MKS INSTRUMENTS, INC.
2 TECH DRIVE, SUITE 201
ANDOVER, MA 01810
+1 978.645.5500
WWW.MKSINST.COM
ANNUAL REPORT
2018
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BOARD OF DIRECTORS
John R. Bertucci
Chairman
MKS Instruments, Inc.
Rajeev “Raj” Batra
President
Digital Factory Division, Siemens Industry, Inc.
Gregory R. Beecher
Vice President and Chief Financial Officer
Teradyne, Inc.
Richard S. Chute, Esq.
Gerald G. Colella
Chief Executive Officer
MKS Instruments, Inc.
Peter R. Hanley
Former President
Novellus Systems, Inc.
Rick D. Hess
Former Executive Vice President
Analog Devices, Inc.
Jacqueline F. Moloney
Chancellor
University of Massachusetts Lowell
Elizabeth A. Mora
Chief Administrative Officer
The Charles Stark Draper Laboratory, Inc.
MANAGEMENT
Gerald G. Colella
Chief Executive Officer
John T.C. Lee
President and
Chief Operating Officer
SHAREHOLDER CONTACTS
Corporate Headquarters
MKS Instruments, Inc.
2 Tech Drive, Suite 201
Andover, MA 01810
Telephone: 978.645.5500
www.mksinst.com
Seth H. Bagshaw
Senior Vice President, Chief Financial Officer
and Treasurer
Outside Counsel
Wilmer Cutler Pickering Hale and Dorr LLP
Boston, MA
Kathleen F. Burke
Senior Vice President, General Counsel
and Assistant Secretary
Independent Auditors
PricewaterhouseCoopers LLP
Boston, MA
John F. Ippolito
Senior Vice President
Strategic Development
Catherine M. Langtry
Senior Vice President
Global Human Resources
Stock Listing
NASDAQ Global Select Market
Symbol: MKSI
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Telephone: 718.921.8200
Fax: 718.765.8717
www.astfinancial.com
Shareholders may also
direct inquiries to:
Seth H. Bagshaw
Senior Vice President, Chief Financial Officer
and Treasurer
MKS Instruments, Inc.
2 Tech Drive, Suite 201
Andover, MA 01810
Telephone: 978.645.5500
www.mksinst.com
Annual Meeting of Shareholders
Wednesday, May 8, 2019, 10:00 a.m.
MKS Instruments, Inc.
2 Tech Drive, Suite 201
Andover, MA 01810
MKS INSTRUMENTS, INC. (NASDAQ: MKSI) 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.
FINANCIAL HIGHLIGHTS
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
------------------------------------------------------------
2018
-----------------
2017
-----------------
2016
-----------------
2015
-----------------
2014
-----------------
Statement of Operations (1)
Net revenues
Gross profit (2)
Income from operations (3)
Net income (4)
Basic net income per share
Diluted net income per share
$ 2,075,108
$ 1,915,977
$ 1,295,342
$ 813,524
$ 780,869
979,476
494,059
392,896
7.22
7.14
891,451
406,634
339,132
6.26
6.16
565,619
157,267
104,809
1.96
1.94
362,872
156,612
122,297
2.30
2.28
337,766
135,142
115,778
2.17
2.16
Cash dividends paid per common share
------------------------------------------------------------
0.78
-----------------
0.71
-----------------
0.68
-----------------
0.68
-----------------
0.66
-----------------
Balance Sheet (1)
Cash and cash equivalents, including restricted cash
$ 644,345
$ 333,887
$ 233,910
$ 227,574
$ 305,437
Short-term investments (5)
Working capital (5)
Total assets
Short-term debt (6)
Long-term debt, net (6)
Other liabilities (7)
73,826
1,200,819
2,614,246
3,986
343,842
133,932
209,434
946,431
189,463
761,469
430,663
848,527
286,795
791,665
2,414,018
2,212,242
1,273,347
1,224,044
2,972
389,993
145,296
10,993
601,229
131,921
—
—
—
—
21,482
38,595
Stockholders’ equity
------------------------------------------------------------
1,873,187
-----------------
1,588,907
-----------------
1,241,792
-----------------
1,160,881
-----------------
1,081,822
-----------------
(1) The Statement of Operations Data and the Balance Sheet Data for 2018, 2017 and 2016 include statement of operations data and assets and liabilities acquired
as a result of the acquisition of Newport Corporation (“Newport”) in April 2016 (the “Newport Merger”).
(2) Gross profit for 2016 includes a $15.1 million charge for the amortization of the inventory step-up to fair value related to the Newport Merger.
(3) Income from operations for 2018 includes $3.6 million of restructuring charges and $3.1 million of acquisition and integration costs, which is primarily comprised of
acquisition costs related to our acquisition of Electro Scientific Industries, Inc., which closed on February 1, 2019. Income from operations for 2017 includes $6.7
million of an asset impairment charge, primarily related to the write-off of goodwill and intangible assets in conjunction with the consolidation of two manufacturing
plants, $5.3 million of acquisition and integration costs from the Newport Merger and $3.9 million of restructuring charges. Income from operations for 2016
includes a $15.1 million charge for the amortization of the inventory step-up to fair value, $27.3 million of acquisition and integration costs from the Newport
Merger and $5.0 million of an asset impairment charge. Income from operations for 2015 includes $2.1 million of restructuring charges. Income from operations
for 2014 includes $2.5 million of restructuring charges.
(4) Net income for 2018 includes an $8.3 million windfall tax benefit on the vesting of stock-based compensation and $5.0 million of accrued taxes on MKS subsidiary
distributions. Net income for 2017 includes charges, net of tax, of $6.7 million of an asset impairment charge, $3.4 million of acquisition and integration costs
and $3.7 million of restructuring charges. Net income for 2017 also includes a gain, net of tax, of $72.0 million related to the sale of a business, a $28.7 million
transition tax on accumulated foreign earnings, a $14.0 million tax accrual on a distribution to a subsidiary, a $24.5 million deferred tax adjustment, which
also includes the reversal of a tax accrual on a French dividend related to the 2017 Tax Cut and Jobs Act, a $11.1 million windfall tax benefit on the vesting of
stock-based compensation and an adjustment, net of tax, of $5.9 million of amortization of debt issuance costs relating to the term loan credit agreement used
to partially finance the Newport Merger. Net income for 2016 includes charges, net of tax, of $9.8 million of amortization of inventory step-up to fair value, $19.0
million of acquisition and integration costs, $5.0 million of asset impairment charges and a $2.0 million withholding tax on dividends. These charges are offset
by a tax benefit of $5.0 million for a legal entity restructuring. Net income for 2015 includes charges, net of tax, of $1.4 million of restructuring costs and also
includes $7.7 million in tax credits for reserve releases related to the settlement of tax audits. Net income for 2014 includes charges, net of tax, of $1.5 million
of restructuring costs and also includes $14.6 million in tax credits for reserve releases related to the settlement of tax audits and the expiration of the statute of
limitations.
(5) Effective December 31, 2015, the Company changed the method of classification of its investments previously classified as long-term investments to short-term
investments within current assets. For the year ended December 31, 2014, short-term investments have been re-classified to include investments with contractual
maturities greater than one year from the date of purchase as management had the ability and intent, if necessary, to liquidate any of its cash equivalents
and investments in order to meet the Company’s liquidity needs in the next twelve months. Accordingly, working capital includes investments with contractual
maturities greater than one year from the date of purchase.
(6) Long-term debt, net includes $343.8 million in 2018, $389.3 million in 2017 and short-term and long-term debt, net includes $6.3 million and $600.7 million,
respectively, in 2016, related to the term loan credit agreement.
(7) Other liabilities include non-current deferred taxes and non-current accrued compensation.
Non-GAAP amounts exclude certain costs, including acquisition and integration costs, acquisition inventory step-up adjustments, expenses related to the sale of a business, excess and obsolete
inventory charges, adjustments for the sale of inventory previously written-down, fees and expenses related to the repricing of a term loan, amortization of debt issuance costs, restructuring costs,
environmental costs, asset impairment charges, gain on the sale of a business, net proceeds from an insurance policy, amortization of intangible assets, windfall tax benefits on stock-based
compensation, withholding taxes on dividends, special tax benefits and charges, tax benefits from legal entity restructurings, effects of US tax reform and the related tax effects of these adjustments.
These Non-GAAP measures are not in accordance with generally accepted accounting principles in the United States of America (“GAAP”). MKS management believes the presentation of these non-
GAAP financial measures is useful to investors for comparing prior periods and analyzing ongoing business trends and operating results.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, are statements that could be deemed to be forward looking statements. These statements are only
predictions based on current assumptions and expectations of our management. Words such as “may,” “will,” “should,” “could,” “would,” “projects,” “intends,” “believes,” “plans,” “anticipates,” “expects,”
“estimates,” “forecasts,” “intends,” “continues” and variations of such words and similar expressions are intended to identify such forward-looking statements. All forward-looking statements are subject
to risks and uncertainties, including those discussed in Part 1, Item 1A, “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. These and other factors could cause actual events or results
to differ materially from those in the forward-looking statements. 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 filing this Annual Report on Form 10-K, except to the extent required by law.
PERFORMANCE and PROFITABILITY
REVENUE
GROSS PROFIT
$2,500
$2,000
$1,500
$1,000
$500
$0
$500
$400
$300
$200
$100
$0
$750
$600
$450
$300
$2,075
$1,916
$1,295
$781
$814
$979
$891
$566
$338
$363
$1,000
$800
$600
$400
$200
$0
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
OPERATING EXPENSES
FREE CASH FLOW
$485
$485
$408
$203
$206
$500
$400
$300
$200
$100
$89
$0
$324
$351
$161
$126
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
OPERATING INCOME
NON-GAAP OPERATING INCOME
$494
$407
$750
$600
$450
$300
$150
$145
$0
$546
$471
$242
$164
$157
$157
$150
$135
$0
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
NET INCOME PER SHARE
NON-GAAP NET EARNINGS PER SHARE
$10.00
$8.00
$6.00
$4.00
$2.00
$0
$7.14
$6.16
$2.16
$2.28
$1.94
$10.00
$8.00
$6.00
$4.00
$2.00
$1.89
$0
$7.83
$5.96
$3.03
$2.22
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
ANNUAL REPORT 2018 1
TO OUR SHAREHOLDERS
2018 was another outstanding year for MKS, as
Sales for 2018 were $2.1 billion, an increase of 8% from
revenue and earnings per share both set new
$1.9 billion in 2017, driven by strong sales to both
Company records. Five years ago, we set a strategy
Semiconductor customers, specifically during the first
of delivering sustainable and profitable growth. One
half of the year, as well as customers in our Advanced
of the focus areas has been to enhance our strong
Markets. Our Semiconductor revenue increased 4% to
Semiconductor market portfolio, while broadening our
a record of more than $1.1 billion after a 45% increase
reach into Advanced Markets, which include industrial
in 2017 on a pro forma basis, reflecting the full year
technologies, life and health sciences, research, and
results of Newport Corporation, which we acquired in
defense. We have executed on this strategy with a
2016. In our Advanced Markets, revenue increased to a
combination of successfully integrating key acquisitions,
record $931 million in 2018, or 14% over 2017. This is
strengthening our product portfolio, and enhancing our
on top of the 14% year-over-year growth we achieved
go-to-market strategies for these new markets.
in 2017, on a pro forma basis.
Another year of record results demonstrates
our strategic ability to consistently deliver
sustainable and profitable growth.
Gerald G. Colella
Chief Executive Officer
John T.C. Lee
President and
Chief Operating Officer
Seth H. Bagshaw
Senior Vice President,
Chief Financial Officer and Treasurer
Kathleen F. Burke
Senior Vice President,
General Counsel and Assistant Secretary
John F. Ippolito
Senior Vice President,
Strategic Development
Catherine M. Langtry
Senior Vice President,
Global Human Resources
2 MKS INSTRUMENTS, INC.
Net income increased to $393 million in 2018 from
adding advanced systems expertise and deep technical
$339 million in 2017, an increase of 16%. And net
understanding of laser materials interactions. We
income per share increased to a record $7.14 in 2018,
expect ESI’s leadership in complex printed circuit board
an increase of 16% from a year ago, or 31% on a
processing systems and other capabilities to provide
non-GAAP basis.
MKS the opportunity to accelerate the roadmaps
Our ability to deliver these record results in a
challenging semiconductor environment was driven
primarily by balanced exposure to a diverse range of
Advanced Markets, coupled with our long-standing
commitment to managing expenses.
and performance of our laser, motion, and photonics
portfolio. We expect to further progress our philosophy
of “Solve Together. Succeed Together” by bringing the
best technologies and high quality, reliable solutions
in partnership with our customers. This acquisition
also provides MKS with a very balanced portfolio, with
For the last five years, we have focused on delivering
approximately 51% of our combined revenue in 2018
sustainable and profitable growth, by executing on a
coming from Advanced Markets, and 49% from the
combination of internal improvements and strategic
Semiconductor market, on a pro forma basis, reflecting
acquisitions. During this period, we have tripled
the full year results of ESI.
revenue, from $670 million to over $2 billion, and
delivered a 966% increase in earnings per share. In
terms of broadening our customer and market reach,
we grew our Semiconductor market business by 150%
and our Advanced Markets business by 340%. These
accomplishments are a testament to the MKS Business
Process, our close relationships with our customers and
suppliers, and the skills and dedication of our strong
MKS team around the world.
