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 June 30, 2018March 31, 2019
or
☐ | 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:
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
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 July 31, 2018May 1, 2019, the registrant had 54,791,27454,357,260 shares of common stock outstanding.
FORM10-Q
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 | June 30, 2018 | December 31, 2017 | ||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents, including restricted cash | $ | 427,431 | $ | 333,887 | ||||||||||||
Cash and cash equivalents | $ | 418,016 | $ | 644,345 | ||||||||||||
Short-term investments | 203,686 | 209,434 | 44,326 | 73,826 | ||||||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $4,591 and $4,135 at June 30, 2018 and December 31, 2017, respectively | 339,958 | 300,308 | ||||||||||||||
Inventories, net | 384,929 | 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 | 61,720 | 53,543 | 86,387 | 65,790 | ||||||||||||
|
|
|
| |||||||||||||
Total current assets | 1,417,724 | 1,236,253 | 1,360,352 | 1,464,104 | ||||||||||||
Property, plant and equipment, net | 174,054 | 171,782 | 251,424 | 194,367 | ||||||||||||
Right-of-use asset | 65,628 | — | ||||||||||||||
Goodwill | 588,718 | 591,047 | 1,057,331 | 586,996 | ||||||||||||
Intangible assets, net | 342,684 | 366,398 | 619,091 | 319,807 | ||||||||||||
Long-term investments | 10,476 | 10,655 | 10,350 | 10,290 | ||||||||||||
Other assets | 39,832 | 37,883 | 48,562 | 38,682 | ||||||||||||
|
|
|
| |||||||||||||
Total assets | $ | 2,573,488 | $ | 2,414,018 | $ | 3,412,738 | $ | 2,614,246 | ||||||||
|
|
|
| |||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Short-term debt | $ | 12,511 | $ | 2,972 | $ | 10,281 | $ | 3,986 | ||||||||
Accounts payable | 87,699 | 82,518 | 95,317 | 83,825 | ||||||||||||
Accrued compensation | 75,637 | 96,147 | 61,523 | 82,350 | ||||||||||||
Income taxes payable | 17,294 | 21,398 | 14,355 | 16,358 | ||||||||||||
Deferred revenue | 10,729 | 12,842 | ||||||||||||||
Lease liability | 19,459 | — | ||||||||||||||
Deferred revenue and customer advances | 21,056 | 14,246 | ||||||||||||||
Other current liabilities | 78,201 | 73,945 | 74,568 | 62,520 | ||||||||||||
|
|
|
| |||||||||||||
Total current liabilities | 282,071 | 289,822 | 296,559 | 263,285 | ||||||||||||
Long-term debt, net | 342,096 | 389,993 | 976,823 | 343,842 | ||||||||||||
Non-current deferred taxes | 64,752 | 61,571 | 78,904 | 48,223 | ||||||||||||
Non-current accrued compensation | 55,627 | 51,700 | 60,337 | 55,598 | ||||||||||||
Non-current lease liability | 49,392 | — | ||||||||||||||
Other liabilities | 27,504 | 32,025 | 29,862 | 30,111 | ||||||||||||
|
|
|
| |||||||||||||
Total liabilities | $ | 772,050 | $ | 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; 54,787,153 and 54,355,535 shares issued and outstanding at June 30, 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 | ||||||||||||||
Additionalpaid-in capital | 793,384 | 789,644 | 844,261 | 793,932 | ||||||||||||
Retained earnings | 1,004,698 | 795,698 | 1,086,409 | 1,084,797 | ||||||||||||
Accumulated other comprehensive income | 3,243 | 3,452 | ||||||||||||||
Accumulated other comprehensive loss | (9,922 | ) | (5,655 | ) | ||||||||||||
|
|
|
| |||||||||||||
Total stockholders’ equity | 1,801,438 | 1,588,907 | 1,920,861 | 1,873,187 | ||||||||||||
|
|
|
| |||||||||||||
Total liabilities and stockholders’ equity | $ | 2,573,488 | $ | 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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Products | $ | 509,999 | $ | 426,317 | $ | 1,006,676 | $ | 814,255 | $ | 397,363 | $ | 496,677 | ||||||||||||
Services | 63,141 | 54,440 | 120,739 | 103,655 | 66,198 | 57,598 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total net revenues | 573,140 | 480,757 | 1,127,415 | 917,910 | 463,561 | 554,275 | ||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||
Cost of products | 266,890 | 230,706 | 528,211 | 436,540 | 229,710 | 261,321 | ||||||||||||||||||
Cost of services | 31,373 | 30,468 | 61,472 | 56,240 | 35,733 | 30,099 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total cost of revenues (exclusive of amortization shown separately below) | 298,263 | 261,174 | 589,683 | 492,780 | 265,443 | 291,420 | ||||||||||||||||||
Gross profit | 274,877 | 219,583 | 537,732 | 425,130 | 198,118 | 262,855 | ||||||||||||||||||
Research and development | 36,504 | 33,680 | 71,361 | 66,962 | 38,933 | 34,857 | ||||||||||||||||||
Selling, general and administrative | 76,559 | 71,979 | 159,508 | 146,199 | 82,455 | 82,949 | ||||||||||||||||||
Fees and expenses related to incremental term loan | 5,847 | — | ||||||||||||||||||||||
Acquisition and integration costs | (1,168 | ) | 790 | (1,168 | ) | 2,232 | 30,167 | — | ||||||||||||||||
Restructuring | 790 | 2,064 | 2,010 | 2,586 | 223 | 1,220 | ||||||||||||||||||
Customer contract obligation | 1,700 | — | ||||||||||||||||||||||
Environmental costs | — | — | 1,000 | — | — | 1,000 | ||||||||||||||||||
Asset impairment | — | 6,719 | — | 6,719 | ||||||||||||||||||||
Amortization of intangible assets | 10,901 | 11,468 | 22,091 | 23,969 | 15,727 | 11,190 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income from operations | 151,291 | 92,883 | 282,930 | 176,463 | 23,066 | 131,639 | ||||||||||||||||||
Interest income | 1,456 | 507 | 2,561 | 1,023 | 1,714 | 1,105 | ||||||||||||||||||
Interest expense | 3,922 | 6,997 | 9,352 | 15,829 | 9,119 | 5,430 | ||||||||||||||||||
Gain on sale of business | — | 74,856 | — | 74,856 | ||||||||||||||||||||
Other expense, net | 281 | 3,277 | 853 | 1,256 | 325 | 572 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income before income taxes | 148,544 | 157,972 | 275,286 | 235,257 | 15,336 | 126,742 | ||||||||||||||||||
Provision for income taxes | 25,682 | 37,532 | 47,303 | 49,757 | 2,881 | 21,621 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income | $ | 122,862 | $ | 120,440 | $ | 227,983 | $ | 185,500 | $ | 12,455 | $ | 105,121 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Changes in value of financial instruments designated as cash flow hedges, net of tax expense (benefit)(1) | $ | 7,712 | $ | 23 | $ | 7,890 | $ | (2,429 | ) | |||||||||||||||
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 | (18,508 | ) | 17,729 | (7,737 | ) | 22,264 | (4,268 | ) | 10,771 | |||||||||||||||
Unrecognized pension gain, net of tax expense (benefit)(2) | 48 | 123 | (37 | ) | 205 | |||||||||||||||||||
Unrealized loss on investments, net of tax benefit(3) | (266 | ) | (168 | ) | (325 | ) | (249 | ) | ||||||||||||||||
Unrecognized pension loss, net of tax benefit(2) | (1 | ) | (85 | ) | ||||||||||||||||||||
Unrealized loss on investments, net of tax benefit(3) | (50 | ) | (59 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total comprehensive income | $ | 111,848 | $ | 138,147 | $ | 227,774 | $ | 205,291 | $ | 8,188 | $ | 115,926 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income per share: | ||||||||||||||||||||||||
Basic | $ | 2.25 | $ | 2.22 | $ | 4.18 | $ | 3.44 | $ | 0.23 | $ | 1.93 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Diluted | $ | 2.22 | $ | 2.19 | $ | 4.12 | $ | 3.37 | $ | 0.23 | $ | 1.90 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Cash dividends per common share | $ | 0.20 | $ | 0.18 | $ | 0.38 | $ | 0.35 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||
Basic | 54,719 | 54,178 | 54,571 | 53,973 | 54,147 | 54,423 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Diluted | 55,274 | 55,001 | 55,280 | 54,979 | 54,848 | 55,286 | ||||||||||||||||||
|
|
|
|
|
|
(1) | Tax expense (benefit) was |
(2) | Tax |
(3) | Tax benefit was |
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 | |||||||||||||||||||||||
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 | |||||||||||||||||||||||
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)
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Cash flows provided by operating activities: | ||||||||
Net income | $ | 227,983 | $ | 185,500 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 40,377 | 42,421 | ||||||
Amortization of debt issuance costs, original issue discount and soft call premium | 2,887 | 3,742 | ||||||
Asset impairment | — | 6,719 | ||||||
Gain on sale of business | — | (74,856 | ) | |||||
Stock-based compensation | 16,792 | 14,989 | ||||||
Provision for excess and obsolete inventory | 10,292 | 11,002 | ||||||
Provision for bad debt | 596 | 511 | ||||||
Deferred income taxes | 1,170 | 7,798 | ||||||
Other | 460 | 796 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | (42,511 | ) | (15,901 | ) | ||||
Inventories | (59,529 | ) | (34,056 | ) | ||||
Income taxes | (11,416 | ) | 21,918 | |||||
Other current andnon-current assets | (4,317 | ) | (2,779 | ) | ||||
Accrued compensation | (15,933 | ) | (161 | ) | ||||
Other current andnon-current liabilities | 9,912 | 4,970 | ||||||
Accounts payable | 5,604 | 2,860 | ||||||
|
|
|
| |||||
Net cash provided by operating activities | 182,367 | 175,473 | ||||||
|
|
|
| |||||
Cash flows (used in) provided by investing activities: | ||||||||
Net proceeds from sale of business | — | 72,509 | ||||||
Purchases of investments | (148,816 | ) | (69,582 | ) | ||||
Maturities of investments | 90,734 | 85,234 | ||||||
Sales of investments | 63,363 | 25,319 | ||||||
Purchases of property, plant and equipment | (21,818 | ) | (9,739 | ) | ||||
|
|
|
| |||||
Net cash (used in) provided by investing activities | (16,537 | ) | 103,741 | |||||
|
|
|
| |||||
Cash flows used in financing activities: | ||||||||
Proceeds from short and long-term borrowings | 36,989 | 8,637 | ||||||
Payments on short-term borrowings | (28,059 | ) | (9,261 | ) | ||||
Payments on long-term borrowings | (50,000 | ) | (53,141 | ) | ||||
Net payments related to employee stock awards | (13,052 | ) | (13,413 | ) | ||||
Dividend payments to common stockholders | (20,750 | ) | (18,903 | ) | ||||
|
|
|
| |||||
Net cash used in financing activities | (74,872 | ) | (86,081 | ) | ||||
|
|
|
| |||||
Effect of exchange rate changes on cash and cash equivalents | 2,586 | 1,069 | ||||||
|
|
|
| |||||
Increase in cash and cash equivalents and restricted cash | 93,544 | 194,202 | ||||||
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) | $ | 427,431 | $ | 428,112 | ||||
|
|
|
|
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 June 30, 2018,March 31, 2019, and for the three and six months ended June 30, 2018March 31, 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, 20172018 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, 20172018 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 within Services for the Vacuum & Analysis segment 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 June 30, 2017 | ||||||||||||
As previously reported | Adjustment | As reclassified | ||||||||||
Net revenues: | ||||||||||||
Products | $ | 431,950 | $ | (5,633 | ) | $ | 426,317 | |||||
Services | 48,807 | 5,633 | 54,440 | |||||||||
|
|
|
|
|
| |||||||
Total net revenues | 480,757 | — | 480,757 | |||||||||
|
|
|
|
|
| |||||||
Cost of revenues: | ||||||||||||
Cost of products | 229,304 | 1,402 | 230,706 | |||||||||
Cost of services | 31,870 | (1,402 | ) | 30,468 | ||||||||
|
|
|
|
|
| |||||||
Total cost of revenues | $ | 261,174 | $ | — | $ | 261,174 | ||||||
|
|
|
|
|
|
Six Months Ended June 30, 2017 | ||||||||||||
As previously reported | Adjustment | As reclassified | ||||||||||
Net revenues: | ||||||||||||
Products | $ | 824,872 | $ | (10,617 | ) | $ | 814,255 | |||||
Services | 93,038 | 10,617 | 103,655 | |||||||||
|
|
|
|
|
| |||||||
Total net revenues | 917,910 | — | 917,910 | |||||||||
|
|
|
|
|
| |||||||
Cost of revenues: | ||||||||||||
Cost of products | 434,364 | 2,176 | 436,540 | |||||||||
Cost of services | 58,416 | (2,176 | ) | 56,240 | ||||||||
|
|
|
|
|
| |||||||
Total cost of revenues | $ | 492,780 | $ | — | $ | 492,780 | ||||||
|
|
|
|
|
|
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
2) | Recently Issued Accounting Pronouncements |
In JuneOctober 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2018-07,2018-16, “Compensation-Stock Compensation“Derivatives and Hedging (Topic 718): Improvements toNon-Employee Share-Based Payment Accounting.815).” This standard is intendedpermits 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 addition to reduce costthe interest rates on direct treasury obligations of the U.S. government, the London Interbank Offered Rate (“LIBOR”) swap rate, the OIS rate based on the Federal Funds Effective Rate and complexitythe Securities Industry and to improve financial reporting for share-based payments issued to nonemployees.Financial Markets Association Municipal Swap Rate. This ASU expands the scope of Topic 718 Compensation-Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. The provisions of this ASU arestandard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not expectadopted this ASU during the first quarter of 2019 and the adoption of this ASU todid not have a material impact on the Company’s consolidated financial statements.
