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MKS Instruments Reports Fourth Quarter and Full Year 2018 Financial Results

Jan 29, 2019
  • 2018 was another record year in revenue and GAAP and Non-GAAP EPS
  • Total revenue increased 8% in 2018, compared to 2017, to a record $2.1 billion
  • Revenue from advanced markets increased 14% to $931 million in 2018, compared to 2017
  • Semiconductor revenue increased 4% to $1.14 billion in 2018, compared to 2017

ANDOVER, Mass., Jan. 29, 2019 (GLOBE NEWSWIRE) -- MKS Instruments, Inc. (Nasdaq: MKSI), a global provider of technologies that enable advanced processes and improve productivity, today reported fourth quarter and full year 2018 financial results.

GAAP Financial Results

    Q4     Full Year  
    2018     2017     2018     2017  
Net revenues ($ millions)   $ 461     $ 512     $ 2,075     $ 1,916  
Operating margin     20.4 %     23.4 %     23.8 %     21.2 %
Net income ($ millions)   $ 72     $ 78     $ 393     $ 339  
Diluted EPS   $ 1.32     $ 1.41     $ 7.14     $ 6.16  

Non-GAAP Financial Results

    Q4     Full Year  
    2018     2017     2018     2017  
Net revenues ($ millions)   $ 461     $ 512     $ 2,075     $ 1,916  
Operating margin     23.7 %     25.9 %     26.3 %     24.6 %
Net earnings ($ millions)   $ 84     $ 95     $ 430     $ 328  
Diluted EPS   $ 1.54     $ 1.71     $ 7.83     $ 5.96  

“We are pleased to report another year of record results despite semiconductor market headwinds in the second half of the year,” said Gerald Colella, Chief Executive Officer.  Mr. Colella added, “Our ability to consistently deliver sustainable and profitable growth through market cycles reflects the benefits of our diversification strategy as well as our cost discipline, flexible manufacturing capabilities, and continued market share gains.”

“During 2018, we recorded 8% revenue growth, a 170 basis point improvement in non-GAAP operating margins and a 31% increase in non-GAAP earnings per share,” said Seth Bagshaw, Senior Vice President and Chief Financial Officer.  Mr. Bagshaw added “This performance reflects the strong operating leverage inherent in our model as well as balanced exposure to a variety of end markets, and continued cost structure improvements.” 

Fourth Quarter 2018 Financial Results
Revenue was $461 million, a decrease of 5% from $487 million in the third quarter of 2018 and a decrease of 10% from $512 million in the fourth quarter of 2017.

Fourth quarter net income was $72 million, or $1.32 per diluted share, compared to net income of $93 million, or $1.70 per diluted share in the third quarter of 2018, and $78 million, or $1.41 per diluted share in the fourth quarter of 2017.

Non-GAAP net earnings, which exclude special charges and credits, were $84 million, or $1.54 per diluted share, compared to $103 million, or $1.88 per diluted share, in the third quarter of 2018, and $95 million, or $1.71 per diluted share, in the fourth quarter of 2017.

Sales to semiconductor customers were $235 million, a decrease of 10% compared to the third quarter of 2018, and sales to Advanced Markets were $226 million, consistent with the third quarter of 2018.

Sales in the Vacuum and Analysis Division were $258 million, a decrease of 10% compared to the third quarter of 2018, and Sales in the Light and Motion Division were $203 million, an increase of 1% from the third quarter of 2018.

Additional Financial Information
The Company had $718 million in cash and short-term investments and $348 million of Term Loan Debt as of December 31, 2018.  During the fourth quarter, the Company also paid a dividend of $10.8 million or $0.20 per diluted share.

Full Year and 2018 Financial Results
Sales were a record $2.1 billion, an increase of 8% from $1.9 billion in 2017, driven by strong sales to both semiconductor customers, specifically during the first half of the year, as well as customers in our Advanced Markets, which include industrial manufacturing, life and health sciences and research and defense markets. Sales to semiconductor customers were $1.1 billion, an increase of 4% compared to 2017, while sales to Advanced Markets were $931 million, an increase of 14% compared to 2017.

Sales in the Vacuum and Analysis Division were $1.3 billion, an increase of 4% compared to 2017, driven by very strong sales to semiconductor customers during the first half of 2018 and sales to our Advanced Markets.

Sales in the Light and Motion Division were $814 million, an increase of 15% from $709 million in 2017, driven by both sales to semiconductor customers as well as industrial manufacturing customers.

First Quarter 2019 Outlook
Based on current business levels, the Company expects that revenue in the first quarter of 2019 could range from $400 million to $440 million.  At these volumes, GAAP net income could range from $0.78 to $1.02 per diluted share and Non-GAAP net earnings could range from $0.95 to $1.18 per diluted share.  The financial guidance excludes the effects of our announced acquisition of Electro Scientific Industries, Inc. (Nasdaq: ESIO) which is expected to close on February 1, 2019.

