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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, 2004
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.)
90 Industrial Way, Wilmington, Massachusetts 01887
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 284-4000
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 27,
2004: 53,606,134
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003
Consolidated Statements of Operations -
Three and nine months ended September 30, 2004
and 2003
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2004 and 2003
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.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, 2004 December 31, 2003
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $123,560 $ 74,660
Short-term investments .................................................... 83,023 54,518
Trade accounts receivable, net ............................................ 85,333 65,454
Inventories ............................................................... 104,337 82,013
Other current assets ...................................................... 11,106 5,631
-------- --------
Total current assets .................................................. 407,359 282,276
Long-term investments ..................................................... 10,469 13,625
Property, plant and equipment, net ........................................ 79,903 76,121
Goodwill, net ............................................................. 259,784 259,924
Acquired intangible assets, net ........................................... 45,085 56,192
Other assets .............................................................. 3,751 4,724
-------- --------
Total assets .......................................................... $806,351 $692,862
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ..................................................... $ 20,871 $ 17,736
Current portion of long-term debt ......................................... 2,133 2,460
Accounts payable .......................................................... 25,673 25,302
Accrued compensation ...................................................... 15,837 7,711
Income taxes payable ...................................................... 14,686 --
Other accrued expenses .................................................... 23,610 18,599
-------- --------
Total current liabilities ............................................. 102,810 71,808
Long-term debt ................................................................. 7,111 8,924
Other liabilities .............................................................. 4,458 3,820
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;
53,606,134 and 52,040,019 issued and outstanding at
September 30, 2004 and December 31, 2003, respectively ............... 113 113
Additional paid-in capital ................................................ 624,411 587,910
Retained earnings ......................................................... 57,962 12,238
Accumulated other comprehensive income .................................... 9,486 8,049
-------- --------
Total stockholders' equity ............................................ 691,972 608,310
-------- --------
Total liabilities and stockholders' equity ............................ $806,351 $692,862
======== ========
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,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales ........................................... $ 139,651 $ 81,568 $ 424,221 $ 235,513
Cost of sales ....................................... 84,045 53,846 252,993 154,940
----------- ----------- ----------- -----------
Gross profit ........................................ 55,606 27,722 171,228 80,573
Research and development ............................ 14,201 12,034 43,157 34,719
Selling, general and administrative ................. 22,971 17,090 65,784 52,368
Amortization of acquired intangible assets .......... 3,689 3,612 11,073 11,007
Restructuring, asset impairment and other charges ... -- 330 437 634
----------- ----------- ----------- -----------
Income (loss) from operations ....................... 14,745 (5,344) 50,777 (18,155)
Interest expense .................................... 100 173 384 720
Interest income ..................................... 542 396 1,424 1,505
Other income ........................................ -- -- 5,402 --
----------- ----------- ----------- -----------
Income (loss) before income taxes ................... 15,187 (5,121) 57,219 (17,370)
Provision for income taxes .......................... 3,037 500 11,495 1,151
----------- ----------- ----------- -----------
Net income (loss) ................................... $ 12,150 $ (5,621) $ 45,724 $ (18,521)
=========== =========== =========== ===========
Net income (loss) per share:
Basic ......................................... $ 0.23 $ (0.11) $ 0.86 $ (0.36)
=========== =========== =========== ===========
Diluted ....................................... $ 0.22 $ (0.11) $ 0.83 $ (0.36)
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic ......................................... 53,602 51,625 53,466 51,475
=========== =========== =========== ===========
Diluted ....................................... 54,302 51,625 54,785 51,475
=========== =========== =========== ===========
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,
2004 2003
---------- ----------
Cash flows from operating activities:
Net income (loss) ................................................................... $ 45,724 $ (18,521)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................................. 20,460 22,165
Gain on collection of a note receivable ....................................... (5,042) --
Gain on the sale of assets .................................................... (423) --
Other ......................................................................... 501 79
Changes in operating assets and liabilities:
Trade accounts receivable ................................................ (20,399) (6,683)
Inventories .............................................................. (22,546) (1,480)
Other current assets ..................................................... (5,475) (352)
Accrued expenses and other current liabilities ........................... 15,180 (2,761)
Accounts payable ......................................................... 384 3,727
Income taxes payable ..................................................... 14,720 --
---------- ----------
Net cash provided by (used in) operating activities ................................. 43,084 (3,826)
---------- ----------
Cash flows from investing activities:
Purchases of short-term and long-term available for sale investments ............ (143,586) (53,471)
Maturities and sales of short-term and long-term available for sale investments . 118,627 41,504
Purchases of property, plant and equipment ...................................... (13,983) (4,735)
Purchases of businesses, net of cash acquired ................................... -- (2,150)
Proceeds from sale of property, plant and equipment ............................. 1,294 70
Proceeds from collection of a note receivable ................................... 5,042 --
Other ........................................................................... 1,023 398
---------- ----------
Net cash used in investing activities ............................................... (31,583) (18,384)
---------- ----------
Cash flows from financing activities:
Proceeds from short-term borrowings ............................................. 67,157 48,223
Payments on short-term borrowings ............................................... (63,478) (48,628)
Principal payments on long-term debt ............................................ (2,139) (4,690)
Proceeds from issuance of common stock, net of issuance costs ................... 32,549 --
Proceeds from exercise of stock options and employee stock purchase plan ........ 3,952 4,394
---------- ----------
Net cash provided by (used in) financing activities ................................. 38,041 (701)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents ........................ (642) 1,191
---------- ----------
Increase (decrease) in cash and cash equivalents .................................... 48,900 (21,720)
Cash and cash equivalents at beginning of period .................................... 74,660 88,820
---------- ----------
Cash and cash equivalents at end of period .......................................... $ 123,560 $ 67,100
========== ==========
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, 2004
and for the three and nine months ended September 30, 2004 and 2003 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 consolidated 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 consolidated financial
statements should be read in conjunction with the December 31, 2003
audited consolidated financial statements and notes thereto included in
the MKS Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 11, 2004.
The preparation of these consolidated 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 consolidated 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, 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.
Certain amounts in prior periods have been reclassified to be
consistent with current period classifications.
