
$
|
1.70
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted
|
|
$
|
1.51
|
|
|
$
|
1.68
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
Options and restricted stock outstanding of 3,684,435, 4,789,894
and 5,957,682 during the years ended December 31, 2007,
2006 and 2005, respectively, are excluded from the calculation
of diluted net income per common share because their inclusion
would be anti-dilutive.
Stock-Based
Compensation
Effect of
Adoption of SFAS 123R, Share-Based Payment
Prior to January 1, 2006, the Company accounted for
stock-based awards to employees using the intrinsic value method
as prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations (APB
25). Accordingly, no compensation expense was recorded for
options issued to employees in fixed amounts with fixed exercise
prices at least equal to the fair market value of the
Companys common stock at the date of grant. The Company
had adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure,
(SFAS 123).
On January 7, 2005, the Company accelerated the vesting of
outstanding stock options granted to employees and officers with
an exercise price of $23.00 per share or greater. As a result of
this action, options to purchase approximately
1,600,000 shares of the Companys common stock became
exercisable on January 7, 2005. No compensation expense was
recorded related to this action as these options had no
intrinsic value on January 7, 2005. For purposes of the
SFAS 123 pro forma calculation below, the expense related
to the options that were accelerated was $16,886,000, net of
tax, for the year ended December 31, 2005. The reason that
the Company accelerated the vesting of the identified stock
options was to reduce the Companys compensation expense in
periods subsequent to the adoption of SFAS No. 123R,
Share-Based Payment (SFAS 123R).
As of January 1, 2006, the Company adopted SFAS 123R
using the modified prospective method. SFAS 123R requires
companies to recognize compensation cost for all stock-based
awards based upon the grant-date fair value of those awards and
to recognize the expense over the requisite service period for
awards expected to vest. Using the modified prospective method
of adopting SFAS 123R, MKS began recognizing compensation
expense for equity-based awards granted after January 1,
2006 plus unvested awards granted prior to January 1, 2006.
Under this method of implementation, prior periods were not
restated. The Company has elected to adopt the alternative
transition method for calculating the tax effects of
equity-based compensation. The alternative transition method
includes simplified methods to establish the beginning balance
of the additional paid-in capital pool (APIC pool) related to
the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and
consolidated statement of cash flows of the tax effects of
employee equity-based compensation awards that are outstanding
upon the implementation of SFAS 123R. Subsequent to the
initial adoption of SFAS 123R, the Company calculates
potential windfall or shortfall tax benefits under the treasury
stock method by excluding the impact of pro forma deferred tax
assets.
The Company recognized the full impact of its share-based
payment plans in the consolidated statements of operations for
the years ended December 31, 2007 and 2006 under
SFAS 123R. As of December 31, 2007, the Company
capitalized $570,000 of such cost on its consolidated balance
sheet. The Company did not capitalize any
42
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
amount as of December 31, 2006 as such costs were not
material. The following table reflects the effect of recording
stock-based compensation for the years ended December 31,
2007 and 2006 in accordance with SFAS 123R:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Stock-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
$
|
3,516
|
|
|
$
|
8,521
|
|
Restricted stock
|
|
|
8,481
|
|
|
|
3,862
|
|
Employee stock purchase plan
|
|
|
921
|
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
12,918
|
|
|
|
13,143
|
|
Tax effect on stock-based compensation
|
|
|
(5,712
|
)
|
|
|
(4,614
|
)
|
|
|
|
|
|
|
|
|
|
Net effect on net income
|
|
$
|
7,206
|
|
|
$
|
8,529
|
|
|
|
|
|
|
|
|
|
|
Effect on earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
The pre-tax effect within the Statement of Operations of
recording stock-based compensation for the years ended
December 31, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of sales
|
|
$
|
1,564
|
|
|
$
|
2,204
|
|
Research and development expense
|
|
|
3,275
|
|
|
|
3,348
|
|
Selling, general and administrative expense
|
|
|
8,079
|
|
|
|
7,591
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax stock-based compensation expense
|
|
$
|
12,918
|
|
|
$
|
13,143
|
|
|
|
|
|
|
|
|
|
|
Prior to
the adoption of SFAS 123R
The following table illustrates the effect on net income and net
income per share, for the year ended December 31, 2005, if
the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee awards.
|
|
|
|
|
|
|
2005
|
|
|
Net income as reported
|
|
$
|
34,565
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of tax
|
|
|
|
|
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all awards, net
of tax
|
|
|
(24,321
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
10,244
|
|
|
|
|
|
|
Basic and diluted net income per share:
|
|
|
|
|
Basic as reported
|
|
$
|
0.64
|
|
Basic Pro forma
|
|
$
|
0.19
|
|
Diluted as reported
|
|
$
|
0.63
|
|
Diluted Pro forma
|
|
$
|
0.19
|
|
43
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
Valuation
Assumptions
In connection with the adoption of SFAS 123R, the Company
reassessed its valuation technique and related assumptions. The
Company determines the fair value of restricted stock based on
the number of shares granted and the closing market price of the
Companys common stock on the date of the award, and
estimates the fair value of stock options and employee stock
purchase rights using the Black-Scholes valuation model, which
is consistent with our valuation techniques previously utilized
for options in footnote disclosures required under
SFAS 123. Such values are recognized as expense on a
straight-line basis over the requisite service periods, net of
estimated forfeitures. The estimation of stock-based awards that
will ultimately vest requires significant judgment. We consider
many factors when estimating expected forfeitures, including
types of awards and historical experience. Actual results, and
future changes in estimates, may differ substantially from our
current estimates.
There were no options granted during the year ended
December 31, 2007. The weighted average grant date fair
value of options granted during the year ended December 31,
2006, as determined under SFAS 123R, and during the year
December 31, 2005, as determined under SFAS 123, was
$12.00 and $8.27 per share, respectively. The total intrinsic
value of options exercised during the years ended
December 31, 2007, 2006 and 2005 was approximately
$16,462,000, $14,252,000 and $2,858,000, respectively. The fair
values of options at the date of grant were estimated using the
Black-Scholes option-pricing model with the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
|
|
|
|
5.0
|
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
|
|
|
|
4.9
|
%
|
|
|
4.0
|
%
|
Expected Volatility
|
|
|
|
|
|
|
52.0
|
%
|
|
|
51.0
|
%
|
Dividend yield
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The weighted average fair value of employee stock purchase
rights granted in 2007, 2006 and 2005 was $4.88, $5.18 and
$4.18, respectively. The fair value of the employees
purchase rights was estimated using the Black-Scholes
option-pricing model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Employee stock purchase rights:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
5.0
|
%
|
|
|
4.8
|
%
|
|
|
2.7
|
%
|
Expected volatility
|
|
|
33.0
|
%
|
|
|
34.6
|
%
|
|
|
34.0
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatilities for 2007 and 2006 are based on a
combination of implied and historical volatilities of our common
stock and based on historical volatilities for 2005; the
expected life represents the weighted average period of time
that options granted are expected to be outstanding giving
consideration to vesting schedules and our historical exercise
patterns; and the risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time of grant
for periods corresponding with the expected life of the option.
The fair value of stock options and restricted stock awards that
vested during the year ended December 31, 2007, 2006 and
2005 was approximately $4,876,000, $8,111,000 and $10,097,000,
respectively. As of December 31, 2007, the unrecognized
compensation cost related to non-vested stock options and the
unrecognized compensation cost related to restricted stock was
approximately $2,273,000 and $17,247,000 respectively, and will
be recognized over an estimated weighted average amortization
period of 0.9 years and 1.9 years, respectively.
44
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
Foreign
Exchange
The functional currency of the majority of the Companys
foreign subsidiaries is the applicable local currency. For those
subsidiaries, assets and liabilities are translated to
U.S. dollars at year-end exchange rates. Income and expense
accounts are translated at the average exchange rates prevailing
during the year. The resulting translation adjustments are
included in accumulated other comprehensive income in
consolidated stockholders equity. Foreign exchange
transaction gains and losses, which arise from transaction
activity and are reflected in operations, were immaterial in
2007, 2006 and 2005.
Revenue
Recognition and Accounts Receivable Allowances
Revenue from product sales is recorded upon transfer of title
and risk of loss to the customer provided that there is evidence
of an arrangement, the sales price is fixed or determinable, and
collection of the related receivable is reasonably assured. In
most transactions, the Company has no obligations to customers
after the date products are shipped other than pursuant to
warranty obligations. In some instances, the Company provides
installation, training, support and services to customers after
the product has been shipped. For revenue arrangements with
multiple deliverables, the Company defers the fair value related
to any undelivered elements until the undelivered element is
delivered. Fair value is the price charged when the element is
sold separately. The Company provides for the estimated costs to
fulfill customer warranty obligations upon the recognition of
the related revenue. Shipping and handling fees, if any, billed
to customers are recognized as revenue. The related shipping and
handling costs are recognized in cost of sales. Accounts
receivable allowances include sales returns and bad debt
allowances. The Company monitors and tracks the amount of
product returns and reduces revenue at the time of shipment for
the estimated amount of such future returns, based on historical
experience. The Company makes estimates evaluating its allowance
for doubtful accounts. The Company continuously monitors
collections and payments from its customers and maintains a
provision for estimated credit losses based upon its historical
experience and any specific customer collection issues that it
has identified.
