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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 September 30, 2002
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 October 31,
2002: 51,242,766
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets --
September 30, 2002 and December 31, 2001
Consolidated Statements of Income --
Three and nine months ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows --
Nine months ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 75,595 $ 120,869
Short-term investments ................................................ 37,654 16,625
Trade accounts receivable, net ........................................ 52,218 35,778
Inventories ........................................................... 82,864 56,954
Deferred tax asset .................................................... 18,406 16,426
Other current assets .................................................. 13,196 16,353
--------- ---------
Total current assets .............................................. 279,933 263,005
Property, plant and equipment, net .................................... 83,212 69,634
Goodwill .............................................................. 258,525 31,113
Acquired intangible assets, net ....................................... 71,498 21,172
Long-term investments ................................................. 15,658 11,029
Other assets .......................................................... 8,819 15,236
--------- ---------
Total assets ...................................................... $ 717,645 $ 411,189
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ................................................. $ 11,684 $ 9,238
Current portion of long-term debt ..................................... 4,308 5,074
Current portion of capital lease obligations .......................... 360 503
Accounts payable ...................................................... 20,072 9,668
Accrued compensation .................................................. 8,720 6,116
Other accrued expenses ................................................ 24,365 15,551
--------- ---------
Total current liabilities ......................................... 69,509 46,150
Long-term debt ............................................................ 12,435 10,916
Long-term portion of capital lease obligations ............................ 136 341
Deferred tax liability .................................................... 9,862 ---
Other liabilities ......................................................... 1,707 911
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; none issued and outstanding ........................... --- ---
Common Stock, no par value, 200,000,000 shares authorized;
51,242,766 and 37,998,699 issued and outstanding at
September 30, 2002 and December 31, 2001, respectively ............ 113 113
Additional paid-in capital ............................................ 575,173 285,252
Retained earnings ..................................................... 47,854 68,160
Accumulated other comprehensive income (loss) ......................... 856 (654)
--------- ---------
Total stockholders' equity ........................................ 623,996 352,871
--------- ---------
Total liabilities and stockholders' equity ........................ $ 717,645 $ 411,189
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
3
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales ................................................ $ 92,216 $ 53,201 $ 237,215 $ 236,745
Cost of sales ............................................ 60,391 37,105 156,455 151,636
--------- --------- --------- ---------
Gross profit ............................................. 31,825 16,096 80,760 85,109
Research and development ................................. 12,650 9,303 33,835 29,907
Selling, general and administrative ...................... 20,455 17,474 58,234 54,107
Amortization of goodwill and acquired intangible assets... 3,778 3,020 10,120 8,005
Goodwill impairment charge ............................... --- --- --- 3,720
Merger expenses .......................................... --- --- --- 7,708
Restructuring and asset impairment charges ............... 2,408 --- 2,408 ---
Purchase of in-process research and development .......... --- --- 8,390 2,340
--------- --------- --------- ---------
Loss from operations ..................................... (7,466) (13,701) (32,227) (20,678)
Interest expense ......................................... 281 424 862 1,197
Interest income .......................................... 714 1,208 2,077 4,382
Income from litigation settlement ........................ 4,200 --- 4,200 ---
Other expense ............................................ 4,121 1,246 4,121 1,246
--------- --------- --------- ---------
Loss before income taxes ................................. (6,954) (14,163) (30,933) (18,739)
Benefit for income taxes ................................. (3,129) (5,092) (10,627) (3,381)
--------- --------- --------- ---------
Net loss ................................................. $ (3,825) $ (9,071) $ (20,306) $ (15,358)
========= ========= ========= =========
Net loss per share:
Basic and diluted .................................... $ (0.07) $ (0.24) $ (0.41) $ (0.41)
========= ========= ========= =========
Weighted average common shares outstanding:
Basic and diluted .................................... 51,262 37,801 49,567 37,364
========= ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
4
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss .............................................................................. $ (20,306) $ (15,358)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ..................................................... 21,165 16,681
Goodwill impairment charge ........................................................ --- 3,720
Purchase of in-process research and development ................................... 8,390 2,340
Loss on disposal of assets ........................................................ 170 1,246
Asset impairment charges .......................................................... 4,988 ---
Deferred taxes .................................................................... (9,319) ---
Other ............................................................................. 551 21
Changes in operating assets and liabilities net of effects of businesses acquired:
Trade accounts receivable ...................................................... (11,065) 52,921
Inventories .................................................................... (3,546) 3,261
Other current assets ........................................................... 6,041 (9,359)
Accrued expenses and other current liabilities ................................. (2,377) (18,673)
Accounts payable ............................................................... 3,722 (13,644)
--------- ---------
Net cash provided by (used in) operating activities ................................... (1,586) 23,156
--------- ---------
Cash flows from investing activities:
Maturities and sales of short-term and long-term investments ...................... 53,852 16,605
Purchases of short-term and long-term investments ................................. (79,881) (19,668)
Purchases of property, plant and equipment ........................................ (5,833) (12,564)
Increase in other assets .......................................................... (623) (3,754)
Proceeds from disposal of assets .................................................. 275 4,514
Purchases of businesses, net of cash acquired ..................................... (16,298) (7,842)
--------- ---------
Net cash used in investing activities ................................................. (48,508) (22,709)
--------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings ............................................... 10,282 23,262
Payments on short-term borrowings ................................................. (9,395) (27,346)
Principal payments on long-term debt .............................................. (4,863) (2,073)
Proceeds from long-term debt ...................................................... --- 833
Proceeds from exercise of stock options ........................................... 7,544 3,595
Principal payments under capital lease obligations ................................ (327) (599)
--------- ---------
Net cash provided by (used in) financing activities ................................... 3,241 (2,328)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents .......................... 1,579 375
--------- ---------
Decrease in cash and cash equivalents ................................................. (45,274) (1,506)
Cash and cash equivalents at beginning of period ...................................... 120,869 123,082
Effect of excluded results of ASTeX (Note 1) .......................................... --- (3,142)
--------- ---------
Cash and cash equivalents at end of period ............................................ $ 75,595 $ 118,434
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ....................................................................... $ 879 $ 855
========= =========
Income taxes ................................................................... $ 2,150 $ 13,004
========= =========
Noncash transactions during the period:
Stock issued for acquisitions .................................................. $ 282,341 $ 12,110
========= =========
Note receivable and warrants from disposal of assets ........................... $ --- $ 4,121
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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 September 30, 2002 and for the three and
nine months ended September 30, 2002 and 2001 is unaudited; however, in the
opinion of MKS Instruments, Inc., the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the results for the interim periods. The terms "MKS"
and the "Company" refer to MKS Instruments, Inc. and its subsidiaries. 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, 2001 audited financial statements and notes thereto included
in the MKS Annual Report on Form 10-K filed with the Securities and
Exchange Commission on April 1, 2002.
On January 26, 2001, MKS completed its acquisition of Applied Science and
Technology, Inc. ("ASTeX") in a transaction accounted for under the pooling
of interests method of accounting. Under the terms of the agreement, each
outstanding share of ASTeX common stock was exchanged for 0.7669 newly
issued shares of common stock of MKS, resulting in the issuance of
approximately 11.2 million shares of common stock of MKS, representing
approximately 30% of its then outstanding shares.
As a result of conforming dissimilar fiscal year-ends, ASTeX's results of
operations for the six-month period ended December 31, 2000 are excluded
from the consolidated financial statements. As a result, the statement of
cash flows for the nine months ended September 30, 2001 reflects an
adjustment of $3,142,000, which represents the ASTeX cash flow during the
excluded period.
2) USE OF ESTIMATES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of these 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
financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to revenue recognition,
in-process research and development, merger expenses, intangible assets and
goodwill, inventories, deferred tax assets, 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.
3) RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS
143"). The objective of SFAS 143 is to provide accounting guidance for
legal obligations associated with the retirement of long-lived assets. The
retirement obligations included within the scope of this pronouncement are
those that an entity cannot avoid as a result of either the acquisition,
construction or normal operation of a long-lived asset. Components of
larger systems also fall under this pronouncement, as well as tangible
long-lived assets with indeterminable lives. The provisions of SFAS 143 are
effective for financial statements issued for fiscal years beginning after
June 15, 2002. The Company is currently evaluating the expected impact of
the adoption of SFAS 143 on the Company's financial condition, cash flows
and results of operations. The Company will adopt the standard in the first
quarter of fiscal 2003.
6
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Tables in thousands, except per share data)
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses significant issues relating to the
implementation of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and
develops a single accounting method under which long-lived assets that are
to be disposed of by sale are measured at the lower of book value or fair
value less cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. Effective January 1,
2002, the Company adopted SFAS 144. The adoption of SFAS 144 did not have a
material impact on the Company's financial position and results of
operations.
