MKS Instruments(MKSI) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited financial statements show significant year-over-year growth in revenue, net income, and total assets Condensed Consolidated Balance Sheets Total assets grew to $4.37 billion, driven by acquisitions and strong retained earnings growth Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total current assets | $1,994.9 | $1,804.4 | | Goodwill | $1,226.2 | $1,066.4 | | Intangible assets, net | $589.5 | $512.2 | | Total assets | $4,365.9 | $3,903.8 | | Total current liabilities | $437.1 | $373.9 | | Long-term debt, net | $809.7 | $815.0 | | Total liabilities | $1,637.3 | $1,542.9 | | Retained earnings | $1,853.0 | $1,487.3 | | Total stockholders' equity | $2,728.6 | $2,360.9 | Condensed Consolidated Statements of Operations and Comprehensive Income The company reported strong year-over-year growth in revenue and net income for both Q3 and the nine-month period Q3 2021 vs Q3 2020 Performance (in millions, except EPS) | Metric | Q3 2021 | Q3 2020 | % Change | | :--- | :--- | :--- | :--- | | Total net revenues | $741.9 | $589.8 | +25.8% | | Gross profit | $348.4 | $262.0 | +32.9% | | Income from operations | $175.3 | $116.4 | +50.6% | | Net income | $132.4 | $91.7 | +44.4% | | Diluted EPS | $2.38 | $1.66 | +43.4% | Nine Months 2021 vs 2020 Performance (in millions, except EPS) | Metric | Nine Months 2021 | Nine Months 2020 | % Change | | :--- | :--- | :--- | :--- | | Total net revenues | $2,185.7 | $1,669.8 | +30.9% | | Gross profit | $1,025.7 | $747.9 | +37.1% | | Income from operations | $517.1 | $307.1 | +68.4% | | Net income | $401.2 | $234.5 | +71.1% | | Diluted EPS | $7.21 | $4.24 | +69.9% | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $2.73 billion, primarily driven by net income of $401.2 million - Retained earnings grew from $1,487.3 million at December 31, 2020, to $1,853.0 million at September 30, 2021[13] - The company paid cash dividends totaling $35.5 million during the first nine months of 2021[13][111] Condensed Consolidated Statements of Cash Flows Operating cash flow remained strong at $445.2 million, though investing activities increased due to an acquisition Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $445.2 | $366.0 | | Net cash used in investing activities | ($351.2) | ($172.3) | | Net cash used in financing activities | ($61.7) | ($115.3) | | Increase in cash and cash equivalents | $25.0 | $78.7 | - The acquisition of business, net of cash acquired, used $268.4 million in cash during the first nine months of 2021[18] Notes to Unaudited Condensed Consolidated Financial Statements The notes detail revenue disaggregation, the Photon Control acquisition, and the pending $5.1 billion Atotech acquisition - On July 15, 2021, the Company completed its acquisition of Photon Control for aggregate consideration of $302.7 million, funded with cash on hand[113][114] - On July 1, 2021, the Company entered into a definitive agreement to acquire Atotech Limited for approximately $5.1 billion in cash and stock, with the acquisition expected to close by the end of 2021[144] - The company's two largest customers, Lam Research Corporation and Applied Materials, Inc, represented 14.6% and 10.7% of net revenues, respectively, for the first nine months of 2021[133] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes strong performance to semiconductor market demand and discusses recent and pending acquisitions Overview and Recent Events The company completed the acquisition of Photon Control and announced a definitive agreement to acquire Atotech - Completed the acquisition of Photon Control, a designer of optical sensors for semiconductor wafer fabrication, on July 15, 2021, for CAD 378.6 million (USD 302.7 million)[153] - Entered into a definitive agreement to acquire Atotech, a process chemicals technology company, for approximately $5.1 billion[155] - Secured a commitment for a new $5.3 billion term loan facility and a $500 million revolving credit facility to fund the Atotech acquisition and refinance existing debt[155] Segments and Markets The semiconductor market drove performance, accounting for 61% of revenue with 36% year-over-year growth in Q3 - The Semiconductor market accounted for approximately 61% of net revenues for the nine months ended September 30, 2021[162] - Net revenues in the semiconductor market increased by 36% for Q3 2021 and 34% for the nine months ended Sep 30, 2021, compared to the same periods in the prior year[164] - The company is experiencing supply chain disruptions and component shortages in its semiconductor market, which may negatively impact revenue for Q4 2021[168] Results of Operations Q3 net revenues grew 25.8% year-over-year, with gross margin improving to 47.0% due to higher volumes Net Revenues by Segment (in millions) | Segment | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Vacuum & Analysis | $483.1 | $361.3 | $1,376.6 | $995.1 | | Light & Motion | $208.7 | $175.9 | $583.6 | $507.3 | | Equipment & Solutions | $50.1 | $52.6 | $225.5 | $167.4 | | Total | $741.9 | $589.8 | $2,185.7 | $1,669.8 | - Total gross margin increased to 47.0% in Q3 2021 from 44.4% in Q3 2020, primarily due to higher revenue volumes and favorable product mix[187][189] - Acquisition and integration costs were $8.6 million in Q3 2021, primarily related to the Photon Control acquisition and the announced Atotech acquisition[200] - The effective tax rate for Q3 2021 was 20.4%, compared to 15.7% in Q3 2020[96][97][206] Liquidity and Capital Resources The company maintains a strong liquidity position with $879.6 million in cash and robust operating cash flow - Cash and cash equivalents and short-term investments totaled $879.6 million at September 30, 2021[214] - Net cash provided by operating activities was $445.2 million for the nine months ended September 30, 2021[215] - The outstanding principal amount of the Term Loan Facility was $826.7 million as of September 30, 2021, with an interest rate of 1.8%[227] - The company declared dividends totaling $0.64 per share ($35.5 million) in the first nine months of 2021[221] Quantitative and Qualitative Disclosures About Market Risk There were no material changes in the company's market risk exposure since the last annual report - As of September 30, 2021, there were no material changes in the company's exposure to market risk from December 31, 2020[249] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the end of the quarter - The Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[250] - No changes occurred in the company's internal control over financial reporting during the quarter ended September 30, 2021, that would have a material effect[251] PART II. OTHER INFORMATION Legal Proceedings The company is involved in an ongoing legal proceeding related to the 2016 Newport Corporation acquisition - The company is subject to a legal proceeding stemming from the 2016 Newport Corporation merger, where plaintiffs allege breaches of fiduciary duty by Newport's former directors[141] - A Nevada District Court granted summary judgment in favor of the defendants in January 2020, but the plaintiffs have appealed to the Nevada Supreme Court[142] - Management believes the ultimate outcome of this and other ordinary course legal matters will not have a material adverse effect on the company's financial condition or results of operations[143] Risk Factors The report refers to risk factors previously disclosed in its 2020 Form 10-K and a prior Form 10-Q - For a discussion of risk factors, the report incorporates by reference the sections in the Annual Report on Form 10-K for the year ended December 31, 2020, and the Quarterly Report on Form 10-Q for the period ended June 30, 2021[254] Exhibits This section lists filed exhibits, including agreements for the Atotech acquisition and required officer certifications - Key exhibits filed include the Implementation Agreement with Atotech Limited dated July 1, 2021, and the associated debt Commitment Letter[256] - Certifications from the CEO and CFO pursuant to Rule 13a-14(a)/15d-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[256] Signatures