Conference Call Details
A conference call with management will be held on Wednesday, January 30, 2019 at 8:30 a.m. (Eastern Time). To participate in the conference call, please dial (877) 212-6076 for domestic callers and (707) 287-9331 for international callers, and an operator will connect you.  Participants will need to provide the operator with the Conference ID of 6575625, which has been reserved for this call.  A live and archived webcast of the call will be available on the Company’s website at www.mksinst.com, along with the Company's earnings press release and supplemental financial information.

About MKS Instruments
MKS Instruments, Inc. is a global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for our customers.  Our products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, power, reactive gas generation, vacuum technology, lasers, photonics, sub-micron positioning, vibration control and optics.  We also provide services relating to the maintenance and repair of our products, installation services and training.  Our primary served markets include semiconductor, industrial technologies, life and health sciences, research and defense. Additional information can be found at www.mksinst.com.

Use of Non-GAAP Financial Results
This release includes measures that are not in accordance with U.S. generally accepted accounting principles (“Non-GAAP measures”). Non-GAAP measures exclude amortization of acquired intangible assets, asset impairments, costs associated with completed and announced acquisitions, acquisition integration costs, restructuring charges, certain excess and obsolete inventory charges, fees and expenses related to the re-pricings of our term loan, amortization of debt issuance costs, environmental costs related to an acquisition, costs associated with the sale of a business, the one-time tax effects of the 2017 Tax Cut and Jobs Act, windfall tax benefits from stock-based compensation, accrued taxes on subsidiary distributions, a tax adjustment related to the sale of a business, tax cost of the inter-company sale of an asset and the related tax effects of adjustments impacting pre-tax income. These Non-GAAP measures should be viewed in addition to, and not as a substitute for, MKS’ reported results, and may be different from Non-GAAP measures used by other companies. In addition, these Non-GAAP measures are not based on any comprehensive set of accounting rules or principles. MKS management believes the presentation of these Non-GAAP measures is useful to investors for comparing prior periods and analyzing ongoing business trends and operating results.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the future financial performance, business prospects and growth of MKS.  These statements are only predictions based on current assumptions and expectations.  Actual events or results may differ materially from those in the forward-looking statements set forth herein.  Among the important factors that could cause actual events to differ materially from those in the forward-looking statements are the conditions affecting the markets in which MKS operates, including the fluctuations in capital spending in the semiconductor industry and other advanced manufacturing markets, fluctuations in net sales to our major customers, the ability of MKS to complete the ESI acquisition, litigation relating to the ESI acquisition, the risk that disruption from the proposed ESI acquisition materially and adversely affects the respective business and operations of MKS and ESI, the risk that the anticipated benefits from the proposed ESI acquisition may not be realized within the expected time period or at all, competition from larger or more established companies in MKS’ and ESI’s respective markets; MKS’ ability to successfully grow ESI’s business; potential adverse reactions or changes to business relationships resulting from the announcement, pendency or completion of the ESI acquisition, the challenges, risks and costs involved with integrating the operations of the companies we have acquired, including our most recently completed acquisition of Newport Corporation, the Company’s ability to successfully grow our business, potential fluctuations in quarterly results, the terms of our term loan, dependence on new product development, rapid technological and market change, acquisition strategy, manufacturing and sourcing risks, volatility of stock price, international operations, financial risk management, and the other factors described in MKS’ most recent Annual Report on Form 10-K for the year ended December 31, 2017 filed with SEC, and its subsequent Quarterly Reports on Form 10-Q.  MKS is under no obligation to, and expressly disclaims any obligation to, update or alter these forward-looking statements, whether as a result of new information, future events or otherwise after the date of this press release.  

Company Contact:  Seth H. Bagshaw
Senior Vice President, Chief Financial Officer and Treasurer
Telephone:  978.645.5578

Investor Relations Contacts: 
Monica Gould
The Blueshirt Group
Telephone:  212.871.3927
Email:  monica@blueshirtgroup.com

Lindsay Grant Savarese
The Blueshirt Group
Telephone:  212.331.8417
Email:  lindsay@blueshirtgroup.com

               
MKS Instruments, Inc.
 
Unaudited Consolidated Statements of Operations
 
(In thousands, except per share data)
 
               
               
               
    Three Months Ended   
    December 31,    December 31,    September 30,  
      2018       2017       2018    
        (Note 14)      
Net revenues:              
Products   $   402,271     $   458,155     $   426,255    
Services       58,270         53,645         60,897    
Total net revenues       460,541         511,800         487,152    
Cost of revenues:              
Products       221,766         243,384         219,311    
Services       28,891         30,090         35,981    
Total cost of revenues       250,657         273,474         255,292    
               