2) Stock-Based Compensation
The Company has several stock-based employee compensation plans. The
Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense is recorded for
options issued to employees in fixed amounts 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.
6
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
The following table illustrates the effect on net income (loss) and net
income (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,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss):
Net income (loss) as reported ............................. $ 12,150 $ (5,621) $ 45,724 $ (18,521)
Deduct: Total stock-based employee compensation
expense determined under the fair-value-based
method for all awards, net of tax ...................... (6,125) (4,305) (18,075) (14,345)
---------- ---------- ---------- ----------
Pro forma net income (loss) ............................... $ 6,025 $ (9,926) $ 27,649 $ (32,866)
========== ========== ========== ==========
Basic net income (loss) per share:
Net income (loss) as reported ............................. $ 0.23 $ (0.11) $ 0.86 $ (0.36)
========== ========== ========== ==========
Pro forma net income (loss) ............................... $ 0.11 $ (0.19) $ 0.52 $ (0.64)
========== ========== ========== ==========
Diluted net income (loss) per share:
Net income (loss) as reported ............................. $ 0.22 $ (0.11) $ 0.83 $ (0.36)
========== ========== ========== ==========
Pro forma net income (loss) ............................... $ 0.11 $ (0.19) $ 0.50 $ (0.64)
========== ========== ========== ==========
There was 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, 2004 and 2003, as the
Company established a full valuation allowance for its net deferred tax
assets.
3) Goodwill and Intangible Assets
Intangible Assets
Acquired amortizable intangible assets consisted of the following as of
September 30, 2004:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Completed technology ....................... $ 72,528 $(36,891) $ 35,637
Customer relationships ..................... 6,640 (3,351) 3,289
Patents, trademarks, tradenames and other .. 12,394 (6,235) 6,159
-------- -------- --------
$ 91,562 $(46,477) $ 45,085
======== ======== ========
Acquired amortizable intangible assets consisted of the following as of
December 31, 2003:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Completed technology ....................... $ 72,563 $(27,654) $ 44,909
Customer relationships ..................... 6,640 (2,663) 3,977
Patents, trademarks, tradenames and other .. 12,394 (5,088) 7,306
-------- -------- --------
$ 91,597 $(35,405) $ 56,192
======== ======== ========
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, 2004 was $3,689,000 and
$11,073,000, respectively. 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. Estimated
amortization expense related to acquired intangibles for the remainder
of 2004 will be approximately $3,689,000 and for each of the five
succeeding fiscal years is as follows:
Year Amount
---- ------
2005 $13,864
2006 11,763
2007 11,129
2008 2,759
2009 1,205
Goodwill
The change in the carrying amount of goodwill during the three and nine
months ended September 30, 2004 was not material.
4) Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Numerator
Net income (loss) .......................................... $ 12,150 $ (5,621) $ 45,724 $ (18,521)
=========== =========== =========== ===========
Denominator
Shares used in net income (loss) per common share - basic .... 53,602 51,625 53,466 51,475
Effect of dilutive securities:
Stock options and employee stock purchase plan .......... 700 -- 1,319 --
----------- ----------- ----------- -----------
Shares used in net income (loss) per common share - diluted .. 54,302 51,625 54,785 51,475
=========== =========== =========== ===========
Net income (loss) per common share
Basic ..................................................... $ 0.23 $ (0.11) $ 0.86 $ (0.36)
=========== =========== =========== ===========
Diluted ................................................... $ 0.22 $ (0.11) $ 0.83 $ (0.36)
=========== =========== =========== ===========
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, which
totaled approximately 7,333,000 and 5,002,000 shares for the three and
nine months ended September 30, 2004, respectively, as the effect would
be anti-dilutive. All options outstanding during the three and nine
months ended September 30, 2003 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 10,318,000
and 7,898,000 shares of the Company's common stock outstanding as of
September 30, 2004 and 2003, respectively.
8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
5) Cash and Cash Equivalents and Investments
All highly liquid investments with an original maturity of three months
or less at the date of purchase are considered to be cash equivalents.
Cash and cash equivalents consists of the following:
September 30, December 31,
2004 2003
-------- -------
Cash and money market instruments ..................... $ 49,905 $60,869
Commercial paper ...................................... 43,748 12,645
Federal government and government agency obligations .. 6,482 876
Corporate obligations ................................. 23,425 270
-------- -------
$123,560 $74,660
======== =======
The fair value of short-term available-for-sale investments maturing
within one year consists of the following:
September 30, December 31,
2004 2003
------- -------
Certificates of deposit ................................ $ 1,612 --
Federal government and government agency obligations ... 60,006 $41,566
Commercial paper ....................................... 16,166 10,449
Corporate obligations .................................. 5,239 2,503
------- -------
$83,023 $54,518
======= =======
The fair value of long-term available-for-sale investments with
maturities greater than 1 year consists of the following:
September 30, December 31,
2004 2003
------- -------
Corporate obligations .................................. $ 9,219 $ 5,499
Federal government and government agency obligations ... 1,250 4,807
Commercial paper ....................................... -- 3,319
------- -------
$10,469 $13,625
======= =======
The appropriate classification of investments in securities is
determined at the time of purchase. Debt securities that the Company
does not have the intent and ability to hold to maturity are classified
as "available-for-sale" and are carried at fair value. Unrealized gains
and losses on securities classified as available-for-sale are included
in accumulated other comprehensive income in consolidated stockholders'
equity. Gross unrealized gains and gross unrealized losses on
available-for-sale investments were not material at September 30, 2004
and December 31, 2003, respectively.
