mksi-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-Q

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

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.)

 

 

2 Tech Drive, Suite 201, Andover, Massachusetts

01810

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code (978) 645-5500

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 30, 2018 the registrant had 53,986,114 shares of common stock outstanding.

 

 

 

 

 


 

MKS INSTRUMENTS, INC.

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1.

FINANCIAL STATEMENTS (Unaudited).

 

 

 

Condensed Consolidated Balance Sheets – September 30, 2018 and December 31, 2017

3

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income – Three and nine months ended September 30, 2018 and 2017

4

 

 

 

Consolidated Statements of Stockholders’ Equity

5

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2018 and 2017

6

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

35

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

48

 

 

ITEM 4.

CONTROLS AND PROCEDURES.

48

 

PART II. OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS.

48

 

 

ITEM 1A.

RISK FACTORS.

49

 

 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

50

 

 

 

 

 

ITEM 6.

EXHIBITS.

51

 

 

 

 

SIGNATURES

52

 

 

 

2


 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS.

 

MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

 

ASSETS

 

September 30, 2018

 

 

December 31, 2017

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents, including restricted cash

 

$

399,850

 

 

$

333,887

 

Short-term investments

 

 

219,776

 

 

 

209,434

 

Trade accounts receivable, net of allowance for doubtful accounts of $4,761 and $4,135 at September 30, 2018 and December 31, 2017, respectively

 

 

318,470

 

 

300,308

 

Inventories, net

 

 

399,077

 

 

 

339,081

 

Other current assets

 

 

75,298

 

 

 

53,543

 

Total current assets

 

 

1,412,471

 

 

 

1,236,253

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

180,182

 

 

 

171,782

 

Goodwill

 

 

587,861

 

 

 

591,047

 

Intangible assets, net

 

 

331,288

 

 

 

366,398

 

Long-term investments

 

 

10,404

 

 

 

10,655

 

Other assets

 

 

42,390

 

 

 

37,883

 

Total assets

 

$

2,564,596

 

 

$

2,414,018

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Short-term debt

 

$

6,130

 

 

$

2,972

 

Accounts payable

 

 

81,486

 

 

 

82,518

 

Accrued compensation

 

 

74,472

 

 

 

96,147

 

Income taxes payable

 

 

12,942

 

 

 

21,398

 

Deferred revenue

 

 

9,136

 

 

 

12,842

 

Other current liabilities

 

 

78,327

 

 

 

73,945

 

Total current liabilities

 

 

262,493

 

 

 

289,822

 

 

 

 

 

 

 

 

 

 

Long-term debt, net

 

 

342,970

 

 

 

389,993

 

Non-current deferred taxes

 

 

61,540

 

 

 

61,571

 

Non-current accrued compensation

 

 

56,888

 

 

 

51,700

 

Other liabilities

 

 

30,412

 

 

 

32,025

 

Total liabilities

 

$

754,303

 

 

$

825,111

 

Commitments and contingencies (Note 19)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred Stock, $0.01 par value per share, 2,000,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Common Stock, no par value, 200,000,000 shares authorized; 53,984,623 and 54,355,535 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

113

 

 

 

113

 

Additional paid-in capital

 

 

786,138

 

 

 

789,644

 

Retained earnings

 

 

1,023,959

 

 

 

795,698

 

Accumulated other comprehensive income

 

 

83

 

 

 

3,452

 

Total stockholders’ equity

 

 

1,810,293

 

 

 

1,588,907

 

Total liabilities and stockholders’ equity

 

$

2,564,596

 

 

$

2,414,018

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3


MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

426,255

 

 

$

428,891

 

 

$

1,432,931

 

 

$

1,243,146

 

Services

 

 

60,897

 

 

 

57,376

 

 

 

181,636

 

 

 

161,031

 

Total net revenues

 

 

487,152

 

 

 

486,267

 

 

 

1,614,567

 

 

 

1,404,177

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products

 

 

219,311

 

 

 

226,445

 

 

 

747,522

 

 

 

662,985

 

Cost of services

 

 

35,981

 

 

 

31,827

 

 

 

97,453

 

 

 

88,067

 

Total cost of revenues (exclusive of amortization shown separately below)

 