Gross profit       209,884         238,326         231,860    
Research and development       32,461         33,045         31,898    
Selling, general and administrative       68,166         72,510         70,822    
Acquisition and integration costs       4,245         634         36    
Restructuring       193         1,324         1,364    
Amortization of intangible assets       10,735         10,797         10,695    
Income from operations       94,084         120,016         117,045    
Interest income       1,698         1,125         1,516    
Interest expense       3,871         7,989         3,719    
Other expense, net       763         2,155         326    
Income from operations before income taxes       91,148         110,997         114,516    
Provision for income taxes        19,512         33,359         21,239    
Net income   $   71,636     $   77,638     $   93,277    
Net income per share:              
Basic   $   1.33     $   1.43     $   1.71    
Diluted   $   1.32     $   1.41     $   1.70    
Cash dividends per common share   $   0.20     $   0.18     $   0.20    
Weighted average shares outstanding:               
Basic       54,005         54,318         54,476    
Diluted       54,454         55,236         54,954    
               
The following supplemental Non-GAAP earnings information is presented to aid in understanding MKS' operating results:  
Net income   $   71,636     $   77,638     $   93,277    
Adjustments:              
Acquisition and integration costs (Note 1)       4,245         634         36    
Amortization of debt issuance costs (Note 2)       711         3,983         682    
Restructuring (Note 3)       193         1,324         1,364    
Amortization of intangible assets       10,735         10,797         10,695    
Windfall tax benefit on stock-based compensation (Note 4)       (202 )       (658 )       (287 )  
Deferred tax adjustment (Note 5)       —         (24,546 )       —    
Transition tax on accumulated foreign earnings (Note 6)       —         28,658         863    
Tax adjustment related to the sale of a business (Note 7)       —         (12,131 )       —    
Accrued tax on MKS subsidiary distributions (Note 8)       (2,277 )       14,000         (2,756 )  
Tax cost on the inter-company sale of an asset (Note 9)       541         —         —    
Pro-forma tax adjustments       (1,549 )       (5,083 )       (659 )  
Non-GAAP net earnings (Note 10)    $   84,033     $   94,616     $   103,215    
Non-GAAP net earnings per share (Note 10)   $   1.54     $   1.71     $   1.88    
Weighted average shares outstanding       54,454         55,236         54,954    
Income from operations   $   94,084     $   120,016     $   117,045    
Adjustments:              
Acquisition and integration costs (Note 1)       4,245         634         36    
Restructuring (Note 3)       193         1,324         1,364    
Amortization of intangible assets       10,735         10,797         10,695    
Non-GAAP income from operations (Note 11)   $   109,257     $   132,771     $   129,140    
Non-GAAP operating margin percentage (Note 11)     23.7 %     25.9 %     26.5 %  
Interest expense   $   3,871     $   7,989     $   3,719    
Amortization of debt issuance costs (Note 2)       711         3,983         682    
Non-GAAP interest expense   $   3,160     $   4,006     $   3,037    
Net income   $   71,636     $   77,638     $   93,277    
Interest expense, net       2,173         6,864         2,203    
Provision for income taxes       19,512         33,359         21,239    
Depreciation       9,212         9,208         8,834    
Amortization       10,735         10,797         10,695    
EBITDA (Note 12)   $   113,268     $   137,866     $   136,248    
Stock-based compensation       5,257         4,544         5,213    
Acquisition and integration costs (Note 1)       4,245         634         36    
Restructuring (Note 3)       193         1,324         1,364    
Other adjustments       —         839         —    
Adjusted EBITDA (Note 13)   $   122,963     $   145,207     $   142,861    
               
Note 1: During the fourth quarter of 2018 we incurred acquisition costs related to the announced acquisition of Electro Scientific Industries, Inc. which is expected to close on February 1, 2019. We recorded acquisition and integration costs related to the Newport Corporation acquisition, which closed during the second quarter of 2016, during the three months ended September 30, 2018 and December 31, 2017.   
               
Note 2: We recorded additional interest expense related to the amortization of debt issuance costs affiliated with our Term Loan Credit Agreement and ABL Facility.  
               
Note 3: We recorded restructuring charges during the three months ended December 31, 2018 and September 30, 2018, which consisted primarily of severance costs related to an organization-wide reduction in workforce. We recorded restructuring costs during the three months ended December 31, 2017, primarily related to the consolidation of two manufacturing plants.  
               
Note 4: We recorded windfall tax benefits on the vesting of stock-based compensation.  
               
Note 5: We recorded a deferred tax adjustment, which also includes the reversal of a tax accrual on a French dividend, related to U.S. tax reform legislation during the three months ended December 31, 2017.  
               
Note 6: We recorded and adjusted the transition tax on accumulated foreign earnings related to the 2017 Tax Cut and Jobs Act.  
               
Note 7: We recorded a tax adjustment resulting from the 2017 Tax Cut and Jobs Act, related to the sale of our Data Analytics Solutions business during the three months ended December 31, 2017.  
               
Note 8: We recorded and adjusted tax accruals related to distributions of MKS subsidiaries.  
               