In MarchAugust 2018, the FASB issued ASU2018-05,2018-15, “Income Taxes (Topic 740).“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 an amendmenta service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that adopts 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 ininclude aninternal-use software license). The accounting for the income tax effectsservice element of the Tax Cuts and Jobs Act (“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 the Company’s December 31, 2017 financial statements. The Company recorded provisional amounts with respect to the Act under SAB 118 at December 31, 2017 and June 30, 2018 and needs to complete additional analysis and receive additional guidance from the Internal Revenue Service with respect to provisions of the Acthosting arrangement that affect the Company before the provisional determinations become final. Until the Company completes its analysis and receives additional guidance, the Companyis a service contract is not ableaffected by the amendments to determine if the impact of ASU2018-05this update. This standard is material to the Company’s consolidated financial statements in any period.
In February 2018, the FASB issued ASU2018-02, “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, 2018,2019, 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 ASU2017-09, “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 adoptionfirst quarter of this ASU did not have a material impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU2017-07, “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 ASU2017-01, “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.
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
In November 2016, the FASB issued ASU2016-18, “Statement of Cash Flows (Topic 230)-Restricted Cash,” an amendment to ASU2016-15. 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 thebeginning-of-period andend-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 ASU2016-15. 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 ASU2016-16, “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 ASU2016-15, “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 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 have the option to either apply the standard retrospectively through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption or they can apply the new standard to comparative periods presented. 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 practical expedients for land easements (Update2018-01 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 accumulating details on the population of leases. 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 ASU2016-01, “Financial Instruments-Overall (Subtopic825-10)-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 during2016-02 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 ASU2014-09, “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 usedalso elected to adopt the modified retrospective methodpackage of practical expedients upon adoption in the first quarter of 2018. The FASB issued additional updatestransition, 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 relatingeffective date. The Company implemented internal controls and a lease accounting information system to reporting revenue on a gross versus net basis (Update2016-08 in March 2016), identifying performance obligations and licensing arrangements (Update2016-10 in April 2016), narrow-scope improvements and practical expedients (Update2016-12 in May 2016), technical corrections and improvements (Update2016-20 in December 2016), and SEC Updates (Update2017-13 in September 2017 and Update2017-14 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.enable
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.
3) |
|
The Company adopted ASC 606 on January 1, 2018 using the modified retrospective methodhas operating leases for all contractsreal estate andnon-real estate, which are comprised of automobiles, in North America, Europe, and Asia. The Company does not completed as of the date of adoption. The reported results for the six months ended June 30, 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of Accounting Standards Codification 605, Revenue Recognition (ASC 605).have any finance leases.
The Company has recorded a net increaselease arrangements with lease andnon-lease components, has elected 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 revenueaccount for the quarter ended June 30, 2018 was immateriallease andnon-lease components 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 servicessingle lease component, and will provide financial statement readers with enhanced disclosures. To achieve this core principle, the Company applies the following five steps:
|
|
|
|
|
Revenue under ASC 606 is recognized when or as obligations under the terms of a contract with the Company’s customer has been satisfied 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, 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 number of days completed to date, which is consistent with ratable recognition. Customized products with no alternative future use to the Company, and that have an enforceable right to payment for performance completed to date, are also recorded over time. The Company considers this to be a faithful depiction of the transfer to the customer of revenue over time as the work is performed or service is delivered, ratably over time.
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, and are distinct in the contextallocated all of the contract wherebyconsideration to the transfer oflease component only. The Company has existing net leases in which the product or service isnon-lease components (e.g. common area maintenance, maintenance, consumables, etc.) are paid separately identifiable from other promisesrent 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 taxesnon-lease components that are not included in the Company collects concurrent with revenue-producing activitiesright-of-use asset and lease liability, and are excluded from revenue. The Company’s normal payment termsreflected 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 varydriven by factors such as future changes in an index (e.g., the typeConsumer Price Index).
Aright-of-use asset of $65,628, short-term lease liability of $19,459 and locationlong-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 June 30, 2018 contain a significant financing component. Contract assetsMarch 31, 2019.
The elements of lease expense were as follows:
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 |
Future lease payments undernon-cancelable leases as of January 1 and June 30, 2018 were $3,065 and $3,298, respectively, and included in other current assets.March 31, 2019 are detailed as 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 | ||
|
|
Contracts with Multiple Performance Obligations
4) | Revenue from Contracts with Customers |
The Company periodically enters into contracts with its customers in which a customer may purchase a combinationContract assets as of goodsMarch 31, 2019 and or services, such 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 beDecember 31, 2018 were $3,624 and $3,624, respectively, and 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. Impacts of variable consideration were immaterial during the three and six months ended June 30, 2018.
Deferred Revenues
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 obligations under the contract. The Company has elected to use the practical expedient related to disclosing the remaining performance obligations as of June 30, 2018, as the majority have a duration of less than one year.other current assets.
A rollforward of the Company’s deferred revenue and customer advances is as follows:
Six Months Ended June 30, 2018 | ||||
Beginning balance, January 1(1) | $ | 14,448 | ||
Amount of deferred revenue recognized in income | (10,092 | ) | ||
Additions to deferred revenue | 9,924 | |||
|
| |||
Ending balance, June 30(2) | $ | 14,280 | ||
|
|
Three Months Ended March 31, 2019 | ||||
Beginning balance, January 1(1) | $ | 17,474 | ||
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) | $ | 24,074 | ||
|
|
(1) | Beginning deferred revenue and customer advances as of January 1, |
(2) | Ending deferred revenue as of |
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 June 30, 2018 | Three Months Ended March 31, 2019 | |||||||||||||||||||||||||||
Vacuum & Analysis | Light & Motion | Total | Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | ||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||
Products | $ | 321,454 | $ | 188,545 | $ | 509,999 | $ | 192,648 | $ | 178,697 | $ | 26,018 | $ | 397,363 | ||||||||||||||
Services | 46,874 | 16,267 | 63,141 | 41,707 | 15,291 | 9,200 | 66,198 | |||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||
Total net revenues | $ | 368,328 | $ | 204,812 | $ | 573,140 | $ | 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 June 30, 2017 | ||||||||||||
Vacuum & Analysis | Light & Motion | Total | ||||||||||
Net revenues: | ||||||||||||
Products | $ | 269,665 | $ | 156,652 | $ | 426,317 | ||||||
Services | 40,296 | 14,144 | 54,440 | |||||||||
|
|
|
|
|
| |||||||
Total net revenues | $ | 309,961 | $ | 170,796 | $ | 480,757 | ||||||
|
|
|
|
|
|
Six Months Ended June 30, 2018 | ||||||||||||
Vacuum & Analysis | Light & Motion | Total | ||||||||||
Net revenues: | ||||||||||||
Products | $ | 625,790 | $ | 380,886 | $ | 1,006,676 | ||||||
Services | 90,882 | 29,857 | 120,739 | |||||||||
|
|
|
|
|
| |||||||
Total net revenues | $ | 716,672 | $ | 410,743 | $ | 1,127,415 | ||||||
|
|
|
|
|
|
Six Months Ended June 30, 2017 | ||||||||||||
Vacuum & Analysis | Light & Motion | Total | ||||||||||
Net revenues: | ||||||||||||
Products | $ | 511,120 | $ | 303,135 | $ | 814,255 | ||||||
Services | 76,825 | 26,830 | 103,655 | |||||||||
|
|
|
|
|
| |||||||
Total net revenues | $ | 587,945 | $ | 329,965 | $ | 917,910 | ||||||
|
|
|
|
|
|
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 areis recorded over time.
Refer to Note 17 in the financial statements for revenue by reportable segment, geography and groupings of similar products.
Investments |
The fair value of investments classified as short-term consists of the following:
June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Available-for-sale investments: | ||||||||||||||||
Time deposits and certificates of deposit | $ | 18,455 | $ | 9,757 | $ | 101 | $ | 102 | ||||||||
Bankers’ acceptance drafts | 2,522 | 5,330 | 1,722 | 989 | ||||||||||||
Asset-backed securities | 34,727 | 36,990 | — | 9,113 | ||||||||||||
Commercial paper | 25,925 | 13,750 | 33,509 | 19,359 | ||||||||||||
Corporate obligations | 66,663 | 77,821 | 8,994 | 9,352 | ||||||||||||
Municipal bonds | 2,615 | 1,970 | ||||||||||||||
U.S. treasury obligations | 31,434 | 28,078 | — | 13,298 | ||||||||||||
U.S. agency obligations | 21,345 | 35,738 | — | 21,613 | ||||||||||||
|
|
|
| |||||||||||||
$ | 203,686 | $ | 209,434 | $ | 44,326 | $ | 73,826 | |||||||||
|
|
|
|
Investments classified as long-term consist of the following:
June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Available-for-sale investments: | ||||||||||||||||
Group insurance contracts | $ | 6,076 | $ | 6,255 | $ | 5,950 | $ | 5,890 | ||||||||
Cost method investments: | ||||||||||||||||
Minority interest in a private company | 4,400 | 4,400 | 4,400 | 4,400 | ||||||||||||
|
|
|
| |||||||||||||
$ | 10,476 | $ | 10,655 | $ | 10,350 | $ | 10,290 | |||||||||
|
|
|
|
The following tables show the gross unrealized gains and (losses) aggregated by investment category foravailable-for-sale investments:
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)
The following tables show the gross unrealized gains and (losses) aggregated by investment category foravailable-for-sale investments:
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 | ||||||||
|
|
|
|
|
|
|
|
As of June 30, 2018: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Short-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Time deposits and certificates of deposit | $ | 18,452 | $ | 3 | $ | — | $ | 18,455 | ||||||||
Bankers’ acceptance drafts | 2,522 | — | — | 2,522 | ||||||||||||
Asset-backed securities | 34,760 | 9 | (42 | ) | 34,727 | |||||||||||
Commercial paper | 26,337 | — | (412 | ) | 25,925 | |||||||||||
Corporate obligations | 66,632 | 59 | (28 | ) | 66,663 | |||||||||||
Municipal bonds | 2,620 | — | (5 | ) | 2,615 | |||||||||||
U.S. treasury obligations | 31,418 | 16 | — | 31,434 | ||||||||||||
U.S. agency obligations | 21,341 | 5 | (1 | ) | 21,345 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 204,082 | $ | 92 | $ | (488 | ) | $ | 203,686 | ||||||||
|
|
|
|
|
|
|
| |||||||||
As of June 30, 2018: | Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Estimated Fair Value | ||||||||||||
Long-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Group insurance contracts | $ | 6,051 | $ | 25 | $ | — | $ | 6,076 | ||||||||
|
|
|
|
|
|
|
|
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 | ||||||||||||
Long-term investments: | ||||||||||||||||
Available-for-sale investments: | ||||||||||||||||
Group insurance contracts | $ | 6,006 | $ | 249 | $ | — | $ | 6,255 | ||||||||
|
|
|
|
|
|
|
|
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 | $ | 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 June 30, 2018March 31, 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 June 30, 2018March 31, 2019 and December 31, 2017,2018 were temporary.
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Interest income is accrued as earned. Dividend income is recognized as income on the date the stock trades“ex-dividend.” The cost of marketable securities sold is determined by the specific identification method. Realized gains or losses are reflected in income and were not material for the sixthree months ended June 30, 2018March 31, 2019 and 2017.2018.
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.
