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UNITED STATES
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 March 31, 2003
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 __.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No __.
Number of shares outstanding of the issuer's common stock as of April 30, 2003:
51,383,573
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002
Consolidated Statements of Income -
Three months ended March 31, 2003 and 2002
Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2002
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)
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 80,527 $ 88,820
Short-term investments .............................................. 42,558 39,894
Trade accounts receivable, net ...................................... 49,499 45,505
Inventories ......................................................... 72,423 73,235
Other current assets ................................................ 5,039 6,098
-------- --------
Total current assets ........................................... 250,046 253,552
Long-term investments ............................................... 19,000 15,980
Property, plant and equipment, net .................................. 80,734 82,595
Goodwill, net ....................................................... 259,719 259,781
Acquired intangible assets, net ..................................... 63,943 67,720
Other assets ........................................................ 5,931 5,995
-------- --------
Total assets ................................................... $679,373 $685,623
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ............................................... $ 13,427 $ 13,877
Current portion of long-term debt ................................... 4,265 4,263
Current portion of capital lease obligations ........................ 265 332
Accounts payable .................................................... 17,323 15,301
Accrued compensation ................................................ 7,189 6,117
Other accrued expenses .............................................. 19,952 21,654
-------- --------
Total current liabilities ...................................... 62,421 61,544
Long-term debt ........................................................... 11,107 11,469
Long-term portion of capital lease obligations ........................... 200 257
Other liabilities ........................................................ 1,621 1,663
Commitments and contingencies (Note 12)
Stockholders' equity:
Common Stock, no par value, 200,000,000 shares authorized;
51,383,573 and 51,359,753 issued and outstanding at
March 31, 2003 and December 31, 2002, respectively ............ 113 113
Additional paid-in capital .......................................... 579,265 579,175
Retained earnings ................................................... 21,193 28,623
Accumulated other comprehensive income .............................. 3,453 2,779
-------- --------
Total stockholders' equity ..................................... 604,024 610,690
-------- --------
Total liabilities and stockholders' equity ..................... $679,373 $685,623
======== ========
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
March 31,
2003 2002
-------- --------
Net sales ........................................ $ 72,777 $ 59,067
Cost of sales .................................... 47,371 39,847
-------- --------
Gross profit ..................................... 25,406 19,220
Research and development ......................... 11,232 9,132
Selling, general and administrative .............. 17,819 17,058
Amortization of acquired intangible assets ....... 3,778 2,205
Purchase of in-process research and development... -- 6,100
-------- --------
Loss from operations ............................. (7,423) (15,275)
Interest expense ................................. 288 329
Interest income .................................. 568 755
-------- --------
Loss before income taxes ......................... (7,143) (14,849)
Provision (benefit) for income taxes ............. 287 (3,062)
-------- --------
Net loss ......................................... $ (7,430) $(11,787)
======== ========
Net loss per share:
Basic and diluted ........................... $ (0.14) $ (0.25)
======== ========
Weighted average common shares outstanding:
Basic and diluted ........................... 51,380 46,288
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------- ---------
Cash flows from operating activities:
Net loss .................................................................. $ (7,430) $ (11,787)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ...................................... 7,558 5,612
Purchase of in-process research and development .................... -- 6,100
Other .............................................................. 221 62
Changes in operating assets and liabilities net of effects of
businesses acquired:
Trade accounts receivable .................................... (4,213) (10,325)
Inventories .................................................. 765 (1,775)
Other current assets ......................................... 1,059 5,401
Accrued expenses and other current liabilities ............... (712) 577
Accounts payable ............................................. 2,023 3,344
-------- ---------
Net cash used in operating activities ..................................... (729) (2,791)
-------- ---------
Cash flows from investing activities:
Purchases of short-term and long-term investments .................... (24,600) (37,731)
Maturities and sales of short-term and long-term investments ......... 18,843 20,647
Purchases of property, plant and equipment ........................... (1,691) (1,335)
Increase in other assets ............................................. 159 37
Purchases of businesses, net of cash acquired ........................ -- (5,716)
-------- ---------
Net cash used in investing activities ..................................... (7,289) (24,098)
-------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings .................................. 11,789 1,505
Payments on short-term borrowings .................................... (12,316) --
Principal payments on long-term debt ................................. (357) (684)
Proceeds from exercise of stock options .............................. 90 2,610
Principal payments under capital lease obligations ................... (90) (121)
-------- ---------
Net cash provided by (used in) financing activities ....................... (884) 3,310
-------- ---------
Effect of exchange rate changes on cash and cash equivalents .............. 609 (170)
-------- ---------
Decrease in cash and cash equivalents ..................................... (8,293) (23,749)
Cash and cash equivalents at beginning of period .......................... 88,820 120,869
-------- ---------
Cash and cash equivalents at end of period ................................ $ 80,527 $ 97,120
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 81 $ 129
======== =========
Income taxes .................................................... $ 861 $ 1,517
======== =========
Noncash transactions during the period:
Stock issued for acquisitions ................................... $ -- $ 282,341
======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
5
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except per share data)
1) Basis of Presentation
The terms "MKS" and the "Company" refer to MKS Instruments, Inc. and
its subsidiaries. The interim financial data as of March 31, 2003
and for the three months ended March 31, 2003 and 2002 is unaudited;
however, in the opinion of MKS, 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 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, 2002 audited
financial statements and notes thereto included in the MKS Annual
Report on Form 10-K filed with the Securities and Exchange
Commission on March 31, 2003.