9
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
6) Inventories
Inventories consist of the following:
September 30, December 31,
2004 2003
-------- --------
Raw material ................... $ 45,803 $ 36,834
Work in process ................ 23,472 15,786
Finished goods ................. 35,062 29,393
-------- --------
$104,337 $ 82,013
======== ========
7) Stockholders' Equity
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Net income (loss) ....................................... $ 12,150 $ (5,621) $ 45,724 $ (18,521)
Other comprehensive income, net of taxes of $0:
Changes in value of financial instruments designated
as hedges of currency ............................ 460 (1,186) 2,368 (1,024)
Foreign currency translation adjustment ............ 311 1,612 (1,041) 3,837
Unrealized gain (loss) on investments .............. 83 (48) 110 (61)
--------- --------- --------- ---------
Other comprehensive income, net of taxes ................ 854 378 1,437 2,752
--------- --------- --------- ---------
Total comprehensive income (loss) ....................... $ 13,004 $ (5,243) $ 47,161 $ (15,769)
========= ========= ========= =========
Common Stock Offering
On January 21, 2004, the Company issued 1,142,857 shares of its common
stock at $26.25 per share through a public offering. Proceeds of the
offering, net of underwriters' discount and offering expenses, were
approximately $28,251,000. On January 23, 2004, the underwriters
exercised their over-allotment option and therefore, the Company issued
an additional 171,429 shares of its common stock, which generated net
proceeds of approximately $4,298,000.
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
consolidated 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
consolidated statements of operations.
As a result of incurring significant operating losses from 2001 through
2003, the Company determined that it is more likely than not that its
deferred tax assets may not be realized. During the fourth quarter of
2002, the Company established a full valuation allowance for its net
deferred tax assets. At September 30, 2004 and December 31, 2003, the
Company continued to believe that it is more likely than not that all
of its deferred tax assets may not be realized. If the Company
generates sustained future taxable income against which these tax
attributes may be applied, some portion or all of the valuation
allowance would be reversed. If the valuation allowance were reversed,
a portion would be recorded as a reduction of goodwill, an additional
amount would be recorded as an increase to additional paid in capital
and the remainder would be recorded as a reduction to income tax
expense.
10
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
During the three and nine months ended September 30, 2004, the
Company's estimated U.S. federal tax liability has been offset by the
benefit from U.S. net operating loss carryforwards. The tax rate for
the three and nine months ended September 30, 2004 differs from the
U.S. statutory rate primarily due to the release of the valuation
allowance associated with the utilization of the prior federal net
operating loss. The provision for income taxes for the three and nine
months ended September 30, 2003 was comprised of tax expense from
foreign operations and state taxes.
9) Geographic, Product and Significant Customer Information
The Company operates in one segment for the development, manufacturing,
sales and servicing of instruments, components, subsystems and process
control solutions that measure, control, power and monitor critical
parameters of semiconductor and other advanced manufacturing processes.
The Company's chief decision-maker reviews operating results for the
entire Company to make decisions about allocating resources and
assessing performance.
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,
2004 2003 2004 2003
-------- -------- -------- --------
Geographic net sales
United States ... $ 93,052 $ 47,091 $280,971 $138,029
Japan ........... 21,181 14,196 63,979 40,369
Europe .......... 11,744 11,614 36,807 31,801
Asia ............ 13,674 8,667 42,464 25,314
-------- -------- -------- --------
$139,651 $ 81,568 $424,221 $235,513
======== ======== ======== ========
September 30, December 31,
2004 2003
------- -------
Long-lived assets:
United States ...... $68,907 $65,977
Japan .............. 5,814 5,978
Europe ............. 5,026 5,541
Asia ............... 3,907 3,349
------- -------
$83,654 $80,845
======= =======
The Company groups its products into three product groups. Net sales
for these product groups are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
Instruments and Control Systems ......... $ 65,310 $ 40,950 $191,976 $115,721
Power and Reactive Gas Products ......... 57,978 30,898 179,932 90,750
Vacuum Products ......................... 16,363 9,720 52,313 29,042
-------- -------- -------- --------
$139,651 $ 81,568 $424,221 $235,513
======== ======== ======== ========
11
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
The Company had one customer comprising 19% and 17% of net sales for
the three months ended September 30, 2004 and 2003, respectively, and
20% and 17% for the nine months ended September 30, 2004 and 2003,
respectively.
10) Commitments and Contingencies
On July 12, 2004, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against MKS in federal district court in Delaware, seeking
injunctive relief and damages for alleged infringement of a patent held
by Advanced Energy. On August 30, 2004, the Company filed its answer to
the complaint, denying Advanced Energy's claims and stating a
counterclaim seeking a declaratory judgment that the claims of the
patent are invalid, unenforceable and not infringed by the Company or
its products. Given that the litigation is in the early stages, the
Company cannot be certain of the outcome of this litigation, but does
plan to oppose the claims vigorously.
On January 12, 2004, Gas Research Institute ("GRI") brought suit in
federal district court in Illinois against the Company, On-Line
Technologies, Inc. ("On-Line") which we acquired in 2001, and another
defendant, Advanced Fuel Research, Inc. ("AFR"), for breach of
contract, misappropriation of trade secrets and related claims relating
to certain infra-red gas analysis technology allegedly developed under
a January 1995 Contract for Research between GRI and AFR. The
technology was alleged to have been incorporated into certain of the
Company's products. GRI made claims for damages, exemplary damages,
attorney's fees and costs and injunctive relief. The Company filed an
answer, denying liability and asserting various defenses to GRI's
claims. The Company also asserted a cross-claim against co-defendant
AFR, alleging misrepresentation, breach of contract and breach of
various duties owed by AFR, and alleging that in the event the Company
and On-Line are held liable to GRI, AFR would be required to reimburse,
indemnify, and hold harmless On-Line and the Company for any such
liability. On November 9, 2004, the parties entered into a settlement
agreement and the court dismissed the case, including cross-claims,
pursuant to the settlement.
On April 3, 2003, 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 the Company's subsidiary Applied Science and
Technology, Inc. ("ASTeX"). On May 14, 2003, MKS 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. The Company sought injunctive relief and
damages for Advanced Energy's infringement. These lawsuits are
unrelated to the Advanced Energy litigation described above. On
December 24, 2003, the Colorado court granted the Company's motion to
transfer Advanced Energy's Colorado Action to Delaware. In connection
with the jury trial, the parties agreed to present the jury with
representative claims from three of the five ASTeX patents. On July 23,
2004, the jury found that Advanced Energy infringed all three patents.
The Company has filed a motion for a permanent injunction, which is
pending before the court, and the parties are currently briefing
post-trial motions. The parties are also awaiting a trial date with
respect to damages and associated claims of the Company and certain
remaining affirmative defenses and related claims of Advanced Energy.
That trial date has not yet been scheduled.
