<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 number 0-23621
-------
MKS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2277512
--------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Six Shattuck Road, Andover, Massachusetts 01810
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 975-2350
----------------------------
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 X No __.
Number of shares outstanding of the issuer's common stock as of July 31, 2000:
25,292,440
<PAGE> 2
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999
Consolidated Statements of Income -
Three and six months ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 44,485 $ 35,714
Short-term investments ................................................. 21,382 28,132
Trade accounts receivable, net ......................................... 49,635 36,857
Inventories ............................................................ 37,909 27,650
Deferred tax asset ..................................................... 5,196 4,119
Other current assets ................................................... 7,869 3,378
--------- ---------
Total current assets ............................................... 166,476 135,850
Property, plant and equipment, net ..................................... 33,341 32,826
Goodwill, net .......................................................... 7,928 --
Other assets ........................................................... 10,465 5,929
--------- ---------
Total assets ....................................................... $ 218,210 $ 174,605
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .................................................. $ 16,271 $ 12,423
Current portion of long-term debt ...................................... 7,001 7,346
Current portion of capital lease obligations ........................... 916 1,059
Accounts payable ....................................................... 13,670 7,683
Accrued compensation ................................................... 8,300 9,202
Other accrued expenses ................................................. 7,682 6,314
Income taxes payable ................................................... -- 1,385
Distribution Payable ................................................... 3,350 3,350
--------- ---------
Total current liabilities .......................................... 57,190 48,762
Long-term debt ............................................................. 3,961 4,340
Long-term portion of capital lease obligations ............................. 1,135 1,322
Deferred tax liability ..................................................... 1,175 522
Other liabilities .......................................................... 488 490
Commitments and contingencies (Note 10) Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; none issued and outstanding ............................ -- --
Common Stock, no par value, 50,000,000 shares authorized;
25,095,431 and 24,632,849 issued and outstanding at
June 30, 2000 and December 31, 1999, respectively .................. 113 113
Additional paid-in capital ............................................. 99,320 84,713
Retained earnings ...................................................... 53,783 33,166
Shareholder receivable ................................................. (797) (856)
Accumulated other comprehensive income ................................. 1,842 2,033
--------- ---------
Total stockholders' equity ......................................... 154,261 119,169
--------- ---------
Total liabilities and stockholders' equity ......................... $ 218,210 $ 174,605
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 4
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
2000 1999 2000 1999
----- ----- ---- ----
<S> <C> <C> <C> <C>
Net sales ............................................. $ 77,701 $ 44,209 $ 143,257 $ 82,119
Cost of sales ......................................... 41,699 25,550 77,212 48,107
--------- --------- --------- ---------
Gross profit .......................................... 36,002 18,659 66,045 34,012
Research and development .............................. 5,818 3,317 10,245 6,272
Selling, general and administrative ................... 12,312 9,435 23,312 18,292
--------- --------- --------- ---------
Income from operations ................................ 17,872 5,907 32,488 9,448
Interest expense ...................................... 421 346 850 684
Interest income ....................................... 888 578 1,691 674
Other income (expense), net ........................... (209) -- (209) 168
--------- --------- --------- ---------
Income before income taxes ............................ 18,130 6,139 33,120 9,606
Provision for income taxes ............................ 6,844 2,333 12,503 2,671
Non-recurring deferred tax credit (Note 9) ............ -- (3,770) -- (3,770)
--------- --------- --------- ---------
Net income ............................................ $ 11,286 $ 7,576 $ 20,617 $ 10,705
========= ========= ========= =========
Historical net income per share:
Basic ............................................. $ 0.45 $ 0.31 $ 0.83 $ 0.51
========= ========= ========= =========
Diluted ........................................... $ 0.43 $ 0.30 $ 0.79 $ 0.48
========= ========= ========= =========
Historical weighted average common shares outstanding:
Basic ............................................. 25,041 24,065 24,917 21,060
========= ========= ========= =========
Diluted ........................................... 26,291 24,951 26,208 22,177
========= ========= ========= =========
Pro forma data:
Historical income before income taxes ............. $ 6,139 $ 9,606
Pro forma provision for income taxes assuming C
corporation tax ............................... 2,333 3,650
--------- ---------
Pro forma net income .............................. $ 3,806 $ 5,956
========= =========
Pro forma net income per share:
Basic ............................................. $ 0.16 $ 0.28
========= =========
Diluted ........................................... $ 0.15 $ 0.27
========= =========
Pro forma weighted average common shares outstanding:
Basic ............................................. 24,065 21,060
========= =========
Diluted ........................................... 24,951 21,921
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 5
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 20,617 $ 10,705
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................. 3,953 3,095