2) Stock-Based Compensation
The Company applies Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation expense is recorded for options
issued to employees in fixed amounts and with fixed exercise prices
at least equal to the fair market value of the Company's common
stock at the date of grant.
The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," through
disclosure only. All stock-based awards to non-employees are
accounted for at their fair value in accordance with SFAS No. 123.
The following table illustrates the effect on net loss and net loss
per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee awards.
Three Months Ended
March 31,
2003 2002
---------- ----------
Net loss:
Net loss as reported .............................................. $ (7,430) $ (11,787)
Deduct: Total stock-based employee compensation expense determined
under the fair-value-based method for all awards, net of tax ... (4,902) (3,151)
---------- ----------
Pro forma net loss ................................................ $ (12,332) $ (14,938)
========== ==========
Basic net loss per share:
Net loss as reported .............................................. $ (0.14) $ (0.25)
========== ==========
Pro forma net loss ................................................ $ (0.24) $ (0.32)
========== ==========
Diluted net loss per share:
Net loss as reported .............................................. $ (0.14) $ (0.25)
========== ==========
Pro forma net loss ................................................ $ (0.24) $ (0.32)
========== ==========
There is no tax benefit included in the stock-based employee
compensation expense determined under the fair-value-based method
for the three months ended March 31, 2003, as the Company
established a full valuation allowance for its net deferred tax
assets.
6
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
The weighted average fair value of options at the date of grant was
estimated using the Black-Scholes model and was $9.81 with the
following assumptions in the three months ended March 31, 2003:
expected life of 5 years, weighted average interest rate of 2.99%,
expected volatility of 81%, and no dividend yield. In the three
months ended March 31, 2002, the weighted average fair value of
options at the date of grant was $16.31 with the following
assumptions for that period: expected life of 5 years, weighted
average interest rate of 4.39%, expected volatility of 81%, and no
dividend yield.
3) 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, accounts
receivable, inventory, intangible assets, goodwill, other long-lived
assets, in-process research and development, income taxes, deferred
tax valuation allowance, 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.
4) Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities," which addresses consolidation by a
business of variable interest entities in which it is the primary
beneficiary. The Interpretation is effective immediately for certain
disclosure requirements and variable interest entities created after
January 31, 2003, and periods beginning after June 15, 2003 for
variable interest entities created before February 1, 2003. The
Company does not expect the adoption of FIN 46 to have a material
impact on its consolidated financial position or results of
operations.
In November 2002, the EITF reached a consensus on issue 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF 00-21
addresses revenue recognition on arrangements encompassing multiple
elements that are delivered at different points in time, defining
criteria that must be met for elements to be considered to be a
separate unit of accounting. If an element is determined to be a
separate unit of accounting, the revenue for the element is
recognized at the time of delivery. EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after
June 15, 2003. The Company does not expect that the pronouncement
will have a material impact on its consolidated financial position
or results of operations.