We have been clear in our strategy to broaden
MKS’ exposure to new customers and markets. The
acquisition of Electro Scientific Industries, or ESI, which
closed on February 1, 2019, is another significant step
in executing this strategy, and expands our addressable
market by approximately $2.2 billion. We expect the
addition of ESI to strengthen our expertise in the
lasers, photonics and optics markets, enabling us to
develop systems that provide unique and cost-effective
solutions to meet the challenges of our customers’
evolving technology needs. This acquisition further
broadens our Surround the WorkpieceSM offerings by
As we look ahead to 2019, we will continue to build
on our accomplishments of 2018. We will renew our
focus on delivering sustainable and profitable growth
and creating long-term value for our shareholders. In
closing, I want to again thank our dedicated employees
and our management team for their contributions.
And I want to thank you, our customers, suppliers, and
shareholders, for your continued confidence in MKS.
Gerald G. Colella
Chief Executive Officer
ANNUAL REPORT 2018 3
RECONCILIATION OF GAAP NET INCOME FROM OPERATIONS TO NON-GAAP NET EARNINGS
(in thousands, except per share data) Year Ended December 31,
------------------------------------------------------------------------------------------
2017
-----------------
2018
-----------------
2016
-----------------
Net income
Adjustments:
$ 392,896
$ 339,132
$ 104,809
Acquisition and integration costs
Acquisition inventory step-up
Expenses related to sale of a business
Excess and obsolete inventory charge
Sale of previously written down inventory
Fees and expenses relating to repricing of term loan
Amortization of debt issuance costs
Restructuring
Environmental costs
Asset impairment
Gain on sale of business
Net proceeds from an insurance policy
Amortization of intangible assets
Windfall tax benefit on stock-based compensation
Withholding tax on dividends
Special tax (benefit)/expense
Tax benefit from legal entity restructuring
Effects of US tax reform
Pro forma tax adjustments
3,113
—
—
—
—
378
3,884
3,567
1,000
—
—
—
43,521
(8,277)
(5,033)
541
—
(586)
(4,655)
5,332
—
859
1,160
—
492
9,405
3,920
—
6,719
(74,856)
—
45,743
(11,071)
14,000
—
—
4,112
(16,763)
27,279
15,090
—
—
—
1,239
6,897
642
—
5,000
—
(1,323)
35,681
—
1,362
—
(5,038)
—
(27,617)
2015
-----------------
$ 122,297
2014
-----------------
$ 115,778
30
—
—
488
(2,098)
—
—
2,074
—
—
—
—
6,764
—
—
(7,692)
—
—
499
2,179
—
—
—
—
—
2,464
—
—
—
—
4,945
—
—
(21,117)
—
—
(2,790)
(3,569)
-----------------------------------------------------------------------------------------
-----------------
-----------------
-----------------
-----------------
-----------------
Non-GAAP net earnings
$ 430,349
$ 328,184
$ 164,021
$ 119,073
$ 101,179
RECONCILIATION OF GAAP INCOME FROM OPERATIONS TO NON-GAAP INCOME FROM OPERATIONS
(in thousands, except per share data) Year Ended December 31,
2015
-----------------
------------------------------------------------------------------------------------------
2018
-----------------
2017
-----------------
2016
-----------------
Income from operations
Adjustments:
Acquisition and integration costs
Acquisition inventory step-up
Expenses related to sale of a business
Excess and obsolete inventory charge
Sale of previously written down inventory
Fees and expenses relating to repricing of term loan
Restructuring
Environmental costs
Asset impairment
Amortization of intangible assets
$ 494,059
$ 406,634
$ 157,267
$ 156,612
3,113
—
—
—
—
378
3,567
1,000
—
43,521
5,332
—
859
1,160
—
492
3,920
—
6,719
45,743
27,279
15,090
—
—
—
1,239
642
—
5,000
35,681
30
—
—
488
(2,098)
—
2,074
—
—
6,764
2014
-----------------
$ 135,142
499
2,179
—
—
—
—
2,464
—
—
4,945
-----------------------------------------------------------------------------------------
-----------------
-----------------
-----------------
-----------------
-----------------
Non-GAAP income from operations
$ 545,638
$ 470,859
$ 242,198
$ 163,870
$ 145,229
RECONCILIATION OF GAAP NET INCOME PER SHARE TO NON-GAAP NET EARNINGS PER SHARE
(in thousands, except per share data) Year Ended December 31,
------------------------------------------------------------------------------------------
2017
-----------------
2018
-----------------
2016
-----------------
2015
-----------------
Net income per share
Adjustments:
$ 7.14
$ 6.16
$ 1.94
$ 2.28
Acquisition and integration costs
Acquisition inventory step-up
Expenses related to sale of a business
Excess and obsolete inventory charge
Sale of previously written down inventory
Fees and expenses relating to repricing of term loan
Amortization of debt issuance costs
Restructuring
Environmental costs
Asset impairment
Gain on sale of business
Net proceeds from an insurance policy
Amortization of intangible assets
Windfall tax benefit on stock-based compensation
Withholding tax on dividends
Special tax (benefit)/expense
Tax benefit from legal entity restructuring
Effects of US tax reform
Pro forma tax adjustments
0.06
—
—
—
—
0.01
0.07
0.06
0.02
—
—
—
0.79
(0.15)
(0.09)
0.01
—
(0.01)
(0.08)
0.10
—
0.02
0.02
—
0.01
0.17
0.07
—
0.12
(1.36)
—
0.83
(0.20)
0.25
—
—
0.08
(0.31)
0.50
0.28
—
—
—
0.02
0.13
0.01
—
0.09
—
(0.02)
0.66
—
0.02
—
(0.09)
—
(0.51)
—
—
—
—
(0.04)
—
—
0.04
—
—
—
—
0.13
—
—
(0.14)
—
—
(0.05)
2014
-----------------
$ 2.16
0.01
0.04
—
—
—
—
—
0.05
—
—
—
—
0.09
—
—
(0.39)
—
—
(0.07)
-----------------------------------------------------------------------------------------
-----------------
-----------------
-----------------
-----------------
-----------------
Non-GAAP net earnings per share
Weighted average shares outstanding
$ 7.83
54,992
$ 5.96
55,074
$ 3.03
54,051
$ 2.22
53,560
$ 1.89
53,515
4 MKS INSTRUMENTS, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(MARK ONE)
È
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
(State or other Jurisdiction of
Incorporation or Organization)
2 Tech Drive, Suite 201, Andover, Massachusetts
(Address of Principal Executive Offices)
04-2277512
(IRS Employer
Identification No.)
01810
(Zip Code)
(978) 645-5500
(Registrant’s Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Common Stock, no par value
Name of exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È
No ‘
Indicate by check mark if the registrant
is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.
Yes ‘
No È
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
No ‘
subject to such filing requirements for the past 90 days. Yes È
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 such files). Yes È
No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. È
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. (Check one):
Large accelerated filer È 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 or 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 È
Aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant as of June 30, 2018 based on the
closing price of the registrant’s common stock on such date as reported by the Nasdaq Global Select Market: $5,217,380,580.
Number of shares outstanding of the issuer’s common stock, no par value, as of February 19, 2019: 54,197,726
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for MKS’ Annual Meeting of Stockholders to be held on May 8, 2019 are incorporated by
reference into Part III of this Form 10-K.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
TABLE OF CONTENTS
PART I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
2
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31
32
33
34
35
37
39
64
66
127
127
128
129
129
129
129
129
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits and Financial Statement Schedules
Item 15.
Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
130
134
136
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. When used herein, the words “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,”
“may,” “see,” “will,” “would” and similar expressions are intended to identify forward-looking statements
although not all forward-looking statements contain these identifying words. These forward-looking statements
reflect management’s current opinions and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those stated or implied. MKS assumes no obligation to update this information.
Risks and uncertainties include, but are not limited to, those discussed in the section entitled “Risk Factors” of
this annual report on Form 10-K.
Item 1.
Business
PART I
MKS Instruments, Inc. (“MKS” or the “Company”) was founded in 1961 as a Massachusetts corporation.
We are 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. 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, RF & DC 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.
Recent Events
Acquisition of Electro Scientific Industries, Inc.
On February 1, 2019, we completed our previously announced acquisition of Electro Scientific Industries,
Inc., an Oregon corporation (“ESI”), pursuant to the Agreement and Plan of Merger (the “ESI Merger”). ESI is
an innovator in laser-based manufacturing solutions for micro-machining applications. Micro-machining
applications are used extensively in the manufacture of mobile devices, electronic components, thin film devices
and semiconductor packaging. At the effective time of the ESI Merger and pursuant to the terms and conditions
of the Agreement and Plan of Merger, each share of ESI’s common stock issued and outstanding as of
immediately prior to the effective time of the ESI Merger was converted into the right to receive $30.00 per share
in cash, without interest and subject to deduction for any required withholding tax. We paid to the former ESI
stockholders aggregate consideration of approximately $1 billion, excluding related transaction fees and
expenses. We funded the payment of the aggregate consideration with a combination of our available cash on
hand and proceeds from our term loan facility described below.
In connection with the completion of the ESI Merger, we entered into an amendment (“Amendment No. 5”)
to our Term Loan Credit Agreement with Barclays Bank PLC as administrative agent and collateral agent, that
provided additional tranche B-5 term loan commitment in the principal amount of $650.0 million, which we used
to partially fund the ESI Merger.
Also, in connection with the completion of the ESI Merger, we terminated our $50.0 million asset-based
credit agreement with Deutsche Bank AG New York Branch as administrative and collateral agent, and we
entered into an asset-based credit agreement with Barclays Bank PLC, as administrative agent and collateral
agent, that provides senior secured revolving credit financing of up to $100.0 million, subject to a borrowing base
limitation.
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Other Dispositions and Acquisitions
Sale of Data Analytics Solutions Business
In April 2017, we completed the sale of our Data Analytics Solutions business for total proceeds of
$72.5 million, net of cash sold and recorded a pre-tax gain of $74.9 million. This business, which had net
revenues in 2016 of $12.7 million and was included in our Vacuum & Analysis segment, was no longer a part of
our long-term strategic objectives. The business did not qualify as a discontinued operation as this sale did not
represent a strategic shift in our business, nor did the sale have a major effect on our operations. Therefore, the
results of operations for all periods are included in our income from operations. The assets and liabilities of this
business have not been reclassified or segregated in the consolidated balance sheet or consolidated statements of
cash flows as the amounts were immaterial.
Acquisition of Newport Corporation
On April 29, 2016, we completed our acquisition of Newport Corporation (“Newport”) pursuant to an
Agreement and Plan of Merger dated as of February 22, 2016 (the “Newport Merger”). At the effective time of
the Newport Merger, each share of Newport’s common stock issued and outstanding as of immediately prior to
the effective time of the Newport Merger was converted into the right to receive $23.00 in cash, without interest
and subject to deduction for any required withholding tax. We paid to the former Newport stockholders aggregate
consideration of approximately $905 million, excluding related transaction fees and expenses, and repaid
approximately $93 million of Newport’s U.S. indebtedness outstanding as of immediately prior to the effective
time of the Newport Merger. We funded the payment of the aggregate consideration with a combination of our
available cash on hand of approximately $240 million and the proceeds from the senior secured term loan facility
in the principal amount of $780 million (see Note 13 to Notes to Consolidated Financial Statements in Item 8 of
this Annual Report on Form 10-K).
Newport was a global supplier of advanced-technology products and systems to customers in the scientific
research and defense/security, microelectronics, life and health sciences and industrial manufacturing markets.
Reportable Segments
Effective April 29, 2016, in conjunction with our acquisition of Newport, we changed the structure of our
reportable segments based upon our organizational structure and how our Chief Operating Decision Maker
utilizes information provided to allocate resources and make decisions. Our two reportable segments are the
Vacuum & Analysis segment and the Light & Motion segment. The Vacuum & Analysis segment represents
primarily the legacy MKS business and the Light & Motion segment represents the remaining legacy Newport
business. With the acquisition of ESI, we will be adding a third segment.
The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which
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, RF & DC power, reactive gas generation and vacuum technology. The Light & Motion
segment provides a broad range of instruments, components and subsystems which are derived from our core
competencies in lasers, photonics, sub-micron positioning, vibration control, and optics.
We group our products into six product groups based upon the similarity of the product function, type of
product and manufacturing processes. These six groups are: Analytical and Controls Solutions Products; Power,
Plasma and Reactive Gas Solutions Products; Vacuum Solutions Products; Photonics Products; Optics Products;
and Laser Products. The Analytical and Controls Solutions Products, the Power, Plasma and Reactive Gas
Solutions Products and the Vacuum Solutions Products are included in the Vacuum & Analysis segment and the
Photonics Products, Optics Products and Laser Products are included in the Light & Motion segment.
3
For further information on our segments, see Note 19 to the Notes to the Consolidated Financials contained
in this Annual Report on Form 10-K.
Where You Can Find More Information
We file reports, proxy statements and other documents with the Securities and Exchange Commission
(“SEC”). Our SEC filings are available to you on the SEC’s internet site at http://www.sec.gov.
Our website is http://www.mksinst.com. We are not including the information contained in our website as
part of, or incorporating it by reference into, this annual report on Form 10-K. We make available free of charge
through our internet site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we
electronically file such materials with, or furnish them to, the SEC.
