Summary of MKS INSTRUMENTS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We believe that this Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. When used herein, the words "believes," "anticipates," "plans," "expects," "estimates," "would," "will," "intends" and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect management's current opinions and are subject to certain risks and uncertainties that could cause results to differ materially from those stated or implied. While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates or expectations change. Risks and uncertainties include, but are not limited to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 in the section entitled "Risk Factors" and Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q. 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, 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. For the six months ended June 30, 2009 and the full year ended December 31, 2008, we estimate that approximately 41.3% and 56.6% 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 significant portion of our sales.
Recent reductions in demand for the products manufactured by semiconductor capital equipment manufacturers and semiconductor device manufacturers have adversely affected our business. The global economic uncertainty is prolonging a steep downturn in semiconductor capital equipment spending and adversely affecting our business, financial condition and results of operations. Product revenues have decreased 74.8% for the six months ended June 30, 2009 compared to the same period in 2008 for these customers. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain how long we will remain at our current sales levels or the timing or extent of further weakness or any future upturn in the semiconductor capital equipment industry. However, as a result of the current improvement in our order trend, we are estimating a modest increase in revenues for the quarter ended September 30, 2009 compared to June 30, 2009.
Our product revenues sold to our other markets, which exclude semiconductor capital equipment and semiconductor device product applications, decreased 39.7% for the six months ended June 30, 2009 compared to the same period in 2008. The decrease in 2009 reflects the continued weakness in the global economy and the impact from tightened credit markets on our customers' ability to invest in capital spending.
In light of the continued global financial crisis and its impact on our semiconductor original equipment manufacturer ("OEM") customers and the other markets we serve, we initiated a restructuring plan in the first quarter of 2009 and recorded a $5.7 million charge for the six months ended June 30, 2009. The plan included a reduction in our worldwide headcount of approximately 24.0% in order to resize our overall cost structure. Also in the first quarter of 2009, we recorded a $14.4 million charge related to excess and obsolete inventory primarily as a result of a lower future production plan in response to the continued weakness in the markets we serve. During the second quarter of 2009, we reviewed our goodwill and other long-lived assets for potential impairment as a result of current market and economic conditions that have contributed to a decline in our forecasted business levels, and the excess of our consolidated net assets over our market capitalization for a sustained period of time. As a result of this impairment assessment, we recorded non-cash goodwill and intangible asset impairment charges of $193.3 million and $11.7 million, respectively. There can be no assurance that changes in future events or circumstances, including our estimates and assumptions, will not result in future impairment charges.

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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. For the six months ended June 30, 2009 and full year ended December 31, 2008, international net sales accounted for approximately 48.1% and 43.5%, of net sales, respectively. A significant portion of our international net sales were sales in Japan. We expect that international net sales will continue to represent a significant percentage of our total net sales.
Critical Accounting Policies and Estimates The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. There have been no material changes in our critical accounting policies since December 31, 2008. For further information, please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2008 in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates." Results of Operations
The following table sets forth, for the periods indicated, the percentage of total net revenues of certain line items included in MKS' consolidated statements of operations data.

                                                Three Months Ended         Six Months Ended
                                                     June 30,                  June 30,
                                                 2009         2008         2009         2008

Net revenues
Product                                           79.4 %       86.6 %       80.4 %       87.8 %
Services                                          20.6         13.4         19.6         12.2

Total net revenues                               100.0        100.0        100.0        100.0
Cost of revenues
Cost of product revenues                          55.3         49.9         64.1         50.2
Cost of service revenues                          12.4          8.9         12.9          8.0

Total cost of revenues                            67.7         58.8         77.0         58.2

Gross profit                                      32.3         41.2         23.0         41.8
Research and development                          15.5         12.1         17.8         11.0
Selling, general and administrative               32.7         20.4         34.7         18.2
Amortization of acquired intangible assets         1.3          1.2          1.7          1.4
Goodwill and asset impairment charges            263.5            -        133.8            -
Restructuring                                      0.1            -          3.6            -

Income (loss) from operations                   (280.8 )        7.5       (168.6 )       11.2
Interest income, net                               0.3          1.0          0.8          1.0
Impairment of investments                            -         (0.1 )          -         (0.4 )

