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MKSI > SEC Filings for MKSI > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for MKS INSTRUMENTS INC

Form 10-Q for MKS INSTRUMENTS INC


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "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, 2011 in the section entitled "Risk Factors" as referenced in Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q.

Overview

We are a global provider of instruments, subsystems and process control solutions that measure, control, power, monitor and analyze critical parameters of advanced manufacturing processes to improve process performance and productivity. We also provide services relating to the maintenance and repair of our products, software maintenance, installation services and training.

Our products are derived from our core competencies in pressure measurement and control, materials delivery, gas composition analysis, 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 and light emitting diodes ("LEDs"), data storage media and other advanced manufactured products. We also leverage our technology into 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, LEDs, solar cells, data storage media and other coating applications; and industrial, medical, pharmaceutical manufacturing, energy generation, environmental monitoring and other advanced manufacturing companies, as well as university, government and industrial research laboratories. For the nine months ended September 30, 2012 and 2011, approximately 64% and 61% of our net revenues, 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 portion of our sales.

Effective in the second quarter of fiscal 2012, we changed our reporting segments from one to four segments based upon the information that is provided to the Company's chief operating decision maker. The Company's new reportable segments are: Advanced Manufacturing Capital Equipment, Analytical Solutions Group, Europe Region Sales & Service, and Asia Region Sales & Service.

The Advanced Manufacturing Capital Equipment segment includes the development, manufacture, sales and servicing of instruments and control products, power and reactive gas products and vacuum products, all of which are utilized in semiconductor processing and other similar advanced manufacturing processes. Sales in this segment include both external sales and intercompany sales (which are stated at agreed upon transfer prices). External sales of these products made in Europe or Asia are reported as sales in the Europe Region Sales & Service or Asia Region Sales & Service segments. The Analytical Solutions Group includes, materials delivery, gas composition analysis and information technology products. The Europe and Asia sales and service groups mainly resell and service the Advanced Manufacturing Capital Equipment and Analytical Solutions Group products sold into their respective regions.

Net revenues to semiconductor capital equipment manufacture and semiconductor device manufacture customers declined by 18% for the nine months ended September 30, 2012 compared to the same period in the prior year. Since the second quarter of 2012, we have seen a weakening in our orders and sales in the semiconductor markets as worldwide economic uncertainty and slowing consumer spending resulted in lower electronics demand and a slowing of investments in semiconductor production capacity. As a result of this weakening in demand in the semiconductor markets, we anticipate that our overall fourth quarter revenue amounts in 2012 could be lower than our third quarter revenue amounts in 2012. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry.

Our net revenues sold to other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications, declined by 28% for the nine months ended September 30, 2012 compared to the same period for the prior year. This decline was primarily caused by decreases in the solar and LED markets, which in total declined by 65%, as manufacturers are absorbing existing inventories from 2010 and 2011. Our net revenues to all other non-semiconductor markets (excluding solar and LED) declined by 9% for the nine months ended September 30, 3012 compared to the same period for the prior year. These advanced markets include medical, pharmaceutical, environmental, thin films, solar and other markets and we anticipate that these markets will grow and in future years could represent a larger portion of our total revenue.


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A significant portion of our net revenues is to customers in international markets. For the nine months ended September 30, 2012 and 2011, international net revenues accounted for approximately 49% and 52% of our net revenues, respectively. A significant portion of our international net revenues were in Japan, Korea and China. We expect that international net revenues will continue to represent a significant percentage of our total net revenues.

On August 29, 2012, we completed our acquisition of Plasmart, Inc. ("Plasmart") located in Daejeon, Korea. Plasmart develops radio frequency (RF), plasma generation and monitoring systems for the semiconductor, flat panel display, active matrix organic light emitting diodes and solar photovoltaic industries. The purchase price was $24.4 million, net of $0.1 of cash acquired.

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, 2011. 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, 2011 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 and comprehensive income data.