 

255,292

 

 

 

258,272

 

 

 

844,975

 

 

 

751,052

 

Gross profit

 

 

231,860

 

 

 

227,995

 

 

 

769,592

 

 

 

653,125

 

Research and development

 

 

31,898

 

 

 

32,548

 

 

 

103,259

 

 

 

99,510

 

Selling, general and administrative

 

 

70,822

 

 

 

71,347

 

 

 

229,952

 

 

 

217,546

 

Acquisition and integration costs

 

 

36

 

 

 

2,466

 

 

 

(1,132

)

 

 

4,698

 

Restructuring

 

 

1,364

 

 

 

10

 

 

 

3,374

 

 

 

2,596

 

Environmental costs

 

 

 

 

 

 

 

 

1,000

 

 

 

 

Asset impairment

 

 

 

 

 

 

 

 

 

 

 

6,719

 

Fees and expenses related to repricing of term loan

 

 

 

 

 

492

 

 

 

378

 

 

 

492

 

Amortization of intangible assets

 

 

10,695

 

 

 

10,977

 

 

 

32,786

 

 

 

34,946

 

Income from operations

 

 

117,045

 

 

 

110,155

 

 

 

399,975

 

 

 

286,618

 

Interest income

 

 

1,516

 

 

 

873

 

 

 

4,077

 

 

 

1,896

 

Interest expense

 

 

3,719

 

 

 

7,172

 

 

 

13,071

 

 

 

23,001

 

Gain on sale of business

 

 

 

 

 

 

 

 

 

 

 

74,856

 

Other expense, net

 

 

326

 

 

 

2,485

 

 

 

1,179

 

 

 

3,741

 

Income before income taxes

 

 

114,516

 

 

 

101,371

 

 

 

389,802

 

 

 

336,628

 

Provision for income taxes

 

 

21,239

 

 

 

25,377

 

 

 

68,542

 

 

 

75,134

 

Net income

 

$

93,277

 

 

$

75,994

 

 

$

321,260

 

 

$

261,494

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in value of financial instruments designated as

cash flow hedges, net of tax expense (benefit)(1)

 

$

163

 

 

$

(908

)

 

$

8,053

 

 

$

(3,578

)

Foreign currency translation adjustments, net of tax of $0

 

 

(3,576

)

 

 

8,088

 

 

 

(11,314

)

 

 

30,352

 

Unrecognized pension gain (loss), net of tax expense (benefit)(2)

 

 

24

 

 

 

(565

)

 

 

(13

)

 

 

(204

)

Unrealized gain (loss) on investments, net of tax expense (benefit)(3)

 

 

230

 

 

 

1,301

 

 

 

(95

)

 

 

1,137

 

Total comprehensive income

 

$

90,118

 

 

$

83,910

 

 

$

317,891

 

 

$

289,201

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.71

 

 

$

1.40

 

 

$

5.89

 

 

$

4.84

 

Diluted

 

$

1.70

 

 

$

1.38

 

 

$

5.82

 

 

$

4.75

 

Cash dividends per common share

 

$

0.20

 

 

$

0.175

 

 

$

0.58

 

 

$

0.525

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

54,476

 

 

 

54,282

 

 

 

54,539

 

 

 

54,076

 

Diluted

 

 

54,954

 

 

 

55,101

 

 

 

55,171

 

 

 

55,020

 

 

(1)

Tax expense was $49 and $688 for the three months ended September 30, 2018 and 2017, respectively. Tax expense (benefit) was $2,304 and $(884) for the nine months ended September 30, 2018 and 2017, respectively.

(2)

Tax expense (benefit) was $7 and $(312) for the three months ended September 30, 2018 and 2017, respectively. Tax benefit was $(17) and $(315) for the nine months ended September 30, 2018 and 2017, respectively.