Cash and
Cash Equivalents and Investments
All highly liquid investments with a maturity date of three
months or less at the date of purchase are considered to be cash
equivalents. The appropriate classification of investments in
securities is determined at the time of purchase. Debt
securities that the Company does not have the intent and ability
to hold to maturity are classified as
available-for-sale
and are carried at fair value. Unrealized gains and losses on
securities classified as
available-for-sale
are included in accumulated other comprehensive income in
consolidated stockholders equity.
The Company reviews its investment portfolio on a monthly basis
to identify and evaluate individual investments that have
indications of possible impairment. The factors considered in
determining whether a loss is
other-than-temporary
include: the length of time and extent to which fair market
value has been below the cost basis, the financial condition and
near-term prospects of the issuer, credit quality, and the
Companys ability to hold the investment for a period of
time sufficient to allow for any anticipated recovery in fair
value. During this review, as of December 31, 2007, the
Company determined that declines in the fair value of two of its
investments in certain commercial paper were
other-than-temporary.
This commercial paper was issued by two structured investment
vehicles (SIVs) that entered into receivership during the fourth
quarter of 2007 and failed to make payment at maturity. Due to
the mortgage-related assets held by these issuers, they were
exposed to adverse market conditions that affected the value of
their collateral and their ability to access short-term funding.
These investments are not currently trading on active markets,
and therefore, have no readily determinable market value. As a
result of the Companys evaluation as of December 31,
2007, it recorded a $1,457,000 impairment charge to earnings
based upon the Company receiving contemporaneous quotes from
established third-party pricing services. This resulted in a new
cost basis for the securities of $4,275,000.
45
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
The fair value of short-term
available-for-sale
investments with maturities or estimated lives of less than one
year consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Federal Government and Government Agency Obligations
|
|
$
|
46,813
|
|
|
$
|
2,092
|
|
Commercial Paper and Corporate Obligations
|
|
|
52,984
|
|
|
|
72,657
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
99,797
|
|
|
$
|
74,749
|
|
|
|
|
|
|
|
|
|
|
The fair value of long-term
available-for-sale
investments with maturities or estimated lives of one to five
years consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Commercial Paper and Corporate Obligations
|
|
$
|
|
|
|
$
|
2,816
|
|
|
|
|
|
|
|
|
|
|
The following table shows the gross unrealized gains and losses
aggregated by investment category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Government and Government Agency Obligations
|
|
$
|
13,554
|
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
13,569
|
|
Commercial Paper and Corporate Obligations
|
|
|
13,853
|
|
|
|
39
|
|
|
|
64
|
|
|
|
13,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,407
|
|
|
$
|
54
|
|
|
$
|
64
|
|
|
$
|
27,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper and Corporate Obligations
|
|
$
|
29,581
|
|
|
$
|
156
|
|
|
$
|
19
|
|
|
$
|
29,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income is accrued as earned. Dividend income is
recognized as income on the date the stock trades
ex-dividend. The cost of marketable securities sold
is determined by the specific identification method and realized
gains or losses are reflected in income and were not material in
2007, 2006 and 2005.
Inventories
The Company values its inventory at the lower of cost
(first-in,
first-out method) or market. The Company regularly reviews
inventory quantities on hand and records a provision to write
down excess and obsolete inventory to its estimated net
realizable value, if less than cost, based primarily on its
estimated forecast of product demand.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost. Equipment
acquired under capital leases is recorded at the present value
of the minimum lease payments required during the lease period.
Expenditures for major renewals and betterments that extend the
useful lives of property, plant and equipment are capitalized.
Expenditures for maintenance and repairs are charged to expense
as incurred. When assets are sold or otherwise disposed of, the
cost and related accumulated depreciation are eliminated from
the accounts and any resulting gain or loss is recognized in
earnings.
Depreciation is provided on the straight-line method over the
estimated useful lives of twenty to thirty-one and one-half
years for buildings and three to seven years for machinery and
equipment and furniture and fixtures and
46
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
office equipment, which includes ERP software. Leasehold
improvements are amortized over the shorter of the lease term or
the estimated useful life of the leased asset.
Intangible
Assets
Intangible assets resulting from the acquisitions of entities
accounted for using the purchase method of accounting are
estimated by management based on the fair value of assets
acquired. These include acquired customer lists, technology,
patents, trade name and covenants not to compete. Intangible
assets are amortized from two to eight years on a straight-line
basis which represents the estimated periods of benefit.
Goodwill
Goodwill is the amount by which the cost of acquired net assets
exceeded the fair value of those net assets on the date of
acquisition. The Company assesses goodwill for impairment on an
annual basis during the fourth quarter of each fiscal year, or
more frequently when events and circumstances occur indicating
that the recorded goodwill may be impaired. If the book value of
a reporting unit exceeds its fair value, the implied fair value
of goodwill is compared with the carrying amount of goodwill. If
the carrying amount of goodwill exceeds the implied fair value,
an impairment loss is recorded equal to that excess.
Impairment
of Long-Lived Assets
The Company evaluates the recoverability of its long-lived
assets, in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144).
SFAS 144 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds
the future undiscounted cash flows attributable to such assets.
If impairment is indicated, the assets are written down to their
estimated fair value.
Research
and Development
Research and development costs are expensed as incurred and
consist mainly of compensation related expenses and project
materials. The Companys research and development efforts
include numerous projects, which generally have duration of 12
to 30 months.
In-Process
Research and Development
The Company values tangible and intangible assets acquired
through its business acquisitions at fair value including
in-process research and development (IPR&D).
The Company determines IPR&D through established valuation
techniques for various projects for the development of new
products and technologies and expenses IPR&D when technical
feasibility is not reached.
Advertising
Costs
Advertising costs are expensed as incurred. Advertising costs
were immaterial in 2007, 2006 and 2005.
Income
Taxes
The Company records income taxes using the asset and liability
method. Deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax
bases, and operating loss and tax credit carryforwards. The
Company evaluates the realizability of net deferred tax assets
and assesses the need for valuation allowance on a quarterly
basis. The future benefit to be derived from its deferred tax
assets is dependent upon its ability to generate sufficient
future taxable income to realize the assets. The company records
a valuation
47
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
allowance to reduce its net deferred tax assets to the amount
that is more likely than not to be realized. To the extent the
Company establishes a valuation allowance, an expense will be
recorded within the provision for income taxes line on the
statement of operations. As of December 31, 2005, the
Company had a valuation allowance of $3,497,000 for its state
tax credit carryforwards. During the fourth quarter of 2006, the
Company determined that it would begin utilizing these
aforementioned state tax credits and reduced the valuation
allowance to reflect the amount of the state tax credits that
are more likely than not expected to be utilized. The remaining
valuation allowance at December 31, 2006 was $317,000,
related to the remaining state tax credits acquired with the
purchase of Ion. During 2007, the Company increased the
valuation allowance for the state tax loss carryforwards and
state tax credits acquired in the purchase of YDI. The valuation
allowance is $534,000 at December 31, 2007.
New
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. The
Company does not believe that SFAS 157 will have a material
impact on its consolidated financial statements. Certain
portions of SFAS 157 have been deferred for one year.
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 does not believe that SFAS 159 will have a
material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS no. 141(R),
Business Combinations, which replaces
SFAS No. 141. This revised standard requires assets,
liabilities and non-controlling interests acquired to be
measured at fair value and requires that costs incurred to
effect the acquisition be recognized separately from the
business combination. In addition, this statement expands the
scope to include all transactions and other events in which one
entity obtains control over one or more businesses. This
statement is effective for all business combinations for which
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. The Company is in the process of evaluating whether the
adoption of this standard will have a material effect on its
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51. This
statement establishes accounting and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement is effective for
fiscal years beginning on or after December 15, 2008. The
Company is in the process of evaluating whether the adoption of
this standard will have a material effect on its financial
position, results of operations or cash flows.
Use of
Estimates
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these 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
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
48
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
long-lived assets, in-process research and development, 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.
|
|
3)
|
Financial
Instruments and Risk Management
|
Foreign
Exchange Risk Management
The Company hedges a portion of its forecasted foreign currency
denominated intercompany sales of inventory, over a maximum
period of fifteen months, using forward exchange contracts
primarily related to Japanese, Korean and European currencies.