                                                     Three Months Ended             Nine Months Ended
                                                       September  30,                September  30,
                                                    2012            2011           2012           2011
Net revenues:
Product                                                81.1 %         85.9 %          84.0 %        88.1 %
Services                                               18.9           14.1            16.0          11.9

Total net revenues                                    100.0 %        100.0 %         100.0 %       100.0 %
Cost of revenues:
Cost of product revenues                               48.3           46.7            47.9          47.2
Cost of service revenues                               11.7            8.2             9.6           6.9

Total cost of revenues                                 60.0 %         54.9 %          57.5 %        54.1 %

Gross profit                                           40.0 %         45.1 %          42.5 %        45.9 %
Research and development                               10.0            7.4             9.0           7.2
Selling, general and administrative                    21.0           16.5            18.9          14.8
Litigation                                              3.8             -              1.0            -
Completed acquisition costs                             0.6             -              0.2            -
Amortization of intangible assets                       0.1            0.1             0.1           0.1

Income from operations                                  4.5 %         21.1 %          13.3 %        23.8 %
Interest income, net                                    0.2            0.1             0.1           0.1

Income from operations before income taxes              4.7 %         21.2 %          13.4 %        23.9 %
Provision for income taxes                              2.9            5.6             4.8           7.5

Net income                                              1.8 %         15.6 %           8.6 %        16.4 %

Net Revenues (dollars in millions)



                                             Three Months Ended September 30,                   Nine Months Ended September 30,
                                          2012              2011          % Change           2012              2011          % Change
Net Revenues:
Product                                $     114.6       $     167.1          (31.4 )%    $     428.0       $     573.3          (25.4 )%
Service                                       26.8              27.4           (2.1 )            81.7              77.5            5.4

Total net revenues                     $     141.4       $     194.5          (27.3 )%    $     509.7       $     650.8          (21.7 )%


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Product revenues decreased $52.5 million and $145.3 million during the three and nine months ended September 30, 2012, respectively, compared to the same periods for the prior year. Product revenues from customers in the semiconductor markets decreased by 25.7% and 17.6% for the three and nine month periods ended in 2012 compared to 2011, while product revenues to customers in our non-semiconductor markets decreased by 29.5% and 28.0% for the same periods. The decrease in the semiconductor markets we serve was mainly the result of the worldwide economic uncertainty and slowing consumer spending resulting in lower electronics demand and a slowing of investments in semiconductor production capacity. The decrease in the non-semiconductor markets was primarily caused by decreases in the solar and LED markets as end market customers utilize existing product shipments from 2010 and 2011.

Service revenues consisted mainly of fees for services relating to the maintenance and repair of our products and software services, installation and training. Service revenues decreased $0.6 million and increased $4.2 million, during the three and nine months ended September 30, 2012, compared to the same period for the prior year. The increase for the nine month period relates primarily to our foreign locations where we have made investments in our service organizations.

Total international net revenues, including product and service, were $67.7 million and $249.8 million or 47.8% and 49.0% of net revenues for the three and nine months ended September 30, 2012, respectively. Total international net revenues, including product and service, were $105.3 million and $340.6 million, or 54.1% and 52.3% of net revenues for the three and nine months ended September 30, 2011, respectively. The decrease in the three and nine month periods are mainly attributable to a decrease in sales in China, primarily attributed to a significant solar shipment during the three months ended March 31, 2011, and a decrease in sales in Japan and Europe.

The following is our net revenues by reportable segment (in millions):

                                                 Three Months Ended September 30,                   Nine Months Ended September 30,
                                              2012              2011          % Change           2012              2011         % Change
Net revenues:
Advanced Manufacturing Capital Equipment   $    104.2        $    144.0           (27.6 )%    $     382.0        $  525.4           (27.3 )%
Analytical Solutions Group                       15.1              15.1             0.2              47.7            45.3             5.3
Europe Sales & Service Operations                13.5              19.4           (30.4 )            38.1            61.5           (38.0 )
Asia Sales & Service Operations                  46.8              72.2           (35.2 )           182.7           241.0           (24.2 )
Corporate, Eliminations and Other               (38.2 )           (56.2 )          32.0            (140.8 )        (222.4 )          36.7

Total net revenues                         $    141.4        $    194.5           (27.3 )%    $     509.7        $  650.8           (21.7 )%