Note 9: We recorded taxes on the inter-company sale of an asset during the three months ended December 31, 2018.  
               
Note 10: The Non-GAAP net earnings and Non-GAAP net earnings per share amounts exclude acquisition and integration costs, amortization of debt issuance costs, restructuring costs, amortization of intangible assets, a windfall tax benefit related to stock compensation expense, accrued taxes on subsidiary distributions, a deferred tax adjustment, transition tax on accumulated foreign earnings, a tax adjustment related to the sale of a business, tax cost on the inter-company sale of an asset and the related tax effect of these adjustments to reflect the expected full year effective tax rate in the related period.  
               
Note 11: The Non-GAAP income from operations and Non-GAAP operating margin percentages exclude acquisition and integration costs, restructuring costs and amortization of intangible assets.  
               
Note 12: EBITDA excludes net interest, income taxes, depreciation and amortization of intangible assets.  
               
Note 13: Adjusted EBITDA excludes stock-based compensation, acquisition and integration costs, restructuring costs and other adjustments as defined in our Term Loan Credit Agreement.  
               
Note 14: We historically recorded the revenue and related cost of revenue for our spare parts within Products in our Statement of Operations for the Vacuum and Analysis Division. We have now determined that these items are better reflected within Services in our Statement of Operations and have revised the presentation of our previously issued financial statements as shown below:  
               
               
               
               
    Three Months Ended December 31, 2017  
    As previously
reported
  Adjustment   As revised  
Net revenues:              
Products   $   463,851     $   (5,696 )   $   458,155    
Services       47,949         5,696         53,645    
Total net revenues        511,800         —         511,800    
Cost of revenues:              
Cost of products       242,008         1,376         243,384    
Cost of services       31,466         (1,376 )       30,090    
Total cost of revenues    $   273,474     $   —     $   273,474    
               

 

               
MKS Instruments, Inc.  
Unaudited Consolidated Statements of Operations  
(In thousands, except per share data)  
               
               
               
        Twelve Months Ended   
        December 31,   
          2018     2017 (Note 21)  
Net revenues:              
Products       $   1,835,202     $   1,701,301    
Services           239,906         214,676    
Total net revenues           2,075,108         1,915,977    
Cost of revenues:              
Products           969,288         906,369    
Services           126,344         118,157    
Total cost of revenues           1,095,632         1,024,526    
Gross profit           979,476         891,451    
Research and development           135,720         132,555    
Selling, general and administrative           298,118         290,056    
Acquisition and integration costs           3,113         5,332    
Restructuring           3,567         3,920    
Environmental costs           1,000         —    
Asset impairment            —         6,719    
Fees and expenses related to repricing of term loan           378         492    
Amortization of intangible assets           43,521         45,743    
Income from operations           494,059         406,634    
Interest income           5,775         3,021    
Interest expense           16,942         30,990    
Gain on sale of business           —         74,856    
Other expense, net           1,942         5,896    
Income from operations before income taxes           480,950         447,625    
Provision for income taxes            88,054         108,493    
Net income       $   392,896     $   339,132    
Net income per share:              
Basic       $   7.22     $   6.26    
Diluted       $   7.14     $   6.16    
Cash dividends per common share       $   0.78     $   0.71    
Weighted average shares outstanding:               
Basic           54,406         54,137    
Diluted           54,992         55,074    
               