These derivatives are designated as cash-flow hedges, and
changes in their fair value are carried in accumulated other
comprehensive income until the hedged transaction affects
earnings. When the hedged transaction affects earnings, the
appropriate gain or loss from the derivative designated as a
hedge of the transaction is reclassified from accumulated other
comprehensive income to cost of sales. As of December 31,
2007, the amount that will be reclassified from accumulated
other comprehensive income to cost of sales over the next twelve
months is immaterial. The ineffective portion of the derivatives
is recorded in cost of sales and was immaterial in 2007, 2006
and 2005.
The Company hedges certain intercompany and other payables with
forward foreign exchange contracts. Since these derivatives
hedge existing amounts that are denominated in foreign
currencies, the derivatives do not qualify for hedge accounting
under SFAS No. 133. The foreign exchange gain or loss
on these derivatives was immaterial in 2007, 2006 and 2005.
Realized and unrealized gains and losses on forward exchange
contracts that do not qualify for hedge accounting are
recognized immediately in earnings. The cash flows resulting
from forward exchange contracts that qualify for hedge
accounting are classified in the consolidated statement of cash
flows as part of cash flows from operating activities. Cash
flows resulting from forward exchange contracts that do not
qualify for hedge accounting are classified in the consolidated
statement of cash flows as investing activities. The Company
does not hold or issue derivative financial instruments for
trading purposes.
There were forward exchange contracts with notional amounts
totaling $66,660,000 outstanding at December 31, 2007 of
which $39,925,000 were outstanding to exchange Japanese Yen for
U.S. dollars. There were forward exchange contracts with
notional amounts totaling $20,324,000 outstanding at
December 31, 2006 of which $14,619,000 were outstanding to
exchange Japanese yen for U.S. dollars. There were forward
exchange contracts with notional amounts totaling $35,299,000
outstanding at December 31, 2005. Of such forward exchange
contracts, $28,461,000 were outstanding to exchange Japanese yen
for US dollars.
Gains and losses on forward exchange contracts that qualify for
hedge accounting are classified in cost of goods sold and
totaled a gain of $1,312,000, $1,932,000 and $812,000 for the
years ended December 31, 2007, 2006 and 2005, respectively.
The fair values of forward exchange contracts at
December 31, 2007 and 2006, determined by applying period
end currency exchange rates to the notional contract amounts,
amounted to an unrealized gain of $43,000 and $998,000 for the
years ended December 31, 2007 and 2006, respectively.
Concentrations
of Credit Risk
The Companys significant concentrations of credit risk
consist principally of cash and cash equivalents, investments,
forward exchange contracts and trade accounts receivable. The
Company maintains cash and cash equivalents with financial
institutions including some banks with which it has borrowings.
The Company maintains
49
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
investments primarily in U.S. Treasury and government
agency securities and corporate debt securities, with minimum
rating of A1-P1 or AAA. The Company enters into forward currency
contracts with high credit-quality financial institutions in
order to minimize credit risk exposure. The Companys
customers are primarily concentrated in the semiconductor
industry, and a limited number of customers account for a
significant portion of the Companys revenues. The Company
regularly monitors the creditworthiness of its customers and
believes it has adequately provided for potential credit loss
exposures. Credit is extended for all customers based primarily
on financial condition and collateral is not required.
Fair
Value of Financial Instruments
The fair value of the term loans, including the current portion,
approximates its carrying value given its variable rate interest
provisions. The fair value of marketable securities is based on
quoted market prices. The fair value of mortgage notes is based
on borrowing rates for similar instruments and, therefore,
approximates its carrying value. For all other balance sheet
financial instruments, the carrying amount approximates fair
value because of the short period to maturity of these
instruments.
4) Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw material
|
|
$
|
73,529
|
|
|
$
|
82,007
|
|
Work in process
|
|
|
26,171
|
|
|
|
26,943
|
|
Finished goods
|
|
|
51,031
|
|
|
|
40,870
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,731
|
|
|
$
|
149,820
|
|
|
|
|
|
|
|
|
|
|
|
|
5)
|
Property,
Plant and Equipment
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
11,566
|
|
|
$
|
11,310
|
|
Buildings
|
|
|
64,991
|
|
|
|
63,932
|
|
Machinery and equipment
|
|
|
86,747
|
|
|
|
87,136
|
|
Furniture and fixtures and office equipment
|
|
|
47,165
|
|
|
|
38,244
|
|
Leasehold improvements
|
|
|
13,750
|
|
|
|
8,082
|
|
Construction in progress
|
|
|
3,239
|
|
|
|
2,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227,458
|
|
|
|
211,550
|
|
Less: accumulated depreciation and amortization
|
|
|
146,093
|
|
|
|
132,087
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,365
|
|
|
$
|
79,463
|
|
|
|
|
|
|
|
|
|
|
50
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
Depreciation and amortization of property, plant and equipment
totaled $14,476,000, $13,972,000 and $12,351,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
6) Debt
Credit
Agreements and Short-Term Borrowings
On July 31, 2007, the Company renewed an unsecured
short-term LIBOR based loan agreement with a bank to be utilized
primarily by its Japanese subsidiary for short-term liquidity
purposes. The credit line, which expires on July 31, 2008,
provides for the Company to borrow in multiple currencies of up
to an equivalent of $35,000,000 U.S. dollars. At
December 31, 2007, the Company had outstanding borrowings
of $8,952,000 U.S. dollars, payable on demand, at an
interest rate of 1.62%.
Additionally, the Companys Japanese subsidiary has lines
of credit and short-term borrowing arrangements with two
financial institutions which provide for aggregate borrowings as
of December 31, 2007 of up to $22,379,000, which generally
expire and are renewed at three month intervals. At
December 31, 2007 and 2006, total borrowings outstanding
under these arrangements were $10,015,000 and $5,041,000,
respectively, at interest rates ranging from 1.24% to 1.875% at
December 31, 2007 and at an interest rate of 1.50% at
December 31, 2006.
Long-Term
Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Mortgage notes
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
Less: current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt less current portion
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
The Company has a long-term debt agreement with the County of
Monroe Industrial Development Agency (COMIDA) for a
manufacturing facility located in Rochester, New York. The terms
are the same as that of the underlying Industrial Development
Revenue Bond which calls for payments of interest only through
July 1, 2014, at which time the Bond is repayable in a lump
sum of $5,000,000. Interest is reset annually based on bond
remarketing, with an option by the Company to elect a fixed
rate, subject to a maximum rate of 13% per annum. At
December 31, 2007 the interest rate was 4.0%. The
bond is collateralized by the building. The remaining principal
balance outstanding at December 31, 2007 was $5,000,000.
The net book value of the building at December 31, 2007 was
approximately $9,472,000.
7) Commitments
and Contingencies
On October 3, 2005, MKS entered into a settlement agreement
with Advanced Energy Industries, Inc. (Advanced
Energy), pursuant to which Advanced Energy paid MKS
$3,000,000 in cash in October 2005. The settlement agreement was
entered into in connection with a patent infringement litigation
suit.
The Company is subject to other 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 leases certain of its facilities and machinery and
equipment under capital and operating leases expiring in various
years through 2012 and thereafter. Generally, the facility
leases require the Company to pay
51
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
maintenance, insurance and real estate taxes. Rental expense
under operating leases totaled $8,257,000, $7,443,000 and
$7,439,000, for the years ended December 31, 2007, 2006 and
2005, respectively.
Minimum lease payments under operating and capital leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
Capital Leases
|
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
8,431
|
|
|
$
|
1,345
|
|
2009
|
|
|
6,287
|
|
|
|
744
|
|
2010
|
|
|
5,096
|
|
|
|
160
|
|
2011
|
|
|
3,678
|
|
|
|
|
|
2012
|
|
|
3,208
|
|
|
|
|
|
Thereafter
|
|
|
12,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
38,802
|
|
|
|
2,249
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
|
|
|
|
2,107
|
|
Less: current portion
|
|
|
|
|
|
|
1,236
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
|
|
|
|
$
|
871
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company has entered into
non-cancelable purchase commitments for certain inventory
components and other equipment and services used in its normal
operations. The majority of these purchase commitments covered
by these arrangements are for periods of less than one year and
aggregate to approximately $103,689,000. Additionally, the
Company has engaged a third party to provide certain computer
equipment, IT network services and IT support. This contract is
for a period of approximately six years beginning in September
2004 and has a significant penalty for early termination. The
obligation at December 31, 2007 of approximately
$20,803,000, excluding capital lease and interest payments of
$2,249,000, will be paid over the term of the arrangement.
Average annual payments are expected to be approximately
$6,934,000.
To the extent permitted by Massachusetts law, the Companys
Restated Articles of Organization, as amended, require the
Company to indemnify any of its current or former officers or
directors or any person who has served or is serving in any
capacity with respect to any of the Companys employee
benefit plans. Because no claim for indemnification has been
pursued by any person covered by the relevant provisions of the
Companys Restated Articles of Organization, the Company
believes that the estimated exposure for these indemnification
obligations is currently minimal. Accordingly, the Company has
no liabilities recorded for these requirements as of
December 31, 2007.
