Bulletin
Investor Alert

New York Markets Open in:

May 2, 2022, 5:21 p.m. EDT

10-Q: MKS INSTRUMENTS INC

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding the future financial performance, business prospects and growth of MKS. These statements are only predictions based on current assumptions and expectations. Any statements that are not statements of historical fact (including statements containing the words "will," "projects," "intends," "believes," "plans," "anticipates," "expects," "estimates," "forecasts," "continues" and similar expressions) should be considered to be forward-looking statements. Actual events or results may differ materially from those in the forward-looking statements set forth herein.

Among the important factors that could cause actual events to differ materially from those in the forward-looking statements are manufacturing and sourcing risks, including the impact and duration of supply chain disruptions, component shortages and price increases, and changes in global demand and the impact of the COVID-19 pandemic with respect to such disruptions, shortages and price increases, our ability to complete the acquisition of Atotech Limited ("Atotech"), the terms of our existing term loan, the terms and availability of financing for the Atotech Acquisition (as defined below), the substantial indebtedness we expect to incur in connection with the Atotech Acquisition and the need to generate sufficient cash flows to service and repay such debt, our entry into Atotech's chemicals technology business, in which we do not have experience and which may expose us to significant additional liabilities, the risk of litigation relating to the Atotech Acquisition, the risk that disruption from the Atotech Acquisition materially and adversely affects our businesses and operations and those of Atotech, the ability to realize the anticipated synergies, cost savings and other benefits of the Atotech Acquisition, competition from larger or more established companies in our and Atotech's respective markets, the ability to successfully grow our business and the businesses of Atotech, Photon Control Inc. ("Photon Control"), which we acquired in July 2021, and Electro Scientific Industries, Inc. ("ESI"), which we acquired in February 2019, potential adverse reactions or changes to business relationships resulting from pendency or completion of the Atotech Acquisition, conditions affecting the markets in which we and Atotech operate, including the fluctuations in capital spending in the semiconductor industry and other advanced manufacturing markets, and fluctuations in sales to our and Atotech's major customers, the ability to anticipate and meet customer demand, the challenges, risks and costs involved with integrating the operations of the companies we have acquired, potential fluctuations in quarterly results, dependence on new product development, rapid technological and market change, acquisition strategy, volatility of stock price, international operations, financial risk management, and the other factors described in our Annual Report on Form 10-K for the year ended December 31, 2021 and any subsequent Quarterly Reports on Form 10-Q, as filed with the U.S. Securities and Exchange Commission (the "SEC"). Additional risk factors may be identified from time to time in MKS' future filings with the SEC. We are under no obligation to, and expressly disclaims any obligation to, update or alter these forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report.

The Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes principal factors affecting the results of our operations, financial condition and liquidity, as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on our condensed consolidated financial statements. Historically, we have compared our current quarter results to the same period in the prior year. Given the nature of our business, in particular cyclical variations in the semiconductor market, we have changed our basis of comparison to the prior quarter. The SEC rules require we also present the comparison of the current quarter results to the same period in the prior year, our historic practice in the period of change. As this Quarterly Report on Form 10-Q is the first filing in which we have changed our basis of comparison, this section provides an analysis of our financial results for the three months ended March 31, 2022 compared to the three months ended December 31, 2021 and the three months ended March 31, 2021, in accordance with SEC rules.

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, 2021.

For further information about our critical accounting policies, please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2021 in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates."

Overview

We are a global provider of instruments, systems, 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 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, electronic control technology, reactive gas generation and delivery, power generation and delivery, vacuum technology, temperature sensing, lasers, photonics, optics, precision motion control, vibration control and laser-based manufacturing systems solutions. We also provide services relating to the maintenance and repair of our products, installation services and training. We primarily serve the semiconductor, advanced electronics and specialty industrial markets.

Recent Events

On July 1, 2021, we entered into a definitive agreement with Atotech (as amended from time to time, the "Implementation Agreement") to acquire Atotech, a leading process chemicals technology company and a market leader in advanced electroplating solutions. Pursuant to the Implementation Agreement, we agreed to pay $16.20 per share in cash and 0.0552 of a share of our common stock for each outstanding common share of Atotech (the "Atotech Acquisition"). At the time of the announcement of the Atotech Acquisition, the total value of the aggregate cash and stock consideration was approximately $5.1 billion. The final value of the consideration will be determined at the time of the closing of the Atotech Acquisition, which is subject to the satisfaction of certain closing conditions, including receipt of regulatory approval from China and approval by the Royal Court of Jersey. Our obligation to complete the Atotech Acquisition is not subject to any financing condition. We intend to fund the cash portion of the transaction with a combination of available cash on hand and committed term loan debt financing.