In June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146") was issued. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
The provisions of SFAS 146 are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application
encouraged. The Company is currently reviewing the provisions of SFAS 146
to determine the standard's impact upon adoption. The Company will adopt
the standard in the first quarter of fiscal 2003.
4) GOODWILL AND INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain existing
recognized intangibles such as goodwill, reassessment of the useful lives
of existing recognized intangible assets, and reclassification of certain
intangibles out of previously reported goodwill. The Company adopted SFAS
142 on January 1, 2002.
INTANGIBLE ASSETS
In accordance with SFAS 142, the Company reassessed the classification of
its goodwill and intangible assets. This analysis, which was completed
during the quarter ended March 31, 2002, resulted in the reclassification
of workforce related intangible assets of $2,023,000 to goodwill. Also, in
accordance with this statement, the Company reassessed the useful lives of
its amortizable intangible assets and determined that the lives were
appropriate.
Acquired amortizable intangible assets consisted of the following as of
September 30, 2002:
GROSS NET WEIGHTED
CARRYING ACCUMULATED CARRYING AVERAGE
AMOUNT AMORTIZATION AMOUNT USEFUL LIFE
------- ------------ -------- ------------
Completed technology.................................. $69,394 $(12,547) $ 56,847 6 years
Customer relationships................................ 6,640 (1,513) 5,127 7 years
Patents, trademarks, tradenames and other............. 12,394 (2,870) 9,524 7 years
------- -------- --------
$88,428 $(16,930) $ 71,498 6 years
======= ======== ========
7
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Tables in thousands, except per share data)
Amortizable intangible assets consisted of the following as of December 31,
2001:
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
-------- ------------ ---------
Completed technology........................................... $16,564 $(4,402) $12,162
Customer relationships......................................... 4,040 (851) 3,189
Patents, trademarks, tradenames and other...................... 8,132 (2,311) 5,821
------- ------ -------
$28,736 $(7,564) $21,172
======= ======== =======
Aggregate amortization expense related to acquired intangibles for the
three and nine months ended September 30, 2002 was $3,778,000 and
$10,120,000, respectively, and was $1,354,000 and $3,420,000 for the three
and nine months ended September 30, 2001, respectively. Estimated
amortization expense related to acquired intangibles for each of the five
succeeding fiscal years is as follows:
YEAR AMOUNT
---- ------
2002 $13,898
2003 14,576
2004 14,251
2005 13,351
2006 11,249
GOODWILL
SFAS 142 requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. During the second
quarter of 2002, the Company completed the transitional goodwill impairment
test as of January 1, 2002 and no adjustment to goodwill was necessary. The
changes in the carrying amount of goodwill by reportable segments during
the three and nine months ended September 30, 2002 were as follows:
NORTH AMERICA FAR EAST EUROPE TOTAL
------------- -------- ------ -----
Balance at December 31, 2001.............................. $ 29,606 $296 $ 1,211 $ 31,113
Workforce reclassification................................ 2,023 --- --- 2,023
Goodwill acquired during the quarter...................... 203,496 --- 14,678 218,174
------- ---- ------- --------
Balance at March 31, 2002................................. 235,125 296 15,889 251,310
Finalization of purchase price allocation................. (6,089) --- 4,022 (2,067)
Goodwill acquired during the quarter...................... --- --- 9,648 9,648
-------- ---- ------- --------
Balance at June 30, 2002.................................. $229,036 $296 $29,559 $258,891
Finalization of purchase price allocation................. (284) --- --- (284)
Foreign currency translation.............................. --- (5) (77) (82)
-------- ---- ------- --------
Balance at September 30, 2002............................. $228,752 $291 $29,482 $258,525
======== ==== ======= ========
8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Tables in thousands, except per share data)
The following is the pro forma effect on net income and net income per
share had SFAS No. 142 been in effect for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Reported net loss.......................................................... $(9,071) $(15,358)
Add back: impact of goodwill amortization, net of taxes.................... 1,456 3,786
------- --------
Adjusted net loss.......................................................... $(7,615) $(11,572)
======= =========
Basic and diluted net loss per share....................................... $( 0.24) $ ( 0.41)
Add back: impact of goodwill amortization, net of taxes.................... 0.04 0.10
------- --------
Adjusted basic and diluted net loss per share.............................. $ (0.20) $ (0.31)
======= ========
5) CASH AND CASH EQUIVALENTS AND INVESTMENTS
Cash and Cash equivalents consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Cash and Money Market Instruments.......................................... $36,662 $101,045
Commercial Paper........................................................... 22,353 8,094
Federal Government and Government Agency Obligations....................... 15,066 11,730
Corporate Obligations...................................................... 1,514 ---
------- --------
$75,595 $120,869
======= ========
Short-term available-for-sale investments at market value maturing within
one year consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Federal Government and Government Agency Obligations....................... $26,047 $ 5,442
Certificate of Deposits.................................................... 4,414 ---
Commercial Paper........................................................... 7,193 8,083
State and Municipal Government Obligations................................. --- 3,100
------- -------
$37,654 $16,625
======= =======
Long-term available-for-sale investments at market value with maturities of
1 to 5 years consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Federal Government and Government Agency Obligations.................... $ 6,676 $ 1,008
State and Municipal Government Obligations.............................. --- 7,021
Corporate Obligations................................................... 8,982 3,000
------- -------
$15,658 $11,029
======= =======
9
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Tables in thousands, except per share data)
6) NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
THREE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
Numerator
Net loss ....................................................... $(3,825) $ (9,071)
======= ========
Denominator
Shares used in net loss per common share -- basic and diluted... 51,262 37,801
======= ========
Net loss per common share
Basic and diluted .............................................. $ (0.07) $ (0.24)
======= ========
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
Numerator
Net loss ...................................................... $ (20,306) $(15,358)
========== ========
Denominator
Shares used in net loss per common share -- basic and diluted.. 49,567 37,364
========== ========
Net loss per common share
Basic and diluted ............................................. $ (0.41) $ (0.41)
========== ========
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. All options outstanding during the three and nine months ended
September 30, 2002 and 2001 are excluded from the calculation of diluted
net loss per common share because their inclusion would be anti-dilutive.
There were options to purchase approximately 7,114,000 and 5,069,000 shares
of the Company's common stock outstanding as of September 30, 2002 and
2001, respectively.
7) INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
Raw material........................................................... $32,129 $21,019
Work in process........................................................ 20,778 15,362
Finished goods......................................................... 29,957 20,573
------- -------
$82,864 $56,954
======= =======
8) STOCKHOLDERS' EQUITY
Total comprehensive loss was as follows:
THREE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
Net loss .............................................................. $(3,825) $(9,071)
Other comprehensive income (loss), net of taxes:
Changes in value of financial instruments designated
as hedges of currency and interest rate exposures ................. (127) (799)
Foreign currency translation adjustment ............................. (83) 987
Unrealized gain (loss) on investments ............................... (2) (1)
------- -------
Other comprehensive income (loss), net of taxes ....................... (212) 187
------- -------
Total comprehensive loss .............................................. $(4,037) $(8,884)
======= =======
10
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Tables in thousands, except per share data)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
Net loss............................................................. $(20,306) $(15,358)
Other comprehensive income (loss), net of taxes:
Changes in value of financial instruments designated
as hedges of currency and interest rate exposures................ (279) (186)
Foreign currency translation adjustment............................ 1,728 22
Unrealized gain (loss) on investments.............................. 61 (315)
-------- --------
Other comprehensive income (loss), net of taxes...................... 1,510 (479)
-------- --------
Total comprehensive loss............................................. $(18,796) $(15,837)
======== ========
9) INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The measurement of deferred tax
assets is reduced by a valuation allowance if, based upon weighted
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
The Company does not provide for a U.S. income tax liability on
undistributed earnings of its foreign subsidiaries. The earnings of
non-U.S. subsidiaries, which reflect full provision for non-U.S. income
taxes, are indefinitely reinvested in non-U.S. operations or will be
remitted substantially free of additional tax. As of September 30, 2002,
the unrecognized deferred tax liability associated with these unremitted
earnings was approximately $2,000,000.
The Company evaluates the realizability of its deferred tax assets and
assesses the need for a valuation allowance each quarter. The future
benefit to be derived from its deferred tax assets is dependent upon its
ability to generate sufficient future taxable income to realize the assets.
The semiconductor industry is in a downturn, and the Company has incurred
significant losses from operations over several quarters. The Company
believes that its net deferred tax assets will be realized. However, if the
Company continues to incur losses from operations, and the outlook remains
unclear, the Company may be required under Generally Accepted Accounting
Principles to establish a valuation allowance against all or a significant
portion of its net deferred tax assets. To the extent the Company
establishes a valuation allowance, an expense will be recorded within the
provision for income taxes line in the Statement of Income.
10) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMER
Segment information for the three months ended September 30, 2002 and 2001
was as follows:
NORTH AMERICA FAR EAST EUROPE TOTAL
------------- -------- ------ -----
Net sales to unaffiliated customers 2002 $58,254 $23,131 $10,831 $92,216
2001 33,537 11,082 8,582 53,201
Intersegment net sales 2002 19,346 5,401 317 25,064
2001 10,858 169 326 11,353
Income (loss) from operations 2002 (12,744) 4,644 634 (7,466)
2001 (15,011) 865 445 (13,701)
11
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Tables in thousands, except per share data)
Segment information for the nine months ended September 30, 2002 and 2001
was as follows:
NORTH AMERICA FAR EAST EUROPE TOTAL
------------- -------- ------ -----
Net sales to unaffiliated customers 2002 $155,942 $53,240 $28,033 $237,215
2001 163,733 40,885 32,127 236,745
Intersegment net sales 2002 46,375 10,055 973 57,403
2001 39,265 857 1,041 41,163
Income (loss) from operations 2002 (41,031) 7,236 1,568 (32,227)
2001 (29,793) 4,212 4,903 (20,678)
The Company had one customer comprising 25% and 14% of net sales for the
three months ended September 30, 2002 and 2001, respectively, and 24% and
19% of net sales for the nine months ended September 30, 2002 and 2001,
respectively.
11) COMMITMENTS AND CONTINGENCIES
On November 3, 1999, On-Line Technologies, Inc. ("On-Line"), which was
acquired by the Company in April 2001, brought suit in federal district
court in Connecticut against Perkin-Elmer, Inc. and certain other
defendants for infringement of On-Line's patent related to its FTIR
spectrometer product. The suit seeks injunctive relief and damages for
infringement. Perkin-Elmer, Inc. has filed a counterclaim seeking
invalidity of the patent, costs, and attorneys' fees. The Company believes
that the counterclaim is without merit.
The Company cannot be certain of the outcome of the foregoing litigation,
but does plan to assert its claims against other parties and oppose the
counterclaims against it vigorously.
On November 30, 2000, ASTeX, which was acquired by the Company in January
2001, brought suit in federal district court in Delaware against Advanced
Energy Industries, Inc. ("Advanced Energy") for infringement of ASTeX's
patent related to its Astron product. On May 17, 2002, a jury affirmed the
validity of the Company's patent and found that Advanced Energy infringed
the patent. On May 31, 2002, based on the jury's findings, the Court
entered a judgement on the infringement claim in favor of the Company and
against Advanced Energy, and awarded $4,200,000 in damages to compensate
the Company for Advanced Energy's infringing activity. Advanced Energy
filed motions to overturn the verdict. During August of 2002, the Company
and Advanced Energy entered into an agreement whereby Advanced Energy
agreed to pay the awarded damages amount to the Company and withdraw its
motions to overturn the verdit. The Company received the $4,200,000 in
September 2002, and recorded the amount as Income from litigation
settlement.
The Company is subject to other legal proceedings and claims, which have
arisen in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company's results of
operations, financial condition or cash flows.
12) ACQUISITIONS AND DISPOSAL OF ASSETS
On January 31, 2002, MKS completed its acquisition of the ENI Business of
Emerson Electric Co. ("ENI"), a supplier of solid-state radio frequency
(RF) and direct current (DC) plasma power supplies, matching networks and
instrumentation to the semiconductor and thin-film processing industries.
The reasons for the acquisition of ENI were based upon the ability to offer
higher value and more integrated application solutions by combining ENI's
solid-state power conversion technology with the Company's core competency
in plasma and reactive gas solutions.
12
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Tables in thousands, except per share data)
The acquisition has been accounted for under the purchase method of
accounting. The purchase price was approximately $266,530,000 and consisted
of approximately 12,000,0000 shares of MKS common stock valued at
approximately $261,264,000 and transaction expenses of approximately
$5,266,000. The value of MKS common stock was approximately $21.7720 per
share based on the average closing price of MKS' common stock for the
five-day period including the date of the announcement of the signing of
the merger agreement and the two days preceding and succeeding such date.
The purchase price was allocated to the assets acquired based upon their
estimated fair values and resulted in an allocation of approximately
$197,123,000 to goodwill. The results of operations are included in the
Company's consolidated statement of income as of and since the date of the
purchase. The allocation of the purchase price is as follows:
Current assets........................................................................ 31,038
Other assets.......................................................................... 2,123
Fixed assets.......................................................................... 18,882
Completed technology.................................................................. 39,600
Patents............................................................................... 6,500
Customer relationships................................................................ 2,600
In-process research and development................................................... 7,500
Goodwill.............................................................................. 197,123
Other liabilities..................................................................... (13,883)
Long term liabilities................................................................. (24,953)
--------
$266,530
========
The amounts allocated to acquired intangible assets are being amortized
using the straight-line method over their respective estimated useful
lives: 6 years for completed technology, 8 years for patents, and 8 years
for customer relationships. The total weighted average amortizable life of
the acquired intangible assets is 6 years.
In connection with the acquisition of ENI, the Company obtained an
appraisal from an independent appraiser of the fair value of its intangible
assets. This appraisal valued purchased in-process research and development
("IPR&D") of various projects for the development of new products and
technologies at approximately $7,500,000. Because the technological
feasibility of products under development had not been established and no
future alternative uses existed, the purchased IPR&D was expensed during
the six months ended June 30, 2002. The value of the purchased IPR&D was
determined using the income approach, which discounts expected future cash
flows from projects under development to their net present value. Each
project was analyzed to determine the technological innovations included;
the utilization of core technology; the complexity, cost and time to
complete development; any alternative future use or current technological
feasibility; and the stage of completion. The cash flows derived from the
IPR&D projects were discounted at rates ranging from 25% to 30%. The
Company believes these rates were appropriate given the risks associated
with the technologies for which commercial feasibility had not been
established. The percentage of completion for each in-process project was
determined by identifying the cost incurred to date of the project as a
ratio of the total estimated cost required to bring the project to
technical and commercial feasibility. The percentage of completion for
in-process projects acquired ranged from 65% to 80%, based on management's
estimates of tasks completed and the tasks to be completed to bring the
projects to technological and commercial feasibility. The projects were
generally expected to have durations of up to 12 months. As of September
30, 2002, the actual development timelines and costs were in line with
management's estimates.
13
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
In connection with the acquisition of On-Line, the Company obtained an
appraisal from an independent appraiser of the fair value of its intangible
assets. This appraisal valued purchased IPR&D of various projects for the
development of new products and technologies at approximately $2,340,000.
The projects were generally expected to have durations of 24 to 48 months.
Because the technological feasibility of products under development had not
been established and no future alternative uses existed, the purchased
IPR&D was expensed during the quarter ended June 30, 2001. The value of the
purchased IPR&D was determined using the income approach, which discounts
expected future cash flows from projects under development to their net
present value.
Each project was analyzed to determine the technological innovations
included; the utilization of core technology; the complexity, cost and time
to complete development; any alternative future use or current
technological feasibility; and the stage of completion. The cash flows
derived from the in-process technology projects were discounted at a rate
of 25%. The Company believes this rate was appropriate given the risks
associated with the technologies for which commercial feasibility had not
been established. The percentage of completion for each in-process project
was determined by identifying the elapsed time invested in the project as a
ratio of the total time required to bring the project to technical and
commercial feasibility. The percentage of completion for in-process
projects acquired ranged from 55% to 65%, based on management's estimates
of tasks completed and the tasks to be completed to bring the projects to
technological and commercial feasibility.
Development of in-process technology remains a substantial risk to the
Company due to a variety of factors including the remaining effort to
achieve technical feasibility, rapidly changing customer requirements and
competitive threats from other companies and technologies.
On March 13, 2002, MKS completed its acquisition of Tenta Technology Ltd.
("Tenta"), a supplier of modular, computer-based process control systems
that are designed for 300mm semiconductor process tool applications. The
reasons for the acquisition of Tenta were based upon the ability to offer
higher value and more integrated application solutions by integrating
Tenta's process controllers with MKS' digital network products to provide a
more complete process control solution. The acquisition has been accounted
for under the purchase method of accounting. The purchase price was
allocated to the net assets acquired based upon their estimated fair
values. The results of operations are included in the Company's
consolidated statement of income as of and since the date of the purchase.
