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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 September 30, 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 October 24,
2003: 51,784,301
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002
Consolidated Statements of Operations -
Three months and nine months ended September 30, 2003
and 2002
Consolidated Statements of Cash Flows -
Nine months ended September 30, 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 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, 2003 December 31, 2002
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 67,100 $ 88,820
Short-term investments......................................................... 48,513 39,894
Trade accounts receivable, net................................................. 53,963 45,505
Inventories.................................................................... 75,973 73,235
Other current assets........................................................... 7,975 6,098
---------- ----------
Total current assets....................................................... 253,524 253,552
Long-term investments.......................................................... 18,243 15,980
Property, plant and equipment, net............................................. 76,629 82,595
Goodwill, net.................................................................. 260,091 259,781
Acquired intangible assets, net................................................ 58,889 67,720
Other assets................................................................... 5,809 5,995
---------- ----------
Total assets............................................................... $ 673,185 $ 685,623
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.......................................................... $ 14,943 $ 13,877
Current portion of long-term debt.............................................. 1,800 4,263
Current portion of capital lease obligations................................... 37 332
Accounts payable............................................................... 19,143 15,301
Accrued compensation........................................................... 6,040 6,117
Other accrued expenses......................................................... 19,681 21,654
---------- ----------
Total current liabilities.................................................. 61,644 61,544
Long-term debt..................................................................... 9,183 11,469
Long-term portion of capital lease obligations..................................... 115 257
Other liabilities.................................................................. 2,439 1,663
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; none issued and outstanding.................................... --- ---
Common Stock, no par value, 200,000,000 shares authorized;
51,772,761 and 51,359,753 issued and outstanding at
September 30, 2003 and December 31, 2002, respectively..................... 113 113
Additional paid-in capital..................................................... 584,058 579,175
Retained earnings.............................................................. 10,102 28,623
Accumulated other comprehensive income......................................... 5,531 2,779
---------- ----------
Total stockholders' equity................................................. 599,804 610,690
---------- ----------
Total liabilities and stockholders' equity................................. $ 673,185 $ 685,623
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
3
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales .......................................................... $ 81,568 $ 92,216 $ 235,513 $ 237,215
Cost of sales ...................................................... 53,846 60,391 154,940 156,455
--------- --------- --------- ---------
Gross profit ....................................................... 27,722 31,825 80,573 80,760
Research and development ........................................... 12,034 12,650 34,719 33,835
Selling, general and administrative ................................ 17,090 20,455 52,368 58,234
Amortization of acquired intangible assets ......................... 3,612 3,778 11,007 10,120
Restructuring, asset impairment and other charges .................. 330 2,408 634 2,408
Purchase of in-process research and development .................... --- --- --- 8,390
--------- --------- --------- ---------
Loss from operations ............................................... (5,344) (7,466) (18,155) (32,227)
Interest expense ................................................... 173 281 720 862
Interest income .................................................... 396 714 1,505 2,077
Income from litigation settlement .................................. --- 4,200 --- 4,200
Other expense ...................................................... --- 4,121 --- 4,121
--------- --------- --------- ---------
Loss before income taxes ........................................... (5,121) (6,954) (17,370) (30,933)
Provision (benefit) for income taxes ............................... 500 (3,129) 1,151 (10,627)
--------- --------- --------- ---------
Net loss ........................................................... $ (5,621) $ (3,825) $ (18,521) $ (20,306)
========= ========= ========= =========
Net loss per share:
Basic and diluted ............................................. $ (0.11) $ (0.07) $ (0.36) $ (0.41)
========= ========= ========= =========
Weighted average common shares outstanding:
Basic and diluted ............................................. 51,625 51,262 51,475 49,567
========= ========= ========= =========
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,
2003 2002
---- ----
Cash flows from operating activities:
Net loss ............................................................................. $ (18,521) $ (20,306)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................... 22,165 21,165
Purchase of in-process research and development ................................. --- 8,390
Asset impairment charges ........................................................ --- 4,988
Deferred taxes .................................................................. --- (9,319)
Other ........................................................................... 79 721
Changes in operating assets and liabilities net of effects of
businesses acquired:
Trade accounts receivable ................................................... (6,683) (11,065)
Inventories ................................................................. (1,480) (3,546)
Other current assets ........................................................ (352) 6,041
Accrued expenses and other current liabilities .............................. (2,761) (2,377)
Accounts payable ............................................................ 3,727 3,722
--------- ---------
Net cash used in operating activities ................................................ (3,826) (1,586)
--------- ---------
Cash flows from investing activities:
Purchases of short-term and long-term investments .............................. (53,471) (79,881)
Maturities and sales of short-term and long-term investments ................... 41,504 53,852
Purchases of property, plant and equipment ..................................... (4,735) (5,833)
Decrease (increase) in other assets ............................................ 398 (623)
Proceeds from disposal of assets ............................................... 70 275
Purchases of businesses, net of cash acquired .................................. (2,150) (16,298)
--------- ---------
Net cash used in investing activities ................................................ (18,384) (48,508)
--------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings ............................................ 48,223 10,282
Payments on short-term borrowings .............................................. (48,628) (9,395)
Principal payments on long-term debt ........................................... (4,247) (4,863)
Proceeds from exercise of stock options ........................................ 4,394 7,544
Principal payments under capital lease obligations ............................. (443) (327)
--------- ---------
Net cash (used in) provided by financing activities .................................. (701) 3,241
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ......................... 1,191 1,579
--------- ---------
Decrease in cash and cash equivalents ................................................ (21,720) (45,274)
Cash and cash equivalents at beginning of period ..................................... 88,820 120,869
--------- ---------
Cash and cash equivalents at end of period ........................................... $ 67,100 $ 75,595
========= =========
Supplemental disclosure of cash flow information:
Noncash transactions during the period:
Stock issued for acquisitions ............................................... $ 0 $ 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 September 30, 2003
and for the three and nine months ended September 30, 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
of 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.
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.