Loss (gain) on disposal of property, plant and equipment ....... 40 (181)
Non-recurring deferred tax credit .............................. -- (3,770)
Deferred taxes ................................................. (972) 113
Other .......................................................... 82 85
Forward exchange contract loss realized ........................ -- (64)
Changes in operating assets and liabilities, net of effects of
businesses acquired:
Increase in trade accounts receivable ....................... (12,644) (9,328)
Increase in inventories ..................................... (10,189) (1,205)
Increase in other current assets ............................ (1,995) (248)
Increase in accrued expenses and other current liabilities .. 484 2,422
Increase in accounts payable ................................ 5,915 3,665
-------- --------
Net cash provided by operating activities .......................... 5,291 5,289
-------- --------
Cash flows from investing activities:
Proceeds from sales of (purchases of) investments .............. 3,433 (23,756)
Purchases of property, plant and equipment ..................... (3,756) (2,421)
Proceeds from sales of property, plant & equipment ............. -- 208
Purchase of Telvac Engineering, Ltd., net of cash acquired ..... (752) --
(Increase) decrease in other assets ............................ 189 (221)
Cash used to settle forward exchange contracts ................. -- 64
-------- --------
Net cash used in investing activities .............................. (886) (26,126)
-------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings ............................ 12,009 5,209
Payments on short-term borrowings .............................. (8,029) (5,211)
Principal payments on long-term debt ........................... (1,026) (1,029)
Proceeds from exercise of stock options ........................ 2,409 --
Proceeds from issuance of common stock, net of issuance costs .. -- 82,062
Cash distributions to stockholders ............................. -- (40,000)
Principal payments under capital lease obligations ............. (608) (419)
-------- --------
Net cash provided by financing activities 4,755 40,612
-------- --------
Effect of exchange rate changes on cash and cash equivalents ....... (389) (292)
-------- --------
Increase in cash and cash equivalents .............................. 8,771 19,483
Cash and cash equivalents at beginning of period ................... 35,714 11,188
-------- --------
Cash and cash equivalents at end of period ......................... $ 44,485 $ 30,671
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .................................................... $ 536 $ 605
======== ========
Income taxes ................................................ $ 13,733 $ 2,738
======== ========
Noncash transactions during the period:
Assets acquired under capital leases ........................ $ -- $ 86
======== ========
Stock issued in acquisition of Compact Instrument ........... $ 8,433 $ --
======== ========
Debt issued in acquisition of Telvac Engineering, Ltd. ...... $ 752 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 6
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except per share data)
1) BASIS OF PRESENTATION
---------------------
The interim financial data as of June 30, 2000 and for the three and six
months ended June 30, 2000 and 1999 is unaudited; however, in the opinion
of MKS Instruments, Inc. ("MKS" or the "Company"), the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for the interim periods.
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and note disclosures required by generally accepted accounting
principles. The financial statements should be read in conjunction with the
December 31, 1999 audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 30, 2000.
2) USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
3) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition". SAB 101
summarizes the staff's view in applying generally accepted accounting
principles to revenue recognition. The application of the guidance in SAB
101 will be required in the Company's fourth quarter of the fiscal year
2000. The effect of applying this guidance, if any, will be reported as a
cumulative effect adjustment resulting from a change in accounting
principle. The Company is currently in the process of evaluating the impact
that SAB 101 will have on its financial position and results of operations.
In June, 2000, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138 "Accounting
for Certain Derivative Instruments and Hedging Activities - an amendment
of FASB Statement No. 133." SFAS No. 138 amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. For the Company, SFAS No. 138 is effective for
all fiscal quarters beginning after June 15, 2000. The Company is currently
evaluating the effects of this statement.
4) CASH AND CASH EQUIVALENTS AND INVESTMENTS
-----------------------------------------
Cash equivalents consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- -----
<S> <C> <C>
Cash and Money Market Instruments $ 20,564 $ 22,156
Commercial Paper 6,943 5,558
Federal Government and Government Agency Obligations 16,978 6,000
Corporate Obligations -- 2,000
-------- --------
$ 44,485 $ 35,714
======== ========
</TABLE>
Short-term available-for-sale investments maturing within one year consist
of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- -----
<S> <C> <C>
Federal Government and Government Agency Obligations $ 16,574 $ 16,245
Corporate Obligations 1,000 5,501
Commercial Paper 2,450 4,641
Equity Securities 1,358 1,745
-------- --------
$ 21,382 $ 28,132
======== ========
</TABLE>
<PAGE> 7
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Long-term available-for-sale investments maturing within two years consist
of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- -----
<S> <C> <C>
Federal Government and Government Agency Obligations $ 3,993 $ 1,063
======= =======
</TABLE>
5) HISTORICAL AND PRO FORMA NET INCOME PER SHARE
----------------------------------------------
Historical net income per share is not meaningful in 1999 because of the
Company's conversion from an S corporation to a C corporation in April,
1999 upon the closing of its initial public offering. For the three and six
months ended June 30, 1999, historical net income has been adjusted for the
pro forma provision for income taxes calculated assuming the Company was
subject to income taxation as a C corporation.