The Company also enters into agreements in the ordinary course
of business which include indemnification provisions. Pursuant
to these agreements, the Company indemnifies, holds harmless and
agrees to reimburse the indemnified party, generally its
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 the Companys
products. The term of these indemnification obligations is
generally perpetual after execution of the agreement. The
maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is, in
some instances, not contractually limited. The Company has never
incurred costs to defend lawsuits or settle claims related to
these indemnification obligations. As a result, the Company
believes the estimated fair value of these obligations is
minimal. Accordingly, the Company has no liabilities recorded
for these obligations as of December 31, 2007.
When, as part of an acquisition, the Company acquires all of the
stock or all of the assets and liabilities of another company,
the Company assumes liability for certain events or occurrences
that took place prior to the date
52
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
of acquisition. The maximum potential amount of future payments
the Company 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 the
Company has not made significant payments for these
indemnifications. Accordingly, no liabilities have been recorded
for these obligations.
In conjunction with certain asset sales, the Company 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 cannot be reasonably
estimated. Other than obligations recorded as liabilities at the
time of the asset sale, historically the Company has not made
significant payments for these indemnifications.
8) Stockholders
Equity
Stock
Repurchase Program
On February 12, 2007, MKS Board of Directors approved
a share repurchase program (the Program) for the
repurchase of up to $300,000,000 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 year ended December 31,
2007, the Company repurchased 4,779,000 shares of common
stock for $101,157,000 for an average price of $21.17 per share.
From January 1, 2008 through February 21, 2008, the
Company purchased 812,210 shares of common stock for
$15,744,914, representing an average price of $19.39 per share.
Stock
Purchase Plans
The Companys Third Amended and Restated 1999 Employee
Stock Purchase Plan (the Purchase Plan) authorizes
the issuance of up to an aggregate of 1,250,000 shares of
Common Stock to participating employees. Offerings under the
Purchase Plan commence on June 1 and December 1 and terminate,
respectively, on November 30 and May 31. Under the Purchase
Plan, eligible employees may purchase shares of Common Stock
through payroll deductions of up to 10% of their compensation.
The price at which an employees option is exercised is the
lower of (1) 85% of the closing price of the Common Stock
on the NASDAQ Global Market on the day that each offering
commences or (2) 85% of the closing price on the day that
each offering terminates. During 2007 and 2006, the Company
issued 166,127 and 120,515 shares, respectively, of Common
Stock to employees who participated in the Purchase Plan at
exercise prices of $17.64 and $15.44 per share in 2007 and
$16.59 and $17.65 per share in 2006, respectively. As of
December 31, 2007, there were 305,445 shares reserved
for future issuance under the Purchase Plan.
The Companys Second Amended and Restated International
Employee Stock Purchase Plan (the Foreign Purchase
Plan) authorizes the issuance of up to an aggregate of
250,000 shares of Common Stock to participating employees.
Offerings under the Foreign Purchase Plan commence on June 1 and
December 1 and terminate, respectively, on November 30 and
May 31. Under the Foreign Purchase Plan, eligible employees
may purchase shares of Common Stock through payroll deductions
of up to 10% of their compensation. The price at which an
employees option is exercised is the lower of (1) 85%
of the closing price of the Common Stock on the NASDAQ Global
Market on the day that each offering commences or (2) 85%
of the closing price on the day that each offering terminates.
During 2007 and 2006, the Company issued 32,803 and 23,236,
respectively, shares of Common Stock to employees who
participated in the Foreign Purchase Plan at exercise prices of
$17.64 and $15.44 per share in 2007 and $16.59 and $17.65
per share in 2006, respectively. As of December 31, 2007,
there were 82,417 shares reserved for future issuance under
the Foreign Purchase Plan.
53
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
Equity
Incentive Plans
The Companys equity incentive plans (the
Plans) are intended to attract and retain employees
and to provide an incentive for them to assist the Company to
achieve long-range performance goals and to enable them to
participate in the long-term growth of the Company. Employees
may be granted restricted stock and restricted stock units
(collectively, restricted stock), options to
purchase shares of the Companys stock and other equity
incentives under the Plans.
The Companys 2004 Stock Incentive Plan (the 2004
Plan) was adopted by the board of directors on
March 4, 2004 and approved by the stockholders on
May 13, 2004. As of December 31, 2007 there were
8,245,399 shares authorized for issuance under the 2004
Plan, which amount shall increase each year by an amount equal
to 5% of the total outstanding shares of the Companys
common stock outstanding on January 1 of such year, provided
that the maximum aggregate number of shares of common stock
which may be issued under the 2004 Plan is
15,000,000 shares (subject to adjustment for certain
changes in MKS capitalization). The Company may grant
options, restricted stock awards, stock appreciation rights and
other stock-based awards to employees, officers, directors,
consultants and advisors under the 2004 Plan. As of
December 31, 2007 there were 6,832,159 shares
available for future grant under the 2004 Plan.
The Companys Second Restated 1995 Stock Incentive Plan
(the 1995 Plan) expired in November 2005 and no
further awards may be granted under the 1995 Plan, although
there are still outstanding options available for exercise under
this plan.
The Companys 1997 Director Stock Plan (the
1997 Director Plan) provides for (i) the
initial grant of options to purchase 20,000 shares of
common stock to each person who first becomes an outside
director and (ii) annual grants of options to purchase
12,000 shares of common stock on the date of the annual
meeting of stockholders. In December 2004, the board of
directors amended the 1997 Director Plan to allow for all
options granted on or after May 17, 2000 to be exercisable
within the three year period from the date of the
directors termination as director. On March 4, 2004,
the board of directors approved, and on May 13, 2004, the
stockholders approved, an increase in the number of shares
available for issuance under the 1997 Director Plan from
300,000 shares to 750,000 shares. The 1997 Director
Plan was terminated on February 12, 2007.
On January 7, 2005, the Company accelerated the vesting of
outstanding options with an exercise price of $23.00 or greater.
As a result of this action, options to purchase approximately
1,600,000 shares became exercisable on January 7,
2005. No compensation expense was recorded in 2005 related to
this action as these options had no intrinsic value on
January 7, 2005. The reason that the Company accelerated
the vesting of the identified stock options was to reduce the
Companys compensation charges in future years.
The Company has granted options to employees under the 2004
Plan, 1995 Plan and the 1993 Stock Option Plan and to directors
under the 1997 Director Plan and the 1996 Director
Stock Option Plan (collectively, the Plans). The
Plans are administered by the compensation committee of the
Companys board of directors.
At December 31, 2007, 6,832,159 shares of the
Companys common stock were available for future grants
under the Plans. Stock options are granted at an exercise price
equal to 100% of the fair value of the Companys common
stock. Generally, stock options granted to employees under the
Plans in 2001 and after, vest 25% after one year and 6.25% per
quarter thereafter, and expire 10 years after the grant
date. Generally, stock options granted under the Plans prior to
2000 vest 20% after one year and 5% per quarter thereafter, and
expire 10 years after the grant date. Options granted to
directors generally vest at the earliest of (1) the next
annual meeting, (2) 13 months from date of grant, or
(3) the effective date of an acquisition. Restricted stock
awards generally vest three years from the date of grant.