(3)

Tax expense (benefit) was $17 and $(467) for the three months ended September 30, 2018 and 2017, respectively. Tax (benefit) expense was $(22) and $274 for the nine months ended September 30, 2018 and 2017, respectively.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

4


MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

(in thousands, except share data)

 

Shares

 

 

Amount

 

 

Paid-In

Capital

 

 

Retained Earnings

 

 

Comprehensive

Income/(Loss)

 

 

Stockholders’

Equity

 

Balance at June 30, 2018

 

 

54,787,153

 

 

$

113

 

 

$

793,384

 

 

$

1,004,698

 

 

$

3,243

 

 

$

1,801,438

 

Net issuance under stock-based plans

 

 

15,601

 

 

 

 

 

 

 

(589

)

 

 

 

 

 

 

 

 

 

 

(589

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

5,213

 

 

 

 

 

 

 

 

 

 

 

5,213

 

Stock repurchase

 

 

(818,131

)

 

 

 

 

 

 

(11,870

)

 

 

(63,130

)

 

 

 

 

 

 

(75,000

)

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,859

)

 

 

 

 

 

 

(10,859

)

Accounting Standards Codification Topic 606 adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

 

 

 

 

 

(27

)

Comprehensive income (net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

93,277

 

 

 

 

 

 

 

93,277

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,160

)

 

 

(3,160

)

Balance at September 30, 2018

 

 

53,984,623

 

 

$

113

 

 

$

786,138

 

 

$

1,023,959

 

 

$

83

 

 

$

1,810,293

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

(in thousands, except share data)

 

Shares

 

 

Amount

 

 

Paid-In

Capital

 

 

Retained Earnings

 

 

Comprehensive

Income/(Loss)

 

 

Stockholders’

Equity

 

Balance at December 31, 2017

 

 

54,355,535

 

 

$

113

 

 

$

789,644

 

 

$

795,698

 

 

$

3,452

 

 

$

1,588,907

 

Net issuance under stock-based plans

 

 

447,219

 

 

 

 

 

 

 

(13,641

)

 

 

 

 

 

 

 

 

 

 

(13,641

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

22,005

 

 

 

 

 

 

 

 

 

 

 

22,005

 

Stock repurchase

 

 

(818,131

)

 

 

 

 

 

 

(11,870

)

 

 

(63,130

)

 

 

 

 

 

 

(75,000

)

Cash dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,608

)

 

 

 

 

 

 

(31,608

)

Accounting Standards Codification Topic 606 adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,739

 

 

 

 

 

 

 

1,739

 

Comprehensive income (net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

321,260

 

 

 

 

 

 

 

321,260

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,369

)

 

 

(3,369

)

Balance at September 30, 2018

 

 

53,984,623

 

 

$

113

 

 

$

786,138

 

 

$

1,023,959

 

 

$

83

 

 

$

1,810,293

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

5


MKS INSTRUMENTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows provided by operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

321,260

 

 

$

261,494

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

59,906

 

 

 

62,550

 

Amortization of debt issuance costs, original issue discount and soft call premium

 

 

3,784

 

 

 

6,385

 

Asset impairment

 

 

 

 

 

6,719

 

Gain on sale of business

 

 

 

 

 

(74,856

)

Stock-based compensation

 

 

22,005

 

 

 

19,834

 

Provision for excess and obsolete inventory

 

 

15,575

 

 

 

15,349

 

Provision for bad debt

 

 

859

 

 

 

650

 

Deferred income taxes

 

 

(3,525

)

 

 

6,641

 

Other

 

 

531

 

 

 

832

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(23,125

)

 

 

(26,489

)

Inventories

 

 

(80,441

)

 

 

(51,251

)

Income taxes

 

 

(13,874

)

 

 

15,646

 

Other current and non-current assets

 

 

(17,652

)

 

 

(9,714

)

Accrued compensation

 

 

(15,529

)

 

 

11,058

 

Other current and non-current liabilities

 

 

8,934

 

 

 

22,517

 

Accounts payable

 

 

(385

)

 

 

7,071

 

Net cash provided by operating activities

 

 

278,323

 

 

 

274,436

 

 

 

 

 

 

 

 

 

 

Cash flows (used in) provided by investing activities:

 

 

 

 

 

 

 

 

Net proceeds from sale of business

 

 

 

 

 

72,509

 

Purchases of investments

 

 

(213,774

)

 

 

(199,012

)

Maturities of investments

 

 

135,339

 

 

 

116,779

 

Sales of investments

 

 

67,868

 

 

 

43,571

 

Purchases of property, plant and equipment

 