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 June 30, 2018March 31, 2019 and are summarized as follows:
Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||||
Description | June 30, 2018 | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | 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 | $ | 13,636 | $ | 13,636 | $ | — | $ | — | $ | 294 | $ | 294 | $ | — | $ | — | ||||||||||||||||
Time deposits and certificates of deposit | 2,000 | — | 2,000 | — | 3,852 | — | 3,852 | — | ||||||||||||||||||||||||
Commercial paper | 14,433 | — | 14,433 | — | 82,584 | — | 82,584 | — | ||||||||||||||||||||||||
Corporate obligations | 1,560 | — | 1,560 | — | 12,570 | — | 12,570 | — | ||||||||||||||||||||||||
U.S. agency obligations | 10,847 | — | 10,847 | — | 49,084 | — | 49,084 | — | ||||||||||||||||||||||||
Restricted cash – money market funds | 114 | 114 | — | — | 317 | 317 | — | — | ||||||||||||||||||||||||
Available-for-sale investments: | ||||||||||||||||||||||||||||||||
Time deposits and certificates of deposit | 18,455 | — | 18,455 | — | 101 | — | 101 | — | ||||||||||||||||||||||||
Bankers acceptance drafts | 2,522 | — | 2,522 | — | ||||||||||||||||||||||||||||
Asset-backed securities | 34,727 | — | 34,727 | — | ||||||||||||||||||||||||||||
Bankers’ acceptance drafts | 1,722 | — | 1,722 | — | ||||||||||||||||||||||||||||
Commercial paper | 25,925 | — | 25,925 | — | 33,509 | — | 33,509 | — | ||||||||||||||||||||||||
Corporate obligations | 66,663 | — | 66,663 | — | 8,994 | — | 8,994 | — | ||||||||||||||||||||||||
Municipal bonds | 2,615 | — | 2,615 | — | ||||||||||||||||||||||||||||
U.S. treasury obligations | 31,434 | — | 31,434 | — | ||||||||||||||||||||||||||||
U.S. agency obligations | 21,345 | — | 21,345 | — | ||||||||||||||||||||||||||||
Group insurance contracts | 6,076 | — | 6,076 | — | 5,950 | — | 5,950 | — | ||||||||||||||||||||||||
Derivatives – foreign exchange contracts | 3,666 | — | 3,666 | — | ||||||||||||||||||||||||||||
Derivatives – currency forward contracts | 3,492 | — | 3,492 | — | ||||||||||||||||||||||||||||
Funds in investments and other assets: | ||||||||||||||||||||||||||||||||
Israeli pension assets | 15,796 | — | 15,796 | — | 14,481 | — | 14,481 | — | ||||||||||||||||||||||||
Derivatives – interest rate hedge –non-current | 8,565 | — | 8,565 | — | 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 | $ | 280,379 | $ | 13,750 | $ | 266,629 | $ | — | $ | 223,482 | $ | 611 | $ | 222,871 | $ | — | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Derivatives – foreign exchange contracts | $ | 822 | $ | — | $ | 822 | $ | — | ||||||||||||||||||||||||
Derivatives – currency forward contracts | $ | 322 | $ | — | $ | 322 | $ | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Reported as follows: | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents(1) | $ | 42,476 | $ | 13,636 | $ | 28,840 | $ | — | ||||||||||||||||||||||||
Restricted cash | 114 | 114 | — | — | ||||||||||||||||||||||||||||
Cash and cash equivalents, including restricted cash(1) | $ | 148,701 | $ | 611 | $ | 148,090 | $ | — | ||||||||||||||||||||||||
Short-term investments | 203,686 | — | 203,686 | — | 44,326 | — | 44,326 | — | ||||||||||||||||||||||||
Other current assets | 3,666 | — | 3,666 | — | 3,492 | — | 3,492 | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total current assets | $ | 249,942 | $ | 13,750 | $ | 236,192 | $ | — | $ | 196,519 | $ | 611 | $ | 195,908 | $ | — | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Long-term investments(2) | $ | 6,076 | $ | — | $ | 6,076 | $ | — | $ | 5,950 | $ | — | $ | 5,950 | $ | — | ||||||||||||||||
Other assets | 24,361 | — | 24,361 | — | 21,013 | — | 21,013 | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total long-term assets | $ | 30,437 | $ | — | $ | 30,437 | $ | — | $ | 26,963 | $ | — | $ | 26,963 | $ | — | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Other current liabilities | $ | 822 | $ | — | $ | 822 | $ | — | $ | 322 | $ | — | $ | 322 | $ | — | ||||||||||||||||
|
|
|
|
|
|
|
|
(1) | The cash and cash equivalent amounts presented in the table above do not include cash of |
(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, 2018 and are summarized as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Description | 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 | $ | 180,340 | $ | 180,340 | $ | — | $ | — | ||||||||
Time deposits and certificates of deposit | 850 | — | 850 | — | ||||||||||||
Commercial paper | 2,687 | — | 2,687 | — | ||||||||||||
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 | 102 | — | 102 | — | ||||||||||||
Bankers’ acceptance drafts | 989 | — | 989 | — | ||||||||||||
Asset-backed securities | 9,113 | — | 9,113 | — | ||||||||||||
Commercial paper | 19,359 | — | 19,359 | — | ||||||||||||
Corporate obligations | 9,352 | — | 9,352 | — | ||||||||||||
U.S. treasury obligations | 13,298 | — | 13,298 | — | ||||||||||||
U.S. agency obligations | 21,613 | — | 21,613 | — | ||||||||||||
Group insurance contracts | 5,890 | — | 5,890 | — | ||||||||||||
Derivatives – currency forward contracts | 2,485 | — | 2,485 | — | ||||||||||||
Funds in investments and other assets: | ||||||||||||||||
Israeli pension assets | 14,408 | — | 14,408 | — | ||||||||||||
Derivatives – interest rate hedge –non-current | 6,083 | — | 6,083 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 290,097 | $ | 180,450 | $ | 109,647 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Derivatives – currency forward contracts | $ | 1,168 | $ | — | $ | 1,168 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Reported as follows: | ||||||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents, including restricted cash(1) | $ | 187,405 | $ | 180,450 | $ | 6,955 | $ | — | ||||||||
Short-term investments | 73,826 | — | 73,826 | — | ||||||||||||
Other current assets | 2,485 | — | 2,485 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current assets | $ | 263,716 | $ | 180,450 | $ | 83,266 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Long-term investments(2) | $ | 5,890 | $ | — | $ | 5,890 | $ | — | ||||||||
Other assets | 20,491 | — | 20,491 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total long-term assets | $ | 26,381 | $ | — | $ | 26,381 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Other current liabilities | $ | 1,168 | $ | — | $ | 1,168 | $ | — | ||||||||
|
|
|
|
|
|
|
|
(1) | The cash and cash equivalent amounts presented in the table above do not include cash of $456,940 as of December 31, 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)
Assets and liabilities of the Company are measured at fair value on a recurring basis as of December 31, 2017 and are summarized as follows:
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) | ||||||||||||
Assets: | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 4,987 | $ | 4,987 | $ | — | $ | — | ||||||||
Time deposits and certificates of deposit | 2,100 | — | 2,100 | — | ||||||||||||
Commercial paper | 30,475 | — | 30,475 | — | ||||||||||||
Restricted cash – money market funds | 119 | 119 | — | — | ||||||||||||
Available-for-sale investments: | ||||||||||||||||
Time deposits and certificates of deposit | 9,757 | — | 9,757 | — | ||||||||||||
Bankers acceptance drafts | 5,330 | — | 5,330 | — | ||||||||||||
Asset-backed securities | 36,990 | — | 36,990 | — | ||||||||||||
Commercial paper | 13,750 | — | 13,750 | — | ||||||||||||
Corporate obligations | 77,821 | — | 77,821 | — | ||||||||||||
Municipal bonds | 1,970 | — | 1,970 | — | ||||||||||||
U.S. treasury obligations | 28,078 | — | 28,078 | — | ||||||||||||
U.S. agency obligations | 35,738 | — | 35,738 | — | ||||||||||||
Group insurance contracts | 6,255 | — | 6,255 | — | ||||||||||||
Derivatives – foreign exchange contracts | 168 | — | 168 | — | ||||||||||||
Funds in investments and other assets: | ||||||||||||||||
Israeli pension assets | 15,048 | — | 15,048 | — | ||||||||||||
Derivatives – interest rate hedge –non-current | 6,179 | — | 6,179 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 274,765 | $ | 5,106 | $ | 269,659 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Derivatives – foreign exchange contracts | $ | 6,198 | $ | — | $ | 6,198 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 6,198 | $ | — | $ | 6,198 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents(1) | $ | 37,562 | $ | 4,987 | $ | 32,575 | $ | — | ||||||||
Restricted cash | 119 | 119 | — | — | ||||||||||||
Short-term investments | 209,434 | — | 209,434 | — | ||||||||||||
Other current assets | 168 | — | 168 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current assets | $ | 247,283 | $ | 5,106 | $ | 242,177 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Long-term investments(2) | $ | 6,255 | $ | — | $ | 6,255 | $ | — | ||||||||
Other assets | 21,227 | — | 21,227 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total long-term assets | $ | 27,482 | $ | — | $ | 27,482 | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Other current liabilities | $ | 6,198 | $ | — | $ | 6,198 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|
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, bankersbankers’ 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.
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 1.75%2.0% as of June 30, 2018,March 31, 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. TheAt March 31, 2019, the notional amount of this transaction was $305,000$290,000 and had a fair value of $8,565 at June 30, 2018. The$4,459. At December 31, 2018, the notional amount of this transaction was $305,000$290,000 and had a fair value of $6,179 at December 31, 2017.
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
$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
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 June 30, 2018March 31, 2019 and December 31, 2017,2018, the Company had outstanding forward foreign exchange contracts with gross notional values of $178,327$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 June 30, 2018March 31, 2019 and December 31, 2017:2018:
June 30, 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 | $ | 47,023 | $ | 416 | $ | 39,022 | $ | 302 | ||||||||
U.S. Dollar/South Korean Won | 73,485 | 1,226 | 54,077 | 1,424 | ||||||||||||
U.S. Dollar/Euro | 26,059 | 435 | 20,146 | 916 | ||||||||||||
U.S. Dollar/U.K. Pound Sterling | 12,763 | 250 | 10,921 | 125 | ||||||||||||
U.S. Dollar/Taiwan Dollar | 18,997 | 517 | 19,836 | 403 | ||||||||||||
|
|
|
| |||||||||||||
Total | $ | 178,327 | $ | 2,844 | $ | 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 | June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | ||||||||||||
Derivative assets: | ||||||||||||||||
Foreign exchange contracts(1) | $ | 3,666 | $ | 168 | $ | 3,492 | $ | 2,485 | ||||||||
Foreign currency interest rate hedge(2) | 8,565 | 6,179 | 4,459 | 6,083 | ||||||||||||
Derivative liabilities: | ||||||||||||||||
Foreign exchange contracts(1) | (822 | ) | (6,198 | ) | (322 | ) | (1,168 | ) | ||||||||
|
|
|
| |||||||||||||
Total net derivative asset designated as hedging instruments | $ | 11,409 | $ | 149 | $ | 7,629 | $ | 7,400 | ||||||||
|
|
|
|
(1) | The derivative |
(2) | The foreign currency interest rate hedge assets of |
The net amount of existing gains as of June 30, 2018March 31, 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) on derivatives designated as cash flow hedging instruments:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | Three Months Ended March 31, | ||||||||||||||||||||
Derivatives Designated as Cash Flow Hedging Instruments | 2019 | 2018 | ||||||||||||||||||||||
Forward exchange contracts: | ||||||||||||||||||||||||
Net gain (loss) recognized in OCI(1) | $ | 10,079 | $ | 29 | $ | 10,145 | $ | (4,242 | ) | |||||||||||||||
Net loss reclassified from accumulated OCI into income(2) | $ | (2,648 | ) | $ | (934 | ) | $ | (5,188 | ) | $ | (482 | ) | ||||||||||||
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 March 31, 2019 and |
The following table provides a summary of the gains (losses)gain (loss) on derivatives not designated as hedging instruments:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | Three Months Ended March 31, | ||||||||||||||||||||
Derivatives Not Designated as Hedging Instruments | 2019 | 2018 | ||||||||||||||||||||||
Forward exchange contracts: | ||||||||||||||||||||||||
Net loss recognized in income(1) | $ | 1,375 | $ | (219 | ) | $ | 122 | $ | (1,682 | ) | ||||||||||||||
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. |
Inventories |
Inventories consist of the following:
June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Raw materials | $ | 221,914 | $ | 191,351 | $ | 303,588 | $ | 235,593 | ||||||||
Work-in-process | 63,372 | 54,050 | 76,560 | 61,908 | ||||||||||||
Finished goods | 99,643 | 93,680 | 95,485 | 87,188 | ||||||||||||
|
|
|
| |||||||||||||
$ | 384,929 | $ | 339,081 | $ | 475,633 | $ | 384,689 | |||||||||
|
|
|
|
|
Sale of Data Analytics SolutionsElectro 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 saleCompany, EAS Equipment, Inc., formerly a Delaware corporation and a wholly-owned subsidiary of its Data Analytics Solutions businessthe 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, netflexible 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 soldelectronic 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 2016sales charge associated with the fair valuewrite-up of $12,700 and was includedinventory 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 asfinalization of the purchase accounting assessment will result in a discontinued operation as this sale did not representchange in the valuation of assets acquired and liabilities assumed and may have a strategic shiftmaterial 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 didoperating results in the sale haveperiod 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 onnumber 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 arethis acquisition were included in the Company’s incomeconsolidated 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 segregatedagreements 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 ornet 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 statementsresults of cash flows asoperations 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 sixthree months ended June 30, 2018March 31, 2019 and year ended December 31, 20172018 were as follows:
Six Months Ended June 30, 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 | (2,329 | ) | — | (2,329 | ) | 10,439 | — | 10,439 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance at June 30, 2018 and December 31, 2017 | $ | 732,994 | $ | (144,276 | ) | $ | 588,718 | $ | 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) |
|
|
Intangible Assets
Components of the Company’s intangible assets are comprised of the following:
As of June 30, 2018: | Gross | Impairment Charges(1) | Accumulated Amortization | Foreign Currency Translation | Net | |||||||||||||||
Completed technology | $ | 172,431 | $ | (105 | ) | $ | (126,383 | ) | $ | 26 | $ | 45,969 | ||||||||
Customer relationships | 282,744 | (1,406 | ) | (54,712 | ) | 550 | 227,176 | |||||||||||||
Patents, trademarks, trade names and other | 110,523 | — | (40,985 | ) | 1 | 69,539 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
$ | 565,698 | $ | (1,511 | ) | $ | (222,080 | ) | $ | 577 | $ | 342,684 | |||||||||
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017: | Gross | Impairment Charges(1) | Accumulated Amortization | Foreign Currency Translation | Net | |||||||||||||||||||||||||||||||||||
As of March 31, 2019: | Gross | Accumulated Impairment Charges | Accumulated Amortization | Foreign Currency Translation | Net | |||||||||||||||||||||||||||||||||||
Completed technology | $ | 172,431 | $ | (105 | ) | $ | (115,371 | ) | $ | 333 | $ | 57,288 | $ | 448,831 | $ | (105 | ) | $ | (146,614 | ) | $ | (162 | ) | $ | 301,950 | |||||||||||||||
Customer relationships | 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 | 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) |
|
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 | ||||||||
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense related to acquired intangibles for the sixthree months ended June 30,March 31, 2019 and 2018 was $15,727 and 2017 was $22,091 and $23,969,$11,190, respectively. The net amortization expense from favorable lease commitments for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 iswas net of $370$0 and $366, respectively, of amortization income from unfavorable lease commitments.$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) | $ | 21,475 | ||||||
2019 | 40,182 | |||||||
2019 (remaining) | $ | 51,638 | ||||||
2020 | 28,152 | 55,751 | ||||||
2021 | 20,272 | 47,958 | ||||||
2022 | 17,645 | 45,480 | ||||||
2023 | 17,280 | 45,121 | ||||||
2024 | 44,204 | |||||||
Thereafter | 139,195 | 273,039 |
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, theThe 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 12016 Term Loan Facility, which decreased the applicable margin for LIBOR borrowings underfrom 4.0% to 1.75%, with a LIBOR rate floor of 0.75%. As a consequence of the Company’spricing 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% for2.00% (from 1.75%) with respect to LIBOR borrowings and extended1.00% (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 date2016 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 1.75%2.0% at June 30, 2018. TheMarch 31, 2019. At March 31, 2019, the notional amount of this transaction was $305,000$290,000 and had a fair value of $8,565 at June 30, 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 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.