The following is a reconciliation of basic to diluted historical and pro
forma net income per share:
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
---------- -----------------------
HISTORICAL PRO FORMA HISTORICAL
---------- --------- ----------
<S> <C> <C> <C>
Net income ............................... $11,286 $ 3,806 $ 7,576
Shares used in net income per common
share-basic ............................ 25,041 24,065 24,065
Effect of dilutive securities:
Employee and director stock options .... 1,250 886 886
------- ------- -------
Shares used in net income per common
share-diluted .......................... 26,291 24,951 24,951
======= ======= =======
Net income per common share-basic ........ $ 0.45 $ 0.16 $ 0.31
======= ======= =======
Net income per common share-diluted ...... $ 0.43 $ 0.15 $ 0.30
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---------- -----------------------
HISTORICAL PRO FORMA HISTORICAL
---------- --------- ----------
<S> <C> <C> <C>
Net income................................ $ 20,617 $ 5,956 $ 10,705
Shares used in net income per common
share-basic............................. 24,917 21,060 21,060
Effect of dilutive securities:
Employee and director stock options..... 1,291 861 1,117
------- ------- -------
Shares used in net income per common
share-diluted........................... 26,208 21,921 22,177
======== ======= ========
Net income per common share-basic......... $ 0.83 $ 0.28 $ 0.51
======== ======= ========
Net income per common share-diluted....... $ 0.79 $ 0.27 $ 0.48
======== ======= ========
</TABLE>
<PAGE> 8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
For purposes of computing diluted earnings per share, weighted average
common share equivalents do not include stock options with an exercise
price greater than the average market price of the common shares during the
period. Options to purchase 45,642, 28,299, 0 and 12,000 shares of common
stock were outstanding during the three and six months ended June 30, 2000
and the three and six months ended June 30, 1999, respectively, but were
not included in the calculation of diluted net income per common share
because the option price was greater than the average market price of the
common shares during the period.
6) INVENTORIES
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw material..................................................... $ 8,813 $ 6,644
Work in process.................................................. 10,211 7,026
Finished goods................................................... 18,885 13,980
-------- -------
$ 37,909 $27,650
======== =======
</TABLE>
7) STOCKHOLDERS' EQUITY
--------------------
Total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Net income.................................................. $ 11,286 $ 7,576
Other comprehensive income, net of taxes:
Non-recurring deferred tax charge to comprehensive
income (Note 9)......................................... -- (660)
Impact of adopting SFAS No. 133........................... -- (16)
Changes in value of financial instruments designated
as hedges of currency and interest rate exposures....... 121 254
Foreign currency translation adjustment................... (189) (172)
Unrealized gain (loss) on investments..................... (108) 293
-------- -------
Other comprehensive income, net of taxes.................... (176) (301)
-------- -------
Total comprehensive income.................................. $ 11,110 $ 7,275
======== =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C>
Net income.................................................. $ 20,617 $10,705
Other comprehensive income, net of taxes:
Non-recurring deferred tax charge to comprehensive
income (Note 9)......................................... -- (660)
Impact of adopting SFAS No. 133........................... -- (16)
Changes in value of financial instruments designated
as hedges of currency and interest rate exposures....... 313 254
Foreign currency translation adjustment................... (294) (739)
Unrealized gain (loss) on investments..................... (210) 412
-------- -------
Other comprehensive income, net of taxes.................... (191) (749)
-------- -------
Total comprehensive income.................................. $ 20,426 $ 9,956
======== =======
</TABLE>
<PAGE> 9
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
8) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMER
--------------------------------------------
Segment Information for the three months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
NORTH AMERICA FAR EAST EUROPE TOTAL
------------- -------- ------ -----
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers 2000 $54,871 $16,143 $6,687 $77,701
1999 30,861 8,658 4,690 44,209
Intersegment net sales 2000 $15,324 $278 $321 $15,923
1999 8,931 195 342 9,468
Income from operations 2000 $16,143 $1,007 $722 $17,872
1999 5,230 331 346 5,907
</TABLE>
Segment Information for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
NORTH AMERICA FAR EAST EUROPE TOTAL
------------- -------- ------ -----
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers 2000 $100,277 $30,120 $12,860 $143,257
1999 56,994 15,747 9,378 82,119
Intersegment net sales 2000 $29,536 $649 $619 $30,804
1999 15,772 327 510 16,609
Income from operations 2000 $28,570 $2,370 $1,548 $32,488
1999 8,087 623 738 9,448
</TABLE>
The Company had one customer comprising 27% and 22% of net sales for the
three months ended June 30, 2000 and 1999, respectively, and 26% and 21%
for the six months ended June 30, 2000 and 1999, respectively.