On November 3, 1999, On-Line 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 and related claims. 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
appealed this decision to the federal circuit court of appeals. On
October 13, 2004, the federal circuit court of appeals reversed the
lower court's dismissal of certain claims in the case. Accordingly, the
court is expected to reinstate the case in federal district court in
Connecticut.
12
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
The Company is subject to other legal proceedings and claims, which
have arisen in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company's results of
operations, financial condition or cash flows.
11) Restructuring, Asset Impairment and Other Charges
As a result of its various acquisitions from 2000 through 2002 and the
downturn in the semiconductor capital equipment market which began in
2000, the Company had redundant activities and excess manufacturing
capacity and office space. Therefore in 2002, and continuing through
the first quarter of 2004, the Company implemented restructuring
activities to rationalize manufacturing operations and reduce operating
expenses. As a result, in 2002 the Company took a restructuring charge
of $2,726,000, which consisted of $1,228,000 related to exiting leased
facilities, $631,000 of severance cost related to 225 terminated
employees and an asset impairment charge of $867,000.
In the second quarter of 2003, the Company recorded restructuring,
asset impairment and other charges of $304,000 related to the
consolidation of previous acquisitions. 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.
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.
During the first quarter of 2004, the Company completed its
restructuring activities related to the consolidation of operations
from acquired companies when it exited an additional leased facility
and recorded a restructuring charge of $437,000.
The following table sets forth the activity in the restructuring
accruals from December 31, 2003 to September 30, 2004:
Workforce Facility
Reductions Consolidations Total
---------- -------------- -------
Balance as of December 31, 2003 .................. $ 199 $ 1,831 $ 2,030
Restructuring provision in first quarter ......... -- 437 437
Charges utilized in first quarter ................ (15) (226) (241)
------- ------- -------
Balance as of March 31, 2004 ..................... 184 2,042 2,226
Charges utilized in second quarter ............... (95) (276) (371)
------- ------- -------
Balance as of June 30, 2004 ...................... 89 1,766 1,855
Charges utilized in third quarter ................ -- (121) (121)
------- ------- -------
Balance as of September 30, 2004 ................. $ 89 $ 1,645 $ 1,734
======= ======= =======
The remaining accruals for workforce reductions are expected to be paid
by June of 2005. The facilities consolidation charges will be paid over
the respective lease terms, the latest of which ends in 2008. The
accruals for severance costs and lease payments are recorded in Other
accrued expenses and Other liabilities in the consolidated balance
sheets.
13
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
12) 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's estimates, revisions to
the estimated warranty liability would be required.
Product warranty activity for the nine months ended September 30, 2004
and 2003 was as follows:
2004 2003
------- -------
Balance at beginning of year ........................................ $ 5,804 $ 6,921
Provisions for product warranties during the period ................. 6,473 2,099
Direct charges to the warranty liability during the period .......... (4,429) (3,279)
------- -------
Balance as of September 30 .......................................... $ 7,848 $ 5,741
======= =======
13) Other Income
During the second quarter of 2004, the Company received $5,042,000
related to the collection of a note receivable that had been written
off in the third quarter of 2002. This amount was recorded as a gain
and included in Other income in the consolidated statements of
operations for the nine months ended September 30, 2004.
14) Short-term Borrowings
On August 3, 2004, the Company entered into an unsecured short-term
LIBOR based loan agreement with a bank to be utilized primarily by its
Japanese subsidiary for short-term liquidity purposes. The credit line,
which expires on August 1, 2005, provides for the Company to borrow in
multiple currencies of up to an equivalent of $35,000,000 U.S. dollars.
At September 30, 2004, the Company had outstanding borrowings of 1.1
billion Yen or $9,982,000 U.S. dollars, payable on demand, at an
interest rate of 1.3%.
Additionally, the Company's Japanese subsidiary has lines of credit and
short-term borrowing arrangements with various financial institutions
which provided for aggregate borrowings as of September 30, 2004 and
December 31, 2003 of up to $28,131,000 and $28,003,000, respectively,
which generally expire and are renewed at one to six month intervals.
At September 30, 2004 and December 31, 2003, total borrowings
outstanding under these arrangements were $10,889,000 and $17,736,000,
respectively, at interest rates ranging from 1.24% to 1.29% and 1.23%
to 1.50%, respectively.
14
MKS INSTRUMENTS, INC.
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 in the section in
this Report entitled "Factors That May Affect Future Results."
OVERVIEW
We are a leading worldwide provider of instruments, components,
subsystems and process control solutions that measure, control, power and
monitor critical parameters of semiconductor and other advanced manufacturing
processes.
We are managed as one operating segment which is organized around 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 and thin film coatings for diverse markets such as
flat panel displays, optical and magnetic storage media, architectural glass,
and electro-optical products. We also provide technologies for 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, 2004 and the full year
ended December 31, 2003, we estimate that approximately 77% and 69% of our net
sales, respectively, were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers.
During the latter half of 2003 and continuing into the first half of
2004, the semiconductor capital equipment market experienced a market upturn
after almost a three-year downturn. Starting in the fourth quarter of 2003, we
experienced an increase in orders and shipments and as a result have returned to
profitability. In the third quarter of 2004 our orders and sales declined from
the second quarter of 2004. We currently expect our fourth quarter 2004 sales to
be lower than the third quarter of 2004. The semiconductor capital equipment
industry has been very cyclical, and we cannot determine how long this trend
will last.
A portion of our sales is to operations in international markets.
International sales include sales by our foreign subsidiaries, but exclude
direct export sales. For the nine months ended September 30, 2004 and full year
ended December 31, 2003, international sales accounted for approximately 34% and
41% of net sales, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make judgments, assumptions and
estimates that affect the amounts reported. There have been no material changes
in our critical accounting policies since December 31, 2003. See the discussion
of critical accounting policies in our Annual Report on Form 10-K for the year
ended December 31, 2003.
