UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM10-Q

(MARK ONE)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2018~~2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number0-23621

MKS INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

Massachusetts

04-2277512

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


2 Tech Drive, Suite 201, Andover, Massachusetts		01810
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code(978)645-5500

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common Stock, no par value

MKSI

Nasdaq Global Select Market

As of May 1, ~~2018~~2019, the registrant had ~~54,681,504~~54,357,260 shares of common stock outstanding.

MKS INSTRUMENTS, INC.

FORM10-Q

INDEX

PART I. FINANCIAL INFORMATION

~~ITEM 1.~~

ITEM 1.

FINANCIAL STATEMENTS (Unaudited).

Condensed Consolidated Balance Sheets – March 31, ~~2018~~2019 and December 31, ~~2017~~2018

Condensed Consolidated Statements of Operations and Comprehensive Income – Three months ended March 31, ~~2018~~2019 and ~~2017~~2018

Consolidated Statements of Stockholders’ Equity – Three months ended March 31, 2019 and 2018

Condensed Consolidated Statements of Cash Flows – Three months ended March 31, ~~2018~~2019 and ~~2017~~2018

Notes to Unaudited Condensed Consolidated Financial Statements

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

3035

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

4145

ITEM 4.

CONTROLS AND PROCEDURES.

4146

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

4246

ITEM 1A.

RISK FACTORS.

4247

ITEM 6.

EXHIBITS.

4348

SIGNATURES

4450

PART I. FINANCIAL INFORMATION

ITEM 1.

~~ITEM 1.~~ FINANCIAL STATEMENTS.

MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)


					March 31, 2019			December 31, 2018
ASSETS	March 31, 2018		December 31, 2017
Current assets:
Cash and cash equivalents, including restricted cash	$	340,888	$	333,887
Cash and cash equivalents					$	418,016		$	644,345
Short-term investments		200,614		209,434		44,326			73,826
Trade accounts receivable, net of allowance for doubtful accounts of $4,456 and $4,135 at March 31, 2018 and December 31, 2017, respectively		341,718		300,308
Inventories, net		365,709		339,081
Trade accounts receivable, net of allowance for doubtful accounts of $4,968 and $5,243 at March 31, 2019 and December 31, 2018, respectively						335,990			295,454
Inventories						475,633			384,689
Other current assets		59,093		53,543		86,387			65,790

Total current assets		1,308,022		1,236,253		1,360,352			1,464,104
Property, plant and equipment, net		172,802		171,782		251,424			194,367
Right-of-use asset						65,628			—
Goodwill		593,494		591,047		1,057,331			586,996
Intangible assets, net		356,345		366,398		619,091			319,807
Long-term investments		10,841		10,655		10,350			10,290
Other assets		39,952		37,883		48,562			38,682

Total assets	$	2,481,456	$	2,414,018	$	3,412,738		$	2,614,246


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	5,456	$	2,972	$	10,281		$	3,986
Accounts payable		92,364		82,518		95,317			83,825
Accrued compensation		62,505		96,147		61,523			82,350
Income taxes payable		31,096		21,398		14,355			16,358
Deferred revenue		14,003		12,842
Lease liability						19,459			—
Deferred revenue and customer advances						21,056			14,246
Other current liabilities		85,601		73,945		74,568			62,520

Total current liabilities		291,025		289,822		296,559			263,285
Long-term debt, net		341,290		389,993		976,823			343,842
Non-current deferred taxes		61,769		61,571		78,904			48,223
Non-current accrued compensation		53,848		51,700		60,337			55,598
Non-current lease liability						49,392			—
Other liabilities		35,184		32,025		29,862			30,111

Total liabilities		783,116		825,111		1,491,877			741,059

Commitments and contingencies (Note 19)
Stockholders’ equity:
Preferred Stock, $0.01 par value per share, 2,000,000 shares authorized; none issued and outstanding		—		—		—			—
Common Stock, no par value, 200,000,000 shares authorized; 54,492,103 and 54,355,535 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively		113		113
Common Stock, no par value, 200,000,000 shares authorized; 54,231,772 and 54,039,554 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively						113			113
Additional paid-in capital		791,150		789,644		844,261			793,932
Retained earnings		892,820		795,698		1,086,409			1,084,797
Accumulated other comprehensive income		14,257		3,452
Accumulated other comprehensive loss						(9,922	)		(5,655	)

Total stockholders’ equity		1,698,340		1,588,907		1,920,861			1,873,187

Total liabilities and stockholders’ equity	$	2,481,456	$	2,414,018	$	3,412,738		$	2,614,246

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,						Three Months Ended March 31,
	2018			2017			2019			2018
Net revenues:
Products	$	496,677		$	387,938		$	397,363		$	496,677
Services		57,598			49,215			66,198			57,598

Total net revenues		554,275			437,153			463,561			554,275
Cost of revenues:
Cost of products		261,321			205,834			229,710			261,321
Cost of services		30,099			25,772			35,733			30,099

Total cost of revenues (exclusive of amortization shown separately below)		291,420			231,606			265,443			291,420

Gross profit		262,855			205,547			198,118			262,855
Research and development		34,857			33,282			38,933			34,857
Selling, general and administrative		82,949			74,220			82,455			82,949
Fees and expenses related to incremental term loan								5,847			—
Acquisition and integration costs		—			1,442			30,167			—
Restructuring		1,220			522			223			1,220
Customer contract obligation								1,700			—
Environmental costs		1,000			—			—			1,000
Amortization of intangible assets		11,190			12,501			15,727			11,190

Income from operations		131,639			83,580			23,066			131,639
Interest income		1,105			516			1,714			1,105
Interest expense		5,430			8,832			9,119			5,430
Other (expense) income		(572	)		2,021
Other expense, net								325			572

Income before income taxes		126,742			77,285			15,336			126,742
Provision for income taxes		21,621			12,225			2,881			21,621

Net income	$	105,121		$	65,060		$	12,455		$	105,121

Other comprehensive income:
Changes in value of financial instruments designated as cash flow hedges, net of tax benefit⁽¹⁾	$	178		$	(2,440	)
Changes in value of financial instruments designated as cash flow hedges, net of tax expense (benefit)⁽¹⁾							$	52		$	178
Foreign currency translation adjustments, net of tax of $0		10,771			4,534			(4,268	)		10,771
Unrecognized pension (loss) gain, net of tax benefit (expense)⁽²⁾		(85	)		115
Unrealized (loss) on investments, net of tax benefit⁽³⁾		(59	)		(126	)
Unrecognized pension loss, net of tax benefit⁽²⁾								(1	)		(85	)
Unrealized loss on investments, net of tax benefit⁽³⁾								(50	)		(59	)

Total comprehensive income	$	115,926		$	67,143		$	8,188		$	115,926

Net income per share:
Basic	$	1.93		$	1.21		$	0.23		$	1.93

Diluted	$	1.90		$	1.18		$	0.23		$	1.90

Cash dividends per common share	$	0.18		$	0.175

Weighted average common shares outstanding:
Basic		54,423			53,769			54,147			54,423

Diluted		55,286			54,958			54,848			55,286

⁽¹⁾	Tax ~~benefit~~expense (benefit) was ~~$112~~$15 and ~~$1,831~~($112) for the three months ended March 31, 2019 and 2018, ~~and 2017,~~ respectively.

⁽²⁾	Tax benefit ~~(expense)~~ was ~~$36~~$21 and ~~$(86)~~$36 for the three months ended March 31, 2019 and 2018, ~~and 2017,~~ respectively.

⁽³⁾	Tax benefit was ~~$17~~$16 and ~~$94~~$17 for the three months ended March 31, 2019 and 2018, ~~and 2017,~~ respectively.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

(Unaudited)


	Common Stock				Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total Stockholders’ Equity
	Shares		Amount		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total Stockholders’ Equity
Balance at December 31, 2018		54,039,554	$	113	$	793,932	$	1,084,797		$	(5,655	)	$	1,873,187
Net issuance under stock-based plans		192,218				22,491								22,491
Stock-based compensation						27,838								27,838
Cash dividend ($0.20 per common share)								(10,843	)					(10,843	)
Comprehensive income (net of tax):
Net income								12,455						12,455
Other comprehensive loss											(4,267	)		(4,267	)

Balance at March 31, 2019		54,231,772	$	113	$	844,261	$	1,086,409		$	(9,922	)	$	1,920,861


	Common Stock				Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)		Total Stockholders’ Equity
	Shares		Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)		Total Stockholders’ Equity
Balance at December 31, 2017		54,355,535	$	113	$	789,644		$	795,698		$	3,452	$	1,588,907
Net issuance under stock-based plans		136,568				(8,920	)							(8,920	)
Stock-based compensation						10,426								10,426
Cash dividend ($0.18 per common share)									(9,808	)				(9,808	)
Accounting Standards Codification Topic 606 Adjustment									1,809					1,809
Comprehensive income (net of tax):
Net income									105,121					105,121
Other comprehensive gain												10,805		10,805

Balance at March 31, 2018		54,492,103	$	113	$	791,150		$	892,820		$	14,257	$	1,698,340

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

   Three Months Ended
March 31,
   2018 2017
Cash flows provided by operating activities:

Net income
   $ 105,121 $ 65,060
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
   20,492 21,833
Amortization of debt issuance costs, original issue discount and soft call premium
   2,019 2,715
Stock-based compensation
   10,426 8,782
Provision for excess and obsolete inventory
   5,333 5,031
Provision for bad debt
   335 316
Deferred income taxes
   (705 ) (1,809 )
Other
   34 85
Changes in operating assets and liabilities:

Trade accounts receivable
   (37,336 ) (15,215 )
Inventories
   (28,177 ) (11,714 )
Income taxes
   8,822 8,067
Other current and non-current assets
   (942 ) (2,199 )
Accrued compensation
   (32,531 ) (16,786 )
Other current and non-current liabilities
   10,544 1,082
Accounts payable
   9,321 809


Net cash provided by operating activities
   72,756 66,057


Cash flows provided by investing activities:

Purchases of investments
   (49,753 ) (42,292 )
Maturities of investments
   49,596 55,672
Sales of investments
   8,930 21,179
Purchases of property, plant and equipment
   (9,390 ) (4,099 )


Net cash (used in) provided by investing activities
   (617 ) 30,460


Cash flows used in financing activities:

Proceeds from short and long-term borrowings
   11,907 736
Payments on short-term borrowings
   (10,274 ) (1,398 )
Payments on long-term borrowings
   (50,000 ) (51,570 )
Net payments related to employee stock awards
   (8,921 ) (2,894 )
Dividend payments to common stockholders
   (9,808 ) (9,419 )


Net cash used in financing activities
   (67,096 ) (64,545 )


Effect of exchange rate changes on cash and cash equivalents
   1,958 (4,696 )


Increase in cash and cash equivalents and restricted cash
   7,001 27,276
Cash and cash equivalents, including restricted cash, at beginning of period⁽¹⁾
   333,887 233,910


Cash and cash equivalents, including restricted cash, at end of period⁽²⁾
   $ 340,888 $ 261,186

⁽¹⁾	~~Restricted cash at the beginning of the period was $119 and $5,287 for the three months ended March 31, 2018 and 2017, respectively.~~

⁽²⁾	~~Restricted cash at the end of the period was $118 and $5,274 for the three months ended March 31, 2018 and 2017, respectively.~~


	Three Months Ended March 31,
	2019			2018
Cash flows provided by operating activities:
Net income	$	12,455		$	105,121
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25,211			20,492
Amortization of inventorystep-up adjustment to fair value		5,140			—
Amortization of debt issuance costs, original issue discount, and soft call premium		1,202			2,019
Stock-based compensation		27,838			10,426
Provision for excess and obsolete inventory		5,063			5,333
(Recovery) provision for doubtful accounts		(440	)		335
Deferred income taxes		(2,445	)		(705	)
Other		66			34
Changes in operating assets and liabilities, net of business acquired:
Trade accounts receivable		4,028			(37,336	)
Inventories		(10,327	)		(28,177	)
Income taxes		(3,653	)		8,822
Other current andnon-current assets		4,804			(942	)
Accrued compensation		(22,957	)		(32,531	)
Other current andnon-current liabilities		359			10,544
Accounts payable		(17,294	)		9,321

Net cash provided by operating activities		29,050			72,756

Cash flows used in investing activities:
Acquisition of business, net of cash acquired		(988,599	)		—
Purchases of investments		(44,212	)		(49,753	)
Maturities of investments		18,684			49,596
Sales of investments		154,489			8,930
Proceeds from sale of assets		35			—
Purchases of property, plant and equipment		(14,529	)		(9,390	)

Net cash used in investing activities		(874,132	)		(617	)

Cash flows provided by (used in) financing activities:
Net proceeds from short and long-term borrowings		638,638			11,907
Payments on short-term borrowings		(176	)		(10,274	)
Payments on long-term borrowings		—			(50,000	)
Net payments related to employee stock awards		(8,987	)		(8,921	)
Dividend payments to common stockholders		(10,843	)		(9,808	)

Net cash provided by (used in) financing activities		618,632			(67,096	)

Effect of exchange rate changes on cash and cash equivalents		121			1,958

(Decrease) Increase in cash and cash equivalents and restricted cash		(226,329	)		7,001
Cash and cash equivalents at beginning of period		644,345			333,887

Cash and cash equivalents at end of period	$	418,016		$	340,888

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1)	Basis of Presentation

The terms “MKS” and the “Company” refer to MKS Instruments, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The interim financial data as of March 31, ~~2018,~~2019, and for the three months ended March 31, ~~2018~~2019 are unaudited; however, in the opinion of MKS, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The condensed consolidated balance sheet presented as of December 31, ~~2017~~2018 has been derived from the consolidated audited financial statements as of that date. The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with the instructions to Form10-Q and do not include all of the information and note disclosures required by United States generally accepted accounting principles (“U.S. GAAP”). The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the MKS Annual Report on Form10-K for the year ended December 31, ~~2017~~2018 filed with the Securities and Exchange Commission on February ~~28, 2018.~~26, 2019.

The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On anon-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, stock-based compensation, inventory, intangible assets, goodwill and other long-lived assets, warranty liabilities, pension liabilities, acquisition 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.

~~Reclassification of certain line items in prior period financial statements~~

The Company has historically recorded the revenue and related cost of revenue for the sale of its spare parts within Products in its Statements of Operations for the Vacuum & Analysis segment. The Company has now determined that these items are better presented within revenue and related cost of revenue in Services in its Statements of Operations to align with the current manner in which the Company operates its services business, and has elected to reclassify these amounts in previously issued financial statements as shown below. This change in presentation has no impact on total revenue or total cost of revenue.

   Three Months Ended March 31, 2017
   As previously
reported    Adjustment    As re-
classified
Net revenues:

Products
   $ 392,922    (4,984 )    $ 387,938
Services
   44,231    4,984    49,215






Total net revenues
   437,153    —      437,153
Cost of revenues:

Cost of products
   205,060    774    205,834
Cost of services
   26,546    (774 )    25,772






Total cost of revenues
   231,606    —      231,606

2)	Recently Issued Accounting Pronouncements

In ~~March~~October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2018-05, “Income Taxes~~2018-16, “Derivatives and Hedging (Topic ~~740)~~815).” This standard ~~is an amendment that adopts~~permits the language of Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”) and aims to address certain circumstances that may arise for registrants in accounting for the income tax effectsuse of the ~~Tax Cuts and Jobs Act (the “Act”~~Overnight Index Swap Rate (“OIS”) ~~and to address any uncertainty or diversity of views in practice regarding~~based on the ~~application of Topic 740 in situations where~~Secured Overnight Financing Rate as a ~~registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the~~U.S. benchmark interest rate for hedge accounting purposes under Topic ~~740 for certain income tax effects~~815 in addition to the interest rates on direct treasury obligations of the ~~Act for~~U.S. government, the ~~reporting period in which~~London Interbank Offered Rate (“LIBOR”) swap rate, the ~~Act was enacted. The provisions of this ASU were applied to~~OIS rate based on the ~~Company’s December 31, 2017 financial statements. The Company recorded provisional amounts with respect to~~Federal Funds Effective Rate and the ~~Act under SAB 118 at December 31, 2017~~Securities Industry and March 31, 2018 and needs to complete additional analysis and receive additional guidance from the Internal Revenue Service with respect to provisions of the Act that affect the Company before the provisional determinations become final. Until the Company completes its analysis and receives additional guidance, the CompanyFinancial Markets Association Municipal Swap Rate. This standard is ~~not able to determine if the impact of ASU 2018-05 is material to the Company’s consolidated financial statements in any period.~~

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220).” The amendments in this standard allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Act. The provisions of this ASU are effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this ASU during the first quarter of 2019 and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU2018-15, “Intangibles-Goodwill andOther-Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that include aninternal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments to this update. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU2017-12, “Derivatives and Hedging (Topic 815).” This standard better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The provisions of this ASU are effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company ~~does not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.~~

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718)-Scope of Modification Accounting.” This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the ~~three month period ended March 31, 2018. The adoption~~first quarter of ~~this ASU did not have a material impact on the Company’s consolidated financial statements.~~

In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715)-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This standard requires that an employer disaggregate the service cost component from the other components of net benefit cost. This standard also provides explicit guidance on how to present the service cost component2019 and the other components of the net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The provisions of this ASU are effective for annual periods beginning after December 31, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805)-Clarifying the Definition of a Business.” This standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard also provides a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)-Restricted Cash,” an amendment to ASU 2016-15. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years and should be applied at the time of adoption of ASU 2016-15. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740)-Intra-Entity Transfer of Assets Other Than Inventory.” This standard requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs as opposed to when the assets have been sold to an outside party. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)-Classification of Certain Cash Receipts and Cash Payments.” This standard addresses eight specific cash flow issues with the objective of addressing the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU2016-02, ~~“Leases (Topic 842).”~~ Leases. This standard requires the recognition of lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. ~~In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.~~ This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The FASB issued additional updates to the new standard in Topic 842 relating to a practical expedients for land easements (Update 2018-01 in January 2018). The Company has reviewed the requirements of this standard and has formulated a plan for implementation. The management team has communicated its approach to the Audit Committee and will provide regular updates as appropriate. The Company is currently working at accumulating a complete population of leases from all of its locations. The Company has selected a software repository to track all of its lease agreements and to assist in the reporting and disclosure requirements required by the standard. The Company will continue to assess and disclose the impact that this ASU will have on its consolidated financial statements, disclosures and related controls, when known.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10)-Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The new standard revises accounting related to equity investments and the presentation of certain fair value changes for financial assets and liabilities measured at fair value. Among other things, it amends the presentation and disclosure requirements of equity securities that do not result in consolidation and are not accounted for under the equity method. Changes in the fair value of these equity securities will be recognized directly in net income. This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ~~this~~ ASU ~~during~~2016-02 on January 1, 2019, and used the ~~three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.~~

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”). This ASU provides for a single comprehensive model to use in accounting for revenue arising from contracts with customers and has replaced most existing revenue recognition guidance in GAAP. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at thedate as its date of initial application. As such, the Company did not adjust prior period amounts. The Company ~~used~~also elected to adopt the ~~modified retrospective method~~package of practical expedients upon ~~adoption in the first quarter of 2018. The FASB issued additional updates~~transition, which permits companies to not reassess lease identification, classification, and initial direct costs under ASU2016-02 for leases that commenced prior to the new revenue standard in Topic 606 relating to reporting revenue on a gross versus net basis (Update 2016-08 in March 2016), identifying performance obligations and licensing arrangements (Update 2016-10 in April 2016), narrow-scope improvements and practical expedients (Update 2016-12 in May 2016), technical corrections and improvements (Update 2016-20 in December 2016), and SEC Updates (Update 2017-13 in September 2017 and Update 2017-14 in November 2017). The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements as described further in Note 3.

3)	~~Revenue from Contracts with Customers~~

effective date. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for the three months ended March 31, 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605).implemented internal controls and a lease accounting information system to enable

The Company has recorded a net increase to opening retained earnings of $1,809 as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to its service business and certain custom products. The impact to revenues for the quarter ended March 31, 2018 was immaterial as a result of applying ASC 606.

The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s goods or services and will provide financial statement readers with enhanced disclosures. To achieve this core principle, the Company applies the following five steps:

•

~~Identify the contract with a customer~~

•

~~Identify the performance obligations in the contract~~

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

preparation on adoption. Upon adoption, the Company recorded a cumulative effect of initially applying this new standard, resulting in the addition of $71,042 ofright-of-use assets and $20,192 and $54,147 of short-term and long-term lease liabilities, respectively. Theright-of-use asset is net of the deferred rent liability, prepaid rent and a net favorable lease asset which werere-classified to theright-of-use asset upon adoption of the standard. For additional information on the required disclosures related to the impact of adopting this standard, see Note 3 to the Consolidated Condensed Financial Statements.

•

~~Determine the transaction price~~

Leases

•

~~Allocate the transaction price to performance obligations in the contract~~

•

~~Recognize revenue when or as the Company satisfies a performance obligation~~

~~Revenue under ASC 606 is recognized when or as obligations under the terms of a contract with the Company’s customer have been satisfied~~The Company has operating leases for real estate and control has transferred to the customer. The majority of the Company’s performance obligations, and associated revenue, are transferred to customers at a point in time, generally upon shipment of a product to the customer or receipt of the product by the customer and without significant judgments. Installation services are not significant and are usually completed in a short period of time (normally less than two weeks) and therefore, recorded at a point in time when the installation services are completed, rather than over time as they are not material. Extended warranty, service contracts, and repair services,non-real estate, which are transferred to the customer over time, are recorded as revenue as the services are performed. For repair services, the Company makes an accrual at quarter end based upon historical repair times within its product groups to record revenue based upon the estimated numbercomprised of ~~days completed to date, which is consistent with ratable recognition. Customized products with no alternative future use to the Company,~~automobiles, in North America, Europe, and ~~that have an enforceable right to payment for performance completed to date, are also recorded over time.~~Asia. The Company ~~considers this~~does not have any finance leases.

The Company has lease arrangements with lease andnon-lease components, has elected to beaccount for the lease andnon-lease components as a ~~faithful depiction of the transfer to the customer of revenue over time as the work or service is performed.~~

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company,single lease component, and ~~are distinct in the context~~has allocated all of the contract ~~whereby~~consideration to the ~~transfer of~~lease component only. The Company has existing net leases in which the ~~product or service is~~non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) are paid separately ~~identifiable~~ from ~~other promises~~rent based on actual costs incurred. Therefore,non-lease components are not included in theright-of-use asset and lease liability and are reflected as expenses in the ~~contract. Sales, value add,~~periods incurred.

The Company has existing leases that include variable lease and ~~other taxes~~non-lease components that are not included in the ~~Company collects concurrent with revenue-producing activities~~right-of-use asset and lease liability, and are ~~excluded from revenue. The Company’s normal payment terms~~reflected as expenses in the periods incurred. Such payments primarily include common area maintenance charges and increases in rent payments that are ~~30 to 60 days but vary~~driven by factors such as future changes in an index (e.g., the ~~type~~Consumer Price Index).