Income (loss) before income taxes               (280.5 )        8.4       (167.8 )       11.8
Provision (benefit) for income taxes             (18.8 )        3.0        (24.4 )        3.7

Net income (loss)                               (261.7 )%       5.4 %     (143.4 )%       8.1 %

Net Revenue (dollars in millions)

                              Three Months Ended June 30,             Six Months Ended June 30,
                            2009          2008       %Change        2009        2008       %Change

    Net Revenues
    Product               $  62.9       $ 148.1       (57.5 )%    $ 125.4     $ 319.8       (60.8 )%
    Service                  16.3          22.9       (29.0 )        30.5        44.6       (31.6 )

    Total net revenues    $  79.2       $ 171.0       (53.7 )%    $ 155.9     $ 364.4       (57.2 )%

Product revenues decreased $85.2 million during the three months ended June 30, 2009, compared to the same period in 2008, mainly due to a decrease in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers due to the challenging economic environment. The decrease in demand from these customers is due to the challenging global economic conditions, which resulted in a decrease in revenues of $54.5 million or 43.1% compared to the same period for the prior year. The product revenues related to other markets decreased by $30.7 million or 51.6% compared to the same period for the prior

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year as a result of the continued weakness in the global economy and the impact from tightened credit markets on our customers' ability to invest in capital spending.
Product revenues decreased $194.5 million during the six months ended June 30, 2009, compared to the same period in 2008, mainly due to a decrease in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers due to the challenging economic environment, which resulted in a decrease in revenues of $144.0 million or 74.8% from these customers compared to the same period for the prior year. The product revenues related to other markets decreased by $50.5 million or 39.7% compared to the same period for the prior year.
Service revenues consist mainly of fees for services relating to the maintenance and repair of our products, software maintenance, installation services and training. Service revenue decreased $6.6 million and $14.1 million during the three and six months ended June 30, 2009, compared to the same period in 2008, respectively. The decrease is due to our customers delayed spending on these services due to the challenging global economic conditions.
Total international net revenues, including product and service, were $36.7 million and $74.9 million for the three and six months ended June 30, 2009, or 46.3% and 48.1% of net revenues, respectively, compared to $73.1 million and $143.5 million for the three and six months ended June 30, 2008, or 42.8% and 39.4% of net revenues, respectively. The decreases are mainly due to a decrease in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers due to the challenging economic environment. The international net revenues related to other markets also decreased compared to the same periods for the prior year.

Gross Profit

                                    Three Months Ended June 30,                         Six Months Ended June 30,
                                                               %Points                                           %Points
                               2009             2008           Change            2009             2008           Change

Gross profit as
percentage of net
revenues
Product                         30.3 %          42.4 %          (12.1 )%          20.2 %          42.8 %          (22.6 )%
Service                         39.9            33.4              6.5             34.4            34.6             (0.2 )

Total gross profit
percentage                      32.3 %          41.2 %           (8.9 )%          23.0 %          41.8 %          (18.8 )%

Gross profit on product revenues decreased 12.1 percentage points for the three months ended June 30, 2009, compared to the three months ended June 30, 2008. Our margin was negatively impacted by approximately 18.4 percentage points from lower revenue volumes since a portion of our overhead costs are fixed, 3.1 percentage points from unfavorable product mix, partially offset by increases of 8.1 percentage points from reduced warranty costs, lower excess and obsolete inventory related charges and favorable foreign currency fluctuations.
Gross profit on product revenues decreased by 22.6 percentage points during the six months ended June 30, 2009, compared to the six months ended June 30, 2008. Our margin was negatively impacted by approximately 18.9 percentage points from decreased revenue volumes since a portion of our overhead costs are fixed, 8.7 percentage points from excess and obsolete inventory related charges and 1.4 percentage points from unfavorable product mix. These decreases were partially offset by increases of 2.5 percentage points from lower overhead spending and 4.0 percentage points from reduced warranty costs and favorable foreign currency fluctuations. The excess and obsolete inventory related charges were primarily a result of a lower future production plan in response to the continued weakness in the markets we serve. The decrease in overhead costs is primarily related to decreases in compensation expense.
Cost of service revenues consists primarily of costs of providing services for repair and training which includes salaries and related expenses and other fixed costs. Service gross profit increased by 6.5 percentage points for the three months ended June 30, 2009, compared to the corresponding period in the prior year, primarily as a result of lower compensation expense which is partially due to the workforce reductions that occurred since the third quarter of 2008. Service gross margin for the six months ended June 20, 2009 was consistent with the corresponding period of the prior year. Research and Development (dollars in millions)