5) Goodwill and Intangible Assets
Intangible Assets
Acquired amortizable intangible assets consisted of the following as of
March 31, 2003:
Gross Net Weighted
Carrying Accumulated Carrying Average
Amount Amortization Amount Useful Life
------- ------------ -------- -----------
Completed technology ....................... $ 69,394 $(18,712) $50,682 6 years
Customer relationships ..................... 6,640 (1,973) 4,667 7 years
Patents, trademarks, tradenames and other... 12,394 (3,800) 8,594 7 years
------ ------- -----
$ 88,428 $(24,485) $63,943 6 years
======== ========= =======
7
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Acquired amortizable intangible assets consisted of the following as of
December 31, 2002:
Gross Net Weighted
Carrying Accumulated Carrying Average
Amount Amortization Amount Useful Life
------- ------------ -------- -----------
Completed technology ....................... $ 69,394 $(15,629) $53,765 6 years
Customer relationships ..................... 6,640 (1,743) 4,897 7 years
Patents, trademarks, tradenames and other... 12,394 (3,336) 9,058 7 years
-------- --------- -------
$ 88,428 $(20,708) $67,720 6 years
======== ========= =======
Aggregate amortization expense related to acquired intangibles for the
three months ended March 31, 2003 was $3,778,000, and was $2,205,000
for the three months ended March 31, 2002. Estimated amortization
expense related to acquired intangibles for each of the five succeeding
fiscal years is as follows:
Year Amount
---- --------
2003 $ 14,469
2004 14,145
2005 13,244
2006 11,143
2007 10,536
Goodwill
The change in the carrying amount of goodwill during the three months
ended March 31, 2003 was not material.
6) Cash and Cash Equivalents and Investments
Cash and Cash equivalents consist of the following:
March 31, December 31,
2003 2002
------- -------
Cash and Money Market Instruments .................. $47,640 $51,538
Commercial Paper ................................... 26,774 31,216
Federal Government and Government Agency
Obligations ....................................... 5,114 6,066
Corporate Obligations .............................. 999 --
------- -------
$80,527 $88,820
======= =======
Short-term available-for-sale investments at market value maturing
within one year consist of the following:
March 31, December 31,
2003 2002
------- -------
Federal Government and Government Agency
Obligations ....................................... $26,948 $28,636
Corporate Obligations .............................. -- 858
Commercial Paper ................................... 15,610 10,400
------- -------
$42,558 $39,894
======= =======
8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Long-term available-for-sale investments at market value with
maturities of 1 to 5 years consist of the following:
March 31, December 31,
2003 2002
------- -------
Federal Government and Government Agency
Obligations ....................................... $ 6,568 $ 2,061
Commercial Paper ................................... 4,754 --
Corporate Obligations .............................. 7,678 13,919
------- -------
$19,000 $15,980
======= =======
Gross unrealized gains and losses on available-for-sale investments
were not material at March 31, 2003 and December 31, 2002.
7) Net Loss Per Share
The following table sets forth the computation of basic and diluted net
loss per share:
Three Months Ended March 31,
2003 2002
---------- --------
Numerator
Net loss .................................................. $ (7,430) $(11,787)
========== ========
Denominator
Shares used in net loss per common share - basic and
diluted .................................................. 51,380 46,288
========== ========
Net loss per common share
Basic and diluted .......................................... $ (0.14) $ (0.25)
========== ========
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 months ended March
31, 2003 and 2002 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 8,242,000 and 7,548,000 shares
of the Company's common stock outstanding as of March 31, 2003 and
2002, respectively.
8) Inventories
Inventories consist of the following:
March 31, December 31,
2003 2002
------- -------
Raw material ........... $35,247 $36,630
Work in process ........ 12,069 11,617
Finished goods ......... 25,107 24,988
------- -------
$72,423 $73,235
======= =======
9
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
9) Stockholders' Equity
Total comprehensive loss was as follows:
Three Months Ended March 31,
2003 2002
------- --------
Net loss ................................................ $(7,430) $(11,787)
Other comprehensive income (loss), net of taxes:
Changes in value of financial instruments designated
as hedges of currency and interest rate
exposures ....................................... 1 (156)
Foreign currency translation adjustment ............ 770 (340)
Unrealized gain (loss) on investments .............. (97) (55)
------- --------
Other comprehensive income (loss), net of taxes ......... 674 (551)
------- --------
Total comprehensive loss ................................ $(6,756) $(12,338)
======= ========
10) Income Taxes
The Company records income taxes using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective income tax bases, and operating loss and tax
credit carryforwards. The Company evaluates the realizability of its
net deferred tax assets and assesses the need for a valuation allowance
on a quarterly basis. 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 Company
records a valuation allowance to reduce its net deferred tax assets to
the amount that may be more likely than not to be realized. To the
extent the Company establishes a valuation allowance, an expense will
be recorded within the provision for income taxes line on the statement
of income.