Markets and Applications
Since our inception, we have focused on satisfying the needs of our customers by establishing long-term
collaborative relationships. We have a diverse base of customers and our primary served markets are
manufacturers of capital equipment for semiconductor manufacturing, industrial technologies, life and health
sciences, as well as research and defense. Approximately 55%, 57% and 56% of our net revenues for the years
2018, 2017 and 2016, respectively, were from sales to semiconductor capital equipment manufacturers and
semiconductor device manufacturers.
Approximately 45%, 43% and 44% of our net revenues in the years 2018, 2017 and 2016, respectively, were
from advanced manufacturing applications. These include, but are not limited to, industrial technologies, life and
health sciences, as well as research and defense.
A significant portion of our net revenues are from sales to customers in international markets. For the years
2018, 2017 and 2016, international net revenues accounted for approximately 51%, 50% and 48% of our total net
revenues, respectively. A significant portion of our international net revenues were in South Korea, Japan,
Germany and Israel. We expect that international revenues will continue to account for a significant percentage
of total net revenues for the foreseeable future, and that in particular, the proportion of our sales to Asian
customers will continue to increase, due in large part to our acquisition of ESI, as approximately ninety percent
of ESI’s customers are located in Asia. Long-lived assets, located in the United States, were $147 million,
$125 million and $123 million as of December 31, 2018, 2017 and 2016, respectively, excluding goodwill and
intangibles and long-term tax-related accounts. Long-lived assets, located outside of the United States, were
$77 million, $78 million, and $78 million as of December 31, 2018, 2017 and 2016, respectively, excluding
goodwill and intangibles and long-term tax-related accounts.
Semiconductor Manufacturing Applications
A significant portion of our sales are derived from products sold to semiconductor capital equipment
manufacturers and semiconductor device manufacturers. Our products are used in the major semiconductor
processing steps such as depositing thin films of material onto silicon wafer substrates, etching, cleaning,
lithography, metrology and inspection.
We anticipate that the semiconductor manufacturing market will continue to account for a substantial
portion of our sales. While the semiconductor device manufacturing market is global, major semiconductor
capital equipment manufacturers are concentrated in China, Japan, South Korea, Taiwan, and the United States.
4
Advanced Markets
In addition to semiconductor manufacturing, our products are used in the industrial technologies, life and
health sciences, as well as research and defense markets.
Industrial Technologies
Industrial Technologies encompasses a wide range of diverse applications such as glass coating, laser
marking, measurement and scribing, natural gas and oil production, environmental monitoring and electronic thin
films. Electronic thin films are a primary component of numerous electronic products including flat panel
displays, light emitting diodes, solar cells and data storage media.
Industrial Technologies manufacturers are located in developed and developing countries across the globe.
Life and Health Sciences
Our products for Life and Health Sciences are used in a diverse array of applications including bioimaging,
medical
and surgical
instrumentation, consumable medical supply manufacturing and pharmaceutical production. Our Life and Health
Sciences customers are located globally.
sterilization, medical device manufacturing,
analytical, diagnostic
instrument
Research and Defense
In addition, our products are sold to government, university and industrial laboratories for applications
involving research and development in materials science, physical chemistry, photonics, optics and electronics
materials. Our products are also sold for monitoring and defense applications including surveillance, imaging and
infrastructure protection. Major equipment providers and research laboratories are concentrated in China,
Europe, Japan, South Korea, Taiwan and the United States.
Product Groups
Vacuum &Analysis Segment
The Vacuum & Analysis segment includes Analytical and Control Solutions Products; Vacuum Solutions
Products; and Power, Plasma and Reactive Gas Solutions Products.
Analytical and Control Solutions. Our Analytical and Control Solutions Products include gas analyzers,
automation control products, I/O modules, automation software, and precision machined components and
electromechanical assemblies.
Vacuum Solutions. Our Vacuum Solutions Products consist of two primary product offerings: Pressure
and Vacuum Measurement Solutions Products and Materials Delivery Solutions Products.
• Pressure and Vacuum Measurement Solutions Products. Our Pressure and Vacuum Measurement
Solutions Products consist of direct and indirect pressure measurement and integrated process solutions.
Each of our pressure measurement and vacuum product lines consist of products that are designed for a
variety of pressure ranges and accuracies.
• Materials Delivery Solutions Products. Our Materials Delivery Solutions Products include flow and
valve technologies as well as integrated pressure measurement and control subsystems to provide
customers with precise control capabilities that are optimized for a given application.
5
Power, Plasma and Reactive Gas Solutions. Our Power, Plasma and Reactive Gas Solutions Products
include power delivery, plasma and reactive gas products used in semiconductor and other thin film applications
and in medical imaging equipment applications.
• Power Delivery Products. We design and manufacture microwave, direct current and radio frequency
power delivery systems as well as radio frequency matching networks and metrology products. In the
semiconductor, industrial technologies and other market sectors, our power supplies are used to provide
energy to various etching, stripping and deposition processes. Our power amplifiers are also used in
medical imaging equipment.
• Plasma and Reactive Gas Products. We design and manufacture reactive gas products, which create
reactive species. A reactive species is an atom or molecule in an unstable state, which is used to facilitate
various chemical reactions in the processing of thin films (deposition of films, etching and cleaning of
films and surface modifications). A number of different technologies are used to create reactive gas
including different plasma technologies and barrier discharge technologies.
Light and Motion Segment
The Light and Motion segment includes Laser Products; Photonics Products; and Optics Products.
Lasers. Our Laser Products include lasers and laser-based systems including ultrafast
lasers and
amplifiers, fiber lasers, diode-pumped solid-state lasers, high-energy pulsed lasers and tunable lasers. In addition
to providing a wide range of standard and configured laser products and accessories to our end-user customers,
we also work closely with our original equipment manufacturer (“OEM”) customers to develop lasers and laser
system designs optimized for their product and technology roadmaps.
Photonics. Our Photonics Products include optical components, lens assemblies and vibration isolation
solutions as well as three-dimensional non-contact measurement sensors and equipment. We also design, develop
and manufacture subsystems and subassemblies that integrate our broad portfolio of products and technologies
into solutions that meet the specific application requirements of our OEM and select end-user customers. Our
Photonics Products also includes our instruments and motion products which includes high-precision motion
stages and controls, hexapods, photonics instruments for measurement and analysis, and production equipment
for test and measurement customers.
Optics. Our Optics Products include precision optics, thin-film filters and coatings, replicated mirrors and
ruled and holographic diffraction gratings.
Customers
We sell our products to thousands of customers worldwide, in a wide range of end markets. Our largest
customers include leading semiconductor capital equipment manufacturers such as Applied Materials, Inc. and
Lam Research Corporation. Revenues from our top ten customers accounted for approximately 41%, 43% and
39% of net revenues for the years 2018, 2017 and 2016, respectively. Applied Materials, Inc. accounted for 12%,
13% and 14% and Lam Research Corporation accounted for 11%, 12% and 11% of our net revenues for the years
2018, 2017 and 2016, respectively.
Sales, Marketing, Service and Support
Our worldwide sales, marketing, service and support organization is critical to our strategy of maintaining
close relationships with semiconductor capital equipment and device manufacturers and manufacturers of
advanced applications. We market and sell our products and services through our global direct sales organization,
an international network of independent distributors and sales representatives, our websites and product catalogs.
As of December 31, 2018, we had 475 sales employees worldwide, located in the United States, United
6
Kingdom, China, Japan, Israel, South Korea, Germany, France, Taiwan, Singapore, Netherlands and Italy. We
maintain a marketing staff that identifies customer requirements, assists in product planning and specifications,
and focuses on future trends in semiconductor and other markets.
As semiconductor device manufacturers have become increasingly sensitive to the significant costs of
system downtime, they have required that suppliers offer comprehensive local repair, field service and customer
support. Manufacturers require close support to enable them to repair, modify, upgrade and retrofit their
equipment to improve yields and adapt new materials or processes. To meet these market requirements, we
provide technical support from offices located in China, Germany, Japan, South Korea, Singapore, Taiwan, the
United Kingdom, Israel and the United States. We provide repair and calibration services at internal service
depots and authorized service providers located worldwide. We typically provide warranties for periods ranging
from one to three years, depending upon the type of product, with the majority of our products ranging from one
to two years. We typically provide warranty on our repair services for periods ranging from 90 days to up to one
year, depending upon the type of repair.
Research and Development
Our products incorporate sophisticated technologies to measure, monitor, deliver, analyze, power and
control complex semiconductor and advanced manufacturing processes, thereby enhancing uptime, yield and
throughput for our customers. Our products have continuously advanced as we strive to meet our customers’
evolving needs. We have developed, and continue to develop, new products to address industry trends, such as
the shrinking of integrated circuit critical dimensions and technology inflections, and, in the flat panel display
and solar markets,
the transition to larger substrate sizes, which require more advanced process control
technology. In addition, we have developed, and continue to develop, products that support the migration to new
classes of materials, ultra-thin layers, and 3D structures that are used in small geometry manufacturing. We
involve our marketing, engineering, manufacturing and sales personnel in the development of new products in
order to reduce the time to market for new products. Our employees also work closely with our customers’
development personnel, helping us to identify and define future technical needs on which to focus research and
development efforts. We support research at academic institutions targeted at advances in materials science and
semiconductor process development.
As of December 31, 2018, we had 663 research and development employees, primarily located in the United
States, France and Israel. Our research and development expenses were $135.7 million, $132.6 million and
$110.6 million for the years 2018, 2017 and 2016, respectively. Our research and development efforts include
numerous projects, none of which are individually material, and generally have a duration of 3 to 30 months
depending upon whether the product is an enhancement of existing technology or a new product. Our current
initiatives include projects to enhance the performance characteristics of older products, to develop new products
and to integrate various technologies into subsystems.
Manufacturing
Our manufacturing facilities are located in Austria, China, France, Germany, Israel, Italy, South Korea,
Mexico, Romania, the United Kingdom and the United States. Manufacturing activities include the assembly and
testing of components and subassemblies, which are integrated into our products. We outsource some of our
assembly work. We purchase a wide range of electronic, optical, mechanical and electrical components, some of
which are designed to our specifications. We consider our lean manufacturing techniques and responsiveness to
customers’ significantly fluctuating product demands to be a competitive advantage. As of December 31, 2018,
we had 3,109 manufacturing-related employees, located primarily in North America (United States) and Asia
(primarily China and Israel).
Backlog
At December 31, 2018, our backlog of unfilled orders for all products and services was $400 million,
compared to $464 million at December 31, 2017. The decrease in backlog of $64 million in 2018 compared to
7
2017 is primarily attributed to a decrease in business levels throughout our company in the second half of 2018.
As of December 31, 2018, approximately $391 million of our consolidated backlog was scheduled to be shipped
on or before December 31, 2019. In general, we schedule production of our products based upon our customers’
delivery requirements. Our lead times are very short, as a large portion of our orders are received and shipped
within 90 days. While backlog is calculated on the basis of firm orders, orders may be subject to cancellation or
delay, in many cases, by the customer with limited or no penalty. Our backlog at any particular date, therefore, is
not necessarily indicative of actual sales which may be generated for any succeeding period. Historically, our
backlog levels have fluctuated based upon the ordering patterns of our customers and changes in our
manufacturing capacity.
Competition
The market for our products is highly competitive. Principal competitive factors include:
• historical customer relationships;
• product quality, performance and price;
• breadth of product line;
• manufacturing capabilities; and
• customer service and support.
Although we believe that we compete favorably with respect to these factors, there can be no assurance that
we will continue to do so.
We encounter substantial competition in most of our product lines, although no single competitor competes
with us across all product lines. Certain of our competitors may have greater financial and other resources than
we do. In some cases, competitors are smaller than we are, but are well established in specific product niches.
For example, Advanced Energy Industries, Inc. offers products that compete with our power delivery and
reactive gas generator products. Hitachi Ltd. and Horiba Ltd. products compete with our product line of mass
flow controllers. Inficon, Inc. offers products that compete with our vacuum measurement and gas analysis
products and our vacuum gauging products. Nor-Cal Products, Inc. and VAT, Inc. offer products that compete
with our vacuum components.
Ametek, Inc. offers products that compete with our optics and photonics products. Coherent, Inc. offers
products that compete with our lasers and photonics instruments. Excelitas Technologies Corp. offers products
that compete with our laser and optics products. IDEX Corporation offers products that compete with our lasers,
optics, and photonics subsystems. IPG Photonics, Inc. offers products that compete with our laser products.
Jenoptik AG offers products that compete with our laser, optics, and photonics products. PI miCos GmbH offers
products that compete with our photonics products. Thorlabs, Inc. offers products that compete with our optics,
lasers and photonics products. Trumpf Group offers products that compete with our laser products.
Patents and Other Intellectual Property Rights
We rely on a combination of patent, copyright, trademark and trade secret laws and license agreements to
establish and protect our proprietary rights. As of December 31, 2018, we owned 510 U.S. patents and 984
foreign patents that expire at various dates through 2038. As of December 31, 2018, we had 82 pending U.S.
patent applications. Foreign counterparts of certain U.S. applications have been filed or may be filed at the
appropriate time.
We require each of our employees, including our executive officers, to enter into standard agreements
pursuant to which the employee agrees to keep confidential all of our proprietary information and to assign to us
all inventions while they are employed by us.
8
Employees
As of December 31, 2018, we employed 4,851 persons. We believe that our ongoing success depends upon
our continued ability to attract and retain highly skilled employees. Outside of the United States, there are certain
countries where our employees are represented by works counsel or trade unions, as is common practice or
required by law. We believe that our employee relations are good.