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" ("SFAS No. 123"), 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- --------- ---------
Net loss:
Net loss as reported.............................. $ (5,621) $ (3,825) $ (18,521) $ (20,306)
Deduct: Total stock-based employee compensation
expense determined under the fair-value-based
method for all awards, net of tax............... (4,305) (2,011) (14,345) (9,010)
-------- -------- --------- ---------
Pro forma net loss................................ $ (9,926) $ (5,836) $ (32,866) $ (29,316)
======== ======== ========= =========
Basic and diluted net loss per share:
Net loss as reported.............................. $ (0.11) $ (0.07) $ (0.36) $ (0.41)
======== ======== ========= =========
Pro forma net loss................................ $ (0.19) $ (0.11) $ (0.64) $ (0.59)
======== ======== ========= =========
6
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
There is no tax benefit included in the stock-based employee
compensation expense determined under the fair-value-based method for
the three and nine months ended September 30, 2003, as the Company
established a full valuation allowance for its net deferred tax assets.
3) Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS No. 149"). This statement amends SFAS 133 to
provide clarification on the financial accounting and reporting of
derivative instruments and hedging activities and requires contracts
with similar characteristics to be accounted for on a comparable basis.
This statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June
30, 2003. The Company adopted SFAS No. 149 on July 1, 2003 and the
adoption did not have a material effect on its consolidated financial
position or results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). 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 adopted EITF 00-21 on July 1, 2003 and the
adoption did not have a material effect on its consolidated financial
position or results of operations.
4) Goodwill and Intangible Assets
Intangible Assets
Acquired amortizable intangible assets consisted of the following as of
September 30, 2003:
Gross Net Weighted
Carrying Accumulated Carrying Average
Amount Amortization Amount Useful Life
-------- ------------ -------- -----------
Completed technology .......................... $ 71,575 $(24,582) $ 46,993 6 years
Customer relationships ........................ 6,640 (2,432) 4,208 7 years
Patents, trademarks, tradenames and other...... 12,394 (4,706) 7,688 7 years
-------- -------- --------
$ 90,609 $(31,720) $ 58,889 6 years
======== ======== ========
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
======== ======== ========
7
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Aggregate amortization expense related to acquired intangibles for the
three and nine months ended September 30, 2003 was $3,612,000 and
$11,007,000 respectively. 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. Estimated
amortization expense related to acquired intangibles for each of the
five succeeding fiscal years is as follows:
Year Amount
---- ------
2003 $14,684
2004 14,687
2005 13,786
2006 11,685
2007 11,051
Goodwill
The change in the carrying amount of goodwill during the three and nine
months ended September 30, 2003 was not material.
5) Net Loss Per Share
The following table sets forth the computation of basic and diluted net
loss per share:
Three Months Ended Nine Months Ended
September, 30 September 30,
2003 2002 2003 2002
---- ---- ---- ----
Numerator
Net loss .......................................... $ (5,621) $ (3,825) $ (18,521) $ (20,306)
========= ========= ========= =========
Denominator
Shares used in net loss per common share - basic
and diluted ....................................... 51,625 51,262 51,475 49,567
========= ========= ========= =========
Net loss per common share -
basic and diluted ................................ $ (0.11) $ (0.07) $ (0.36) $ (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, 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 7,898,000
and 7,114,000 shares of the Company's common stock outstanding as of
September 30, 2003 and 2002, respectively.
6) Inventories
Inventories consist of the following:
September 30, December 31,
2003 2002
---- ----
Raw material........................... $ 37,726 $ 36,630
Work in process........................ 14,429 11,617
Finished goods......................... 23,818 24,988
-------- --------
$ 75,973 $ 73,235
======== ========
8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
7) Comprehensive Income (Loss)
The following table illustrates the components of comprehensive loss as
required by SFAS 130, "Reporting Comprehensive Income":
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss ........................................ $ (5,621) $ (3,825) $(18,521) $(20,306)
Other comprehensive income, net of taxes:
Changes in value of financial instruments
designated as hedges of currency and interest
rate exposures .............................. (1,186) (127) (1,024) (279)
Foreign currency translation adjustment ..... 1,612 (83) 3,837 1,728
Unrealized gain (loss) on investments ....... (48) (2) (61) 61
-------- -------- -------- --------
Other comprehensive income (loss), net of taxes.. 378 (212) 2,752 1,510
-------- -------- -------- --------
Total comprehensive loss ........................ $ (5,243) $ (4,037) $(15,769) $(18,796)
======== ======== ======== ========
8) 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 and nine
months ended September 30, 2003. The provision for income taxes for the
three and nine months ended September 30, 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.
9
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
9) Segment Information and Significant Customer
The Company is organized into three operating segments: Instruments and
Control Systems, Power and Reactive Gas Products, and Vacuum Products.
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.
Information about the Company's operations in different geographic
regions is presented in the tables below. 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.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Geographic net sales
United States $ 47,091 $ 58,254 $138,029 $155,942
Japan 14,196 14,452 40,369 31,238
Europe 11,614 10,831 31,801 28,033
Asia 8,667 8,679 25,314 22,002
-------- -------- -------- --------
$ 81,568 $ 92,216 $235,513 $237,215
======== ======== ======== ========
September 30, December 31,
2003 2002
---- ----
Long - lived assets
United States $336,277 $351,063
Japan 10,461 10,875
Europe 8,899 8,734
Asia 45,781 45,419
-------- --------
$401,418 $416,091
======== ========
The Company had one customer comprising 17% and 25% of net sales for
the three months ended September 30, 2003 and 2002, respectively, and
17% and 24% for the nine months ended September 30, 2003 and 2002,
respectively.
10) Commitments and Contingencies
Legal Matters
On April 3, 2003, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against MKS in federal district court in Colorado ("Colorado
Action"), seeking a declaratory judgment that Advanced Energy's Xstream
product does not infringe three patents held by Applied Science and
Technology, Inc. ("ASTeX"), a subsidiary of MKS. MKS has filed a motion
to dismiss Advanced Energy's complaint, and that motion is now pending
before the Colorado court. On May 14, 2003, MKS and ASTeX brought suit
in federal district court in Delaware against Advanced Energy for
infringement of five ASTeX patents, including the three patents at
issue in the Colorado
10
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Action. MKS and ASTeX seek injunctive relief and damages for Advanced
Energy's infringement. Advanced Energy has moved to dismiss this suit
in favor of Advanced Energy's Colorado action, and MKS has opposed
Advanced Energy's motion. Advanced Energy's motion to dismiss is now
pending before the Delaware court. Both of these cases are in the early
stages of pre-trial discovery.