Aright-of-use asset of $65,628, short-term lease liability of $19,459 and ~~location~~long-term lease liability of ~~its customers and~~$49,392 were reflected on the products or services offered. The time between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer. None of the Company’s contractsbalance sheet as of March 31, ~~2018 contain a significant financing component. Contract assets as of January 1 and March 31, 2018 were immaterial and included in other current assets.~~

~~Contracts with Multiple Performance Obligations~~2019.

The ~~Company periodically enters into contracts with its customers in which a customer may purchase a combination~~elements of ~~goods and or services, such~~lease expense were as products with installation services or extended warranty obligations. These contracts include multiple promises that the Company evaluates to determine if the promises are separate performance obligations. Once the Company determines the performance obligations, the Company then determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the method the Company expects to better predict the amount of consideration to which it will be entitled. There are no constraints on the variable consideration recorded. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price charged separately to customers or using an expected cost-plus-margin method. The corresponding revenues are recognized when or as the related performance obligations are satisfied, which are noted above. The impact of variable consideration was immaterial during the three months ended March 31, 2018.follows:

~~Deferred Revenues~~


	Three Months Ended March 31, 2019
Lease Cost:
Operating lease cost	$	5,377
Other Information:
Operating cash flows used for operating leases	$	5,711
Weighted average discount rate		3.81	%
Weighted average remaining lease term		4.9 years

The Company’s standard assurance warranty period is normally 12 to 24 months. The Company sells separately-priced service contracts and extended warranty contracts related to certain of its products, especially its laser products. The separately priced contracts generally range from 12 to 60 months. The Company normally receives payment at the inception of the contract and recognizes revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the obligationsFuture lease payments under ~~the contract. The Company has elected to use the practical expedient related to disclosing the remaining performance obligations~~non-cancelable leases as of March 31, ~~2018,~~2019 are detailed as ~~the majority have a duration of less than one year.~~follows:


2019 (remaining)	$	16,831
2020		18,608
2021		12,687
2022		7,518
2023		6,315
Thereafter		13,761

Total lease payments		75,720
Less: imputed interest		6,869

Total operating lease liabilities	$	68,851

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Minimum lease payments under operating leases prior to adoption of ASU2016-02 were as follows:


Year Ending December 31,	Operating Leases
2019	$	20,106
2020		17,142
2021		10,325
2022		5,573
2023		4,411
Thereafter		8,739

Total minimum lease payments	$	66,296

4)	Revenue from Contracts with Customers

Contract assets as of March 31, 2019 and December 31, 2018 were $3,624 and $3,624, respectively, and included in other current assets.

A rollforward of the Company’s deferred revenue and customer advances is as follows:


	Three Months Ended March 31, 2018			Three Months Ended March 31, 2019
Beginning balance, January 1⁽¹⁾	$	14,448		$	17,474
Amount of deferred revenue recognized in income		(4,757	)
Additions to deferred revenue		7,639
Deferred revenue and customer advances assumed in ESI Merger					3,314
Additions to deferred revenue and customer advances					17,219
Amount of deferred revenue and customer advances recognized in income					(13,933	)

Ending balance, March 31⁽²⁾	$	17,330		$	24,074

⁽¹⁾

Beginning deferred revenue and customer advances as of January 1, ~~2018 includes $11,322~~2019 included $8,134 of current deferred revenue, ~~and $3,126~~$3,228 of long-term deferred ~~revenue.~~revenue and $6,112 of current customer advances.

⁽²⁾

Ending deferred revenue as of March 31, ~~2018 includes $14,003~~2019 included $13,322 of current deferred revenue, ~~and $3,327~~$3,018 of long-term deferred ~~revenue.~~revenue and $7,734 of current customer advances.

~~Costs to Obtain and Fulfill a Contract~~

Under ASC 606, the Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administration expenses. The Company has elected to recognize the costs for freight and shipping when control over products has transferred to the customer as an expense in cost of sales.

The Company monitors and tracks the amount of product returns and reduces revenue at the time of shipment for the estimated amount of 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.

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers:


	Three Months Ended March 31, 2018						Three Months Ended March 31, 2019
	Vacuum & Analysis		Light & Motion		Total		Vacuum & Analysis		Light & Motion		Equipment & Solutions		Total
Net revenues:
Products	$	304,336	$	192,341	$	496,677	$	192,648	$	178,697	$	26,018	$	397,363
Services		44,008		13,590		57,598		41,707		15,291		9,200		66,198

Total net revenues	$	348,344	$	205,931	$	554,275	$	234,355	$	193,988	$	35,218	$	463,561


							Three Months Ended March 31, 2018
							Vacuum & Analysis		Light & Motion		Equipment & Solutions		Total
Net revenues:
Products							$	304,336	$	192,341	$	—	$	496,677
Services								44,008		13,590		—		57,598

Total net revenues							$	348,344	$	205,931	$	—	$	554,275

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

   Three Months Ended March 31, 2017
   Vacuum &
Analysis    Light & Motion    Total
Net revenues:

Products
   $ 241,455    $ 146,483    $ 387,938
Services
   36,529    12,686    49,215






Total net revenues
   $ 277,984    $ 159,169    $ 437,153

Product revenue, excluding revenue from certain custom products, is recorded at a point in time, while the majority of the service revenue and revenue from certain custom products ~~are~~is recorded over time.

Refer to Note 17 for revenue by reportable segment, geography and groupings of similar products.

5)	Investments

The fair value of investments classified as short-term consists of the following:


	March 31, 2019		December 31, 2018
Available-for-sale investments:
Time deposits and certificates of deposit	$	101	$	102
Bankers’ acceptance drafts		1,722		989
Asset-backed securities		—		9,113
Commercial paper		33,509		19,359
Corporate obligations		8,994		9,352
U.S. treasury obligations		—		13,298
U.S. agency obligations		—		21,613

	$	44,326	$	73,826

Investments classified as long-term consist of the following:


	March 31, 2019		December 31, 2018
Available-for-sale investments:
Group insurance contracts	$	5,950	$	5,890
Cost method investments:
Minority interest in a private company		4,400		4,400

	$	10,350	$	10,290

The following ~~table summarizes revenue from contracts with customers~~tables show the gross unrealized gains and (losses) aggregated by ~~major market:~~investment category foravailable-for-sale investments:

   Three Months Ended March 31, 2018
   Vacuum &
Analysis    Light & Motion    Total
Net revenues:

Semiconductor
   $ 275,701    $ 37,813    $ 313,514
Advanced markets
   72,643    168,118    240,761






Total net revenues
   $ 348,344    $ 205,931    $ 554,275


As of March 31, 2019:	Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
Short-term investments:
Available-for-sale investments:
Time deposits and certificates of deposit	$	99	$	2	$	—		$	101
Bankers’ acceptance drafts		1,722		—		—			1,722
Commercial paper		33,752		1		(244	)		33,509
Corporate obligations		8,996		1		(3	)		8,994

	$	44,569	$	4	$	(247	)	$	44,326


As of March 31, 2019:	Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
Long-term investments:
Available-for-sale investments:
Group insurance contracts	$	5,582	$	368	$	—		$	5,950

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

   Three Months Ended March 31, 2017
   Vacuum &
Analysis    Light & Motion    Total
Net revenues:

Semiconductor
   $ 218,804    $ 29,700    $ 248,504
Advanced markets
   59,180    129,469    188,649






Total net revenues
   $ 277,984    $ 159,169    $ 437,153

~~Refer to Note 17 in the financial statements for revenue by reportable segment, geography and groupings of similar products.~~



As of December 31, 2018:	Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
Short-term investments:
Available-for-sale investments:
Time deposits and certificates of deposit	$	102	$	—	$	—		$	102
Bankers’ acceptance drafts		989		—		—			989
Asset-backed securities		9,121		1		(9	)		9,113
Commercial paper		19,504		—		(145	)		19,359
Corporate obligations		9,367		—		(15	)		9,352
U.S. treasury obligations		13,294		4		—			13,298
U.S. agency obligations		21,617		2		(6	)		21,613

	$	73,994	$	7	$	(175	)	$	73,826

4)	~~Investments~~

~~The fair value of investments classified as short-term consists of the following:~~

   March 31, 2018    December 31, 2017
Available-for-sale investments:

Time deposits and certificates of deposit
   $ 10,459    $ 9,757
Bankers’ acceptance drafts
   2,179    5,330
Asset-backed securities
   38,012    36,990
Commercial paper
   16,010    13,750
Corporate obligations
   78,767    77,821
Municipal bonds
   2,618    1,970
U.S. treasury obligations
   30,220    28,078
U.S. agency obligations
   22,349    35,738




   $ 200,614    $ 209,434

~~Investments classified as long-term consist of the following:~~

   March 31, 2018    December 31, 2017
Available-for-sale investments:

Group insurance contracts
   $ 6,441    $ 6,255
Cost method investments:

Minority interest in a private company
   4,400    4,400




   $ 10,841    $ 10,655

~~The following tables show the gross unrealized gains and (losses) aggregated by investment category for available-for-sale investments:~~

As of March 31, 2018:    Cost    Gross
Unrealized
Gains    Gross
Unrealized
(Losses)    Estimated
Fair Value
Short-term investments:

Available-for-sale investments:

Time deposits and certificates of deposit
   $ 10,458    $ 1    $ —      $ 10,459
Bankers’ acceptance drafts
   2,179    —      —      2,179
Asset-backed securities
   38,056    13    (57 )    38,012
Commercial paper
   16,065    —      (55 )    16,010
Corporate obligations
   78,778    38    (49 )    78,767
Municipal bonds
   2,620    —      (2 )    2,618
U.S. treasury obligations
   30,196    24    —      30,220
U.S. agency obligations
   22,343    6    —      22,349








   $ 200,695    $ 82    $ (163 )    $ 200,614

As of March 31, 2018:    Cost    Gross
Unrealized
Gains    Gross
Unrealized
(Losses)    Estimated
Fair Value
Long-term investments:

Available-for-sale investments:

Group insurance contracts
   $ 6,382    $ 59    $ —      $ 6,441

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

As of December 31, 2017:    Cost    Gross
Unrealized
Gains    Gross
Unrealized
(Losses)    Estimated
Fair Value
Short-term investments:

Available-for-sale investments:

Time deposits and certificates of deposit
   $ 9,756    $ 1    $ —      $ 9,757
Bankers acceptance drafts
   5,330    —      —      5,330
Asset-backed securities
   37,017    15    (42 )    36,990
Commercial paper
   13,810    —      (60 )    13,750
Corporate obligations
   77,788    58    (25 )    77,821
Municipal bonds
   1,970    —      —      1,970
U.S. treasury obligations
   28,054    24    —      28,078
U.S. agency obligations
   35,728    10    —      35,738








   $ 209,453    $ 108    $ (127 )    $ 209,434


As of December 31, 2017:	Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value
As of December 31, 2018:									Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Estimated Fair Value
Long-term investments:
Available-for-sale investments:
Group insurance contracts	$	6,006	$	249	$	—	$	6,255	$	5,546	$	344	$	—	$	5,890

The tables above, which show the gross unrealized gains and (losses) aggregated by investment category foravailable-for-sale investments as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, reflect the inclusion within short-term investments of investments with contractual maturities greater than one year from the date of purchase. Management has the ability, if necessary, to liquidate any of its investments in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase are classified as short-term on the accompanying balance sheets.

The Company reviews and evaluates its investments for any indication of possible impairment. Based on this review, the Company has determined that the unrealized losses related to these investments at March 31, ~~2018~~2019 and December 31, ~~2017,~~2018 were temporary.

Interest income is accrued as earned. Dividend income is recognized as income on the date the stock trades ~~“ex-dividend.~~“ex-dividend.” The cost of marketable securities sold is determined by the specific identification method. Realized gains or losses are reflected in income and were not material for the three months ended March 31, ~~2018~~2019 and ~~2017.~~2018.

5)6)	Fair Value Measurements

In accordance with the provisions of fair value accounting, a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.

The fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:


Level 1		Quoted prices in active markets for identical assets or liabilities assessed as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or securities or derivative contracts that are valued using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)


Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company categorizes such assets and liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

~~Assets and liabilities of the Company are measured at fair value on a recurring basis as of March 31, 2018 and are summarized as follows:~~

Fair Value Measurements at Reporting Date
Using
Description
March 31, 2018 Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Assets:

Cash equivalents:

Money market funds
$ 1,075 $ 1,075 $ —   $ —
Commercial paper
18,385 —   18,385 —
Corporate obligations
950 —   950 —
Municipal bonds
1,335 —   1,335 —
U.S. treasury obligations
12,953 —   12,953 —
U.S. agency obligations
9,509 —   9,509 —
Restricted cash — money market funds
118 118 —   —
Available-for-sale investments:

Time deposits and certificates of deposit
10,459 —   10,459 —
Bankers’ acceptance drafts
2,179 —   2,179 —
Asset-backed securities
38,012 —   38,012 ��
Commercial paper
16,010 —   16,010 —
Corporate obligations
78,767 —   78,767 —
Municipal bonds
2,618 —   2,618 —
U.S. treasury obligations
30,220 —   30,220 —
U.S. agency obligations
22,349 —   22,349 —
Group insurance contracts
6,441 —   6,441 —
Derivatives — currency forward contracts
85 —   85 —
Funds in investments and other assets:

Israeli pension assets
15,031 —   15,031 —
Derivatives — interest rate hedge —non-current
8,170 —   8,170 —

Total assets
$ 274,666 $ 1,193 $ 273,473 $ —

Liabilities:

Derivatives — currency forward contracts
$ 8,273 $ —   $ 8,273 $ —

Reported as follows:

Assets:

Cash and cash equivalents⁽¹⁾
$ 44,207 $ 1,075 $ 43,132 $ —
Restricted cash
118 118 —   —
Short-term investments
200,614 —   200,614 —
Other current assets
85 —   85 —

Total current assets
$ 245,024 $ 1,193 $ 243,831 $ —

Long-term investments⁽²⁾
$ 6,441 $ —   $ 6,441 $ —
Other assets
23,201 —   23,201 —

Total long-term assets
$ 29,642 $ —   $ 29,642 $ —

Liabilities:

Other current liabilities
$ 8,273 $ —   $ 8,273 $ —

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Assets and liabilities of the Company are measured at fair value on a recurring basis as of March 31, 2019 and are summarized as follows:


			Fair Value Measurements at Reporting Date Using
Description	March 31, 2019		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents:
Money market funds	$	294	$	294	$	—	$	—
Time deposits and certificates of deposit		3,852		—		3,852		—
Commercial paper		82,584		—		82,584		—
Corporate obligations		12,570		—		12,570		—
U.S. agency obligations		49,084		—		49,084		—
Restricted cash – money market funds		317		317		—		—
Available-for-sale investments:
Time deposits and certificates of deposit		101		—		101		—
Bankers’ acceptance drafts		1,722		—		1,722		—
Commercial paper		33,509		—		33,509		—
Corporate obligations		8,994		—		8,994		—
Group insurance contracts		5,950		—		5,950		—
Derivatives – currency forward contracts		3,492		—		3,492		—
Funds in investments and other assets:
Israeli pension assets		14,481		—		14,481		—
Derivatives – interest rate hedge –non-current		4,459		—		4,459		—
Deferred compensation plan assets:
Mutual funds and exchange traded funds		1,799		—		1,799		—
Money market securities		274		—		274		—

Total assets	$	223,482	$	611	$	222,871	$	—

Liabilities:
Derivatives – currency forward contracts	$	322	$	—	$	322	$	—

Reported as follows:
Assets:
Cash and cash equivalents, including restricted cash⁽¹⁾	$	148,701	$	611	$	148,090	$	—
Short-term investments		44,326		—		44,326		—
Other current assets		3,492		—		3,492		—

Total current assets	$	196,519	$	611	$	195,908	$	—

Long-term investments⁽²⁾	$	5,950	$	—	$	5,950	$	—
Other assets		21,013		—		21,013		—

Total long-term assets	$	26,963	$	—	$	26,963	$	—

Liabilities:
Other current liabilities	$	322	$	—	$	322	$	—

⁽¹⁾

The cash and cash equivalent amounts presented in the table above do not include cash of ~~$294,903 and non-negotiable time deposits of $1,660~~$269,315 as of March 31, ~~2018.~~2019.

⁽²⁾

The long-term investments presented in the table above do not include the Company’s minority interest investment in a private company, which is accounted for under the cost method.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Assets and liabilities of the Company are measured at fair value on a recurring basis as of December 31, ~~2017~~2018 and are summarized as follows:


			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
Description	December 31, 2017		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		December 31, 2018		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents:
Money market funds	$	4,987	$	4,987	$	—	$	—	$	180,340	$	180,340	$	—	$	—
Time deposits and certificates of deposit		2,100		—		2,100		—		850		—		850		—
Commercial paper		30,475		—		30,475		—		2,687		—		2,687		—
Restricted cash — money market funds		119		119		—		—
U.S. agency obligations										3,418		—		3,418		—
Restricted cash – money market funds										110		110		—		—
Available-for-sale investments:
Time deposits and certificates of deposit		9,757		—		9,757		—		102		—		102		—
Bankers acceptance drafts		5,330		—		5,330		—
Bankers’ acceptance drafts										989		—		989		—
Asset-backed securities		36,990		—		36,990		—		9,113		—		9,113		—
Commercial paper		13,750		—		13,750		—		19,359		—		19,359		—
Corporate obligations		77,821		—		77,821		—		9,352		—		9,352		—
Municipal bonds		1,970		—		1,970		—
U.S. treasury obligations		28,078		—		28,078		—		13,298		—		13,298		—
U.S. agency obligations		35,738		—		35,738		—		21,613		—		21,613		—
Group insurance contracts		6,255		—		6,255		—		5,890		—		5,890		—
Derivatives — currency forward contracts		168		—		168		—
Derivatives – currency forward contracts										2,485		—		2,485		—
Funds in investments and other assets:
Israeli pension assets		15,048		—		15,048		—		14,408		—		14,408		—
Derivatives — interest rate hedge — non-current		6,179		—		6,179		—
Derivatives – interest rate hedge –non-current										6,083		—		6,083		—

Total assets	$	274,765	$	5,106	$	269,659	$	—	$	290,097	$	180,450	$	109,647	$	—

Liabilities:
Derivatives — currency forward contracts	$	6,198	$	—	$	6,198	$	—
Derivatives – currency forward contracts									$	1,168	$	—	$	1,168	$	—

Total liabilities	$	6,198	$	—	$	6,198	$	—

Reported as follows:
Assets:
Cash and cash equivalents⁽¹⁾	$	37,562	$	4,987	$	32,575	$	—
Restricted cash		119		119		—		—
Cash and cash equivalents, including restricted cash⁽¹⁾									$	187,405	$	180,450	$	6,955	$	—
Short-term investments		209,434		—		209,434		—		73,826		—		73,826		—
Other current assets		168		—		168		—		2,485		—		2,485		—

Total current assets	$	247,283	$	5,106	$	242,177	$	—	$	263,716	$	180,450	$	83,266	$	—

Long-term investments⁽²⁾	$	6,255	$	—	$	6,255	$	—	$	5,890	$	—	$	5,890	$	—
Other assets		21,227		—		21,227		—		20,491		—		20,491		—

Total long-term assets	$	27,482	$	—	$	27,482	$	—	$	26,381	$	—	$	26,381	$	—

Liabilities:
Other current liabilities	$	6,198	$	—	$	6,198	$	—	$	1,168	$	—	$	1,168	$	—

⁽¹⁾

The cash and cash equivalent amounts presented in the table above do not include cash of ~~$292,808 and non-negotiable time deposits of $3,398~~$456,940 as of December 31, ~~2017.~~2018.

⁽²⁾

The long-term investments presented in the table above do not include the Company’s minority interest investment in a private company, which is accounted for under the cost method.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Money Market Funds

Money market funds are cash and cash equivalents and are classified within Level 1 of the fair value hierarchy.

Available-For-Sale Investments

Available-for-sale investments consisted of time deposits, ~~and drafts,~~ certificates of deposit, ~~bankers~~bankers’ acceptance drafts, asset-backed securities (which include auto loans, credit card receivables and equipment trust receivables), commercial paper, corporate obligations, ~~municipal bonds,~~ U.S. treasury obligations, ~~and~~ U.S. agency ~~obligations.~~obligations and group insurance contracts.

The Company measures its debt and equity investments at fair value. The Company’savailable-for-sale investments are classified within Level 2 of the fair value hierarchy.

Israeli Pension Assets

Israeli pension assets represent investments in mutual funds, government securities and other time deposits. These investments are set aside for the retirement benefit of the employees at the Company’s Israeli subsidiaries. These funds are classified within Level 2 of the fair value hierarchy.

Derivatives

As a result of the Company’s global operating activities, the Company is exposed to market risks from changes in foreign currency exchange rates and variable interest rates, which may adversely affect its operating results and financial position. When deemed appropriate, the Company minimizes its risks from foreign currency exchange rate and interest rate fluctuations through the use of derivative financial instruments. The principal market in which the Company executes its foreign currency contracts and interest rate swaps is the institutional market in anover-the-counter environment with a relatively high level of price transparency. The market participants usually are large commercial banks. The forward foreign currency exchange contracts and interest rate hedge are valued using broker quotations or market transactions and are classified within Level 2 of the fair value hierarchy.

6)7)	Derivatives

The Company enters into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments and those utilized as economic hedges. The Company operates internationally and, in the normal course of business, is exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. The Company has used derivative instruments, such as forward foreign currency exchange contracts, to manage certain foreign currency exposure, and interest rate swaps to manage interest rate exposure.

By nature, all financial instruments involve market and credit risks. The Company enters into derivative instruments with major investment grade financial institutions, for which no collateral is required. The Company has policies to monitor the credit risk of these counterparties. While there can be no assurance, the Company does not anticipate any materialnon-performance by any of these counterparties.

Interest Rate Swap Agreement

On September 30, 2016, the Company entered into an interest rate swap agreement to fix the rate on approximately 50% of its then-outstanding balance under the Credit Agreement, as described further in Note ~~10.~~11. This hedge fixes the interest rate paid on the hedged debt at 1.198% per annum plus the applicable credit spread, which was ~~2.00%~~2.0% as of March 31, ~~2018,~~2019, through September 30, 2020. The interest rate swap is recorded at fair value on the balance sheet and changes in the fair value are recognized in other comprehensive income (loss) (“OCI”). To the extent that this arrangement is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs. ~~The~~At March 31, 2019, the notional amount of this transaction was ~~$305,000~~$290,000 and had a fair value of ~~$8,170 at March~~$4,459. At December 31, ~~2018. The~~2018, the notional amount of this transaction was ~~$305,000~~$290,000 and had a fair value of ~~$6,179 at December 31, 2017.~~$6,083.

