MKS Instruments(US:MKSI)2021-02-23 22:04Part I Business MKS Instruments, Inc. provides instruments, systems, and process control solutions globally, serving semiconductor and advanced manufacturing markets through three reportable segments - MKS operates through two main product strategies: "Surround the Chamber®" for semiconductor customers and "Surround the Workpiece®" for laser-based manufacturing, expanded through the acquisitions of Newport and ESI2627 Revenue by Market (2018-2020) | Market | 2020 Revenue % | 2019 Revenue % | 2018 Revenue % | | :--- | :--- | :--- | :--- | | Semiconductor | 59% | 49% | 55% | | Advanced Markets | 41% | 51% | 45% | Customer Concentration (2018-2020) | Customer Group | 2020 Revenue % | 2019 Revenue % | 2018 Revenue % | | :--- | :--- | :--- | :--- | | Top 10 Customers | 44% | 33% | 41% | | Lam Research & Applied Materials | 24% | 18% | 23% | Research & Development Expenses (2018-2020) | Year | R&D Expense (in millions) | | :--- | :--- | | 2020 | $173.1 | | 2019 | $164.1 | | 2018 | $135.7 | - As of December 31, 2020, the company had a global workforce of approximately 5,800 individuals, with 49% in North America, 26% in the Asia-Pacific region, and 25% in Europe and the Middle East58 Risk Factors The company faces significant risks from the COVID-19 pandemic, semiconductor industry cyclicality, international operations, debt obligations, and intellectual property protection - The COVID-19 pandemic poses risks through government mandates, potential economic downturns, operational challenges, and supply chain interruptions, particularly from key suppliers in Malaysia and Mexico666871 - The business is highly dependent on capital spending in the semiconductor industry, which accounted for 59% of net revenues in 2020, an industry characterized by periodic and sometimes severe fluctuations82 - International operations, which accounted for 55% of 2020 net revenues, expose the company to risks including political instability, trade restrictions (tariffs), and unfavorable currency exchange rates7480 - The terms of the company's Term Loan Facility and ABL Facility impose significant financial obligations and restrictive covenants that limit its ability to incur additional debt, pay dividends, and make certain acquisitions115118 - Increased trade tensions between the U.S. and China have resulted in tariffs and sanctions against key customers like Huawei and SMIC, leading to loss of business and increased compliance burdens125126127 - As of December 31, 2020, goodwill and intangible assets represented approximately $1,579 million, or 40% of total assets, which are subject to impairment risk if business performance deteriorates124 Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None161 Properties MKS Instruments operates numerous principal and other facilities globally, both owned and leased, for manufacturing, research, and corporate functions, primarily in the US, China, France, Israel, Mexico, and Singapore Principal Facilities as of December 31, 2020 | Location | Activity | Segment(s) | Ownership | | :--- | :--- | :--- | :--- | | Shenzhen, China | Manufacturing and Service | Vacuum & Analysis, Light & Motion | Leased | | Beaune-la-Rolande/Brigueil, France | Manufacturing, R&D | Light & Motion | Owned | | Jerusalem, Israel | Manufacturing, Sales, R&D | Light & Motion | Owned & Leased | | Nogales, Mexico | Manufacturing and Service | Vacuum & Analysis, Light & Motion | Leased | | Andover, MA, USA | Corporate HQ, Manufacturing, R&D | Vacuum & Analysis | Owned & Leased | | Irvine, CA, USA | Manufacturing, R&D | Light & Motion | Leased | | Rochester, NY, USA | Manufacturing, Sales, Service, R&D | Vacuum & Analysis | Owned | Legal Proceedings The company is involved in a putative class action lawsuit related to the 2016 acquisition of Newport Corporation, but management believes it will not materially affect financial condition or results - The company is subject to a class action lawsuit, In re Newport Corporation Shareholder Litigation, stemming from its 2016 acquisition of Newport, with the case currently on appeal in the Nevada Supreme Court after the District Court granted summary judgment in favor of the defendants565566 Mine Safety Disclosures This item is not applicable to the company - Not applicable168 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities MKS Instruments' common stock is traded on Nasdaq, with a consistent dividend policy and an ongoing share repurchase program, demonstrating outperformance against market indices - The Board of Directors declared a cash dividend of $0.20 per share in each quarter of 2020 and 2019, totaling $0.80 per share annually173 - The company has a $200 million share repurchase