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.
11) Acquisitions
On January 31, 2002, the Company 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, the Company 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.
On April 5, 2002, the Company 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. The acquisitions have been
accounted for under the purchase method of accounting.
On September 30, 2003, the Company acquired Wenzel Instruments
("Wenzel"), a privately held developer of solid state
MicroElectroMechanical System ("MEMS") based vacuum sensor technology
for advanced manufacturing processes.
The results of operations of these acquired companies are included in
the Company's consolidated statement of operations as of and since the
date of purchase.
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 the period.
Nine Months Ended
September 30, 2002
------------------
Net sales................................ $ 241,662
Net loss................................. $ (14,496)
Net loss per share:
Basic and diluted............... $ (0.28)
11
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
The unaudited pro forma results for the nine months ended September 30,
2002 excludes approximately $1,300,000 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.
12) Restructuring, Asset Impairment and Other Charges
During 2003, the Company continued its consolidation of recent
acquisitions that it initiated in 2002 to accelerate product
development, rationalize manufacturing operations and reduce operating
costs. In the third quarter of 2003, the Company recorded
restructuring, asset impairment and other charges of $330,000. These
charges consisted of $129,000 of severance costs related to workforce
reductions and $201,000 of professional fees and other charges related
to the consolidation. The payment of severance costs and professional
fees are expected to be complete by the end of 2003.
During the second quarter of 2003, the Company recorded restructuring,
asset impairment and other charges of $304,000. The charges consisted
of $112,000 of severance costs related to workforce reductions, an
asset impairment charge of $92,000 primarily for assets to be disposed,
and $100,000 of professional fees related to the consolidation. The
payment of severance costs and professional fees are expected to be
complete by the end of 2003.
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
workforce reduction was across all functional groups and consisted of
225 employees. The payment of severance costs is expected to be
complete by the end of the first quarter of 2004. The facilities
consolidation charges will be paid over the respective lease terms
ending in 2007.
The following table sets forth the activity in the restructuring
reserves from December 31, 2002 to September 30, 2003 related to the
2002 and 2003 initiatives:
Workforce Asset Facility
Reductions Impairment Consolidations Total
---------- ---------- -------------- -----
Balance as of December 31, 2002............................. $ 326 $ - $ 1,164 $ 1,490
Charges utilized in first quarter........................... (75) - (21) (96)
------ -------- ------- -------
Balance as of March 31, 2003................................ 251 - 1,143 1,394
Restructuring provision in second quarter................... 112 92 100 304
Charges utilized in second quarter.......................... (35) (92) (21) (148)
------ -------- ------- -------
Balance as of June 30, 2003................................. 328 - 1,222 1,550
Restructuring provision in the third quarter................ 129 - 201 330
Charges utilized in third quarter........................... (373) - (201) (574)
------ -------- ------- -------
Balance as of September 30, 2003............................ $ 84 $ - $ 1,222 $ 1,306
====== ======== ======= =======
12
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
13) 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 nine months ended September 30, 2003
was as follows:
Balance as of December 31, 2002................................... $ 6,921
Provisions for product warranties................................. 2,099
Direct charges to the warranty liability.......................... (3,279)
-------
Balance as of September 30, 2003.................................. $ 5,741
=======
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
We believe 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. We assume no obligation to update this information. Risks and
uncertainties include, but are not limited to, those discussed herein in the
section entitled "Factors That May Affect Future Results."
OVERVIEW
Our objective is to be the leading worldwide provider of instruments,
components, subsystems and process control solutions that improve productivity
and return on invested capital for semiconductor and other customers in
advanced manufacturing applications.
We are organized into three product groups: Instruments and Control
Systems, Power and Reactive Gas Products, and Vacuum Products. Our products are
derived from our 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.
Our products are used to manufacture semiconductors; thin film coatings for
diverse markets such as flat panel displays, optical and magnetic storage media,
architectural glass, and electro-optical products; and medical imaging
equipment.
Our customers include semiconductor capital equipment manufacturers,
semiconductor device manufacturers, industrial manufacturing companies, medical
equipment manufacturers and university, government and industrial research
laboratories. For the nine months ended September 30, 2003 and the full year
ended December 31, 2002, we estimate that approximately 67% and 70% of our net
sales, respectively, were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers.
A significant portion of our sales are to operations in international
markets. International sales include sales by our foreign subsidiaries, but
exclude direct export sales, which were less than 10% of our total net sales for
each of the years ended December 31, 2002, 2001 and 2000. For the nine months
ended September 30, 2003 and the full year ended December 31, 2002,
international sales accounted for approximately 41% and 36% of net sales,
respectively.
RECENT ACQUISITIONS
On January 31, 2002, we completed the 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. We
acquired ENI in order to offer higher value and more integrated application
solutions by combining ENI's solid-state power conversion technology with our
core competency in plasma and reactive gas solutions. The acquisition has been
accounted for under the purchase method of accounting.
14
Also in 2002, we acquired three companies that expanded our position in
distributed computer-based process control and data management. On March 13,
2002, we 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, we 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, we acquired
EquipNet Ltd. ("EquipNet"), a privately held company that develops web-based
connectivity equipment for the semiconductor industry.
On September 30, 2003, we acquired Wenzel Instruments ("Wenzel"), a
privately held developer of solid state MicroElectroMechanical System ("MEMS")
based vacuum sensor technology for advanced manufacturing processes.