Foreign Exchange Contracts

The Company hedges a portion of its forecasted foreign currency-denominated intercompany sales of inventory, over a maximum period of eighteen months, using forward foreign exchange contracts accounted for as cash-flow hedges related to Japanese, South Korean, British, Euro ~~and Taiwanese currencies. To the extent these derivatives are effective in off-setting the variability of the~~

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

and Taiwanese currencies. To the extent these derivatives are effective inoff-setting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria, changes in the derivatives’ fair value are not included in current earnings but are included in OCI in stockholders’ equity. These changes in fair value will subsequently be reclassified into earnings, as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs. The cash flows resulting from forward exchange contracts are classified in the consolidated statements of cash flows as part of cash flows from operating activities. The Company does not enter into derivative instruments for trading or speculative purposes.

As of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had outstanding forward foreign exchange contracts with gross notional values of ~~$228,463~~$144,002 and ~~$208,922,~~$159,394, respectively. The following tables provide a summary of the primary net hedging positions and corresponding fair values held as of March 31, ~~2018~~2019 and December 31, ~~2017:~~2018:


	March 31, 2018					March 31, 2019
Currency Hedged (Buy/Sell)	Gross Notional Value		Fair Value⁽¹⁾			Gross Notional Value		Fair Value⁽¹⁾
U.S. Dollar/Japanese Yen	$	75,339	$	(3,212	)	$	39,022	$	302
U.S. Dollar/South Korean Won		85,680		(2,772	)		54,077		1,424
U.S. Dollar/Euro		33,186		(1,068	)		20,146		916
U.S. Dollar/U.K. Pound Sterling		13,807		(512	)		10,921		125
U.S. Dollar/Taiwan Dollar		20,451		(624	)		19,836		403

Total	$	228,463	$	(8,188	)	$	144,002	$	3,170


	December 31, 2017					December 31, 2018
Currency Hedged (Buy/Sell)	Gross Notional Value		Fair Value⁽¹⁾			Gross Notional Value		Fair Value⁽¹⁾
U.S. Dollar/Japanese Yen	$	70,175	$	(233	)	$	43,770	$	(478	)
U.S. Dollar/South Korean Won		79,672		(3,799	)		59,149		570
U.S. Dollar/Euro		26,140		(1,047	)		23,515		688
U.S. Dollar/U.K. Pound Sterling		12,104		(337	)		11,827		323
U.S. Dollar/Taiwan Dollar		20,831		(614	)		21,133		214

Total	$	208,922	$	(6,030	)	$	159,394	$	1,317

⁽¹⁾

Represents the receivable (payable) amount included in the consolidated balance sheet.

The following table provides a summary of the fair value amounts of the Company’s derivative instruments:


Derivatives Designated as Hedging Instruments	March 31, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Derivative assets:
Foreign exchange contracts⁽¹⁾	$	85		$	168		$	3,492		$	2,485
Foreign currency interest rate hedge⁽²⁾		8,170			6,179			4,459			6,083
Derivative liabilities:
Foreign exchange contracts⁽¹⁾		(8,273	)		(6,198	)		(322	)		(1,168	)

Total net derivative (liability) asset designated as hedging instruments	$	(18	)	$	149
Total net derivative asset designated as hedging instruments							$	7,629		$	7,400

⁽¹⁾

The derivative ~~asset~~assets of ~~$85~~$3,492 and ~~$168~~$2,485 as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, related to foreign exchange contracts and are classified in other current assets in the consolidated balance sheet. The derivative ~~liability~~liabilities of ~~$(8,273)~~$322 and ~~$(6,198)~~$1,168 as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018, respectively, are classified in other current liabilities in the consolidated balance sheet. These foreign exchange contracts are subject to a master netting agreement with one financial institution. However, the Company has elected to record these contracts on a gross basis in the balance sheet.

⁽²⁾

The foreign currency interest rate hedge assets of ~~$8,170~~$4,459 and ~~$6,179~~$6,083 as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, are classified in other assets in the consolidated balance sheet.

The net amount of existing gains as of March 31, ~~2018~~2019 that the Company expects to reclassify from OCI into earnings within the next twelve months is immaterial.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The following table provides a summary of the gains (losses) ~~gains~~ on derivatives designated as cash flow hedging instruments:


	Three Months Ended March 31,						Three Months Ended March 31,
Derivatives Designated as Cash Flow Hedging Instruments	2018			2017			2019		2018
Forward exchange contracts:
Net gain (loss) recognized in OCI⁽¹⁾	$	66		$	(4,271	)
Net (loss) gain reclassified from accumulated OCI into income⁽²⁾	$	(2,539	)	$	452
Net gain recognized in OCI⁽¹⁾							$	67	$	66
Net gain (loss) reclassified from accumulated OCI into income⁽²⁾							$	949	$	(2,539	)

⁽¹⁾

Net change in the fair value of the effective portion classified in OCI.

⁽²⁾

Effective portion classified in cost of products for the three ~~months ended~~ March 31, ~~2018~~2019 and ~~2017.~~2018. The tax effect of the gains or losses reclassified from accumulated OCI into income is immaterial.

The following table provides a summary of the ~~losses~~gain (loss) on derivatives not designated as hedging instruments:


	Three Months Ended March 31,						Three Months Ended March 31,
Derivatives Not Designated as Hedging Instruments	2018			2017			2019		2018
Forward exchange contracts:
Net loss recognized in income⁽¹⁾	$	(1,253	)	$	(1,463	)
Net gain (loss) recognized in income⁽¹⁾							$	57	$	(1,253	)

⁽¹⁾

The Company enters into foreign exchange contracts to hedge against changes in the balance sheet for certain subsidiaries to mitigate the risk associated with certain foreign currency transactions in the ordinary course of business. These derivatives are not designated as hedging instruments and gains or losses from these derivatives are recorded immediately in other (expense) income.

7)8)	Inventories ~~net~~

Inventories consist of the following:


	March 31, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Raw materials	$	203,520	$	191,351	$	303,588	$	235,593
Work-in-process		62,212		54,050		76,560		61,908
Finished goods		99,977		93,680		95,485		87,188

	$	365,709	$	339,081	$	475,633	$	384,689

8)9)	~~Dispositions~~Acquisitions

~~Sale of Data Analytics Solutions~~Electro Scientific Industries, Inc.

~~In April 2017,~~On February 1, 2019, the Company completed its acquisition of Electro Scientific Industries, Inc. (“ESI”) pursuant to an Agreement and Plan of Merger, dated as of October 29, 2018 (the “Merger Agreement”), by and among the ~~sale~~Company, EAS Equipment, Inc., formerly a Delaware corporation and a wholly-owned subsidiary of ~~its Data Analytics Solutions business~~the Company, and ESI (the “ESI Merger”). At the effective time of the ESI Merger and pursuant to the terms and conditions of the Merger Agreement, each share of ESI’s common stock that was issued and outstanding immediately prior to the effective time of the ESI Merger was converted into the right to receive $30.00 in cash, without interest and subject to deduction of any required withholding tax.

The aggregate consideration of approximately $1,032,671, excluding related transaction fees and expenses, andnon-cash consideration related to the exchange of share-based awards of approximately $30,630 for a total purchase consideration of approximately $1,063,301. The Company funded the payment of the aggregate consideration with a combination of the Company’s available cash on hand and the proceeds from the Company’s senior secured term loan facility described in Note 11.

ESI provides laser-based manufacturing solutions for the micro-machining industry that enable customers to optimize production. It’s market is composed primarily of ~~$72,509, net~~flexible and rigid PCB processing/fabrication, semiconductor wafer processing and passive component manufacturing and testing. ESI solutions incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of ~~cash sold~~electronic devices and systems.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The purchase price of ESI consisted of the following:


Cash paid for outstanding shares⁽¹⁾	$	1,032,671
Settlement of share-based compensation awards⁽²⁾		30,630

Total purchase price		1,063,301
Less: Cash and cash equivalents acquired		(44,072	)

Total purchase price, net of cash and cash equivalents acquired	$	1,019,229

⁽¹⁾	Represents cash paid of $30.00 per share for approximately 34,422,361 shares of ESI common stock, without interest and subject to a deduction for any required withholding tax.

⁽²⁾	Represents the vested but not issued portion of ESI share-based compensation awards as of the acquisition date of February 1, 2019.

Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of ESI based on their fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The Company expects that none of such goodwill and intangible assets will be deductible for tax purposes.

The following table summarizes the allocation of the preliminary purchase price to the fair values assigned to assets acquired and liabilities assumed at the date of the ESI Merger:


Current assets (excluding inventory)	$	209,194
Inventory		92,364
Intangible assets		318,600
Goodwill		471,403
Property, plant and equipment		52,891
Long-term assets		9,633

Total assets acquired		1,154,085
Current liabilities		51,479
Non-current deferred taxes		32,146
Other long-term liabilities		7,159

Total liabilities assumed		90,784
Fair value of assets acquired and liabilities assumed		1,063,301
Less: Cash and cash equivalents acquired		(44,072	)

Total purchase price, net of cash and cash equivalents acquired	$	1,019,229

The fair valuewrite-up of acquired finished goods inventory and demonstration inventory was $8,383, the amount of which will be expensed over the period during which the acquired inventory is sold. Accordingly, for the three months ended March 31, 2019, the Company recorded a ~~gain~~$5,140 incremental cost of ~~$74,856. This business, which had revenues in 2016~~sales charge associated with the fair valuewrite-up of ~~$12,700 and was included~~inventory acquired in the ~~Vacuum & Analysis segment,~~ESI Merger.

The fair valuewrite-up of acquired property, plant and equipment of $26,667 will be amortized over the estimated useful life of the applicable assets. Property, plant and equipment is valued at itsvalue-in-use, unless there was ~~no longer~~ a known plan to dispose of the asset.

The acquired intangible assets are being amortized on a straight-line basis, which approximates the economic use of the asset.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The following table reflects the allocation of the acquired intangible assets and related estimate of useful lives:


Completed technology - Laser	$	257,900	12 years
Completed technology -Non-Laser		18,500	10 years
Trademarks and trade names		14,400	7 years
Customer relationships		25,400	10 years
Backlog		2,400	1 year

	$	318,600

The net fair value of the acquired intangibles was determined using the income approach. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by the Company’s management. There are inherent uncertainties and management judgment required in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of tangible and intangible assets, the excess amount of which was allocated to goodwill.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s ~~long-term strategic objectives.~~

results of operations. The ~~business did not qualify as~~finalization of the purchase accounting assessment will result in a ~~discontinued operation as this sale did not represent~~change in the valuation of assets acquired and liabilities assumed and may have a ~~strategic shift~~material impact on the Company’s results of operations and financial position. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill to reflect additional information received about facts and circumstances which existed at the date of acquisition. The Company records adjustments to the assets acquired and liabilities assumed subsequent to the purchase price allocation period in the Company’s ~~business, nor did~~operating results in the ~~sale have~~period in which the adjustments are determined. The size and breadth of the ESI Merger will necessitate the use of this measurement period to adequately analyze and assess a ~~major effect on~~number of the ~~Company’s operations. Therefore,~~factors used in establishing the fair value of certain tangible and intangible assets acquired and liabilities assumed as of the acquisition date and the related tax impacts of any changes made. Any potential adjustments made could be material in relation to the preliminary values presented above.

The Company believes the amount of goodwill relative to identifiable intangible assets relates to several factors including: (1) broadening its position in key industrial end markets to complementary solutions; and (2) leveraging component and systems expertise to provide robust solutions to meet customer evolving technology needs.

The results of ~~operations for all periods are~~this acquisition were included in the Company’s ~~income~~consolidated statement of operations beginning on February 1, 2019. ESI constitutes the Company’s Equipment & Solutions reportable segment (see Note 17).

Certain executives from ~~operations.~~ESI had severance provisions in their respective ESI employment agreements. The ~~assets and liabilities of this business have not been reclassified or segregated~~agreements included terms that were accounted for as dual-trigger arrangements. Through the Company’s acquisition accounting, the expense relating to these benefits was recognized in the combined entity’s financial statements. The Company recorded costs of $2,701 and $14,023 in acquisition and integration costs as compensation expense and stock-based compensation expense, respectively, for the three months ended March 31, 2019 associated with these severance provisions. The restricted stock units and stock appreciation rights that were eligible for accelerated vesting if the executive exercised his or her rights but were not issued as of each reporting period-end, will be excluded from the computation of basic earnings per share and included in the computation of diluted earnings per share for such reporting period.

In addition, the Company recorded $6,764 in acquisition and integration costs, which were primarily advisory services costs.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The Company’s consolidated ~~balance sheet or~~net revenue and earnings for the three months ended March 31, 2019 include the following amounts of revenue and earnings of ESI since the acquisition date:


	Three Months Ended March 31, 2019
Total net revenues	$	35,218

Net loss	$	(31,716	)

Net loss per share:

Basic	$	(0.59	)

Diluted	$	(0.59	)

Pro Forma Results

The following unaudited pro forma financial information presents the combined results of operations of the Company as if the ESI Merger had occurred on January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of what the Company’s condensed consolidated ~~statements~~results of ~~cash flows as~~operations actually would have been had the ~~amounts were immaterial.~~acquisition occurred at the beginning of each year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined Company.


	Three Months Ended March 31,
	2019		2018
Total net revenues	$	478,069	$	660,513

Net income	$	49,135	$	101,633

Net income per share:

Basic	$	0.91	$	1.87

Diluted	$	0.90	$	1.84

The unaudited pro forma financial information above gives effect primarily to the following:

(1)

Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment, respectively from the purchase price allocation.

(2)

Revenue and cost of goods sold, adjustments as a result of the reduction in deferred revenue and the cost related to their estimated fair value.

(3)

Incremental interest expense related to the Company’s Incremental Term Loan Facility, as discussed in Note 11.

(4)

The exclusion of acquisition costs and inventory and demonstration inventorystep-up amortization from the three month periods ended March 31, 2019 and the addition of these items to the three month period ended March 31, 2018.

(5)

The exclusion of debt issuance costs due to the modification of the Incremental Term Loan Facility from the three month period ended March 31, 2019 and the addition of this item to the three month period ended March 31, 2018.

(6)

The estimated tax impact of the above adjustments.

10)	Goodwill and Intangible Assets

Goodwill

The Company’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. The Company assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment. The Company regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.

Effective July 1, 2018, the Company reassigned goodwill to certain reporting units within the Light & Motion reportable segment resulting from a reorganization of the composition of goodwill reporting units. The goodwill was reassigned to the reporting units affected using the relative fair value approach. In conjunction with this goodwill reassignment, the Company performed an interim quantitative impairment test as of July 1, 2018 for all of its reporting units and concluded that the fair values of each reporting unit exceeded their respective carrying values.

Effective January 1, 2019, the Company reassigned goodwill to certain reporting units within the Light & Motion reportable segment resulting from a reorganization of the composition of goodwill reporting units. The goodwill was reassigned to the reporting units affected using the relative fair value approach. The Company also concluded that the fair value of each reporting unit exceeded its respective carrying value.

The changes in the carrying amount of goodwill and accumulated impairment ~~(loss)~~loss during the three months ended March 31, ~~2018~~2019 and year ended December 31, ~~2017~~2018 were as follows:

Three Months Ended March 31, 2018 Twelve Months Ended December 31, 2017
Gross
Carrying
Amount Accumulated
Impairment
(Loss) Net Gross
Carrying
Amount Accumulated
Impairment
(Loss) Net
Beginning balance at January 1
$ 735,323 $ (144,276 ) $ 591,047 $ 727,999 $ (139,414 ) $ 588,585
Sale of business⁽¹⁾
—   —   —   (3,115 ) —   (3,115 )
Impairment loss⁽²⁾
—   —   —   —   (4,862 ) (4,862 )
Foreign currency translation
2,447 —   2,447 10,439 —   10,439

Ending balance at March 31, 2018 and December 31, 2017
$ 737,770 $ (144,276 ) $ 593,494 $ 735,323 $ (144,276 ) $ 591,047


	Three Months Ended March 31, 2019									Twelve Months Ended December 31, 2018
	Gross Carrying Amount			Accumulated Impairment Loss			Net			Gross Carrying Amount			Accumulated Impairment Loss			Net
Beginning balance at January 1	$	731,272		$	(144,276	)	$	586,996		$	735,323		$	(144,276	)	$	591,047
Acquired goodwill⁽¹⁾		471,403			—			471,403			—			—			—
Foreign currency translation		(1,068	)		—			(1,068	)		(4,051	)		—			(4,051	)

Ending balance at March 31, 2019 and December 31, 2018	$	1,201,607		$	(144,276	)	$	1,057,331		$	731,272		$	(144,276	)	$	586,996

⁽¹⁾

~~In 2017,~~

During the ~~Company sold its Data Analytics business and, as a result, charged the related goodwill of $(3,115) to the gain on sale of business.~~

⁽²⁾

~~In 2017,~~three months ended March 31, 2019, the Company recorded ~~an impairment loss of $(4,862) related to the write-off~~$471,403 of goodwill related to the ~~discontinuation of a product line and consolidation of two manufacturing plants.~~ESI Merger.

Intangible Assets

Components of the Company’s intangible assets are comprised of the following:

As of March 31, 2018:
   Gross    Impairment
Charges    Accumulated
Amortization    Foreign
Currency
Translation    Net
Completed technology
   $ 172,431    $ (105 )    $ (120,898 )    $ 425    $ 51,853
Customer relationships
   282,744    (1,406 )    (50,138 )    2,682    233,882
Patents, trademarks, trade names and other
   110,523    —      (39,958 )    45    70,610










   $ 565,698    $ (1,511 )    $ (210,994 )    $ 3,152    $ 356,345


As of December 31, 2017:	Gross		Impairment Charges⁽²⁾			Accumulated Amortization			Foreign Currency Translation			Net
As of March 31, 2019:														Gross		Accumulated Impairment Charges			Accumulated Amortization			Foreign Currency Translation			Net
Completed technology⁽¹⁾	$	172,431	$	(105	)	$	(115,371	)	$	333		$	57,288	$	448,831	$	(105	)	$	(146,614	)	$	(162	)	$	301,950
Customer relationships⁽¹⁾		282,744		(1,406	)		(45,518	)		1,571			237,391		308,144		(1,406	)		(68,738	)		(819	)		237,181
Patents, trademarks, trade names and other⁽¹⁾		110,523		—			(38,730	)		(74	)		71,719		120,895		—			(40,976	)		41			79,960

	$	565,698	$	(1,511	)	$	(199,619	)	$	1,830		$	366,398	$	877,870	$	(1,511	)	$	(256,328	)	$	(940	)	$	619,091

⁽¹⁾

~~In 2017,~~

During the three months ended March 31, 2019, the Company ~~sold its Data Analytics business and, as a result, wrote off~~recorded $318,600 of separately identified intangible assets related to the ~~related intangibles~~ESI Merger, of ~~$4,155 of~~which $276,400 was completed technology, ~~$2,300 of~~$25,400 was customer relationships and ~~$1,200~~$16,800 was trademarks, trade names and backlog. Separately, on January 1, 2019, the Company reclassified $6,428 of gross favorable lease assets and $3,445 of related accumulated amortization from patents, trademarks, trade names and other ~~which were fully amortized at~~to the ~~time of sale.~~right-of-use asset line in the balance sheet.

⁽²⁾

In 2017, the Company recorded impairment charges of $1,511 related to the write-off of intangible assets as a result of the discontinuation of a product line and consolidation of two manufacturing plants.

Aggregate amortization expense related to acquired intangibles for the three months ended March 31, 2018 and 2017 was $11,190 and $12,501, respectively. The amortization expense for the three months ended March 31, 2018 and 2017, was net of $185 and

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)


As of December 31, 2018:	Gross		Impairment Charges			Accumulated Amortization			Foreign Currency Translation			Net
Completed technology	$	172,431	$	(105	)	$	(137,283	)	$	(73	)	$	34,970
Customer relationships		282,744		(1,406	)		(63,788	)		(269	)		217,281
Patents, trademarks, trade names and other		110,523		—			(42,954	)		(13	)		67,556

	$	565,698	$	(1,511	)	$	(244,025	)	$	(355	)	$	319,807

~~$177, respectively,~~Aggregate amortization expense related to acquired intangibles for the three months ended March 31, 2019 and 2018 was $15,727 and $11,190, respectively. The net amortization expense from favorable lease commitments for the three months ended March 31, 2019 and 2018 was net of ~~amortization income from unfavorable lease commitments.~~$0 and $407, respectively. Aggregate net amortization expense related to acquired intangible assets ~~and unfavorable lease commitments~~ for future years is as follows:


Year	Amount		Amount
2018 (remaining)	$	32,596
2019		40,511
2019 (remaining)			$	51,638
2020		28,393		55,751
2021		20,485		47,958
2022		17,811		45,480
2023		17,427		45,121
2024				44,204
Thereafter		140,413		273,039

~~10)~~11)

Debt

Term Loan Credit Agreement

In connection with the completion of the ~~Company’s~~ acquisition of Newport Corporation ~~(“Newport”)~~ in ~~April~~ 2016 (the “Newport Merger”), the Company entered into a term loan credit agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto (the “Lenders”), that provided senior secured financing in the original principal amount of $780,000 (the “2016 Term Loan Facility”), subject to increase at the Company’s option and subject to receipt of lender commitments in accordance with the Credit Agreement (the 2016 Term Loan Facility, together with the 2019 Incremental Term Loan Facility (as defined below), “Term Loan Facility”). The 2016 Term Loan Facility matures on April 29, 2023. Borrowings under the Term Loan Facility bear interest per annum at one of the following rates selected by the Company: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in The Wall Street Journal, (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of 1.75%, plus, in each case, an applicable margin; or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a LIBOR rate floor of 0.75%, plus an applicable margin. The Company has elected the interest rate as described in clause (b). The Credit Agreement provides that, unless an alternate rate of interest is agreed, all loans will be determined by reference to the Base Rate if the LIBOR rate cannot be ascertained, if regulators impose material restrictions on the authority of a lender to make LIBOR rate loans, or for other reasons. The 2016 Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.

~~On June 9, 2016, the~~The Company subsequently entered into ~~Amendment No. 1 (the “Repricing Amendment 1”)~~four separate repricing amendments to the ~~Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Repricing Amendment 1~~2016 Term Loan Facility, which decreased the applicable margin for LIBOR borrowings ~~under~~from 4.0% to 1.75%, with a LIBOR rate floor of 0.75%. As a consequence of the ~~Company’s~~pricing of the 2019 Incremental Term Loan Facility (defined below), the applicable margin for the 2016 Term Loan Facility was increased to ~~2.50% for base rate borrowings and 3.50% for~~2.00% (from 1.75%) with respect to LIBOR borrowings and ~~extended~~1.00% (from 0.75%) with respect to base rate borrowings. The interest rate on the ~~period during which a prepayment premium may be required for a “Repricing Transaction” (as defined in the Credit Agreement) until six months after the effective date~~2016 Term Loan Facility as of the Repricing Amendment 1. In connection with the execution of the Repricing Amendment 1, the Company paid a prepayment premium of 1.00%, or $7,300, as well as certain fees and expenses of the administrative agent and the Lenders, in accordance with the terms of the Credit Agreement. Immediately prior to the effectiveness of the Repricing Amendment 1, the Company prepaid $50,000 of principal under the Credit Agreement. In September 2016, the Company prepaid an additional $60,000 under the Credit Agreement.March 31, 2019 was 4.5%.