On April 5, 2002, the Company completed its acquisition of privately held
IPC Fab Automation GmbH ("IPC"), a developer and provider of web-based
hardware and software that enable e-diagnostics and advanced process
control for advanced manufacturing customers. The reasons for the
acquisition of IPC were based upon the ability to offer higher value and
more integrated application solutions by integrating IPC's connectivity
hardware and software with MKS' digital network products to provide a more
complete process control solution. The acquisition has been accounted for
under the purchase method of accounting. The purchase price was allocated
to the net assets acquired based upon their estimated fair values. The
purchase price allocation is preliminary and dependent upon the completion
of an acquired intangibles valuation report. The results of operations are
included in the Company's consolidated statement of income as of and since
the date of the purchase.
14
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Tables in thousands, except per share data)
The following unaudited pro forma information presents a summary of the
historical results of operations of the Company as if the ENI, Tenta, and
IPC acquisitions had occurred at the beginning of each period.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2001
---- ---- ----
Net sales................................................. $ 67,160 $241,662 $317,434
Net loss.................................................. $(16,802) $(14,496) $(22,692)
Net loss per share:
Basic and diluted....................................... $ (0.33) $ (0.28) $ (0.45)
The unaudited pro forma results for the nine months ended September 30,
2002 excludes approximately $1.3 million of non-recurring charges directly
related to the transaction that were incurred by Tenta prior to the date of
the acquisition. Additionally, the charges for purchased IPR&D were not
included in the unaudited pro forma results, because they were
non-recurring and directly related to the transactions.
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.
In August 2001, the Company sold certain assets for proceeds of
approximately $9,000,000, consisting of approximately $4,700,000 in cash,
$3,900,000 in a note receivable, and $200,000 of warrants. The note
receivable matures August 7, 2004, and bears an annual interest rate of
9.0%. The loss on the transaction was $1,246,000 before taxes. In the three
months ended September 30, 2002, the Company recorded a charge of
$4,121,000 to other expense for the Company's estimate of the impairment on
the note receivable and warrants.
13) GOODWILL IMPAIRMENT CHARGE
When the Company acquired the Shamrock product line, it was expected that
sales of the existing system design and development of new system designs
would generate future revenues. Since the acquisition, the Company has
provided potential customers with purchase quotations for Shamrock systems,
including a significant quotation to a potential customer in January 2001
for the sale of several systems. The customer did not purchase the systems,
and the quotation expired in March 2001. The Company was unsuccessful in
selling any systems of the product line after the acquisition and, with the
expiration of the significant quote in March 2001, the Company evaluated
the recoverability of the long-lived assets, primarily goodwill. As a
result, based on discounted cash flow analysis, the Company recorded an
impairment charge for the carrying value of the related goodwill of
approximately $3,720,000 in the quarter ended March 31, 2001.
14) MERGER COSTS
On January 26, 2001 MKS completed its acquisition of ASTeX in a transaction
accounted for under the pooling of interests method of accounting. Under
the pooling of interests method of accounting, fees and expenses related to
the merger are expensed in the period of the merger. During the three
months ended March 31, 2001, MKS expensed approximately $7.7 million of
merger related expenses, consisting of $6.9 million of investment banking,
legal, accounting, printing and other professional fees, and $0.8 million
of regulatory and other costs.
15
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Tables in thousands, except per share data)
15) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
During the quarter ended September 30, 2002 the Company implemented a
consolidation of recent acquisitions to accelerate product development,
rationalize manufacturing operations, and reduce operating costs. As a
result of these actions, the Company recorded restructuring and asset
impairment charges of $2,408,000. The charges consisted of $631,000 of
severance costs related to a workforce reduction, $910,000 related to
consolidation of leased facilities, and an asset impairment charge of
$867,000 primarily related to the impairment of an intangible asset from
the discontinuance of certain product development activities. The fair
value of the impaired intangible asset was determined using the expected
present value of future cash flows. The workforce reduction was across all
functional groups and consisted of 225 employees, with 173 terminated
during the quarter. Severance costs of $262,000 were paid during the
quarter ended September 30, 2002. The remainder of the severance costs are
expected to be paid by the end of the second quarter of 2003. The
facilities consolidation charges will be paid over the respective lease
terms ending in 2007. The impaired assets are in the North America segment
of the Company.
A summary of the restructuring charges and related asset impairments during
the three months ended September 30, 2002 is outlined as follows:
TOTAL CASH NON-CASH ACCRUAL
CHARGES PAYMENTS CHARGES BALANCE
------- -------- -------- -------
Workforce reductions....................................... $ 631 $(262) $ --- $ 369
Facility consolidations.................................... 910 --- --- 910
Assets impairment.......................................... 867 --- (867) ---
------ ----- ----- ------
$2,408 $(262) $(867) $1,279
====== ===== ===== ======
16
MKS INSTRUMENTS, INC.
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. When used
herein, including this Management's Discussion and Analysis, the words
"believes," "anticipates," "plans," "expects," 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. MKS Instruments, Inc. assumes no obligation to update this
information. Risks and uncertainties include, but are not limited to those
discussed in the section entitled "Factors That May Affect Future Results."
OVERVIEW
MKS develops, manufactures and provides instruments, components and integrated
subsystems used to measure, control, power and monitor critical parameters of
semiconductor and other advanced manufacturing process environments. The Company
estimates that during 2001 approximately 64% of its net sales were to
semiconductor capital equipment manufacturers and semiconductor device
manufacturers.
On January 31, 2002, MKS completed its acquisition of the ENI Business of
Emerson Electric Co. ("ENI"), a supplier of solid-state radio frequency (RF) and
direct current (DC) plasma power supplies, matching networks and instrumentation
to the semiconductor and thin-film processing industries. The reasons for the
acquisition of ENI were based upon the ability to offer higher value and more
integrated application solutions by combining ENI's solid-state power conversion
technology with the Company's core competency in plasma and reactive gas
solutions. The acquisition has been accounted for under the purchase method of
accounting. The purchase price was approximately $266,530,000 and consisted of
approximately 12,000,0000 shares of MKS common stock valued at approximately
$261,264,000 and transaction expenses of approximately $5,266,000. The value of
MKS common stock was approximately $21.7720 per share based on the average
closing price of MKS' common stock for the five-day period including the date of
the announcement of the signing of the merger agreement and the two days
preceding and succeeding such date. The purchase price was allocated to the
assets acquired based upon their estimated fair values and resulted in an
allocation of approximately $197,123,000 to goodwill. The results of operations
are included in the Company's consolidated statement of income as of and since
the date of the purchase.
17
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of total
net sales of certain line items included in MKS' consolidated statement of
income data.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales .................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................................. 65.5 69.7 66.0 64.1
----- ----- ----- -----
Gross profit ............................................... 34.5 30.3 34.0 35.9
Research and development ................................... 13.7 17.5 14.3 12.6
Selling, general and administrative ........................ 22.2 32.8 24.5 22.9
Amortization of goodwill and acquired intangible assets..... 4.1 5.7 4.3 3.4
Goodwill impairment charge ................................. --- --- --- 1.6
Merger expenses ............................................ --- --- --- 3.2
In-process research and development ........................ --- --- 3.5 1.0
Restructuring and asset impairment charges ................. 2.6 --- 1.0 ---
----- ----- ----- -----
Loss from operations ....................................... (8.1) (25.7) (13.6) (8.8)
Interest income, net ....................................... 0.5 1.4 0.5 1.4
Income from litigation settlement .......................... 4.6 --- 1.8 ---
Other expense .............................................. 4.5 2.3 1.7 0.5
----- ----- ----- -----
Loss before income taxes ................................... (7.5) (26.6) (13.0) (7.9)
Provision (benefit) for income taxes ....................... (3.4) (9.6) (4.4) (1.4)
----- ----- ----- -----
Net loss ................................................... (4.1)% (17.0)% (8.6)% (6.5)%
===== ===== ===== =====
NET SALES. Net sales increased 73.3% to $92.2 million for the three months
ended September 30, 2002 from $53.2 million for the three months ended September
30, 2001. International net sales were approximately $34.0 million for the three
months ended September 30, 2002 or 36.8% of net sales and $19.7 million for the
same period of 2001 or 37.0% of net sales. Net sales of $237.2 million for the
nine months ended September 30, 2002 was approximately the same as net sales of
$236.7 million for the same period of 2001. International net sales were
approximately $81.3 million for the nine months ended September 30, 2002 or
34.3% of net sales and $73.0 million for the same period of 2001 or 30.8% of net
sales. The increase in net sales in the three months ended September 30, 2002
compared to the same period of 2001 was due to increased worldwide demand for
the Company's products from the Company's semiconductor capital equipment
manufacturer and semiconductor device manufacturer customers during the quarter.