On April 1, 2022, we entered into an amendment to the Implementation Agreement (the "Amendment"), providing for additional time for the satisfaction of certain closing conditions set forth in the Implementation Agreement, including approval of the Atotech Acquisition by the Royal Court of Jersey and receipt of regulatory approvals ("Clearances"), such that the Long Stop Date (as defined in the Implementation Agreement) was extended from March 31, 2022 to September 30, 2022.

In addition, the Amendment amends certain provisions related to obtaining the Clearances, the timing of the closing date and the obligations of the parties with respect to the debt financing contemplated in connection with the Atotech Acquisition and provides for the automatic termination of the Implementation Agreement if the closing has not occurred by the Long Stop Date.

In connection with the Amendment, we terminated our debt commitment letter, dated as of July 1, 2021, and entered into (a) a new debt commitment letter, dated as of April 1, 2022, with JPMorgan Chase Bank, N.A. and Barclays Bank PLC (the "Commitment Parties") and (b) joinders to such commitment letter to add certain additional lender parties (together with the Commitment Parties, the "2022 Commitment Parties") dated as of April 4, 2022 ((a) and (b) together, the "2022 Commitment Letter"), pursuant to which, among other things, the 2022 Commitment Parties committed to provide us with (i) a senior secured term loan B credit facility consisting of a $4.25 billion term loan B and (ii) a senior secured term loan A credit facility consisting of a $1.0 billion term loan A

On April 11, 2022, in connection with the 2022 Commitment Letter, we completed the syndication of the 2022 New Term Loan Facilities, comprised of (i) two tranches of term loan B: a tranche of $3.6 billion at the secured overnight financing rate ("SOFR") plus 2.75%, a floor of 0.50% and 2.0% of original issue discount ("OID"), and a Euro tranche of EUR 600 million at EURIBOR plus 3.00%, a floor of 0.00% and 2.00% of OID; and (ii) a $1.0 billion term loan A at SOFR plus 2.50%, a floor of 0.00% and 0.25% of OID.

The 2022 Commitment Parties' obligations under the 2022 Commitment Letter and the closing and initial funding under the 2022 New Term Loan Facilities and the 2022 New Revolving Credit Facility are subject to certain customary conditions including, without limitation, the consummation of the Atotech Acquisition in accordance with the Implementation Agreement, the accuracy of specified representations and warranties made by us and other customary closing conditions.

For additional information about the commitment letter we entered into on July 1, 2021, which we terminated in connection with the 2022 Commitment Letter, see Note 18 to the Condensed Consolidated Financial Statements.

Segments

In the first quarter of 2022, we updated the names of our three divisions in order to simplify our naming conventions. Our reportable segments continue to be our three divisions.

The Vacuum Solutions Division ("VSD"), formerly the Vacuum & Analysis Division, 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, electronic control technology, reactive gas generation and delivery, power generation and delivery, and vacuum technology.

The Photonics Solutions Division ("PSD"), formerly the Light & Motion Division, provides a broad range of instruments, components and subsystems, which are derived from our core competencies in lasers, photonics, optics, temperature sensing, precision motion control and vibration control.

The Equipment Solutions Division ("ESD"), formerly the Equipment & Solutions Division, provides a range of laser-based systems and test products, including laser-based systems for printed circuit board ("PCB") manufacturing, which include flexible

interconnect PCB processing systems and high-density interconnect solutions for rigid PCB manufacturing and substrate processing, and multi-layer ceramic capacitor test systems.

Markets

Beginning with the first quarter of 2022, we changed how we present revenue to better represent the end markets we serve and to enable investors to better understand the key drivers of our business. We separated what we previously categorized as Advanced Markets into our Advanced Electronics and Specialty Industrial end markets. Our Semiconductor end market remains unchanged.







        Net Revenues by Market
                                                                    Three Months Ended
        (dollars in
        millions)          March 31, 2022       % Total       December 31, 2021       % Total       March 31, 2021       % Total
        Semiconductor     $            488            66 %   $               495            65 %   $            412            59 %
        Advanced
        Electronics                     82            11 %                    96            13 %                115            17 %
        Specialty
        Industrial                     172            23 %                   173            22 %                167            24 %
          Total net
        revenues          $            742           100 %   $               764           100 %   $            694           100 %
        


Semiconductor Market

This market primarily relates to products used in major semiconductor processing steps, such as depositing thin films of material onto silicon wafer substrates, etching, cleaning, lithography, metrology and inspection. A significant portion of our sales is anticipated to continue to be derived from products sold to semiconductor capital equipment manufacturers and semiconductor device manufacturers.