On September 30, 2016, the Company entered into an interest rate swap agreement, which has a maturity date of September 30, 2020, to fix the rate on $335,000 of the then-outstanding balance of the ~~Credit Agreement.~~2016 Term Loan Facility. The rate is fixed at 1.198% per annum plus the applicable credit spread, which was ~~2.00%~~2.0% at March 31, ~~2018. The~~2019. At March 31, 2019, the notional amount of this transaction was ~~$305,000~~$290,000 and had a fair value of ~~$8,170 at March 31, 2018.~~$4,459.

On December 14, 2016, the Company entered into Amendment No. 2 (the “Repricing Amendment 2”) to the Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Repricing Amendment 2 decreased the applicable margin for the Company’s term loan under the Credit Agreement to 2.75% for LIBOR borrowings and 1.75% for base rate borrowings and reset the period during which a prepayment premium may be required for a Repricing Transaction until six months after the effective date of the Repricing Amendment 2. In November 2016, prior to the effectiveness of the Repricing Amendment 2, the Company prepaid an additional $40,000 of principal under the Credit Agreement. In March 2017, the Company prepaid an additional $50,000 of principal under the Credit Agreement.

On July 6, 2017, the Company entered into Amendment No. 3 (the “Repricing Amendment 3”) to the Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Repricing Amendment 3 decreased the applicable margin for the Company’s term loan under the Credit Agreement to 2.25% for LIBOR rate loans when the Total Leverage Ratio (as defined in the Credit Agreement) was at or above 1.25:1 and decreased to 2.00% when the Total Leverage Ratio was below 1.25:1, both with a LIBOR floor of 0.75%. The margin for base rate borrowings

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

decreased to 1.25% when the Total Leverage Ratio is at or above 1.25:1 and to 1.00% when the Total Leverage Ratio is below 1.25:1. The period during which a prepayment premium may be required for a Repricing Transaction was reset to six months after the effective date of the Repricing Amendment 3.

~~In July 2017, August 2017, November 2017 and March 2018 the Company prepaid $50,000, $75,000, $50,000 and $50,000, respectively, of principal under the Credit Agreement.~~ As of March 31, ~~2018,~~2019, after total principal prepayments of $425,000 and regularly scheduled principal payments of $6,536, the total outstanding principal balance of the 2016 Term Loan Facility was $348,464. ~~The interest rate as~~As a result of ~~March 31, 2018 was 3.648%.~~

~~On April 11, 2018,~~making these prepayments, the Company ~~entered into Amendment No. 4 (the “Repricing Amendment 4”)~~is no longer required to make any regularly scheduled principal payments on the ~~Credit Agreement by and among~~2016 Term Loan Facility until the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Repricing Amendment 4 decreased the applicable margin for the Company’s LIBOR rate term loan under the Credit Agreement to 1.75%, with a LIBOR floor of 0.75%. The margin for base rate borrowings decreased to 0.75% with a base rate floor of 1.75%. The period during which a prepayment premium may be required for a Repricing Transaction was reset to six months after the effectivematurity date of the ~~Repricing Amendment 4.~~loan.

The Company incurred $28,747 of deferred finance fees, original issue discount and repricing fees related to the term loans under the 2016 Term Loan Facility, which isare included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. A portion of these fees ~~has~~have been accelerated in connection with the various debt prepayments during 2016, 2017 and 2018. As of March 31, ~~2018,~~2019, the remaining balance of the deferred finance fees, original issue discount and repricing ~~fee~~fees related to the 2016 Term Loan Facility was ~~$7,226.~~$3,980.

On February 1, 2019, in connection with the completion of the ESI Merger, the Company entered into an amendment (“Amendment No. 5”) to the Credit Agreement. Amendment No. 5 provided an additional trancheB-5 term loan commitment in the principal amount of $650,000 (the “2019 Incremental Term Loan Facility”), all of which was drawn down in connection with the closing of the ESI Merger. Pursuant to Amendment No. 5, the Company also effectuated certain amendments to the Credit Agreement which make certain of the negative covenants and other provisions less restrictive. The 2019 Incremental Term Loan Facility matures on February 1, 2026 and bears interest at a rate per annum equal to, at the Company’s option, a base rate or LIBOR rate (as described above) plus, in each case, an applicable margin equal to 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The 2019 Incremental Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.

The Company incurred $11,362 of deferred finance fees and original issue discount fees related to the term loans under the 2019 Incremental Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. As of March 31, 2019, the remaining balance of the deferred finance fees and original issue discount related to the 2019 Incremental Term Loan Facility was $11,244.

The Company is required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the 2019 Incremental Term Loan Facility, with the balance due on February 1, 2026. If on or prior to the date that is six months after the closing date of Amendment No. 5, the Company prepays any loans under the 2019 Incremental Term Loan Facility in connection with a repricing transaction, the Company must pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid. At March 31, 2019, the total balance outstanding of the 2019 Incremental Term Loan Facility was $650,000 and the interest rate was 4.7%.

Under the Credit Agreement, the Company is required to prepay outstanding term loans under the 2016 Term Loan Facility and the 2019 Incremental Term Loan Facility, subject to certain exceptions, with portions of its annual excess cash flow as well as with the net cash proceeds of certain asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. ~~The Company is also~~As a result the Company’s Total Leverage Ratio, it was not required to make ~~scheduled quarterly payments each equal to 0.25%~~a prepayment of excess cash flow for the principal amount of the term loans outstanding, less the amount of certain voluntary and mandatory repayments after such date, with the balance due on the seventh anniversary of the closing date. As a result of making total prepayments of $425,000 through Marchfiscal year ended December 31, ~~2018, the Company is no longer required to make any scheduled principal payments until maturity date of the loan.~~2018.

All obligations under the Term Loan Facility are guaranteed by certain of the Company’s domestic subsidiaries, and are collateralized by substantially all of the Company’s assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.

The Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the Lenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions generally permitted to be taken by a secured creditor. At March 31, ~~2018,~~2019, the Company was in compliance with all covenants under the Credit Agreement.

Senior Secured Asset-Based Revolving Credit Facility

In connection with the completion of the Newport Merger in April 2016, the Company ~~also~~ entered into an asset-based credit agreement with Deutsche Bank AG New York Branch, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto, ~~(the “ABL Facility”),~~ that ~~provides~~provided senior secured financing of up to $50,000, which the Company never borrowed against. On February 1, 2019, in connection with the completion of the ESI Merger, the Company terminated the $50,000 asset-based credit agreement with Deutsche Bank AG New York Branch and entered into an asset-based credit agreement with Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

time to time party thereto (the “ABL Credit Agreement”), that provides senior secured revolving credit financing of up to $100,000, subject to a borrowing base ~~limitation.~~limitation (the “ABL Facility”). The borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of certain eligible accounts; plus (b) ~~subject~~prior to certain notice and ~~field~~filed examination and appraisal requirements, the lesser of (i) 20% of net book value of eligible inventory in the United States and (ii) 30% of the borrowing base, and after the satisfaction of such requirements, the lesser of (i) the lesser of (A) 65% of the lower of cost or market value of certain eligible inventory and (B) 85% of the net orderly liquidation value of certain eligible inventory and (ii) 30% of the borrowing base; minus (c) reserves established by the administrative ~~agent; provided that until the administrative agent’s receipt of a field examination of accounts receivable the borrowing base shall be equal to 70% of the book value of certain eligible accounts.~~agent. The ABL Facility includes borrowing capacity in the form of letters of credit up to ~~$15,000. The Company has not drawn against the ABL Facility as of March 31, 2018.~~$25,000.

Borrowings under the ABL Facility bear interest at a rate per annum equal to, at ~~one~~the Company’s option, any of the following, ~~rates selected by the Company:~~plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in The Wall Street Journal, ~~and~~ (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%~~, plus, in each case, an initial applicable margin~~ and (4) a floor of ~~0.75%~~0.00%; and (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

adjusted for certain additional costs, ~~plus an~~with a floor of 0.00%. The initial applicable margin ~~of 1.75%.~~for borrowings under the ABL Facility is 0.50% with respect to base rate borrowings and 1.50% with respect to LIBOR borrowings. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.

The Company incurred $1,201 of costs in connection with the ABL Facility, which were capitalized and included in other assets in the accompanying consolidated balance sheets and are being amortized to interest expense using the straight-line method over the contractual term of five years of the ABL Facility.

In addition to paying interest on any outstanding principal under the ABL Facility, the Company is required to pay a commitment fee in respect of the unutilized commitments ~~thereunder. The initial commitment fee is 0.375%~~thereunder equal to 0.25% per annum. The total commitment fee recognized in interest expense for the three months ended March 31, 2018, was $95. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the commitment fee is subject to downward adjustment based on the amount of average unutilized commitments for the three month period immediately preceding such adjustment date. The Company must also pay customary letter of credit fees and agency fees.

The Company incurred $785 of costs in connection with the new ABL Facility, which were capitalized and included in other assets in the accompanying consolidated balance sheet and are being amortized to interest expense over the contractual term of five years of the ABL Facility. As a result of the prior asset-based facility being terminated, the Company wrote off $216 of previously capitalized debt issuance costs.

The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor.

Lines of Credit and Short-Term Borrowing Arrangements

One of the Company’s Japanese subsidiaries has lines of credit and short-term borrowing arrangements with two financial institutions, which arrangements generally expire and are renewed at ~~three month~~three-month intervals. The lines of credit provided for aggregate borrowings as of March 31, ~~2018~~2019 of up to an equivalent of ~~$21,641 U.S. dollars.~~$20,747. One of the borrowing arrangements has an interest rate based on the Tokyo Interbank Offer Rate at the time of borrowing and the other has an interest rate based on the Japanese Short-Term Prime Lending Rate. ~~Total borrowings outstanding under these arrangements were $941 at March 31, 2018.~~ There were no borrowings outstanding under these arrangements at March 31, 2019 and December 31, ~~2017.~~2018, respectively.

The Company ~~assumed~~has various revolving lines of credit and a financing ~~facility with the completion of the Newport Merger.~~facility. These revolving lines of credit and financing facility have no expiration date and ~~provided for aggregate borrowings~~ as of March 31, ~~2018~~2019, provided for aggregate borrowings of up to an equivalent of ~~$9,879 U.S. dollars.~~$11,275. These lines of credit have a base interest rate of 1.25% plus a Japanese Yen overnight LIBOR rate. Total borrowings outstanding under these arrangements were ~~$3,828~~$3,195 and ~~$2,965~~$3,389 at March 31, ~~2018~~2019 and December 31, ~~2017.~~2018, respectively.

One of the Company’s Austrian subsidiaries has various outstanding loans from the Austrian government to fund research and development. These loans are unsecured and do not require principal repayment as long as certain conditions are met. Interest on these loans is payable semi-annually. The interest rates associated with these loans range from ~~0.75%~~0% to ~~2.00%~~0.75%.

   March 31, 2018    December 31, 2017
Short-term debt:

Japanese lines of credit
   $ 3,915    $ 2,750
Japanese receivables financing facility
   854    215
Austrian loans due through March 2019
   681    —
Other debt
   6    7




   $ 5,456    $ 2,972

   March 31, 2018    December 31, 2017
Long-term debt:

Austrian loans due through March 2020
   $ 52    $ 714
Term Loan Facility, net⁽¹⁾
   341,238    389,279




   $ 341,290    $ 389,993

⁽¹⁾

~~Net of deferred financing fees, original issuance discount and repricing fee of $7,226 and $9,185 as of March 31, 2018 and December 31, 2017, respectively.~~

~~The Company recognized interest expense of $5,430 and $8,832 for the three months ended March 31, 2018 and 2017, respectively.~~

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)


	March 31, 2019		December 31, 2018
Short-term debt:
Japanese lines of credit	$	2,175	$	2,724
Japanese receivables financing facility		1,020		665
Austrian loans due through March 2020		586		597
Term Loan Facility		6,500		—

	$	10,281	$	3,986


	March 31, 2019		December 31, 2018
Long-term debt:
Austrian loans due through March 2020 and other debt	$	83	$	86
Term Loan Facility, net⁽¹⁾		976,740		343,756

	$	976,823	$	343,842

⁽¹⁾	Net of deferred financing fees, original issuance discount and repricing fee of $15,224 and $4,708 as of March 31, 2019 and December 31, 2018, respectively.

The Company recognized interest expense of $9,119 and $5,430 for the three months ended March 31, 2019 and 2018, respectively.

Contractual maturities of the Company’s debt obligations as of March 31, ~~2018~~2019 are as follows:


Year	Amount		Amount
2018 (remaining)	$	4,788
2019		668
2019 (remaining			$	8,656
2020		52		6,583
2021		—		6,500
2022		—		6,500
2023				354,964
2024				6,500
Thereafter		348,464		612,625

~~11)~~12)

Product Warranties

The Company records 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 Company’s warranty obligation is affected by shipment volume, product failure rates, utilization levels, material usage, and supplier warranties on parts delivered to the Company. Should actual product failure rates, utilization levels, material usage, or supplier warranties on parts differ from the Company’s estimates, revisions to the estimated warranty liability would be required.

Product warranty activities were as follows:


	Three Months Ended March 31,						Three Months Ended March 31,
	2018			2017			2019			2018
Beginning of period	$	10,104		$	8,261		$	10,399		$	10,104
Assumed product warranty liability from ESI Merger								7,177			—
Provision for product warranties		5,184			3,014			6,062			5,184
Direct and other charges to warranty liability		(4,073	)		(2,790	)		(6,705	)		(4,073	)

End of period⁽¹⁾	$	11,215		$	8,485		$	16,933		$	11,215

⁽¹⁾

~~Short-term~~

As of March 31, 2019, short-term product warranty of ~~$10,856~~$13,843 and long-term product warranty of ~~$359 as of March 31, 2018, are~~$3,090 were included within other current liabilities and other liabilities, respectively, within the accompanying condensed consolidated balance sheet. ~~Short-term~~As of March 31, 2018, short-term product warranty of ~~$8,071~~$10,856 and long-term product warranty of ~~$414 as of March 31, 2017, are~~$359 were included within other current liabilities and other liabilities, respectively, within the accompanying condensed consolidated balance sheet.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

~~12)~~13)

Income Taxes

The ~~Act was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income~~Company’s effective tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. The Company is applying SAB 118 when accountingrates for the ~~enactment effects of the Act. As of March 31, 2018, the Company has not completed the accounting for all of the tax effects of the Act, however provisional estimates have been recorded.~~

~~For the quarter~~three months ended March 31, 2019 and 2018 ~~the Company recognized a tax benefit of $790 related to the provisional estimates recorded for the Act~~were 18.8% and ~~included these adjustments as a component of income tax expense from continuing operations.~~17.1%, respectively. The ~~calculations will continue to be refined and adjusted as additional analysis is completed and more guidance is issued. These future adjustments could be material to income tax expense.~~

The global intangible low-taxed income (“GILTI”) provision from the Act subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred. The Company has elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred and expects to incur tax for the year ended December 31, 2018. The reasonable estimate for this adjustment, net of foreign tax credits, increased the Company’s effective tax rate for ~~2018~~the three months ended March 31, 2019 and the related income tax expense were lower than the U.S. statutory tax rate due to the U.S. deduction for foreign derived intangible income, the federal tax credit for research activities and the geographic mix of income earned by ~~approximately 1.0%.~~the Company’s international subsidiaries being taxed at rates lower than the U.S. statutory tax rate, offset by the global intangiblelow-taxed income inclusion, the limitation on the deduction of executive compensation and state income taxes.

The Company’s effective tax rate for the three months ended March 31, 2018 and ~~2017 was 17.1% and 15.8%, respectively. The effective tax rate for~~ the ~~three months ended March 31, 2018, and~~ related income tax expense ~~was~~were lower than the U.S. statutory tax rate mainly due to the geographic mix of income earned by the Company’s international subsidiaries being taxed at rates lower than the U.S. statutory tax rate, windfall benefits of stock compensation and the ~~new~~ deduction for foreign derived intangible income

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

~~from the Act~~ offset by the tax effects ~~of the new provision for~~from global intangible ~~low taxed~~low-taxed income ~~from the Act~~ and state income taxes.

The effective tax rate for the three months ended March 31, 2017 was lower than the U.S. statutory tax rate mainly due to the impact of lower tax rates on foreign income, the deduction for domestic production activities and windfall benefits of stock compensation.

As of March 31, ~~2018 and December 31, 2017,~~2019, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately ~~$27,938~~$40,725. At December 31, 2018, the total amount of gross unrecognized tax benefits, which excludes interest and ~~$27,345, respectively.~~penalties, was approximately $32,684. The net increase was primarily attributable to the addition of historical gross unrecognized tax benefits for ESI as a result of the ESI Merger during the quarter ended March 31, 2019. As of March 31, ~~2018, if these benefits~~2019, excluding interest and penalties, there were ~~recognized in a future period, the timing~~approximately $33,085 of ~~which is not estimable, the~~ net unrecognized tax ~~benefit of $20,525, excluding interest and penalties,~~benefits that, if recognized, would impact the Company’s effective tax rate.

The Company accrues interest expense, and if applicable, penalties, for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had accrued interest on unrecognized tax benefits of approximately ~~$532~~$543 and ~~$327,~~$568, respectively.

Over the next 12 months it is reasonably possible that the Company may recognize approximately ~~$1,047~~$1,452 of previously net unrecognized tax benefits, excluding interest and penalties, related to various U.S. federal, state and foreign tax positions primarily as a result of the expiration of certain statutes of limitations.

The Company and its subsidiaries are subject to examination by U.S. federal, state and foreign tax authorities. The ~~United States~~U.S. Internal Revenue Service commenced an examination of the Company’s U.S. federal income tax filings for tax years 2015 and 2016 during the quarter ended September 30, 2017. This audit was effectively settled during the quarter ended March 31, 2018, and the impact was not material. Also during the quarter ended March 31, 2018, the Company received notification from the ~~United States~~U.S. Internal Revenue Service ~~that a new~~of their intent to audit ~~is scheduled to begin for~~ its U.S. subsidiary, Newport Corporation, for tax year 2015. This audit commenced during the quarter ended June 30, 2018 and there have been no proposed adjustments through March 31, 2019. The U.S. statute of limitations remains open for tax years ~~2014~~2015 through present. The statute of limitations for the Company’s tax filings in other jurisdictions varies between fiscal years ~~2012~~2013 through present. WeThe Company also ~~have~~has certain federal credit carry-forwards and state tax loss and credit carry-forwards that are open to examination for tax years 2000 through the present.

MKS INSTRUMENTS, INC.

~~13)~~

~~Pension Plans~~

~~As a result of the acquisition of Newport, the Company has assumed all assets~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and liabilities of Newport’s defined benefit pension plans, which covers substantially all of its full-time employees in France, Germany, Israel and Japan. In addition, there are certain pension liabilities relating to former employees in the United Kingdom. The German plan is unfunded, as permitted under the plan and applicable laws. The net periodic benefit costs were immaterial for both the three month periods ended March 31, 2018 and 2017. The Company’s contributions to these plans for both the three month period ended March 31, 2018 and 2017, as required by local pension accounting laws, were immaterial.per share data)

14)	Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:


	Three Months Ended March 31,				Three Months Ended March 31,
	2018		2017		2019		2018
Numerator:
Net income	$	105,121	$	65,060	$	12,455	$	105,121

Denominator:
Shares used in net income per common share — basic		54,423,000		53,769,000
Shares used in net income per common share – basic						54,147,000		54,423,000
Effect of dilutive securities:
Restricted stock units, stock appreciation rights and shares issued under employee stock purchase plan		863,000		1,189,000		701,000		863,000

Shares used in net income per common share — diluted		55,286,000		54,958,000
Shares used in net income per common share – diluted						54,848,000		55,286,000

Net income per common share:
Basic	$	1.93	$	1.21	$	0.23	$	1.93
Diluted	$	1.90	$	1.18	$	0.23	$	1.90

Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

~~(using~~ (using the treasury stock method) if securities containing potentially dilutive common shares (restricted stock units and stock appreciation rights) had been converted to such common shares, and if such assumed conversion is dilutive.

For the three months ended March 31, 2019 and 2018 there were approximately 128,200 and 380 weighted-average restricted stock units, and no weighted-average stock appreciation rights, that would have had an anti-dilutive effect on EPS, and would thus need to be excluded from the computation of diluted weighted-average shares. For the three months ended March 31, 2017, there were no weighted-average shares of restricted stock units or stock appreciation rightsrespectively, that would have had an anti-dilutive effect on EPS, and would thus need to be excluded from the computation of diluted weighted-average shares.

15)	Stock-Based Compensation

The Company grants restricted stock units (“RSUs”) to employees and directors under the 2014 Stock Incentive Plan (the “2014 Plan”). The 2014 Plan is administered by the Compensation Committee of the Company’s Board of Directors. The 2014 Plan is intended to attract and retain employees and directors, and to provide an incentive for these individuals to assist the Company to achieve long-range performance goals and to enable these individuals to participate in the long-term growth of the Company.

In connection with the completion of the ESI Merger, the Company assumed:

all RSUs that vest based solely on the satisfaction of service conditions, granted under any ESI equity plan, arrangement or agreement (“ESI Plan”) that were outstanding immediately prior to the effective time of the ESI Merger, and as to which shares of ESI common stock were not fully distributed in connection with the closing of the ESI Merger,

all RSUs that were granted subject to vesting based on both the achievement of performance goals and the satisfaction of service conditions granted under any ESI Plan that were outstanding immediately prior to the effective time of the ESI Merger, and

all stock appreciation rights (“SARs”) granted under any ESI Plan, whether vested or unvested, that were outstanding immediately prior to the effective time of the ESI Merger and held by an individual who was a service provider of ESI as of the date on which the effective time of the ESI Merger occurred.

As of the effective time of the ESI Merger, based on a formula in the Merger Agreement, (a) such RSUs were converted automatically into RSUs with respect to 736,133 shares of the Company’s common stock (the “Assumed RSUs”), and (b) all SARs were converted automatically into SARs with respect to 12,787 shares of the Company’s common stock (the “Assumed SARs”).

Included in the total number of assumed RSUs are 326,283 shares of the Company’s common stock for employees and outside directors that are part of the ESI Deferred Compensation plan. These shares will not become issued shares until their respective release dates.

The shares of the Company’s common stock that are subject to the Assumed SARs and the Assumed RSUs are issuable pursuant to the Company’s 2014 Plan.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The 748,920 shares of the Company’s common stock that are issuable pursuant to the Assumed RSUs and the Assumed SARs under the Company’s 2014 Plan were registered under the Securities Act of 1933 on the Registration Statement on FormS-8. These shares are in addition to the 18,000,000 shares of the Company’s common stock reserved for issuance under the Company’s 2014 Plan and previously registered under the Securities Act of 1933 on the Registration Statement on FormS-8.