54
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
The following table presents the activity for options under the
Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding beginning of period
|
|
|
7,614,655
|
|
|
$
|
21.62
|
|
|
|
9,459,271
|
|
|
$
|
20.36
|
|
|
|
10,023,717
|
|
|
$
|
20.25
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
102,000
|
|
|
$
|
22.94
|
|
|
|
316,500
|
|
|
$
|
16.93
|
|
Exercised
|
|
|
(2,233,303
|
)
|
|
$
|
18.58
|
|
|
|
(1,563,706
|
)
|
|
$
|
13.33
|
|
|
|
(382,211
|
)
|
|
$
|
10.70
|
|
Forfeited or Expired
|
|
|
(258,296
|
)
|
|
$
|
25.59
|
|
|
|
(382,910
|
)
|
|
$
|
24.64
|
|
|
|
(498,735
|
)
|
|
$
|
23.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period
|
|
|
5,123,056
|
|
|
$
|
22.74
|
|
|
|
7,614,655
|
|
|
$
|
21.62
|
|
|
|
9,459,271
|
|
|
$
|
20.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
4,810,516
|
|
|
$
|
23.22
|
|
|
|
6,720,395
|
|
|
$
|
22.36
|
|
|
|
7,750,739
|
|
|
$
|
21.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the activity for restricted stock
under the Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Non-vested
|
|
|
Weighted
|
|
|
Non-vested
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average Grant
|
|
|
Restricted
|
|
|
Average Grant
|
|
|
|
Stock
|
|
|
Date Fair Value
|
|
|
Stock
|
|
|
Date Fair Value
|
|
|
Non-vested restricted stock beginning of period
|
|
|
714,125
|
|
|
$
|
22.00
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
775,353
|
|
|
$
|
22.06
|
|
|
|
741,090
|
|
|
$
|
22.01
|
|
Vested
|
|
|
(4,527
|
)
|
|
$
|
23.39
|
|
|
|
(1,250
|
)
|
|
$
|
23.43
|
|
Forfeited or Expired
|
|
|
(135,601
|
)
|
|
$
|
22.53
|
|
|
|
(25,715
|
)
|
|
$
|
22.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock end of period
|
|
|
1,349,350
|
|
|
$
|
21.98
|
|
|
|
714,125
|
|
|
$
|
22.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information with respect to
options outstanding and exercisable under the Plans at
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value (In
|
|
|
Number of
|
|
|
Exercise
|
|
|
Value (In
|
|
|
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (In Years)
|
|
|
Thousands)
|
|
|
Shares
|
|
|
Price
|
|
|
Thousands)
|
|
|
|
|
|
$ 6.67 $13.87
|
|
|
96,174
|
|
|
$
|
8.99
|
|
|
|
1.85
|
|
|
$
|
976
|
|
|
|
95,517
|
|
|
$
|
8.96
|
|
|
$
|
972
|
|
|
|
|
|
$14.00 $19.00
|
|
|
1,735,341
|
|
|
$
|
15.95
|
|
|
|
5.38
|
|
|
|
5,535
|
|
|
|
1,436,532
|
|
|
$
|
16.12
|
|
|
|
4,338
|
|
|
|
|
|
$19.40 $29.50
|
|
|
2,530,041
|
|
|
$
|
25.02
|
|
|
|
4.80
|
|
|
|
|
|
|
|
2,516,967
|
|
|
$
|
25.05
|
|
|
|
|
|
|
|
|
|
$29.93 $61.50
|
|
|
761,500
|
|
|
$
|
32.36
|
|
|
|
4.12
|
|
|
|
|
|
|
|
761,500
|
|
|
$
|
32.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,123,056
|
|
|
$
|
22.74
|
|
|
|
4.84
|
|
|
$
|
6,511
|
|
|
|
4,810,516
|
|
|
$
|
23.22
|
|
|
$
|
5,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of options
exercisable was 4.71 years at December 31, 2007.
The aggregate intrinsic value in the table above represents the
total pretax intrinsic value, based on the Companys
closing stock price of $19.14 as of December 31, 2007,
which would have been received by the option holders had all
option holders exercised their options as of that date. The
total number of in-the-money options exercisable as of
December 31, 2007 was 1,532,049.
55
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
The total cash received from employees as a result of employee
stock option exercises during the years ended December 31,
2007 and 2006 was approximately $42,005,000 and $20,838,000,
respectively. In connection with these exercises, the net tax
benefits realized by the Company for the years ended
December 31, 2007 and 2006 were approximately $5,712,000
and $4,614,000, respectively.
The Company settles employee stock option exercises with newly
issued common shares.
Accumulated
Other Comprehensive Income
The balance of accumulated other comprehensive income (loss) was
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Instruments
|
|
|
Unrealized
|
|
|
Other
|
|
|
|
Cumulative
|
|
|
Designated as
|
|
|
Gain
|
|
|
Comprehensive
|
|
|
|
Translation
|
|
|
Cash Flow
|
|
|
(Loss) on
|
|
|
Income
|
|
|
|
Adjustments
|
|
|
Hedges
|
|
|
Investments
|
|
|
(Loss)
|
|
|
Balance at December 31, 2005
|
|
$
|
6,294
|
|
|
$
|
594
|
|
|
$
|
48
|
|
|
$
|
6,936
|
|
Foreign currency translation adjustment, net of taxes of $0
|
|
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
3,172
|
|
Changes in value of financial instruments designated as cash
flow hedges, net of tax benefit of $90
|
|
|
|
|
|
|
(149
|
)
|
|
|
|
|
|
|
(149
|
)
|
Change in unrealized gain on investments, net of taxes of $64
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
9,466
|
|
|
$
|
445
|
|
|
$
|
154
|
|
|
$
|
10,065
|
|
Foreign currency translation adjustment, net of taxes of $0
|
|
|
3,744
|
|
|
|
|
|
|
|
|
|
|
|
3,744
|
|
Changes in value of financial instruments designated as cash
flow hedges, net of tax benefit of $423
|
|
|
|
|
|
|
(532
|
)
|
|
|
|
|
|
|
(532
|
)
|
Change in unrealized (loss) on investments, net of tax benefit
of $71
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
13,210
|
|
|
$
|
(87
|
)
|
|
$
|
64
|
|
|
$
|
13,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9) Income
Taxes
A reconciliation of the Companys 2007, 2006 and 2005
effective tax rate to the U.S. federal statutory rate
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. Federal income tax statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Federal and state tax credits
|
|
|
(4.3
|
)
|
|
|
(1.7
|
)
|
|
|
(4.7
|
)
|
State income taxes, net of federal benefit
|
|
|
1.7
|
|
|
|
2.3
|
|
|
|
1.7
|
|
Effect of foreign operations taxed at various rates
|
|
|
(4.9
|
)
|
|
|
(7.1
|
)
|
|
|
(5.3
|
)
|
Extraterritorial income and qualified production activity tax
benefit
|
|
|
(0.7
|
)
|
|
|
(0.9
|
)
|
|
|
(2.0
|
)
|
Deferred tax asset valuation allowance
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
1.3
|
|
Other
|
|
|
1.2
|
|
|
|
2.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.0
|
%
|
|
|
28.0
|
%
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
The components of income before income taxes and the related
provision (benefit) for income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
64,228
|
|
|
$
|
72,276
|
|
|
$
|
14,872
|
|
Foreign
|
|
|
55,788
|
|
|
|
58,665
|
|
|
|
32,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
120,016
|
|
|
$
|
130,941
|
|
|
$
|
47,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Federal
|
|
$
|
29,663
|
|
|
$
|
36,056
|
|
|
$
|
1,958
|
|
State
|
|
|
1,682
|
|
|
|
3,252
|
|
|
|
1,259
|
|
Foreign
|
|
|
12,594
|
|
|
|
8,916
|
|
|
|
8,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,939
|
|
|
|
48,224
|
|
|
|
12,139
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Federal
|
|
|
(7,741
|
)
|
|
|
(9,219
|
)
|
|
|
856
|
|
State and Foreign
|
|
|
(2,542
|
)
|
|
|
(2,299
|
)
|
|
|
(553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,283
|
)
|
|
|
(11,518
|
)
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
33,656
|
|
|
$
|
36,706
|
|
|
$
|
12,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, the significant components
of the deferred tax assets and deferred tax liabilities were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses and credits
|
|
$
|
7,604
|
|
|
$
|
2,751
|
|
Inventory and warranty reserves
|
|
|
14,632
|
|
|
|
13,863
|
|
Accounts receivable and other accruals
|
|
|
2,310
|
|
|
|
5,320
|
|
Depreciation and amortization
|
|
|
6,030
|
|
|
|
5,988
|
|
Stock-based compensation
|
|
|
8,424
|
|
|
|
4,447
|
|
Other
|
|
|
6,346
|
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
45,346
|
|
|
|
34,685
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Acquired intangible assets
|
|
|
(17,560
|
)
|
|
|
(18,618
|
)
|
Other
|
|
|
(508
|
)
|
|
|
(498
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(18,068
|
)
|
|
|
(19,116
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(534
|
)
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
26,744
|
|
|
$
|
15,252
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, the Company had
Massachusetts research credit carryforwards of $4,477,000 and
$3,341,000, respectively. These credit carryforwards will expire
at various dates through 2022.
57
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
At December 31, 2007, as a result of the acquisition of
YDI, the Company had a federal net operating loss carryforward
of $8,832,000 and a federal general business credit carryforward
of $810,000. The Companys intention is to carryforward
both these tax attributes, subject to the limitations of the
Internal Revenue Code. The loss and credit carryforwards expire
at various dates through 2027.
At December 31, 2006, as a result of the acquisition of Ion
Systems Inc., the Company had a federal net operating loss
carryforward of $1,216,000 and a federal general business credit
carryforward of $71,000. The Company carried both of these tax
attributes to previous Ion tax years and recovered $497,000 of
previously paid taxes.
Although the Company believes that its tax positions are
consistent with applicable U.S. federal, state and
international laws, certain tax reserves are maintained at
December 31, 2007 should these positions be challenged by
the applicable tax authority and additional tax assessed on
audit.
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 did not recognize an adjustment in the
liability for unrecognized income tax benefits. A reconciliation
of the beginning and ending amount of gross unrecognized tax
benefits is as follows:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
11,637,000
|
|
Increases for prior years
|
|
|
1,264,000
|
|
Increases for the current year
|
|
|
3,240,000
|
|
Reductions related to settlements with taxing authorities
|
|
|
|
|
Reductions related to expiration of statute of limitations
|
|
|
(18,000
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
16,123,000
|
|
|
|
|
|
|
At December 31, 2007, if these benefits were recognized in
a future period, the timing of which is not estimable, the net
unrecognized tax benefit of approximately $13,242,000 would
impact our effective tax rate.