 

(36,885

)

 

 

(17,857

)

Net cash (used in) provided by investing activities

 

 

(47,452

)

 

 

15,990

 

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(75,000

)

 

 

 

Proceeds from short and long-term borrowings

 

 

60,624

 

 

 

13,158

 

Payments on short-term borrowings

 

 

(57,865

)

 

 

(13,277

)

Payments on long-term borrowings

 

 

(50,002

)

 

 

(178,141

)

Net payments related to employee stock awards

 

 

(13,641

)

 

 

(14,719

)

Dividend payments to common stockholders

 

 

(31,608

)

 

 

(28,403

)

Net cash used in financing activities

 

 

(167,492

)

 

 

(221,382

)

Effect of exchange rate changes on cash and cash equivalents

 

 

2,584

 

 

 

3,140

 

Increase in cash and cash equivalents and restricted cash

 

 

65,963

 

 

 

72,184

 

Cash and cash equivalents, including restricted cash, at beginning of period(1)

 

 

333,887

 

 

 

233,910

 

Cash and cash equivalents, including restricted cash, at end of period(2)

 

$

399,850

 

 

$

306,094

 

 

(1)

Restricted cash at the beginning of the period was $119 and $5,287 for the nine months ended September 30, 2018 and 2017, respectively.

(2)

Restricted cash at the end of the period was $114 and $117 for the nine months ended September 30, 2018 and 2017, respectively.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

6


 

MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1)

Basis of Presentation

The terms “MKS” and the “Company” refer to MKS Instruments, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The interim financial data as of September 30, 2018, and for the three and nine months ended September 30, 2018 are unaudited; however, in the opinion of MKS, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The condensed consolidated balance sheet presented as of December 31, 2017 has been derived from the consolidated audited financial statements as of that date. The unaudited condensed 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 United States generally accepted accounting principles (“U.S. GAAP”). The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the MKS Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on February 28, 2018.

The preparation of these unaudited condensed 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 unaudited condensed 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, stock-based compensation, inventory, intangible assets, goodwill and other long-lived assets, warranty liabilities, pension liabilities, acquisition expenses, income taxes 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.

Reclassification of certain line items in prior period financial statements

The Company has historically recorded the revenue and related cost of revenue for the sale of its spare parts within Products in its Statements of Operations for the Vacuum & Analysis segment. The Company has now determined that these items are better presented within revenue and related cost of revenue within Services for the Vacuum & Analysis segment in its Statements of Operations to align with the current manner in which the Company operates its services business, and has elected to reclassify these amounts in previously issued financial statements as shown below. This change in presentation has no impact on total revenue or total cost of revenue.

 

 

 

Three Months Ended September 30, 2017

 

 

 

As previously reported

 

 

Adjustment

 

 

As reclassified

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

434,710

 

 

$

(5,819

)

 

$

428,891

 

Services

 

 

51,557

 

 

 

5,819

 

 

 

57,376

 

Total net revenues

 

 

486,267

 

 

 

 

 

 

486,267

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products

 

 

225,174

 

 

 

1,271

 

 

 

226,445

 

Cost of services

 

 

33,098

 

 

 

(1,271

)

 

 

31,827

 

Total cost of revenues

 

$

258,272

 

 

$

 

 

$

258,272

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

As previously reported

 

 

Adjustment

 

 

As reclassified

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

1,259,582

 

 

$

(16,436

)

 

$

1,243,146

 

Services

 

 

144,595

 

 

 

16,436

 

 

 

161,031

 

Total net revenues

 

 

1,404,177

 

 

 

 

 

 

1,404,177

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products

 

 

659,538

 

 

 

3,447

 

 

 

662,985

 

Cost of services

 

 

91,514

 

 

 

(3,447

)

 

 

88,067

 

Total cost of revenues

 

$

751,052

 

 

$

 

 

$

751,052

 

 

 

 

7


MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

2)