Item 1A. Risk Factors
The following describes certain risks we face in our business. Additional risks that we do not yet know of or
that we currently believe are immaterial may also impair our business. If any of the events or circumstances
described in the following risks actually occurs, our business, financial condition or results of operations could
suffer, and the trading price of our common stock could decline. In assessing these risks, investors should also
refer to the other information contained or incorporated by reference in this report and our other filings with the
Securities and Exchange Commission.
Our business depends substantially on capital spending in the semiconductor industry, which is characterized
by periodic fluctuations that may cause a reduction in demand for our products.
Approximately 55%, 57% and 56% of our net revenues for the years 2018, 2017 and 2016, respectively,
were from sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers.
While our acquisition of Newport Corporation, (“Newport”) in 2016, has reduced our concentration of customers
in these markets and we expect some additional reduction as a result of our February 2019 acquisition of Electro
Scientific Industries, Inc. (“ESI”), we anticipate that sales to such customers will continue to account for a
substantial portion of our net revenues. Our business depends upon the capital expenditures of semiconductor
device manufacturers, which in turn depends upon the demand for semiconductors.
The semiconductor industry is characterized by rapid technological change, frequent product introductions,
changing customer requirements and evolving industry standards. Because our customers face uncertainties with
regard to the growth and requirements of these markets, their products and components may not achieve, or
continue to achieve, anticipated levels of market acceptance. If our customers are unable to deliver products that
gain market acceptance, it is likely that these customers will not purchase our products or will purchase smaller
quantities of our products. We often invest substantial resources in developing our products and subsystems in
advance of significant sales of these products and subsystems to such customers. A failure on the part of our
customers’ products to gain market acceptance, or a failure of the semiconductor market to sustain current sales
levels or to grow would have a significant negative effect on our business, financial condition and results of
operations.
The semiconductor industry has historically been characterized by cyclical variations in product supply and
demand. These sometimes sudden and severe cycles may result from a number of factors, including overall
consumer and industrial spending and demand for electronic products that drive manufacturer production, as well
as the manufacturer’s capacity utilization, timing of new product introductions and demand for customers’
products, inventory levels relative to demand and access to affordable capital. The timing, severity and duration
of these market cycles are difficult to predict, and we may not be able to respond effectively to these cycles. The
cyclicality of the semiconductor market is demonstrated by the changes in sales to semiconductor capital
equipment and device manufacturers in past years. For example, our sales to semiconductor capital equipment
manufacturers and semiconductor device manufacturers increased compared to the prior year by 4%, 52% and
29% in 2018, 2017 and 2016, respectively. While we experienced strong sales to these customers during the first
half of 2018, we saw moderation in capital spending in the semiconductor capital equipment industry in the third
and fourth quarters of 2018 with a similar effect on our semiconductor-related revenue, and we expect that to
continue into the first half of 2019. The 52% increase in 2017, compared to 2016, was mainly attributable to an
increase in volume from our semiconductor customers and from the full year effect of net sales from Newport,
which we acquired in April 2016.
9
During semiconductor market downturns, periods of overcapacity have resulted in rapid and significantly
reduced demand for our products, which may result in lower gross margins due to reduced absorption of
manufacturing overhead, as our ability to rapidly and effectively reduce our cost structure in response to such
downturns is limited by the fixed nature of many of our expenses in the near term. Further, our ability to reduce
our long-term expenses is constrained by our need to continue our investment in next-generation product
technology and to support and service our products. In addition, due to the relatively long manufacturing lead
times for some of the products and subsystems we sell to this market, we may incur expenditures or purchase raw
materials or components for products we are unable to sell. Accordingly, downturns in the semiconductor capital
equipment market may materially harm our business, financial condition and operating results. Conversely, when
upturns in this market occur, we may have difficulty rapidly and effectively increasing our manufacturing
capacity to meet sudden increases in customer demand. If we fail to do so, we may lose business to our
competitors and our relationships with our customers may be harmed. In addition, many semiconductor
manufacturers have operations and customers in Asia, a region that in past years has experienced serious
economic problems including currency devaluations, debt defaults, lack of liquidity and recessions.
The acquisition of ESI involves numerous risks, including the inability to effectively integrate ESI’s business
and operations or realize the expected benefits from the acquisition, which could materially harm our
operating results.
Our February 2019 acquisition of ESI has increased our product offerings, end markets, and number of
employees and facilities. ESI’s products and certain of its technology, markets and customer base are
significantly different from our historical experience. Combining our businesses could make it more difficult to
maintain relationships with customers, employees or suppliers. Integrating ESI’s business and operations with
ours will require significant management attention, efforts and expenditures, and we may not be able to achieve
the integration in an effective, complete, timely or cost-efficient manner.
Potential risks related to our acquisition of ESI include our ability to:
• expand our financial and management controls and reporting systems and procedures to integrate and
manage ESI;
• integrate our information technology systems to enable the management and operation of the combined
business;
• realize expected synergies and cost savings resulting from the acquisition;
• maintain and improve ESI’s operations while integrating our combined manufacturing organization;
• avoid lost revenue due to customer confusion, alienation or misinformation regarding the transaction, and
retain and expand ESI’s customer base while aligning our sales efforts;
• avoid lost revenue resulting from the distraction or confusion of our personnel as a consequence of the
acquisition and ongoing integration efforts;
• identify and retain key ESI personnel;
• recognize and capitalize on anticipated product sales and technology enhancement opportunities
presented by our combined businesses;
• adequately familiarize ourselves with ESI’s products and technology and certain of its markets and
customer base such that we can manage ESI’s business effectively; and
• successfully integrate our respective corporate cultures such that we achieve the benefits of acting as a
unified company.
Other potential risks related to our acquisition of ESI include:
• the assumption of unknown or contingent liabilities, or other unanticipated events or circumstances; and
10
• the potential to incur or record significant cash or non-cash charges or write down the carrying value of
intangible assets and goodwill obtained in the ESI acquisition, which could adversely impact our cash
flow or lower our earnings in the period or periods for which we incur such charges or write down such
assets.
Further, some very significant customers of our laser and motion products compete with ESI. ESI will
initially remain a separate division from our Light & Motion segment that supplies these laser and motion
products, and we have implemented internal measures intended to segregate competitively sensitive information
that we receive from these customers from our ESI business, however, these customers may choose to source
their laser and motion products from alternate suppliers, which could result in a potentially significant loss of
revenue for our laser and motion business.
If we are unable to successfully or timely integrate the operations of ESI’s business into our business, we
may be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the
acquisition and our business could be adversely affected. Additionally, we have incurred and will continue to
incur transaction-related costs,
including legal, regulatory and other costs associated with implementing
integration plans, including facilities and systems consolidation costs and employment-related costs. Although
we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the
integration of the businesses, should allow us to offset transaction and integration-related costs over time, this net
benefit may not be achieved in the near term, or at all. Further, we may not realize the expected benefits from the
acquisition. ESI’s business and operations may not achieve the anticipated revenues and operating results. We
may in the future choose to close or divest certain sectors of ESI, which could require us to record losses and/or
spend cash relating to such closures or divestitures. Any of the foregoing risks could materially harm our
business, financial condition and results of operations.
The terms of our term loan credit facility and asset-based revolving credit facility impose significant financial
obligations and risks upon us, limit our ability to take certain actions, and could discourage a change in
control.
In February 2019, we amended our existing term loan credit facility and obtained a new revolving credit
facility in connection with financing our acquisition of ESI. The term loan credit facility, as amended, provided
us with additional senior secured financing in the principal amount of $650 million as of February 1, 2019, with a
term of seven years. Together with this additional financing, we have $998 million in total outstanding debt as of
February 1, 2019. The revolving credit facility provides us with senior secured financing of up to $100 million,
subject to a borrowing base limitation.
Our indebtedness under these credit facilities has increased our interest expense and could have the effect,
among other things, of reducing the funds available to flexibly respond to changing business and economic
conditions. Our indebtedness could also reduce funds available for working capital, capital expenditures,
acquisitions and other general corporate purposes and may create competitive disadvantages relative to other
companies with lower debt levels. If we do not achieve the expected benefits from the acquisition, or if the
financial performance of the combined company does not meet current expectations, then our ability to service
our indebtedness may be adversely impacted.
A significant portion of the amounts outstanding under the credit facilities bear interest at variable interest
rates. Although we hedge some of that exposure, if interest rates increase, variable rate debt will create higher
debt service requirements, which could adversely affect our cash flows. In addition, our credit ratings could
affect the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings of our
indebtedness reflect each nationally recognized statistical rating organization’s opinion of our financial strength,
operating performance and ability to meet our debt obligations. There can be no assurance that we will achieve a
particular rating or maintain a particular rating in the future. Moreover, we may be required to raise substantial
additional financing to fund working capital, capital expenditures, acquisitions or other general corporate
11
requirements. Our ability to arrange additional financing or refinancing will depend on, among other factors, our
financial position and performance, as well as prevailing market conditions and other factors beyond our control.
There can be no assurance that we will be able to obtain additional financing or refinancing on terms acceptable
to us or at all.
Our term loan credit facility, as amended, uses LIBOR as a reference rate for our term loans, such that the
interest due pursuant to such loans may be calculated using LIBOR (subject to a stated minimum value). On
July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it
intends to phase out LIBOR by the end of 2021. LIBOR borrowings may become unavailable before that date. It
is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established
such that it continues to exist after 2021. The future of LIBOR at this time is uncertain. If the method for
calculation of LIBOR changes, if LIBOR is no longer available or if lenders have increased costs due to changes
in LIBOR, we may have to modify our term loan credit facility, or the loans using LIBOR as a reference rate will
convert to the base rate (calculated by reference to the higher of the federal funds effective rate plus 50 basis
points or the prime rate, subject to a stated minimum value) which could result in higher interest rates.
The term loan credit facility and the revolving credit facility contain a number of negative covenants that,
among other things and subject to certain exceptions, restrict our ability and/or our subsidiaries’ ability to:
• incur additional indebtedness;
• pay certain dividends on our capital stock or redeem, repurchase or retire certain capital stock or certain
other indebtedness;
• make certain investments, loans and acquisitions;
• engage in certain transactions with our affiliates;
• sell assets, including capital stock of our subsidiaries;
• materially alter the business we conduct;
• consolidate or merge;
• incur liens; and
• engage in sale-leaseback transactions.
These covenants restrict our ability to engage in or benefit from these actions, thereby limiting our
flexibility in planning for, or reacting to, changes and opportunities in the markets in which we compete, such as
limiting our ability to engage in mergers and acquisitions. This could place us at a competitive disadvantage. If
the matters described in our other risk factors result in a material adverse effect on our business, financial
condition or results of operations, we may be unable to comply with the terms of our credit facilities or
experience an event of default.
The term loan credit agreement and the revolving credit agreement contain customary events of default,
including:
• failure to make required payments;
• failure to comply with certain agreements or covenants;
• materially breaching any representation or warranty made or deemed made in connection with the
respective credit facility;
• failure to pay, or cause acceleration of, certain other indebtedness;
• certain events of bankruptcy and insolvency;
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• failure to pay certain judgments; and
• a change in control of us.
The amount of cash available to us for repayment of amounts owed under these credit facilities will depend
on our usage of our existing cash balances and our operating performance and ability to generate cash flow from
operations in future periods, which will be subject to financial, business and other factors affecting our
operations, many of which are beyond our control. We cannot provide any assurances that we will generate
sufficient cash flow from operations to service our debt obligations. Any failure to repay these obligations as they
become due would result in an event of default under the credit facilities.
Further, because a change in control of us constitutes an event of default under these credit facilities, this
would likely be a deterrent to a potential acquirer, as any potential acquisition would trigger an event of default,
unless the lenders agreed to waive such event of default. We cannot guarantee that any such waiver would be
obtained.
If an event of default occurs, the lenders may end their obligation to make loans to us under the credit
facilities, and may declare any outstanding indebtedness under the credit facilities immediately due and payable.
In such case, we would need to obtain additional financing or significantly deplete our available cash, or both, in
order to repay this indebtedness. Any additional financing may not be available on reasonable terms or at all, and
significant depletion of our available cash could harm our ability to fund our operations or execute our broader
corporate objectives. If we were unable to repay outstanding indebtedness following an event of default, then in
addition to other available rights and remedies, the lenders could initiate foreclosure proceedings on substantially
all of our assets. Any such foreclosure proceedings or other rights and remedies successfully implemented by the
lenders in an event of default would have a material adverse effect on our business, financial condition and
results of operations.
Our quarterly operating results have fluctuated, and are likely to continue to vary significantly, which may
result in volatility in the market price of our common stock.
A substantial portion of our shipments occurs shortly after an order is received, and therefore we generally
operate with a relatively low level of backlog. As a result, a decrease in demand for our products from one or
more customers could occur with limited advance notice and could have a material adverse effect on our results
of operations in any particular period. Further, with respect to certain of our business lines, we often recognize a
significant portion of net revenues in the last month of each fiscal quarter, due in part to the tendency of some
customers to wait until late in a quarter to commit to purchase certain of our products as a result of capital
expenditure approvals and budgeting constraints occurring at the end of a quarter, or the hope of obtaining more
favorable pricing from a competitor seeking the business. Thus, variations in timing of sales can cause significant
fluctuations in our quarterly sales, gross margin and profitability. Orders expected to ship in one period could
shift to another period due to changes in the timing of our customers’ purchase decisions, rescheduled delivery
dates requested by our customers, manufacturing capacity constraints or logistics delays. Our operating results
for a particular quarter or year may be adversely affected if our customers, particularly our largest customers,
cancel or reschedule orders, or if we cannot fill orders in time due to capacity constraints or unexpected delays in
manufacturing, testing, shipping or product acceptance. Also, we base our manufacturing plans on our forecasted
product mix. If the actual product mix varies significantly from our forecast, we may not be able to fill some
orders, which would result in delays in the shipment of our products and could shift sales to a subsequent period.