The following supplemental Non-GAAP earnings information is presented to aid in understanding MKS' operating results:  
Net income       $   392,896     $   339,132    
Adjustments:              
Acquisition and integration costs (Note 1)           3,113         5,332    
Expenses related to sale of a business (Note 2)           —         859    
Excess and obsolete inventory charge (Note 3)           —         1,160    
Fees and expenses related to repricing of term loan (Note 4)            378         492    
Amortization of debt issuance costs (Note 5)           3,884         9,405    
Restructuring (Note 6)           3,567         3,920    
Environmental costs (Note 7)           1,000         —    
Asset impairment (Note 8)           —         6,719    
Gain on sale of business (Note 9)           —         (74,856 )  
Amortization of intangible assets           43,521         45,743    
Windfall tax benefit on stock-based compensation (Note 10)           (8,277 )       (11,071 )  
Accrued tax on MKS subsidiary distributions (Note 11)           (5,033 )       14,000    
Tax adjustment related to the sale of a business (Note 12)           —         2,876    
Deferred tax adjustment (Note 13)           878         (24,546 )  
Transition tax on accumulated foreign earnings (Note 14)           (1,464 )       28,658    
Tax cost on the inter-company sale of an asset (Note 15)           541         —    
Pro-forma tax adjustments           (4,655 )       (19,639 )  
Non-GAAP net earnings (Note 16)        $   430,349     $   328,184    
Non-GAAP net earnings per share (Note 16)       $   7.83     $   5.96    
Weighted average shares outstanding           54,992         55,074    
Income from operations       $   494,059     $   406,634    
Adjustments:              
Acquisition and integration costs (Note 1)           3,113         5,332    
Expenses related to sale of a business (Note 2)           —         859    
Excess and obsolete inventory charge (Note 3)           —         1,160    
Fees and expenses related to repricing of term loan (Note 4)            378         492    
Restructuring (Note 6)           3,567         3,920    
Environmental costs (Note 7)           1,000         —    
Asset impairment (Note 8)           —         6,719    
Amortization of intangible assets           43,521         45,743    
Non-GAAP income from operations (Note 17)       $   545,638     $   470,859    
Non-GAAP operating margin percentage (Note 17)         26.3 %     24.6 %  
Gross profit       $   979,476     $   891,451    
Excess and obsolete inventory charge (Note 3)           —         1,160    
Non-GAAP gross profit (Note 18)       $   979,476     $   892,611    
Non-GAAP gross profit percentage (Note 18)         47.2 %     46.6 %  
Interest expense       $   16,942     $   30,990    
Amortization of debt issuance costs (Note 5)           3,884         9,405    
Non-GAAP interest expense       $   13,058     $   21,585    
Net Income       $   392,896     $   339,132    
Interest expense, net           11,167         27,969    
Provision for income taxes           88,054         108,493    
Depreciation           36,332         36,813    
Amortization           43,521         45,743    
EBITDA (Note 19)       $   571,970     $   558,150    
Stock-based compensation           27,262         24,378    
Acquisition and integration costs (Note 1)           3,113         5,332    
Expenses related to sale of a business (Note 2)           —         859    
Excess and obsolete inventory charge (Note 3)           —         1,160    
Fees and expenses related to repricing of term loan (Note 4)            378         492    
Restructuring (Note 6)           3,567         3,920    
Environmental costs (Note 7)           1,000         —    
Asset impairment (Note 8)           —         6,719    
Gain on sale of business (Note 9)           —         (74,856 )  
Other adjustments           772         3,244    
Adjusted EBITDA (Note 20)       $   608,062     $   529,398    
               
Note 1:  Acquisition and integration costs for the twelve months ended December 31, 2018 include acquisition costs of $4.2 million related to the announced acquisition of Electro Scientific Industries, Inc. which is expected to close on February 1, 2019. In addition, we reversed a severance accrual of $1.1 million related to our 2016 acquisition of Newport Corporation. For the twelve months ended December 31, 2017, we recorded integration costs related to our acquisition of Newport Corporation.  
               
Note 2: We recorded legal and consulting expenses during the twelve months ended December 31, 2017 related to the sale of a business, which was completed in April 2017.  
               
Note 3: We recorded excess and obsolete inventory charges in cost of sales during the twelve months ended December 31, 2017, related to the discontinuation of a product line in connection with the consolidation of two manufacturing sites.  
               
Note 4: We recorded fees and expenses during the twelve months ended December 31, 2018 and 2017 related to repricings of our Term Loan Credit Agreement.  
               
Note 5: We recorded additional interest expense related to the amortization of debt issuance costs affiliated with our Term Loan Credit Agreement and ABL Facility.  
               
Note 6: We recorded restructuring costs during the twelve months ended December 31, 2018, which were primarily comprised of severance costs related to a worldwide reduction in workforce in the third quarter, transferring a portion of our U.S. shared accounting functions to a third party as well as the consolidation of certain shared accounting functions in Asia. We recorded restructuring costs during the twelve months ended December 31, 2017, primarily related to the restructuring of one of our international facilities and the consolidation of sales offices.  
               
Note 7: We recorded environmental costs during the twelve months ended December 31, 2018, related to an Environmental Protection Agency-designated Superfund site, which was acquired as part of our acquisition of Newport Corporation.  
               
Note 8: We recorded an asset impairment charge, primarily related to the write-off of goodwill and intangible assets, during the twelve months ended December 31, 2017, in connection with the consolidation of two manufacturing plants.  
               
Note 9: We recorded a gain during the twelve months ended December 31, 2017, related to the sale of our Data Analytics Solutions business.  
               
Note 10: We recorded windfall tax benefits on the vesting of stock-based compensation.  
               
Note 11: We recorded and adjusted tax accruals related to distributions of MKS subsidiaries.  
               
Note 12: We recorded taxes related to the sale of our Data Analytics Solutions business during the twelve months ended December 31, 2017.  
               
Note 13: As a result of tax reform, we recorded an adjustment to deferred taxes and reversed taxes previously accrued on a dividend from a foreign subsidiary in December 2017. The deferred tax effect of tax reform was further adjusted in Q1 2018 after additional analysis.  
               
Note 14: During the twelve months ended December 31, 2017, we recorded a transition tax on accumulated foreign earnings related to the 2017 Tax Cut and Jobs Act. During the twelve months ended December 31, 2018, we adjusted the transition tax on accumulated foreign earnings that was recorded in 2017.  
               
Note 15: We recorded taxes on the inter-company sale of an asset during the twelve months ended December 31, 2018.  
               