As a result of incurring significant operating losses since 2001, the
Company determined that it is more likely than not that its deferred
tax assets may not be realized, and since the fourth quarter of 2002
has established a full valuation allowance for its net deferred tax
assets. Accordingly, the Company has not recorded a deferred tax
benefit from the net operating loss incurred in the three months ended
March 31, 2003. The provision for income taxes of $287,000 for the
three months ended March 31, 2003 is comprised of tax expense from
foreign operations and state taxes.
In periods subsequent to establishing a valuation allowance, if the
Company were to determine that it would be able to realize its net
deferred tax assets in excess of their net recorded amount, an
adjustment to the valuation allowance would be recorded as a reduction
to income tax expense in the period such determination was made. Also
in future periods, if the Company were to determine that it would not
be able to realize the recorded amount of its net deferred tax assets,
an adjustment to the valuation allowance would be recorded as an
increase to income tax expense in the period such determination was
made.
11) Segment Information and Significant Customer
During 2002, the Company consolidated its product groups to accelerate
product development, rationalize manufacturing operations, and reduce
operating costs. This realignment of operations has organized the
Company into three product groups: Instruments and Control Systems;
Power and Reactive Gas Products; and Vacuum Products. The Company's
products are derived from MKS' core competencies in pressure
measurement and control; materials delivery; gas and thin-film
composition analysis; control and information management; power and
reactive gas generation; and vacuum technology. The Company's operating
segments are aggregated into one reportable segment because the
products are manufactured and distributed in a similar manner, have
similar long-term margins and are sold to a similar customer base. The
segment information for the three months ended March 31, 2002 has been
reclassified to conform with these internal organizational changes.
10
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Net sales to unaffiliated customers are based on the location in which
the sale originated. Transfers between geographic areas are at
negotiated transfer prices and have been eliminated from consolidated
net sales. Net sales to unaffiliated customers and long-lived assets by
geographic area were as follows:
Three Months Ended March 31, 2003
---------------------------------------------------
United States Far East Europe Total
------------- -------- ------ -----
Net sales to unaffiliated customers $ 43,125 $20,316 $9,336 $ 72,777
Long-lived assets $362,136 $41,487 $6,704 $410,327
Three Months Ended March 31, 2002
---------------------------------------------------
United States Far East Europe Total
------------- -------- ------ -----
Net sales to unaffiliated customers $ 39,394 $11,336 $8,337 $ 59,067
Long-lived assets $352,785 $57,275 $6,059 $416,119
Included in the Far East are Japan, Korea, Singapore, Taiwan, China and
Hong Kong. Included in Europe are Germany, France and the United
Kingdom. Net sales to unaffiliated customers from Japan were
$13,393,000 and $7,290,000 for the three months ended March 31, 2003
and 2002, respectively. Long-lived assets within Japan amounted to
$10,576,000 and $10,997,000 at March 31, 2003 and 2002, respectively.
The Company had one customer comprising 17% and 16% of net sales for
the three months ended March 31, 2003 and 2002, respectively.
12) 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 sought injunctive relief and damages for
infringement. Perkin-Elmer, Inc. filed a counterclaim seeking
invalidity of the patent, costs, and attorneys' fees. In June 2002, the
defendants filed a motion for summary judgment. In April 2003 the court
granted the motion and dismissed the case. The Company has appealed
this decision.
The Company is subject to 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.
13) Acquisitions
On January 31, 2002, MKS completed its acquisition of the ENI Business
("ENI") of Emerson Electric Co., 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. On March 13, 2002, MKS acquired Tenta Technology Ltd.
("Tenta"), a company that designs and supplies modular, computer-based
process control systems for 300mm semiconductor process tool
applications. The reasons for the acquisition 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
acquisitions have been accounted for under the purchase method of
accounting. The results of operations of these acquired companies are
included in the Company's consolidated statement of income as of and
since the date of purchase.
11
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 and Tenta
acquisitions had occurred at the beginning of the period.
Three Months Ended
March 31, 2002
------------------
Net sales ...................... $ 63,207
Net loss ....................... $ (7,087)
Net loss per share:
Basic .............. $ (0.14)
Diluted ............ $ (0.14)
The unaudited pro forma results for the three months ended March 31,
2002 excludes approximately $1.3 million of non-recurring charges
directly related to the transactions. Additionally, the charge for
purchase of in-process research and development was not included in the
unaudited pro forma results, because it was non-recurring and directly
related to the transaction.