All of these risks have a disproportionately high impact on our ESI business, which derives substantial revenue
from a few significant customers and the sale of a relatively small quantity of products. A significant percentage
of our expenses are fixed and based in part on expectations of future net revenues. The inability to adjust
spending quickly enough to compensate for any shortfall would magnify the adverse impact of a shortfall in net
revenues on our results of operations. Factors that could cause fluctuations in our financial results include:
• a worldwide economic slowdown or disruption in the global financial markets;
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• fluctuations in our customers’ capital spending, industry cyclicality (particularly in the semiconductor
industry), market seasonality (particularly in the research and defense market), levels of government
funding available to our customers (particularly in the life and health sciences and research and defense
markets) and other economic conditions within the markets we serve;
• the timing of the receipt of orders within a given period and the level of orders from major customers;
• demand for our products and the products sold by our customers;
• shipment delays;
• disruption in sources of supply;
• production capacity constraints;
• specific features requested by customers;
• the timing and level of cancellations and delays of orders in backlog for our products;
• the timing of product shipments and revenue recognition within a given quarter;
• variations in the mix of products we sell;
• changes in our pricing practices or in the pricing practices of our competitors or suppliers;
• our timing in introducing new products;
• engineering and development investments relating to new product introductions, and significant changes
to our manufacturing and outsourcing operations;
• market acceptance of any new or enhanced versions of our products;
• timing of new product introductions by our competitors;
• timing and level of inventory obsolescence, scrap and warranty expenses;
• the availability, quality and cost of components and raw materials we use to manufacture our products;
• changes in our effective tax rates;
• changes in our capital structure, including cash, marketable securities and debt balances, and changes in
interest rates;
• changes in bad debt expense based on the collectability of our accounts receivable;
• timing, type, and size of acquisitions and divestitures, and related expenses and charges;
• fluctuations in currency exchange rates;
• our expense levels;
• impairment of goodwill and amortization of intangible assets; and
• fees, expenses and settlement costs or judgments against us relating to litigation.
As a result of the factors discussed above, among others, it is likely that we may in the future experience
quarterly or annual fluctuations, and that, in one or more future quarters, our operating results may fall below the
expectations of public market analysts or investors. In any such event, the price of our common stock could
fluctuate or decline significantly. Consequently, we believe that quarter-to-quarter and year-to-year comparisons
of our results of operations, or any other similar period-to-period comparisons, may not be reliable indicators of
our future performance.
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The loss of net revenues from any one of our major customers would likely have a material adverse effect on
us.
Our top ten customers accounted for approximately 41%, 43% and 39% of our net revenues for the years
2018, 2017 and 2016, respectively. One customer, Applied Materials, Inc., accounted for approximately 12%,
13% and 14% of our net revenues for the years 2018, 2017 and 2016, respectively, and another customer, Lam
Research Corporation, accounted for 11%, 12% and 11% of our net revenues for the years 2018, 2017 and 2016,
respectively. In any one reporting period, a single customer or several customers may contribute even a larger
percentage of our consolidated revenues. Further, our recently-acquired ESI business also depends on a few
significant customers for a large portion of revenue in any given quarter. The loss of a major customer or any
reduction in orders by these customers, including reductions due to market or competitive conditions, would
likely have a material adverse effect on our business, financial condition and results of operations. None of our
significant customers has entered into an agreement with us requiring it to purchase any minimum quantity of our
products. Because our largest customers are semiconductor capital equipment manufacturers, we are particularly
susceptible to the cyclicality of the semiconductor market.
Attempts to lessen the adverse effect of any loss or reduction of net revenues through the rapid addition of
new customers could be difficult because a relatively small number of companies dominate the semiconductor
equipment market. Further, prospective customers typically require lengthy qualification periods prior to placing
volume orders with a new supplier. Our future success will continue to depend upon:
• our ability to maintain relationships with existing key customers;
• our ability to attract new customers and satisfy any required qualification periods;
• our ability to introduce new products in a timely manner for existing and new customers; and
• the successes of our customers in creating demand for their capital equipment products that incorporate
our products.
We face significant risks from doing business internationally.
Our business is subject to risks inherent in conducting business globally. International revenues account for
a significant portion of total net sales, with a substantial portion of such sales originating in Asia (especially
South Korea, Japan, Israel, China and Taiwan) and Europe (especially Germany). We expect that international
revenues will continue to account for a significant percentage of total net sales for the foreseeable future, and that
in particular, the proportion of our sales to Asian customers will continue to increase, due in large part to our
acquisition of ESI, as approximately ninety percent of ESI’s customers are located in Asia. Additionally, we have
substantial
international manufacturing, sales and administrative operations, with significant facilities and
employee populations in Europe and Asia, and a substantial portion of our manufacturing in China, Israel,
Mexico and Singapore. Our international operations expose us to various risks, which include:
• adverse changes or instability in the political or economic conditions in countries or regions where we
manufacture or sell our products, for example, the uncertainty associated with the pending exit of the
United Kingdom from the European Union;
• challenges of administering our diverse business and product lines globally;
• the actions of government regulatory authorities, including embargoes, executive orders, import and
export restrictions, tariffs, currency controls, trade restrictions and trade barriers (including retaliatory
actions), license requirements, environmental and other regulatory requirements and other rules and
regulations applicable to the manufacture, import and export of our products, all of which are complicated
and potentially conflicting, often require significant
time and resources for
compliance, and may impose strict and severe penalties for noncompliance;
investments in cost,
• greater risk of violations of applicable U.S. and international anti-corruption and trade laws by our
employees, sales representatives, distributors or other agents;
15
• longer accounts receivable collection periods and longer payment cycles;
• overlapping, differing or more burdensome tax structures;
• adverse currency exchange rate fluctuations;
• reduced or inconsistent protection of intellectual property;
• shipping and other logistics complications;
• the imposition of restrictions on currency conversion or the transfer of funds;
• compliance costs and withholding taxes associated with the repatriation of our overseas earnings;
• the expropriation of private enterprises;
• more complex and burdensome labor laws and practices in countries where we have employees;
• cultural and management style differences;
• preference for locally-produced products;
• changes in labor conditions and difficulties in staffing and managing foreign operations, including, but
not limited to, the formation of labor unions;
• difficulties in staffing and managing each of our individual international operations; and
• increased risk of exposure to civil unrest, terrorism and military activities.
If we experience any of the risks associated with international business, our business, financial condition
and results of operations could be significantly harmed.
In particular, we have significant facilities and operations and a considerable number of employees in Israel.
A number of our products are manufactured in facilities located in Israel. The Middle East remains a volatile
region, and the future of peace efforts between Israel and neighboring countries remains extremely uncertain.
Any armed conflicts or significant political instability in the region is likely to negatively affect business
conditions and could significantly disrupt our operations in Israel, which would negatively impact our business.
Further, many of our employees in Israel are subject
to being called for active duty under emergency
circumstances. If a military conflict or war arises, these individuals could be required to serve in the military for
extended periods of time, and our operations in Israel could be disrupted by the absence of one or more key
employees or a significant number of other employees for a significant period of time. Any such disruption could
adversely affect our business.
Recently, the United States government has taken actions against certain of our customers, particularly in
Asia, including indictments for various criminal charges, and in some cases, restrictions on doing business with
such customers. In the event we are unable to do business with any such customer, we will lose the anticipated
revenue from these product sales, the amount of which could be significant. In addition, such customers could
also elect to purchase products from unaffected non-U.S. competitors, even when trade restrictions are not in
place, jeopardizing our future long-term relationship with them. Further, compliance with regulatory restrictions
may cause us to breach contractual obligations, which would result in costs, penalties and litigation.
As part of our business strategy, we have entered into and may enter into or seek to enter into business
combinations and acquisitions that may be difficult to identify and complete, challenging and costly to
integrate, disruptive to our business and our management, and/or dilutive to stockholder value.
Since our inception, we have made acquisitions and, as a part of our business strategy, we may enter into
additional business combinations and acquisitions. Our most recent acquisitions of Newport in April 2016 and
ESI in February 2019 have significantly increased our size, including with respect to revenue, product offerings,
16
number of employees and facilities. Our ability to successfully identify suitable acquisition targets, complete
acquisitions on acceptable terms, and efficiently and effectively integrate our acquired businesses, including our
recent acquisitions, into our organization is critical to our growth. We may not be able to identify target
companies that meet our strategic objectives or successfully negotiate and complete acquisitions with companies
we have identified on acceptable terms. Further, we may incur significant expense in pursuing acquisitions that
cannot be completed due to regulatory or other restrictions. Additionally, our credit facilities only permit us to
make acquisitions under certain circumstances, and also restrict our ability to incur additional indebtedness in
certain circumstances. Further, the process of integrating acquired companies into our operations requires
significant resources and is time consuming, expensive and disruptive to our business. We may not realize the
benefits we anticipate from these acquisitions because of the following significant challenges:
• the difficulty of integrating the operations, technology and personnel of the acquired companies;
• the potential disruption of our ongoing business and distraction of management;
• possible internal control weaknesses of the acquired companies;
• significant expenses related to the acquisitions, including any resulting shareholder litigation;
• the assumption of unknown or contingent liabilities associated with acquired businesses;
• the potential to incur or record significant cash or non-cash charges or write down the carrying value of
intangible assets and goodwill obtained in the acquisition, which could adversely impact our cash flow or
lower our earnings in the period or periods for which we incur such charges or write down such assets;
• potentially incompatible cultural differences between the two companies;
• incorporating the acquired company’s technology and products into our current and future product lines,
and successfully generating market demand for these expanded product lines;
• potential additional geographic dispersion of operations;
• the difficulty in achieving anticipated synergies and efficiencies;
• the difficulty in leveraging the acquired company’s and our combined technologies and capabilities
across our product lines and customer base;
• potential sales disruptions as a result of integrating the acquired company’s sales channels with our sales
channels; and
• our ability to retain key customers, suppliers and employees of an acquired company.
We may also be placed at a competitive disadvantage by selling products in markets and geographies that
are new to us. In addition, if we are not successful in completing acquisitions that we may pursue in the future,
we may be required to re-evaluate our growth strategy, and we may incur substantial expenses and devote
significant management time and resources in seeking to complete proposed acquisitions that may not generate
benefits for us.
In addition, with future acquisitions, we could use substantial portions of our available cash as all or a
portion of the purchase price. We could also issue additional securities as consideration for these acquisitions,
which could cause significant stockholder dilution, or obtain additional debt financing, which could reduce our
future cash flow, without achieving the desired accretion to our business. For example, in 2019, we used
approximately $400 million of our available cash and obtained approximately $650 million of additional debt
financing in order to acquire ESI. Further, our prior acquisitions and any future acquisitions may not ultimately
help us achieve our strategic goals and may pose other risks to us.
As a result of our previous acquisitions, we have several different decentralized operating and accounting
internal controls, procedures and
systems. We will need to continue to modify our accounting policies,
17
compliance programs to provide consistency across all of our operations. In order to increase efficiency and
operating effectiveness and improve corporate visibility into our decentralized operations, we continue to review
opportunities to integrate Enterprise Resource Planning (“ERP”) systems where practical. We expect to continue
to integrate the ERP systems in phases over the next few years. Any future implementations may risk potential
disruption of our operations during the conversion periods and the implementations could require significantly
more management time and higher implementation costs than currently estimated.
An inability to convince semiconductor device manufacturers to specify the use of our products to our
customers that are semiconductor capital equipment manufacturers would weaken our competitive position.
The markets for our products,
in particular the semiconductor capital equipment market, are highly
competitive. Our competitive success often depends upon factors outside of our control. For example, in some
cases, semiconductor device manufacturers may direct semiconductor capital equipment manufacturers to use a
specified supplier’s product in their equipment. Accordingly, for such products, our success will depend in part
on our ability to have semiconductor device manufacturers specify that our products be used at
their
semiconductor
In addition, we may encounter difficulties in changing established
relationships of competitors that already have a large installed base of products within such semiconductor
fabrication facilities.
fabrication facilities.
If our products are not designed into successive generations of our customers’ products, we will lose
significant net revenues during the lifespan of those products.
New products designed by capital equipment manufacturers typically have a lifespan of five to fifteen years.
Our success depends on our products being designed into new generations of equipment. We must develop
products that are technologically advanced so that they are positioned to be chosen for use in each successive
generation of capital equipment. If customers do not choose our products, our net revenues may be reduced
during the lifespan of our customers’ products. In addition, we must make a significant capital investment to
develop products for our customers well before our products are introduced and before we can be sure that we
will recover our capital investment through sales to the customers in significant volume. We are thus also at risk
during the development phase that our products may fail to meet our customers’ technical or cost requirements
and may be replaced by a competitive product or alternative technology solution. If that happens, we may be
unable to recover our development costs.