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
On April 11, 2018, the Company entered into Amendment No. 4 (the “Repricing Amendment 4”) 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 4 decreased the applicable margin for the Company’s LIBOR rate 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 effective date of the Repricing Amendment 4.
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 June 30, 2018,March 31, 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 asAs a result of June 30, 2018 was 3.7%.making these prepayments, the Company is no longer required to make any regularly scheduled principal payments on the 2016 Term Loan Facility until the maturity date of the 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 hashave been accelerated in connection with the various debt prepayments during 2016, 2017 and 2018. As of June 30, 2018,March 31, 2019, the remaining balance of the deferred finance fees, original issue discount and repricing feefees related to the 2016 Term Loan Facility was $6,418.$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 required to make scheduled quarterly payments each equal to 0.25% of 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 June 30, 2018 and based on the Company’s Total Leverage Ratio, the Company is no longerit was not required to make any scheduled principal payments until maturity datea 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 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 June 30, 2018,March 31, 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 providesprovided 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) subjectprior to certain notice and fieldfiled 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 June 30, 2018.$25,000.
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at onethe 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 adjusted for certain additional costs, plus anwith 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.
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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 fees recognized in interest expense for the three and six months ended June 30, 2018, were immaterial. 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 monththree-month intervals. The lines of credit provided for aggregate borrowings as of June 30, 2018March 31, 2019 of up to an equivalent of $20,779 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 $6,795 at June 30, 2018. There were no borrowings outstanding under these arrangements at March 31, 2019 and December 31, 2017.2018, respectively.
The Company assumedhas 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 as of March 31, 2019, provided for aggregate borrowings as of June 30, 2018 of up to an equivalent of $11,293 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 $5,067$3,195 and $2,965$3,389 at June 30, 2018March 31, 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%.
June 30, 2018 | December 31, 2017 | |||||||
Short-term debt: | ||||||||
Japanese lines of credit | $ | 11,862 | $ | 2,750 | ||||
Japanese receivables financing facility | — | 215 | ||||||
Austrian loans due through March 2019 | 646 | — | ||||||
Other debt | 3 | 7 | ||||||
|
|
|
| |||||
$ | 12,511 | $ | 2,972 | |||||
|
|
|
|
June 30, 2018 | December 31, 2017 | |||||||
Long-term debt: | ||||||||
Austrian loans due through March 2020 | $ | 50 | $ | 714 | ||||
Term Loan Facility, net(1) | 342,046 | 389,279 | ||||||
|
|
|
| |||||
$ | 342,096 | $ | 389,993 | |||||
|
|
|
|
|
The Company recognized interest expense of $9,352 and $15,829 for the six months ended June 30, 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 June 30, 2018March 31, 2019 are as follows:
Year | Amount | Amount | ||||||
2018 (remaining) | $ | 11,877 | ||||||
2019 | 634 | |||||||
2019 (remaining | $ | 8,656 | ||||||
2020 | 50 | 6,583 | ||||||
2021 | — | 6,500 | ||||||
2022 | — | 6,500 | ||||||
2023 | 354,964 | |||||||
2024 | 6,500 | |||||||
Thereafter | 348,464 | 612,625 |
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:
Six Months Ended June 30, | 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 | 8,484 | 7,555 | 6,062 | 5,184 | ||||||||||||
Direct and other charges to warranty liability | (7,328 | ) | (6,084 | ) | (6,705 | ) | (4,073 | ) | ||||||||
|
|
|
| |||||||||||||
End of period(1) | $ | 11,260 | $ | 9,732 | $ | 16,933 | $ | 11,215 | ||||||||
|
|
|
|
(1) |
|
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Income Taxes |
The Tax CutsCompany’s effective tax rates for the three months ended March 31, 2019 and Jobs Act (“the Act”) was enacted on December 22, 2017.2018 were 18.8% and 17.1%, respectively. The Act reduces the U.S. federal corporate incomeeffective tax rate from 35% to 21%, requires companies to pay aone-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 accounting for the enactment effects ofthree months ended March 31, 2019 and the Act. As of June 30, 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 ended June 30, 2018, the Company recognized a tax benefit of $659 from an adjustment of the provisional estimates recorded for the Act and included these adjustments as a component ofrelated income tax expense from continuing operations. The calculations will continuewere lower than the U.S. statutory tax rate due to be refinedthe U.S. deduction for foreign derived intangible income, the federal tax credit for research activities and adjusted as additional analysis is completed and more guidance is issued. These future adjustments could be material tothe geographic mix of income earned by the Company’s international subsidiaries being taxed at rates lower than the U.S. statutory tax expense.
Therate, offset by the global intangiblelow-taxed income (“GILTI”) provision frominclusion, the Act subjects a U.S. shareholder to current taxlimitation on GILTI earned by certain foreign subsidiaries. Under FASB Staff Q&A, Topic 740 No. 5, the Company has elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred. The Company expects to incur GILTI tax for the year ended December 31, 2018. The estimate for this GILTI tax, netdeduction of foreign tax credits, increased the Company’s effective tax rate for 2018 by approximately 1.0%.executive compensation and state income taxes.
The Company’s effective tax rate for the three and six months ended June 30,March 31, 2018 was 17.3% and 17.2%, respectively. The effective tax rate for the three and six months ended June 30, 2018, and related income tax expense waswere 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 from the Act offset by the tax effects of the new provision forfrom global intangible low taxedlow-taxed income from the Act and state income taxes.
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The effective tax rate for the three and six months ended June 30, 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 June 30, 2018 and DecemberMarch 31, 2017,2019, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $28,961$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 June 30, 2018, if these benefitsMarch 31, 2019, excluding interest and penalties, there were recognized in a future period, the timingapproximately $33,085 of which is not estimable, the net unrecognized tax benefit of $21,491, 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 June 30, 2018March 31, 2019 and December 31, 2017,2018, the Company had accrued interest on unrecognized tax benefits of approximately $572$543 and $327,$568, respectively.
Over the next 12 months it is reasonably possible that the Company may recognize approximately $1,920$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 StatesU.S. Internal Revenue Service commenced an examination of ourthe 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. DuringAlso during the quarter ended March 31, 2018, the Company received notification from the United StatesU.S. Internal Revenue Service of their intent to audit its U.S. subsidiary, Newport Corporation, for tax year 2015. This audit commenced during the quarter ended June 30, 2018.2018 and there have been no proposed adjustments through March 31, 2019. The U.S. statute of limitations remains open for tax years 20142015 through present. The statute of limitations for the Company’s tax filings in other jurisdictions varies between fiscal years 20122013 through present. WeThe Company also havehas 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.
|
As a result of the acquisition of Newport, the Company has assumed all assetsNOTES 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 and six month periods ended June 30, 2018 and 2017. The Company’s contributions to these plans for both the three and six month periods ended June 30, 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 122,862 | $ | 120,440 | $ | 227,983 | $ | 185,500 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Denominator: | ||||||||||||||||
Shares used in net income per common share – basic | 54,719,000 | 54,178,000 | 54,571,000 | 53,973,000 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Restricted stock units, stock appreciation rights and shares issued under employee stock purchase plan | 555,000 | 823,000 | 709,000 | 1,006,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Shares used in net income per common share – diluted | 55,274,000 | 55,001,000 | 55,280,000 | 54,979,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 2.25 | $ | 2.22 | $ | 4.18 | $ | 3.44 | ||||||||
Diluted | $ | 2.22 | $ | 2.19 | $ | 4.12 | $ | 3.37 |
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Numerator: | ||||||||
Net income | $ | 12,455 | $ | 105,121 | ||||
|
|
|
| |||||
Denominator: | ||||||||
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 | 701,000 | 863,000 | ||||||
|
|
|
| |||||
Shares used in net income per common share – diluted | 54,848,000 | 55,286,000 | ||||||
|
|
|
| |||||
Net income per common share: | ||||||||
Basic | $ | 0.23 | $ | 1.93 | ||||
Diluted | $ | 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 (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 and six months ended June 30,March 31, 2019 and 2018 there were approximately 99,000128,200 and 49,000 weighted-average restricted stock units, respectively, 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 and six months ended June 30, 2017, there were approximately 800 and 5,000380 weighted-average restricted stock units, respectively, 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 1,770,0002,588,000 shares of common stock for approximately $52,000$127,000 pursuant to the program since its adoption. During the three and six months ended June 30,March 31, 2019 and 2018, and 2017, there were no repurchases of common stock.
Cash Dividends
Holders of the Company’s common stock are entitled to receive dividends when they are declared by the Company’s Board of Directors. TheIn 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, the Company’s Board of Directors declared a quarterly cash dividend of $0.18 per share, during the first quarter of 2018 and $0.20 per share during the second quarter of 2018, which totaled $20,750 or $0.38 per share. The Company’s Board of Directors declared a cash dividend of $0.175 per share during the first and second quarters of 2017, which totaled $18,903 or $0.35 per share.$9,808.
On July 30, 2018,May 8, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid on SeptemberJune 7, 20182019 to shareholders of record as of AugustMay 27, 2018.2019. 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.
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 Newport Merger, the Company assumed:
During the six months ended June 30, 2018, the Company granted 259,597 RSUs with a weighted average grant date fair value of $112.56. During the six months ended June 30, 2017, the Company granted 376,081 RSUs with a weighted average grant date fair value of $67.13. There were no SARs granted during the six months ended June 30, 2018 or 2017.