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. The 2003 Federal tax
year remains open to the extent of the loss carryforwards to
2004 and 2005. As of December 31, 2007, there were on-going
audits in various other tax jurisdictions.
Over the next 12 months it is reasonably possible that the
Company may recognize $4,300,000 to $4,800,000 of previously
unrecognized tax benefits related to various federal, state and
foreign tax positions as a result of the conclusion of various
audits and the expiration of the statute of limitations. The
following tax years, in the major tax jurisdictions noted, are
open for assessment or refund: U.S. Federal: 2003 to 2006,
Germany: 2001 to 2006, Korea: 2005 to 2006, Japan: 2000 to 2006
and the United Kingdom: 2005 and 2006.
The Company accrues interest and penalties, if applicable, for
any uncertain tax positions. Any interest and penalty expense is
a component of income tax expense. At the date of adoption of
FIN 48 and at December 31, 2007, the Company had
$700,000 and $1,500,000, respectively, accrued for interest on
unrecognized tax benefits.
For the year ended December 31, 2007, the Company amended
prior federal tax returns to reflect revised estimates for
qualifying research and development costs that allowed the
company to claim additional research tax credits. As a result of
this claim, the Company recorded a benefit to income tax expense
of $1,800,000 million.
During the year ended December 31, 2006, the Company
received a notification letter from the Israeli Ministry of
Industry Trade and Labor (MITL) indicating that its
Israeli operations were in compliance with requirements relating
to the tax holiday granted to its manufacturing operations in
Israel in 2001. This tax holiday is anticipated to expire in
2011 and is subject to meeting continued investment, employment
and other requirements under the
58
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
guidelines of the MITL. This tax holiday resulted in income tax
savings of $3,393,000, $5,125,000 and $1,190,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
Additionally, for the year ended December 31, 2006, the
Company recorded the impact of both a change in German tax rules
allowing interest deductions on certain loans and adjustments
relating to transfer pricing. As a result of these items the
Company recorded additional income tax benefits of $1,565,000
for the year ended December 31, 2006. The net reduction in
the valuation allowance for the year ended December 31,
2006 resulted from the utilization of tax credit carryovers of
$2,706,000 and the expiration of credits of $474,000 on a merged
subsidiary.
During 2005, the Internal Revenue Service (IRS)
completed its examination of the Companys tax returns for
the tax years 1999 through 2002. As a result of this
examination, during the year ended December 31, 2005, the
Company recorded a reduction in income taxes payable of
$1,621,000, a benefit to income tax expense of $1,901,000 and a
$576,000 reduction of goodwill related to a previous acquisition.
On October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was signed into law. The Act contains a
provision allowing U.S. multinational companies a one-time
incentive to repatriate foreign earnings at an effective tax
rate of 5.25%. During 2005, the Company conducted an extensive
study of the new provision and concluded that no opportunities
existed from which the Company could benefit from repatriation
of its undistributed foreign earnings. Through December 31,
2007, the Company has not provided deferred income taxes on the
undistributed earnings of its foreign subsidiaries because such
earnings were intended to be permanently reinvested outside the
U.S. Determination of the potential deferred income tax
liability on these undistributed earnings is not practicable
because such liability, if any, is dependent on circumstances
existing if and when remittance occurs. At December 31,
2007, the Company had $199,253,000 of undistributed earnings in
its foreign subsidiaries.
10) Employee
Benefit Plans
The Company has a 401(k) profit-sharing plan for
U.S. employees meeting certain requirements in which
eligible employees may contribute between 1% and 50% of their
annual compensation to this plan, and, with respect to employees
who are age 50 and older, certain specified additional
amounts, limited by an annual maximum amount determined by the
IRS. The Company, at its discretion, may provide a matching
contribution which will generally match up to the first 2% of
each participants compensation, plus 25% of the next 4% of
compensation. At the discretion of the board of directors, the
Company may also make additional contributions for the benefit
of all eligible employees. The Companys contributions were
$2,516,000 $2,385,000 and $1,894,000 for 2007, 2006 and 2005,
respectively.
The Company maintains a bonus plan which provides cash awards to
key employees, at the discretion of the compensation committee
of the board of directors, based upon operating results and
employee performance. The bonus expense was $3,713,000 in 2007,
$10,300,000 in 2006 and was $2,402,000 in 2005.
The Company provides supplemental retirement benefits for
certain of its officers and executive officers. This obligation
was $5,765,000 and $3,098,000 at December 31, 2007 and
2006, respectively.
11) Segment
and Geographical Information and Significant Customer
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.
59
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Geographic net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
477,801
|
|
|
$
|
515,896
|
|
|
$
|
320,816
|
|
Japan
|
|
|
103,474
|
|
|
|
96,936
|
|
|
|
79,820
|
|
Europe
|
|
|
88,279
|
|
|
|
70,648
|
|
|
|
52,687
|
|
Asia
|
|
|
110,933
|
|
|
|
99,321
|
|
|
|
55,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
780,487
|
|
|
$
|
782,801
|
|
|
$
|
509,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Long lived assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
63,731
|
|
|
$
|
68,393
|
|
Japan
|
|
|
6,520
|
|
|
|
5,479
|
|
Europe
|
|
|
4,386
|
|
|
|
4,908
|
|
Asia
|
|
|
9,269
|
|
|
|
3,609
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,906
|
|
|
$
|
82,389
|
|
|
|
|
|
|
|
|
|
|
The Company groups its products into three product groups. Net
sales for these product groups are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Instruments and Control Systems
|
|
$
|
377,992
|
|
|
$
|
371,919
|
|
|
$
|
233,279
|
|
Power and Reactive Gas Products
|
|
|
319,403
|
|
|
|
328,810
|
|
|
|
215,858
|
|
Vacuum and Other Products
|
|
|
83,092
|
|
|
|
82,072
|
|
|
|
60,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
780,487
|
|
|
$
|
782,801
|
|
|
$
|
509,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had one customer comprising 20%, 21% and 18% of net
sales for the years ended December 31, 2007, 2006 and 2005,
respectively. During the years ended December 31, 2007,
2006 and 2005, the Company estimates that approximately 68%, 70%
and 71% of its net sales, respectively, were to semiconductor
capital equipment manufacturers and semiconductor device
manufacturers.
12) Acquisitions
On November 7, 2007, the Company acquired Yield Dynamics,
Inc. (YDI), a provider of yield management
technology located in Sunnyvale, California. YDIs data and
yield management software, along with MKS portfolio of
sensors that control critical processes, data collection and
integration hardware, and real-time fault detection and
classification software, provides a comprehensive offering for
generating, collecting and analyzing process sensor data and
correlating the data to wafers, chambers and tools across the
semiconductor fab as well as other thin film manufacturing
processes. The purchase price consisted of $23,659,000 in cash,
net of $651,000 in cash acquired and $363,000 in acquisition
related costs. The purchase agreement includes contingent
payments of up to $10,000,000 based upon achieving specific
annual and cumulative revenue targets between 2008 and 2010.
60
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Current assets
|
|
$
|
693
|
|
Intangible assets
|
|
|
9,010
|
|
Other assets
|
|
|
4,039
|
|
Goodwill
|
|
|
15,407
|
|
|
|
|
|
|
Total assets acquired
|
|
|
29,149
|
|
|
|
|
|
|
Current liabilities
|
|
|
(844
|
)
|
Deferred tax liabilities
|
|
|
(3,632
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(4,476
|
)
|
|
|
|
|
|
Total purchase price including acquisition costs
|
|
$
|
24,673
|
|
|
|
|
|
|
The goodwill and other intangible assets associated with the
acquisition are not deductible for tax purposes. Of the
$9,010,000 of acquired intangible assets, the following table
reflects the allocation of the acquired intangible assets and
related estimates of useful lives:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
2,300
|
|
|
8-year useful life
|
Completed technology
|
|
|
5,500
|
|
|
6-year useful life
|
Others
|
|
|
310
|
|
|
2-5-year useful life
|
In-process research and development
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,010
|
|
|
|
|
|
|
|
|
|
|
This transaction resulted in an amount of purchase price that
exceeded the estimated fair values of tangible and intangible
assets, which was allocated to goodwill. The Company believes
that the amount of goodwill relative to identifiable intangible
assets relates to several factors including: (1) being a
provider of yield management software technology which will be
increasingly important to solution providers for semiconductor
and other industrial customers and (2) enhanced ability to
combine YDIs software products with MKS multivariate
software and traditional hardware products.