During the three months ended March 31, 2019, the Company granted 182,212 RSUs with a weighted average grant date fair value of $82.58. During the three months ended March 31, 2018, the Company granted 122,831 RSUs with a weighted average grant date fair value of $109.62. There were no SARs granted during the three months ended March 31, 2019 or 2018.

The total stock-based compensation expense included in the Company’s consolidated statements of income and comprehensive income was as follows:


	Three Months Ended March 31,
	2019		2018
Cost of revenues	$	422	$	1,005
Research and development expense		810		722
Selling, general and administrative expense		8,038		8,699
Acquisition and integration related expense		18,568		—

Totalpre-tax stock-based compensation expense	$	27,838	$	10,426

At March 31, 2019, the total compensation expense related to unvested stock-based awards granted to employees and directors under the 2014 Plan that had not been recognized was $31,356, net of estimated forfeitures. The future compensation expense for time-based awards is recognized on a straight-line basis and the future compensation expense for performance-based awards is recognized using the accelerated graded vesting method, both of which expense over the requisite service period, net of estimated forfeitures, except for retirement eligible employees, in which case the Company expenses the fair value of the grant in the period the grant is issued. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience. Actual results and future changes in estimates may differ substantially from the Company’s current estimates.

The following table presents the activity for RSUs under the Plan:


	Three Months Ended March 31, 2019
	Outstanding RSUs			Weighted Average Grant Date Fair Value
RSUs – beginning of period		647,394		$	74.04
Assumed shares from ESI Merger		736,133		$	84.10
Accrued dividend shares		1,558		$	78.45
Granted		182,212		$	82.58
Vested		(274,898	)	$	67.57
Forfeited		(76,096	)	$	91.14

RSUs – end of period		1,216,303		$	81.81

The following table presents the activity for SARs under the Plan:


	Three Months Ended March 31, 2019
	Outstanding SARs			Weighted Average Grant Date Fair Value
SARs – beginning of period		177,538		$	28.52
Assumed SARs from ESI Merger		12,787		$	17.38
Exercised		(23,569	)	$	27.34
Forfeited or expired		(184	)	$	27.89

SARs Outstanding – end of period		166,572		$	27.86

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

16)	Stockholders’ Equity

Share Repurchase Program

On July 25, 2011, the Company’s Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of $200,000 of its outstanding common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions and business development activities, including, but not limited to, merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any time without prior notice. The Company has repurchased approximately ~~1,770,000~~2,588,000 shares of common stock for approximately ~~$52,000~~$127,000 pursuant to the program since its adoption. During the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, there were no repurchases of common stock.

Cash Dividends

Holders of the Company’s common stock are entitled to receive dividends when ~~and if~~ they are declared by the Company’s ~~board~~Board of ~~directors.~~Directors. In addition, the Company accrues dividend equivalents on the RSUs the Company assumed in the ESI Merger described in Note 15 above when dividends are declared by the Company’s Board of Directors. During the three months ended March 31, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share, which totaled $10,843. During the three months ended March 31, 2018, ~~we paid~~the Company’s Board of Directors declared a quarterly cash ~~dividends~~dividend of ~~$9,808 in the aggregate or~~ $0.18 per ~~share. During~~share, which totaled $9,808.

On May 8, 2019, the ~~three months ended March 31, 2017, we~~Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid ~~cash dividends~~on June 7, 2019 to shareholders of ~~$9,419 in the aggregate or $0.175 per share.~~record as of May 27, 2019. Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of the Company’s Board of Directors. In addition, under the terms of the ~~Company’s senior secured~~ Term Loan Facility and its ~~senior secured asset-based revolving credit facility,~~ABL Facility, the Company may be restricted from paying dividends under certain circumstances.

~~16)~~

~~Stock-Based Compensation~~

The Company has granted Restricted Stock Units (“RSUs”) to employees and directors under the 2014 Stock Incentive Plan (the “2014 Plan”). The 2014 Plan is administered by the Compensation Committee of the Company’s Board of Directors. The 2014 Plan is intended to attract and retain employees and directors, and to provide an incentive for these individuals to assist the Company to achieve long-range performance goals and to enable these individuals to participate in the long-term growth of the Company.

~~In connection with the completion of the Newport Merger, the Company assumed:~~

● all RSUs granted under any Newport equity plan that were outstanding immediately prior to the effective time of the Newport Merger, and as to which shares of Newport common stock were not fully distributed in connection with the closing of the Newport Merger, and

~~● all stock appreciation rights (“SARs”) granted under any Newport equity plan, whether vested or unvested, that were outstanding immediately prior to the effective time of the Newport Merger.~~

During the three months ended March 31, 2018, the Company granted 122,831 RSUs with a weighted average grant date fair value of $109.62. During the three months ended March 31, 2017, the Company granted 171,179 RSUs with a weighted average grant date fair value of $66.06. There were no SARs granted during the three months ended March 31, 2018 or 2017.

~~The total stock-based compensation expense included in the Company’s consolidated statements of income and comprehensive income was as follows:~~

   Three Months Ended
March 31, 2018    Three Months Ended
March 31, 2017
Cost of revenue
   $ 1,005    $ 930
Research and development expense
   722    745
Selling, general and administrative expense
   8,699    7,107




Total pre-tax stock-based compensation expense
   $ 10,426    $ 8,782

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

At March 31, 2018, the total compensation expense related to unvested stock-based awards granted to employees, officers and directors under the 2014 Plan that had not been recognized was $22,844, net of estimated forfeitures. The future compensation expense is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures except for retirement eligible employees in which the Company expenses the fair value of the grant in the period the grant is issued. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience. Actual results and future changes in estimates may differ substantially from the Company’s current estimates.

~~The following table presents the activity for RSUs under the Plan:~~

   Three Months Ended March 31, 2018
   Outstanding RSUs    Weighted Average
Grant Date
Fair Value
RSUs — beginning of period
   943,379    $ 47.57
Accrued dividend shares
   18    124.85
Granted
   122,831    109.62
Vested
   (204,290 )    40.96
Forfeited
   (23,740 )    61.63



RSUs — end of period
   838,198    $ 57.88

~~The following table presents the activity for SARs under the Plan:~~

   Three Months Ended March 31, 2018
   Outstanding SARs    Weighted Average
Grant Date
Fair Value
SARs — beginning of period
   282,907    $ 28.62
Exercised
   (17,775 )    27.90
Forfeited or expired
   (773 )    31.13



SARs Outstanding — end of period
   264,359    $ 28.66

17)	Business Segment, Geographic Area, Product and Significant Customer Information

The Company is a global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and ~~productivity.~~productivity for its customers. The Company’s products are derived from its core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, ~~RF & DC~~ power, reactive gas generation, vacuum technology, lasers, photonics, sub-micron positioning, vibration control, optics and ~~optics.~~laser-based manufacturing solutions. The Company also provides services ~~related~~relating to the maintenance and repair of its products, installation services and training. The Company’s primary served markets include semiconductor, industrial technologies, life and health sciences, research and defense.

The Company’s Chief Operating Decision Maker (“CODM”) utilizes financial information to make decisions about allocating resources and assessing performance for the entire Company, which is used in the decision making process to assess performance. ~~Based upon the information provided to the CODM,~~Effective February 1, 2019, in conjunction with its acquisition of ESI, the Company ~~has determined it has~~created a third reportable segment known as the Equipment & Solutions segment in addition to its existing two reportable ~~segments. The Company’s two reportable segments are:~~segments: the Vacuum & Analysis segment and the Light & ~~Motion.~~Motion segment.

The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, RF & DC power, reactive gas generation and vacuum technology.

The Light & Motion segment provides a broad range of instruments, components and subsystems which are derived from the Company’s core competencies in lasers, photonics,sub-micron positioning, vibration control, and optics.

The Equipment & Solutions segment provides laser-based manufacturing solutions for the micro-machining industry that enable customers to optimize production. The segment’s market is composed primarily of flexible and rigid PCB processing/fabrication, semiconductor wafer processing and passive component manufacturing & test. Equipment & Solutions incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The Company derives its segment results directly from the manner in which results are reported in its management reporting system. The accounting policies that the Company uses to derive reportable segment results are substantially the same as those used for external reporting purposes. The Company does not disclose external or intersegment revenues separately by reportable segment as this information is not presented to the CODM for decision making purposes.

The following table sets forth net revenues by reportable segment:


	Three Months Ended March 31,
	2019		2018
Vacuum & Analysis	$	234,355	$	348,344
Light & Motion		193,988		205,931
Equipment & Solutions		35,218		—

	$	463,561	$	554,275

The following table sets forth a reconciliation of segment gross profit to consolidated net income:


	Three Months Ended March 31,
	2019		2018
Gross profit by reportable segment:
Vacuum & Analysis	$	98,139	$	158,500
Light & Motion		92,741		104,355
Equipment & Solutions		7,238		—

Total gross profit by reportable segment		198,118		262,855
Operating expenses:
Research and development		38,933		34,857
Selling, general and administrative		82,455		82,949
Fees and expenses related to incremental term loan		5,847		—
Acquisition and integration costs		30,167		—
Restructuring		223		1,220
Customer contract obligation		1,700		—
Environmental costs		—		1,000
Amortization of intangible assets		15,727		11,190

Income from operations		23,066		131,639
Interest and other expense, net		7,730		4,897

Income before income taxes		15,336		126,742
Provision for income taxes		2,881		21,621

Net income	$	12,455	$	105,121

The following table sets forth capital expenditures by reportable segment for the three months ended March 31, 2019 and 2018:


	Vacuum & Analysis		Light & Motion		Equipment & Solutions		Total
Three Months Ended March 31, 2019:
Capital expenditures	$	7,488	$	5,154	$	1,887	$	14,529

Three Months Ended March 31, 2018:
Capital expenditures	$	6,197	$	3,193	$	—	$	9,390

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The following ~~are net revenues by reportable segment:~~

   Three Months Ended March 31,
   2018    2017
Vacuum & Analysis
   $ 348,344    $ 277,984
Light & Motion
   205,931    159,169




   $ 554,275    $ 437,153

~~The following is a reconciliation of segment gross profit to consolidated net income:~~

   Three Months Ended March 31,
   2018    2017
Gross profit by reportable segment:

Vacuum & Analysis
   $ 158,500    $ 128,924
Light & Motion
   104,355    76,623




Total gross profit by reportable segment
   262,855    205,547
Operating expenses:

Research and development
   34,857    33,282
Selling, general and administrative
   82,949    74,220
Acquisition and integration costs
   —      1,442
Restructuring
   1,220    522
Environmental costs
   1,000    —
Amortization of intangible assets
   11,190    12,501




Income from operations
   131,639    83,580
Interest and other expense, net
   (4,897 )    (6,295 )




Income before income taxes
   126,742    77,285
Provision for income taxes
   21,621    12,225




Net income
   $ 105,121    $ 65,060

~~The following are capital expenditures~~table sets forth depreciation and amortization by reportable segment for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

   Vacuum & Analysis    Light & Motion    Total
Three Months Ended March 31, 2018:

Capital expenditures
   $ 6,197    $ 3,193    $ 9,390






Three Months Ended March 31, 2017:

Capital expenditures
   $ 2,374    $ 1,725    $ 4,099

~~The following are depreciation and amortization of intangible assets by reportable segment for the three months ended March 31, 2018 and 2017:~~


	Vacuum & Analysis		Light & Motion		Total		Vacuum & Analysis		Light & Motion		Equipment & Solutions		Total
Three Months Ended March 31, 2018:
Three Months Ended March 31, 2019:
Depreciation and amortization	$	5,129	$	15,363	$	20,492	$	4,045	$	14,140	$	7,026	$	25,211

Three Months Ended March 31, 2017:
Three Months Ended March 31, 2018
Depreciation and amortization	$	5,122	$	16,711	$	21,833	$	5,129	$	15,363	$	—	$	20,492

Total income tax expense is not presented by reportable segment because the necessary information is not available or used by the CODM.

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

The following ~~are~~table sets forth segment assets by reportable segment:


March 31, 2018:	Vacuum & Analysis		Light & Motion		Corporate, Eliminations & Other			Total
March 31, 2019:										Vacuum & Analysis		Light & Motion		Equipment & Solutions		Corporate, Eliminations & Other			Total
Segment assets:
Accounts receivable	$	225,822	$	131,677	$	(15,781	)	$	341,718	$	160,040	$	139,592	$	51,088	$	(14,730	)	$	335,990
Inventory, net		216,237		149,472		—			365,709		225,431		164,603		85,690		(91	)		475,633

Total segment assets	$	442,059	$	281,149	$	(15,781	)	$	707,427	$	385,471	$	304,195	$	136,778	$	(14,821	)	$	811,623


December 31, 2017:	Vacuum & Analysis		Light & Motion		Corporate, Eliminations & Other			Total
December 31, 2018:										Vacuum & Analysis		Light & Motion		Equipment & Solutions		Corporate, Eliminations & Other			Total
Segment assets:
Accounts receivable	$	201,318	$	119,934	$	(20,944	)	$	300,308	$	171,604	$	140,658	$	—	$	(16,808	)	$	295,454
Inventory, net		197,831		141,250		—			339,081		222,965		161,658		—		66			384,689

Total segment assets	$	399,149	$	261,184	$	(20,944	)	$	639,389	$	394,569	$	302,316	$	—	$	(16,742	)	$	680,143

AThe following is a reconciliation of segment assets to consolidated total ~~assets is as follows:~~assets:


	March 31, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Total segment assets	$	707,427	$	639,389	$	811,623	$	680,143
Cash and cash equivalents, restricted cash and investments		552,343		553,976
Cash and cash equivalents and investments						472,692		728,461
Other current assets		59,093		53,543		86,387		65,790
Property, plant and equipment, net		172,802		171,782		251,424		194,367
Right-of-use asset						65,628		—
Goodwill and intangible assets, net		949,839		957,445		1,676,422		906,803
Other assets		39,952		37,883		48,562		38,682

Consolidated total assets	$	2,481,456	$	2,414,018	$	3,412,738	$	2,614,246

Geographic

Information about the Company’s operations in different geographic regions is presented in the tables below. Net revenues to unaffiliated customers are based on the location in which the sale originated. Transfers between geographic areas are at ~~negotiated~~tax transfer prices and have been eliminated from consolidated net revenues.


	Three Months Ended March 31,				Three Months Ended March 31,
	2018		2017		2019		2018
Net revenues:
United States	$	276,720	$	218,050	$	224,347	$	276,720
Korea		54,011		44,878		35,802		54,011
Japan		58,274		37,792		42,102		58,274
Asia (excluding Korea and Japan)		101,384		88,243		101,327		101,384
Europe		63,886		48,190		59,983		63,886

	$	554,275	$	437,153	$	463,561	$	554,275

   March 31, 2018    December 31, 2017
Long-lived assets:⁽¹⁾

United States
   $ 127,637    $ 124,689
Europe
   28,787    28,820
Asia
   49,566    49,645




   $ 205,990    $ 203,154

⁽¹⁾

~~Long-lived assets include property, plant and equipment, net and certain other long-term assets, excluding long-term tax related accounts.~~

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)


	March 31, 2019		December 31, 2018
Long-lived assets:⁽¹⁾
United States	$	198,747	$	146,687
Europe		29,983		26,794
Asia		57,523		50,572

	$	286,253	$	224,053

⁽¹⁾	Long-lived assets include property, plant and equipment, net and certain other long-term assets, excluding long-term tax related accounts.

Goodwill associated with each of the Company’s reportable segments is as follows:


	March 31, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Reportable segment:
Vacuum & Analysis	$	197,689	$	197,617	$	196,937	$	197,126
Light & Motion		395,805		393,430		388,896		389,870
Equipment & Solutions						471,498		—

Total goodwill	$	593,494	$	591,047	$	1,057,331	$	586,996

Worldwide Product Information

~~Because the reportable segment information above does not reflect worldwide sales of the Company’s products, the~~The Company groups its ~~products~~product offerings into ~~six~~three groups ~~of similar products~~ based upon the similarity of product ~~function. The following table sets forth worldwide net revenue for each group of products:~~function as follows:

   Three Months Ended March 31,
   2018    2017
Analytical and Control Solutions Products
   $ 33,712    $ 31,820
Power, Plasma and Reactive Gas Solutions Products
   167,052    122,800
Vacuum Solutions Products
   147,580    123,364
Lasers Products
   74,797    44,944
Optics Products
   54,379    46,505
Photonics Products
   76,755    67,720




   $ 554,275    $ 437,153


	Three Months Ended March 31,
	2019		2018
Advanced Manufacturing Components	$	371,345	$	496,677
Global Service		66,198		57,598
Advanced Manufacturing Systems		26,018		—

	$	463,561	$	554,275

~~Sales~~Advanced manufacturing components are comprised of ~~Analytical and Control Solutions Products; Power, Plasma and Reactive Gas Solutions Products; and Vacuum Solutions Products are included in~~product revenues from the Company’s Vacuum & Analysis ~~segment. Sales of Laser Products; Optics Products;~~ and ~~Photonics Products are included in the~~ Light & Motion ~~segment.~~

~~Major Customers~~

~~The Company had two customers with net revenues greater than 10%~~segments. Global service is comprised of total ~~net~~service revenues infor all three of the ~~periods shown below:~~Company’s reportable segments. Advanced manufacturing systems is comprised of product revenues for the Company’s Equipment & Solutions segment.

   Three Months Ended March 31,
   2018 2017
LAM Research Corporation.
   12.6 % 12.6 %
Applied Materials, Inc.
   12.2 % 13.0 %

18)	Restructuring

~~During~~The Company recorded restructuring charges of $223 during the three months ended March 31, ~~2018 and 2017,~~2019, primarily related to severance costs related to the consolidation of certain functions in Asia. The Company recorded restructuring charges of $1,220 ~~and $522, respectively. The restructuring charges for~~during the three months ended March 31, 2018 primarily related to severance costs related to streamlining and consolidating certain administrative functions. ~~The restructuring charges for the three months ended March 31, 2017 relate to the restructuring of one of the Company’s international facilities and the consolidation of certain sales offices.~~

Restructuring activities were as follows:


	Three Months Ended March 31,						Three Months Ended March 31,
	2018			2017			2019			2018
Beginning of period	$	3,244		$	540		$	2,632		$	3,244
Charged to expense		1,220			522			223			1,220
Payments and adjustments		(1,806	)		(347	)		(252	)		(1,806	)

End of period	$	2,658		$	715		$	2,603		$	2,658

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

19)	Commitments and Contingencies

OnNewport Litigation

In March 9, 2016, atwo putative class ~~action~~actions lawsuit captionedDixon Chung v. Newport Corp., et al., Case No.A-16-733154-C, ~~was~~ and Hubert C. Pincon v. Newport Corp., et al., Case No.A-16-734039-B, were filed in the District Court, Clark County, Nevada on behalf of a putative class of stockholders of Newport for claims related to the

~~MKS INSTRUMENTS, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(in thousands, except share and per share data)~~

merger agreement (“Newport Merger ~~Agreement~~Agreement”) between the Company, Newport, and a wholly-owned subsidiary of the Company (“Merger ~~Sub. On March 25, 2016, a second putative class action complaint captioned~~~~Hubert C. Pincon v. Newport Corp., et al.~~~~, Case No. A-16-734039-B, was filed in the District Court, Clark County, Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Merger Agreement.~~Sub”). The lawsuits named as defendants the Company, Newport, Merger Sub, and certain then current and former members of Newport’s board of directors. Both complaints alleged that ~~the~~Newport directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices and by omitting material information from the proxy statement. The complaints also alleged that the Company, Newport, and Merger Sub aided and abetted the directors’ alleged breaches of their fiduciary duties. The complaints sought injunctive relief, including to enjoin or rescind the Newport Merger Agreement, and an award of attorneys’ and other fees and costs, among other relief. On April 14, 2016, the Court ~~granted plaintiffs’ motion to consolidate~~consolidated the ~~Pincon and Chung~~ actions.

On October 19, 2016, plaintiffs in the consolidated action filed an amended complaint captionedIn re Newport Corporation Shareholder Litigation,, Case No.A-16-733154-B, in the District Court, Clark County, Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Newport Merger Agreement. The amended complaint ~~named as defendants the Company, Newport, and the then-current members of~~contained substantially similar allegations related to Newport’s former board of directors. It alleged that the named directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices, and by omitting material information from the proxy statement. The complaint also alleged that the Company and Newport aided and abetted the named directors’ alleged breaches of their fiduciary ~~duties.~~duties to Newport’s stockholders. The amended complaint sought monetary damages, includingpre- and post-judgment interest. ~~On December 9, 2016, defendants filed motions to dismiss the amended complaint, which plaintiffs opposed.~~ On June 22, 2017, the Court granted Defendants’ motion to dismiss and dismissed the amended complaint against all defendants but granted plaintiffs leave to amend.

On July 27, 2017, plaintiffs filed a second amended complaint ~~which names as defendants certain~~containing substantially similar allegations but naming only Newport’s former directors ~~of Newport.~~as defendants. On August 8, 2017, the Court dismissed the Company and Newport from the action pursuant to stipulations among the parties. The second amended complaint alleges that the directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, and by omitting material information from the proxy statement.action. The second amended complaint seeks monetary damages, includingpre- and post-judgment interest. ~~On September 1, 2017 the Newport directors filed~~The Court granted a motion for class certification on September 27, 2018, appointing Mr. Pincon and Locals 302 and 612 of the International Union of Operating Engineers - Employers Construction Industry Retirement Trust as class representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily dismissed from the litigation. Discovery is ongoing in this action.

ESI Litigation

On November 29, 2018, a complaint captioned Brian Morris et. al. v. Electro Scientific Industries, Inc. et al. was filed in the U.S. District Court for the District of Oregon by alleged former stockholders of ESI in connection with the ESI Merger. The complaint named the Company’s subsidiary, ESI, and the former members of ESI’s board of directors as defendants. Five additional complaints were subsequently filed, two in the U.S. District Court for the District of Oregon and three in the Multnomah County Circuit Court in the State of Oregon. The cases filed in the U.S. District Court were dated December 6, 2018 and December 12, 2018 and captioned Melvyn Klein et. al. v. Electro Scientific Industries, Inc. et al. and Donald Mager et. al. v. Electro Scientific Industries, Inc. et al., respectively. The complaints filed in Multnomah County Circuit Court were dated December 5, 2018, December 5, 2018 and December 13, 2018 and captioned Michael Kent et. al v. Electro Scientific Industries, Inc. et al., Christopher Stanley et. al v. Electro Scientific Industries, Inc. et al. and Eduardo Colmenares et. al. v. Electro Scientific Industries, Inc., MKS Instruments, Inc., et al., respectively (collectively with Brian Morris et. al. v. Electro Scientific Industries, Inc. et. al., the “Lawsuits”).