14) Restructuring and Asset Impairment Charges
During 2002, the Company implemented a consolidation of recent
acquisitions to accelerate product development, rationalize
manufacturing operations, and reduce operating costs. As a result, the
Company recorded restructuring and asset impairment charges of
$2,726,000 during 2002. The activity for the three months ended March
31, 2003 related to the restructuring accrual is outlined as follows:
Balance Cash Balance
December 31, 2002 Payments March 31, 2003
----------------- --------- --------------
Workforce reductions ........... $ 331 $ (75) $ 256
Facility consolidations ........ 1,159 (21) 1,138
------- ------- ------
$ 1,490 $ (96) $1,394
======= ======= ======
15) Product Warranties
The Company provides for the estimated costs to fulfill customer
warranty obligations upon the recognition of the related revenue. While
the Company engages in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of
its component suppliers, the Company's warranty obligation is affected
by product failure rates, utilization levels, material usage, and
supplier warranties on parts delivered to the Company. Should actual
product failure rates, utilization levels, material usage, or supplier
warranties on parts differ from the Company estimates, revisions to the
estimated warranty liability would be required.
Product warranty activity for the three months ended March 31, 2003 was
as follows:
Balance as of December 31, 2002 ............ $ 6,921
Provisions for product warranties .......... 315
Direct charges to the warranty liability.... (1,052)
-------
Balance as of March 31, 2003 ............... $ 6,184
=======
12
MKS INSTRUMENTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MKS believes that 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, the words "believes," "anticipates," "plans,"
"expects," "estimates" 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
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.
On January 31, 2002, MKS completed its acquisition of the ENI Business ("ENI")
of Emerson Electric Co., 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. Also in 2002, MKS acquired three companies that expanded its
position in distributed computer-based process control and data management. On
March 13, 2002, MKS acquired Tenta Technology, Ltd. ("Tenta"), a privately held
company that designs and supplies modular, computer-based process control
systems for 300mm semiconductor process tool applications. On April 5, 2002, MKS
acquired IPC Fab Automation GmbH ("IPC"), a privately held developer and
provider of web-based hardware and software that enables e-diagnostics and
advanced process control for advanced manufacturing applications. On October 1,
2002, MKS acquired EquipNet Ltd. ("EquipNet"), a privately held company that
develops web-based connectivity equipment for the semiconductor industry. The
results of operations of these acquired companies are included in the Company's
consolidated statement of income as of and since the date of the purchase.
The Company's customers include semiconductor capital equipment manufacturers,
semiconductor device manufacturers, industrial manufacturing companies and
university, government and industrial research laboratories. During 2002, 2001
and 2000, MKS estimates that approximately 70%, 64% and 76% of its net sales,
respectively, were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers. MKS expects that sales to such customers
will continue to account for a substantial majority of its sales. In 2002, 2001
and 2000, sales to MKS' top ten customers accounted for approximately 49%, 39%
and 52%, respectively, of MKS' net sales. During 2002, 2001 and 2000, Applied
Materials, Inc. accounted for approximately 23%, 18% and 30%, respectively, of
MKS' net sales.
A significant portion of MKS' sales are to operations in international markets.
International sales include sales by MKS' foreign subsidiaries, but exclude
direct export sales, which were less than 10% of MKS' total net sales for each
of the years ended December 31, 2002, 2001 and 2000. International sales
accounted for approximately 36% of net sales in 2002, 31% of net sales in 2001
and 23% of net sales in 2000. Sales by MKS' Japan subsidiary comprised 14%, 12%
and 11% of net sales in 2002, 2001 and 2000, respectively.
13
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
March 31,
2003 2002
----- -----
Net sales .................................. 100.0% 100.0%
Cost of sales .............................. 65.1 67.5
----- -----
Gross profit ............................... 34.9 32.5
Research and development ................... 15.4 15.5
Selling, general and administrative ........ 24.5 28.9
Amortization of acquired intangible assets.. 5.2 3.7
In-process research and development ........ -- 10.3
----- -----
Loss from operations ....................... (10.2) (25.9)
Interest income, net ....................... 0.4 0.7
----- -----
Loss before income taxes ................... (9.8) (25.2)
Provision (benefit) for income taxes ....... 0.4 (5.2)
----- -----
Net loss ................................... (10.2)% (20.0)%
===== =====
Net Sales. Net sales increased 23.2% to $72.8 million for the three
months ended March 31, 2003 from $59.1 million for the three months ended March
31, 2002. International net sales were approximately $29.7 million for the three
months ended March 31, 2003 or 40.7% of net sales and $19.7 million for the same
period of 2002 or 33.3% of net sales. The increase 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 2003 increased approximately $5.3
million from increased revenues of ENI and Tenta, the companies acquired during
the three months ended March 31, 2002.