Recently Issued Accounting Pronouncements

In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-05, “Income Taxes (Topic 740).” This standard is an amendment that adopts the language of Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”) and aims to address certain circumstances that may arise for registrants in accounting for the income tax effects of the Tax Cuts and Jobs Act (the “Act”) and to address any uncertainty or diversity of views in practice regarding the application of Topic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under Topic 740 for certain income tax effects of the Act for the reporting period in which the Act was enacted. The provisions of this ASU were applied to the Company’s December 31, 2017 financial statements. The Company recorded provisional amounts with respect to the Act under SAB 118 at December 31, 2017 and September 30, 2018 and needs to complete additional analysis and receive additional guidance from the U.S. Internal Revenue Service with respect to provisions of the Act that affect the Company before the provisional determinations become final. Until the Company completes its analysis and receives additional guidance, the Company is not able to determine if the impact of ASU 2018-05 is material to the Company’s consolidated financial statements in any period.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815).” This standard better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The provisions of this ASU are effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718)-Scope of Modification Accounting.” This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715)-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This standard requires that an employer disaggregate the service cost component from the other components of net benefit cost. This standard also provides explicit guidance on how to present the service cost component and the other components of the net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The provisions of this ASU are effective for annual periods beginning after December 31, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805)-Clarifying the Definition of a Business.” This standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard also provides a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)-Restricted Cash,” an amendment to ASU 2016-15. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years and should be applied at the time of adoption of ASU 2016-15. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

8


MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740)-Intra-Entity Transfer of Assets Other Than Inventory.” This standard requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs as opposed to when the assets have been sold to an outside party. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)-Classification of Certain Cash Receipts and Cash Payments.” This standard addresses eight specific cash flow issues with the objective of addressing the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This standard requires the recognition of lease assets and liabilities for all leases, with certain exceptions, on the balance sheet. In transition, lessees and lessors have the option to either apply the standard retrospectively through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption or they can apply the new standard to comparative periods presented. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The FASB issued additional updates to the new standard in Topic 842 (Update 2018-01 in January 2018 – Land Easement Practical Expedient for Transition to Topic 842, Update 2018-10 – Codification Improvements to Topic 842 and Update 2018-11 in July 2018 – Targeted Improvements). The Company has reviewed the requirements of this standard and has formulated a plan for implementation. The management team has communicated its approach to the Audit Committee and will provide regular updates as appropriate. The Company is currently accumulating details on the population of leases and entering these details into a selected software database, which will be a repository and accounting solution for reporting and disclosure requirements required by the standard. The Company will continue to assess and disclose the impact that this ASU will have on its consolidated financial statements, disclosures and related controls, when known.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10)-Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. The new standard revises accounting related to equity investments and the presentation of certain fair value changes for financial assets and liabilities measured at fair value. Among other things, it amends the presentation and disclosure requirements of equity securities that do not result in consolidation and are not accounted for under the equity method. Changes in the fair value of these equity securities will be recognized directly in net income. This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU during the three month period ended March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”). This ASU provides for a single comprehensive model to use in accounting for revenue arising from contracts with customers and has replaced most existing revenue recognition guidance in GAAP. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company used the modified retrospective method upon adoption in the first quarter of 2018. The FASB issued additional updates to the new revenue standard in Topic 606 relating to reporting revenue on a gross versus net basis (Update 2016-08 in March 2016), identifying performance obligations and licensing arrangements (Update 2016-10 in April 2016), narrow-scope improvements and practical expedients (Update 2016-12 in May 2016), technical corrections and improvements (Update 2016-20 in December 2016), and SEC Updates (Update 2017-13 in September 2017 and Update 2017-14 in November 2017). The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements as described further in Note 3.

9


MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

3)

Revenue from Contracts with Customers

The Company adopted Accounting Standards Codification ASC 606 (“ASC 606”) on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for the nine months ended September 30, 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of Accounting Standards Codification 605, Revenue Recognition.  

The Company has recorded a net increase to opening retained earnings of $1,809 as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to its service business and certain custom products. The impact to revenue for the quarter ended September 30, 2018 as a result of applying ASC 606 was immaterial.