Additionally, net sales in 2002 includes the revenues of ENI, Tenta and IPC, the
companies acquired during the year.
The net sales of the Company for the nine months ended September 30, 2002,
excluding the amount of revenue of the companies acquired in 2002, declined
compared to the same period of 2001. The decrease was due to the worldwide
slowdown in demand for the Company's products from the Company's semiconductor
capital equipment manufacturer and semiconductor device manufacturer customers,
which began in the first quarter of 2001 and continued through the third quarter
of 2002. Although net sales increased in the three months ended September 30,
2002, the Company believes that net sales could decline to between $65 million
and $75 million in the three months ended December 31, 2002. The Company cannot
determine how long the downturn will last. In the absence of significant
improvement, net sales could continue to decline or remain low, and the amount
of goodwill, other long-lived assets, deferred tax assets, and inventory
considered realizable could be significantly reduced.
GROSS PROFIT. Gross profit as a percentage of net sales increased to 34.5%
for the three months ended September 30, 2002 from 30.3% for the three months
ended September 30, 2001. The increase was primarily due to fuller utilization
of existing manufacturing capacity as a result of increased net sales and other
manufacturing efficiencies, partially offset by charges related to excess and
obsolete inventory and warranty costs. Gross profit as a percentage of net sales
decreased to 34.0% for the nine months ended September 30, 2002 from 35.9% for
the same period of 2001. The reduction in gross profit percentage was primarily
due to the addition of the manufacturing overhead costs of the companies
acquired in 2002.
18
RESEARCH AND DEVELOPMENT. Research and development expense increased 36.0%
to $12.7 million or 13.7% of net sales for the three months ended September 30,
2002 from $9.3 million or 17.5% of net sales for the three months ended
September 30, 2001. The increase was due to increased compensation expense of
$1.9 million and increased expenses for project materials of $1.3 million,
primarily from the companies acquired during the year. Research and development
expense increased 13.1% to $33.8 million or 14.3% of net sales for the nine
months ended September 30, 2002 from $29.9 million or 12.6% of net sales for the
same period of 2001. The increase was due to increased compensation expense of
$2.3 million and increased expenses for project materials of $1.7 million,
primarily from the companies acquired during the year.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 17.1% to $20.5 million or 22.2% of net sales for the three
months ended September 30, 2002 from $17.5 million or 32.8% of net sales for the
three months ended September 30, 2001. The increase was due to increased
compensation expense of $1.6 million and other selling expenses, primarily from
the companies acquired during the year. Selling, general and administrative
expenses increased 7.6% to $58.2 million or 24.5% of net sales for the nine
months ended September 30, 2002 from $54.1 million or 22.9% of net sales for the
same period of 2001. The increase was due to increased compensation expense of
$3.0 million, primarily from the companies acquired during the year, and
increased professional fees.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLE ASSETS. Amortization
expense of $3.8 million and $10.1 million for the three and nine months ended
September 30, 2002, respectively, represents the amortization of the
identifiable intangibles resulting from the acquisitions completed by MKS. In
accordance with SFAS No. 142, the Company ceased amortizing goodwill on January
1, 2002. Amortization of goodwill was $1.7 million and $4.6 million for the
three and nine months ended September 30, 2001, respectively. Amortization of
the identifiable intangibles was $1.3 million and $3.4 million for the three and
nine months ended September 30, 2001, respectively.
GOODWILL IMPAIRMENT CHARGE. When the Company acquired the Shamrock product
line, it was expected that sales of the existing system design and development
of new system designs would generate future revenues. The Company had provided
potential customers with purchase quotations for Shamrock systems, including a
significant quotation to a potential customer in January 2001 for the sale of
several systems. The customer did not purchase the systems, and the quotation
expired in March 2001. The Company was unsuccessful in selling any systems of
the product line after the acquisition and, with the expiration of the
significant quote in March 2001, the Company evaluated the recoverability of the
long-lived assets, primarily goodwill. As a result, based on discounted cash
flow analysis, the Company recorded an impairment charge for the carrying value
of the related goodwill of approximately $3.7 million in the quarter ended March
31, 2001.
MERGER COSTS. On January 26, 2001 MKS completed its acquisition of ASTeX in
a transaction accounted for under the pooling of interests method of accounting.
Under the pooling of interests method of accounting, fees and expenses related
to the merger are expensed in the period of the merger. During the nine months
ended June 30, 2001, MKS expensed approximately $7.7 million of merger related
expenses, consisting of $6.9 million of investment banking, legal, accounting,
printing and other professional fees, and $0.8 million of regulatory and other
costs.
PURCHASE OF IN-PROCESS TECHNOLOGY. In-process research and development of
$8.4 million and $2.3 million for the nine months ended September 30, 2002 and
2001 arose from the acquisitions the Company made in 2002 and 2001,
respectively.
In January 2002, the Company acquired ENI in a transaction accounted for
under the purchase method. The purchase price was allocated to the assets
acquired, including intangible assets, based on their estimated fair values. The
intangible assets include approximately $7.5 million for acquired in-process
technology for projects, generally expected to have durations of 12 months, that
did not have future alternative uses. The value of the purchased in-process
technology was determined using the income approach, which discounts expected
future cash flows from projects under development to their net present value.
Each project was analyzed to determine the technological innovations included;
the utilization of core technology; the complexity, cost and time to complete
development; any alternative future use or current technological feasibility;
and the stage of completion. The cash flows derived from the in-process
technology projects were discounted at rates ranging from 25% to 30%. The
Company believes these rates were appropriate given the risks
19
associated with the technologies for which commercial feasibility had not been
established. The percentage of completion for each in-process project was
determined by identifying the cost incurred to date of the project as a ratio of
the total cost required to bring the project to technical and commercial
feasibility. The percentage completion for in-process projects acquired ranged
from 65% to 80% complete, based on management's estimates of tasks completed and
the tasks to be completed to bring the projects to technological and commercial
feasibility. At the date of the acquisition, the development of these projects
had not yet reached technological feasibility, and the technology in progress
had no alternative future uses. Accordingly, these costs were expensed in the
first six months of 2002.
In April 2001, the Company acquired On-Line in a transaction accounted for
as a purchase. The purchase price was allocated to the assets acquired,
including intangible assets, based on their estimated fair values. The
intangible assets include approximately $2.3 million for acquired in-process
technology for various projects, generally expected to have durations of 24 to
48 months, that did not have future alternative uses. The value of the purchased
in-process technology was determined using the income approach, which discounts
expected future cash flows from projects under development to their net present
value. Each project was analyzed to determine the technological innovations
included; the utilization of core technology; the complexity, cost and time to
complete development; any alternative future use or current technological
feasibility; and the stage of completion. The cash flows derived from the
in-process technology projects were discounted at a rate of 25%. The Company
believes this rate was appropriate given the risks associated with the
technologies for which commercial feasibility had not been established. The
percentage of completion for each in-process project was determined by
identifying the elapsed time invested in the project as a ratio of the total
time required to bring the project to technical and commercial feasibility. The
percentage of completion for in-process projects acquired ranged from 55% to
65%, based on management's estimates of tasks completed and the tasks to be
completed to bring the projects to technological and commercial feasibility. At
the date of the acquisition, the development of these projects had not yet
reached technological feasibility, and the technology in progress had no
alternative future uses. Accordingly, these costs were expensed in the second
quarter of 2001.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During the quarter ended
September 30, 2002 the Company implemented a consolidation of recent
acquisitions to accelerate product development, rationalize manufacturing
operations, and reduce operating costs. As a result of these actions, the
Company recorded restructuring and asset impairment charges of $2.4 million. The
charges consisted of $0.6 million of severance costs related to a workforce
reduction, $0.9 million related to consolidation of leased facilities, and an
asset impairment charge of $0.9 million primarily related to the impairment of
an intangible asset from the discontinuance of certain product development
activities. The fair value of the impaired intangible asset was determined using
the expected present value of future cash flows. The workforce reduction was
across all functional groups and consisted of 225 employees, with 173 terminated
during the quarter. Severance costs of $0.3 million were paid during the quarter
ended September 30, 2002. The remainder of the severance costs are expected to
be paid by the end of the second quarter of 2003. The facilities consolidation
charges will be paid over the respective lease terms ending in 2007. The
impaired assets are in the North America segment of the Company.
INTEREST INCOME (EXPENSE), NET. During the three and nine months ended
September 30, 2002, the Company generated net interest income of $0.4 million
and $1.2 million, respectively, primarily from interest on its invested cash and
short-term investments, offset by interest expense on outstanding debt.