Note 16: The Non-GAAP net earnings and Non-GAAP net earnings per share amounts exclude acquisition and integration costs, expenses related to the sale of a business, an excess and obsolete inventory charge, fees and expenses related to the repricing of the Term Loan Credit Agreement, amortization of debt issuance costs, restructuring costs, environmental costs, an asset impairment charge, a gain on the sale of a business, amortization of intangible assets, accrued taxes on subsidiary distributions, a windfall tax benefit related to stock compensation expense, taxes related to the sale of a business, a deferred tax adjustment, transition tax on accumulated foreign earnings, tax costs on the inter-company sale of an asset and the related tax effect of these adjustments to reflect the expected full year effective tax rate in the related period.  
               
Note 17: The Non-GAAP income from operations and Non-GAAP operating margin percentages exclude acquisition and integration costs, expenses related to the sale of a business, an excess and obsolete inventory charge, fees and expenses related to the repricing of the Term Loan Credit Agreement, restructuring costs, environmental costs, an asset impairment charge and amortization of intangible assets.  
               
Note 18: The Non-GAAP gross profit amounts and Non-GAAP gross profit percentages exclude an excess and obsolete inventory charge related to the discontinuation of a product line.  
               
Note 19: EBITDA excludes net interest, income taxes, depreciation and amortization of intangible assets.  
               
Note 20: Adjusted EBITDA excludes stock-based compensation, acquisition and integration costs, expenses related to the sale of a business, an excess and obsolete inventory charge, fees and expenses related to the repricing of the Term Loan Credit Agreement, restructuring costs, environmental costs, an asset impairment charge, a gain on the sale of a business and other adjustments as defined in our Term Loan Credit Agreement.  
               
Note 21: We historically recorded the revenue and related cost of revenue for our spare parts within Products in our Statement of Operations for the Vacuum and Analysis Division. We have now determined that these items are better reflected within Services in our Statement of Operations and have revised the presentation of our previously issued financial statements as shown below:  
               
               
    Twelve Months Ended December 31, 2017  
    As previously reported   Adjustment   As revised  
Net revenues:              
Products    $   1,723,433   $   (22,132 )   $   1,701,301    
Services        192,544       22,132         214,676    
Total net revenues        1,915,977       —         1,915,977    
Cost of revenues:              
Cost of products        901,546       4,823         906,369    
Cost of services        122,980       (4,823 )       118,157    
Total cost of revenues    $   1,024,526   $   —     $   1,024,526    
               


           
MKS Instruments, Inc.  
Unaudited Consolidated Balance Sheet  
(In thousands)  
           
           
           
           
    December 31,   December 31,  
      2018       2017  
ASSETS          
Cash and cash equivalents, including restricted cash   $   644,345     $   333,887  
Short-term investments       73,826         209,434  
Trade accounts receivable, net       295,454         300,308  
Inventories       384,689         339,081  
Other current assets       65,790         53,543  
Total current assets       1,464,104         1,236,253  
Property, plant and equipment, net       194,367         171,782  
Goodwill       586,996         591,047  
Intangible assets, net       319,807         366,398  
Long-term investments       10,290         10,655  
Other assets       38,682         37,883  
Total assets   $   2,614,246     $   2,414,018  
LIABILITIES AND STOCKHOLDERS' EQUITY          
Short-term debt   $   3,986     $   2,972  
Accounts payable       83,825         82,518  
Accrued compensation       82,350         96,147  
Income taxes payable       16,358         21,398  
Deferred revenue       8,134         12,842  
Other current liabilities       68,632         73,945  
Total current liabilities       263,285         289,822  
Long-term debt, net       343,842         389,993  
Non-current deferred taxes       48,223         61,571  
Non-current accrued compensation       55,598         51,700  
Other liabilities       30,111         32,025  
Total liabilities       741,059         825,111  
Stockholders' equity:          
Common stock       113         113  
Additional paid-in capital       793,932         789,644  
Retained earnings       1,084,797         795,698  
Accumulated other comprehensive income       (5,655 )       3,452  
Total stockholders' equity       1,873,187         1,588,907  
Total liabilities and stockholders' equity   $   2,614,246     $   2,414,018  
           


               
MKS Instruments, Inc.  
Unaudited Consolidated Statements of Cash Flows  
(In thousands, except per share data)  
               