The results of operations of these acquired companies are included in
our consolidated statement of operations as of and since the date of purchase.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of total net sales of certain line items included in our consolidated statement
of income data.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales ................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................................ 66.0 65.5 65.8 66.0
----- ----- ----- -----
Gross profit ............................................. 34.0 34.5 34.2 34.0
Research and development ................................. 14.8 13.7 14.7 14.3
Selling, general and administrative ...................... 21.0 22.2 22.2 24.5
Amortization of goodwill and acquired intangible assets... 4.4 4.1 4.7 4.3
Restructuring and asset impairment charges ............... 0.4 2.6 0.3 1.0
In-process research and development ...................... -- -- -- 3.5
----- ----- ----- -----
Loss from operations ..................................... (6.6) (8.1) (7.7) (13.6)
Interest income, net ..................................... 0.3 0.5 0.3 0.5
Income from litigation settlement ........................ -- 4.6 -- 1.8
Other expense ............................................ -- 4.5 -- 1.7
----- ----- ----- -----
Loss before income taxes ................................. (6.3) (7.5) (7.4) (13.0)
Provision (benefit) for income taxes ..................... 0.6 (3.4) 0.5 (4.4)
----- ----- ----- -----
Net loss ................................................. (6.9)% (4.1)% (7.9)% (8.6)%
===== ===== ===== =====
Net Sales. Net sales decreased $10.6 million or 11.5 % to $81.6 million
for the three months ended September 30, 2003 from $92.2 million for the three
months ended September 30, 2002. International net sales were approximately
$34.5 million for the three months ended September 30, 2003 or 42.3% of net
sales and $34.0 million for the same period of 2002 or 36.8% of net sales. The
decline in net sales was due to decreased domestic demand for our products from
our semiconductor capital equipment manufacturer and semiconductor device
manufacturer customers, as compared to the third quarter of 2002.
Net sales decreased $1.7 million or 0.7% to $235.5 million for the nine
months ended September 30, 2003 from $237.2 million for the nine months ended
September 30, 2002. International net sales were approximately $97.5 million for
the nine months ended September 30, 2003 or 41.4% of net sales and $81.3 million
for the same period of 2002 or 34.3% of net sales. During the nine months ended
September 30, 2002, we acquired ENI, Tenta and IPC. These acquisitions increased
our net sales by $2.4 million for the nine months ended September 30, 2003
compared to the prior comparable period, as they were included in net sales for
the full period in 2003 while net sales for the nine months ended September 30,
2002 includes their revenues only from the date of acquisition. This increase
was offset by decreased domestic demand for our products from our semiconductor
capital equipment manufacturer and semiconductor device manufacturer customers,
as compared to the nine months ended September 30, 2002.
15
The semiconductor capital equipment market has experienced a
significant downturn since 2001. As a result, since 2001, we have experienced a
significant reduction in demand for products from our semiconductor capital
equipment manufacturer and semiconductor device manufacturer customers. The
semiconductor capital equipment industry has been cyclical, and we 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 decreased
slightly to 34.0% for the three months ended September 30, 2003 from 34.5% for
the three months ended September 30, 2002. The decrease was primarily due to
lower overhead absorption from the lower volume of sales in 2003, offset
partially by reduced material costs. Gross profit as a percentage of net sales
increased slightly to 34.2% for the nine months ended September 30, 2003 from
34.0% for the same period of 2002. The small increase in the year to date gross
profit percent is mainly due to a favorable foreign exchange impact, offset by
higher materials costs of new products in initial production runs.
Research and Development. Research and development expense decreased
$0.6 million or 4.9% to $12.0 million or 14.8% of net sales for the three months
ended September 30, 2003 from $12.6 million or 13.7% of net sales for the three
months ended September 30, 2002. The decrease was primarily due to lower
compensation expense of $0.5 million from lower headcount. Research and
development expense increased $0.9 million or 2.6% to $34.7 million or 14.7% of
net sales for the nine months ended September 30, 2003 from $33.8 million or
14.3% of net sales for the same period of 2002. The increase was due mainly to
increased compensation expense of $0.7 million, as a result of including a full
nine months of costs in 2003 of the companies acquired during 2002.
Selling, General and Administration. Selling, general and
administration expenses decreased $3.4 million or 16.5% to $17.1 million or
21.0% of net sales for the three months ended September 30, 2003 from $20.5
million or 22.2% of net sales for the three months ended September 30, 2002. The
decrease was due primarily to lower compensation expense, as a result of lower
headcount, of $1.6 million resulting from cost savings initiatives and a
decrease in professional fees of $0.9 million. Selling, general and
administrative expenses decreased $5.9 million or 10.1% to $52.4 million or
22.2% of net sales for the nine months ended September 30, 2003 from $58.2
million or 24.5% of net sales for the same period of 2002. The decrease was due
primarily to lower compensation expense, as a result of lower headcount, of $2.1
million resulting from cost savings initiatives and decreased professional fees
of $2.8 million.
Amortization of Acquired Intangible Assets. Amortization expense was
$3.6 million for the quarter ended September 30, 2003, a slight decrease of $0.2
million or 0.4% from the quarter ended September 30, 2002 as a result of some
intangibles being fully amortized. For the nine months ended September 30, 2003,
amortization expense was $11.0 million, an increase of $0.9 million or 8.8% from
the $10.1 million for the nine months ended September 30, 2002. The increase in
amortization during 2003 was due to amortization of intangibles from companies
acquired in 2002.
Restructuring, Asset Impairment and Other Charges. During 2003, we
continued the consolidation of recent acquisitions and recorded restructuring,
asset impairment and other charges of $0.3 million for the quarter ended
September 30, 2003 and $0.3 million for the quarter ended June 30, 2003. The
charges in the third quarter of 2003 consisted of $0.1 million of severance
costs related to workforce reductions and $0.2 million of professional fees and
other costs related to the consolidation. The charges in the second quarter of
2003 consisted of $0.1 million of severance costs related to workforce
reductions, an asset impairment charge of $0.1 million primarily for assets to
be disposed, and $0.1 million of professional fees related to the consolidation.
The severance costs and professional fees are accrued as of September 30, 2003
and are expected to be paid by the end of 2003.
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 workforce reduction was across all
functional groups and consisted of 225 employees. The payment of severance costs
are expected to be completed by the end of the first quarter of 2004. The
facilities consolidation charges will be paid over the respective lease terms
ending in 2007.