INCOME FROM LITIGATION SETTLEMENT. On November 30, 2000, ASTeX, which was
acquired by MKS in January 2001, brought suit in federal district court in
Delaware against Advanced Energy Industries, Inc. ("Advanced Energy") for
infringement of ASTeX's patent related to its Astron product. On May 17, 2002, a
jury affirmed the validity of the Company's patent and found that Advanced
Energy infringed the patent. On May 31, 2002, based on the jury's findings, the
Court entered a judgement on the infringement claim in favor of the Company and
against Advanced Energy, and awarded $4.2 million in damages to compensate the
Company for Advanced Energy's infringing activity. Advanced Energy filed motions
to overturn the verdict. During August of 2002, the Company and Advanced Energy
entered into an agreement whereby Advanced Energy agreed to pay the awarded
damages amount to the Company and withdraw its motions to overturn the verdict.
The Company received the $4.2 million in September 2002, and recorded the amount
as Income from litigation settlement.
20
OTHER EXPENSE. During August 2001, MKS sold certain assets for proceeds of
approximately $9.0 million, including a note receivable of approximately $3.9
million, and warrants of $0.2 million. The loss on the transaction was $1.2
million and was recorded as other expense for the three and nine months ended
September 30, 2001. In the three months ended September 30, 2002, MKS recorded a
charge of $4.1 million to other expense for the Company's estimate of the
impairment on the note receivable and warrants.
BENEFIT FOR INCOME TAXES. The Company's effective tax rate for the three
months ended September 30, 2002 was a benefit of 45%, which differed from the
statutory rate of 35% due to favorable tax attributes from its foreign
subsidiaries. The effective tax rate for the nine months ended September 30,
2002 was a benefit of 34%. The impact of the favorable tax attributes from
foreign subsidiaries in the nine months of 2002 was offset by the impact of
non-deductible charges associated with acquisitions made in 2002.
The Company's effective tax rates for the three and nine months ended
September 30, 2001 were a benefit of 36% and a benefit of 18%, respectively. The
effective tax rate for the nine months ended September 30, 2001 differed from
the statutory rate of 35% due to the impact of non-deductible charges associated
with acquisitions made in 2001.
The Company evaluates the realizability of its deferred tax assets and
assesses the need for a valuation allowance each quarter. The future benefit to
be derived from its deferred tax assets is dependent upon its ability to
generate sufficient future taxable income to realize the assets. The
semiconductor industry is in a downturn, and the Company has incurred
significant losses from operations over several quarters. The Company believes
that its net deferred tax assets will be realized. However, if the Company
continues to incur losses from operations, and the outlook remains unclear, the
Company may be required under Generally Accepted Accounting Principles to
establish a valuation allowance against all or a significant portion of its net
deferred tax assets. To the extent the Company establishes a valuation
allowance, an expense will be recorded within the provision for income taxes
line in the Statement of Income.
LIQUIDITY AND CAPITAL RESOURCES
The Company 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 used cash of $1.6 million for the nine months ended September 30,
2002. The cash flow from operations for the nine months ended September 30, 2002
was impacted by the net loss of $20.3 million, an increase in accounts
receivable of $11.1 million, deferred tax benefits of $9.3 million, and offset
by non-cash charges for in-process research and development of $8.4 million,
depreciation and amortization of $21.2 million, and asset impairment charges of
$5.0 million. Investing activities utilized cash of $48.5 million for the nine
months ended September 30, 2002 primarily from purchases of investments and
purchases of businesses. Financing activities provided cash of $3.2 million,
primarily from proceeds from employees exercising stock options.
Working capital was $210.4 million as of September 30, 2002, a decrease of $6.4
million from December 31, 2001. MKS entered into a credit agreement on July 31,
2002 whereby MKS has a combined $40.0 million line of credit with two banks. The
credit agreement expires on July 31, 2003 and has no collateral provisions.
MKS believes that its working capital, 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 12 months.
21
FACTORS THAT MAY AFFECT FUTURE RESULTS
MKS believes that this document contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are subject to risks and uncertainties and are based on the beliefs
and assumptions of management of MKS, based on information currently available
to MKS' management. Use of words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," "should," "likely" or similar expressions,
indicate a forward-looking statement. Forward-looking statements involve risks,
uncertainties and assumptions. Certain of the information contained in this
Quarterly Report on Form 10-Q consists of forward-looking statements. Important
factors that could cause actual results to differ materially from the
forward-looking statements include the following:
MKS' BUSINESS DEPENDS SUBSTANTIALLY ON CAPITAL SPENDING IN THE SEMICONDUCTOR
INDUSTRY WHICH IS CHARACTERIZED BY PERIODIC FLUCTUATIONS THAT MAY CAUSE A
REDUCTION IN DEMAND FOR MKS' PRODUCTS.
MKS estimates that approximately 64% of its sales during 2001 were to
semiconductor capital equipment manufacturers and semiconductor device
manufacturers, and it expects that sales to such customers will continue to
account for a substantial majority of its sales. MKS' 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 MKS' 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 MKS' customers to reduce their orders. More
recently, in 2001 and 2002, MKS has experienced a significant reduction in
demand from OEM customers, and lower gross margins due to reduced absorption of
manufacturing overhead at the lower revenue levels. MKS incurred special charges
for excess and obsolete inventory of $14.0 million in the fourth quarter of 2001
and $2.6 million in the second quarter of 2001. The charges were significantly
higher than normal and were primarily caused by a significant reduction in
demand including reduced demand for older technology products. In addition, many
semiconductor manufacturers have operations and customers in Asia, a region
which in recent years has experienced serious economic problems including
currency devaluations, debt defaults, lack of liquidity and recessions. MKS
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
MKS' business, financial condition and results of operations.
MKS' QUARTERLY OPERATING RESULTS HAVE VARIED, AND ARE LIKELY TO CONTINUE TO VARY
SIGNIFICANTLY. THIS MAY RESULT IN VOLATILITY IN THE MARKET PRICE FOR MKS'
SHARES.
A substantial portion of MKS' shipments occur shortly after an order is received
and therefore MKS operates with a low level of backlog. As a result, a decrease
in demand for MKS' products from one or more customers could occur with limited
advance notice and could have a material adverse effect on MKS' results of
operations in any particular period. A significant percentage of MKS' 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 MKS' results of
operations. Factors that could cause fluctuations in MKS' net sales include:
- - the timing of the receipt of orders from major customers;
- - shipment delays;
- - disruption in sources of supply;
- - seasonal variations of capital spending by customers;
- - production capacity constraints; and
- - specific features requested by customers.
22
For example, MKS was in the process of increasing its production capacity when
the semiconductor capital equipment market began to experience a significant
downturn in 1996. This downturn had a material adverse effect on MKS' 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 MKS' 1998 and first quarter 1999
operating results. More recently, the semiconductor capital equipment market
experienced a significant downturn during 2001 and continuing through the third
quarter of 2002. As a result, MKS has experienced a reduction in demand from OEM
customers, which has had a material adverse effect on MKS' operating results.
During 2001 gross margins were negatively affected by special charges for excess
and obsolete inventory of $14.0 million in the fourth quarter of 2001 and $2.6
million in the second quarter of 2001. The charges were significantly higher
than normal and were primarily caused by a significant reduction in demand
including reduced demand for older technology products. As a result of the
factors discussed above, it is likely that MKS will in the future experience
quarterly or annual fluctuations and that, in one or more future quarters, its
operating results will fall below the expectations of public market analysts or
investors. In any such event, the price of MKS' common stock could decline
significantly.
THE LOSS OF NET SALES TO ANY ONE OF MKS' MAJOR CUSTOMERS WOULD LIKELY HAVE A
MATERIAL ADVERSE EFFECT ON MKS.
MKS' top ten customers accounted for approximately 39% of its net sales in 2001,
52% of its net sales in 2000 and 46% of its net sales in 1999. 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 MKS' business, financial condition and results of operations.
During 2001 and 2000, one customer, Applied Materials, accounted for
approximately 18% and 30%, respectively, of MKS' net sales. None of MKS'
significant customers, including Applied Materials, has entered into an
agreement requiring it to purchase any minimum quantity of MKS' products. The
demand for MKS' products from its 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. MKS' future success will continue to depend upon:
- - its ability to maintain relationships with existing key customers;
- - its ability to attract new customers; and
- - the success of its customers in creating demand for their capital equipment
products which incorporate MKS' products.
AS PART OF MKS' BUSINESS STRATEGY, MKS HAS ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT
TO INTEGRATE, DISRUPT ITS BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION.