While the semiconductor device manufacturing market is global, major semiconductor capital equipment manufacturers are concentrated in China, Japan, South Korea, Taiwan and the United States. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we cannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry.

For the three months ended March 31, 2022, net revenues in our semiconductor market decreased by $7 million or 1%, compared to the prior quarter, and increased $76 million or 19%, compared to the same period in the prior year. The sequential decrease was reflective of continued supply chain disruptions and component shortages due to global capacity constraints compounded by increasing global demand, as well as the ongoing COVID-19 pandemic. We expect these disruptions and shortages to continue in the near-term while our suppliers adjust to significant increases in demand and respond to the challenges posed by the COVID-19 pandemic. The year-over-year increase was reflective of increased broad-based demand for our VSD and PSD products, which includes Photon Control, partially offset by the effects of supply chain disruptions and component shortages.

Advanced Electronics Market

This market primarily relates to sales of products for PCB manufacturing, solar, display and electronic component applications. These applications include flexible and rigid PCB processing/fabrication, glass coating and electronic thin films. Electronic thin films are a primary component of numerous electronic products, including flat panel displays, light emitting diodes, solar cells and data storage media. Advanced electronics manufacturers are located globally.

For the three months ended March 31, 2022, net revenues in our advanced electronic market decreased by $14 million or 15%, compared to the prior quarter and decreased $33 million or 29%, compared to the same period in the prior year. These decreases were primarily due to softer industry demand for flexible PCB drilling equipment which is primarily related to our ESD.

Specialty Industrial Market

This market primarily relates to sales of products for industrial, life and health sciences, research and defense applications.

Industrial

Industrial technologies encompasses a wide range of diverse applications, such as laser marking, measurement and scribing, natural gas and oil production and environmental monitoring. Our industrial customers are located globally.

Life and Health Sciences

Our products for life and health sciences are used in a diverse array of applications, including bioimaging, medical instrument sterilization, medical device manufacturing, analytical, diagnostic and surgical instrumentation, consumable medical supply manufacturing and pharmaceutical production. Our life and health sciences customers are located globally.

Research and Defense

Our products for research and defense are sold to government, university and industrial laboratories for applications involving research and development in materials science, physical chemistry, photonics, optics and electronics materials. Our products are also sold for monitoring and defense applications, including surveillance, imaging and infrastructure protection. Major equipment providers and research laboratories are concentrated in China, Europe, Japan, South Korea, Taiwan and the United States.

For the three months ended March 31, 2022, net revenues from customers in our specialty industrial market decreased by $1 million or 1%, compared to the prior quarter, and increased by $4 million or 2%, compared to the same period in the prior year. Net sales in life and health sciences applications increased both sequentially and year-over-year. Net sales of products supporting defense applications increased sequentially but were offset by seasonally lower demand in the research market.

International Markets

A significant portion of our net revenues is from sales to customers in international markets. For the three months ended March 31, 2022 and 2021 and for the three months ended December 31, 2021, international revenues accounted for approximately 54%, 59% and 55%, respectively, of our total net revenues. A significant portion of our international net revenues was from China, Japan, South Korea and Taiwan. We expect international net revenues will continue to represent a significant percentage of our total net revenues for the foreseeable future.

Long-lived assets located outside of the United States accounted for approximately 53% and 50% of our total long-lived assets as of March 31, 2022 and December 31, 2021, respectively. Long-lived assets include property, plant and equipment, net, right-of-use assets, and certain other assets and exclude goodwill, intangible assets and long-term tax-related accounts.







        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 condensed consolidated
        statements of operations and comprehensive income data.
                                                                          Three Months Ended
                                                                             December 31,
                                                         March 31, 2022          2021          March 31, 2021
        Net revenues:
        Products                                                    87.4 %           87.4 %               87.2 %
        Services                                                    12.6             12.6                 12.8
        Total net revenues                                         100.0            100.0                100.0
        Cost of revenues:
        Cost of product revenues                                    48.5             47.0                 46.5
        Cost of service revenues                                     6.5              6.6                  7.1
        Total cost of revenues (exclusive of
        amortization shown separately below)                        55.0             53.6                 53.6
        Gross profit                                                45.0             46.4                 46.4
        Research and development                                     7.0              6.7                  6.8
        Selling, general and administrative                         12.5             12.6                 13.8
        Acquisition and integration costs                            1.1              1.2                  0.9
        Restructuring and other                                      0.3              0.2                  0.7
        Amortization of intangible assets                            2.0              2.0                  1.8
        Gain on sale of long-lived assets                           (1.0 )              -                    -
        Income from operations                                      23.1             23.7                 22.4
        Interest expense                                             0.8              0.8                  0.9
        Other (income) expense, net                                 (0.8 )           (0.4 )                0.2
        Income before income taxes                                  23.1             23.3                 21.3
        Provision for income taxes                                   3.8              3.7                  3.7
        Net income                                                  19.3 %           19.6 %               17.6 %
        