The semiconductor capital equipment market has experienced a
significant downturn since 2001. As a result, since 2001 the Company has
experienced a significant reduction in demand for its products from its
semiconductor capital equipment manufacturer and semiconductor device
manufacturer customers. The semiconductor capital equipment industry has been
cyclical, and 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, and inventory
considered realizable could be significantly reduced.
Gross Profit. Gross profit as a percentage of net sales increased to
34.9% for the three months ended March 31, 2003 from 32.5% for the three months
ended March 31, 2002. The increase was primarily due to overhead costs being a
lower percentage of the higher net sales, and cost saving initiatives.
Research and Development. Research and development expense increased
23.0% to $11.2 million or 15.4% of net sales for the three months ended March
31, 2003 from $9.1 million or 15.5% of net sales for the three months ended
March 31, 2002. The increase was due to increased compensation expense of $1.1
million and increased expenses for project materials of $1.0 million, primarily
from including a full quarter of costs during 2003 of the companies acquired
during 2002.
Selling, General and Administration. Selling, general and
administration expenses increased 4.5% to $17.8 million or 24.5% of net sales
for the three months ended March 31, 2003 from $17.1 million or 28.9% of net
sales for the three months ended March 31, 2002. The increase was due to
increased compensation expense of $0.4 million and other selling expenses,
primarily from including a full quarter of costs during 2003 of the companies
acquired during 2002.
14
Amortization of Acquired Intangible Assets. Amortization expense of
$3.8 million for the three months ended March 31, 2003 represents the
amortization of the identifiable intangibles resulting from the acquisitions
completed by MKS. The increase in amortization expense of $1.6 million as
compared to the three months ended March 31, 2002 is due to amortization of
intangible assets from the companies acquired in 2002.
Purchase of In-process Technology. In-process research and
development of $6.1 million for the three months ended March 31, 2002 arose from
the acquisition of ENI.
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 asset allocation as of March 31, 2002 included approximately $6.1
million for acquired in-process technology for projects, generally expected to
have durations of 12 months, that did not have future alternative uses.
Interest Income (Expense), Net. During the three months ended March
31, 2003, the Company generated net interest income of $0.3 million, primarily
from interest on its invested cash and investments, offset by interest expense
on outstanding debt. Interest income declined $0.2 million to $0.6 million for
the three months ended March 31, 2003 from $0.8 million for the three months
ended March 31, 2002. The decrease was due to lower interest rate yields during
2003.
Provision (benefit) for Income Taxes. The Company recorded a
provision for income taxes of $0.3 million for the three months ended March 31,
2003, for an effective tax rate of 4.0%. As a result of incurring significant
operating losses since 2001, the Company determined that it is more likely than
not that its deferred tax assets may not be realized, and since the fourth
quarter of 2002 has established a full valuation allowance for its net deferred
tax assets. Accordingly, the Company has not recorded a deferred tax benefit
from the net operating loss incurred in the three months ended March 31, 2003.
The provision for income taxes of $0.3 million is comprised of tax expense from
foreign operations and state taxes. Until an appropriate level of profitability
is reached, the Company will not record deferred tax benefits from its net
operating losses in future results of operations.
The Company's effective tax rate for the three months ended March
31, 2002 was a benefit of 20.6%. The effective tax rate differed from the
statutory rate of 35% due to the impact of non-deductible charges associated
with acquisitions made in 2002.
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 $0.7 million for the three months ended
March 31, 2003. The cash flow from operations for the first quarter of 2003 was
impacted by the net loss of $7.4 million, offset by non-cash charges included in
the net loss for depreciation and amortization of $7.6 million. Additionally,
changes in operating assets and liabilities reduced cash by $1.1 million,
primarily from an increase in accounts receivable of $4.2 million, offset by
changes in other current assets of $1.1 million and accounts payable of $2.0
million. Investing activities utilized cash of $7.3 million for the three months
ended March 31, 2003 primarily from purchases of available-for-sale investments.