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The total stock-based compensation expense included in the Company’s consolidated statements of income and comprehensive income was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Cost of revenues | $ | 1,489 | $ | 1,187 | $ | 2,494 | $ | 2,117 | ||||||||
Research and development expense | 819 | 827 | 1,541 | 1,572 | ||||||||||||
Selling, general and administrative expense | 4,058 | 4,193 | 12,757 | 11,300 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Totalpre-tax stock-based compensation expense | $ | 6,366 | $ | 6,207 | $ | 16,792 | $ | 14,989 | ||||||||
|
|
|
|
|
|
|
|
At June 30, 2018, 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 $30,447, 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:
Six Months Ended June 30, 2018 | ||||||||
Outstanding RSUs | Weighted Average Grant Date Fair Value | |||||||
RSUs – beginning of period | 943,379 | $ | 47.57 | |||||
Accrued dividend shares | 31 | $ | 115.65 | |||||
Granted | 259,597 | $ | 112.56 | |||||
Vested | (478,238 | ) | $ | 44.21 | ||||
Forfeited | (33,889 | ) | $ | 60.77 | ||||
|
| |||||||
RSUs – end of period | 689,880 | $ | 73.71 | |||||
|
|
The following table presents the activity for SARs under the Plan:
Six Months Ended June 30, 2018 | ||||||||
Outstanding SARs | Weighted Average Grant Date Fair Value | |||||||
SARs – beginning of period | 282,907 | $ | 28.62 | |||||
Exercised | (79,767 | ) | $ | 28.91 | ||||
Forfeited or expired | (1,950 | ) | $ | 29.00 | ||||
|
| |||||||
SARs Outstanding – end of period | 201,190 | $ | 28.50 | |||||
|
|
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 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, 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 relatedrelating to the maintenance and repair of its products, installation services and training. The Company’s primary served markets are manufacturers of capital equipment forinclude semiconductor, manufacturing, industrial technologies, life and health sciences, as well as 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 hascreated 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.
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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 aretable sets forth net revenues by reportable segment:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Vacuum & Analysis | $ | 368,328 | $ | 309,961 | $ | 716,672 | $ | 587,945 | $ | 234,355 | $ | 348,344 | ||||||||||||
Light & Motion | 204,812 | 170,796 | 410,743 | 329,965 | 193,988 | 205,931 | ||||||||||||||||||
Equipment & Solutions | 35,218 | — | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
$ | 573,140 | $ | 480,757 | $ | 1,127,415 | $ | 917,910 | $ | 463,561 | $ | 554,275 | |||||||||||||
|
|
|
|
|
|
The following istable sets forth a reconciliation of segment gross profit to consolidated net income:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Gross profit by reportable segment: | ||||||||||||||||||||||||
Vacuum & Analysis | $ | 171,082 | $ | 139,867 | $ | 329,582 | $ | 268,790 | $ | 98,139 | $ | 158,500 | ||||||||||||
Light & Motion | 103,795 | 79,716 | 208,150 | 156,340 | 92,741 | 104,355 | ||||||||||||||||||
Equipment & Solutions | 7,238 | — | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total gross profit by reportable segment | 274,877 | 219,583 | 537,732 | 425,130 | 198,118 | 262,855 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development | 36,504 | 33,680 | 71,361 | 66,962 | 38,933 | 34,857 | ||||||||||||||||||
Selling, general and administrative | 76,559 | 71,979 | 159,508 | 146,199 | 82,455 | 82,949 | ||||||||||||||||||
Fees and expenses related to incremental term loan | 5,847 | — | ||||||||||||||||||||||
Acquisition and integration costs | (1,168 | ) | 790 | (1,168 | ) | 2,232 | 30,167 | — | ||||||||||||||||
Restructuring | 790 | 2,064 | 2,010 | 2,586 | 223 | 1,220 | ||||||||||||||||||
Asset impairment | — | 6,719 | — | 6,719 | ||||||||||||||||||||
Environmental Costs | — | — | 1,000 | — | ||||||||||||||||||||
Customer contract obligation | 1,700 | — | ||||||||||||||||||||||
Environmental costs | — | 1,000 | ||||||||||||||||||||||
Amortization of intangible assets | 10,901 | 11,468 | 22,091 | 23,969 | 15,727 | 11,190 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income from operations | 151,291 | 92,883 | 282,930 | 176,463 | 23,066 | 131,639 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Gain on sale of business | — | 74,856 | — | 74,856 | ||||||||||||||||||||
Interest and other expense, net | 2,747 | 9,767 | 7,644 | 16,062 | 7,730 | 4,897 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income before income taxes | 148,544 | 157,972 | 275,286 | 235,257 | 15,336 | 126,742 | ||||||||||||||||||
Provision for income taxes | 25,682 | 37,532 | 47,303 | 49,757 | 2,881 | 21,621 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income | $ | 122,862 | $ | 120,440 | $ | 227,983 | $ | 185,500 | $ | 12,455 | $ | 105,121 | ||||||||||||
|
|
|
|
|
|
The following istable sets forth capital expenditures by reportable segment for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:
Vacuum & Analysis | Light & Motion | Total | Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | ||||||||||||||||||||||
Three Months Ended June 30, 2018: | ||||||||||||||||||||||||||||
Three Months Ended March 31, 2019: | ||||||||||||||||||||||||||||
Capital expenditures | $ | 6,972 | $ | 5,456 | $ | 12,428 | $ | 7,488 | $ | 5,154 | $ | 1,887 | $ | 14,529 | ||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||
Six Months Ended June 30, 2018: | ||||||||||||||||||||||||||||
Three Months Ended March 31, 2018: | ||||||||||||||||||||||||||||
Capital expenditures | $ | 13,169 | $ | 8,649 | $ | 21,818 | $ | 6,197 | $ | 3,193 | $ | — | $ | 9,390 | ||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||
Three Months Ended June 30, 2017: | ||||||||||||||||||||||||||||
Capital expenditures | $ | 3,528 | $ | 2,112 | $ | 5,640 | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Six Months Ended June 30, 2017: | ||||||||||||||||||||||||||||
Capital expenditures | $ | 5,902 | $ | 3,837 | $ | 9,739 | ||||||||||||||||||||||
|
|
|
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The following istable sets forth depreciation and amortization by reportable segment for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:
Vacuum & Analysis | Light & Motion | Total | Vacuum & Analysis | Light & Motion | Equipment & Solutions | Total | ||||||||||||||||||||||
Three Months Ended June 30, 2018: | ||||||||||||||||||||||||||||
Three Months Ended March 31, 2019: | ||||||||||||||||||||||||||||
Depreciation and amortization | $ | 4,968 | $ | 14,917 | $ | 19,885 | $ | 4,045 | $ | 14,140 | $ | 7,026 | $ | 25,211 | ||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||||||||||||||
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||||||
Depreciation and amortization | $ | 10,097 | $ | 30,280 | $ | 40,377 | $ | 5,129 | $ | 15,363 | $ | — | $ | 20,492 | ||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||
Three Months Ended June 30, 2017: | ||||||||||||||||||||||||||||
Depreciation and amortization | $ | 5,097 | $ | 15,491 | $ | 20,588 | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Six Months Ended June 30, 2017: | ||||||||||||||||||||||||||||
Depreciation and amortization | $ | 10,219 | $ | 32,202 | $ | 42,421 | ||||||||||||||||||||||
|
|
|
Total income tax expense is not presented by reportable segment because the necessary information is not available or used by the CODM.
The following aretable sets forth segment assets by reportable segment:
June 30, 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 | $ | 227,639 | $ | 127,553 | $ | (15,234 | ) | $ | 339,958 | $ | 160,040 | $ | 139,592 | $ | 51,088 | $ | (14,730 | ) | $ | 335,990 | ||||||||||||||||
Inventory, net | 227,635 | 157,294 | — | 384,929 | 225,431 | 164,603 | 85,690 | (91 | ) | 475,633 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Total segment assets | $ | 455,274 | $ | 284,847 | $ | (15,234 | ) | $ | 724,887 | $ | 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:
June 30, 2018 | December 31, 2017 | |||||||
Total segment assets | $ | 724,887 | $ | 639,389 | ||||
Cash and cash equivalents, restricted cash and investments | 641,593 | 553,976 | ||||||
Other current assets | 61,720 | 53,543 | ||||||
Property, plant and equipment, net | 174,054 | 171,782 | ||||||
Goodwill and intangible assets, net | 931,402 | 957,445 | ||||||
Other assets | 39,832 | 37,883 | ||||||
|
|
|
| |||||
Consolidated total assets | $ | 2,573,488 | $ | 2,414,018 | ||||
|
|
|
|
MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
March 31, 2019 | December 31, 2018 | |||||||
Total segment assets | $ | 811,623 | $ | 680,143 | ||||
Cash and cash equivalents and investments | 472,692 | 728,461 | ||||||
Other current assets | 86,387 | 65,790 | ||||||
Property, plant and equipment, net | 251,424 | 194,367 | ||||||
Right-of-use asset | 65,628 | — | ||||||
Goodwill and intangible assets, net | 1,676,422 | 906,803 | ||||||
Other assets | 48,562 | 38,682 | ||||||
|
|
|
| |||||
Consolidated total assets | $ | 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 tax transfer prices and have been eliminated from consolidated net revenues.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net revenues: | ||||||||||||||||
United States | $ | 281,818 | $ | 244,649 | $ | 558,538 | $ | 462,699 | ||||||||
Korea | 66,983 | 59,827 | 120,994 | 104,705 | ||||||||||||
Japan | 54,087 | 36,865 | 112,361 | 74,657 | ||||||||||||
Asia (excluding Korea and Japan) | 107,193 | 91,630 | 208,577 | 179,873 | ||||||||||||
Europe | 63,059 | 47,786 | 126,945 | 95,976 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 573,140 | $ | 480,757 | $ | 1,127,415 | $ | 917,910 | |||||||||
|
|
|
|
|
|
|
|
Long-lived assets:(1) | June 30, 2018 | December 31, 2017 | ||||||
United States | $ | 132,097 | $ | 124,689 | ||||
Europe | 26,622 | 28,820 | ||||||
Asia | 49,078 | 49,645 | ||||||
|
|
|
| |||||
$ | 207,797 | $ | 203,154 | |||||
|
|
|
|
Net revenues: United States Korea Japan Asia (excluding Korea and Japan) Europe Goodwill associated with each of the Company’s reportable segments is as follows: Three Months Ended March 31, 2019 2018 $ 224,347 $ 276,720 35,802 54,011 42,102 58,274 101,327 101,384 59,983 63,886 $ 463,561 $ 554,275
June 30, 2018 | December 31, 2017 | |||||||
Reportable segment: | ||||||||
Vacuum & Analysis | $ | 197,152 | $ | 197,617 | ||||
Light & Motion | 391,566 | 393,430 | ||||||
|
|
|
| |||||
Total goodwill | $ | 588,718 | $ | 591,047 | ||||
|
|
|
|
Worldwide Product Information
Because the reportable segment information above does not reflect worldwide sales of the Company’s products, the Company groups its products into six groups of similar products based upon the similarity of product function. The following table sets forth worldwide net revenue for each group of products:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Analytical and Control Solutions Products | $ | 31,493 | $ | 32,801 | $ | 65,205 | $ | 64,621 | ||||||||
Power, Plasma and Reactive Gas Solutions Products | 187,765 | 142,639 | 354,817 | 265,439 | ||||||||||||
Vacuum Solutions Products | 149,070 | 134,379 | 296,650 | 257,743 | ||||||||||||
Lasers Products | 70,663 | 52,299 | 145,460 | 97,243 | ||||||||||||
Optics Products | 57,200 | 50,706 | 111,579 | 97,211 | ||||||||||||
Photonics Products | 76,949 | 67,933 | 153,704 | 135,653 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 573,140 | $ | 480,757 | $ | 1,127,415 | $ | 917,910 | |||||||||
|
|
|
|
|
|
|
|
Sales of Analytical and Control Solutions Products; Power, Plasma and Reactive Gas Solutions Products; and Vacuum Solutions Products are included in the Company’s Vacuum & Analysis segment. Sales of Laser Products; Optics Products; and Photonics Products are included in the Light & Motion segment.