        Net Revenues
                                                     Three Months Ended
        (dollars in millions)    March 31, 2022       December 31, 2021       March 31, 2021
        Products                $            648     $               668     $            605
        Services                              94                      96                   89
        Total net revenues      $            742     $               764     $            694
        


For the three months ended March 31, 2022, net product revenues decreased $20 million compared to the prior quarter and increased $43 million compared to the same period in the prior year. The sequential decrease was reflective of continued supply chain disruptions and component shortages in the semiconductor market, as well as, softer industry demand for flexible PCB drilling equipment. The year-over-year increase was primarily due to a volume increase from our semiconductor customers of $73 million, partially offset by the effects of supply chain disruptions and component shortages, as well as a decrease of $36 million from our customers in the advanced electronics market, primarily for flexible PCB drilling equipment.

Net 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. For the three months ended March 31, 2022, net service revenue decreased $2 million compared to the prior quarter and increased $5 million compared to the same period in the prior year. The sequential decrease was primarily due to decreased service revenue from our semiconductor market and the year-over-year increase was primarily due to increased service revenue from our advanced electronics customers.

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







                                                                             Three Months Ended
        (dollars in millions)                            March 31, 2022       December 31, 2021       March 31, 2021
        Net revenues:
        Vacuum Solutions Division                       $            474     $               485     $            436
        Photonics Solutions Division                                 228                     230                  182
        Equipment Solutions Division                                  40                      49                   76
        Total net revenues                              $            742     $               764     $            694
        


For the three months ended March 31, 2022, net revenues from VSD decreased $11 million compared to the prior quarter and increased $38 million compared to the same period in the prior year. The decrease was reflective of continued supply chain disruptions and component shortages in the semiconductor market and the year-over-year increase was primarily due to volume increases in the semiconductor market, partially offset by decreased revenue due to the effects of supply chain disruptions and component shortages.

For the three months ended March 31, 2022, net revenue from PSD decreased $2 million compared to the prior quarter and increased $46 million compared to the same period in the prior year. The year-over-year increase was reflective of volume increases in the semiconductor market and contributions from Photon Control.

For the three months ended March 31, 2022, net revenue from ESD decreased $9 million compared to the prior quarter and decreased $36 million compared to the same period in the prior year. The decrease in each period was primarily due to softer industry demand for flexible PCB drilling equipment.







        Gross Margin
                                                    Three Months Ended                            Three Months Ended
                                         March 31,     December 31,      % Points       March 31,     March 31,      % Points
                                           2022            2021           Change          2022          2021          Change
        Gross margin as a percentage
        of net revenues:
        Products                              44.4 %           46.2 %         (1.8 )%        44.4 %        46.7 %         (2.3 )%
        Services                              49.2             47.6            1.6           49.2          44.7            4.5
        Total gross margin                    45.0 %           46.4 %         (1.4 )%        45.0 %        46.4 %         (1.4 )%
        


Gross margin for our products declined sequentially and year-over-year, primarily due to higher materials costs from the global component shortage. Gross margin year-over-year was also negatively affected by unfavorable overhead absorption arising from the effect of component shortages on manufacturing efficiencies, partially offset by higher revenue volumes.

Gross margin for our services increased sequentially and year-over-year, primarily as a result of our efforts to transition customers to higher-value offerings such as service contracts and equivalent-to-new product refurbishments. These service offerings also benefitted from labor efficiency from more predictable work loading from additional service contracts.

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







                                                      Three Months Ended                           Three Months Ended
                                           March 31,     December 31,      % Points        March        March        % Points
                                             2022            2021           Change        31, 2022     31, 2021       Change
        Gross margin as a percentage of
        net revenues:
        Vacuum Solutions Division               43.5 %           46.2 %         (2.7 )%       43.5 %       47.0 %         (3.5 )%
        . . .
        


May 02, 2022

COMTEX_406597832/2041/2022-05-02T17:21:05

Is there a problem with this press release? Contact the source provider Comtex at editorial@comtex.com. You can also contact MarketWatch Customer Service via our Customer Center.

(c) 1995-2022 Cybernet Data Systems, Inc. All Rights Reserved

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.