MKS Instruments(MKSI)2023-11-08 20:39Ransomware Event Impact - Ransomware event negatively impacted Q1 2023 revenue by approximately $160 million, with $120 million recovered in Q2 and $30 million in Q3[123] - Net revenues for Q3 2023 in the semiconductor market decreased by $74 million (17%) compared to the prior quarter, with $20 million attributed to delayed orders from the ransomware event[134] - The ransomware event incurred net costs of $2 million for Q3 2023 and $14 million for the nine months ended September 30, 2023, primarily due to third-party consulting services and cybersecurity enhancements[125] - The company has recovered approximately $110 million of revenue from orders delayed by the ransomware event from Q1 2023[134] - Net revenues in the specialty industrial market decreased by $15 million (4%) for the three months ended September 30, 2023, compared to the prior quarter, with delayed orders due to a ransomware event impacting revenue by approximately $10 million[144] - Net product revenues decreased by $67 million for the three months ended September 30, 2023, compared to the prior quarter, with $17 million recovered from the ransomware event[149] Semiconductor Market Performance - Net revenues for Q3 2023 in the semiconductor market decreased by $74 million (17%) compared to the prior quarter, with $20 million attributed to delayed orders from the ransomware event[134] - Net revenues for the nine months ended September 30, 2023, in the semiconductor market decreased by $421 million (27%) compared to the same period in the prior year due to softened demand[135] - Net revenues from VSD decreased by $426 million for the nine months ended September 30, 2023, compared to the same period in the prior year, due to volume decreases in the semiconductor market[154] Electronics and Packaging Market Performance - Net revenues for Q3 2023 in the electronics and packaging market increased by $18 million (8%) compared to the prior quarter, driven by higher chemistry sales and increased PCB and package substrate production[138] - Net revenues for the nine months ended September 30, 2023, in the electronics and packaging market increased by $416 million (151%) compared to the same period in the prior year, primarily due to the Atotech Acquisition[139] Specialty Industrial Market Performance - The specialty industrial market net revenues for Q3 2023 were $322 million, representing 35% of total net revenues[131] - Net revenues in the specialty industrial market decreased by $15 million (4%) for the three months ended September 30, 2023, compared to the prior quarter, with delayed orders due to a ransomware event impacting revenue by approximately $10 million[144] - Net revenues in the specialty industrial market increased by $274 million (42%) for the nine months ended September 30, 2023, compared to the same period in the prior year, driven by the Atotech Acquisition[145] Atotech Acquisition Impact - Net revenues for the nine months ended September 30, 2023, in the electronics and packaging market increased by $416 million (151%) compared to the same period in the prior year, primarily due to the Atotech Acquisition[139] - Net revenues in the specialty industrial market increased by $274 million (42%) for the nine months ended September 30, 2023, compared to the same period in the prior year, driven by the Atotech Acquisition[145] - Net product revenues increased by $263 million for the nine months ended September 30, 2023, compared to the same period in the prior year, driven by the Atotech Acquisition, with MSD net product revenues increasing by $710 million[150] - Net revenues from MSD increased by $737 million for the nine months ended September 30, 2023, compared to the prior year, as MSD was established following the Atotech Acquisition[156] - Research and development expenses increased by $50 million for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to the Atotech Acquisition[164] - Selling, general, and administrative expenses increased by $195 million for the nine months ended September 30, 2023, driven by the Atotech Acquisition and ransomware-related costs[169] - Acquisition and integration costs for the nine months ended September 30, 2023, were $14 million, primarily related to the Atotech Acquisition[170] - Amortization of intangible assets decreased by $8 million in Q3 2023 compared to the prior quarter, but increased by $148 million for the nine months ended September 30, 2023, due to the Atotech Acquisition[172] - The Atotech Acquisition was completed on August 17, 2022, with a total net purchase price of $5.7 billion, funded by cash on hand and proceeds from the New Term Loan Facility[190] U.S. Export Regulations Impact - The company expects an annualized reduction of net revenues in the range of $250 million to $350 million due to new U.S. export regulations, with the impact currently expected to be on the lower end of that range[136] Financial Performance and Expenses - Total net revenues for Q3 2023 were $932 million, with semiconductor, electronics and packaging, and specialty industrial markets contributing 39%, 26%, and 35% respectively[131] - Gross margin for products decreased to 45.4% for the three months ended September 30, 2023, from 46.9% in the prior quarter, due to lower revenue volumes and higher inventory charges[157] - Gross margin for MSD increased to 54.1% for the three months ended September 30, 2023, from 50.0% in the prior quarter, driven by favorable product mix and lower overhead costs[163] - Selling, general, and administrative expenses decreased by $5 million in Q3 2023 compared to the prior quarter, primarily due to lower compensation and travel costs[168] - Restructuring charges for the nine months ended September 30, 2023, were $13 million, mainly due to severance costs from global cost-saving initiatives[171] - Non-cash goodwill impairments totaled $1,827 million in Q2 2023, with $826 million for the EL reporting unit, $428 million for the GMF reporting unit, and $372 million for the ESB reporting unit[175] - Interest expense increased by $5 million in Q3 2023 compared to the prior quarter, primarily due to higher interest rates on borrowings related to the Atotech Acquisition[178] - Net cash provided by operating activities was $138 million for the nine months ended September 30, 2023, despite a net loss of $1,772 million, driven by non-cash charges and working capital changes[187] - Net cash used in investing activities was $50 million for the nine months ended September 30, 2023, primarily due to $53 million in capital expenditures[188] - Net cash used in financing activities was $116 million for the nine months ended September 30, 2023, including $67 million for payments on the New Term Loan Facility and $44 million in dividend payments[188] - The company declared a cash dividend of $0.22 per share for each of the first three quarters of 2023, totaling $44 million for the nine months ended September 30, 2023[189] Research and Development - Research and development expenses increased by $50 million for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to the Atotech Acquisition[164] - Research and development efforts focus on improving instruments, components, chemistry, subsystems, systems, and process control solutions, with projects typically lasting 3 to 36 months[165] - New products are being developed to address industry trends such as the transition to 5G, larger substrate sizes in flat panel displays, and the shift to electric vehicles[166] Financing and Debt - The New Term Loan Facility includes three tranches: a USD 1 billion loan (USD Tranche A), a USD 3.6 billion loan (USD Tranche B), and a EUR 600 million loan (Euro Tranche B)[191] - As of September 30, 2023, the outstanding principal amount of the New Term Loan Facility was $5.0 billion with a weighted average interest rate of 7.9%[211] - The company made a voluntary prepayment of $100 million on the USD Tranche A on October 31, 2023[213] - The company has lines of credit and financing facilities in Japan, providing for aggregate borrowings of up to $13 million, with no borrowings as of September 30, 2023[214] - The company uses derivative instruments, such as foreign exchange forward contracts and interest rate swaps, to manage foreign currency and interest rate exposure[215] - The company converted USD LIBOR-based interest rate caps and swaps to Term SOFR, effective June 30, 2023, with no material impact on results of operations[217] Market Risk and Contractual Obligations - No material changes in the company's exposure to market risk from December 31, 2022 to September 30, 2023[219] - No changes outside the ordinary course of business to the company's contractual obligations as disclosed in the Annual Report[218] International Revenues - International revenues accounted for 66% of total net revenues for the nine months ended September 30, 2023, up from 56% in the prior year, primarily due to the Atotech Acquisition[146]