Many of the markets and industries that we serve are subject to rapid technological change, and if we fail to
introduce new and innovative products or improve our existing products, or if the adoption or applications we
serve is not successful, our business, financial condition and results of operations will be harmed.
Many of our markets are characterized by rapid technological advances, evolving industry standards,
introductions and enhancements, and the periodic introduction of
shifting customer needs, new product
disruptive technology that displaces current
technology due to a combination of price, performance and
reliability. For example, our recently acquired ESI division is largely dependent upon the mobile phone market
(which we include within our industrial technologies market), which is subject to rapid technological changes. As
a result, many of the products in our markets can become outdated quickly and without warning. We depend, to a
significant extent, upon our ability to enhance our existing products, to anticipate and address the demands of the
marketplace for new and improved and disruptive technologies, either through internal development or by
acquisitions, and to be price competitive. If we or our competitors introduce new or enhanced products, it may
cause our customers to defer or cancel orders for our existing products. If we or our competitors introduce
disruptive technology that displaces current technology, existing product platforms or lines of business from
which we generate significant revenue may be rendered obsolete. Further, if our customers or the industries we
serve shift to technologies that do not utilize our platform of products, our business, financial condition and
results of operations could be harmed.
18
they can be difficult
Because many of our products are sophisticated and complex,
to design and
manufacture, and we may experience delays in introducing new products or enhancements to our existing
products. If we do not introduce our new products or enhancements into the marketplace in a timely fashion, our
customers may choose to purchase our competitors’ products. Certain of our markets, such as the semiconductor
capital equipment market and the mobile phone market, experience cyclicality and unevenness in capital
spending, so if we fail to introduce new products in a timely manner we may miss market upturns, or may fail to
have our products or subsystems designed into our customers’ products. We may not be successful in acquiring,
developing, manufacturing or marketing new products and technologies on a timely or cost-effective basis. If we
fail to adequately introduce new, competitive products and technologies on a timely basis, our business, financial
condition and results of operations will be harmed.
Further, we are constantly investing in products for emerging applications, and we expect to generate
increasingly significant revenue levels from sales of products for these applications. These applications are
evolving, and the extent to which they achieve widespread adoption or significant growth is uncertain. Many
factors may affect the viability of widespread adoption or growth of these applications, including their cost-
effectiveness, performance and reliability compared to alternatives. If these applications or our products for these
applications are not widely adopted or fail to grow as we project, we will not generate the revenue growth we
anticipate from sales of our products for these emerging applications, and our results of operations could be
harmed.
Because the sales cycle for some of our products is long and difficult to predict, and certain of our orders are
subject to rescheduling or cancellation, we may experience fluctuations in our operating results.
Many of our products are complex and customers for these products require substantial time to qualify our
products and make purchase decisions. In addition, some of our sales to defense and security customers are under
major defense programs that involve lengthy competitive bidding and qualification processes. These customers
often perform, or require us to perform, extensive configuration, testing and evaluation of our products before
committing to purchasing them, which can require a significant upfront investment by us. The sales cycle for
these products from initial contact through shipment varies significantly, is difficult to predict and can last more
than a year. If we fail to anticipate the likelihood, costs, or timing associated with sales of these products, or the
cancellation or rescheduling of orders for these products, our business and results of operations would be harmed.
Our orders are generally subject to rescheduling without penalty or cancellation without penalty other than
reimbursement for certain labor and material costs. We from time to time experience order rescheduling and
cancellations, which can result in fluctuation of our operating results from period to period.
Certain of our markets, sales regions and customers may be adversely affected by a lack of government
funding and the availability of credit.
Our worldwide sales to customers in the research and defense markets rely to a large extent on government
funding for research and defense-related programs. Any decline in government funding as a result of reduced
budgets in connection with fiscal austerity measures, revised budget priorities or other causes would likely result
in reduced sales of our products that are purchased either directly or indirectly with government funding, which
would have an adverse impact on our results of operations.
Concerns regarding the global availability of credit also may make it more difficult for our customers to
raise capital, whether debt or equity, to finance their projects and purchases of capital equipment. Delays in our
customers’ ability to obtain such financing, or the unavailability of such financing, could adversely affect sales of
our products and systems, including, but not limited to, high-value lasers and systems, and therefore harm our
business and operating results.
19
We offer products for multiple markets and must face the challenges of supporting the distinct needs of each
of the markets we serve.
We offer products for a number of very diverse markets. Because we operate in multiple markets, we must
work constantly to understand the needs, standards and technical requirements of many different applications
within these markets, and must devote significant resources to developing different products for these markets.
Product development is costly and time consuming. We must anticipate trends in our customers’ industries and
develop products before our customers’ products are commercialized. If we do not accurately predict our
customers’ needs and future activities, we may invest substantial resources in developing products that do not
achieve broad market acceptance. Our growth prospects rely in part on successful entry into new markets, which
depends on our displacing entrenched competitors who are more familiar with these markets and better known to
customers. In many cases, we are attempting to enter or expand our presence in these new markets with newly-
introduced products that are not yet proven in the industry. Our decision to continue to offer products to a given
market or to penetrate new markets is based in part on our judgment of the size, growth rate and other factors that
contribute to the attractiveness of a particular market. If our product offerings in any particular market are not
competitive, our analyses of a market are incorrect or our sales and marketing approach for a market is
ineffective, our business, financial condition and results of operations would be harmed.
Further, serving diverse markets requires an understanding of different sales cycles, and the development
and maintenance of a complex global sales team and sales channels to support the markets’ differing needs. It
also requires dynamic operations that can support both complex, customized product builds as well as quick turn-
around for commercial off-the-shelf sales. If we fail to provide the sales and operational support for our diverse
markets, our business, financial condition and results of operations would be harmed.
Manufacturing interruptions or delays could affect our ability to meet customer demand and lead to higher
costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.
Our business depends on its timely supply of equipment, services and related products that meet the rapidly
changing technical and volume requirements of our customers, which depends in part on the timely delivery of
industry
parts, components and subassemblies from suppliers,
conditions and the volatility of demand for manufacturing equipment increase capital, technical, operational and
other risks for us and for companies throughout our supply chain. We may also experience significant
interruptions of our manufacturing operations, delays in our ability to deliver products or services, increased
costs or customer order cancellations as a result of:
including contract manufacturers. Cyclical
• volatility in the availability and cost of materials, including rare earth elements;
• information technology or infrastructure failures; and
• natural disasters or other events beyond our control (such as earthquakes, floods or storms, regional
economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war), particularly
where we or our subcontractors and contract manufacturers conduct manufacturing.
In addition, if we need to rapidly increase our business and manufacturing capacity to meet increases in
demand or expedited shipment schedules, this may exacerbate any interruptions in our manufacturing operations
and supply chain and the associated effect on our working capital. Moreover, if actual demand for our products is
different
than expected, we may purchase more/fewer parts than necessary or incur costs for canceling,
postponing or expediting delivery of parts. If we purchase inventory in anticipation of customer demand that
does not materialize, or if our customers reduce or delay orders, we may incur excess inventory charges. Any or
all of these factors could materially and adversely affect our business, financial condition and results of
operations.
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A material amount of our assets represents goodwill and intangible assets, and our net income would be
reduced if our goodwill or intangible assets become impaired.
As of December 31, 2018, our goodwill and intangible assets, net,
represented approximately
$906.8 million, or 35% of our total assets. Goodwill is generated in our acquisitions when the cost of an
acquisition exceeds the fair value of the net tangible and identifiable intangible assets we acquire. As a result of
the ESI acquisition, we expect to add in excess of $500 million of additional goodwill and intangible assets.
Goodwill is subject to an impairment analysis at least annually based on the fair value of the reporting unit.
Intangible assets relate primarily to the developed technologies, customer relationships and patents and
trademarks acquired by us as part of our acquisitions of other companies and are subject to an impairment
analysis whenever events or changes in circumstances exist that indicate that the carrying value of the intangible
asset might not be recoverable. We will continue to monitor and evaluate the carrying value of goodwill and
intangible assets. If market and economic conditions or business performance deteriorate, the likelihood that we
would record an impairment charge would increase, which impairment charge could materially and adversely
affect our results of operations.
We operate in highly competitive industries.
The markets for our products are intensely competitive, and we believe that competition from both new and
existing competitors will increase in the future. Principal competitive factors include:
• historical customer relationships;
• continued technological advancement;
• product quality, performance and price;
• breadth of product line;
• manufacturing capabilities; and
• customer service and support.
Although we believe that we compete favorably with respect to these factors, we may not be able to
continue to do so. We encounter substantial competition in most of our product lines. Certain of our competitors
may enjoy greater name recognition and have greater financial, technical, marketing and other resources than we
have, and some may have lower material costs than ours due to their control over sources of components and raw
materials. In some cases, competitors are smaller than we are, but well established in specific product niches. We
may encounter difficulties in changing established relationships of competitors with a large installed base of
products at such customers’ fabrication facilities. In addition, our competitors can be expected to continue to
improve the design and performance of their products. Competitors may develop products that offer price,
performance or technological features superior to those of our products. If our competitors develop superior
products, we may lose existing customers and market share. Further, technological advances in our served
markets may cause one or more of our portfolio of products to be displaced over time. We also face competition
in some of our markets from our existing and potential customers who have developed or may develop products
that are competitive to ours, or who engage subcontract manufacturers or system integrators to manufacture
products or systems on their behalf.
Increased pressure on price may result in pricing concessions, extended payment terms and decreased
margins.
We have experienced and continue to experience pricing pressure from both competitors and customers in
the sale of our products. New entrants to our markets have offered aggressive price and payment terms in an
attempt to gain market share. Some competitors, particularly in China, also develop low-cost competitive
products. Pricing pressures typically have become even more intense during cyclical downturns in the
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semiconductor industry, when competitors seek to maintain or increase market share, reduce inventory or
introduce more technologically advanced or lower-cost products. In addition, we may agree to pricing
concessions or extended payment terms with our customers in connection with expanding into new markets or
gaining volume orders, or to improve our customer cost of ownership in highly competitive applications. Our
business, financial condition, gross margins or results of operations may be materially and adversely affected by
competitive pressure and price-based competition.
If significant additional tariffs or other trade restrictions are placed on our products made in China and/or the
components that we or our suppliers source from China, our business, financial condition and results of
operations may be materially harmed.
General trade tensions between the U.S. and China have been escalating throughout 2018 and into 2019,
with one round of U.S. tariffs on Chinese goods taking effect in July 2018, and a second round implemented in
September 2018. Although we do not anticipate a material impact on our products made in China from the first
and second rounds of U.S. tariffs, a third round of tariffs has been proposed by the U.S. In July 2018, the Trump
Administration proposed a new list of thousands of categories of goods, including electronics, that could face
tariffs of 10%. The Trump Administration subsequently proposed that the third round tariffs be increased from
10% to 25%. If the proposed new tariff list remains unaltered and these additional tariffs are placed on our
products made in China and/or the components that we or our suppliers source from China, or any related
counter-measures are taken by China, as we ship certain of our products from the U.S. into China, our business,
financial condition and results of operations may be materially harmed. We will explore all of our options to
reduce the potential impact of these proposed tariffs on our business, including but not limited to, seeking
alternative sources for our components, modifying other business practices, raising our prices, and shifting
production outside of China. Additionally, the Trump Administration continues to signal that it may alter trade
agreements and terms between China and the United States, including limiting trade with China, and may impose
additional tariffs on imports from China. Even if the currently proposed tariffs are not imposed on our products
or on the components that we or our suppliers source from China, it is possible further tariffs will be imposed on
imports of our products or the components used in our products, or that our business will be impacted by
retaliatory tariffs imposed by China or other countries in response to existing or future tariffs, causing us to seek
alternative suppliers, raise prices or make changes to our operations, any of which could materially harm our
business, financial condition and results of operations.
Key personnel may be difficult to attract and retain.
Our ability to maintain and grow our business is directly related to the service of our employees in each area
of our business. Our future performance will be directly tied to our ability to hire, train, motivate and retain
qualified personnel, including highly skilled technical, financial, managerial and sales and marketing personnel.
Competition for personnel in the technology marketplace is intense, particularly in certain geographies where we
are located, and we cannot be certain that we will be successful in attracting and retaining such personnel. In
addition, many of our product manufacturing processes require deep technical expertise, and these positions can
be particularly challenging to fill. We have from time to time in the past experienced attrition in certain key
positions, and we expect to continue to experience this attrition in the future. If we are unable to hire sufficient
numbers of employees with the experience and skills we need or to retain and motivate our existing employees,
our business and results of operations would be harmed.
Our failure to successfully manage our offshore manufacturing locations or the transition of certain of our
manufacturing operations to other locations and/or to contract manufacturers could harm our business,
financial condition and results of operations.
As part of our continuous cost-reduction efforts, we continue to relocate the manufacture of certain of our
existing product lines and subassemblies to, and initiate the manufacture of certain new products in, our facilities
in China, Israel, Singapore and Romania, as well as to our significant subcontracted operations in Mexico and
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selected contract manufacturers in Asia. In the future, we may expand the level of manufacturing, administrative
and certain other operations that we perform offshore in order to take advantage of cost efficiencies available to
us in those countries. However, we may not achieve the significant cost savings or other benefits that we would
anticipate from moving manufacturing and other operations to a lower cost region. Additionally, if we are unable
to successfully manage the relocation, initiation or oversight of the manufacture of these products, our business,
financial condition and results of operations could be harmed.