15
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
statements of operations data.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------ ------ ------ ------
Net sales ............................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................................ 60.2 66.0 59.6 65.8
------ ------ ------ ------
Gross profit ......................................... 39.8 34.0 40.4 34.2
Research and development ............................. 10.2 14.8 10.2 14.7
Selling, general and administrative .................. 16.4 21.0 15.5 22.2
Amortization of acquired intangible assets ........... 2.6 4.4 2.6 4.7
Restructuring, asset impairment and other charges .... -- 0.4 0.1 0.3
------ ------ ------ ------
Income (loss) from operations ........................ 10.6 (6.6) 12.0 (7.7)
Interest income, net ................................. 0.3 0.3 0.2 0.3
Other income ......................................... -- -- 1.3 --
------ ------ ------ ------
Income (loss) before income taxes .................... 10.9 (6.3) 13.5 (7.4)
Provision for income taxes ........................... 2.2 0.6 2.7 0.5
------ ------ ------ ------
Net income (loss) .................................... 8.7% (6.9)% 10.8% (7.9)%
====== ====== ====== ======
Net Sales. Net sales for the three months ended September 30, 2004
increased $58.1 million or 71% to $139.7 million from $81.6 million for the
three months ended September 30, 2003. The increase was due mainly to stronger
worldwide demand from our semiconductor capital equipment manufacturer and
semiconductor device manufacturer customers, which increased $50.6 million or
92% compared to the same period in the prior year. International net sales were
$46.6 million for the three months ended September 30, 2004 or 33.4% of net
sales compared to $34.5 million for the same period of 2003 or 42.3% of net
sales.
Net sales for the nine months ended September 30, 2004 increased $188.7
million or 80% to $424.2 million from $235.5 million for the nine months ended
September 30, 2003. The increase was due mainly to stronger worldwide demand
from our semiconductor capital equipment manufacturer and semiconductor device
manufacturer customers, which increased $172.3 million or 110% compared to the
same period in the prior year. International net sales were $143.3 million for
the nine months ended September 30, 2004 or 33.8% of net sales compared to $97.5
million for the same period of 2003 or 41.4% of net sales.
Gross Profit. Gross profit as a percentage of net sales increased to
39.8% for the three months ended September 30, 2004 from 34.0% for the three
months ended September 30, 2003. The increase was mainly due to our overhead
costs increasing at a lesser rate than the increase in our net sales, resulting
in 3.9 percentage points of margin improvement. The additional favorable change
in gross margin of approximately 1.9 percentage points is mostly related to the
gradual transition to lower cost material and manufacturing sources, partially
offset by unfavorable product mix.
For the nine months ended September 30, 2004 gross profit increased to
40.4% from 34.2% for the nine months ended September 30, 2003. The increase was
mainly due to our overhead costs increasing at a lesser rate than the increase
in our net sales, resulting in 5.0 percentage points of margin improvement. The
additional favorable change in gross margin of approximately 1.2 percentage
points is mostly related to the gradual transition to lower cost material and
manufacturing sources, partially offset by unfavorable product mix.
Research and Development. Our research and development is primarily
focused on developing and improving our instruments, components, subsystems and
process control solutions that measure, control, power and monitor critical
parameters of semiconductor and other advanced manufacturing processes.
16
We have hundreds of products and our research and development efforts
primarily consist of a large number of projects related to these products, none
of which is in and of itself material to us. Current projects typically have a
duration of 12 to 30 months depending upon whether the product is an enhancement
of existing technology or a new product. Our current initiatives include
projects to enhance the performance characteristics of older products, to
develop new products and to integrate various technologies into subsystems.
These projects support in large part the transition in the semiconductor
industry to larger wafer sizes and smaller integrated circuit geometries, which
require more advanced process control technology. Research and development
expenses consist primarily of salaries and related expense for personnel engaged
in research and development, fees paid to consultants, material costs for
prototypes and other expenses related to the design, development, testing and
enhancement of our products.
Research and development expense for the three months ended September
30, 2004 increased $2.2 million or 18% to $14.2 million or 10.2% of net sales
from $12.0 million or 14.8% of net sales for the three months ended September
30, 2003. The increase was primarily due to increased compensation expense of
$1.4 million as a result of higher staffing levels, restored compensation
levels, salary increases and incentive compensation, $0.4 million of higher
project material expenses and $0.4 million of higher consulting expenses.
Research and development expense for the nine months ended September
30, 2004 increased $8.4 million or 24% to $43.2 million or 10.2% of net sales
from $34.7 million or 14.7% of net sales for the nine months ended September 30,
2003. The increase was primarily due to increased compensation expense of $4.6
million as a result of higher staffing levels, restored compensation levels,
salary increases and incentive compensation, $2.6 million of higher project
material expenses, mainly related to our power and reactive gas products, and
$1.0 million of increased consulting costs.
We believe that the continued investment in research and development
and ongoing development of new products are essential to the expansion of our
markets, and expect to continue to make significant investment in research and
development activities. We are subject to risks if products are not developed in
a timely manner, due to rapidly changing customer requirements and competitive
threats from other companies and technologies. Our success primarily depends on
our products being designed into new generations of equipment for the
semiconductor industry. We develop products that are technologically current so
that they are positioned to be chosen for use in each successive generation of
semiconductor capital equipment. If our products are not chosen to be designed
into our customers' products, our net sales may be reduced during the lifespan
of those products.
Selling, General and Administrative. Selling, general and
administrative expenses for the three months ended September 30, 2004 increased
$5.9 million or 34% to $23.0 million or 16.4% of net sales from $17.1 million or
21.0% of net sales for the three months ended September 30, 2003. The increase
was primarily due to higher compensation expense of $2.3 million as a result of
restored compensation levels, salary increases, incentive compensation and
higher sales commissions, $1.3 million in higher legal fees related mainly to
our patent infringement litigation against Advanced Energy, $0.9 million
increase in consulting fees primarily for information technology ("IT") related
services, and $0.7 million increase in professional fees primarily related to
compliance with the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley").
Selling, general and administrative expenses for the nine months ended
September 30, 2004 increased $13.4 million or 26% to $65.8 million or 15.5% of
net sales from $52.4 million or 22.2% of net sales for the nine months ended
September 30, 2003. The increase was primarily due to higher compensation
expense of $7.4 million as a result of restored compensation levels, salary
increases, incentive compensation and higher sales commissions, $2.7 million in
higher legal fees related mainly to our patent infringement litigation against
Advanced Energy, $1.0 million increase in consulting fees primarily for IT
related services, and $1.0 million increase in professional fees primarily
related to compliance with Sarbanes-Oxley.