                                    Three Months Ended June 30,                        Six Months Ended June 30,
                               2009             2008           %Change           2009             2008           %Change

Research and
development expenses         $  12.3          $ 20.7            (40.6 )%       $  27.7          $ 40.0            (30.7 )%

Research and development expense decreased $8.4 million during the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The decrease includes a $4.8 million decrease in compensation expense, a $2.0 million decrease in consulting and other costs, a $1.1 million reduction in spending on project materials and a $0.5 million decrease in patent and other legal related costs. The decrease in compensation expense is mainly due to the workforce reductions implemented and in connection with cost cutting measures

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that started in the third quarter of 2008 and our restructuring program, which we initiated in the first quarter of 2009, as well as mandatory time off taken during 2009.
Research and development expense decreased $12.3 million during the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease includes a $6.8 million decrease in compensation expense, a $3.2 million decrease in consulting and other costs, a $1.9 million reduction in spending on project materials and a $0.4 million decrease in patent and other legal related costs. The decrease in compensation expense is mainly due to the workforce reductions implemented and in connection with cost cutting measures that started in the third quarter of 2008 and our restructuring program, which we initiated in the first quarter of 2009, as well as mandatory time off taken during 2009.
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 focused on developing and improving our instruments, components, subsystems and process control solutions to improve process performance and productivity, none of which is individually material to us. Current projects typically have a duration of 12 to 30 months depending upon whether the product is an enhancement of existing technology or a new product. Our current initiatives include projects to enhance the performance characteristics of older products, to develop new products and to integrate various technologies into subsystems. These projects support in large part the transition in the semiconductor industry to larger wafer sizes and smaller integrated circuit geometries, which require more advanced process control technology. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, fees paid to consultants, material costs for prototypes and other expenses related to the design, development, testing and enhancement of our products.
We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets, and expect to continue to make significant investment in research and development activities. We are subject to risks if products are not developed in a timely manner, due to rapidly changing customer requirements and competitive threats from other companies and technologies. Our success primarily depends on our products being designed into new generations of equipment for the semiconductor industry. We develop products that are technologically advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital equipment. If our products are not chosen to be designed into our customers' products, our net revenues may be reduced during the lifespan of those products.
Selling, General and Administrative (dollars in millions)

                                    Three Months Ended June 30,                        Six Months Ended June 30,
                               2009             2008           %Change           2009             2008           %Change

Selling, general and
administrative
expenses                     $  25.9          $ 34.9            (25.8 )%       $  54.1          $ 66.5            (18.6 )%

Selling, general and administrative expenses decreased $9.0 million for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The decrease includes a $4.6 million decrease in compensation expense, a $1.9 million favorable impact from foreign exchange fluctuations and a decrease of $1.5 million in consulting and professional fees in part related to lower IT infrastructure costs. The decrease in compensation expense is mainly due to the workforce reductions implemented and in connection with cost cutting measures that started in the third quarter of 2008 and our restructuring program, which we initiated in the first quarter of 2009, as well as mandatory time off taken during 2009.
Selling, general and administrative expenses decreased $12.4 million for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease includes an $8.7 million decrease in compensation expense, a decrease of $2.9 million in consulting and professional fees in part related to lower IT infrastructure costs and a decrease of $1.7 million in other discretionary spending. The decrease in compensation expense is mainly due to the workforce reductions implemented and in connection with cost cutting measures that started in the third quarter of 2008 and our restructuring program, which we initiated in the first quarter of 2009, as well as mandatory time off taken during 2009.
Amortization of Acquired Intangible Assets (dollars in millions)

                                     Three Months Ended June 30,                       Six Months Ended June 30,
                               2009             2008            %Change           2009           2008           %Change

Amortization of
acquired intangible
assets                       $   1.0          $   2.0            (49.0 )%       $  2.7          $ 5.1            (47.7 )%

Amortization expense for the three and six months ended June 30, 2009 decreased $1.0 million and $2.4 million, respectively, as certain acquired intangible assets became fully amortized during 2008 as well as related to the write-down of certain intangibles of $6.1 million recorded in the fourth quarter of 2008.