In particular,
transferring product
lines to other manufacturing locations and/or
to our contract
manufacturers’ facilities often requires us to transplant complex manufacturing equipment and processes across a
large geographical distance and to train a completely new workforce concerning the use of this equipment and
these processes. In addition, certain of our customers may require the requalification of products supplied to them
in connection with the relocation of manufacturing operations. If we are unable to manage this transfer and
training smoothly and comprehensively, or if we are unable to complete the requalification of products in a
timely manner, we could suffer manufacturing and supply chain delays, excessive product defects, harm to our
results of operations and our reputation with our customers, and loss of customers. Further, the utilization of
overseas contract manufacturers may require additional customs tariffs or may require export licenses, which
may be difficult or costly to obtain. We also may not realize the cost savings that we currently anticipate from
locating operations in Mexico, China, Israel, Romania and Singapore. For example, we are experiencing rising
material, labor and shipping costs in China and the potential for new tariffs on our products manufactured in
China and Mexico.
Additionally, qualifying contract manufacturers and commencing volume production are expensive and
time-consuming activities, and there is no guarantee we will continue to do so successfully. Further, our reliance
on contract manufacturers reduces our control over the assembly process, quality assurance, production costs and
material and component supply for our products. If we fail to manage our relationship with our contract
manufacturers, or if any of the contract manufacturers experience financial difficulty, or delays, disruptions,
capacity constraints or quality control problems in their operations, our ability to ship products to our customers
could be impaired and our competitive position and reputation could be harmed. Further, if we or our contract
manufacturers are unable to negotiate with suppliers for reduced component costs, our operating results could be
harmed.
In addition, our contract manufacturers may terminate our agreements with them upon prior notice to us or
immediately for reasons such as if we become insolvent, or if we fail to perform a material obligation under the
agreements. If we are required to change contract manufacturers or assume internal manufacturing operations for
any reason, including the termination of one of our contracts, we will likely suffer manufacturing and shipping
delays, lost revenue, increased costs and damage to our customer relationships, any of which could harm our
business, financial condition and results of operations.
Our products could contain defects, which would increase our costs and seriously harm our business,
operating results, financial condition and customer relationships.
Many of our products are inherently complex in design and, in some cases, require extensive customization
and/or ongoing regular maintenance. Further, the manufacture of these products often involves a highly complex
and precise process and the utilization of specially qualified components that conform to stringent specifications.
Several of our products require highly skilled labor. As a result of the technical complexity of these products,
design defects, skilled labor turnover, changes in our or our suppliers’ manufacturing processes or the inadvertent
use of defective or nonconforming materials by us or our suppliers could adversely affect our manufacturing
yields and product reliability. This could in turn harm our business, operating results, financial condition and
customer relationships.
We provide warranties for our products, and we accrue allowances for estimated warranty costs at the time
we recognize revenue for the sale of the products. The determination of such allowances requires us to make
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estimates of product return rates and expected costs to repair or replace the products under warranty. We
establish warranty reserves based on historical warranty costs for our products. If actual return rates or repair and
replacement costs differ significantly from our estimates, our results of operations could be negatively impacted.
In particular, ESI’s system products are extremely complex, and have historically had much higher warranty
costs as a percentage of revenues than our other products. As a result, our overall warranty costs as a percentage
of revenues will likely increase as a result of our acquisition of ESI.
Our customers may discover defects in our products after the products have been fully deployed and
operated under peak stress conditions. In addition, some of our products are combined with products from other
suppliers, which may contain defects. Furthermore, some of our customers use our products in ways other than
their intended purpose. As a result, should problems occur, it may be difficult to identify the source of the
problem. If we are unable to identify and fix defects or other problems, we could experience, among other things:
• loss of customers;
• increased costs of product returns and warranty expenses;
• increased costs required to analyze and mitigate the defects or problems;
• damage to our reputation;
• failure to attract new customers or achieve market acceptance;
• diversion of development and engineering resources; and/or
• legal action by our customers.
The occurrence of any one or more of the foregoing factors could seriously harm our business, financial
condition and results of operations.
We are exposed to various risks related to legal proceedings, including product liability claims and intellectual
property infringement claims, which if successful, could have a material adverse effect on our business,
financial condition and results of operations.
From time to time, we may be involved in legal proceedings or claims regarding product performance,
product liability, patent infringement, intellectual property rights, antitrust, environmental regulations, securities,
contracts, unfair competition, misappropriation of trade secrets, employment, workplace safety, and other
matters.
For example, some of our products, such as certain ultrafast lasers, are used in medical applications where
malfunctions could result in serious injury. In addition, certain of our products may be hazardous if not operated
properly or if defective. We are exposed to significant risks for product liability claims if death, personal injury
or property damage results from the use of our products. We may experience material product liability losses in
the future. We currently maintain insurance for certain product liability claims. However, our insurance coverage
may not continue to be available on terms that we accept, if at all. This insurance coverage also may not
adequately cover liabilities that we incur. Further, if our products are defective, we may be required to recall or
redesign these products. A successful claim against us that exceeds our insurance coverage level or that is not
covered by insurance, or any product recall, could have a material adverse effect on our business, financial
condition and results of operations.
In addition, we are currently involved in securities class action litigation in connection with the acquisitions
of Newport and ESI. In each case, the plaintiffs have alleged, among other things, that the then-current directors
of each such acquired company breached their fiduciary duties to their respective shareholders by agreeing to sell
such company through an inadequate and unfair process, leading to inadequate and unfair consideration, by
agreeing to unfair deal protection devices, and by omitting material information from the proxy statement.
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Regardless of the outcome, securities class action litigation such as this can be time-consuming, result in
significant expense to the Company and divert attention and resources of our management and other key
employees. Costs and expenses, or an unfavorable outcome in such cases, could exceed applicable insurance
coverage, if any. Any such unfavorable outcome could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
With respect to our intellectual property, we have from time to time received claims from third parties
alleging that we are infringing certain trademarks, patents or other intellectual property rights held by them. Such
infringement claims have in the past and may in the future result in litigation. Any such litigation could be
protracted and costly, and we could become subject to damages for infringement, or to an injunction preventing
us from selling one or more of our products or using one or more of our trademarks. Such claims could also
result in the necessity of obtaining a license relating to one or more of our products or current or future
technologies, which may not be available on commercially reasonable terms or at all. Any intellectual property
litigation and the failure to obtain necessary licenses or other rights or develop substitute technology may divert
management’s attention from other matters and could have a material adverse effect on our business, financial
condition and results of operations. In addition, the terms of our customer contracts typically require us to
indemnify the customer in the event of any claim of infringement brought by a third party based on our products.
Any claims of this kind may have a material adverse effect on our business, financial condition or results of
operations.
We also on occasion receive notification from customers who believe that we owe them indemnification or
other obligations related to other claims made against such customers by third parties. Legal proceedings and
claims, whether with or without merit, and associated internal investigations, may be time-consuming and
expensive to prosecute, defend or conduct; divert management’s attention and other of our resources; inhibit our
ability to sell our products; result in adverse judgments for damages, injunctive relief, penalties and fines; and
negatively affect our business. There can be no assurance regarding the outcome of current or future legal
proceedings, claims or investigations.
We are subject to international trade compliance regulations, and violations of those regulations could result
in fines or trade restrictions, which could have a material adverse effect on us.
We are subject to trade compliance laws in both the United States and other jurisdictions where we operate.
For example, exports of our products and technology developed or manufactured in the U.S. are subject to export
controls imposed by the U.S. Government and administered by the U.S. Departments of Commerce, State and
Treasury. Similar export regulations govern exports of our products and technology developed or manufactured
in certain other countries, including Austria, France, Germany, Israel, Romania and Singapore. In certain
instances, these regulations may require obtaining licenses from the administering agency prior to exporting
products or technology to international locations or foreign nationals, including foreign nationals employed by us
in the United States and abroad. For products and technology subject to the U.S. Export Administration
Regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security,
the
requirement for a license is dependent on the type and end use of the product and technology, the final
destination and the identity and nationality of the end user. Virtually all exports from the United States of defense
articles subject to the International Traffic in Arms Regulations, administered by the Department of State’s
Directorate of Defense Trade Controls, require a license. The Israeli Ministry of Economy and the Defense
Export Control Agency of the Israeli Ministry of Defense administer similar export regulations and license
requirements, which apply to many of our products and technology developed or manufactured in Israel. In
addition, the Romanian Ministry of Foreign Affairs and the Department for Export Controls administer similar
export regulations and license requirements, which apply to many of our products and technology developed or
manufactured in Romania. Obtaining export licenses can be difficult and time-consuming, and we may not be
successful in obtaining them. Failure to obtain export licenses to enable product and technology exports could
reduce our revenue, harm our relationships with our customers and could adversely affect our business, financial
condition and results of operations. Compliance with export regulations may also subject us to additional fees
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and costs. The absence of comparable export restrictions on competitors in other countries may adversely affect
our competitive position. In addition, if we or our international representatives or distributors fail to comply with
any of these export regulations, we or they could be subject to civil and criminal, monetary and non-monetary
penalties, disruptions to our business, restrictions on our ability to export products and technology and damage to
our reputation, and our business and results of operations could be significantly harmed. While we have
implemented policies and procedures to comply with these laws, we cannot be certain that our employees,
contractors, suppliers or agents will not violate such laws or our policies. For example, as a result of a 2012 U.S.
Government investigation, a former employee of our Shanghai office and a third party not affiliated with us were
imprisoned for export violations relating to the sale of certain of our products. We were not a target of the
government’s investigation and we cooperated fully with the government’s investigation. In addition, although
we conducted our own internal investigation and took corrective human resources actions and have, since 2012,
implemented additional export compliance procedures, we cannot be certain these efforts will be sufficient to
avoid similar situations in the future.
Unfavorable currency exchange rate fluctuations may lead to lower operating margins or may cause us to
raise or reduce prices, which could result in reduced sales.
A significant portion of our net revenues are from customers in international markets. For the years 2018,
2017 and 2016, international net revenues accounted for approximately 51%, 50% and 48% of our total revenues,
respectively. Currency exchange rate fluctuations could have an adverse effect on our net revenues and results of
to our hedging activities. Unfavorable currency
operations and we could experience losses with respect
fluctuations could require us to increase or decrease prices to foreign customers, which could result in lower net
revenues from such customers. Alternatively, if we do not adjust the prices for our products in response to
unfavorable currency fluctuations, our results of operations could be adversely affected by declining net revenues
or profit margins for our products in international markets when the sales are translated into U.S. dollars. Such
exchange rate fluctuations could also increase the costs and expenses of our non-U.S. operations when translated
into U.S. dollars or require us to modify our current business practices. In addition, most sales made by our
foreign subsidiaries are denominated in the currency of the country in which these products are sold and the
currency they receive in payment for such sales could be less valuable at the time of receipt as a result of
exchange rate fluctuations. We enter into forward foreign exchange contracts to reduce a portion of our currency
exposure arising from intercompany sales of inventory as well as intercompany accounts receivable and
intercompany loans. However, we cannot be certain that our efforts will be adequate to protect us against
significant currency fluctuations or that such efforts will not expose us to additional exchange rate risks.
Changes in tax rates or tax regulation could affect results of operations.
As a global company, we are subject to taxation in the United States and various other countries. Significant
judgment is required to determine and estimate worldwide tax liabilities. Our future annual and quarterly
effective tax rates could be affected by numerous factors, including changes in the applicable tax laws;
composition of pre-tax income in countries with differing tax rates; and/or valuation of our deferred tax assets
and liabilities.
The enactment of the Tax Cuts and Jobs Act (the “Act”) in December 2017 significantly affected U.S. tax
law by changing how the U.S. imposes tax on multinational corporations. The U.S. Department of Treasury has
broad authority under the Act to issue regulations and interpretive guidance. No proposed or final regulations
have been issued for significant provisions of the Act, and other provisions may require corrective action by
Congress. In addition, some of the proposed and final regulations that have been issued have been challenged in
court. We have applied available guidance to estimate our tax obligations, but new guidance issued by the U.S.
Treasury Department may cause us to make adjustments to our tax estimates in future periods. The Securities and
Exchange Commission has issued Staff Accounting Bulletin No. 118 (“SAB 118”) acknowledging that
companies will potentially encounter situations for which the analysis of certain income tax effects of the Act
will be incomplete by the time financial statements are required to be issued for reporting periods that include the
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enactment date. In these situations, SAB 118 provides that reasonable estimates may be made for certain effects
of the Act up to one year from enactment. We recorded provisional amounts with respect to the Act at
December 31, 2017 and for the nine months ended September 30, 2018. During the quarter ended December 31,
2018, we completed our analysis and finalized the provisional amounts that were previously recorded. The
ultimate impact of this Act is based upon our understanding and interpretation of the regulatory guidance that has
been issued regarding the Act.
In addition, we are subject to regular examination by the United States Internal Revenue Service and state,
local and foreign tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes
resulting from these examinations to determine the adequacy of our provision for income taxes. Although we
believe our tax estimates are reasonable, there can be no assurance that any final determination will not be
materially different from the treatment reflected in our historical income tax provisions and accruals, which could
materially and adversely affect our financial condition and results of operations.
We are exposed to risks related to cybersecurity threats and incidents.
We rely on various information technology networks and systems, some of which are managed by third
parties, to process, transmit and store electronic information and to carry out and support a variety of business
activities, including manufacturing, research and development, supply chain management, sales and accounting.