The Lawsuits are purported class actions brought on behalf of former ESI stockholders, asserting various claims against the former members of the ESI board of directors, ESI, the Company and the Company’s merger subsidiary, including breach of fiduciary duty and aiding and abetting the breach of fiduciary duty. The Lawsuits allege that the consideration paid to ~~dismiss~~ the ~~second amended complaint,~~ESI shareholders did not appropriately value ESI, and that merger related disclosures failed to disclose certain material information regarding the merger. The Lawsuits purported to seek unspecified damages.

On February 26, 2019, the parties entered into a settlement agreement, pursuant to which plaintiffs ~~opposed. The Court held a hearing on~~dismissed their individual claims with prejudice and class claims without prejudice in return for ESI’s previous supplemental merger related disclosures in connection with the ~~motion~~transaction. ESI provided supplemental merger related disclosures to ~~dismiss on December 7, 2017. On January 5, 2018,~~eliminate the ~~Court entered an order denying the motion~~burden and expense of litigation and to dismiss. The Newport directors answered the second amended complaint, denying the material allegations of the complaint and asserting defenses, on February 20, 2018. On April 13, 2018, the Company received a third-party subpoena~~duces tecum~~ ~~requesting documents and a deposition on various topics in the state of Nevada. The Company served plaintiffs with objections and responses~~avoid any possible disruption to the ~~subpoena on April 27, 2018.~~merger that could result from further litigation.

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The Company is subject to various legal proceedings and claims, which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on ~~the Company’s~~our results of operations, financial condition or cash flows.

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

This Quarterly Report on Form10-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 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 Form10-K for the year ended December 31, ~~2017~~2018 in the section entitled “Risk Factors” as referenced in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form10-Q.

Overview

We are a global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and ~~productivity.~~productivity for our customers. Our products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, ~~RF & DC~~ power, reactive gas generation, vacuum technology, lasers, photonics, sub-micron positioning, vibration control, optics and ~~optics.~~laser-based manufacturing solutions. We also provide services relating to the maintenance and repair of our products, installation services and training. Our primary served markets include semiconductor, industrial technologies, life and health sciences, research and defense.

~~Our~~Acquisition of Electro Scientific Industries, Inc.

On February 1, 2019, we completed our acquisition of Electro Scientific Industries, Inc. (“ESI”) pursuant to an Agreement and Plan of Merger, dated as of October 29, 2018 (the “ESI Merger”). At the effective time of the ESI Merger and pursuant to the terms and conditions of the merger agreement, each share of ESI’s common stock that was issued and outstanding immediately prior to the effective time of the ESI Merger was converted into the right to receive $30.00 in cash, without interest and subject to deduction of any required withholding tax. We paid the former ESI stockholders aggregate consideration of approximately $1.033 billion, excluding related transaction fees and expenses, andnon-cash consideration related to the exchange of share-based awards of approximately $31 million for a total purchase consideration of approximately $1.063 billion. We funded the payment of the aggregate consideration with a combination of our available cash on hand and the proceeds from our senior secured term loan facility as described below.

Segments and Markets

Effective February 1, 2019, in conjunction with our acquisition of ESI, we created a third reportable segment known as the Equipment & Solutions segment in addition to our existing two reportable ~~segments are~~segments: the Vacuum & Analysis segment and the Light & Motion segment. ESI provides laser-based manufacturing solutions for the micro-machining industry that enable customers to optimize production. ESI’s primary served markets include flexible and rigid PCB processing/fabrication, semiconductor wafer processing and passive component manufacturing and testing. ESI solutions incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.

The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, RF & DC power, reactive gas generation and vacuum technology.

The Light & Motion segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in lasers, photonics,sub-micron positioning, vibration control, and optics.

~~Our primary served markets are manufacturers of capital equipment for semiconductor manufacturing, industrial technologies, life and health sciences, as well as research and defense.~~ We have a diverse base of customers. Approximately ~~57%~~52% and 43% of our net revenues for ~~both~~ the three months ended March 31, 2019 and 2018, ~~and 2017,~~respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers. Approximately 43% of our net revenues for both three months ended March 31, 2018 and 2017, were from other advanced manufacturing applications. These include, but are not limited to, industrial technologies, life and health sciences, and research and defense.

Approximately 48% and 57% of our net revenues for the three months ended March 31, 2019 and 2018, respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers.

Net revenues from customers in our advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications, increased by $2.5 million, or 1%, for the three months ended March 31, 2019, compared to the same period in the prior year, primarily due to an increase of $28.6 million from our Equipment & Solutions segment as a result of the ESI Merger, which included two months of revenue from customers in our advanced markets for the quarter. This increase was offset by a decrease of $15.1 million and $11.0 million in revenue from customers in our advanced markets in our Vacuum & Analysis and Light & Motion segments, respectively.

Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers ~~increased~~decreased by ~~$65.0~~$93.2 million, or ~~26%~~30%, for the three months ended March 31, ~~2018,~~2019, compared to ~~2017.~~the same period in the prior year. This ~~increase is~~decrease was comprised of a decrease in net semiconductor revenues of $98.8 million and $1.0 million in the Vacuum & Analysis and Light & Motion segments, respectively, offset by an increase of $6.6 million from our Equipment & Solutions segment as a result of the ESI Merger, which included two months of revenue from semiconductor customers for the quarter.

The semiconductor capital equipment industry has been experiencing a moderation in capital spending in the near term and we have seen a similar effect on our ~~Vacuum & Analysis segment of $56.9 million~~semiconductor revenue in the first quarter and ~~in our Light & Motion segment of $8.1 million.~~expect that to continue into the second quarter. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we ~~are uncertain~~cannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry. Our net revenues from customers in other advanced markets, which exclude semiconductor capital equipment and semiconductor device manufacture customers, increased by $52.1 million, or 28%, for the three months ended March 31, 2018, compared to 2017. The increase was primarily attributed to increases in our industrial technologies and life and health sciences markets.

A significant portion of our net revenues ~~are~~is from sales to customers in international markets. For ~~both periods~~the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, international net revenues accounted for approximately 52% and 50% of our total net revenues. A significant portion of our international net revenues ~~were in~~was from Japan, Germany, China, South Korea ~~Germany, Israel~~ and ~~China.~~Israel. We expect that international net revenues will continue to represent a significant percentage of our total net revenues. Long-lived assets located in the United States were ~~$127.6~~$198.7 million and ~~$124.7~~$146.7 million, as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, excluding goodwill and intangibles, and long-termtax-related accounts. Long-lived assets located outside of the United States were ~~$78.4~~$87.5 million and ~~$78.5~~$77.4 million, as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, excluding goodwill and intangibles, and long-termtax-related accounts.

~~Recent Events~~

~~Sale of Data Analytics Solutions business~~

In April 2017, we completed the sale of our Data Analytics Solutions business for total proceeds of $72.5 million, net of cash sold and recorded a pre-tax gain of $74.9 million. This business, which had net revenues in 2016 of $12.7 million and was included in the Vacuum & Analysis segment, was no longer a part of our long-term strategic objectives.

The business did not qualify as a discontinued operation as this sale did not represent a strategic shift in our business, nor did the sale have a major effect on our operations. Therefore, the results of operations for all periods are included in our income from operations. The assets and liabilities of this business have not been reclassified or segregated in the consolidated balance sheet or consolidated statements of cash flows as the amounts were immaterial.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. There have been no material changes in our critical accounting policies since December 31, ~~2017,~~2018, other than the adoption of ~~Accounting Standard Update 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“~~ASC ~~606”)~~842 as outlined below.

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Leases, (“ASU2016-02”), to enhance the transparency and comparability of financial reporting related to leasing arrangements. We adopted ASU2016-02 on January 1, 2019, or the effective date, and used the effective date as our date of initial application.

At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet asright-of-use assets, short-term lease liabilities and long-term lease liabilities. We have elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and their correspondingright-of-use assets are recorded based on the present value of lease payments over the expected remaining fixed lease term. Certain adjustments to theright-of-use asset may be required for items such as incentives received. In calculating the present value of future lease payments, we utilize our incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We have elected to utilize a single blended interest rate based on currencies, geographies and lease terms that comprise the lease portfolio.

Although separation of lease andnon-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease andnon-lease components. We have elected to account for the lease andnon-lease components of each of our operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operatingright-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense.

Many of our leases contain options to renew and extend lease terms, and options to terminate leases early. We do not recognize theright-of-use asset or lease liability for renewal or termination periods unless we are reasonably certain to exercise the option at lease inception.

For further information about our critical accounting policies, including our revenue recognition policy, please see the discussion of critical accounting policies in our Annual Report on Form10-K for the year ended December 31, ~~2017~~2018 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”

We adopted ASC 606 on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for the three months ended March 31, 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605).

We have recorded a net increase to opening retained earnings of $1.8 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to our service business and certain custom products. The impact to revenues for the quarter ended March 31, 2018 was immaterial as a result of applying ASC 606.

The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of our goods or services and will provide financial statement readers with enhanced disclosures. To achieve this core principle, we apply the following five steps:

•

~~Identify the contract with a customer~~

•

~~Identify the performance obligations in the contract~~

•

~~Determine the transaction price~~

•

~~Allocate the transaction price to performance obligations in the contract~~

•

~~Recognize revenue when or as we satisfy a performance obligation~~

Revenue under ASC 606 is recognized when or as obligations under the terms of a contract with our customer have been satisfied and control has transferred to the customer. The majority of our performance obligations, and associated revenue, are transferred to customers at a point in time, generally upon shipment of a product to the customer or receipt of the product by the customer and without significant judgments. Installation services are not significant and are usually completed in a short period of time (normally less than two weeks) and therefore, recorded at a point in time when the installation services are completed, rather than over time as they are not material. Extended warranty, service contracts, and repair services, which are transferred to the customer over time, are recorded as revenue as the services are performed. For repair services, we make an accrual at quarter end based upon historical repair times within our product groups to record revenue based upon the estimated number of days completed to date, which is consistent with ratable recognition. Customized products with no alternative future use to us, and that have an enforceable right to payment for performance completed to date, are also recorded over time. We consider this to be a faithful depiction of the transfer to the customer of revenue over time as the work or service is performed.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Our normal payment terms are 30 to 60 days but vary by the type and location of our customers and the products or services offered. The time between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer. None of our contracts as of March 31, 2018 contain a significant financing component. Contract assets as of January 1 and March 31, 2018 were immaterial and included in other current assets.

~~Contracts with Multiple Performance Obligations~~

We periodically enter into contracts with our customers in which a customer may purchase a combination of goods and or services, such as products with installation services or extended warranty obligations. These contracts include multiple promises that we evaluate to determine if the promises are separate performance obligations. Once we determine the performance obligations, we then determine the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the method we expect to better predict the amount of consideration to which it will be entitled. There are no constraints on the variable consideration recorded. We then allocate the transaction price to each performance obligation in the contract based on a relative stand-alone selling price charged separately to customers or using an expected cost-plus-margin method. The corresponding revenues are recognized when or as the related performance obligations are satisfied, which are noted above. The impact of variable consideration was immaterial during the three months ended March 31, 2018.

~~Deferred Revenues~~

Our standard assurance warranty period is normally 12 to 24 months. We sell separately-priced service contracts and extended warranty contracts related to certain of our products, especially our laser products. The separately priced contracts generally range from 12 to 60 months. We normally receive payment at the inception of the contract and recognize revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the obligations under the contract. We have elected to use the practical expedient related to disclosing the remaining performance obligations as of March 31, 2018, as the majority have a duration of less than one year.

~~Costs to Obtain and Fulfill a Contract~~

Under ASC 606, we expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administration expenses. We have elected to recognize the costs for freight and shipping when control over products has transferred to the customer as an expense in cost of sales.

We monitor and track the amount of product returns and reduce revenue at the time of shipment for the estimated amount of future returns, based on historical experience. We make estimates evaluating our allowance for doubtful accounts. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified.

Results of Operations

The following table sets forth for the periods indicated the percentage of total net revenues of certain line items included in our consolidated statements of operations and comprehensive income data.


	Three Months Ended March 31,						Three Months Ended March 31,
	2018			2017			2019			2018
Net revenues:
Product		89.6	%		88.7	%		85.7	%		89.6	%
Services		10.4			11.3			14.3			10.4

Total net revenues		100.0			100.0			100.0			100.0
Cost of revenues:
Cost of product revenues		47.2			47.1			49.6			47.2
Cost of service revenues		5.4			5.9			7.7			5.4

Total cost of revenues (exclusive of amortization shown separately below)		52.6			53.0			57.3			52.6

Gross profit		47.4			47.0			42.7			47.4
Research and development		6.3			7.6			8.4			6.3
Selling, general and administrative		15.0			17.0			17.8			15.0
Fees and expenses related to incremental term loan								1.2			—
Acquisition and integration costs		—			0.3			6.5			—
Restructuring								—			0.2
Customer contract obligation								0.4			—
Environmental costs		0.2			—			—			0.2
Restructuring		0.2			0.1
Amortization of intangible assets		2.0			2.9			3.4			2.0

Income from operations		23.7			19.1			5.0			23.7
Interest income		0.2			0.1			0.4			0.2
Interest expense		1.0			2.0			2.0			1.0
Other (expense) income, net		—			0.5
Other expense, net								0.1			—

Income from operations before income taxes		22.9			17.7			3.3			22.9
Provision for income taxes		3.9			2.8			0.6			3.9

Net income		19.0	%		14.9	%		2.7	%		19.0	%

Net Revenues


	Three Months Ended March 31,				Three Months Ended March 31,
(dollars in millions)	2018		2017		2019		2018
Product	$	496.7	$	387.9	$	397.4	$	496.7
Service		57.6		49.2		66.2		57.6

Total net revenues	$	554.3	$	437.1	$	463.6	$	554.3

Product revenues ~~increased $108.8~~decreased $99.3 million during the three months ended March 31, ~~2018,~~2019, compared to the same period in the prior ~~year.~~year, due to a decrease in net product revenues from our semiconductor customers of $92.5 million and a decrease in net product revenues from customers in our advanced markets of $6.8 million. The ~~increase was attributed to an increase of $56.2 million~~decrease in product revenues from semiconductor customers ~~and~~for the MKS business, excluding the impact of the ESI Merger (the “legacy MKS business”) was $99.1 million, offset by an increase in product revenue from our semiconductor customers of $6.6 million from the Equipment & Solutions segment as a result of the ESI Merger, which included two months of product revenue for the quarter. The decrease in product revenues from customers in ~~our other~~advanced markets for the legacy MKS business was $26.2 million, offset by an increase in product revenue from customers in advanced markets of ~~$52.6~~$19.4 million ~~primarily due to increases in our industrial technologies market.~~from the Equipment & Solutions segment as a result of the ESI Merger, which included two months of product revenue for the quarter.

Service revenues consisted mainly of fees for services related to the maintenance and repair of our products, sales of spare parts, and installation and training. In 2018, we started to record the sales of spare parts in our service revenue and related cost of sales line items. Therefore, for the three months ended March 31, 2017, we re-classified $5.0 million of product revenue for spare parts from product to service revenue. Service revenues increased ~~$8.4~~$8.6 million during the three months ended March 31, ~~2018,~~2019 compared to the same period in the prior year. ~~The~~This increase was primarily attributed to an increase ~~of $8.8 million in service revenues from semiconductor customers, partially offset by a net decrease of $0.4 million~~ in service revenues from customers in ~~other~~our advanced ~~markets.~~markets of $9.2 million from the Equipment & Solutions segment as a result of the ESI Merger, which included two months of service revenue for the quarter.

Total international net revenues, including product and service, ~~was~~were $239.2 million and $277.6 million for the three months ended March 31, ~~2018,~~2019, compared to ~~$219.1~~the same period in the prior year. This decrease of $38.4 million for the three months ended March 31, ~~2017. The increase of $58.5 million in total international net revenues for the three months ended March 31, 2018, compared to the same period in the prior year,~~2019 was primarily due to ~~increases~~decreases in net revenues in ~~Japan, Germany, South Korea and China.~~North America.

The following table sets forth our net revenues by reportable segment:


	Three Months Ended March 31,				Three Months Ended March 31,
(dollars in millions)	2018		2017
(dollars in millions)					2019		2018
Net revenues:
Vacuum & Analysis	$	348.4	$	278.0	$	234.4	$	348.4
Light & Motion		205.9		159.1		194.0		205.9
Equipment & Solutions						35.2		—

Total net revenues	$	554.3	$	437.1	$	463.6	$	554.3

Net revenues from our Vacuum & Analysis segment ~~increased $70.4~~decreased $114.0 million for the three months ended March 31, ~~2018,~~2019, compared to the same period in the prior ~~year. The increase was attributed~~year, due to ~~an increase~~decreases in net revenues from semiconductor customers of ~~$56.9~~$98.8 million and ~~an increase~~a decrease in ~~product~~net revenues from customers in our ~~other~~ advanced markets of ~~$13.5~~$15.2 million, primarily ~~due to an increase~~from customers in our industrial technologies market.

Net revenues from our Light & Motion segment ~~increased $46.8~~decreased $11.9 million for the three months ended March 31, ~~2018,~~2019, compared to the same period in the prior year. The ~~increase~~decrease was primarily attributed to ~~an increase~~a decrease in net revenues from customers in our ~~other~~ advanced markets of ~~$38.7~~$11.0 million, primarily ~~due to increases~~from customers in our ~~industrial technologies and~~ life and health sciences ~~markets.~~market. The remainder of the ~~increase is~~decrease was attributed to a decrease in net revenues from semiconductor customers of ~~$8.1~~$0.9 million.

Gross Profit


	Three Months Ended March 31,									Three Months Ended March 31,
	2018			2017			% Points Change			2019			2018			% Points Change
Gross profit as a percentage of net revenues:
Product		47.4	%		46.9	%		0.5	%		42.2	%		47.4	%		(5.2	)%
Service		47.7			47.6			0.1			46.0			47.7			(1.7	)

Total gross profit		47.4	%		47.0	%		0.4	%		42.7	%		47.4	%		(4.7	)%

Gross profit as a percentage of net product revenues ~~increased~~decreased by ~~0.5~~5.2 percentage points for the three months ended March 31, ~~2018,~~2019, compared to the same period in the prior ~~year. The increase was~~year, primarily ~~attributed higher~~due lower revenue ~~volumes.~~volumes and lower factory utilization.

Gross profit as a percentage of net service revenues ~~remained relatively flat for the three months ended March 31, 2018, compared to the same period in the prior year.~~

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

   Three Months Ended
March 31,
   2018 2017 % Points
Change
Gross profit:

Vacuum & Analysis
   45.5 % 46.4 % (0.9 )%
Light & Motion
   50.7 48.1 2.6


Total gross profit
   47.4 % 47.0 % 0.4 %

~~Gross profit for our Vacuum & Analysis segment~~ decreased by ~~0.9~~1.7 percentage points for the three months ended March 31, ~~2018,~~2019, compared to the same period in the prior year, primarily due to unfavorable product mix ~~and an unfavorable change in material costs, primarily attributed to a non-recurring credit adjustment to material costs during the three months ended March 31, 2017. These decreases were~~ partially offset by ~~higher revenue volumes.~~favorable absorption.

The following table sets forth gross profit as a percentage of net revenues by reportable segment:


	Three Months Ended March 31,
	2019			2018			% Points Change
Gross profit as a percentage of net revenues:
Vacuum & Analysis		41.7	%		45.5	%		(3.8	)%
Light & Motion		47.8			50.7			(2.9	)
Equipment & Solutions		20.6			—			100.0

Total gross profit		42.7	%		47.4	%		(4.7	)%

Gross profit for our ~~Light~~Vacuum & ~~Motion~~Analysis segment ~~increased~~decreased by ~~2.6~~3.8 percentage points for the three months ended March 31, ~~2018,~~2019, compared to the same period in the prior year, primarily due to ~~higher~~lower revenue volumes.

Gross profit for our Light & Motion segment decreased by 2.9 percentage points for the three months ended March 31, 2019, compared to the same period in the prior year, primarily due to lower revenue volumes, unfavorable mix and ~~favorable product mix, partially offset by unfavorable changes in foreign exchange.~~lower factory utilization.

Gross profit for our Equipment & Solutions segment of 20.6% for the three months ended March 31, 2019, is lower than normal partly due to the amortization of the inventorystep-up adjustment to fair value from purchase accounting of $5.1 million. Excluding this adjustment, the gross margin would have been 35.1%.

Research and Development

   Three Months Ended
March 31,
(dollars in millions)
   2018    2017
Research and development expenses
   $ 34.9    $ 33.3


	Three Months Ended March 31,
(dollars in millions)	2019		2018
Research and development expenses	$	38.9	$	34.9

Research and development expenses increased ~~$1.6~~$4.0 million for the three months ended March 31, ~~2018,~~2019, compared to the same period in the prior ~~year. The increase was~~year, primarily due to the ESI Merger, which included $2.4 million of compensation related ~~to an increase~~expenses, $0.7 million of ~~$1.3~~project materials, $0.5 million ~~in compensation costs and related benefits~~of depreciation expense and $0.4 million ~~in project materials.~~of occupancy costs.

Our research and development efforts are 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 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.

We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets. We expect to continue to make significant investment in research and development activities. We are subject to risks from products not being developed in a timely manner, as well as from rapidly changing customer requirements and competitive threats from other companies and technologies. Our success primarily depends on our products being designed into new generations of equipment for the semiconductor 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


	Three Months Ended March 31,				Three Months Ended March 31,
(dollars in millions)	2018		2017		2019		2018
Selling, general and administrative expenses	$	82.9	$	74.2	$	82.5	$	82.9

Selling, general and administrative expenses ~~increased~~decreased by ~~$8.7~~$0.4 million for the three months ended March 31, ~~2018,~~2019, compared to the same period in the prior ~~year,~~year. This decrease was primarily ~~due~~attributed to a decrease of $7.4 million related to the legacy MKS business, which included a decrease of $5.9 million of compensation related expenses and $1.6 million of commissions expense. This decrease was offset by an increase of ~~$7.3~~$7.0 million related to the ESI Merger, which included $4.1 million in compensation related expenses, $0.9 million of ~~compensation costs,~~depreciation expense, $0.5 million of ~~which $3.9 million is incentive compensation~~consulting and ~~$3.4 million is salaries~~professional fees and ~~fringes, and related benefits and $1.2~~$0.4 million of commissions expense.

Fees and Expenses Related to Incremental Term Loan Facility


	Three Months Ended March 31,
(dollars in millions)	2019		2018
Fees and expenses related to incremental term loan	$	5.8	$	—

We recorded fees and expenses related to Amendment No. 5 to our senior secured term loan facility, as described below, which related to the ESI Merger, during the three months ended March 31, 2019.

Acquisition and Integration Costs


	Three Months Ended March 31,				Three Months Ended March 31,
(dollars in millions)	2018		2017		2019		2018
Acquisition and integration costs	$	—	$	1.4	$	30.2	$	—

We ~~incurred $1.4 million of~~recorded acquisition and integration costs ~~for~~related to the ESI Merger, which closed on February 1, 2019, during the three months ended March 31, ~~2017 related to Newport Merger.~~2019. These costs consisted primarily of compensation costs for certain executives from ESI who had change in control provisions in their respective ESI employment agreements that were ~~primarily related to legal~~accounted for as dual-trigger arrangements and other stock vesting accelerations, as well as consulting and professional ~~fees.~~fees associated with the ESI Merger.