MKS acquired Compact Instrument Technology, LLC ("Compact Instrument") in March
2000, Telvac Engineering, Ltd. ("Telvac") in May 2000, Spectra Instruments, LLC
("Spectra") in July 2000, D.I.P., Inc. ("D.I.P.") in September 2000, Applied
Science and Technology, Inc. ("ASTeX") in January 2001, On-Line Technologies,
Inc. ("On-Line") in April 2001, the ENI Business ("ENI") of Emerson Electric Co.
in January 2002, Tenta Technologies Ltd. ("Tenta") in March 2002, and IPC Fab
Automation GmbH ("IPC") in April 2002. As a part of its business strategy, MKS
may enter into additional business combinations and acquisitions. Acquisitions
are typically accompanied by a number of risks, including the difficulty of
integrating the operations and personnel of the acquired companies, the
potential disruption of MKS' ongoing business and distraction of management,
expenses related to the acquisition and potential unknown liabilities associated
with acquired businesses.
If MKS is not successful in completing acquisitions that it may pursue in the
future, it may be required to reevaluate its growth strategy, and MKS may have
incurred substantial expenses and devoted significant management time and
resources in seeking to complete proposed acquisitions that will not generate
benefits for it.
23
In addition, with future acquisitions, MKS could use substantial portions of its
available cash as all or a portion of the purchase price. MKS could also issue
additional securities as consideration for these acquisitions, which could cause
significant stockholder dilution. MKS' acquisitions of Compact Instrument,
Telvac, Spectra, D.I.P., ASTeX, On-Line, ENI, Tenta, and IPC and any future
acquisitions may not ultimately help MKS achieve its strategic goals and may
pose other risks to MKS.
AN INABILITY TO CONVINCE SEMICONDUCTOR DEVICE MANUFACTURERS TO SPECIFY THE USE
OF MKS' PRODUCTS TO MKS' CUSTOMERS, WHO ARE SEMICONDUCTOR CAPITAL EQUIPMENT
MANUFACTURERS, WOULD WEAKEN MKS' COMPETITIVE POSITION.
The markets for MKS' products are highly competitive. Its competitive success
often depends upon factors outside of its 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,
MKS' success will depend in part on its ability to have semiconductor device
manufacturers specify that MKS' products be used at their semiconductor
fabrication facilities. In addition, MKS may encounter difficulties in changing
established relationships of competitors that already have a large installed
base of products within such semiconductor fabrication facilities.
IF MKS' PRODUCTS ARE NOT DESIGNED INTO SUCCESSIVE NEW GENERATIONS OF ITS
CUSTOMERS' PRODUCTS, MKS WILL LOSE SIGNIFICANT NET SALES DURING THE LIFESPAN OF
THOSE PRODUCTS.
New products designed by semiconductor capital equipment manufacturers typically
have a lifespan of five to ten years. MKS' success depends on its products being
designed into new generations of equipment for the semiconductor industry. MKS
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 MKS products are not chosen by its
customers, MKS' net sales may be reduced during the lifespan of its customers'
products. In addition, MKS must make a significant capital investment to develop
products for its customers well before its products are introduced and before it
can be sure that it will recover its capital investment through sales to the
customers in significant volume. MKS is thus also at risk during the development
phase that its products may fail to meet its customers' technical or cost
requirements and may be replaced by a competitive product or alternative
technology solution. If that happens, MKS may be unable to recover MKS'
development costs.
THE SEMICONDUCTOR INDUSTRY IS SUBJECT TO RAPID DEMAND SHIFTS WHICH ARE DIFFICULT
TO PREDICT. AS A RESULT, MKS' INABILITY TO EXPAND ITS MANUFACTURING CAPACITY IN
RESPONSE TO THESE RAPID SHIFTS MAY CAUSE A REDUCTION IN ITS MARKET SHARE.
MKS' ability to increase sales of certain products depends in part upon its
ability to expand its manufacturing capacity for such products in a timely
manner. If MKS is unable to expand its manufacturing capacity on a timely basis
or to manage such expansion effectively, its customers could implement its
competitors' products and, as a result, its market share could be reduced.
Because the semiconductor industry is subject to rapid demand shifts which are
difficult to foresee, MKS may not be able to increase capacity quickly enough to
respond to a rapid increase in demand in the semiconductor industry.
Additionally, capacity expansion could increase MKS' fixed operating expenses
and if sales levels do not increase to offset the additional expense levels
associated with any such expansion, its business, financial condition and
results of operations could be materially adversely affected.
SALES TO FOREIGN MARKETS CONSTITUTE A SUBSTANTIAL PORTION OF MKS' NET SALES;
THEREFORE, MKS' NET SALES AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED
BY DOWNTURNS IN ECONOMIC CONDITIONS IN COUNTRIES OUTSIDE OF THE UNITED STATES.
International sales, which include sales by MKS' foreign subsidiaries, but
exclude direct export sales (which were less than 10% of MKS' total net sales),
accounted for approximately 31% of net sales in 2001, 23% of net sales in 2000
and 25% of net sales in 1999.
24
MKS anticipates that international sales will continue to account for a
significant portion of MKS' net sales. In addition, certain of MKS' key domestic
customers derive a significant portion of their revenues from sales in
international markets. Therefore, MKS' sales and results of operations could be
adversely affected by economic slowdowns and other risks associated with
international sales.
RISKS RELATING TO MKS' INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT MKS'
OPERATING RESULTS.
MKS has substantial international sales, service and manufacturing operations in
Europe and Asia, which exposes MKS to foreign operational and political risks
that may harm MKS' business. MKS' international operations are subject to
inherent risks, which may adversely affect MKS, including:
- - political and economic instability in countries where MKS has sales,
service and manufacturing operations, particularly in Asia;
- - fluctuations in the value of currencies and high levels of inflation,
particularly in Asia;
- - changes in labor conditions and difficulties in staffing and managing foreign
operations, including, but not limited to, labor unions;
- - greater difficulty in collecting accounts receivable and longer payment
cycles;
- - burdens and costs of compliance with a variety of foreign laws;
- - increases in duties and taxation;
- - imposition of restrictions on currency conversion or the transfer of funds;
- - changes in export duties and limitations on imports or exports;
- - expropriation of private enterprises; and
- - unexpected changes in foreign regulations.
If any of these risks materialize, MKS' operating results may be adversely
affected.
UNFAVORABLE CURRENCY EXCHANGE RATE FLUCTUATIONS MAY LEAD TO LOWER GROSS MARGINS,
OR MAY CAUSE MKS TO RAISE PRICES WHICH COULD RESULT IN REDUCED SALES.
Currency exchange rate fluctuations could have an adverse effect on MKS' net
sales and results of operations and MKS could experience losses with respect to
its hedging activities. Unfavorable currency fluctuations could require MKS to
increase prices to foreign customers which could result in lower net sales by
MKS to such customers. Alternatively, if MKS does not adjust the prices for its
products in response to unfavorable currency fluctuations, its results of
operations could be adversely affected. In addition, sales made by MKS' foreign
subsidiaries are denominated in the currency of the country in which these
products are sold and the currency it receives in payment for such sales could
be less valuable at the time of receipt as a result of exchange rate
fluctuations. MKS enters into forward exchange contracts and local currency
purchased options to reduce currency exposure arising from intercompany sales of
inventory. However, MKS cannot be certain that its efforts will be adequate to
protect it against significant currency fluctuations or that such efforts will
not expose it to additional exchange rate risks.
KEY PERSONNEL MAY BE DIFFICULT TO ATTRACT AND RETAIN.
MKS' 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 MKS'
business, financial condition and results of operations. MKS believes that its
future success will depend in part on its ability to attract and retain highly
skilled technical, financial, managerial and marketing personnel. MKS cannot be
certain that it will be successful in attracting and retaining such personnel.
25
MKS' PROPRIETARY TECHNOLOGY IS IMPORTANT TO THE CONTINUED SUCCESS OF ITS
BUSINESS. MKS' FAILURE TO PROTECT THIS PROPRIETARY TECHNOLOGY MAY SIGNIFICANTLY
IMPAIR MKS' COMPETITIVE POSITION.
As of September 30, 2002, MKS owned 132 U.S. patents and 90 foreign patents and
had 62 pending U.S. patent applications and 136 pending foreign patent
applications. Although MKS seeks to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it cannot be
certain that:
- - MKS will be able to protect its technology adequately;
- - competitors will not be able to develop similar technology independently;
- - any of MKS' pending patent applications will be issued;
- - intellectual property laws will protect MKS' intellectual property rights; or
- - third parties will not assert that MKS' products infringe patent, copyright
or trade secrets of such parties.
PROTECTION OF MKS' INTELLECTUAL PROPERTY RIGHTS MAY RESULT IN COSTLY LITIGATION.