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, 2019 | December 31, 2018 | |||||||
Reportable segment: | ||||||||
Vacuum & Analysis | $ | 196,937 | $ | 197,126 | ||||
Light & Motion | 388,896 | 389,870 | ||||||
Equipment & Solutions | 471,498 | — | ||||||
|
|
|
| |||||
Total goodwill | $ | 1,057,331 | $ | 586,996 | ||||
|
|
|
|
Major CustomersWorldwide Product Information
The Company had two customers with netgroups its product offerings into three groups based upon the similarity of product function as follows:
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 | |||||
|
|
|
|
Advanced manufacturing components are comprised of product revenues greater than 10%from the Company’s Vacuum & Analysis and Light & Motion segments. Global service is comprised of total netservice 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
LAM Research Corporation | 13.1 | % | 10.8 | % | 12.8 | % | 11.6 | % | ||||||||
Applied Materials, Inc. | 12.9 | % | 13.0 | % | 12.5 | % | 13.0 | % |
18) | Restructuring |
During the six months ended June 30, 2018 and 2017, theThe Company recorded restructuring charges of $2,010 and $2,586, respectively.$223 during the three months ended March 31, 2019, primarily related to severance costs related to the consolidation of certain functions in Asia. The Company recorded restructuring charges forof $1,220 during the sixthree months ended June 30,March 31, 2018 primarily related to severance costs related to streamlining and consolidating certain administrative functions. The restructuring charges for the six months ended June 30, 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:
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Beginning of period | $ | 3,244 | $ | 540 | $ | 2,632 | $ | 3,244 | ||||||||
Charged to expense | 2,010 | 2,586 | 223 | 1,220 | ||||||||||||
Payments and adjustments | (2,727 | ) | (586 | ) | (252 | ) | (1,806 | ) | ||||||||
|
|
|
| |||||||||||||
End of period | $ | 2,527 | $ | 2,540 | $ | 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 actionactions lawsuit captionedDixon Chung v. Newport Corp., et al., Case No.A-16-733154-C, wasand 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 merger agreement (“Newport Merger AgreementAgreement”) between the Company, Newport, and a wholly-owned subsidiary of the Company (“Merger Sub. On March 25, 2016, a second putative class action complaint captionedHubert 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 theNewport 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 consolidateconsolidated 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 ofcontained 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 containing substantially similar allegations but naming only Newport’s former directors as defendants. On August 8, 2017, the Court dismissed the Company and Newport from the action. The second amended complaint seeks monetary damages, includingpre- and post-judgment interest. 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 the 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 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 transaction. ESI provided supplemental merger related disclosures to eliminate the burden and expense of litigation and to avoid any possible disruption to the 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)
On July 27, 2017, plaintiffs filed a second amended complaint, which names as defendants certain former directors of Newport. 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. The second amended complaint seeks monetary damages, includingpre- and post-judgment interest. On September 1, 2017 the Newport directors filed a motion to dismiss the second amended complaint, which plaintiffs opposed. The Court held a hearing on the motion to dismiss on December 7, 2017. On January 5, 2018, the Court entered an order denying 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 May 17, 2018, plaintiff Hubert C. Pincon filed a motion to certify a putative class of former Newport stockholders and appoint Mr. Pincon as the sole representative of the proposed class. On June 11, 2018, plaintiff Dixon Chung was voluntarily dismissed from the litigation. On July 3, 2018, Mr. Pincon filed an amended motion for class certification seeking to have purported class member Locals 302 and 612 of the International Union of Operating Engineers-Employers Construction Industry Retirement Trust appointed as an additional class representative.
On May 23, 2018, the Company received a third-party subpoenaduces tecum requesting documents and a deposition on various topics in the state of Massachusetts. The Company served plaintiffs with objections and responses to the subpoena on June 6, 2018. Discovery negotiations are ongoing.
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’sour 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 FormForm 10-K for the year ended December 31, 20172018 in the section entitled “Risk Factors” as referenced in Part II, Item 1A “Risk Factors” of this Quarterly Report on FormForm 10-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, 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.
OurAcquisition 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 aresegments: 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 58%52% and 43% of our net revenues for both the sixthree months ended June 30,March 31, 2019 and 2018, and 2017respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers.
Approximately 42% of our net revenues for both the six months ended June 30, 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 increaseddecreased by $54$93.2 million, or 19%30%, for the three months ended June 30, 2018,March 31, 2019, compared to the same period in the prior year. This increasedecrease was comprised of an increasea decrease in net semiconductor revenues of $51.0$98.8 million and $1.0 million in the Vacuum & Analysis segment and $3.0 million in the Light & Motion segment. These increases were primarily due to volume increasessegments, respectively, offset by an increase of $6.6 million from our semiconductor customers. Net revenuesEquipment & Solutions segment as a result of the ESI Merger, which included two months of revenue from semiconductor capital equipment manufacture and semiconductor device manufacture customers increased by $119 million, or 22%, for the six months ended June 30, 2018, compared to the same period in the prior year. This increase was comprised of an increase in net semiconductor revenues from the Vacuum & Analysis segment of $108 million and an increase from the Light & Motion segment of $11.0 million. These increases were primarily due to volume increases from our semiconductor customers.quarter.
The semiconductor capital equipment industry ishas been experiencing a moderation in capital spending in the near term and therefore we expect to seehave seen a similar moderationeffect on our semiconductor revenue in the thirdfirst quarter of 2018.and 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 uncertaincannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry.
Net revenues from customers in other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications, increased by $38.5 million, or 19%, for the three months ended June 30, 2018, compared to the same period in the prior year. This increase was comprised of an increase in net revenues from customers in other advanced markets of $30.9 million in the Light & Motion segment and $7.6 million in the Vacuum & Analysis segment. Net revenues from customers in other advanced markets increased by $90.6 million, or 23%, for the six month period ended June 30, 2018, compared to the same period in the prior year. This increase was comprised of an increase in net revenues from customers in other advanced markets of $69.6 million in the Light & Motion segment and $21.0 million in the Vacuum & Analysis segment. The increases for the three and six months ended June 30, 2018 were mainly due to volume increases from customers in the industrial technologies market. Revenues from customers in other advanced markets are made up of many different markets including electronic thin film, life and health sciences, industrial technologies, and research and defense.
A significant portion of our net revenues is from sales to customers in international markets. For both six month periodsthe three months ended June 30,March 31, 2019 and 2018, and 2017, international net revenues accounted for approximately 52% and 50% of our total net revenues. A significant portion of our international net revenues was from Japan, Germany, China, South Korea Japan, 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 $132$198.7 million and $125$146.7 million, as of June 30, 2018March 31, 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 $76$87.5 million and $78$77.4 million, as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, excluding goodwill and intangibles, and long-termtax-related accounts.
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 ASC 842 as outlined below.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Leases, (“ASU2014-09,2016-02”), “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”) as outlined below.
to enhance the transparency and comparability of financial reporting related to leasing arrangements. We adopted ASC 606ASU2016-02 on January 1, 2018 using2019, or the modified retrospective method for all contracts not completedeffective date, and used the effective date as of theour date of adoption. The reported results forinitial application.
At the six months ended June 30, 2018 reflectinception of an arrangement, we determine whether 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 recordedarrangement is or contains 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 its service business and certain custom products. The impact to revenues for the quarter ended June 30, 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:
|
|
|
|
|
Revenue under ASC 606 is recognized when or as obligations under the terms of a contract with our customer has 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 performed daily is primarily ratable over time.
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 identifiedlease based on the productsfacts 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 services that willless. 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 transferredrequired 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 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 distinctlease payments 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 June 30, 2018 contain a significant financing component. Contract assets as of January 1 and June 30, 2018 were $3.1 million and $3.3 million, respectively, 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. Impacts of variable consideration were immaterial during the period.
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.similar economic environment. We have elected to useutilize 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 related to disclosing the remaining performance obligations as of June 30, 2018, as the majority have a duration of less than one year.
Costs to Obtainnot separate lease 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.non-lease components. We have elected to recognizeaccount for the costs for freightlease and shipping when control over products has transferrednon-lease components of each of our operating leases as a single lease component and allocate all of the contract consideration to the customerlease 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 an expense in costlease expense.
Many of sales.
our leases contain options to renew and extend lease terms, and options to terminate leases early. We monitor and trackdo not recognize the amount of product returns and reduce revenueright-of-use asset or lease liability for renewal or termination periods unless we are reasonably certain to exercise the option 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.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, 20172018 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”
Results of Operations
The following table sets forth for the periods indicated the percentage of total net revenues of certain line items included in our consolidated statements of operations and comprehensive income data.
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Product | 89.0 | % | 88.7 | % | 89.3 | % | 88.7 | % | 85.7 | % | 89.6 | % | ||||||||||||
Services | 11.0 | 11.3 | 10.7 | 11.3 | 14.3 | 10.4 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total net revenues | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||
Cost of product revenues | 46.5 | 48.0 | 46.8 | 47.6 | 49.6 | 47.2 | ||||||||||||||||||
Cost of service revenues | 5.5 | 6.3 | 5.5 | 6.1 | 7.7 | 5.4 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total cost of revenues (exclusive of amortization shown separately below) | 52.0 | 54.3 | 52.3 | 53.7 | 57.3 | 52.6 | ||||||||||||||||||
Gross profit | 48.0 | 45.7 | 47.7 | 46.3 | 42.7 | 47.4 | ||||||||||||||||||
Research and development | 6.4 | 7.0 | 6.3 | 7.3 | 8.4 | 6.3 | ||||||||||||||||||
Selling, general and administrative | 13.4 | 15.0 | 14.1 | 15.9 | 17.8 | 15.0 | ||||||||||||||||||
Fees and expenses related to incremental term loan | 1.2 | — | ||||||||||||||||||||||
Acquisition and integration costs | (0.2 | ) | 0.2 | (0.1 | ) | 0.3 | 6.5 | — | ||||||||||||||||
Restructuring | 0.1 | 0.4 | 0.2 | 0.3 | — | 0.2 | ||||||||||||||||||
Customer contract obligation | 0.4 | — | ||||||||||||||||||||||
Environmental costs | — | — | 0.1 | — | — | 0.2 | ||||||||||||||||||
Asset impairment | — | 1.4 | — | 0.7 | ||||||||||||||||||||
Amortization of intangible assets | 1.9 | 2.4 | 2.0 | 2.6 | 3.4 | 2.0 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income from operations | 26.4 | 19.3 | 25.1 | 19.2 | 5.0 | 23.7 | ||||||||||||||||||
Interest income | 0.3 | 0.1 | 0.2 | 0.1 | 0.4 | 0.2 | ||||||||||||||||||
Interest expense | 0.7 | 1.4 | 0.8 | 1.7 | 2.0 | 1.0 | ||||||||||||||||||
Gain on sale of business | — | 15.6 | — | 8.2 | ||||||||||||||||||||
Other expense, net | 0.1 | 0.7 | 0.1 | 0.2 | 0.1 | — | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income from operations before income taxes | 25.9 | 32.9 | 24.4 | 25.6 | 3.3 | 22.9 | ||||||||||||||||||
Provision for income taxes | 4.5 | 7.8 | 4.2 | 5.4 | 0.6 | 3.9 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income | 21.4 | % | 25.1 | % | 20.2 | % | 20.2 | % | 2.7 | % | 19.0 | % | ||||||||||||
|
|
|
|
|
|
Net Revenues
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Product | $ | 510.0 | $ | 426.3 | $ | 1,006.7 | $ | 814.3 | $ | 397.4 | $ | 496.7 | ||||||||||||
Service | 63.1 | 54.4 | 120.7 | 103.6 | 66.2 | 57.6 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total net revenues | $ | 573.1 | $ | 480.7 | $ | 1,127.4 | $ | 917.9 | $ | 463.6 | $ | 554.3 | ||||||||||||
|
|
|
|
|
|
Product revenues increased $83.7 million and $192.4decreased $99.3 million during the three and six months ended June 30, 2018, respectively,March 31, 2019, compared to the same period in the prior year. These increases were both primarily attributedyear, due to increasesa decrease in net product revenues from our semiconductor customers of $47.8$92.5 million and $104.0 million for the three and six month periods ended June 30, 2018, respectively. The remainder of the increases were attributed toa decrease in net product revenues from customers in our other advanced markets of $35.9 million and $88.4 million$6.8 million. The decrease in product revenues from semiconductor customers for the three and six months ended June 30, 2018, respectively, primarilyMKS 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 industrial technologies market.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 advanced markets for the legacy MKS business was $26.2 million, offset by an increase in product revenue from customers in advanced markets of $19.4 million 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 rather than in our product revenue and related cost of sales line items. As a result, for the three and six months ended June 30, 2017, we reclassified $5.6 million and $10.6 million, respectively of product revenue for spare parts from product to service revenue. Service revenues increased $8.7 million and $17.1$8.6 million during the three and six months ended June 30, 2018, respectively,March 31, 2019 compared to the same periodsperiod in the prior year. These increases wereThis increase was primarily attributed to increasesan increase in net service revenues from our semiconductor customers of $6.1 million and $14.9 million for the three and six month periods ended June 30, 2018, respectively. The remainder of the increases were attributed to net service revenues from customers in our other advanced markets of $2.6$9.2 million and $2.2 millionfrom the Equipment & Solutions segment as a result of the ESI Merger, which included two months of service revenue for the three and six months ended June 30, 2018, respectively, primarily from our industrial technologies market.quarter.