On January 3, 2006, the Company completed its 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
monitors electrostatic charge to reduce process contamination
and improve yields, which complements the Companys process
monitoring and control technologies. The aggregate purchase
price consisted of $68,073,000 in cash, net of $5,056,000 in
cash acquired, and $807,000 in acquisition related costs.
61
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Current assets
|
|
$
|
17,310
|
|
Intangible assets
|
|
|
25,947
|
|
Other assets
|
|
|
3,066
|
|
Goodwill
|
|
|
45,017
|
|
|
|
|
|
|
Total assets acquired
|
|
|
91,340
|
|
Current liabilities
|
|
|
(7,245
|
)
|
Deferred tax liabilities
|
|
|
(10,159
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(17,404
|
)
|
|
|
|
|
|
Total purchase price including acquisition costs
|
|
$
|
73,936
|
|
|
|
|
|
|
The goodwill and other intangible assets associated with the
acquisition are not deductible for tax purposes. Of the
$25,947,000 of acquired intangible assets, the following table
reflects the allocation of the acquired intangible assets and
related estimates of useful lives:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
11,992
|
|
|
8-year useful life
|
Completed technology
|
|
|
10,255
|
|
|
6-year useful life
|
Trade names
|
|
|
2,300
|
|
|
8-year useful life
|
Order backlog
|
|
|
1,000
|
|
|
3 months
|
In-process research and development
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,947
|
|
|
|
|
|
|
|
|
|
|
This transaction resulted in an amount of purchase price that
exceeded the estimated fair values of tangible and intangible
assets, which was allocated to goodwill. The Company believes
that the amount of goodwill relative to identifiable intangible
assets relates to several factors including: (1) potential
buyer-specific synergies related to market opportunities for a
combined product offering and (2) potential to leverage the
Companys sales force and intellectual property to attract
new customers and revenue.
On January 3, 2006, the Company completed its 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 the
Companys open and modular platform of process sensors and
data collection, integration, data storage, and visualization
capabilities. The purchase price consisted of $27,400,000 in
cash, net of $2,602,000 in cash acquired, and $392,000 in
acquisition related costs.
62
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Current assets
|
|
$
|
4,243
|
|
Intangible assets
|
|
|
7,650
|
|
Other assets
|
|
|
400
|
|
Goodwill
|
|
|
22,060
|
|
|
|
|
|
|
Total assets acquired
|
|
|
34,353
|
|
Current liabilities
|
|
|
(1,929
|
)
|
Deferred tax liabilities
|
|
|
(2,030
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(3,959
|
)
|
|
|
|
|
|
Total purchase price including acquisition costs
|
|
$
|
30,394
|
|
|
|
|
|
|
The goodwill and other intangible assets associated with the
acquisition are not deductible for tax purposes. Of the
$7,650,000 of acquired intangible assets, the following table
reflects the allocation of the acquired intangible assets and
related estimates of useful lives:
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
2,300
|
|
|
8-year useful life
|
Completed technology
|
|
|
4,150
|
|
|
4-6-year useful life
|
Trade names
|
|
|
800
|
|
|
8-year useful life
|
In-process research and development
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,650
|
|
|
|
|
|
|
|
|
|
|
This transaction resulted in an amount of purchase price that
exceeded the estimated fair values of tangible and intangible
assets, which was allocated to goodwill. The Company believes
that the amount of goodwill relative to identifiable intangible
assets relates to several factors including: (1) being a
provider of multivariate software technology which will be
increasingly important to solution providers for semiconductor
and other industrial customers and (2) enhanced ability to
combine Umetrics software products with MKS
traditional hardware products.
Ions ionization technology and Umetrics multivariate
data analysis technology both complement our process control and
monitoring technologies and will support the Companys
mission to improve process performance and productivity.
On October 11, 2006, we completed our acquisition of Novx
Corp. (Novx), a provider of electrostatic charge
monitoring technology for semiconductor, data storage,
telecommunication, medical device and other markets. Novxs
technology expands our capability to monitor, detect and control
electrostatic charge in advanced process environments, such as
semiconductor and hard disk drive manufacturing. The total
purchase price for Novx was $2,552,000.
The results of these acquisitions were included in the
Companys consolidated operations beginning on the date of
acquisition. The pro forma consolidated statements reflecting
the operating results of YDI, had it been acquired as of
January 1, 2007, would not differ materially from the
operating results of the Company as reported for the twelve
months ended December 31, 2007. The pro forma consolidated
statements reflecting the operating results of Ion, Umetrics and
Novx, had they been acquired as of January 1, 2006, would
not differ materially from the operating results of the Company
for the twelve months ended December 31, 2006.
63
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
13) Goodwill
and Intangible Assets
The Company is required to perform an annual impairment test of
its goodwill under the provisions of SFAS 142.
SFAS 142 requires that companies identify and assess
goodwill at the reporting unit level. Reporting units are
defined as operating segments or one level below an operating
segment, referred to as a component. The Company has determined
that its reporting units are components of its operating
segment. The Company allocates goodwill to reporting units at
the time of acquisition and bases that allocation on which
reporting units will benefit from the acquired assets and
liabilities. The fair value of each reporting unit with goodwill
is compared to its recorded book value. An excess of book value
over fair value indicates that an impairment of goodwill exists.
Fair value is based on a discounted cash flow analysis of
expectations of future earnings for each of the reporting units
with goodwill. The Company completed its annual impairment test
for 2007 and 2006 and concluded that no impairment of goodwill
existed as of October 31, 2007 or October 31, 2006,
the annual goodwill measurement date.
The changes in the carrying amount of goodwill during the years
ended December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
Balance, beginning of year
|
|
$
|
323,973
|
|
|
$
|
255,243
|
|
Goodwill acquired during the year
|
|
|
15,407
|
|
|
|
68,606
|
|
Adjustments to previously recorded goodwill
|
|
|
(1,907
|
)
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
337,473
|
|
|
$
|
323,973
|
|
|
|
|
|
|
|
|
|
|
The adjustments to previously recorded goodwill for 2007 relate
mainly to various tax adjustments for previous acquisitions.
Components of the Companys acquired intangible assets are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Completed technology
|
|
$
|
93,204
|
|
|
$
|
(75,681
|
)
|
|
$
|
87,087
|
|
|
$
|
(63,570
|
)
|
Customer relationships
|
|
|
23,542
|
|
|
|
(9,644
|
)
|
|
|
20,932
|
|
|
|
(7,139
|
)
|
Patents, trademarks, trade names and other
|
|
|
29,729
|
|
|
|
(25,009
|
)
|
|
|
16,494
|
|
|
|
(10,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
146,475
|
|
|
$
|
(110,334
|
)
|
|
$
|
124,513
|
|
|
$
|
(81,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense related to acquired intangibles
for the years ended December 31, 2007, 2006 and 2005 were
$17,083,000, $17,376,000 and $13,864,000, respectively.
Estimated amortization expense related to acquired intangibles
for each of the five succeeding years is as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2008
|
|
$
|
8,912
|
|
2009
|
|
|
7,313
|
|
2010
|
|
|
6,132
|
|
2011
|
|
|
5,707
|
|
2012
|
|
|
3,484
|
|
64
MKS
INSTRUMENTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Table in
thousands, except share and per share data)
14) 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.
Product warranty activity for the years ended December 31,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of year
|
|
$
|
11,549
|
|
|
$
|
7,766
|
|
Warranty assumed through acquisitions
|
|
|
|
|
|
|
612
|
|
Provisions for product warranties
|
|
|
5,992
|
|
|
|
13,006
|
|
Direct charges to the warranty liability
|
|
|
(8,044
|
)
|
|
|
(9,835
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
9,497
|
|
|
$
|
11,549
|
|
|
|
|
|
|
|
|
|
|
|
|
15)
|
Other
Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
8,760
|
|
|
$
|
|
|
Other
|
|
|
2,541
|
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
11,301
|
|
|
$
|
2,926
|
|
|
|
|
|
|
|
|
|
|
Other Accrued Expenses:
|
|
|
|
|
|
|
|
|
Product warranties
|
|
$
|
9,497
|
|
|
$
|
11,549
|
|
Deferred revenue
|
|
|
5,084
|
|
|
|
3,819
|
|
Other
|
|
|
10,787
|
|
|
|
9,663
|
|
|
|
|
|
|
|
|
|
|
Total other accrued expenses
|
|
$
|
25,368
|
|
|
$
|
25,031
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Income tax payable
|
|
$
|
12,782
|
|
|
$
|
|
|
Accrued compensation
|
|
|
7,621
|
|
|
|
4,725
|
|
Other
|
|
|
232
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
20,635
|
|
|
$
|
4,956
|
|
|
|
|
|
|
|
|
|
|
|
|
16)
|
Related
Party Transactions
|
The Vice President and General Manager of the Companys
Vacuum Products Group is the general partner of two real estate
entities (the Aspen Entities). The Company leased
from the Aspen Entities certain facilities occupied by the
Companys Vacuum Products Group in Boulder, Colorado until
the Aspen Entities sold those facilities to a third party on
March 30, 2007. The Company paid the Aspen Entities
$191,000, $751,000 and $835,000 in 2007, 2006 and 2005,
respectively, to lease such facilities.