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Goodwill and Asset Impairment Charges (dollars in millions)

                                     Three Months Ended June 30,                        Six Months Ended June 30,
                                 2009             2008          %Change            2009            2008          %Change

Goodwill and asset
impairment charges           $    208.5          $  -            100.0 %        $   208.5          $ -            100.0 %

During the second quarter of 2009, we reviewed our goodwill and long-lived assets for potential impairment as a result of current market and economic conditions that have contributed to a decline in our forecasted business levels, and the excess of our consolidated net assets over our market capitalization for a sustained period of time. As a result of this impairment assessment, we recorded non-cash goodwill and intangible asset impairment charges of $193.3 million and $11.7 million, respectively. In addition, as a result of a facility consolidation in Asia, we recorded a non-cash impairment charge of $3.5 million resulting from the write-down of the value of a building to its estimated fair value.
Given current market and economic conditions and their potential future impact on the determination of our reporting unit's fair value, the estimates and assumptions used for purposes of the impairment tests conducted for the quarter ended June 30, 2009 could change, requiring impairment testing in future quarters. There can be no assurance that changes in future events or circumstances, including the Company's estimates and assumptions, will not result in a future impairment charge.
Restructuring (dollars in millions)

Three Months Ended June 30, Six Months Ended June 30, 2009 2008 %Change 2009 2008 %Change

Restructuring $ 0.1 $ - 100 % $ 5.7 $ - 100 %

In light of the continued global financial crisis and its impact on our semiconductor equipment OEM customers and the other markets we serve, we initiated a restructuring plan in the first quarter of 2009. The plan included a reduction in our worldwide headcount of approximately 630 people, which represented approximately 24% of our global workforce.
In the first quarter of 2009, we recorded restructuring charges of $5.6 million primarily for severance and other charges associated with the reductions in workforce. A total of $5.7 million in restructuring charges has been recorded for the six months ended June 30, 2009. As of June 30, 2009, the accrued restructuring costs totaled $0.7 million. These costs will be substantially paid by December 31, 2009. As a result of the workforce reductions, we expect annual compensation-related savings of approximately $40.0 million. The savings will be reflected in costs of revenues, research and development expenses and selling, general and administrative expenses. Interest Income, Net (dollars in millions)

Three Months Ended June 30, Six Months Ended June 30, 2009 2008 %Change 2009 2008 %Change

Interest income, net $ 0.2 $ 1.6 (87.0 )% $ 1.2 $ 3.8 (67.9 )%

Interest income, net decreased $1.4 million and $2.6 million during the three and six months ended June 30, 2009, respectively, mainly related to lower interest rates on lower average cash and cash equivalent balances in 2009 compared to the 2008 periods.
Impairment of Investments (dollars in millions)

Three Months Ended June 30, Six Months Ended June 30, 2009 2008 %Change 2009 2008 %Change

Impairment of investments $ - $ 0.3 (100.0 )% $ - $ 1.4 (100.0 )%

We review our 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 our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. At December 31, 2007, we determined that declines in the fair value of two of our investments in certain commercial paper were other-than-temporary and as a result, we recorded a $1.5 million impairment charge to earnings. This resulted in a new cost basis for the securities of $4.3 million at December 31, 2007.
During the review of our investment portfolio as of March 31, 2008, we determined that further declines in the value of these two investments were other-than-temporary and as a result, we recorded an additional $1.2 million impairment charge to earnings. This resulted in a new cost basis for the securities of $3.1 million at March 31, 2008.

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During the second quarter of 2008, we recorded additional impairment charges of $0.3 million on these two investments due to further declines in value. In addition, we received a $0.5 million principal payment from one of these investments during the second quarter of 2008. During the third quarter of 2008, we liquidated our position in these two impaired investments, one by sale and the other by a structured payment, for a combined total of $2.9 million and as a . . .