Restructuring


	Three Months Ended March 31,				Three Months Ended March 31,
(dollars in millions)	2018		2017		2019		2018
Restructuring	$	1.2	$	0.5	$	0.2	$	1.2

~~Restructuring charges for~~We recorded restructuring costs during the three months ended March 31, 2019, which were primarily comprised of severance costs related to the consolidation of certain functions in Asia. We recorded restructuring costs during the three months ended March 31, 2018, primarily ~~related to~~comprised of severance costs related to streamlining and consolidating certain administrative functions. ~~The restructuring charges for~~

Customer Contract Obligation


	Three Months Ended March 31,
(dollars in millions)	2019		2018
Customer contract obligation	$	1.7	$	—

We recorded a charge during the three months ended March 31, ~~2017 relate~~2019 related to ~~the restructuring of one~~a contractual obligation we acquired as part of our ~~international facilities and the consolidation~~acquisition of ~~certain sales offices.~~Newport Corporation (the “Newport Merger”).

Environmental Costs

   Three Months Ended
March 31,
(dollars in millions)
   2018    2017
Environmental costs
   $ 1.0    $ —


	Three Months Ended March 31,
(dollars in millions)	2019		2018
Environmental costs	$	—	$	1.0

We recorded $1.0 million of environmental costs ~~for~~during the ~~three months ended March 31,~~first quarter of 2018 related to a U.S. Environmental Protection Agency-designated Superfund site acquired as part of ~~our acquisition of Newport.~~the Newport Merger.

Amortization of Intangible Assets


	Three Months Ended March 31,				Three Months Ended March 31,
(dollars in millions)	2018		2017		2019		2018
Amortization of intangible assets	$	11.2	$	12.5	$	15.7	$	11.2

Amortization of intangible assets ~~decreased~~increased by ~~$1.3~~$4.5 million during the three months ended March 31, ~~2018 compared~~2019 primarily due to the ~~same period in the prior year, due to certain~~amortization of intangible assets ~~becoming fully amortized.~~acquired as part of the ESI Merger.

Interest ~~(Expense),~~Expense, Net


	Three Months Ended March 31,				Three Months Ended March 31,
(dollars in millions)	2018		2017		2019		2018
Interest expense, net	$	4.3	$	8.3	$	7.4	$	4.3

Interest expense, net, ~~decreased~~increased by ~~$4.0~~$3.1 million for the three months ended March 31, ~~2018, compared~~2019, primarily due to ~~the same period in the prior year. The decrease for the three~~two months ~~ended March 31, 2018 was due primarily~~of interest expense related to ~~principal prepayments of $225.0 million since the first quarter of 2017 and repricings of~~Amendment No. 5 to our ~~Term Loan Facility (as defined in Note 10 in the financial statements).~~senior secured term loan facility, as described below.

Other ~~(expense) income, net~~Expense, Net


	Three Months Ended March 31,					Three Months Ended March 31,
(dollars in millions)	2018			2017		2019		2018
Other (expense) income, net	$	(0.1	)	$	2.0
Other expense, net						$	0.3	$	0.6

The changes in other ~~(expense) income,~~expense, net, for the three months ended March 31, ~~2018 and 2017, respectively,~~2019, primarily related to changes in foreign exchange rates.

Provision for Income Taxes


	Three Months Ended March 31,				Three Months Ended March 31,
(dollars in millions)	2018		2017		2019		2018
Provision for income taxes	$	21.6	$	12.2	$	2.9	$	21.6

Our effective tax rates for the periods ended March 31, 2019 and 2018 were 18.8% and ~~2017 were~~ 17.1% ~~and 15.8%~~, respectively. The effective tax rate in 2018 and related income tax expense, was impacted by the Tax Cuts and Jobs Act (the “Act”) which was enacted into law on December 22, 2017. We account for income tax effects resulting from changes in tax laws in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and that the effects are recorded as a component of provision for income taxes from continuing operations. As a result, we recorded provisional amounts as of December 31, 2017 related to the one-time transition tax and the change in U.S. net deferred tax liabilities resulting from the change in the U.S. statutory rate resulting from the enactment of the Act in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”). The provisional amounts associated with the Act were adjusted in the period ended March 31, 2018 and resulted in a decrease to our effective tax rate. We expect to finalize the provisional amounts when we file our 2017 tax returns in October 2018. The reduction in the corporate tax rate from 35% for 2017 to 21% for 2018, as a result of the Act, also impacted our effective tax rate and tax expense in the period ending March 31, 2018 as compared to March 31, 2017. In addition, the effective tax rate in the period ending March 31, 2018 was lower than the U.S. statutory rate due to foreign earnings taxed at lower rates, windfall benefits of stock compensation, and the new deduction for foreign derived intangible income from the Act offset by the tax effects of the new provisions for global intangible low taxed income from the Act and state income taxes.

~~The~~Our effective tax rate for the three months ended March 31, ~~2017~~2019 and the related income tax expense, was lower than the U.S. statutory tax rate due to the U.S. deduction for foreign derived intangible income, the U.S. credit for research activities and the geographic mix of income earned by the international subsidiaries being taxed at rates lower than the U.S. statutory tax rate, offset by the global intangiblelow-taxed income inclusion, the limitation on the deduction of executive compensation and state income taxes. The geographic mix of income is significantly impacted by acquisition and integration costs, and additional interest expense incurred in the U.S. jurisdiction as a result of the acquisition of ESI.

Our effective tax rate for the three months ended March 31, 2018 was lower than the U.S. statutory tax rate mainly due to ~~the impact of lower tax rates on~~ foreign income being taxed at rates lower than the U.S. statutory tax rate, windfall benefits of stock compensation and the deduction for ~~domestic production activities~~foreign derived intangible income offset by the tax effects from global intangiblelow-taxed income and ~~windfall stock compensation~~state income taxes.

As of March 31, 2019, the total amount of gross unrecognized tax ~~benefit.~~

benefits, which excludes interest and penalties, was approximately $40.7 million. At ~~March~~December 31, 2018, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately ~~$27.9~~$32.7 million. ~~At December 31, 2017, our total amount~~The net increase is primarily attributable the addition of historical gross unrecognized tax benefits ~~which excludes interest and penalties, was approximately $27.3 million. The net increase from December 31, 2017 was primarily attributable to~~for ESI as a result of the ~~addition of reserves for state taxes~~

~~and certain non-U.S. items offset by decreases from settlement of an IRS audit. At~~ESI Merger during the quarter ended March 31, ~~2018,~~2019. As of March 31, 2019, excluding interest and penalties, there were ~~$20.5~~approximately $33.1 million of net unrecognized tax benefits that, if recognized, would impact our annual effective tax rate. We accrue interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As of March 31, ~~2018~~2019 and December 31, ~~2017, we~~2018, the Company had accrued interest on unrecognized tax benefits of approximately $0.5 million and ~~$0.3~~$0.6 million, respectively.

Over the next 12 months it is reasonably possible that we may recognize approximately ~~$1.0~~$1.5 million of previously net unrecognized tax benefits, excluding interest and penalties, related to federal, state and foreign tax positions as a result of the expiration of statutes of limitation. The U.S. statute of limitations remains open for tax years ~~2014~~2015 through present. The statute of limitations for our tax filings in other jurisdictions varies between fiscal years ~~2012~~2013 through the present. We also have certain federal credit carry-forwards and state tax loss and credit carry-forwards that are open to examination for tax years 2000 through the present.

We are subject to examination by U.S. federal, state and foreign tax authorities. The U.S. Internal Revenue Service commenced an examination of ~~our~~the Company’s U.S. federal income tax filings for tax years 2015 and 2016 during the quarter ended September 30, 2017. This audit was effectively settled during the quarter ended March 31, ~~2018.~~2018, and the impact was not material. Also during the quarter ended March 31, 2018, we received notification from the U.S. Internal Revenue Service ~~that a new~~of their intent to audit ~~is scheduled to begin for~~ our U.S. subsidiary, Newport Corporation, for tax year 2015. This audit commenced during the quarter ended June 30, 2018 and there have been no proposed adjustments through March 31, 2019.

On a quarterly basis, we evaluate both positive and negative evidence that affects the realizability of net deferred tax assets and assess the need for a valuation allowance. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income in each jurisdiction of the right type to realize the assets.

Our future effective tax rate depends on various factors, including further interpretations and guidance from U.S. federal and state governments on the impact of the enactment of the Tax Cuts and Jobs Act, the adoption of the proposed regulations issued by the U.S. Internal Revenue Service on the foreign derived intangible income and global intangiblelow-taxed income provisions, as well as the geographic composition of ourpre-tax income, and changes in income tax reserves for unrecognized tax benefits. We monitor these factors and timely adjust our estimates of the effective tax rate accordingly. We expect that the geographic mix ofpre-tax income will continue to have a favorable impact on our effective tax rate, however the geographic mix ofpre-tax income can change based on multiple factors resulting in changes to the effective tax rate in future periods. The effective tax rate in 2018 could be affected by adjustments to the provisional amounts recorded under the guidance of SAB 118 for the one-time transition tax and the revaluation of deferred tax assets and liabilities due to the U.S. statutory rate change in 2017. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax law and regulations. Additionally, the recognition and measurement of certain tax benefits include estimates and judgment by management. Accordingly, we could record additional provisions or benefits for U.S. federal, state, and foreign tax matters in future periods as new information becomes available.

Liquidity and Capital Resources

Cash and cash equivalents ~~restricted cash~~ and short-term marketable investments totaled ~~$541.5~~$462.3 million at March 31, ~~2018,~~2019, compared to ~~$543.3~~$718.2 million at December 31, ~~2017.~~2018. This decrease primarily related to the $406.0 million of cash used to fund the payment of a portion of the purchase price for ESI on February 1, 2019.

Net cash provided by operating activities was $29.1 million for the three months ended March 31, 2019 and resulted from net income of $12.5 million, which includednon-cash charges of $61.6 million, offset by a net increase in working capital of $45.0 million. The net increase in working capital was primarily due to a decrease in accrued compensation of $22.9 million, a decrease in accounts payable of $17.3 million, an increase in inventories of $10.3 million and a decrease in income taxes of $3.7 million, partially offset by a decrease in other current andnon-current assets of $4.8 million and a decrease in accounts receivable of $4.0 million.

Net cash provided by operating activities was $72.7 million for the three months ended March 31, 2018 and resulted from net income of $105.1 million, which includednon-cash charges of $37.9 million, offset by a net increase in working capital of $70.3 million. The net increase in working capital was primarily due to an increase in accounts receivable of $37.3 million and an increase in inventories of $28.2 million, related to an increase in business activities and a decrease in accrued compensation of $32.5 million, asyear-end bonuses were paid. These increases in working capital were offset by an increase in other current andnon-current liabilities of $10.5 million, an increase in accounts payable of $9.3 million and an increase in income taxes of $8.8 million.

Net cash ~~provided by operating~~used in investing activities was ~~$66.1~~$874.1 million for the three months ended March 31, ~~2017,~~2019 and ~~resulted from net income of $65.1 million, which included non-cash charges of $36.9 million, offset by a net increase in working capital of $35.9 million. The net increase in working capital~~ was primarily due to the payment of a ~~decrease in accrued compensation~~portion of ~~$16.8 million, as year-end bonuses were paid, an increase in trade accounts receivable~~the purchase price for the ESI Merger of ~~$15.2~~$988.6 million and ~~an increase in inventories~~purchases of ~~$11.7~~production-related equipment of $14.5 million, ~~related to an increase in business activities and an increase in other current assets of $1.5 million. These increases in working capital were~~ partially offset by ~~an increase in income taxes~~net sales and maturities of ~~$8.1 million and an increase in other current and non-current liabilities~~short-term investments of ~~$1.1~~$129.0 million.

Net cash used in investing activities was $0.6 million for the three months ended March 31, 2018 due to purchases of production-related equipment of $9.4 million, offset by net sales and maturities of short-term investments of $8.8 million.

Net cash provided by ~~investing~~financing activities was ~~$30.5~~$618.6 million for the three months ended March 31, ~~2017,~~2019 and ~~resulted~~was primarily from ~~$34.6~~net proceeds of $638.6 million ~~of net sale and maturities of short-term investments,~~mainly from our 2019 Incremental Term Loan Facility, as described below, used to finance the ESI Merger, partially offset by ~~$4.1~~net payments related to tax payments for employee stock awards of $9.0 million ~~in purchases~~and dividend payments of ~~production-related equipment.~~

$10.8 million. Net cash used in financing activities was $67.1 million for the three months ended March 31, 2018 and resulted from partial repayment of the Term Loan Facility, as described below, of $50.0 million, dividend payments made to common stockholders of $9.8 million and net payments related to tax payments for employee stock awards of $8.9 million, partially offset by a net increase in proceeds from short-term borrowings relating to our

lines of credit of $1.6 million. Net cash used in financing activities was $64.7 million for the three months ended March 31, 2017, and resulted primarily from $51.6 million used for the partial repayment of the Term Loan Facility, $9.4 million of dividend payments made to common stockholders and $2.9 million of net payments related to tax payments for employee stock awards.

On July 25, 2011, our Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of $200 million of our outstanding common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased depends upon a variety of factors, including business conditions, stock market conditions and business development activities, including but not limited to merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any time without prior notice. We have repurchased approximately ~~1,770,000~~2,588,000 shares of common stock for approximately ~~$52.0~~$127 million pursuant to the program since its adoption. During the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, there were no repurchases of common stock.

Holders of our common stock are entitled to receive dividends when and if they are declared by our ~~board~~Board of ~~directors. During~~Directors. In addition, we accrue dividend equivalents on the ~~three months ended March 31, 2018,~~RSUs we ~~paid cash dividends of $9.8 million~~assumed in the ~~aggregate, or~~ESI Merger when dividends are declared by the Company’s Board of Directors. Our Board of Directors declared a cash dividend of $0.20 per share during the first quarter of 2019, which totaled $10.8 million. Our Board of Directors declared a cash dividend of $0.18 per ~~share. During~~share during the ~~three months ended March 31, 2017, we~~first quarter of 2018, which totaled $9.8 million.

On May 8, 2019, our Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid ~~cash dividends~~on June 7, 2019 to shareholders of ~~$9.4 million in the aggregate, or $0.175 per share.~~record as of May 27, 2019. Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our Board of Directors. In addition, under the terms of our senior secured Term Loan Facility and our senior secured asset-based revolving credit facility, we may be restricted from paying dividends under certain circumstances.

~~Sale of Data Analytics Solutions Business~~

~~In April 2017, we completed the sale of our Data Analytics Solutions business for total proceeds of $72.5 million, net of cash sold and recorded a pre-tax gain of $74.9 million.~~

Term Loan Credit Agreement

In connection with the completion of the Newport Merger, we entered into a term loan credit agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto (the “Lenders”), that provided senior secured financing in the original principal amount of $780.0 million (the “2016 Term Loan Facility”), subject to increase at our option and subject to the receipt of lender commitments in accordance with the Credit Agreement (the 2016 Term Loan Facility, together with the 2019 Incremental Term Loan Facility (as defined below), the “Term Loan Facility”). The 2016 Term Loan Facility matures on April 29, 2023. Borrowings under the Term Loan Facility bear interest per annum at one of the following rates selected by the Company: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted inThe Wall Street Journal, (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of 1.75%, plus, in each case, an applicable margin; or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a LIBOR rate floor of 0.75%, plus an applicable margin. We have elected the interest rate as described in clause (b). The Credit Agreement provides that, unless an alternate rate of interest is agreed, all loans will be determined by reference to the Base Rate if the LIBOR rate cannot be ascertained, if regulators impose material restrictions on the authority of a lender to make LIBOR rate loans, ~~and~~or for other reasons. The 2016 Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.

~~In June 2016, we~~We subsequently entered into ~~Amendment No. 1 (the “Repricing Amendment 1”)~~four separate repricing amendments to the ~~Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Repricing Amendment 1~~2016 Term Loan Facility, which decreased the applicable margin for LIBOR borrowings ~~under our~~from 4.0% to 1.75%, with a LIBOR rate floor of 0.75%. As a consequence of the pricing of the 2019 Incremental Term Loan Facility (defined below), the applicable margin for the 2016 Term Loan Facility was increased to ~~2.50% for base rate borrowings and 3.50% for~~2.00% (from 1.75%) with respect to LIBOR borrowings and ~~extended~~1.00% (from 0.75%) with respect to base rate borrowings. The interest rate on the ~~period during which a prepayment premium may be required for a “Repricing Transaction” (as defined in the Credit Agreement) until six months after the effective date~~2016 Term Loan Facility as of the Repricing Amendment 1. In connection with the execution of the Repricing Amendment 1, we paid a prepayment premium of 1.00%, or $7.3 million, as well as certain fees and expenses of the administrative agent and the Lenders, in accordance with the terms of the Credit Agreement. Immediately prior to the effectiveness of the Repricing Amendment 1, we prepaid $50.0 million of principal under the Credit Agreement. In September 2016, we prepaid an additional $60.0 million under the Credit Agreement.March 31, 2019 was 4.5%.

In September 2016, we entered into an interest rate swap agreement, which has a maturity date of September 30, 2020, to fix the rate on $335.0 million of the then-outstanding balance under the ~~Credit Agreement.~~2016 Term Loan Facility. The rate is fixed at 1.198% per annum plus the applicable credit spread, which was ~~2.00%~~2.0% at March 31, ~~2018. At March 31, 2018, the~~2019. The notional amount of the interest rate swap agreement was ~~$305.0 million.~~

In December 2016, we entered into Amendment No. 2 (the “Repricing Amendment 2”) to the Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Repricing Amendment 2 decreased the applicable margin for our term loan under the Credit Agreement to 2.75% for LIBOR borrowings and 1.75% for base rate borrowings and reset the period during which a prepayment premium may be required for a Repricing Transaction until six months after the effective date of the Repricing Amendment 2. In November 2016, prior to the effectiveness of the Repricing Amendment 2, we prepaid an additional $40.0 million of principal under the Credit Agreement. In March 2017, we prepaid an additional $50.0 million of principal under the Credit Agreement.

In July 2017, we entered into Amendment No. 3 (the “Repricing Amendment 3”) to our Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Repricing Amendment 3 decreased the applicable margin for our term loan under the Credit Agreement to 2.25% for LIBOR rate loans when the Total Leverage Ratio (as defined in the Credit Agreement) is at or above 1.25:1 and decreased to 2.00% when the Total Leverage Ratio was below 1.25:1, both with a LIBOR floor of 0.75%. The margin for base rate borrowings decreased to 1.25% when our Total Leverage Ratio was at or above 1.25:1 and will decrease to 1.00% when the Total Leverage Ratio is below 1.25:1. The period in which a prepayment premium may be required for a Repricing Transaction was reset to six months after the effective date of the Repricing Amendment 3.

~~In July 2017, August 2017, November 2017 and March 2018 we voluntarily prepaid $50.0 million, $75.0 million, $50.0~~$290.0 million and ~~$50.0~~had a fair value of $4.5 million ~~respectively, of principal under the Credit Agreement.~~ at March 31, 2019.

As of March 31, ~~2018,~~2019, after total principal prepayments of $425.0 million and regularly scheduled principal payments of $6.5 million, the total outstanding principal balance of the 2016 Term Loan Facility was $348.5 million. ~~The interest rate as~~As a result of ~~March 31, 2018 was 3.648%.~~

~~In April 2018,~~making these prepayments, we ~~entered into Amendment No. 4 (the “Repricing Amendment 4”)~~are no longer required to make any regularly scheduled principal payments on the ~~Credit Agreement by and among~~2016 Term Loan Facility until the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent for the Lenders. The Repricing Amendment 4 decreased the applicable margin for our term loan under the Credit Agreement to 1.75%, with a LIBOR rate floor of 0.75%. The margin for base rate borrowings decreased to 0.75%, with a base rate floor of 1.75%. The period during which a prepayment premium may be required for a Repricing Transaction was reset to six months after the effectivematurity date of the ~~Repricing Amendment 4.~~loan.

We incurred $28.7 million of deferred finance fees, original issue discount and repricing fees related to the term loans under the 2016 Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. A portion of these fees have been accelerated in connection with the various debt prepayments during 2016, 2017 and 2018. As of March 31, ~~2018,~~2019, the remaining balance of the deferred finance fees, original issue discount and repricing fees related to the 2016 Term Loan Facility was ~~$7.2~~$4.0 million.

On February 1, 2019, in connection with the completion of the ESI Merger, we entered into an amendment (“Amendment No. 5”) to the Credit Agreement. Amendment No. 5 provided an additional trancheB-5 term loan commitment in the principal amount of $650.0 million (the “2019 Incremental Term Loan Facility”), all of which was drawn down in connection with the closing of the ESI Merger. Pursuant to Amendment No. 5, we also effectuated certain amendments to the Credit Agreement which make certain of the negative covenants and other provisions less restrictive. The 2019 Incremental Term Loan Facility matures on February 1, 2026 and bears interest at a rate per annum equal to, at our option, a base rate or LIBOR rate (as described above) plus, in each case, an applicable margin equal to 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The 2019 Incremental Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof.

On April 3, 2019, we entered into an interest rate swap agreement, which has a maturity date of March 31, 2023, to fix the rate on $300.0 million of the outstanding balance of the 2019 Incremental Term Loan Facility. The rate is fixed at 2.309% per annum plus the applicable credit spread, which was 2.25% at March 31, 2019.

We incurred $11.4 million of deferred finance fees and original issue discount fees related to the term loans under the 2019 Incremental Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. As of March 31, 2019, the remaining balance of the deferred finance fees and original issue discount related to the 2019 Incremental Term Loan Facility was $11.2 million.

We are required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the 2019 Incremental Term Loan Facility, with the balance due on February 1, 2026. If on or prior to the date that is six months after the closing date of Amendment No. 5, we prepay any loans under the 2019 Incremental Term Loan Facility in connection with a repricing transaction, we must pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid. At March 31, 2019, the total balance outstanding of the 2019 Incremental Term Loan Facility was $650.0 million, and the interest rate was 4.7%.

Under the Credit Agreement, we are required to prepay outstanding term loans under the 2016 Term Loan Facility and the 2019 Incremental Term Loan Facility, subject to certain exceptions, with portions of ~~our~~its annual excess cash flow as well as with the net cash proceeds of certain asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. We are also required to make scheduled quarterly payments each equal to 0.25% of the principal amount of the term loan, less the amount of certain voluntary and mandatory repayments after such date, with the balance due on the seventh anniversary of the closing date. As a result of ~~making total prepayments of $425.0 million through March 31, 2018,~~our Total Leverage Ratio, we ~~are no longer~~were not required to make ~~any scheduled quarterly principal payments until maturity~~a prepayment of excess cash flow for the ~~loan.~~fiscal year ended December 31, 2018.