Total international net revenues, including product and service, were $291.3$239.2 million and $568.9$277.6 million for the three and six months ended June 30, 2018, respectively, compared to $236.1 million and $455.2 million for the three and six months ended June 30, 2017, respectively. The increases of $55.2 million and $113.7 million in total international net revenues for the three and six months ended June 30, 2018, respectively,March 31, 2019, compared to the same period in the prior year, wereyear. This decrease of $38.4 million for the three months ended March 31, 2019 was primarily due to increasesdecreases 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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Vacuum & Analysis | $ | 368.3 | $ | 309.9 | $ | 716.7 | $ | 587.9 | $ | 234.4 | $ | 348.4 | ||||||||||||
Light & Motion | 204.8 | 170.8 | 410.7 | 330.0 | 194.0 | 205.9 | ||||||||||||||||||
Equipment & Solutions | 35.2 | — | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total net revenues | $ | 573.1 | $ | 480.7 | $ | 1,127.4 | $ | 917.9 | $ | 463.6 | $ | 554.3 | ||||||||||||
|
|
|
|
|
|
Net revenues from our Vacuum & Analysis segment increased $58.4 million and $128.8decreased $114.0 million for the three and six months ended June 30, 2018, respectively,March 31, 2019, compared to the same period in the prior year. The increases were attributedyear, due to increasesdecreases in net revenues from semiconductor customers of $50.8$98.8 million and $107.8 million for the three and six months ended June 30, 2018, respectively, and increasesa decrease in net revenues from customers in our other advanced markets of $7.6 million and $21.0$15.2 million, primarily due to an increasefrom customers in our industrial technologies market.
Net revenues from our Light & Motion segment increased $34.0 million and $80.7decreased $11.9 million for the three and six months ended June 30, 2018, respectively,March 31, 2019, compared to the same periodsperiod in the prior year. The increases weredecrease was primarily attributed to increasesa decrease in net revenues from customers in our other advanced markets of $30.9$11.0 million, and $69.6 million for the three and six months ended June 30, 2018, respectively, primarily due to increasesfrom customers in our industrial technologieslife and health sciences market. The remainder of the increases weredecrease was attributed to increasesa decrease in net revenues from semiconductor customers of $3.1 million and $11.1 million for the three and six months ended June 30, 2018, respectively.$0.9 million.
Gross Profit
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||
2018 | 2017 | % Points Change | 2018 | 2017 | % Points Change | 2019 | 2018 | % Points Change | ||||||||||||||||||||||||||||
Gross profit as a percentage of net revenues: | ||||||||||||||||||||||||||||||||||||
Product | 47.7 | % | 45.9 | % | 1.8 | % | 47.5 | % | 46.4 | % | 1.1 | % | 42.2 | % | 47.4 | % | (5.2 | )% | ||||||||||||||||||
Service | 50.3 | 44.0 | 6.3 | 49.1 | 45.7 | 3.4 | 46.0 | 47.7 | (1.7 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Total gross profit | 48.0 | % | 45.7 | % | 2.3 | % | 47.7 | % | 46.3 | % | 1.4 | % | 42.7 | % | 47.4 | % | (4.7 | )% | ||||||||||||||||||
|
|
|
|
|
|
|
|
Gross profit as a percentage of net product revenues increaseddecreased by 1.8 percentage points and 1.15.2 percentage points for the three and six months ended June 30, 2018, respectively,March 31, 2019, compared to the same periodsperiod in the prior year. These increase wereyear, primarily attributed to higherdue lower revenue volumes.volumes and lower factory utilization.
Gross profit as a percentage of net service revenues increaseddecreased by 6.3 percentage points and 3.41.7 percentage points for the three and six months ended June 30, 2018, respectively,March 31, 2019, compared to the same periodsperiod in the prior year. These increases wereyear, primarily attributeddue to lower overhead costs.unfavorable product mix partially offset by favorable absorption.
The following istable sets forth gross profit as a percentage of net revenues by reportable segment:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||
2018 | 2017 | % Points Change | 2018 | 2017 | % Points Change | 2019 | 2018 | % Points Change | ||||||||||||||||||||||||||||
Gross profit as a percentage of net revenues: | ||||||||||||||||||||||||||||||||||||
Vacuum & Analysis | 46.4 | % | 45.1 | % | 1.3 | % | 46.0 | % | 45.7 | % | 0.3 | % | 41.7 | % | 45.5 | % | (3.8 | )% | ||||||||||||||||||
Light & Motion | 50.7 | 46.6 | 4.1 | 50.7 | 47.4 | 3.3 | 47.8 | 50.7 | (2.9 | ) | ||||||||||||||||||||||||||
Equipment & Solutions | 20.6 | — | 100.0 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Total gross profit | 48.0 | % | 45.7 | % | 2.3 | % | 47.7 | % | 46.3 | % | 1.4 | % | 42.7 | % | 47.4 | % | (4.7 | )% | ||||||||||||||||||
|
|
|
|
|
|
|
|
Gross profit for our Vacuum & Analysis segment increaseddecreased by 1.3 percentage points and 0.33.8 percentage points for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year, primarily due to higher revenue volumes, partially offset by unfavorable product mix.
Gross profit for our Light & Motion segment increased by 4.1 percentage points and 3.3 percentage points for the three and six months ended June 30, 2018, respectively, compared to the same periods in the prior year, primarily due to higher revenue volumes and favorable product mix.
Research and Development
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Research and development expenses | $ | 36.5 | $ | 33.7 | $ | 71.4 | $ | 67.0 |
Research and development expenses increased $2.8 million for the three months ended June 30, 2018,March 31, 2019, compared to the same period in the prior year, primarily due to an increase of $2.0 million of compensation costs and related benefits and $0.7 million of project materials, related to increased investment in research and development activities.lower revenue volumes.
Research and development expenses increased $4.4 millionGross profit for our Light & Motion segment decreased by 2.9 percentage points for the sixthree months ended June 30, 2018,March 31, 2019, compared to the same period in the prior year, primarily due to an increaselower revenue volumes, unfavorable mix and lower factory utilization.
Gross profit for our Equipment & Solutions segment of $3.320.6% 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) | 2019 | 2018 | ||||||
Research and development expenses | $ | 38.9 | $ | 34.9 |
Research and development expenses increased $4.0 million for the three months ended March 31, 2019, compared to the same period in the prior year, primarily due to the ESI Merger, which included $2.4 million of compensation costs and benefits and $1.1related expenses, $0.7 million of project materials, related to increased investment in research$0.5 million of depreciation expense and development activities.$0.4 million 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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Selling, general and administrative expenses | $ | 76.6 | $ | 72.0 | $ | 159.5 | $ | 146.2 | $ | 82.5 | $ | 82.9 |
Selling, general and administrative expenses increaseddecreased by $4.6$0.4 million for the three months ended June 30, 2018,March 31, 2019, compared to the same period in the prior year,year. This decrease was primarily dueattributed 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 $2.7$7.0 million related to the ESI Merger, which included $4.1 million in compensation related expenses, $0.9 million of compensation costs and related benefits and $1.8 million of consulting and professional fees.
Selling, general and administrative expenses increased by $13.3 million for the six months ended June 30, 2018, compared to the same period in the prior year, primarily due to an increase of $10.0 million of compensation costs, primarily incentive compensation, and related benefits, $2.0depreciation expense, $0.5 million of consulting and professional fees and $0.8$0.4 million in information technologyof 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 expenses.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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Acquisition and integration costs | $ | (1.2 | ) | $ | 0.8 | $ | (1.2 | ) | $ | 2.2 | $ | 30.2 | $ | — |
We recorded acquisition and integration costs related to the Company’s acquisition of Newport Corporation in April 2016 (the “Newport Merger”)ESI Merger, which closed on February 1, 2019, during the three and six months ended June 30, 2017. During the second quarterMarch 31, 2019. These costs consisted primarily of 2018, we reversed a portion of thesecompensation costs related to severance agreementfor certain executives from ESI who had change in control provisions in their respective ESI employment agreements that were not met.accounted for as dual-trigger arrangements and other stock vesting accelerations, as well as consulting and professional fees associated with the ESI Merger.
Restructuring
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Restructuring | $ | 0.8 | $ | 2.1 | $ | 2.0 | $ | 2.6 | $ | 0.2 | $ | 1.2 |
We recorded restructuring costs during the three and six months ended June 30,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 comprised of severance costs related to transferring a portion of our shared services functions to a third party as well as the consolidation ofstreamlining and consolidating certain shared service functions in the United States and Asia. administrative functions.
Customer Contract Obligation
Three Months Ended March 31, | ||||||||
(dollars in millions) | 2019 | 2018 | ||||||
Customer contract obligation | $ | 1.7 | $ | — |
We recorded restructuring costsa charge during the three and six months ended June 30, 2017, primarilyMarch 31, 2019 related to the restructuring of onea contractual obligation we acquired as part of our international facilities and the consolidationacquisition of sales offices.Newport Corporation (the “Newport Merger”).
Environmental Costs
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Environmental costs | $ | — | $ | — | $ | 1.0 | $ | — | $ | — | $ | 1.0 |
We recorded $1.0 million of environmental costs during the first quarter of 2018 related to a U.S. Environmental Protection Agency-designated Superfund site acquired as part of the Newport Merger.
Asset Impairment
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Asset impairment | $ | — | $ | 6.7 | $ | — | $ | 6.7 |
We recorded $6.7 million of asset impairment charges for the three and six months ended June 30, 2017 due to the consolidation of two manufacturing plants. These charges primarily related to thewrite-off of certain goodwill and intangible assets.
Amortization of Intangible Assets
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Amortization of intangible assets | $ | 10.9 | $ | 11.5 | $ | 22.1 | $ | 24.0 | $ | 15.7 | $ | 11.2 |
Amortization of intangible assets decreasedincreased by $0.6 million and $1.9$4.5 million during the three and six months ended June 30, 2018, respectively, comparedMarch 31, 2019 primarily due to the same periods in the prior year, due to certainamortization of intangible assets becoming fully amortized.acquired as part of the ESI Merger.
Interest (Expense),Expense, Net
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Interest expense, net | $ | 2.5 | $ | 6.5 | $ | 6.8 | $ | 14.8 | $ | 7.4 | $ | 4.3 |
Interest expense, net, decreasedincreased by $4.0 million and $8.0$3.1 million for the three and six months ended June 30, 2018, respectively. The decreases for the three and six month periods ended June 30, 2018 wereMarch 31, 2019, primarily due primarily to principal prepaymentstwo months of $225.0 million since the first quarter of 2017 and repricings ofinterest expense related to 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.
Gain on Sale of Business
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Gain on sale of business | $ | — | $ | 74.9 | $ | — | $ | 74.9 |
We recorded a $74.9 million gain for the three and six months ended June 30, 2017 on the sale of our Data Analytics Solutions business during the second quarter of 2017.
Other Expense, Net
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Other expense, net | $ | 0.3 | $ | 3.3 | $ | 0.9 | $ | 1.3 | $ | 0.3 | $ | 0.6 |
The changes in other expense, net, for the three and six months ended June 30, 2018 and 2017, respectively,March 31, 2019, primarily related to changes in foreign exchange rates.
Provision for Income Taxes
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(dollars in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||||
Provision for income taxes | $ | 25.7 | $ | 37.5 | $ | 47.3 | $ | 49.8 | $ | 2.9 | $ | 21.6 |
Our effective tax rates for the periods ended March 31, 2019 and 2018 were 18.8% and 17.1%, respectively. Our effective tax rate for the three months ended March 31, 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 and six months ended June 30,March 31, 2018 was 17.3% and 17.2%, 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 theone-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 Staff Accounting Bulletin 118 (“SAB 118”). The provisional amounts associated with the Act were adjusted in the period ended June 30, 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 June 30, 2018, as compared to June 30, 2017. In addition, the effective tax rate in the period ending June 30, 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 effect of the new provision for global intangible low taxed income from the Act and state income taxes.
The effective tax rate for the three and six months ended June 30, 2017 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 activitiesforeign derived intangible income offset by the tax effects from global intangiblelow-taxed income and windfall stock compensationstate 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 June 30,December 31, 2018, the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $29.0$32.7 million. At December 31, 2017,The net increase is primarily attributable the total amountaddition of historical gross unrecognized tax benefits which excludes interest and penalties, was approximately $27.3 million. The net increase from Decemberfor ESI as a result of the ESI Merger during the quarter ended March 31, 2017 was primarily attributable to the addition2019. As of reserves for state taxes and certainnon-U.S. items offset by decreases from settlement of a U.S. Internal Revenue Service audit. At June 30, 2018,March 31, 2019, excluding interest and penalties, there were $21.5approximately $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 June 30, 2018March 31, 2019 and December 31, 2017, we2018, the Company had accrued interest on unrecognized tax benefits of approximately $0.6$0.5 million and $0.3$0.6 million, respectively.
Over the next 12 months it is reasonably possible that we may recognize approximately $1.9$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 20142015 through present. The statute of limitations for our tax filings in other jurisdictions varies between fiscal years 20122013 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 ourthe 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. During2018, and the impact was not material. Also during the quarter ended March 31, 2018, we received notification from the U.S. Internal Revenue Service of their intent to audit our U.S. subsidiary, Newport Corporation, for tax year 2015. This audit commenced during the quarter ended June 30, 2018.2018 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, including the adoption of the proposed regulations on the transition tax issued by the U.S. Internal Revenue Service on July 31, 2018,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 theone-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 $631.1$462.3 million at June 30, 2018,March 31, 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 $182.4$29.1 million for the sixthree months ended June 30, 2018March 31, 2019 and resulted from net income of $228.0$12.5 million, which includednon-cash charges of $72.6$61.6 million, offset by a net increase in working capital of $118.2$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 inventoriesaccounts receivable of $59.5$37.3 million and an increase in accounts receivableinventories of $42.5$28.2 million, related to an increase in business activities and a decrease in accrued compensation of $15.9$32.5 million, asyear-end bonuses were paid during the first quarter of 2018, a decrease in income taxes of $11.4 million and an increase in other current andnon-current assets of $4.3 million.paid. These increases in working capital were offset by an increase in other current andnon-current liabilities of $9.9$10.5 million, and an increase in accounts payable of $5.6 million.