program, of which approximately $127.0 million has been utilized since inception, with no shares repurchased during 2020 or 2019176177 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, MKS Instruments achieved significant revenue growth to $2.33 billion, driven by the semiconductor market, leading to improved gross margin, substantial net income increase, and strong operating cash flow Financial Performance (2020 vs. 2019) | Metric (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Total Net Revenues | $2,330.0 | $1,899.8 | | Gross Profit | $1,049.5 | $830.4 | | Gross Margin | 45.0% | 43.7% | | Income from Operations | $453.8 | $219.8 | | Net Income | $350.1 | $140.4 | - Net revenues in the semiconductor market increased by 49% ($457.4 million) in 2020 compared to 2019, driven by strong demand for capital equipment in memory, foundry, and logic manufacturing192 - Net revenues from advanced markets decreased by 3% ($27.2 million) in 2020, as growth in the Equipment & Solutions segment was offset by declines in the Light & Motion and Vacuum & Analysis segments, partly due to COVID-19 impacts on research and life sciences198 Net Revenues by Segment (in millions) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | Vacuum & Analysis | $1,405.9 | $990.5 | | Light & Motion | $689.6 | $725.6 | | Equipment & Solutions | $234.5 | $183.7 | - Cash flow from operations was strong at $513.2 million in 2020, a significant increase from $244.5 million in 2019269270 - As of December 31, 2020, the company had an outstanding principal balance of $833.4 million on its Term Loan Facility and has not borrowed against its $100 million ABL Facility286297 Quantitative and Qualitative Disclosures about Market Risk The company manages primary market risks from interest rate fluctuations on variable-rate debt and foreign currency exchange rates through derivative instruments like interest rate swaps and forward exchange contracts - The company is exposed to interest rate risk on its Term Loan Facility, with $533.4 million of the $833.4 million total debt at a variable interest rate as of December 31, 2020, managed using interest rate swaps323324 - To manage foreign currency risk, the company uses forward exchange contracts, with notional amounts totaling $176.2 million as of December 31, 2020, primarily to hedge exposures to the South Korean won and Japanese yen320321311 Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020, including an unqualified auditor's opinion from PricewaterhouseCoopers LLP, highlighting goodwill impairment assessment as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020330 - The critical audit matter identified was the quantitative goodwill impairment assessment for the Equipment & Solutions reporting unit, due to the significant management judgment involved in determining its fair value339340 Consolidated Balance Sheet Data (in millions) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $3,903.8 | $3,416.3 | | Total Liabilities | $1,542.9 | $1,393.0 | | Total Stockholders' Equity | $2,360.9 | $2,023.3 | Consolidated Statement of Operations Data (in millions) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Net Revenues | $2,330.0 | $1,899.8 | $2,075.1 | | Net Income | $350.1 | $140.4 | $392.9 | Consolidated Cash Flow Data (in millions) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $513.2 | $244.5 | $413.8 | | Net Cash from Investing Activities | $(202.4) | $(947.2) | $72.7 | | Net Cash from Financing Activities | $(121.5) | $476.2 | $(178.0) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports that there have been no changes in or disagreements with its accountants on accounting and financial disclosure - None577 Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020, with no material changes during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020578 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the criteria set forth in the Internal Control-Integrated Framework (2013) by COSO581 Other Information The company reports no other information for this item - None584 Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information for directors, executive officers, corporate governance, compensation, and principal accountant fees is incorporated by reference from the company's forthcoming 2021 Proxy Statement - Information for Part III (Items 10-14) is incorporated by reference from the company's forthcoming 2021 Proxy Statement587589590592593 Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including consolidated financial statements and various organizational documents - This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K596598 Form 10-K Summary This item is not applicable to the company - Not applicable604