Net revenues for the Advanced Manufacturing Capital Equipment decreased 27.6% and 27.3% and the Asia Sales & Service segments decreased 35.2% and 24.2% for the three and nine month periods ended September 30, 2012, respectively, compared to the same periods in the prior year. These decreases are consistent with our overall consolidated revenue decreases for the same periods, since both of these groups sell into the semiconductor and non-semiconductor markets and comprise the majority of our consolidated revenues. The decrease in the Europe Sales & Service segment of 30.4% and 38.0% for the three and nine month periods ended September 30, 2012 compared to the same periods in the prior year was mainly caused by lower revenues in Germany related to the solar market. The increase in net revenues in the Analytical Solutions Group of 0.2% and 5.3% for the three and nine month periods ended September 30, 2012 compared to the same periods in the prior year was mainly caused by an increase in sales of certain products to semiconductor device manufacturers.

Gross Profit



                                              Three Months Ended September 30,                    Nine Months Ended September 30,
                                                                            % Points                                           % Points
                                           2012               2011           Change           2012             2011             Change
Gross profit as percentage of net
revenues:
Product                                       40.4 %             45.7 %          (5.3 )%         43.0 %           46.4 %            (3.4 )%
Service                                       38.2               41.4            (3.2 )          40.2             42.3              (2.1 )

Total gross profit percentage                 40.0 %             45.1 %          (5.1 )%         42.5 %           45.9 %            (3.4 )%

Gross profit on product revenues decreased by 5.3% for the three months ended September 30, 2012, compared to the same period for the prior year. The decrease is primarily due to a decrease of 4.9% due to lower revenue volumes, 1.1% related to unfavorable product mix and 0.3% due to unfavorable foreign exchange. These decreases were partially offset by an increase of 0.8% due to lower overhead spending and 0.5% due to lower excess and obsolete inventory related charges.

Gross profit on product revenues decreased by 3.4% for the nine months ended September 30, 2012, compared to the same period for the prior year. The decrease is mainly due to a decrease of 2.6% due to lower revenue volumes, 1.4% due to higher warranty charges, 1.2% due to higher excess and obsolete related charges and 0.6% due to less overhead absorption. These decreases were partially offset by 2.5% related to favorable product mix.


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Cost of service revenues primarily consists of salaries and related expenses and other fixed costs for repair, software services and training. Service gross profit decreased by 3.2% for the three months ended September 30, 2012 compared to the same period for the prior year. The decrease is primarily due to a decrease of 5.0% primarily due to higher overhead, as a result of our continued investment in our service business, and 0.5% related to unfavorable foreign exchange. This decrease was partially offset by 2.3% related to favorable product mix.

Service gross profit decreased by 2.1% for the nine months ended September 30, 2012 compared to the same period for the prior year. This decrease is primarily due to a decrease of 3.0% due to higher overhead spending and less overhead absorption and a decrease of 0.4% due to unfavorable foreign exchange. These decreases were offset by 0.8% due to favorable revenue volumes and 0.5% related to favorable product mix.

The following is gross profit as a percentage of net revenues by reportable segment:

                                                 Three Months Ended September 30,                    Nine Months Ended September 30,
                                                                               % Points                                           % Points
                                             2012              2011             Change           2012             2011             Change
Gross profit:
Advanced Manufacturing Capital Equipment        33.4 %             38.5 %           (5.1 )%         37.0 %           41.0 %            (4.0 )%
Analytical Solutions Group                      53.4               52.7              0.7            51.4             51.3                -
Europe Region Sales & Service Operations        26.3               29.8             (3.5 )          29.6             27.7               1.9
Asia Region Sales & Service Operations          19.3               14.7              4.6            15.4             14.5               0.9
Corporate, Eliminations and Other               (2.8 )            (13.9 )           11.1            (8.1 )           (3.7 )            (4.4 )

Total net revenues                              40.0 %             45.1 %           (5.1 )%         42.5 %           45.9 %            (3.4 )%

Gross profit for the Advanced Manufacturing Capital Equipment group decreased 5.1% and 4.1% for the three and nine month periods ended September 30, 2012, compared to the same periods in the prior year. The decreases are primarily related to lower revenue volumes.