    Three Months Ended   
    December 31,   December 31,   September 30,  
      2018       2017       2018    
Cash flows from operating activities:              
Net income   $   71,636     $   77,638     $   93,277    
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization       19,947         20,006         19,529    
Amortization of debt issuance costs and original issue discount       934         4,314         897    
Stock-based compensation       5,257         4,544         5,213    
Provision for excess and obsolete inventory       6,749         4,864         5,283    
Provision for doubtful accounts       576         175         263    
Deferred income taxes       (13,249 )       (11,472 )       (4,695 )  
Other       2,118         (8 )       71    
Changes in operating assets and liabilities       41,490         (19,275 )       (23,882 )  
Net cash provided by operating activities       135,458         80,786         95,956    
Cash flows from investing activities:              
Purchases of investments       (39,824 )       (30,545 )       (64,958 )  
Sales of investments       139,674         9,993         4,505    
Maturities of investments       46,410         40,563         44,605    
Purchases of property, plant and equipment       (26,056 )       (13,430 )       (15,067 )  
Other       —         66         —    
Net cash provided by (used in) investing activities       120,204         6,647         (30,915 )  
Cash flows from financing activities:              
Payments of short-term borrowings       (9,299 )       (16,434 )       (29,803 )  
Proceeds from short and long-term borrowings       7,045         15,393         23,635    
Payments of long-term borrowings       —         (50,000 )       (2 )  
Repurchase of common stock       —         —         (75,000 )  
Dividend payments       (10,797 )       (9,775 )       (10,858 )  
Net proceeds (payments) related to employee stock awards       2,537         2,503         (589 )  
Net cash used in financing activities       (10,514 )       (58,313 )       (92,617 )  
Effect of exchange rate changes on cash and cash equivalents       (653 )       (1,327 )       (5 )  
Increase (decrease) in cash and cash equivalents and restricted cash       244,495         27,793         (27,581 )  
Cash and cash equivalents, including restricted cash at beginning of period       399,850         306,094         427,431    
Cash and cash equivalents, including restricted cash at end of period   $   644,345     $   333,887     $   399,850    
               


                         
MKS Instruments, Inc.  
Reconciliation of GAAP Income Tax Rate to Non-GAAP Income Tax Rate  
(In thousands)  
                         
    Three Months Ended December 31, 2018   Three Months Ended September 30, 2018
    Income Before   Provision (benefit)   Effective    Income Before   Provision (benefit)   Effective 
    Income Taxes   for Income Taxes   Tax Rate   Income Taxes   for Income Taxes   Tax Rate
GAAP   $   91,148     $   19,512       21.4 %   $   114,516     $   21,239     18.5 %
Adjustments:                        
Acquisition and integration costs (Note 1)       4,245         —             36         —      
Amortization of debt issuance costs (Note 2)       711         —             682         —      
Restructuring (Note 3)       193         —             1,364         —      
Amortization of intangible assets       10,735         —             10,695         —      
Windfall tax benefit on stock-based compensation (Note 10)       —         202             —         287      
Accrued tax on MKS subsidiary distributions (Note 12)       —         2,277             —         2,756      
Transition tax on accumulated foreign earnings (Note 14)       —         —             —         (863 )    
Tax cost on the inter-company sale of an asset (Note 15)       —         (541 )           —         —      
Tax effect of pro-forma adjustments       —         1,549             —         659      
Non-GAAP   $   107,032     $   22,999       21.5 %   $   127,293     $   24,078     18.9 %
                         
                         
    Three Months Ended December 31, 2017            
    Income Before   Provision (benefit)   Effective             
    Income Taxes   for Income Taxes   Tax Rate            
GAAP   $   110,997     $   33,359       30.1 %            
Adjustments:                        
Acquisition and integration costs (Note 1)       634         —                  
Amortization of debt issuance costs (Note 2)       3,983         —                  
Restructuring (Note 3)       1,324         —                  
Amortization of intangible assets       10,797         —                  
Windfall tax benefit on stock-based compensation (Note 10)       —         658                  
Deferred tax adjustment (Note 13)       —         24,546                  
Transition tax on accumulated foreign earnings (Note 14)       —         (28,658 )                
Accrued tax on MKS subsidiary distributions (Note 12)       —         (14,000 )                
Tax adjustment related to the sale of a business (Note 11)       —         12,131                  
Tax effect of pro-forma adjustments       —         5,083                  
Non-GAAP   $   127,735     $   33,119       25.9 %            
                         
                         
    Twelve Months Ended December 31, 2018   Twelve Months Ended December 31, 2017
    Income Before   Provision (benefit)   Effective    Income Before   Provision (benefit)   Effective 
    Income Taxes   for Income Taxes   Tax Rate   Income Taxes   for Income Taxes   Tax Rate
GAAP   $   480,950     $   88,054       18.3 %   $   447,625     $   108,493     24.2 %
Adjustments:                        
Acquisition and integration costs (Note 1)       3,113         —             5,332         —      
Amortization of debt issuance costs (Note 2)       3,884         —             9,405         —      
Restructuring (Note 3)       3,567         —             3,920         —      
Expenses related to the sale of a business (Note 4)       —         —             859         —      
Excess and obsolete inventory charge (Note 5)       —         —             1,160         —      
Fees and expenses related to repricing of term loan (Note 6)       378         —             492         —      
Environmental costs (Note 7)       1,000         —             —         —      
Asset impairment (Note 8)       —         —             6,719         —      
Gain on sale of business (Note 9)       —         —             (74,856 )       —      
Amortization of intangible assets       43,521         —             45,743         —      
Windfall tax benefit on stock-based compensation (Note 10)       —         8,277             —         11,071      
Tax adjustment related to the sale of a business (Note 11)       —         —             —         (2,876 )    
Accrued tax on MKS subsidiary distributions (Note 12)       —         5,033             —         (14,000 )    
Deferred tax adjustment (Note 13)       —         (878 )           —         24,546      
Transition tax on accumulated foreign earnings (Note 14)       —         1,464             —         (28,658 )    
Tax cost on the inter-company sale of an asset (Note 15)       —         (541 )           —         —      
Tax effect of pro-forma adjustments       —         4,655             —         19,639      
Non-GAAP   $   536,413     $   106,064       19.8 %   $   446,399     $   118,215     26.5 %
                         