Emerson Electric Co. (Emerson) was the beneficial
owner of approximately 5% of the outstanding shares of the
Companys common stock at December 31, 2006. During
2007, Emerson was an unrelated party. For the years ended
December 31, 2006 and 2005, the Company purchased materials
and administrative services from Emerson and its subsidiaries
totaling approximately $1,430,000 and $800,000, respectively.
65
MKS
INSTRUMENTS, INC.
SUPPLEMENTAL FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
|
(Table in thousands, except per share data)
|
|
|
|
(Unaudited)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
211,432
|
|
|
$
|
203,978
|
|
|
$
|
181,014
|
|
|
$
|
184,063
|
|
Gross profit
|
|
|
92,862
|
|
|
|
86,030
|
|
|
|
76,598
|
|
|
|
75,997
|
|
Income from operations
|
|
|
35,880
|
|
|
|
27,643
|
|
|
|
23,068
|
|
|
|
20,394
|
|
Net income(1)
|
|
$
|
27,290
|
|
|
$
|
22,527
|
|
|
$
|
21,382
|
|
|
$
|
15,161
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.40
|
|
|
$
|
0.38
|
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
0.39
|
|
|
$
|
0.37
|
|
|
$
|
0.27
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
179,061
|
|
|
$
|
198,351
|
|
|
$
|
205,494
|
|
|
$
|
199,895
|
|
Gross profit
|
|
|
73,745
|
|
|
|
86,501
|
|
|
|
90,619
|
|
|
|
87,257
|
|
Income from operations
|
|
|
21,869
|
|
|
|
34,452
|
|
|
|
35,622
|
|
|
|
30,598
|
|
Net income(2)
|
|
$
|
15,435
|
|
|
$
|
24,374
|
|
|
$
|
27,933
|
|
|
$
|
26,493
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
|
$
|
0.44
|
|
|
$
|
0.50
|
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.44
|
|
|
$
|
0.50
|
|
|
$
|
0.47
|
|
|
|
|
(1) |
|
Net income for the quarter ended September 30, 2007
includes a net tax benefit of $1.8 million attributable to
a discrete tax matter related to our research and development
tax credits. |
|
(2) |
|
Net income for the quarter ended September 30, 2006
includes a net tax benefit of $1.6 million primarily
attributable to certain discrete tax matters related to our
international operations. Net income for the quarter ended
December 31, 2006 includes a net tax benefit of
$3.1 million attributable to the impact on prior quarters
of the retroactive extension of the R&D tax credit from
January 1, 2006 through December 31, 2006 and to a
reduction of the valuation allowance on state tax credits. |
66
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management (with the participation of our Chief Executive
Officer and Chief Financial Officer) evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)), as of December 31, 2007.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported on a timely basis and that
such information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that
these disclosure controls and procedures are effective and
designed to ensure that the information required to be disclosed
in our reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the
requisite time periods.
Limitations
on Effectiveness of Controls
Our management has concluded that our disclosure controls and
procedures and internal controls provide reasonable assurance
that the objectives of our control system are met. However, our
management (including our Chief Executive Officer and Chief
Financial Officer) does not expect that the disclosure controls
and procedures or internal controls will prevent all errors and
all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Due to the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues, errors
and instances of fraud, if any, within the Company have been or
will be detected. These inherent limitations include the
realities that judgments in decision making can be faulty and
that breakdowns can occur because of simple errors or mistakes.
Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system is
also based in part upon certain assumptions about the likelihood
of future events, and there can be no assurances that any design
will succeed in achieving its stated goals under all potential
future conditions. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rules 13a-15(f)
and
15d-15(f)
promulgated under the Securities Exchange Act as a process
designed by, or under the supervision of, the Companys
Chief Executive Officer and Chief Financial Officer and effected
by the Companys Board of Directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles and includes those
policies and procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and
|
67
|
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control
Integrated Framework.
Based on our assessment, management concluded that, as of
December 31, 2007, our internal control over financial
reporting was effective based on those criteria.
Management has excluded the operations of Yield Dynamics, Inc.
(YDI) from its assessment of internal control over
financial reporting as of December 31, 2007 because this
entity was acquired by the Company in a purchase business
combination during fiscal 2007. The total assets and total
revenues of the acquired businesses of YDI represent
approximately 3% and less than 1%, respectively, of the related
consolidated financial statement amounts as of and for the year
ended December 31, 2007.
Our internal controls over financial reporting as of
December 31, 2007 have been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their attestation report which
appears on pages 35 through 36.
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 our fourth fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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Item 9B.
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Other
Information
|
None.
PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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The information required by this item is set forth under the
captions Election of Directors, Executive
Officers, Code of Ethics,
Directors Audit Committee Financial
Expert and Corporate Governance in our
definitive proxy statement for the 2008 Annual Meeting of
Stockholders, and is incorporated herein by reference.
We are also required under Item 405 of
Regulation S-K
to provide information concerning delinquent filers of reports
under Section 16 of the Securities and Exchange Act of
1934, as amended. This information is listed under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance in our definitive proxy statement for the 2008
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission no later than 120 days after the
end of our fiscal year. This information is incorporated herein
by reference.
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Item 11.
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Executive
Compensation
|
The information required by this item is set forth under the
captions Executive Officers Executive
Compensation and Executive Officers
Compensation Discussion and Analysis in our definitive
proxy statement for the 2008 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission no later
than 120 days after the end of our fiscal year. This
information is incorporated herein by reference.
68
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Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 403 of
Regulation S-K
is set forth under the caption Security Ownership of
Certain Beneficial Owners and Management in our definitive
proxy statement for the 2008 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission no later
than 120 days after the end of our fiscal year. This
information is incorporated herein by reference.
The information required by Item 201(d) of
Regulation S-K
is set forth under the caption Executive
Officers Equity Compensation Plan Information
in our definitive proxy statement for the 2008 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission no later than 120 days after the end of our
fiscal year. This information is incorporated herein by
reference.
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Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is set forth under the
caption Executive Officers Certain
Relationships and Related Transactions and Corporate
Governance in our definitive proxy statement for the 2008
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission no later than 120 days after the
end of our fiscal year. This information is incorporated herein
by reference.
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|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is set forth under the
caption Independent Registered Public Accounting
Firm in our definitive proxy statement for the 2008 Annual
Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after the end of
our fiscal year. This information is incorporated herein by
reference.
PART IV
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Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as a part of this
Report:
1. Financial Statements. The following
Consolidated Financial Statements are included under Item 8
on this Annual Report on
Form 10-K.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
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|
|
|
|
Financial Statements:
|
|
|
|
|
|
|
|
35
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
41
|
|
2. Financial Statement Schedules
The following consolidated financial statement schedule is
included in this Annual Report on
Form 10-K:
Schedule II Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since
they are either not required or information is otherwise
included.
69
3. Exhibits. The following exhibits are
filed as part of this Annual Report on
Form 10-K
pursuant to Item 15(b).
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|
|
|
|
Exhibit No.
|
|
Title
|
|
|
+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
|
|
+4
|
.1(4)
|
|
Specimen certificate representing the common stock
|
|
+10
|
.1(5)*
|
|
Applied Science and Technology, Inc. 1993 Stock Option Plan, as
amended
|
|
+10
|
.2(6)*
|
|
Applied Science and Technology, Inc. 1994 Formula Stock Option
Plan, as amended
|
|
+10
|
.3(4)*
|
|
1996 Amended and Restated Director Stock Option Plan
|
|
+10
|
.4(7)*
|
|
Second Amended and Restated 1997 Director Stock Option
Plan, and forms of option agreements thereto
|
|
+10
|
.5(8)*
|
|
2004 Stock Incentive Plan, as amended (the 2004 Plan)
|
|
+10
|
.6(9)*
|
|
Form of Nonstatutory Stock Option Agreement to be granted under
the 2004 Plan
|
|
+10
|
.7(10)*
|
|
Form of Performance Stock Award under the 2004 Plan
|
|
+10
|
.8(11)*
|
|
Form of Restricted Stock Award under the 2004 Plan
|
|
+10
|
.9(12)*
|
|
Form of Restricted Stock Unit Agreement (cliff vesting) under
the 2004 Plan
|
|
+10
|
.10(13)*
|
|
Form of Restricted Stock Unit Agreement for Initial Grant to
Non-Employee Directors under the 2004 Plan
|
|
+10
|
.11(13)*
|
|
Form of Restricted Stock Unit Agreement for Annual Grant to
Non-Employee Directors under the 2004 Plan
|
|
+10
|
.12(13)*
|
|
Form of Performance-Based Restricted Stock Unit Agreement under
the 2004 Plan
|
|
+10
|
|