16
The following table sets forth the activity in the restructuring
reserves from December 31, 2002 to September 30, 2003 related to the 2002 and
2003 initiatives:
Workforce Asset Facility
Reductions Impairment Consolidations Total
---------- ---------- -------------- -----
(in thousands)
Balance as of December 31, 2002 .............. $ 326 $ - $ 1,164 $ 1,490
Charges utilized in first quarter ............ (75) - (21) (96)
------- ------- ------- -------
Balance as of March 31, 2003 ................. 251 - 1,143 1,394
Restructuring provision in second quarter .... 112 92 100 304
Charges utilized in second quarter ........... (35) (92) (21) (148)
------- ------- ------- -------
Balance as of June 30, 2003 .................. 328 - 1,222 1,550
Restructuring provision in the third quarter.. 129 - 201 330
Charges utilized in third quarter ............ (373) - (201) (574)
------- ------- ------- -------
Balance as of September 30, 2003 ............. $ 84 $ - $ 1,222 $ 1,306
======= ======= ======= =======
Purchase of In-process Technology. In-process research and development
of $8.4 million for the nine months ended September 30, 2002 arose from the
acquisitions we made in 2002.
Interest Income (Expense), Net. Net interest income decreased to $0.2
million for the three months ended September 30, 2003 from $0.4 million for the
three months ended September 30, 2002. For the nine months ended September 30,
2003, net interest income was $0.8 million, a decrease of $0.4 million from the
$1.2 million in the nine months ended September 30, 2002. The decrease in 2003
is mainly related to slightly lower investment balance and lower interest rates
in 2003.
Income from Litigation Settlement. On November 30, 2000, Applied
Science and Technology, Inc. ("ASTeX"), which we acquired in January 2001,
brought suit in federal district court in Delaware against Advanced Energy
Industries, Inc. for infringement of ASTeX's patent related to its Astron
product. On May 17, 2002, a jury affirmed the validity of our patent and found
that Advanced Energy infringed the patent. On May 31, 2002, based on the jury's
findings, the Court entered a judgment on the infringement claim in favor of us
and against Advanced Energy, and awarded $4.2 million in damages to compensate
us for Advanced Energy's infringing activity. Advanced Energy filed motions to
overturn the verdict. During August of 2002, we entered into an agreement with
Advanced Energy whereby Advanced Energy agreed to pay the awarded damages amount
to us and withdraw its motions to overturn the verdict. We received the $4.2
million in September 2002, and recorded the amount as Income from litigation
settlement.
Other Expense. During 2001, we 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. During 2002, due to the downturn in the
semiconductor industry and its result on the acquirer's operations, and the
acquirer's inability to raise financing, we considered the value of the note and
warrants to be impaired. Accordingly, during 2002, we recorded a charge of $4.1
million to other expense for our estimate of the impairment on the note
receivable and warrants.
Provision (benefit) for Income Taxes. We recorded a provision for
income taxes of $0.5 million and $1.2 million for the three and nine months
ended September 30, 2003, as compared to a tax benefit of $3.1 million and $10.6
million for the three and nine months ended September 30, 2002, respectively. As
a result of incurring significant operating losses since 2001, we determined
that it is more likely than not that our deferred tax assets may not be
realized, and since the fourth quarter of 2002 have established a full valuation
allowance for our net deferred tax assets. Accordingly, we have not recorded a
deferred tax benefit from the net operating loss incurred in the three and nine
months ended September 30, 2003. The provision for income taxes in 2003 is
comprised of tax expense from foreign operations and state taxes. Until an
appropriate level of profitability is reached, we will not record deferred tax
benefits from our net operating losses in future results of operations.
17
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and short-term marketable securities of
$115.6 million at September 30, 2003, a decrease of $13.1 million from $128.7
million at December 31, 2002. We have historically financed our operations and
capital requirements through a combination of cash provided by operations,
long-term real estate financing, capital lease financing and short-term
borrowings.
For the nine months ended September 30, 2003, our operating activities
used $3.8 million in cash compared to $1.6 million for the nine months ended
September 30, 2002. The cash used in operations for the nine months ended
September 30, 2003 was impacted by the net loss of $18.5 million and an increase
in operating assets of $8.5 million, offset by non-cash charges included in the
net loss for depreciation and amortization of $22.2 million and an increase in
operating liabilities of $1.0 million. The increase in operating assets
consisted mainly of an increase in accounts receivable of $6.7 million due to
the timing of shipments during the quarter. Net cash used in operating
activities for the nine months ended September 30, 2002 resulted mainly from a
net loss of $20.3 million, an increase in accounts receivable of $11.1 million,
deferred tax benefits of $9.3 million, 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.
We used $18.4 million of cash for investing activities in the nine
months ended September 30, 2003 and $48.5 million in the nine months ended
September 30, 2002. Investing activities in 2003 consisted of $4.7 million of
purchases of capital assets, net purchases of short and long-term investments of
$12.0 million and $2.2 million for the purchase of a business. Investing
activities in 2002 consisted mainly of net purchases of short and long-term
investments of $26.0 million, $16.3 million for the acquisition of businesses
and $5.8 million for the purchases of capital assets.
Net cash used in financing activities of $0.7 million for the nine
months ended September 30, 2003 consisted mainly of $4.7 million of payments on
long-term debt and capital lease obligations offset by proceeds from the
exercise of stock options of $4.4 million. Net cash provided by financing
activities of $3.2 million for the nine months ended September 30, 2002
consisted mainly of proceeds from the exercise of stock options of $7.5 million
offset by principal payments $5.2 million on long-term debt and capital lease
obligations.
On July 31, 2003, our $40.0 million unsecured line of credit facility
with two domestic banks expired and we decided not to renew this facility. There
had been no borrowings made under this line of credit.
We believe that our working capital, together with the cash anticipated
to be generated from operations will be sufficient to satisfy our estimated
working capital and planned capital expenditure requirements through at least
the next 12 months.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149"). This statement amends SFAS 133 to provide
clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. This statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. We adopted SFAS No. 149 on
July 1, 2003 and the adoption did not have a material effect on our consolidated
financial position or results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21").