Amortization of Acquired Intangible Assets. Amortization expense of
$3.7 million and $11.1 million for the three and nine months ended September 30,
2004, respectively, represents the amortization of the identifiable intangibles
resulting from our completed acquisitions. Amortization of identifiable
intangibles was $3.6 million and $11.0 million for the three and nine months
ended September 30, 2003, respectively.
17
Restructuring, Asset Impairment and Other Charges. As a result of our
various acquisitions from 2000 through 2002 and the downturn in the
semiconductor capital equipment market which began in 2000, we had redundant
activities and excess manufacturing capacity and office space. Therefore in
2002, and continuing through the first quarter of 2004, we implemented
restructuring activities to rationalize manufacturing operations and reduce
operating expenses. As a result, in 2002 we took a restructuring charge of $2.7
million which consisted of $1.2 million related to exiting leased facilities,
$0.6 million of severance cost related to 225 terminated employees and an asset
impairment charge of $0.9 million.
During the three months ended June 30, 2003, we recorded restructuring,
asset impairment and other charges of $0.3 million related to our restructuring
activities. The charges 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.
During the three months ended September 30, 2003, we recorded
restructuring, asset impairment and other charges of $0.3 million related to our
restructuring activities. The charges 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.
During the three months ended March 31, 2004, we completed our
restructuring activities related to the consolidation of operations from
acquired companies when we exited an additional leased facility and recorded a
restructuring charge of $0.4 million.
The combined restructuring initiatives are expected to generate annual
savings of approximately $12.6 million mainly through reduced payroll and
facility related costs. We began to realize savings related to the restructuring
initiatives in the fourth quarter of 2002. For the year ending December 31,
2004, we expect to realize approximately $11.8 million of annualized savings.
The remaining expected annualized savings should be realized in 2005.
The following table sets forth the activity in the restructuring
accruals from December 31, 2003 to September 30, 2004:
Workforce Facility
Reductions Consolidations Total
---------- -------------- -----
(in thousands)
Balance as of December 31, 2003 ............. $ 199 $ 1,831 $ 2,030
Restructuring provision in first quarter .... -- 437 437
Charges utilized in first quarter ........... (15) (226) (241)
------- ------- -------
Balance as of March 31, 2004 ................ 184 2,042 2,226
Charges utilized in second quarter .......... (95) (276) (371)
------- ------- -------
Balance as of June 30, 2004 ................. 89 1,766 1,855
Charges utilized in third quarter ........... -- (121) (121)
------- ------- -------
Balance as of September 30, 2004 ............ $ 89 $ 1,645 $ 1,734
======= ======= =======
The remaining cash outlays at September 30, 2004 of $1.7 million
consist primarily of terminated lease obligations, the latest term of which
expires in 2008. These payments will be made out of current working capital.
Interest Income, Net. During the three and nine months ended September
30, 2004, we generated net interest income of $0.4 million and $1.0 million,
respectively, which are comparable to the $0.2 million and $0.8 million for the
three and nine months ended September 30, 2003, respectively. The increase in
the three and nine months ended September 30, 2004 is mainly related to higher
investment balances in 2004.
18
Other Income. Other income of $5.4 million for the nine months ended
September 30, 2004 consisted primarily of a gain of $5.0 million related to the
collection of a note receivable in the second quarter of 2004 that was written
off in 2002.
Provision for Income Taxes. As a result of incurring significant
operating losses from 2001 through 2003, 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. If we generate sustained future taxable income against which these
tax attributes may be applied, some portion or all of the valuation allowance
would be reversed. If the valuation allowance were reversed, a portion would be
recorded as a reduction of goodwill, an additional amount would be recorded as
an increase to additional paid-in capital, and the remainder would be recorded
as a reduction to income tax expense.
We recorded a provision for income taxes of $3.0 million and $11.5
million for the three and nine months ended September 30, 2004, respectively, as
compared to a provision of $0.5 million and $1.2 million for the three and nine
months ended September 30, 2003, respectively. During the three and nine months
ended September 30, 2004, our estimated U.S. federal tax liability has been
offset by the benefit from U.S. net operating loss carryforwards. The tax rate
for the three and nine months ended September 30, 2004 differs from the U.S.
statutory rate primarily due to the release of the valuation allowance
associated with the utilization of the prior federal net operating loss. The
provision for income tax for the three and nine months ended September 30, 2003
was comprised of tax expense from foreign operations and state taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term marketable securities totaled $206.6
million at September 30, 2004 compared to $129.2 million at December 31, 2003.
This increase is mainly due to net proceeds of approximately $32.5 million from
our public offering of common stock in the first quarter of 2004 and $43.1
million of cash generated from operations during the nine months ended September
30, 2004. The primary driver in our current and anticipated future cash flows is
and will continue to be cash generated from operations, consisting mainly of our
net income and changes in operating assets and liabilities. In periods when our
sales are growing, higher sales to customers will result in increased trade
receivables and inventories will generally increase as we build products for
future sales. This may result in lower cash generated from operations.
Conversely, in periods when our sales are declining our trade accounts
receivable and inventory balances will generally decrease, resulting in
increased cash from operations.
Net cash provided by operating activities of $43.1 million for the nine
months ended September 30, 2004 resulted mainly from net income of $45.7
million, non-cash depreciation and amortization expenses of $20.5 million and an
increase in operating liabilities of $30.3 million, partially offset by an
increase in operating assets of $48.4 million and a $5.0 million gain related to
the collection of a previously written off note receivable. The increase in
operating assets consisted mainly of an increase in accounts receivable of $20.4
million due to the higher shipments in the third quarter of 2004 of $139.7
million as compared to the fourth quarter of 2003 of $101.8 million, partially
offset by a decrease in our days sales outstanding from 63 days for the nine
months ended September 30, 2003 to 55 days for the nine months ended September
30, 2004 as a result of improved cash collections, and an increase in inventory
of $22.5 million as a result of higher production volumes in 2004 to support the
higher revenues. The increase in operating liabilities consisted primarily of an
increase in accrued expenses and other current liabilities of $15.2 million
resulting mainly from increased accrued compensation, warranty reserves and
non-income related tax accruals, as well as a $14.7 million increase in income
tax payable. Net cash used in operating activities of $3.8 million for the nine
months ended September 30, 2003 resulted mainly from a 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.