Financing activities used cash of $0.9 million, primarily for payments on debt.
Working capital was $187.6 million as of March 31, 2003, a decrease
of $4.4 million from December 31, 2002. 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. The Company was in compliance with all debt covenants as of March
31, 2003.
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.
15
FACTORS THAT MAY AFFECT FUTURE RESULTS
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 70% of its sales during 2002, 64% of
its sales during 2001, and 76% of its sales during 2000 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, 2002 and 2003, MKS has experienced a significant reduction in demand from
OEM customers, and lower gross margins due to reduced absorption of
manufacturing overhead. MKS incurred significant charges for excess and obsolete
inventory of $16.6 million in 2001. The charges 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.
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, 2002 and 2003.
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 significant charges for excess and obsolete
inventory of $16.6 million in 2001. The charges 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
16
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 49% of its net sales
in 2002, 39% of its net sales in 2001 and 52% of its net sales in 2000. 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 2002, 2001 and 2000, one customer, Applied Materials, accounted for
approximately 23%, 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 Technology Ltd. ("Tenta") in March
2002, IPC Fab Automation GmbH ("IPC") in April 2002 and EquipNet Ltd.
("EquipNet") in October 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.
As a result of its recent acquisitions, the Company has added several
different decentralized accounting systems, resulting in a complex reporting
environment. The Company expects that it will need to continue to modify its
accounting policies, internal controls, procedures and compliance programs to
provide consistency across all its operations.
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.
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, IPC, and
EquipNet and any future acquisitions may not ultimately help MKS achieve its
strategic goals and may pose other risks to MKS.
17
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 include sales by MKS' foreign subsidiaries, but
exclude direct export sales, which were less than 10% of MKS' total net sales
for each of the years ended December 31, 2002, 2001 and 2000. International
sales accounted for approximately 36% of net sales in 2002, 31% of net sales in
2001 and 23% of net sales in 2000.
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.
18
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 and Europe;
- 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.
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 December 31, 2002, MKS owned 170 U.S. patents and 128 foreign
patents and had 89 pending U.S. patent applications and 286 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;
19
- 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. MKS has been involved in lawsuits
enforcing its intellectual property rights in the past, and may be involved in
such litigation in the future. 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.
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
20
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, 2003, John R. Bertucci, president, chairman and chief
executive officer of MKS, and certain members of his family, in the aggregate,
beneficially owned approximately 22.7% 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
12,000,000 shares of common stock to Emerson. As of January 31, 2003, Emerson
beneficially owned approximately 23.4% of MKS' outstanding common stock, and
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.
21
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 Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 31, 2003. MKS enters into local currency
purchased options and forward exchange contracts to reduce currency exposure
arising from intercompany sales of inventory. There were no material changes in
MKS' exposure to market risk from December 31, 2002.
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 Rule 13a-14(c) and 15d-15(c) under the Securities
Exchange Act of 1934) as of a date within 90 days of the filing date of this
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.
As a result of its recent acquisitions, the Company has added several
different decentralized accounting systems, resulting in a complex reporting
environment. The Company expects that it will need to continue to modify its
accounting policies, internal controls, procedures and compliance programs to
provide consistency across all its operations.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 sought injunctive relief and damages for infringement. Perkin-Elmer, Inc.
filed a counterclaim seeking invalidity of the patent, costs, and attorneys'
fees. In June 2002, the defendants filed a motion for summary judgment. In April
2003 the court granted the motion and dismissed the case. The Company has
appealed this decision.
There have been no other material developments since the filing of MKS'
Annual Report on Form 10-K on March 31, 2003.
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 March 31, 2003, approximately $32.2 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.
22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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
----------- -------------------
99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C [sec] 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer 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.
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.
May 8, 2003 By: /s/ Ronald C. Weigner
------------------------------------------
Ronald C. Weigner
Vice President and Chief Financial Officer
(Principal Financial Officer)
23
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: May 8, 2003 /s/ John R. Bertucci
-------------------------------------------
John R. Bertucci
Chairman, Chief Executive Officer and
President
(Principal Executive Officer)
24
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: May 8, 2003 /s/ Ronald C. Weigner
-----------------------------------------
Ronald C. Weigner
Vice President and Chief Financial
Officer
(Principal Financial Officer)
25