The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's goods or services and will provide financial statement readers with enhanced disclosures. To achieve this core principle, the Company applies the following five steps:

 

Identify the contract with a customer

 

Identify the performance obligations in the contract

 

Determine the transaction price

 

Allocate the transaction price to performance obligations in the contract

 

Recognize revenue when or as the Company satisfies a performance obligation

Revenue under ASC 606 is recognized when or as obligations under the terms of a contract with the Company’s customer has been satisfied and control has transferred to the customer. The majority of the Company's performance obligations, and associated revenue, are transferred to customers at a point in time, generally upon shipment of a product to the customer or receipt of the product by the customer and without significant judgments. Installation services are not significant and are usually completed in a short period of time (normally less than two weeks) and therefore, recorded at a point in time when the installation services are completed, rather than over time as they are not material. Extended warranty, service contracts, and repair services, which are transferred to the customer over time, are recorded as revenue as the services are performed. For repair services, the Company makes an accrual at quarter end based upon historical repair times within its product groups to record revenue based upon the estimated number of days completed to date, which is consistent with ratable recognition. Customized products with no alternative future use to the Company, and that have an enforceable right to payment for performance completed to date, are also recorded over time. The Company considers this to be a faithful depiction of the transfer to the customer of revenue over time as the work is performed or service is delivered, ratably over time.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company’s normal payment terms are 30 to 60 days but vary by the type and location of its customers and the products or services offered. The time between invoicing and when payment is due is not significant. For certain products and services and customer types, the Company requires payment before the products or services are delivered to, or performed for, the customer. None of the Company’s contracts as of September 30, 2018 contained a significant financing component. Contract assets as of January 1 and September 30, 2018 were $3,065 and $3,951, respectively, and included in other current assets.  

Contracts with Multiple Performance Obligations

The Company periodically enters into contracts with its customers in which a customer may purchase a combination of goods and or services, such as products with installation services or extended warranty obligations. These contracts include multiple promises that the Company evaluates to determine if the promises are separate performance obligations. Once the Company determines the performance obligations, the Company then determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the method the Company expects to better predict the amount of consideration to which it will be entitled. There are no constraints on the variable

10


MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

consideration recorded. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price charged separately to customers or using an expected cost plus margin method. The corresponding revenues are recognized when or as the related performance obligations are satisfied, which are noted above. The impact of variable consideration was immaterial during the three and nine months ended September 30, 2018.

Deferred Revenues

The Company’s standard assurance warranty period is normally 12 to 24 months. The Company sells separately-priced service contracts and extended warranty contracts related to certain of its products, especially its laser products. The separately priced contracts generally range from 12 to 60 months. The Company normally receives payment at the inception of the contract and recognizes revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the obligations under the contract. The Company has elected to use the practical expedient related to disclosing the remaining performance obligations as of September 30, 2018, as the majority have a duration of less than one year.

A rollforward of the Company’s deferred revenue is as follows:

 

 

 

Nine Months Ended

September 30, 2018

 

Beginning balance, January 1(1)

 

$

14,448

 

Amount of deferred revenue recognized in income

 

 

(15,846

)

Additions to deferred revenue

 

 

13,869

 

Ending balance, September 30(2)

 

$

12,471

 

 

 

(1)

Beginning deferred revenue as of January 1, 2018 included $11,322 of current deferred revenue and $3,126 of long-term deferred revenue.

 

(2)

Ending deferred revenue as of September 30, 2018 included $9,136 of current deferred revenue and $3,335 of long-term deferred revenue.

Costs to Obtain and Fulfill a Contract

Under ASC 606, the Company expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administration expenses. The Company has elected to recognize the costs for freight and shipping when control over products has transferred to the customer as an expense in cost of sales.

The Company monitors and tracks the amount of product returns and reduces revenue at the time of shipment for the estimated amount of future returns, based on historical experience. The Company makes estimates evaluating its allowance for doubtful accounts. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any specific customer collection issues that it has identified.

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers:

 

 

 

Three Months Ended September 30, 2018

 

 

 

Vacuum &

Analysis

 

 

Light &

Motion

 

 

Total

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

239,924

 

 

$

186,331

 

 

$

426,255

 

Services

 

 

46,114

 

 

 

14,783

 

 

 

60,897

 

Total net revenues

 

$

286,038

 

 

$

201,114

 

 

$

487,152

 

 

11


MKS INSTRUMENTS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

Three Months Ended September 30, 2017

 

 

 

Vacuum &

Analysis

 

 

Light &

Motion

 

 

Total