All obligations under the Term Loan Facility are guaranteed by certain of our domestic subsidiaries, and are ~~secured~~collateralized by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions.

The Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the Lenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions generally permitted to be taken by a secured creditor. At March 31, ~~2018,~~2019, we were in compliance with all covenants under the Credit Agreement.

Senior Secured Asset-Based Revolving Credit Facility

In connection with the completion of the Newport Merger in April 2016, we ~~also~~ entered into an asset-based credit agreement with Deutsche Bank AG New York Branch, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto, ~~(the “ABL Facility”),~~ that ~~provides~~provided senior secured financing of up to $50.0 million, which we never borrowed against. On February 1, 2019, in connection with the completion of the ESI Merger, we terminated the $50.0 million asset-based credit agreement with Deutsche Bank AG New York Branch and entered into an asset-based credit agreement with Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto (the “ABL Credit Agreement”), that provides senior secured revolving credit financing of up to $100.0 million, subject to a borrowing base ~~limitation.~~limitation (the “ABL Facility”). The borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of certain eligible accounts; plus (b) ~~subject~~prior to certain notice and ~~field~~filed examination and appraisal requirements, the lesser of (i) 20% of net book value of eligible inventory in the United States and (ii) 30% of the borrowing base, and after the satisfaction of such requirements, the lesser of (i) the lesser of (A) 65% of the lower of cost or market value of certain eligible inventory and (B) 85% of the net orderly liquidation value of certain eligible inventory and (ii) 30% of the borrowing base; minus (c) reserves established by the administrative ~~agent; provided that until the administrative agent’s receipt of a field examination of accounts receivable the borrowing base shall be equal to 70% of the book value of certain eligible accounts.~~agent. The ABL Facility includes borrowing capacity in the form of letters of credit up to ~~$15.0~~$25.0 million. ~~We have not drawn against the ABL Facility.~~

Borrowings under the ABL Facility bear interest at a rate per annum equal to, at ~~one~~our option, any of the following, ~~rates selected by us:~~plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in The Wall Street Journal, ~~and~~ (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%~~, plus, in each case, an initial applicable margin~~ and (4) a floor of ~~0.75%~~0.00%; and (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, ~~plus an~~with a floor of 0.00%. The initial applicable margin ~~of 1.75%.~~for borrowings under the ABL Facility is 0.50% with respect to base rate borrowings and 1.50% with respect to LIBOR borrowings. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the

applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.

We have incurred $1.2 million of costs in connection with the ABL Facility, which were capitalized and included in other assets in the accompanying consolidated balance sheets and are being amortized to interest expense using the straight-line method over the contractual term of five years of the ABL Facility.

In addition to paying interest on any outstanding principal under the ABL Facility, we are required to pay a commitment fee in respect of the unutilized commitments ~~thereunder. The initial commitment fee is 0.375%~~thereunder equal to 0.25% per annum. The total commitment fee recognized in interest expense for the three months ended March 31, 2018 was $0.1 million. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the commitment fee is subject to downward adjustment based on the amount of average unutilized commitments for the three month period immediately preceding such adjustment date. We must also pay customary letter of credit fees and agency fees.

~~Lines~~We incurred $0.8 million of ~~Credit~~costs in connection with the new ABL Facility, which were capitalized and ~~Short-Term Borrowing Arrangements~~

~~One of our Japanese subsidiaries has lines of credit and short-term borrowing arrangements with two financial institutions which arrangements generally expire~~included in other assets in the accompanying consolidated balance sheet and are ~~renewed at three-month intervals. The lines~~being amortized to interest expense over the contractual term of ~~credit provide for aggregate borrowings as of March 31, 2018, of up to an equivalent of $21.6 million U.S. dollars. One~~five years of the borrowing arrangements has an interest rate based on the Tokyo Interbank Offer Rate at the time of borrowing and the other has an interest rate based on the Japanese Short-Term Prime Lending Rate. Total borrowings outstanding under these arrangements were $0.9 million at March 31, 2018. There were no borrowings outstanding under these arrangements at December 31, 2017.

~~We assumed various revolving lines of credit and~~ABL Facility. As a ~~financing facility with the completion~~result of the ~~Newport Merger. These revolving lines~~prior asset-based facility being terminated, we wrote off $0.2 million of ~~credit~~previously capitalized debt issuance costs.

The ABL Credit Agreement also contains customary representations and ~~financing facility have no expiration date~~warranties, affirmative covenants and ~~provide for aggregate borrowings as~~provisions relating to events of ~~March 31, 2018~~default. If an event of updefault occurs, the lenders under the ABL Facility will be entitled to ~~an equivalent~~take various actions, including the acceleration of ~~$9.9 million U.S. dollars. These lines of credit have~~amounts due under the ABL Facility and all actions permitted to be taken by a base interest rate of 1.25% plus a Japanese Yen overnight LIBOR rate. Total borrowings outstanding under these arrangements were $3.8 million and $3.0 million at March 31, 2018 and December 31, 2017.secured creditor.

One of our Austrian subsidiaries has various outstanding loans from the Austrian government to fund research and development. These loans are unsecured and do not require principal repayment as long as certain conditions are met. Interest on these loans is payable semi-annually. The interest rates associated with these loans range from 0.75% to 2.00%.

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 facilitatingoff-balance sheet arrangements or for other contractually narrow or limited purposes. Accordingly, we have nooff-balance sheet arrangements that have or are reasonably expected to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Contractual Obligations

~~After total prepayments of $425.0~~Other than the 2019 Incremental Term Loan Facility for $650.0 million and regularly scheduled principal payments of $6.5 million during the three months ended March 31, 2018, our total outstanding principal balance on our Credit Agreement was $348.5 million. As a result of making total prepayments since the inception of the Credit Agreement, we are no longer required to make any scheduled principal payments until the maturity date of the loan. ThereABL Facility described above, there have been no other changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form10-K for the year ended December 31, ~~2017.~~2018.

Recently Issued Accounting Pronouncements

In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-05, “Income Taxes (Topic 740).” This standard is an amendment that adopts the language of SAB 118 and aims to address certain circumstances that may arise for registrants in accounting for the income tax effects of the Act and to address any uncertainty or diversity of views in practice regarding the application of Topic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under Topic 740 for certain income tax effects of the Act for the reporting period in which the Act was enacted. The provisions of this ASU were applied to our December 31, 2017 financial statements. We recorded provisional amounts with respect to the Act under SAB 118 at December 31, 2017 and March 31, 2018 and need to complete additional analysis and receive additional guidance from the Internal Revenue Service with respect to provisions of the Act that affect us before the provisional determinations become final. Until we complete our analysis and receive additional guidance, we are not able to determine if the impact of ASU 2018-05 is material to our consolidated financial statements in any period.

~~In February~~October 2018, the FASB issued ASU ~~2018-02, “Income Statement – Reporting Comprehensive Income~~2018-16, “Derivatives and Hedging (Topic ~~220)~~815).” ~~The amendments~~This standard permits the use of the Overnight Index Swap Rate (“OIS”) based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in ~~this~~addition to the interest rates on direct treasury obligations of the U.S. government, the LIBOR swap rate, the OIS rate based on the Federal Funds Effective Rate and the Securities Industry and Financial Markets Association Municipal Swap Rate. This standard ~~allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Act. The provisions of this ASU are~~is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. We adopted this ASU during the first quarter of 2019 and the adoption of this ASU did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU2018-15, “Intangibles-Goodwill andOther-Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that include aninternal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments to this update. This standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. We do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

In August 2017, the FASB issued ASU2017-12, “Derivatives and Hedging (Topic 815).” This standard better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The provisions of this ASU are effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. We ~~do not expect~~adopted this ASU during the first quarter of 2019 and the adoption of this ASU todid not have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU2016-02, ~~“Leases (Topic 842).”~~ Leases. This standard requires the recognition of lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. ~~In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.~~ This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. We ~~have reviewed~~adopted ASU2016-02 on January 1, 2019, and used the ~~requirements of the new standard and have formulated a plan for implementation. We have communicated our approach to our Audit Committee and will provide regular updates~~effective date as appropriate. We are currently working at accumulating a complete population of leases from all of our locations. We have selected a software repository to track all of our lease agreements and to assist in the reporting and disclosure requirements required by the standard. We will continue to assess and disclose the impact that this ASU will have on our consolidated financial statements, disclosures and related controls, when known.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU provides for a single comprehensive model to use in accounting for revenue arising from contracts with customers and has replaced most existing revenue recognition guidance in Generally Accepted Accounting Principles. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at theits date of initial application. As such, we did not adjust prior period amounts. We ~~used~~also elected to adopt the ~~modified retrospective method~~package of practical expedients upon transition, which permits companies to not reassess lease identification, classification, and initial direct costs under ASU2016-02 for leases that commenced prior to the effective date. We implemented internal controls and a lease accounting information system to enable preparation on adoption. Upon adoption, we recorded a cumulative effect of initially applying this new standard, resulting in the addition of $71.0 million ofright-of-use assets and $20.2 million and $54.1 million of corresponding short-term and long-term lease liabilities, respectively. Theright-of-use asset is net of the deferred rent liability, prepaid rent and net favorable lease asset which werere-classified to theright-of-use asset upon adoption inof the ~~first quarter~~standard. For additional information on the required disclosures related to the impact of ~~2018. The adoption of~~adopting this ~~ASU did not have a material impact on our financial statements as described further in~~standard, see Note 3 ofto the ~~consolidated financial statements.~~Consolidated Condensed Financial Statements.

ITEM 3.

~~ITEM 3.~~ QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information concerning market risk is contained in the section entitled “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report on Form10-K for the year ended December 31, ~~2017~~2018 filed with the Securities and Exchange Commission on February ~~28, 2018.~~26, 2019. As of March 31, ~~2018,~~2019, there were no material changes in our exposure to market risk from December 31, ~~2017.~~2018.

ITEM 4.

~~ITEM 4.~~ 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 of March 31, ~~2018.~~2019. The term “disclosure controls and procedures,” as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, ~~2018,~~2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended March 31, ~~2018,~~2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~PART II.~~

PART II.

OTHER INFORMATION

ITEM 1.

~~ITEM 1.~~ LEGAL PROCEEDINGS.

Newport Litigation

OnIn March 9, 2016, atwo putative class ~~action~~actions lawsuit captionedDixon Chung v. Newport Corp., et al., Case No.A-16-733154-C, ~~was~~ and Hubert C. Pincon v. Newport Corp., et al., Case No.A-16-734039-B, were filed in the District Court, Clark County, Nevada on behalf of a putative class of stockholders of Newport Corporation (“Newport”) for claims related to the merger agreement (“Newport Merger ~~Agreement~~Agreement”) between the Company, Newport, and a wholly-owned subsidiary of the Company (“Merger ~~Sub. On March 25, 2016, a second putative class action complaint captioned~~~~Hubert C. Pincon v. Newport Corp., et al.~~~~, Case No. A-16-734039-B, was filed in the District Court, Clark County, Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Merger Agreement.~~Sub”). The lawsuits named as defendants the Company, Newport, Merger Sub, and certain then current and former members of Newport’s board of directors. Both complaints alleged that ~~the~~Newport directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices and by omitting material information from the ~~Proxy~~proxy statement. The complaints also alleged that the Company, Newport, and Merger Sub aided and abetted the directors’ alleged breaches of their fiduciary duties. The complaints sought injunctive relief, including to enjoin or rescind the Newport Merger Agreement, and an award of attorneys’ and other fees and costs, among other relief. On April 14, 2016, the Court ~~granted plaintiffs’ motion to consolidate~~consolidated the ~~Pincon and Chung~~ actions.

On October 19, 2016, plaintiffs in the consolidated action filed an amended complaint captionedIn re Newport Corporation Shareholder Litigation,, Case No.A-16-733154-B, in the District Court, Clark County, Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Newport Merger Agreement. The amended complaint ~~named as defendants the Company, Newport, and the then-current members of~~contained substantially similar allegations related to Newport’s former board of directors. It alleged that the named directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, by agreeing to unfair deal protection devices, and by omitting material information from the Proxy statement. The complaint also alleged that the Company and Newport aided and abetted the named directors’ alleged breaches of their fiduciary ~~duties.~~duties to Newport’s stockholders. The amended complaint sought monetary damages, includingpre- and post-judgment interest. ~~On December 9, 2016, defendants filed motions to dismiss the amended complaint, which plaintiffs opposed.~~ On June 22, 2017, the Court granted Defendants’ motion to dismiss and dismissed the amended complaint against all defendants but granted plaintiffs leave to amend.

On July 27, 2017, plaintiffs filed a second amended complaint ~~which names as defendants certain~~containing substantially similar allegations but naming only Newport’s former directors ~~of Newport.~~as defendants. On August 8, 2017, the Court dismissed the Company and Newport from the action pursuant to stipulations among the parties. The second amended complaint alleges that the directors breached their fiduciary duties to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and unfair consideration, and by omitting material information from the Proxy statement.action. The second amended complaint seeks monetary damages, includingpre- and post-judgment interest. ~~On September 1, 2017 the Newport directors filed~~The Court granted a motion for class certification on September 27, 2018, appointing Mr. Pincon and Locals 302 and 612 of the International Union of Operating Engineers - Employers Construction Industry Retirement Trust as class representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily dismissed from the litigation. Discovery is ongoing in this action.

ESI Litigation

On November 29, 2018, a complaint captioned Brian Morris et. al. v. Electro Scientific Industries, Inc. et al. was filed in the U.S. District Court for the District of Oregon by alleged former stockholders of Electro Scientific Industries, Inc. (“ESI”) in connection with the acquisition of ESI by the Company. The complaint named the Company’s subsidiary, ESI, and the former members of ESI’s board of directors as defendants. Five additional complaints were subsequently filed, two in the U.S. District Court for the District of Oregon and three in the Multnomah County Circuit Court in the State of Oregon. The cases filed in the U.S. District Court were dated December 6, 2018 and December 12, 2018 and captioned Melvyn Klein et. al. v. Electro Scientific Industries, Inc. et al. and Donald Mager et. al. v. Electro Scientific Industries, Inc. et al., respectively. The complaints filed in Multnomah County Circuit Court were dated December 5, 2018, December 5, 2018 and December 13, 2018 and captioned Michael Kent et. al v. Electro Scientific Industries, Inc. et al., Christopher Stanley et. al v. Electro Scientific Industries, Inc. et al. and Eduardo Colmenares et. al. v. Electro Scientific Industries, Inc., MKS Instruments, Inc., et al., respectively (collectively with Brian Morris et. al. v. Electro Scientific Industries, Inc. et. al., the “Lawsuits”).

The Lawsuits are purported class actions brought on behalf of former ESI stockholders, asserting various claims against the former members of the ESI board of directors, ESI, the Company and the Company’s merger subsidiary, including breach of fiduciary duty and aiding and abetting the breach of fiduciary duty. The Lawsuits allege that the consideration paid to ~~dismiss~~ the ~~second amended complaint,~~ESI shareholders did not appropriately value ESI, and that ESI’s merger related disclosures failed to disclose certain material information regarding the merger. The Lawsuits purport to seek unspecified damages.

On February 26, 2019, the parties entered into a settlement agreement, pursuant to which plaintiffs ~~opposed. The Court held a hearing on~~dismissed their individual claims with prejudice and class claims without prejudice in return for ESI’s previous supplemental merger related disclosures in connection with the ~~motion~~transaction. ESI provided supplemental merger related disclosures to ~~dismiss on December 7, 2017. On January 5, 2018,~~eliminate the ~~Court entered an order denying~~burden and expense of litigation and to avoid any possible disruption to the motion to dismiss. The Newport directors answered the second amended complaint, denying the material allegations of the complaint and asserting defenses, on February 20, 2018. On April 13, 2018, the Company received a third-party subpoena~~duces tecum~~ ~~requesting documents and a deposition on various topics in the state of Nevada.~~ merger that could result from further litigation.

The Company ~~served plaintiffs with objections and responses to the subpoena on April 27, 2018.~~

~~We are~~is subject to various legal proceedings and claims, which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.

ITEM 1A.

~~ITEM 1A.~~ RISK FACTORS.

Information regarding risk factors affecting the Company’s business are discussed in the Company’s Annual Report on Form10-K for the year ended December 31, ~~2017~~2018 in the section entitled “Risk Factors.” There have been no material changes ~~from~~to the ~~risks disclosed therein.~~risk factors as described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form10-K for the year ended December 31, 2018.

ITEM 6.

~~ITEM 6.~~ EXHIBITS.


Exhibit No.		Exhibit Description

~~+3.1~~⁽¹⁾+3.1(1)		Restated Articles of Organization of the Registrant

~~+3.2~~⁽²⁾+3.2(2)		Articles of Amendment to Restated Articles of Organization of the Registrant, as filed with the Secretary of State of Massachusetts on May 18, 2001

~~+3.3~~⁽³⁾+3.3(3)		Articles of Amendment to Restated Articles of Organization of the Registrant, as filed with the Secretary of State of Massachusetts on May 16, 2002

~~+3.4~~⁽⁴⁾+3.4(4)		Amended and RestatedBy-Laws of the Registrant

*10.1+10.1(5)		Amendment ~~dated March 27, 2018,~~No. 5 to ~~Employment~~Term Loan Credit Agreement and Amendment to Term Loan Guaranty and Term Loan Security Agreement, dated as of ~~October 22, 2013, between Gerald Colella~~February 1, 2019, by and among the Registrant, the other loan parties party thereto, Barclays Bank PLC, as administrative agent and collateral agent and each participating lender party thereto

*10.2+10.2(5)		~~MKS Instruments,~~ABL Credit Agreement, dated as of February 1, 2019, by and among the Registrant, Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto

+10.3(6)*		Electro Scientific Industries, Inc. ~~Management and Key Employee Bonus~~’s 2004 Stock Incentive Plan

+10.4(6)*~~10.3~~		~~MKS Instruments,~~Form of Restricted Stock Units Award Agreement (with time-based vesting) used under Electro Scientific Industries, Inc. ~~Light & Motion Division Management and Key Employee Bonus~~’s 2004 Stock Incentive Plan for 2016-2017

+10.5(6)*		Form of Restricted Stock Units Award Agreement (with time-based vesting) used under Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan for 2018

+10.6(6)*		Form of Restricted Stock Units Award Agreement (with performance-based vesting) used under Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan for 2016-2017

+10.7(6)*		Form of Restricted Stock Units Award Agreement (with performance-based vesting) used under Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan for 2018

+10.8(6)*		Form of the Registrant’s RSU Assumption Agreement (with time-based vesting) for U.S. Employees Relating to Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan

+10.9(6)*		Form of the Registrant’s RSU Assumption Agreement (with time-based vesting) for Employees Outside of the United States Relating to Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan

+10.10(6)*		Form of the Registrant’s RSU Assumption Agreement (with performance-based vesting) for U.S. Employees Relating to Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan

+10.11(6)*		Form of the Registrant’s RSU Assumption Agreement (with performance-based vesting) for Employees Outside of the United States Relating to Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan

31.1		Certification of Principal Executive Officer pursuant to Rule13a-14(a)/~~Rule 15d-14(a)~~Rule15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of Principal Financial Officer pursuant to Rule13a-14(a)/~~Rule 15d-14(a)~~Rule15d-14(a) of the Securities Exchange Act of 1934, as amended

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

~~101.INS~~		~~XBRL Instance Document~~

~~101.SCH~~		~~XBRL Taxonomy Extension Schema Document~~

~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase Document~~

~~101.LAB~~		~~XBRL Taxonomy Extension Label Linkbase Document~~

~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase Document~~

~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document~~

+	Previously filed

*	Management contract or compensatory plan ~~arrangement.~~arrangement

(1)	Incorporated by reference to the Registration Statement on FormS-4 (FileNo. 333-49738), filed with the Securities and Exchange Commission on November 13, 2000.

(2)	Incorporated by reference to the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2001 (FileNo. 000-23621), filed with the Securities and Exchange Commission on August 14, 2001.

(3)	Incorporated by reference to the Registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2002 (FileNo. 000-23621), filed with the Securities and Exchange Commission on August 13, 2002.

(4)	Incorporated by reference to the Registrant’s Current Report on Form8-K (FileNo. 000-23621), filed with the Securities and Exchange Commission on May 6, 2014.

(5)	Incorporated by reference to the Registrant’s Current Report on Form8-K (FileNo. 000-23621), filed with the Securities and Exchange Commission on February 1, 2019.

(6)	Incorporated by reference to the Registrant’s Annual Report on Form10-K for the year ended December 31, 2018 (FileNo. 000-23621), filed with the Securities and Exchange Commission on February 26, 2019.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			MKS INSTRUMENTS, INC.

Date: May 8, ~~2018~~	2019	By:	/s/ Seth H. Bagshaw
			Seth H. Bagshaw
			Senior Vice President, Chief Financial Officer and Treasurer
			(Principal Financial Officer)

4450


	Three Months Ended March 31, 2017
	As previously reported		Adjustment			As re- classified
Net revenues:
Products	$	392,922		(4,984	)	$	387,938
Services		44,231		4,984			49,215

Total net revenues		437,153		—			437,153
Cost of revenues:
Cost of products		205,060		774			205,834
Cost of services		26,546		(774	)		25,772

Total cost of revenues		231,606		—			231,606


As of March 31, 2018:	Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
Short-term investments:
Available-for-sale investments:
Time deposits and certificates of deposit	$	10,458	$	1	$	—		$	10,459
Bankers’ acceptance drafts		2,179		—		—			2,179
Asset-backed securities		38,056		13		(57	)		38,012
Commercial paper		16,065		—		(55	)		16,010
Corporate obligations		78,778		38		(49	)		78,767
Municipal bonds		2,620		—		(2	)		2,618
U.S. treasury obligations		30,196		24		—			30,220
U.S. agency obligations		22,343		6		—			22,349

	$	200,695	$	82	$	(163	)	$	200,614


	Three Months Ended March 31, 2018							Twelve Months Ended December 31, 2017
	Gross Carrying Amount		Accumulated Impairment (Loss)			Net		Gross Carrying Amount			Accumulated Impairment (Loss)			Net
Beginning balance at January 1	$	735,323	$	(144,276	)	$	591,047	$	727,999		$	(139,414	)	$	588,585
Sale of business⁽¹⁾		—		—			—		(3,115	)		—			(3,115	)
Impairment loss⁽²⁾		—		—			—		—			(4,862	)		(4,862	)
Foreign currency translation		2,447		—			2,447		10,439			—			10,439

Ending balance at March 31, 2018 and December 31, 2017	$	737,770	$	(144,276	)	$	593,494	$	735,323		$	(144,276	)	$	591,047


	Three Months Ended March 31, 2018		Three Months Ended March 31, 2017
Cost of revenue	$	1,005	$	930
Research and development expense		722		745
Selling, general and administrative expense		8,699		7,107

Total pre-tax stock-based compensation expense	$	10,426	$	8,782

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