Net cash provided by operating activities was $175.5 million for the six months ended June 30, 2017, and resulted from net income of $185.5 million, which includednon-cash charges of $13.1 million, offset by a net increase in working capital of $23.1 million. The net increase in working capital was primarily due to an increase in inventories of $34.1$9.3 million and an increase in accounts receivable of $15.9 million, related to an increase in business activities and an increase in other current andnon-current assets of $2.8 million. These increases, in working capital were partially offset by an increase in accrued income taxes of $21.9 million, other current andnon-current liabilities of $5.0 million, and accounts payable of $2.9$8.8 million.
Net cash used in investing activities was $16.5$874.1 million for the sixthree months ended June 30,March 31, 2019 and was primarily due to the payment of a portion of the purchase price for the ESI Merger of $988.6 million and purchases of production-related equipment of $14.5 million, partially offset by net sales and maturities of short-term investments of $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 $21.8$9.4 million, offset by net sales and maturities of short-term investments of $5.3$8.8 million.
Net cash provided by investingfinancing activities was $103.7$618.6 million for the sixthree months ended June 30, 2017, dueMarch 31, 2019 and was primarily from net proceeds of $638.6 million mainly from our 2019 Incremental Term Loan Facility, as described below, used to proceeds received fromfinance the saleESI Merger, partially offset by net payments related to tax payments for employee stock awards of our Data Analytics Solutions business of $72.5$9.0 million and net sales and maturitiesdividend payments of short-term investments of $40.9 million, offset by purchases of production-related equipment of $9.7$10.8 million.
Net cash used in financing activities was $74.9$67.1 million for the sixthree months ended June 30,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 $20.8$9.8 million and net payments related to tax payments for employee stock awards of $13.0$8.9 million, partially offset by a net increase in proceeds from short-term borrowings relating to our lines of credit of $8.9 million. Net cash used in financing activities was $86.1 million for the six months ended June 30, 2017, and resulted primarily from partial repayment of the Term Loan Facility of $53.1 million, net payments on short-term borrowings, primarily short-term lines of credit of $0.7 million, dividend payments made to common stockholders of $18.9 million and net payments related to tax payments for employee stock awards of $13.4$1.6 million.
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.Wenotice. We have repurchased approximately 1,770,0002,588,000 shares of common stock for approximately $52.0$127 million pursuant to the program since its adoption. During the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, 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 of Directors. In addition, we accrue dividend equivalents on the RSUs we assumed in the 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 the first quarter of 2018, and $0.20 per share during the second quarter of 2018, which totaled $20.8 million or $0.38 per share. Our Board of Directors declared a cash dividend of $0.175 per share during the first and second quarters of 2017, which totaled $18.9 million or $0.35 per share.$9.8 million.
On July 30, 2018, theMay 8, 2019, our Board of Directors declared a quarterly cash dividend of $0.20 per share to be paid on SeptemberJune 7, 20182019 to shareholders of record as of AugustMay 27, 2018.2019. 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 the 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 apre-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, andor 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, weWe 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 12016 Term Loan Facility, which decreased the applicable margin for LIBOR borrowings under ourfrom 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% for2.00% (from 1.75%) with respect to LIBOR borrowings and extended1.00% (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 date2016 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 1.75%2.0% at June 30, 2018. At June 30, 2018, theMarch 31, 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 April 2018, we entered into Amendment No. 4 (the “Repricing Amendment 4”) 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 4 decreased the applicable margin for our term loan under the Credit Agreement to 1.75% for LIBOR rate loans, 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 effective date of the Repricing Amendment 4.
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 $50.0had a fair value of $4.5 million respectively, of principal under the Credit Agreement. at March 31, 2019.
As of June 30, 2018,March 31, 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 asAs a result of June 30, 2018 was 3.7%.making these prepayments, we are no longer required to make any regularly scheduled principal payments on the 2016 Term Loan Facility until the maturity date of the 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 June 30, 2018,March 31, 2019, the remaining balance of the deferred finance fees, original issue discount and repricing fees related to the 2016 Term Loan Facility was $6.4$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 ourits 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 June 30, 2018 and based on our Total Leverage Ratio, we are no longerwere not required to make any scheduled quarterly principal payments until maturitya 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 securedcollateralized 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 June 30, 2018,March 31, 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 providesprovided 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) subjectprior to certain notice and fieldfiled 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 oneour 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 anwith 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 fees recognized in interest expense for both the three and six months ended June 30, 2018 were immaterial. 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.
LinesWe incurred $0.8 million of Creditcosts 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 expireincluded in other assets in the accompanying consolidated balance sheet and are renewed at three-month intervals. The linesbeing amortized to interest expense over the contractual term of credit provide for aggregate borrowings as of June 30, 2018, of up to an equivalent of $20.8 million U.S. dollars. Onefive 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 $6.8 million at June 30, 2018. There were no borrowings outstanding under these arrangements at December 31, 2017.
We assumed various revolving lines of credit andABL Facility. As a financing facility with the completionresult of the Newport Merger. These revolving linesprior asset-based facility being terminated, we wrote off $0.2 million of creditpreviously capitalized debt issuance costs.
The ABL Credit Agreement also contains customary representations and financing facility have no expiration datewarranties, affirmative covenants and provide for aggregate borrowings asprovisions relating to events of June 30, 2018default. If an event of updefault occurs, the lenders under the ABL Facility will be entitled to an equivalenttake various actions, including the acceleration of $11.3 million U.S. dollars. These lines of credit haveamounts 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 $5.1 million and $3.0 million at June 30, 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
Since inception ofOther than the Credit Agreement, we have made total prepayments of $425.02019 Incremental Term Loan Facility for $650.0 million and regularly scheduled principal payments of $6.5 million. The total outstanding principal balance on our Credit Agreement was $348.5 million at June 30, 2018. As a result of making total prepayments of $425.0 million since the inception of the Credit Agreement and based on our Total Leverage Ratio, 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 FormForm 10-K for the year ended December 31, 2017.2018.
Recently Issued Accounting Pronouncements
In JuneOctober 2018, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU2018-07,2018-16, “Compensation-Stock Compensation“Derivatives and Hedging (Topic 718): Improvements toNon-Employee Share-Based Payment Accounting.815).” This standard is intendedpermits 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 addition to reduce costthe 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 complexitythe Securities Industry and to improve financial reporting for share-based payments issued to nonemployees.Financial Markets Association Municipal Swap Rate. This ASU expands the scope of Topic 718 Compensation-Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. The provisions of this ASU arestandard 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 March 2018, the FASB issued ASU2018-05, “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 at December 31, 2017 and June 30, 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 ASU2018-05 is material to our consolidated financial statements in any period.
In February 2018, the FASB issued ASU2018-02, “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. 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 expectadopted 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 have the option to either apply the standard retrospectively through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption or they can apply the new standard to comparative periods presented. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. We have reviewedadopted ASU2016-02 on January 1, 2019, and used the requirementseffective date as its date of initial application. As such, we did not adjust prior period amounts. We also elected to adopt the 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 new standarddeferred rent liability, prepaid rent and have formulated a plan for implementation. We have communicated our approachnet favorable lease asset which werere-classified to our Audit Committee and will provide regular updates as appropriate. We are currently accumulating details on our populationtheright-of-use asset upon adoption of leases. 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 continueFor additional information on the required disclosures related to assess and disclose the impact thatof adopting this ASU will have on our consolidated financial statements, disclosures and related controls, when known.standard, see Note 3 to the Consolidated Condensed Financial Statements.
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, 20172018 filed with the Securities and Exchange Commission on February 28, 2018.26, 2019. As of June 30, 2018,March 31, 2019, there were no material changes in our exposure to market risk from December 31, 2017.2018.
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 June 30, 2018.March 31, 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 June 30, 2018,March 31, 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 June 30, 2018,March 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. | OTHER INFORMATION |
ITEM 1. | LEGAL PROCEEDINGS. |
OnNewport Litigation
In March 9, 2016, atwo putative class actionactions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.A-16-733154-C, wasand 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 AgreementAgreement”) 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 theNewport 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 consolidateconsolidated the Pincon and Chung actions.
On October 19, 2016, plaintiffs in the consolidated action filed an amended complaint captioned In 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 ofcontained 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 certaincontaining 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 filedThe Court granted a motion to dismiss the second amended complaint, which plaintiffs opposed. The Court held a hearingfor class certification on the motion to dismiss on December 7, 2017. On January 5,September 27, 2018, the Court entered an order denying the motion to dismiss. The Newport directors answered the second amended complaint, denying the material allegationsappointing Mr. Pincon and Locals 302 and 612 of the complaint and asserting defenses, on February 20, 2018. On May 17, 2018, plaintiff Hubert C. Pincon filed a motion to certify a putativeInternational Union of Operating Engineers - Employers Construction Industry Retirement Trust as class of former Newport stockholders and appoint Mr. Pincon as the sole representative of the proposed class.representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily dismissed from the litigation. Discovery is ongoing in this action.
ESI Litigation
On July 3,November 29, 2018, Mr. Pincona complaint captioned Brian Morris et. al. v. Electro Scientific Industries, Inc. et al. was filed an amended motionin the U.S. District Court for class certification seeking to havethe 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 member Locals 302 and 612actions brought on behalf of former ESI stockholders, asserting various claims against the former members of the International UnionESI board of Operating Engineers-Employers Construction Industry Retirement Trust appointed as an additional class representative.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 the 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 May 23, 2018,February 26, 2019, the Company receivedparties entered into a third-party subpoena duces tecum requesting documentssettlement agreement, pursuant to which plaintiffs dismissed their individual claims with prejudice and a deposition on various topicsclass claims without prejudice in return for ESI’s previous supplemental merger related disclosures in connection with the statetransaction. ESI provided supplemental merger related disclosures to eliminate the burden and expense of Massachusetts. litigation and to avoid any possible disruption to the merger that could result from further litigation.
The Company served plaintiffs with objections and responses to the subpoena on June 6, 2018. Discovery negotiations are ongoing.
We areis subject to various legal proceedings and claims, which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.
ITEM 1A. | RISK FACTORS. |
Information regarding risk factors affecting the Company’s business are discussed in the Company’s Annual Report on FormForm 10-K for the year ended December 31, 20172018 in the section entitled “Risk Factors.” There have been no material changes from the risks disclosed therein.
There have been no material changes to the risk factors as described in Part I, Item 1A, “Risk Factors,” in our Annual Report on FormForm 10-K for the year ended December 31, 2017 other than the supplemental risk factor added below.2018.
If significant additional tariffs or other trade restrictions are placed on our products made in China and/or the components that we or our suppliers source from China, our business, financial condition and results of operations may be materially harmed.
General trade tensions between the U.S. and China have been escalating in 2018, with one round of U.S. tariffs on Chinese goods taking effect in July 2018, and a second round expected to be implemented before the end of September 2018. Although we do not anticipate a material impact on our products made in China from the first and second rounds of U.S. tariffs, a third round of tariffs has been proposed by the U.S. In July 2018, the Trump Administration proposed a new list of thousands of categories of goods, including electronics, that could face tariffs of 10%. The Trump Administration subsequently proposed that the third round tariffs be increased from 10% to 25%. If the proposed new tariff list remains unaltered and these additional tariffs are placed on our products made in China and/or the components that we or our suppliers source from China, or any related counter-measures are taken by China, our business, financial condition and results of operations may be materially harmed. We will explore all of our options to reduce the potential impact of these proposed tariffs on our business, including but not limited to, seeking alternative sources for our components, modifying other business practices, raising our prices, and shifting production outside of China. Additionally, the Trump Administration continues to signal that it may alter trade agreements and terms between China and the United States, including limiting trade with China, and may impose additional tariffs on imports from China. Even if the currently proposed tariffs are not imposed on our products or on the components that we or our suppliers source from China, it is possible further tariffs will be imposed on imports of our products or the components used in our products, or that our business will be impacted by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing us to seek alternative suppliers, raise prices or make changes to our operations, any of which could materially harm our business, financial condition and results of operations.
ITEM 6. | EXHIBITS. |
+ | Previously filed |
* | Management contract or compensatory plan |
(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 |
(6) | Incorporated by reference to the Registrant’s |
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, 2019 | By: | /s/ Seth H. Bagshaw | |||
Seth H. Bagshaw | ||||||
Senior Vice President, Chief Financial Officer and Treasurer | ||||||
(Principal Financial Officer) |
50
47