Note 1: Acquisition and integration costs include acquisition costs related to the announced acquisition of Electro Scientific Industries, Inc. which is expected to close on February 1, 2019, for the three and twelve month periods ended December 31, 2018. We recorded acquisition and integration costs related to the Newport Corporation acquisition, which closed during the second quarter of 2016 during the three and twelve month periods ended December 31, 2018 and 2017.
                         
Note 2: We recorded additional interest expense related to the amortization of debt issuance costs affiliated with our Term Loan Credit Agreement and ABL Facility.
                         
Note 3: We recorded restructuring costs during the three and twelve months ended December 31, 2018 and the three months ended September 30, 2018, which were primarily comprised of severance costs related to a worldwide reduction in workforce, transferring a portion of our U.S. shared accounting functions to a third party as well as the consolidation of certain shared accounting functions in Asia. We recorded restructuring costs during the three and twelve months ended December 31, 2017, primarily related to the restructuring of one of our international facilities and the consolidation of sales offices.
                         
Note 4: We recorded legal and consulting expenses during the twelve months ended December 31, 2017 related to the sale of a business, which was completed in April 2017.
                         
Note 5: We recorded excess and obsolete inventory charges in cost of sales during the twelve months ended December 31, 2017, related to the discontinuation of a product line in connection with the consolidation of two manufacturing sites.
                         
Note 6: We recorded fees and expenses during the twelve months ended December 31, 2018 and 2017 related to repricings of our Term Loan Credit Agreement.
                         
Note 7: We recorded additional environmental costs during the twelve months ended December 31, 2018, related to an Environmental Protection Agency-designated Superfund site, which was acquired as part of our acquisition of Newport Corporation.
                         
Note 8: We recorded an asset impairment charge, primarily related to the write-off of goodwill and intangible assets, during the twelve months ended December 31, 2017, in connection with the consolidation of two manufacturing plants.
                         
Note 9: We recorded a gain during the twelve months ended December 31, 2017, related to the sale of our Data Analytics Solutions business.
                         
Note 10: We recorded windfall tax benefits on the vesting of stock-based compensation.
                         
Note 11: We recorded and adjusted taxes related to the sale of our Data Analytics Solutions business during the three and twelve months ended December 31, 2017.
                         
Note 12: We recorded and adjusted our tax accruals related to distributions of MKS subsidiaries during the three months ended September 30, 2018 and the three and twelve months ended December 31, 2018 and 2017.
                         
Note 13: We recorded a deferred tax adjustment, related to the 2017 Tax Cut and Jobs Act during the three months ended December 31, 2017 and the twelve months ended December 31, 2018 and 2017.
                         
Note 14: We recorded and adjusted the transition tax on accumulated foreign earnings related to the 2017 Tax Cut and Jobs Act during the three months ended September 30, 2018 and December 31, 2017 and twelve months ended December 31, 2018 and 2017.
                         
Note 15: We recorded taxes on the inter-company sale of an asset during the three and twelve months ended December 31, 2018.
                         
                         
MKS Instruments, Inc.  
Reconciliation of Q1-19 Guidance - GAAP Net Income to Non-GAAP Net Earnings   
(In thousands, except per share data)    
                         
    Three Months Ended March 31, 2019        
    Low Guidance   High Guidance        
    $ Amount   $ Per Share   $ Amount   $ Per Share        
GAAP net income   $   42,400     $   0.78     $   55,600     $   1.02          
Amortization     10,400         0.19       10,400         0.19          
Deferred financing costs     600         0.01       600         0.01          
Restructuring     300         0.01       300         0.01          
Tax effect of adjustments (Note 1)     (2,100 )       (0.04 )     (2,200 )       (0.04 )        
Non-GAAP net earnings   $   51,600     $   0.95     $   64,700     $   1.18          
Q1 -19 forecasted shares         54,600           54,600          
                         
Note 1: The Non-GAAP adjustments are tax effected at the applicable statutory rates and the difference between the GAAP and Non-GAAP tax rates.        
                         


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Source: MKS Instruments, Inc.