9) INCOME TAXES
------------
Prior to its initial public offering, the Company was treated as an S
corporation for federal income tax purposes. As an S corporation, the
Company was not subject to federal, and certain state income taxes. The
Company terminated its S corporation status upon the closing of the initial
public offering and became subject to taxes at C corporation tax rates.
This change in tax status and tax rates resulted in a non-recurring,
non-cash deferred tax credit to net income of $3,770,000 and a deferred tax
charge to other comprehensive income of $660,000 in the three months ended
June 30, 1999.
10) COMMITMENTS AND CONTINGENCIES
-----------------------------
Prior to its initial public offering, the Company entered into a Tax
Indemnification and S Corporation Distribution Agreement with its then
existing stockholders (the "Pre-IPO stockholders"). The agreement includes
provisions for the payment, with interest, by the pre-IPO stockholders or
MKS, as the case may be, for the difference between the $40,000,000
distributed as an estimate of the amount of the accumulated adjustments
account as of April 4, 1999, which is the date the Company's S Corporation
status was terminated, and the actual amount of the accumulated adjustments
account on that day. The actual amount of the accumulated adjustments
account cannot be determined until MKS calculates the amount of its taxable
income for the year ending December 31, 1999. Based on the
<PAGE> 10
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Company's estimate of the taxable income for the year ending December 31,
1999, MKS believes that an additional future distribution to the Pre-IPO
stockholders will be required under this agreement. The amount of the
additional distribution, prior to interest, is currently estimated to be
$3,350,000. The amount of the additional distribution payable was charged
directly to retained earnings during 1999 and had no impact on net income
or earnings per share. The amount of the accumulated adjustments account
can be affected by income tax audits of MKS. If any audit increases or
decreases the accumulated adjustments account, MKS or the Pre-IPO
stockholders, as the case may be, will also be required to make a payment,
with interest, of such difference to the other party. No shareholders,
other than the Pre-IPO stockholders, are parties to the Tax Indemnification
and S Corporation Distribution Agreement.
11) ACQUISITION
-----------
On March 10, 2000 the Company acquired Compact Instrument Technology, LLC
("Compact Instrument"), a start-up company with proprietary technology in
process monitoring for semiconductor manufacturing and other manufacturing
processes. The acquisition has been accounted for by the purchase method of
accounting. The purchase price was $8,700,000 and consisted of $8,400,000
in MKS common stock and $300,000 in assumed net liabilities. The purchase
price was allocated to the assets acquired based upon their estimated fair
values. This allocation resulted in goodwill of $7,600,000 and acquired
technology of $1,600,000, which are being amortized on a straight-line
basis over 5 years and 3 years, respectively. The acquired technology is
included in "Other assets" in the accompanying balance sheet.
On May 5, 2000 the Company acquired Telvac Engineering, Ltd., a UK-based,
privately held manufacturer of vacuum subsystems. The acquisition has been
accounted for by the purchase method of accounting. The purchase price was
$1,600,000, and consisted of $750,000 in cash, $750,000 in debt and
$100,000 in other acquisition expenses. The purchase price was allocated to
the assets acquired based on their estimated fair values. This allocation
resulted in goodwill of $800,000, which is being amortized on a
straight-line basis over 5 years.
The following unaudited pro forma information presents a summary of the
historical results of operations of the Company as if the acquisitions had
occurred at the beginning of each period.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .................. $ 77,984 $ 44,930 $144,231 $ 83,443
Net income ................. $ 11,245 $ 7,742 $ 20,098 $ 10,933
========= ======== ======== ==========
Net income per share:
Basic .................. $ 0.45 $ 0.32 $ 0.80 $ 0.52
========= ======== ======== ==========
Diluted ................ $ 0.43 $ 0.31 $ 0.77 $ 0.49
========= ======== ======== ==========
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred
at the beginning of the period, or which may result in the future.