Gross profit for the Analytical Solutions Group increased 0.7% and was unchanged for the three and nine month periods ended September 30, 2012, compared to the same periods in the prior year. The slight increase in the three month period ended September 30, 2012, is primarily attributed to product mix, offset by higher overhead spending.

Gross profit for the Europe Region Sales & Service Operations decreased 3.5% and increased 1.9% for the three and nine month periods ended September 30, 2012, compared to the same periods in the prior year. The decrease of 3.5% is primarily related to unfavorable product mix, higher warranty charges and higher overhead spending. The increase of 1.9% is primarily related to favorable product mix, partially offset by lower revenue volumes.

Gross profit for the Asia Region Sales & Service Operations increased 4.6% and 0.9% for the three and nine month periods ended September 30, 2012, compared to the same periods in the prior year. The increases are primarily related to favorable product mix, partially offset by lower revenue volumes.

Research and Development (dollars in millions)

Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 % Change 2012 2011 % Change
Research and development expenses $ 14.1 $ 14.3 (1.4 )% $ 45.9 $ 46.8 (1.9 )%

Research and development expenses decreased slightly for the three and nine months ended September 30, 2012, compared to the same period for the prior year, as a result of lower consulting and project materials spending.

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 thousands of products and our research and development efforts primarily consist of a large number of projects related to these products, none of which is individually material to us. Current projects typically have durations of 3 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


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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 smaller integrated circuit geometries and in the flat panel display and solar markets to larger substrate sizes, 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 as well as legal costs associated with maintaining and defending our intellectual property.

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 we 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 and other advanced technology markets. We develop products that are technologically advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital equipment. 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 September 30, Nine Months Ended September 30,
2012 2011 % Change 2012 2011 % Change
Selling, general and administrative expenses $ 29.7 $ 32.0 (7.3 )% $ 96.3 $ 96.5 (0.2 )%

Selling, general and administrative expenses decreased $2.3 million and $0.2 million for the three and nine months ended September 30, 2012, compared to the same periods for the prior year. The decrease in the three month period includes a $1.9 million decrease which was due to favorable changes in foreign exchange rates and a $0.2 million decrease in compensation related expenses.

Litigation (dollars in millions)

Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 % Change 2012 2011 % Change Litigation $ 5.3 - 100 % $ 5.3 - 100 %

Litigation with shareholders of one of our former subsidiaries was settled for $5.3 million, during the three months ended September 30, 2012. The complaint alleged certain claims against us including breach of contract and implied covenants, and statutory violations. The claims sought unspecified damages and equitable relief. This litigation was long standing and we made the decision to reach a settlement primarily to eliminate future legal expenses related to the suit.

Completed Acquisition Costs (dollars in millions)

Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 % Change 2012 2011 % Change
Completed acquisition costs $ 0.9 - 100 % $ 1.3 - 100 %

The Company incurred $0.9 million and $1.3 million of costs in the three and nine months ended September 30, 2012, respectively, related to the August 2012 acquisition of Plasmart. These costs consisted of investment banking fees, legal fees and due diligence costs.

Amortization of Intangible Assets (dollars in millions)

Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 % Change 2012 2011 % Change
Amortization of intangible assets $ 0.2 $ 0.3 (14.3 )% $ 0.5 $ 0.8 (39.7 )%

Amortization expense for the three and nine months ended September 30, 2012 decreased by $0.1 million and $0.3 million, respectively, compared to the same period for the prior year, as certain intangible assets became fully amortized, partially offset by additional amortization related to the Plasmart acquisition.

Interest Income, Net (dollars in millions)

Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 % Change 2012 2011 % Change
Interest income, net $ 0.3 $ 0.3 (1.8 )% $ 0.7 $ 0.9 (21.6 )%

Interest income, net decreased modestly for the three and nine months ended September 30, 2012 compared to the same period for the prior year, resulting from slightly lower interest rates and changes in our investment portfolio.


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Provision for Income Taxes (dollars in millions)

. . .

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