19
Net cash used in investing activities of $31.6 million for the nine months
ended September 30, 2004 resulted from the net purchases of $25.0 million of
available for sale investments mainly from the net proceeds received from our
stock offering in the first quarter, and the purchase of property, plant and
equipment of $14.0 million for investments in manufacturing equipment and for
consolidation of our IT infrastructure, partially offset by proceeds of $5.0
million received from the collection of a note receivable that was previously
written off. Net cash used in investing activities of $18.4 million for the nine
months ended September 30, 2003 consisted mainly of net purchases of short-term
and long-term available for sale investments of $12.0 million, purchases of
property, plant and equipment of $4.7 million and $2.2 million for the purchase
of a business.
Net cash provided by financing activities of $38.0 million for the nine
months ended September 30, 2004 consisted primarily of $32.5 million in net
proceeds received from our common stock offering in the first quarter, $4.0
million in proceeds from the exercise of stock options and purchases under the
employee stock purchase plan, and net proceeds of $3.7 million from short-term
borrowings, partially offset by $2.1 million of principal payments on long-term
debt. Net cash used in financing activities of $0.7 million for the nine months
ended September 30, 2003 consisted of principal payments of $4.7 million on
long-term debt and capital lease obligations offset by proceeds from the
exercise of stock options of $4.4 million.
On August 3, 2004, we entered into an unsecured short-term LIBOR based
loan agreement with a bank to be utilized primarily by our Japanese subsidiary
for short-term liquidity purposes. The credit line, which expires on August 1,
2005, provides for us to borrow in multiple currencies of up to an equivalent
$35.0 million. At September 30, 2004, we had outstanding borrowings of
$10.0 million, payable on demand, at an interest rate of 1.3%.
We believe that our current working capital, together with the cash
anticipated to be generated from operations and funds available from existing
credit facilities, will be sufficient to satisfy our estimated working capital
and planned capital expenditure requirements through at least the next twelve
months.
As of September 30, 2004, we had $59.4 million of purchase obligations
compared to $50.2 million at December 31, 2004. The increase is mainly due to
inventory purchase commitments as a result of increased production volumes in
2004. The majority of the outstanding inventory purchase commitments of
approximately $54.9 million at September 30, 2004 are to be purchased within the
next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any financial partnerships with unconsolidated entities,
such as entities often referred to as structured finance, special purpose
entities or variable interest entities which are often established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. Accordingly, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had such relationships.
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 77% of our net sales for the nine months
ended September 30, 2004 and 69%, 70% and 64% of our net sales for the years
ended December 31, 2003, 2002 and 2001, 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.
20
Historically, the semiconductor market has been highly cyclical and has
experienced periods of overcapacity, resulting in significantly reduced demand
for capital equipment. In 2001, 2002 and the first half of 2003, we experienced
a significant reduction in demand from OEM customers, and lower gross margins
due to reduced absorption of manufacturing overhead. In addition, many
semiconductor manufacturers have operations and customers in Asia, a region that
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 OF OUR COMMON
STOCK.
A substantial portion of our shipments occurs 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.
In addition, our quarterly operating results may be adversely affected
due to charges incurred in a particular quarter, for example, relating to
inventory obsolescence, bad debt or asset impairments.
As a result of the factors discussed above, it is likely that we may in
the future experience quarterly or annual fluctuations and that, in one or more
future quarters, our operating results may fall below the expectations of public
market analysts or investors. In any such event, the price of our common stock
could decline significantly.
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 50% of our net sales
for the nine months ended September 30, 2004, and 42%, 49% and 39% of our net
sales for the years ended December 31, 2003, 2002 and 2001, 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 the nine months ended September 30, 2004 and years ended
December 31, 2003, 2002 and 2001, one customer, Applied Materials, accounted for
approximately 20%, 18%, 23% and 18%, 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.
21
Attempts to lessen the adverse effect of any loss or reduction of net
sales 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
AND COSTLY TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR
DIVERT MANAGEMENT ATTENTION.
We made several acquisitions in the years 2000 through 2002. 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. 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 incur substantial
expenses and devote 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 prior acquisitions and
any future acquisitions may not ultimately help us achieve our strategic goals
and may pose other risks to us.
As a result of our previous acquisitions, we have added several
different decentralized operating and 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. In order to increase efficiency
and operating effectiveness and improve corporate visibility into our
decentralized operations, we are currently in the planning and design phase of
implementing a new worldwide ERP system. We expect to implement the ERP system
by converting our operations in phases over the next few years, beginning in the
first half of 2005. Although we have a detailed plan to accomplish the ERP
implementation, we may risk potential disruption of our operations during the
conversion periods, the implementation could require significantly more
management time than currently estimated and we could incur significantly higher
implementation costs than currently estimated.
AN INABILITY TO CONVINCE SEMICONDUCTOR DEVICE MANUFACTURERS TO SPECIFY THE USE
OF OUR PRODUCTS TO OUR CUSTOMERS, THAT 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.
22
IF OUR PRODUCTS ARE NOT DESIGNED INTO SUCCESSIVE 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 generation of
semiconductor capital equipment. If customers do not choose our products, 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. 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.
WE OPERATE 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 resources 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 design 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.
23
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
the nine months ended September 30, 2004 and each of the years ended December
31, 2003, 2002 and 2001. International sales accounted for approximately 34% of
our net sales for the nine months ended September 30, 2004 and 41%, 36% and 31%
of net sales for the years ended December 31, 2003, 2002 and 2001, 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 OPERATING
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, most sales made by our
foreign subsidiaries are denominated in the currency of the
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country in which these products are sold and the currency they receive in
payment for such sales could be less valuable at the time of receipt as a result
of exchange rate fluctuations. We enter into forward exchange contracts and
local currency purchased options to reduce currency exposure arising from
intercompany sales of inventory. However, we cannot be certain that our efforts
will be adequate to protect us against significant currency fluctuations or that
such efforts will not expose us to additional exchange rate risks.