Litigation may be necessary in order to enforce MKS' patents, copyrights or
other intellectual property rights, to protect its trade secrets, to determine
the validity and scope of the proprietary rights of others or to defend against
claims of infringement. For example, on November 3, 1999, On-Line Technologies
Inc., which was acquired by MKS in April 2001, brought suit in federal district
court in Connecticut against Perkin-Elmer, Inc. and certain other defendants for
infringement of On-Line's patent related to its FTIR spectrometer product. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on MKS' business, financial condition and
results of operations.
THE MARKET PRICE OF MKS' COMMON STOCK HAS FLUCTUATED AND MAY CONTINUE TO
FLUCTUATE FOR REASONS OVER WHICH MKS HAS NO CONTROL.
The stock market has from time to time experienced, and is likely to continue to
experience, extreme price and volume fluctuations. Recently, prices of
securities of technology companies have been especially volatile and have often
fluctuated for reasons that are unrelated to the operating performance of the
companies. The market price of shares of MKS' common stock has fluctuated
greatly since its initial public offering and could continue to fluctuate due to
a variety of factors. In the past, companies that have experienced volatility in
the market price of their stock have been the objects of securities class action
litigation. If MKS were the object of securities class action litigation, it
could result in substantial costs and a diversion of MKS' management's attention
and resources.
MKS' DEPENDENCE ON SOLE, LIMITED SOURCE SUPPLIERS, AND INTERNATIONAL SUPPLIERS,
COULD AFFECT ITS ABILITY TO MANUFACTURE PRODUCTS AND SYSTEMS.
MKS relies on sole, limited source suppliers, and international suppliers, for a
few of its components and subassemblies that are critical to the manufacturing
of MKS' products. This reliance involves several risks, including the following:
- - the potential inability to obtain an adequate supply of required components;
- - reduced control over pricing and timing of delivery of components; and
- - the potential inability of its suppliers to develop technologically advanced
products to support MKS' growth and development of new systems.
MKS believes that in time MKS could obtain and qualify alternative sources for
most sole, limited source and international supplier parts. Seeking alternative
sources of the parts could require MKS to redesign its systems, resulting in
increased costs and likely shipping delays. MKS may be unable to redesign its
systems, which could result in further costs and shipping delays. These
increased costs would decrease MKS' profit margins if it could not pass the
costs to its customers. Further, shipping delays could damage MKS' relationships
with current and potential customers and have a material adverse effect on MKS'
business and results of operations.
26
MKS IS SUBJECT TO GOVERNMENTAL REGULATIONS.
MKS is subject to federal, state, local and foreign regulations, including
environmental regulations and regulations relating to the design and operation
of MKS' power supply products. MKS must ensure that these systems meet certain
safety standards, many of which vary across the countries in which MKS' systems
are used. For example, the European Union has published directives specifically
relating to power supplies. MKS must comply with these directives in order to
ship MKS' systems into countries that are members of the European Union. MKS
believes it is in compliance with current applicable regulations, directives and
standards and has obtained all necessary permits, approvals, and authorizations
to conduct MKS' business. However, compliance with future regulations,
directives and standards could require it to modify or redesign certain systems,
make capital expenditures or incur substantial costs. If MKS does not comply
with current or future regulations, directives and standards:
- - MKS could be subject to fines;
- - MKS' production could be suspended; or
- - MKS could be prohibited from offering particular systems in specified
markets.
CERTAIN STOCKHOLDERS HAVE A SUBSTANTIAL INTEREST IN MKS AND MAY BE ABLE TO EXERT
SUBSTANTIAL INFLUENCE OVER MKS' ACTIONS.
As of January 31, 2002, John R. Bertucci, president, chairman and chief
executive officer of MKS, and certain members of his family, in the aggregate,
beneficially owned approximately 29.8% of MKS' outstanding common stock. As a
result, these stockholders, acting together, are able to exert substantial
influence over the actions of MKS. Pursuant to the acquisition of the ENI
Business of Emerson Electric Co. ("Emerson"), MKS issued approximately 24% of
its then outstanding shares of common stock to Emerson. Accordingly, Emerson is
able to exert substantial influence over MKS' actions.
SOME PROVISIONS OF MKS' RESTATED ARTICLES OF ORGANIZATION, AS AMENDED, MKS'
AMENDED AND RESTATED BY-LAWS AND MASSACHUSETTS LAW COULD DISCOURAGE POTENTIAL
ACQUISITION PROPOSALS AND COULD DELAY OR PREVENT A CHANGE IN CONTROL OF MKS.
Anti-takeover provisions could diminish the opportunities for stockholders to
participate in tender offers, including tender offers at a price above the then
current market value of the common stock. Such provisions may also inhibit
increases in the market price of the common stock that could result from
takeover attempts. For example, while MKS has no present plans to issue any
preferred stock, MKS' board of directors, without further stockholder approval,
may issue preferred stock that could have the effect of delaying, deterring or
preventing a change in control of MKS. The issuance of preferred stock could
adversely affect the voting power of the holders of MKS' common stock, including
the loss of voting control to others. In addition, MKS' amended and restated
by-laws provide for a classified board of directors consisting of three classes.
The classified board could also have the effect of delaying, deterring or
preventing a change in control of MKS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk is contained in the Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in the
Consolidated Financial Statements for year ended December 31, 2001, which was
filed on Form 10-K on April 1, 2002. MKS enters into local currency purchased
options and forward exchange contracts to reduce currency exposure arising from
intercompany sales of inventory. The potential fair value loss for a
hypothetical 10% adverse change in currency exchange rates on MKS' local
currency purchased options and forward exchange contracts at September 30, 2002
would be immaterial. The potential loss was estimated by calculating the fair
value of the local currency purchased options and forward exchange contracts at
September 30, 2002 and comparing that with those calculated using the
hypothetical currency exchange rates.
27
As of September 30, 2002, MKS had $4.0 million in inter-company debt denominated
in Japanese Yen. MKS entered into forward exchange contracts to reduce the
currency exposure arising from this debt. The potential fair value loss for a
hypothetical 10% adverse change in the forward currency exchange rates on MKS'
forward exchange contract would be immaterial. The potential loss was estimated
by calculating the fair value of the forward exchange contracts at September 30,
2002 and comparing that with those calculated using the hypothetical forward
currency exchange rate.
There were no other material changes in MKS' exposure to market risk from
December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934) as of a
date within 90 days of the filing date of this Quarterly Report on Form 10-Q,
the Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company 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 SEC's rules and forms and are
operating in an effective manner.
b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 30, 2000, Applied Science and Technology, Inc. ("ASTeX"), which was
acquired by MKS in January 2001, brought suit in federal district court in
Delaware against Advanced Energy Industries, Inc. ("Advanced Energy") for
infringement of ASTeX's patent related to its Astron product. On May 17, 2002, a
jury affirmed the validity of the Company's patent and found that Advanced
Energy infringed the patent. On May 31, 2002, based on the jury's findings, the
Court entered a judgement on the infringement claim in favor of the Company and
against Advanced Energy, and awarded $4,200,000 in damages to compensate the
Company for Advanced Energy's infringing activity. Advanced Energy filed
motions to overturn the verdict. During August of 2002, the Company and Advanced
Energy entered into an agreement whereby Advanced Energy agreed to pay the
awarded damages amount to the Company and withdraw its motions to overturn the
verdict. The Company received the $4,200,000 in September 2002, and recorded the
amount as Income from litigation settlement.
There were no other material litigation developments since the filing of MKS'
Annual Report on Form 10-K on April 1, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds from Sales of Registered Securities.
The Company has previously provided information on Form 10-Q for the quarter
ended September 30, 2000 relating to the use of proceeds from the sale of
securities 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. As of September 30, 2002, approximately $30.8
million of the net proceeds from the securities sold has been used to acquire
businesses. There has been no other change to the information previously
provided.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
10.1 Second Restated 1995 Stock Incentive Plan
99.1 Statement Pursuant to 18 U.S.C [sec] 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Statement Pursuant to 18 U.S.C [sec] 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
29
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.
November 13, 2002 By: /s/ Ronald C. Weigner
---------------------------------------
Ronald C. Weigner
Vice President and Chief Financial Officer
(Principal Financial Officer)
30
CERTIFICATIONS
I, John R. Bertucci, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MKS Instruments,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 13, 2002 /s/ John R. Bertucci
-----------------------------------------------
John R. Bertucci
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
31
I, Ronald C. Weigner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MKS Instruments,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 13, 2002 /s/ Ronald C. Weigner
------------------------------------------
Ronald C. Weigner
Vice President and Chief Financial Officer
(Principal Financial Officer)
32
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- ---------------------
10.1 Second Restated 1995 Stock Incentive Plan
99.1 Statement Pursuant to 18 U.S.C [sec] 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Statement Pursuant to 18 U.S.C [sec] 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
33