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. We adopted EITF 00-21 on July 1, 2003 and the adoption did not have a
material effect on our consolidated financial position or results of operations.
18
FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR BUSINESS DEPENDS SUBSTANTIALLY ON CAPITAL SPENDING IN THE SEMICONDUCTOR
INDUSTRY WHICH IS CHARACTERIZED BY PERIODIC FLUCTUATIONS THAT MAY CAUSE A
REDUCTION IN DEMAND FOR OUR PRODUCTS.
We estimate that approximately 70%, 64% and 76% of our sales during
2002, 2001 and 2000, respectively, were to semiconductor capital equipment
manufacturers and semiconductor device manufacturers, and we expect that sales
to such customers will continue to account for a substantial majority of our
sales. Our business depends upon the capital expenditures of semiconductor
device manufacturers, which in turn depend upon the demand for semiconductors.
Periodic reductions in demand for the products manufactured by semiconductor
capital equipment manufacturers and semiconductor device manufacturers may
adversely affect our business, financial condition and results of operations.
Historically, the semiconductor market has been highly cyclical and has
experienced periods of overcapacity, resulting in significantly reduced demand
for capital equipment. Most recently, in 2001, 2002 and 2003, we have
experienced a significant reduction in demand from OEM customers, and lower
gross margins due to reduced absorption of manufacturing overhead. As a result
of this significant reduction in demand, particularly for older technology
products, we incurred significant charges for excess and obsolete inventory of
$16.6 million in 2001. 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. We cannot be certain that semiconductor downturns
will not continue or recur. A decline in the level of orders as a result of any
future downturn or slowdown in the semiconductor capital equipment industry
could have a material adverse effect on our business, financial condition and
results of operations.
OUR QUARTERLY OPERATING RESULTS HAVE VARIED, AND ARE LIKELY TO CONTINUE TO VARY
SIGNIFICANTLY. THIS MAY RESULT IN VOLATILITY IN THE MARKET PRICE FOR OUR SHARES.
A substantial portion of our shipments occur shortly after an order is
received and therefore we operate with a low level of backlog. As a result, a
decrease in demand for our products from one or more customers could occur with
limited advance notice and could have a material adverse effect on our results
of operations in any particular period. A significant percentage of our expenses
are relatively fixed and based in part on expectations of future net sales. The
inability to adjust spending quickly enough to compensate for any shortfall
would magnify the adverse impact of a shortfall in net sales on our results of
operations. Factors that could cause fluctuations in our net sales include:
- 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, the semiconductor capital equipment market experienced a
significant downturn during 2001, 2002 and 2003. As a result, we experienced a
reduction in demand from OEM customers, which has had a material adverse effect
on our quarterly operating results during these years. During 2001, gross
margins were negatively affected by significant charges for excess and obsolete
inventory of $2.6 million in the second quarter and $14.0 million in the fourth
quarter. These 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 we will in the future experience
quarterly or annual fluctuations and that, in one or more future quarters, our
operating results will fall below the expectations of public market analysts or
investors. In any such event, the price of our common stock could decline
significantly.
19
THE LOSS OF NET SALES TO ANY ONE OF OUR MAJOR CUSTOMERS WOULD LIKELY HAVE A
MATERIAL ADVERSE EFFECT ON US.
Our top ten customers accounted for approximately 49%, 39% and 52% of
our net sales in 2002, 2001 and 2000, respectively. The loss of a major customer
or any reduction in orders by these customers, including reductions due to
market or competitive conditions, would likely have a material adverse effect on
our business, financial condition and results of operations. During 2002, 2001
and 2000, one customer, Applied Materials, accounted for approximately 23%, 18%
and 30%, respectively, of our net sales. None of our significant customers,
including Applied Materials, has entered into an agreement requiring it to
purchase any minimum quantity of our products. The demand for our products from
our semiconductor capital equipment customers depends in part on orders received
by them from their semiconductor device manufacturer customers.
Attempts to lessen the adverse effect of any loss or reduction through
the rapid addition of new customers could be difficult because prospective
customers typically require lengthy qualification periods prior to placing
volume orders with a new supplier. Our future success will continue to depend
upon:
- our ability to maintain relationships with existing key customers;
- our ability to attract new customers;
- our ability to introduce new products in a timely manner for existing
and new customers; and
- the success of our customers in creating demand for their capital
equipment products which incorporate our products.
AS PART OF OUR BUSINESS STRATEGY, WE HAVE ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT
TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION.
We have made several acquisitions since 2000. As a part of our business
strategy, we 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 our ongoing business and distraction of
management, expenses related to the acquisition and potential unknown
liabilities associated with acquired businesses.
As a result of our recent acquisitions, we have added several different
decentralized accounting systems, resulting in a complex reporting environment.
We expect that we will need to continue to modify our accounting policies,
internal controls, procedures and compliance programs to provide consistency
across all our operations.
If we are not successful in completing acquisitions that we may pursue
in the future, we may be required to reevaluate our growth strategy, and we may
have incurred substantial expenses and devoted significant management time and
resources in seeking to complete proposed acquisitions that will not generate
benefits for us.
In addition, with future acquisitions, we could use substantial
portions of our available cash as all or a portion of the purchase price. We
could also issue additional securities as consideration for these acquisitions,
which could cause significant stockholder dilution. Our recent acquisitions and
any future acquisitions may not ultimately help us achieve our strategic goals
and may pose other risks to us.
AN INABILITY TO CONVINCE SEMICONDUCTOR DEVICE MANUFACTURERS TO SPECIFY THE USE
OF OUR PRODUCTS TO OUR CUSTOMERS, WHO ARE SEMICONDUCTOR CAPITAL EQUIPMENT
MANUFACTURERS, WOULD WEAKEN OUR COMPETITIVE POSITION.
The markets for our products are highly competitive. Our competitive
success often depends upon factors outside of our control. For example, in some
cases, particularly with respect to mass flow controllers, semiconductor device
manufacturers may direct semiconductor capital equipment manufacturers to use a
specified supplier's product in their equipment. Accordingly, for such products,
our success will depend in part on our ability to have semiconductor device
manufacturers specify that our products be used at their semiconductor
fabrication facilities. In addition, we may encounter difficulties in changing
established relationships of competitors that already have a large installed
base of products within such semiconductor fabrication facilities.