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 December 31, 2003, we owned 194 U.S. patents, 123 foreign patents
and had 84 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 and defending 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.
We may need to expend significant time and expense to protect our
intellectual property regardless of the validity or successful outcome of such
intellectual property claims. If we lose any litigation, we may be required to
seek licenses from others or change, stop manufacturing or stop selling some of
our products.
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.
25
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.
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. IF WE FAIL TO COMPLY WITH THESE
REGULATIONS, OUR BUSINESS COULD BE HARMED.
We are subject to federal, state, local and foreign regulations,
including environmental regulations and regulations relating to the design and
operation of our products. We must ensure that the affected products meet a
variety of 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. In addition, the European Union has
issued directives relating to future regulation of recycling and hazardous
substances, which may be applicable to our products. We must comply with these
directives in order to ship affected products 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 30, 2004, John R. Bertucci, our Chairman and Chief
Executive Officer and certain members of his family, in the aggregate,
beneficially owned approximately 18% of our outstanding common stock. As a
result, these stockholders, acting together, are able to exert substantial
influence over our actions. 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 and its wholly owned subsidiary, Astec America, Inc.
Emerson owned approximately 19% of our outstanding common stock as of September
30, 2004, and James G. Berges, the President and a director of Emerson, is a
member of our board of directors. Accordingly, Emerson is able to exert
substantial influence over our actions.
26
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 US.
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 price 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 us. 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 us.
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 11, 2004. We enter into 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, 2003.
We have performed an analysis to assess the potential financial effect
of reasonably possible near-term changes in interest and foreign currency
exchange rates. Based upon our analysis, the effect of such rate changes in not
expected to be material to our financial condition, results of operations or
cash flows.
ITEM 4. CONTROLS AND PROCEDURES.
a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our principal executive
officer and principal financial officer, has evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on this evaluation, our principal executive officer and principal
financial officer concluded that these disclosure controls and procedures are
effective and designed to ensure that the information required to be disclosed
in our reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the requisite time periods.
While our disclosure controls and procedures provide reasonable
assurance that the appropriate information will be available on a timely basis,
this assurance is subject to limitations inherent in any control system, no
matter how well designed and administered.
b) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting
identified in connection with the evaluation of our internal control performed
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
As a result of various 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 of our operations.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 12, 2004, Advanced Energy Industries, Inc. ("Advanced Energy")
filed suit against us in federal district court in Delaware, seeking injunctive
relief and damages for alleged infringement of a patent held by Advanced Energy.
On August 30, 2004, we filed our answer to the complaint, denying Advanced
Energy's claims and stating a counterclaim seeking a declaratory judgment that
the claims of the patent are invalid, unenforceable and not infringed by us or
our products. Given that the litigation is in the early stages, we cannot be
certain of the outcome of this litigation, but plan to oppose the claims
vigorously.
On January 12, 2004, Gas Research Institute ("GRI") brought suit in
federal district court in Illinois against us, On-Line Technologies, Inc.
("On-Line") which we acquired in 2001, and another defendant, Advanced Fuel
Research, Inc. ("AFR"), for breach of contract, misappropriation of trade
secrets and related claims relating to certain infra-red gas analysis technology
allegedly developed under a January 1995 Contract for Research between GRI and
AFR. The technology was alleged to have been incorporated into certain of our
products. GRI made claims for damages, exemplary damages, attorney's fees and
costs and injunctive relief. We filed an answer, denying liability and asserting
various defenses to GRI's claims. We also asserted a cross-claim against
co-defendant AFR, alleging misrepresentation, breach of contract and breach of
various duties owed by AFR, and alleging that in the event we and On-Line are
held liable to GRI, AFR would be required to reimburse, indemnify, and hold
harmless On-Line and us for any such liability. AFR filed a motion to dismiss
the action for lack of personal jurisdiction or, in the alternative, to transfer
the case to another federal court, which motion was denied in August 2004. On
November 9, 2004, the parties entered into a settlement agreement and the court
dismissed the case, including cross-claims, pursuant to the settlement.
On April 3, 2003, Advanced Energy filed suit against us 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
our subsidiary Applied Science and Technology, Inc. ("ASTeX"). On May 14, 2003,
we 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. We sought injunctive relief and damages for Advanced
Energy's infringement. These lawsuits are unrelated to the Advanced Energy
litigation described above. On December 24, 2003, the Colorado court granted our
motion to transfer Advanced Energy's Colorado Action to Delaware. In connection
with the jury trial, the parties agreed to present the jury with representative
claims from three of the five ASTeX patents. On July 23, 2004, the jury found
that Advanced Energy infringed all three patents. We have filed a motion for a
permanent injunction, which is pending before the court and the parties are
currently briefing post-trial motions in that case. The parties are also
awaiting a trial with respect to damages and associated claims of MKS and
certain remaining affirmative defenses and related claims of Advanced Energy.
That trial date has not yet been scheduled.
On November 3, 1999, On-Line 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 and
related claims. 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. We
appealed this decision to the federal circuit court of appeals. On October 13,
2004, the federal circuit court of appeals reversed the lower court's dismissal
of certain claims in the case. Accordingly, the court is expected to reinstate
the case in federal district court in Connecticut.
We are subject to other legal proceedings and claims, which have arisen
in the ordinary course of business.
In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on our results of operations,
financial condition or cash flows.
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ITEM 6. EXHIBITS.
Exhibit No. Exhibit Description
----------- -------------------
10.1* Form of Nonstatutory Stock Option Agreement to be
granted under the 2004 Stock Incentive Plan.
10.2+ * Form of 2004 Management Incentive Bonus Program
10.3 Optional Advanced Demand Grid Note dated August 3,
2004 in favor of HSBC Bank USA.
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
- ----------
* Management contract or compensatory plan arrangement.
+ Confidential treatment requested as to certain portions which
portions have been separately filed with the Securities and
Exchange Commission.
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 9, 2004 By: /s/ Ronald C. Weigner
------------------------------------------
Ronald C. Weigner
Vice President and Chief Financial Officer
(Principal Financial Officer)
29