<PAGE> 11
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
12) SUBSEQUENT EVENT
----------------
On July 21, 2000 the Company acquired Spectra International, LLC, a
privately held company with products and technology in process monitoring,
for $9,700,000 cash; 183,293 shares of MKS common stock; fully vested
options to purchase 83,675 shares of MKS common stock, calculated at an
exchange ratio of 0.4768 shares of MKS common stock per share of Spectra
common stock; and the assumption of approximately $1,000,000 in long-term
debt. The transaction also includes contingent earnout payments of up to an
aggregate of $12,000,000 over 5 years.
<PAGE> 12
ITEM 2.
MKS INSTRUMENTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains a number of statements, including,
without limitation, statements relating to MKS's beliefs, expectations and plans
which are forward-looking statements, as are statements that certain actions,
conditions or circumstances will continue. Such statements are based upon
management's current expectations and are subject to a number of factors and
uncertainties. Information contained in these forward-looking statements is
inherently uncertain and actual performance and results may differ materially
due to many important factors. See "Factors That May Affect Future Operating
Results" for factors that could cause actual results to differ materially from
any forward-looking statements made by MKS. The terms "MKS", "we", "us" and
"our" refer to MKS Instruments, Inc.
MKS develops, manufactures and supplies instruments, components and integrated
subsystems used to measure, control and analyze gases in semiconductor
manufacturing and similar industrial manufacturing processes. We sold products
to over 4,000 customers in 1999. We estimate that during 1999 approximately 66%
of our net sales were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers. The following table sets forth for the
periods indicated the percentage of total net sales of certain line items
included in MKS's consolidated statement of income data.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 53.7 57.8 53.9 58.6
----- ----- ----- -----
Gross profit ................................ 46.3 42.2 46.1 41.4
Research and development .................... 7.5 7.5 7.1 7.6
Selling, general and administrative ......... 15.8 21.3 16.3 22.3
----- ----- ----- -----
Income from operations ...................... 23.0 13.4 22.7 11.5
Interest income, net ........................ 0.6 0.5 0.5 --
Other income (expense), net ................. (0.3) -- (0.1) 0.2
----- ----- ----- -----
Income before income taxes .................. 23.3 13.9 23.1 11.7
Provision for income taxes .................. 8.8 5.3 8.7 3.3
Non-recurring deferred tax credit ........... -- (8.5) -- (4.6)
----- ----- ----- -----
Net income .................................. 14.5% 17.1% 14.4% 13.0%
===== ===== ===== =====
Pro forma data for 1999:
Historical income before income taxes ... 13.9% 11.7%
Pro forma provision for income taxes .... 5.3 4.4
----- -----
Pro forma net income .................... 8.6% 7.3%
===== =====
</TABLE>
Results of Operations
NET SALES. Net sales increased 75.8% to $77.7 million for the three months
ended June 30, 2000 from $44.2 million for the three months ended June 30, 1999.
International net sales were approximately $22.8 million for the three months
ended June 30, 2000 or 29.4% of net sales and $13.3 million for the three months
ended June 30, 1999 or 30.2% of net sales. Net sales increased 74.5% to $143.3
million for the six months ended June 30, 2000 from $82.1 million in the same
period of 1999. The increases in net sales were due to increased worldwide sales
volume of MKS's existing products which resulted primarily from increased sales
to the Company's semiconductor capital equipment manufacturer and semiconductor
device manufacturer customers.
<PAGE> 13
GROSS PROFIT. Gross profit as a percentage of net sales increased to 46.3%
for the three months ended June 30, 2000 from 42.2% for the three months ended
June 30, 1999. Gross profit as a percentage of net sales increased to 46.1% for
the six months ended June 30, 2000 from 41.4% for the same period of 1999. The
increases were primarily due to fuller utilization of existing manufacturing
capacity as a result of increased net sales and other manufacturing
efficiencies.
RESEARCH AND DEVELOPMENT. Research and development expense increased 75.4%
to $5.8 million or 7.5% of net sales for the three months ended June 30, 2000
from $3.3 million or 7.5% of net sales for the three months ended June 30, 1999
due to increased spending of $0.9 million for compensation and increased
spending of $1.3 million for development materials related to projects in
process. Research and development expense increased 63.3% to $10.2 million for
the six months ended June 30, 2000 from $6.3 million for the same period of 1999
due to increased compensation and increased spending for development materials
related to projects in process.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 30.5% to $12.3 million or 15.8% of net sales for the three
months ended June 30, 2000 from $9.4 million or 21.3% of net sales for the
three months ended June 30, 1999. The increase was due primarily to increased
compensation expense of $1.1 million, increased depreciation and amortization of
$0.5 million, and other general and administrative expenses. Selling, general
and administrative expenses increased 27.4% to $23.3 million for the six months
ended June 30, 2000 from $18.3 million for the same period of 1999 due primarily
to increased compensation expense of $2.1 million, increased depreciation and
amortization of $0.6 million, increased professional fees of $0.4 million and
other general and administrative expenses.