20
IF OUR PRODUCTS ARE NOT DESIGNED INTO SUCCESSIVE NEW GENERATIONS OF OUR
CUSTOMERS' PRODUCTS, WE 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. Our success depends on our
products being designed into new generations of equipment for the semiconductor
industry. We must develop products that are technologically current so that they
are positioned to be chosen for use in each successive new generation of
semiconductor capital equipment. If our products are not chosen by our
customers, our net sales may be reduced during the lifespan of our customers'
products. In addition, we must make a significant capital investment to develop
products for our customers well before our products are introduced and before we
can be sure that we will recover our capital investment through sales to the
customers in significant volume. We are thus also at risk during the development
phase that our products may fail to meet our customers' technical or cost
requirements and may be replaced by a competitive product or alternative
technology solution. If that happens, we may be unable to recover our
development costs.
THE SEMICONDUCTOR INDUSTRY IS SUBJECT TO RAPID DEMAND SHIFTS WHICH ARE DIFFICULT
TO PREDICT. AS A RESULT, OUR INABILITY TO EXPAND OUR MANUFACTURING CAPACITY IN
RESPONSE TO THESE RAPID SHIFTS MAY CAUSE A REDUCTION IN OUR MARKET SHARE.
Our ability to increase sales of certain products depends in part upon
our ability to expand our manufacturing capacity for such products in a timely
manner. If we are unable to expand our manufacturing capacity on a timely basis
or to manage such expansion effectively, our customers could implement our
competitors' products and, as a result, our market share could be reduced.
Because the semiconductor industry is subject to rapid demand shifts which are
difficult to foresee, we may not be able to increase capacity quickly enough to
respond to a rapid increase in demand in the semiconductor industry.
Additionally, capacity expansion could increase our fixed operating expenses and
if sales levels do not increase to offset the additional expense levels
associated with any such expansion, our business, financial condition and
results of operations could be materially adversely affected.
THE COMPANY OPERATES IN A HIGHLY COMPETITIVE INDUSTRY.
The market for our products is highly competitive. Principal
competitive factors include:
- historical customer relationships;
- product quality, performance and price;
- breadth of product line;
- manufacturing capabilities; and
- customer service and support.
Although we believe that we compete favorably with respect to these
factors, there can be no assurance that we will continue to do so. We encounter
substantial competition in most of our product lines. Certain of our
competitors may have greater financial and other resource than we have. In some
cases, competitors are smaller than we are, but well established in specific
product niches. We may encounter difficulties in changing established
relationships of competitors with a large installed base of products at such
customers' fabrication facilities. In addition, our competitors can be expected
to continue to improve the designs and performance of their products. There can
be no assurance that competitors will not develop products that offer price or
performance features superior to those of our products.
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SALES TO FOREIGN MARKETS CONSTITUTE A SUBSTANTIAL PORTION OF OUR NET SALES;
THEREFORE, OUR 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 our foreign subsidiaries, but
exclude direct export sales, which were less than 10% of our total net sales for
each of the years ended December 31, 2002, 2001 and 2000. International sales
accounted for approximately 41%, 36%, 31% and 23% of net sales for the nine
months ended September 30, 2003 and the years ended December 31, 2002, 2001 and
2000, respectively, a significant portion of which were sales to Japan.
We anticipate that international sales will continue to account for a
significant portion of our net sales. In addition, certain of our key domestic
customers derive a significant portion of their revenues from sales in
international markets. Therefore, our sales and results of operations could be
adversely affected by economic slowdowns and other risks associated with
international sales.
RISKS RELATING TO OUR INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
We have substantial international sales, service and manufacturing
operations in Europe and Asia, which exposes us to foreign operational and
political risks that may harm our business. Our international operations are
subject to inherent risks, which may adversely affect us, including:
- political and economic instability in countries where we have 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, our operating results may be
adversely affected.
UNFAVORABLE CURRENCY EXCHANGE RATE FLUCTUATIONS MAY LEAD TO LOWER GROSS MARGINS,
OR MAY CAUSE US TO RAISE PRICES WHICH COULD RESULT IN REDUCED SALES.
Currency exchange rate fluctuations could have an adverse effect on our
net sales and results of operations and we could experience losses with respect
to our hedging activities. Unfavorable currency fluctuations could require us to
increase prices to foreign customers which could result in lower net sales by us
to such customers. Alternatively, if we do not adjust the prices for our
products in response to unfavorable currency fluctuations, our results of
operations could be adversely affected. In addition, sales made by our foreign
subsidiaries are denominated in the currency of the country in which these
products are sold and the currency it receives in payment for such sales could
be less valuable at the time of receipt as a result of exchange rate
fluctuations. We enter into forward exchange contracts and local currency
purchased options to reduce currency exposure arising from intercompany sales of
inventory. However, we cannot be certain that our efforts will be adequate to
protect us against significant currency fluctuations or that such efforts will
not expose us to additional exchange rate risks.
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KEY PERSONNEL MAY BE DIFFICULT TO ATTRACT AND RETAIN.
Our success depends to a large extent upon the efforts and abilities of
a number of key employees and officers, particularly those with expertise in the
semiconductor manufacturing and similar industrial manufacturing industries. The
loss of key employees or officers could have a material adverse effect on our
business, financial condition and results of operations. We believe that our
future success will depend in part on our ability to attract and retain highly
skilled technical, financial, managerial and marketing personnel. We cannot be
certain that we will be successful in attracting and retaining such personnel.
OUR PROPRIETARY TECHNOLOGY IS IMPORTANT TO THE CONTINUED SUCCESS OF OUR
BUSINESS. OUR FAILURE TO PROTECT THIS PROPRIETARY TECHNOLOGY MAY SIGNIFICANTLY
IMPAIR OUR COMPETITIVE POSITION.
As of September 30, 2003, we owned 185 U.S. patents and 126 foreign
patents and had 83 pending U.S. patent applications. Although we seek to protect
our intellectual property rights through patents, copyrights, trade secrets and
other measures, we cannot be certain that:
- we will be able to protect our technology adequately;
- competitors will not be able to develop similar technology
independently;
- any of our pending patent applications will be issued;
- intellectual property laws will protect our intellectual property
rights; or
- third parties will not assert that our products infringe patent,
copyright or trade secrets of such parties.
PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS MAY RESULT IN COSTLY LITIGATION.
Litigation may be necessary in order to enforce our patents, copyrights
or other intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. We have been in the past, and currently
are, involved in lawsuits enforcing our intellectual property rights, 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 our business, financial condition and results of operations.
THE MARKET PRICE OF OUR COMMON STOCK HAS FLUCTUATED AND MAY CONTINUE TO
FLUCTUATE FOR REASONS OVER WHICH WE HAVE NO CONTROL.
The stock market has from time to time experienced, and is likely to
continue to experience, extreme price and volume fluctuations. 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 our common stock has fluctuated greatly
since our 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 we were the object of securities class action litigation, it
could result in substantial costs and a diversion of our management's attention
and resources.
OUR DEPENDENCE ON SOLE, LIMITED SOURCE SUPPLIERS, AND INTERNATIONAL SUPPLIERS,
COULD AFFECT OUR ABILITY TO MANUFACTURE PRODUCTS AND SYSTEMS.
We rely on sole, limited source suppliers, and international suppliers,
for a few of our components and subassemblies that are critical to the
manufacturing of our 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 our suppliers to develop technologically
advanced products to support our growth and development of new systems.
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We believe that in time we could obtain and qualify alternative sources
for most sole, limited source and international supplier parts. Seeking
alternative sources of the parts could require us to redesign our systems,
resulting in increased costs and likely shipping delays. We may be unable to
redesign our systems, which could result in further costs and shipping delays.
These increased costs would decrease our profit margins if we could not pass the
costs to our customers. Further, shipping delays could damage our relationships
with current and potential customers and have a material adverse effect on our
business and results of operations.
WE ARE SUBJECT TO GOVERNMENTAL REGULATIONS.
We are subject to federal, state, local and foreign regulations,
including environmental regulations and regulations relating to the design and
operation of our power supply products. We must ensure that these systems meet
certain safety standards, many of which vary across the countries in which our
systems are used. For example, the European Union has published directives
specifically relating to power supplies. We must comply with these directives in
order to ship our systems into countries that are members of the European Union.
We believe we are in compliance with current applicable regulations, directives
and standards and have obtained all necessary permits, approvals, and
authorizations to conduct our business. However, compliance with future
regulations, directives and standards could require us to modify or redesign
certain systems, make capital expenditures or incur substantial costs. If we do
not comply with current or future regulations, directives and standards:
- we could be subject to fines;
- our production could be suspended; or
- we could be prohibited from offering particular systems in specified
markets.
CERTAIN STOCKHOLDERS HAVE A SUBSTANTIAL INTEREST IN US AND MAY BE ABLE TO EXERT
SUBSTANTIAL INFLUENCE OVER OUR ACTIONS.
As of September 1, 2003, John R. Bertucci, president, chairman and
chief executive officer of MKS, and certain members of his family, in the
aggregate, beneficially owned approximately 21.3% of our 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"), we issued approximately
12,000,000 shares of common stock to Emerson. As of September 1, 2003, Emerson
owned approximately 23.2% of our outstanding common stock, and accordingly,
Emerson is able to exert substantial influence over our actions.
SOME PROVISIONS OF OUR RESTATED ARTICLES OF ORGANIZATION, AS AMENDED, OUR
AMENDED AND RESTATED BY-LAWS AND MASSACHUSETTS LAW COULD DISCOURAGE POTENTIAL
ACQUISITION PROPOSALS AND COULD DELAY OR PREVENT A CHANGE IN CONTROL OF THE
COMPANY.
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 we have no present plans to issue any
preferred stock, our 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 the Company. The issuance of preferred stock
could adversely affect the voting power of the holders of our common stock,
including the loss of voting control to others. In addition, our 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 the Company.
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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 our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 31, 2003. We enter 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 our exposure
to market risk from December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of September 30, 2003. Based on this
evaluation, the Company's chief executive officer and chief financial officer
concluded that, as of September 30, 2003, the Company's disclosure controls and
procedures were (1) designed to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to the Company's
chief executive officer and chief financial officer by others within those
entities, particularly during the period in which this report was being prepared
and (2) effective, in that they provide reasonable assurance 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.
No change in the Company's internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the fiscal quarter ended September 30, 2003 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 3, 2003, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against MKS in federal district court in Colorado ("Colorado
Action"), seeking a declaratory judgment that Advanced Energy's Xstream product
does not infringe three patents held by Applied Science and Technology, Inc.
('ASTeX"), a subsidiary of MKS. MKS has filed a motion to dismiss Advanced
Energy's complaint, and that motion is now pending before the Colorado court. On
May 14, 2003, MKS and ASTeX brought suit in federal district court in Delaware
against Advanced Energy for infringement of five ASTeX patents, including the
three patents at issue in the Colorado Action. MKS and ASTeX seek injunctive
relief and damages for Advanced Energy's infringement. Advanced Energy has moved
to dismiss this suit in favor of Advanced Energy's Colorado action, and MKS has
opposed Advanced Energy's motion. Advanced Energy's motion to dismiss is now
pending before the Delaware court. Both of these cases are in the early stages
of pre-trial discovery.
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'
Quarterly Report on Form 10-Q on August 13, 2003.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Exhibit Description
----------- -------------------
31.1 Certification of Principal Executive Officer pursuant
to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended
31.2 Certification of Principal Financial Officer pursuant
to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 22, 2003, the Company furnished a Current Report on Form 8-K under "Item
9. Regulation FD Disclosure" (Information furnished pursuant to Item 12.
"Disclosure of Results of Operations and Financial Condition") containing a copy
of its earnings release for the period ended June 30, 2003.
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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 6, 2003 By: /s/ Ronald C. Weigner
------------------------------------------
Ronald C. Weigner
Vice President and Chief Financial Officer
(Principal Financial Officer)
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