INTEREST INCOME (EXPENSE), NET. During the three and six months ended June
30, 2000 and the three months ended June 30, 1999, the Company generated net
interest income of $0.5 million, $0.8 million and $0.2 million, respectively,
primarily from the invested net proceeds of our initial public offering, offset
by interest expense on outstanding debt.
OTHER INCOME (EXPENSE), NET. Other expense of $0.2 million in the three and
six months ended June 30, 2000 represents expenses related to the preparation of
the registration statement for the Company's follow-on public stock offering.
The Company decided not to proceed with the follow-on offering, and has
converted the registration statement to a shelf registration statement. Other
income of $0.2 million in the six months ended June 30, 1999 primarily
represents gains recorded from foreign exchange contracts which did not qualify
for hedge accounting.
Effective April 1, 1999 MKS adopted Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The adoption of SFAS No. 133 did not have a
material impact on our financial position or results of operations. The
derivative instruments currently held by us which have been designated as
hedges, including forward exchange contracts, local currency purchased options,
and an interest rate swap, qualify for hedge accounting under SFAS No. 133, and
changes in their fair value will be recorded as a component of other
comprehensive income until the hedged transaction occurs.
PROVISION FOR INCOME TAXES. Prior to the closing of its initial public
offering in April, 1999 MKS was treated as an S corporation for tax purposes. As
an S corporation, MKS was not subject to federal, and certain state, income
taxes. Upon the closing of our initial public offering on April 5, 1999, our
status as an S corporation was terminated and we became subject to taxes as a C
corporation. The pro forma provision for income taxes in 1999 reflects the
estimated tax expense MKS would have incurred had it been subject to federal and
state income taxes as a C corporation.
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
MKS has financed its operations and capital requirements through a combination
of cash provided by operations, long-term real estate financing, capital lease
financing and short-term lines of credit.
Operations provided cash of $5.3 million for the six months ended June 30, 2000
primarily impacted by net income, depreciation and changes in the levels of
accounts payable, inventories and accounts receivable. Investing activities
utilized cash of $0.9 million for the six months ended June 30, 2000 primarily
from the purchase of property and equipment offset by proceeds from selling
short-term investments. Financing activities provided cash of $4.8 million
primarily from short-term borrowings and proceeds from employees exercising
stock options.
Working capital was $109.3 million as of June 30, 2000, an increase of $22.2
million from December 31, 1999. MKS has a combined $30.0 million line of credit
with two banks, expiring December 31, 2000, all of which is available.
Prior to our initial public offering, we entered into a Tax Indemnification and
S Corporation Distribution Agreement with our then existing stockholders. The
agreement includes provisions for the payment, with interest, by those
stockholders or MKS, as the case may be, for the difference between the $40
million distributed as an estimate of the amount of the accumulated adjustments
account as of April 4, 1999, which is the date our S corporation status was
terminated, and the actual amount of the accumulated adjustments account on that
day. The actual amount of the accumulated adjustments account cannot be
determined until we calculate the amount of our taxable income for the year
ending December 31, 1999. Based on our estimate of the taxable income for the
year ending December 31, 1999, we believe that an additional distribution to the
then existing stockholders will be required under this agreement. The amount of
the additional distribution, prior to interest, is currently estimated to be
$3.4 million. The payment of the actual additional distribution is expected to
be made during the third quarter of 2000. The amount of the additional
distribution payable was charged directly to retained earnings during 1999 and
had no impact on net income or earnings per share. The amount of the accumulated
adjustments account can be affected by income tax audits of MKS. If any audit
increases or decreases the accumulated adjustments account, MKS or the then
existing stockholders, as the case may be, will also be required to make a
payment, with interest, of such difference to the other party. No stockholders,
other than the then existing stockholders, are parties to the Tax
Indemnification and S Corporation Distribution Agreement.
MKS believes that the net proceeds from its initial public offering, together
with the cash anticipated to be generated from operations and funds available
from existing credit facilities, will be sufficient to satisfy its estimated
working capital and planned capital expenditure requirements through at least
the next 24 months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 3 of Notes to Consolidated Financial Statements for a discussion of the
impact of recently issued accounting pronouncements.
<PAGE> 15
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY
We estimate that approximately 66% of our sales during 1999 were to
semiconductor capital equipment manufacturers and semiconductor device
manufacturers, and we expect that sales to such customers will continue to
account for a substantial majority of our sales. Our business depends upon the
capital expenditures of semiconductor device manufacturers, which in turn depend
upon the demand for semiconductors. Periodic reductions in demand for the
products manufactured by semiconductor capital equipment manufacturers and
semiconductor device manufacturers may adversely affect our business, financial
condition and results of operations. Historically, the semiconductor market has
been highly cyclical and has experienced periods of overcapacity, resulting in
significantly reduced demand for capital equipment. For example, in 1996 and
1998, the semiconductor capital equipment industry experienced significant
declines, which caused a number of our customers to reduce their orders. We
cannot be certain that semiconductor downturns will not recur. A decline in the
level of orders as a result of any future downturn or slowdown in the
semiconductor capital equipment industry could have a material adverse effect on
our business, financial condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
A substantial portion of our shipments occur shortly after an order is
received and therefore we operate with a low level of backlog. As a consequence
of the just-in-time nature of shipments and the low level of backlog, a decrease
in demand for our products from one or more customers could occur with limited
advance notice and could have a material adverse effect on our results of
operations in any particular period.
A significant percentage of our expenses are relatively fixed and based in
part on expectations of future net sales. The inability to adjust spending
quickly enough to compensate for any shortfall would magnify the adverse impact
of a shortfall in net sales on our results of operations. Factors that could
cause fluctuations in our net sales include:
o the timing of the receipt of orders from major customers;
o shipment delays;
o disruption in sources of supply;
o seasonal variations of capital spending by customers;
o production capacity constraints; and
o specific features requested by customers.
For example, we were in the process of increasing our production capacity
when the semiconductor capital equipment market began to experience a
significant downturn in 1996. This downturn had a material adverse effect on our
operating results in the second half of 1996 and the first half of 1997. After
an increase in business in the latter half of 1997, the market experienced
another downturn in 1998, which had a material adverse effect on our 1998 and
first quarter 1999 operating results. As a result of the factors discussed
above, it is likely that we will in the future experience quarterly or annual
fluctuations and that, in one or more future quarters, our operating results
will fall below the expectations of public market analysts or investors. In any
such event, the price of our common stock could decline significantly.
<PAGE> 16
CUSTOMER CONCENTRATION
Our five largest customers accounted for approximately 33% of our net sales
in 1999 and 24% of our net sales in 1998. The loss of a major customer or any
reduction in orders by these customers, including reductions due to market or
competitive conditions, would likely have a material adverse effect on our
business, financial condition and results of operations. During 1999, one
customer, Applied Materials, accounted for approximately 22% of our net sales.
While we have entered into a purchase contract with Applied Materials that
expires in 2000 unless it is extended by mutual agreement, none of our
significant customers, including Applied Materials, has entered into an
agreement requiring it to purchase any minimum quantity of our products. The
demand for our products from our semiconductor capital equipment customers
depends in part on orders received by them from their semiconductor device
manufacturer customers.
Attempts to lessen the adverse effect of any loss or reduction through the
rapid addition of new customers could be difficult because prospective customers
typically require lengthy qualification periods prior to placing volume orders
with a new supplier. Our future success will continue to depend upon:
o our ability to maintain relationships with existing key customers;
o our ability to attract new customers; and
o the success of our customers in creating demand for their capital
equipment products which incorporate our products.
COMPETITION
The markets for our products are highly competitive. Our competitive
success often depends upon factors outside of our control. For example, in some
cases, particularly with respect to mass flow controllers, semiconductor device
manufacturers may direct semiconductor capital equipment manufacturers to use a
specified supplier's product in their equipment. Accordingly, for such products,
our success will depend in part on our ability to have semiconductor device
manufacturers specify that our products be used at their semiconductor
fabrication facilities. In addition, we may encounter difficulties in changing
established relationships of competitors that already have a large installed
base of products within such semiconductor fabrication facilities.
TECHNOLOGICAL CHANGES
New products designed by semiconductor capital equipment manufacturers
typically have a lifespan of five to ten years. Our success depends on our
products being designed into new generations of equipment for the semiconductor
industry. We must develop products that are technologically current so that they
are positioned to be chosen for use in each successive new generation of
semiconductor capital equipment. If our products are not chosen by our
customers, our net sales may be reduced during the lifespan of our customers'
products.
EXPANSION OF MANUFACTURING CAPACITY
Our ability to increase sales of certain products depends in part upon our
ability to expand our manufacturing capacity for such products in a timely
manner. If we are unable to expand our manufacturing capacity on a timely basis
or to manage such expansion effectively, our customers could implement our
competitor's products and, as a result, our market share could be reduced.
Because the semiconductor industry is subject to rapid demand shifts which are
difficult to foresee, we may not be able to increase capacity quickly enough to
respond to a rapid increase in demand in the semiconductor industry.
<PAGE> 17
Additionally, capacity expansion could increase our fixed operating expenses
and if sales levels do not increase to offset the additional expense levels
associated with any such expansion, our business, financial condition and
results of operations could be materially adversely affected.
INTERNATIONAL OPERATIONS AND SALES
International sales, which include sales by our foreign subsidiaries, but
exclude direct export sales which were less than 10% of our total net sales,
accounted for approximately 31% of net sales in 1999 and 32% of net sales in
1998. We anticipate that international sales will continue to account for a
significant portion of our net sales. In addition, certain of our key domestic
customers derive a significant portion of their revenues from sales in
international markets. Therefore, our sales and results of operations could be
adversely affected by economic slowdowns and other risks associated with
international sales.
Exchange rate fluctuations could have an adverse effect on our net sales and
results of operations and we could experience losses with respect to our hedging
activities. Unfavorable currency fluctuations could require us to increase
prices to foreign customers which could result in lower net sales by us to such
customers. Alternatively, if we do not adjust the prices for our products in
response to unfavorable currency fluctuations, our results of operations could
be adversely affected. In addition, sales made by our foreign subsidiaries are
denominated in the currency of the country in which these products are sold and
the currency we receive in payment for such sales could be less valuable at the
time of receipt as a result of exchange rate fluctuations. We enter into forward
exchange contracts and local currency purchased options to reduce currency
exposure arising from intercompany sales of inventory. However, we cannot be
certain that our efforts will be adequate to protect us against significant
currency fluctuations or that such efforts will not expose us to additional
exchange rate risks.
NEED TO RETAIN AND ATTRACT KEY EMPLOYEES
Our success depends to a large extent upon the efforts and abilities of a
number of key employees and officers, particularly those with expertise in the
semiconductor manufacturing and similar industrial manufacturing industries. The
loss of key employees or officers could have a material adverse effect on our
business, financial condition and results of operations. We believe that our
future success will depend in part on our ability to attract and retain highly
skilled technical, financial, managerial and marketing personnel. Competition
for such personnel is intense, and we cannot be certain that we will be
successful in attracting and retaining such personnel.
INTELLECTUAL PROPERTY MATTERS
Although we seek to protect our intellectual property rights through
patents, copyrights, trade secrets and other measures, we cannot be certain
that:
o we will be able to protect our technology adequately;
o competitors will not be able to develop similar technology
independently;
o any of our pending patent applications will be issued;
o intellectual property laws will protect our intellectual property
rights; or
o third parties will not assert that our products infringe patent,
copyright or trade secrets of such parties.
<PAGE> 18
Litigation may be necessary in order to enforce our patents, copyrights or other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk is contained in the annual Management's
Discussion and Analysis of Financial Condition and Results of Operations in
MKS's Annual Report on Form 10-K for the year ended December 31, 1999, which was
filed with the Securities and Exchange Commission on March 30, 2000. There were
no material changes in MKS's exposure to market risk from December 31, 1999.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MKS is not aware of any material legal proceedings to which it or any of its
subsidiaries is a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds from Sales of Registered Securities. There has been no
change to the information previously provided by the Company on Form 10-Q
for the period ended March 31, 1999 relating to the securities sold by the
Company pursuant to the Registration Statement on Form S-1 (Reg. No.
333-71363) that was declared effective by the Securities and Exchange
Commission on March 29, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of stockholders held on May 17, 2000 (the
"Annual Meeting"), the following proposals were approved as further specified
below:
1. Election of Directors:
FOR WITHHELD AUTHORITY
--- ------------------
Robert J. Therrien 22,294,182 570,209
Louis P. Valente 22,849,793 14,598
2. Continuance and Amendment of the Amended and Restated 1995 Stock Incentive
Plan.
FOR AGAINST ABSTAIN
--- ------- -------
19,133,536 3,148,477 7,298
<PAGE> 19
3. Ratification of Appointment of Independent Accountants.
FOR AGAINST ABSTAIN
--- ------- -------
22,860,633 452 3,306
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Ex. No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K
1. The Company filed a report on Form 8-K with the Securities and Exchange
Commission on June 28, 2000.
<PAGE> 20
SIGNATURE
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.
August 11, 2000 By: /s/ Ronald C. Weigner
--------------------------------------
Ronald C. Weigner
Vice President and Chief Financial Officer
(Principal Financial Officer)