This information includes confidential information belonging to us, our customers and our business partners as
well as personally-identifiable information of individuals. We have experienced, and expect to continue to be
subject to, cybersecurity threats and incidents ranging from employee error or misuse to individual attempts to
gain unauthorized access to information systems to sophisticated and targeted measures known as advanced
persistent threats, none of which have materially affected our financial condition or results of operations to date.
While we devote significant resources to network security, data encryption and other measures to protect our
systems and information from unauthorized access or misuse, a failure in or a breach of our operational or
security systems or infrastructure, or those of our suppliers and other business partners, including as a result of
cyber-attacks, could disrupt our business; result in the disclosure, misuse or loss of confidential information and
critical data; damage our reputation; cause data privacy issues; decrease the value of our investment in research,
development and engineering; cause losses; result in litigation with third parties; and increase our cybersecurity
protection and remediation costs.
Changes in laws and regulations governing data privacy and data protection could have a material adverse
impact on our business.
We are subject to data privacy laws and regulations that apply to the collection, transmission, storage and
use of personally identifiable information, as well as numerous other countries, federal and state privacy and
breach notification laws, including the California Consumer Privacy Act, which gives California residents rights
with respect to the nature, sources and uses of their personal information by companies. We are also subject to
many international data protection laws and regulations, including the General Data Protection Regulation, which
imposes robust European Union (“EU”) data protection requirements and provides for significant penalties for
noncompliance. The EU regulations also established a prohibition on the transfer of personal information from
the EU to other countries whose laws do not protect personal data to an adequate level of privacy or security.
While we have utilized certain permitted approaches for transferring personal information from the European
Union to the United States, these approaches may be reviewed and invalidated by the EU courts or regulatory
bodies and we may be required to ascertain an alternative legal basis for such transfers. In addition, certain
countries have and will continue to modify or adopt more stringent data protection standards.
While we continue to assess and address the implications of existing and new domestic and foreign
regulations relating to data privacy, the evolving regulatory landscape presents a number of legal and operational
challenges, and our efforts to comply may be unsuccessful. We may also face audits or investigations by one or
more government agencies relating to our compliance with these regulations that could result in the imposition of
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penalties or fines, significant expenses in facilitating and responding to the investigations, and overall
reputational harm or negative publicity. The costs of compliance with, and other burdens imposed by, such laws,
regulations and policies that are applicable to us including, restrictions on marketing activities, could have a
material adverse effect on our business, financial condition and results of operations.
Our proprietary technology is important to the continued success of our business. Our failure to protect this
proprietary technology may significantly impair our competitive position.
Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely
on a combination of patent, trademark and trade secret protection and nondisclosure agreements to protect our
proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our
intellectual property, particularly in countries outside the United States, where the laws may not protect our
proprietary rights as fully as in the United States. For example, the patent prosecution and enforcement systems
within China, where we have a significant customer base and manufacturing presence, are less robust than these
systems in other international jurisdictions and as a result, we may be limited in our ability to enforce our
intellectual property rights there. We would also likely be at a disadvantage in any enforcement proceeding in
China as a foreign entity seeking protection against a Chinese company. Patent and trademark laws and trade
secret protection may not be adequate to deter third party infringement or misappropriation of our patents,
trademarks and similar proprietary rights. In addition, patents issued to us may be challenged, invalidated or
circumvented. Our rights granted under those patents may not provide competitive advantages to us, and the
claims under our patent applications may not be allowed. The loss or expiration of any of our key patents could
lead to a significant loss of sales of certain of our products and could materially affect our future results of
operations. We have in the past and may in the future be subject to or may initiate interference proceedings in the
United States Patent and Trademark Office, which can demand significant financial and management resources.
The process of seeking patent protection can be time consuming and expensive and patents may not be issued
from currently pending or future applications. Moreover, our existing patents or any new patents that may be
issued may not be sufficient in scope or strength to provide meaningful protection or any commercial advantage
to us. We may initiate claims or litigation against third parties for infringement of our proprietary rights in order
to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors, which
claims could result in costly litigation, the diversion of our technical and management personnel and the assertion
of counterclaims by the defendants, including counterclaims asserting invalidity of our patents. We will take such
actions where we believe that they are of sufficient strategic or economic importance to us to justify the cost.
The market price of our common stock has fluctuated and may continue to fluctuate for reasons over which
we have no control.
The stock market has from time to time experienced, and is likely to continue to experience, extreme price
and volume fluctuations. Prices of securities of technology companies have been especially volatile and have
often fluctuated for reasons that are unrelated to the operating performance of the companies. Historically, the
market price of shares of our common stock has fluctuated greatly and could continue to fluctuate due to a
variety of factors. In the past, companies that have experienced volatility in the market price of their stock have
been the objects of securities class action litigation. If we were the object of such securities class action litigation,
it could result in substantial costs and a diversion of our management’s attention and resources.
We may not pay dividends on our common stock.
Holders of our common stock are only entitled to receive such dividends when and if they are declared by
our Board of Directors. Further, our credit facilities restrict our ability to pay dividends on our capital stock under
certain circumstances. Although we have declared cash dividends on our common stock since 2011, and
occasionally increased the dividends from prior quarters, we are not required to do so and we may reduce or
eliminate our cash dividend in the future. This could adversely affect the market price of our common stock.
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Our dependence on sole and limited source suppliers, and international suppliers, could affect our ability to
manufacture products and systems.
We rely on sole and limited source suppliers and international suppliers for some of our components and
subassemblies that are critical to the manufacturing of our products due to unique component designs as well as
specialized quality and performance requirements needed to manufacture our products. This reliance involves
several risks, including the following:
• the potential inability to obtain an adequate supply of required components;
• quality and reliability problems with components, which in turn adversely affects our products’ quality
and reliability;
• reduced control over pricing and timing of delivery of components; and
• the potential inability of our suppliers to develop technologically advanced products to support our
growth and development of new products.
We believe we could obtain and qualify alternative sources for most sole and limited source and
international supplier parts; however, the transition time may be long if we were required to obtain alternative
sources. Seeking alternative sources for these parts could require us to redesign our systems, resulting in
increased costs and likely shipping delays. In such an event, any inability to redesign our systems could result in
further costs and shipping delays. These increased costs would decrease our profit margins if we could not pass
the costs to our customers. Further, shipping delays could damage our relationships with current and potential
customers and have a material adverse effect on our business and results of operations.
In addition, we obtain some of the critical capital equipment we use to manufacture certain of our products
from sole or limited sources due to the unique nature of the equipment. In some cases, such equipment can only
be serviced by the manufacturer or a very limited number of service providers due to the complex and specialized
nature of the equipment. If service and/or spare parts for such equipment become unavailable, such equipment
could be rendered inoperable, which could cause delays in the production of our products, and could require us to
procure alternate equipment, if available, which would likely involve long lead times and significant additional
cost, and could harm our results of operations.
We are subject to environmental regulations. If we fail to comply with these regulations, our business could be
harmed.
Our operations are subject to various federal, state, local and international regulations relating to the
protection of the environment, including those governing discharges of pollutants into the air and water, the
management and disposal of hazardous substances and waste and the cleanup of contaminated sites. In the United
States, we are subject to the federal regulation and control of the Environmental Protection Agency (“EPA”), and
we are subject to comparable authorities in other countries. Some of our operations require environmental
permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification,
renewal and revocation by issuing authorities. Future developments, administrative actions or liabilities relating
to environmental matters could have a material adverse effect on our business, results of operations or financial
condition.
Although we believe that our safety procedures for using, handling, storing and disposing of such materials
comply with the standards required by state and federal laws and regulations, we cannot completely eliminate the
risk of accidental contamination or injury from these materials. We have been, and may in the future be, subject
to claims by employees or third parties alleging such contamination or injury, and could be liable for damages,
which liability could exceed the amount of our liability insurance coverage (if any) and the resources of our
business.
Certain portions of the soil at the former facility of our Spectra-Physics business, located in Mountain View,
California, and certain portions of the aquifer surrounding the facility, through which contaminated groundwater
29
flowed, are part of an EPA-designated Superfund site and are subject to a cleanup and abatement order from the
California Regional Water Quality Control Board. Spectra-Physics, which we acquired as part of the Newport
acquisition in April 2016 and which had been acquired by Newport in 2004, along with other entities with
facilities located near the Mountain View, California facility, were identified as responsible parties with respect
to this Superfund site, due to releases of hazardous substances during the 1960s, 1970s and 1980s. Spectra-
Physics and the other responsible parties entered into cost-sharing agreements covering the costs of remediating
the off-site groundwater impact. The site is mature, and investigations, monitoring and remediation efforts by the
responsible parties have been ongoing for approximately 30 years.
We have certain ongoing costs related to investigation, monitoring and remediation of the site that have not
been material to us as a whole in the recent past. However, while we benefitted from the indemnification of
certain costs by a third party in the past, that indemnification is now in a transition period, and we will become
subject to a greater portion of future costs of remediation going forward. Our ultimate costs of remediation and
other potential liabilities are difficult to predict. In the event that the EPA and the California Regional Water
Quality Control Board determine that the site cleanup requires additional measures to ensure that it meets current
standards for environmental contamination, or if they enhance any of the applicable required standards, we will
likely become subject to additional remediation obligations in the future. In addition to our investigation,
monitoring and remediation obligations, we may be liable for property damage or personal injury claims relating
to this site. While we are not aware of any material claims at this time, such claims could be made against us in
the future. If significant costs or other liability relating to this site arise in the future, our business, financial
condition and results of operations could be adversely affected.
to include a variety of federal, state,
The environmental regulations that we are subject
local and
international environmental regulations that restrict the use and disposal of materials used in the manufacture of
our products or require design changes or recycling of our products. If we fail to comply with any present or
future regulations, we could be subject to future liabilities, the suspension of manufacturing or a prohibition on
the sale of products we manufacture. In addition, such regulations could restrict our ability to equip our facilities
or could require us to acquire costly equipment, or to incur other significant expenses to comply with
environmental regulations, including expenses associated with the recall of any non-compliant product and the
management of historical waste.
For example, the European Union has enacted the Restriction on the Use of Certain Hazardous Substances
in Electrical and Electronic Equipment Directive, which regulates the use of certain hazardous substances in
certain products, and the Waste Electrical and Electronic Equipment Directive, which requires the collection,
reuse and recycling of waste from certain products. Compliance with such laws requires significant
resources. These regulations may require us to redesign our products or source alternative components to ensure
compliance with applicable requirements, for example by mandating the use of different types of materials in
certain components. Any such redesign or alternative sourcing may increase the cost of our products, adversely
impact the performance of our products, add greater testing lead-times for product introductions, or in some cases
limit the markets for certain products. Further, such environmental laws are frequently amended, which increases
the cost and complexity of compliance. For example, such amendments have in the past, and may in the future,
result in certain of our products falling in the scope of the directive, even if they were initially exempt. In
addition, certain of our customers, particularly OEM customers whose end products may be subject to these
directives, may require that the products we supply to them comply with these directives, even if not mandated
by law. Because certain directives, for example, those issued from the European Union are implemented in
individual member states, compliance is particularly challenging. Our failure to comply with any of such
regulatory requirements or contractual obligations could result in our being directly or indirectly liable for costs,
fines or penalties and third-party claims, and could jeopardize our ability to conduct business in certain countries.
30
Some provisions of our restated articles of organization, as amended, our amended and restated by-laws and
Massachusetts law could discourage potential acquisition proposals and could delay or prevent a change in
control.
Anti-takeover provisions could diminish the opportunities for stockholders to participate in tender offers,
including tender offers at a price above the then current market price of our common stock. Such provisions may
also inhibit increases in the market price of our common stock that could result from takeover attempts. For
example, while we have no present plans to issue any preferred stock, our Board of Directors, without further
stockholder approval, may issue preferred stock that could have the effect of delaying, deterring or preventing a
change in control of us. The issuance of preferred stock could adversely affect the voting power of the holders of
our common stock, including the loss of voting control to others. In addition, our amended and restated by-laws
provide for a classified Board of Directors consisting of three classes. Our classified board could also have the
effect of delaying, deterring or preventing a change in control of our Company.
Item 1B. Unresolved Staff Comments
None.
31
Item 2.
Properties
The following table provides information concerning MKS’ principal and certain other owned and leased
facilities as of December 31, 2018:
Country
City
Sq. Ft.
Activity
CHINA . . . . . . . . . . . . .
FRANCE . . . . . . . . . . . .
Shenzhen
Wuxi
(1)
302,000 Manufacturing
64,500 Manufacturing
183,000 Manufacturing, Research and
Development
Reportable
Segment
Lease
Expires
Vacuum & Analysis August 31, 2025
October 31, 2021
Light & Motion
Owned
Light & Motion
ISRAEL . . . . . . . . . . . .
Jerusalem
118,000 Manufacturing, Sales, Research and
Light & Motion
MEXICO . . . . . . . . . . . . Nogales
Development
174,700 Manufacturing, Service
UNITED STATES . . . . Andover, MA
158,000 Corporate Headquarters,
Vacuum & Analysis
and Light & Motion
(4)
(2)
(3)
(4)
Manufacturing, Research and
Development
Boulder, CO
86,000 Manufacturing, Customer Support,
Vacuum & Analysis
(5)
Service, Research and Development
Franklin, MA
55,600 Manufacturing, Customer Support,
Light & Motion
January 31, 2026
Irvine, CA
254,900 Manufacturing, Research and
Light & Motion
(6)
Research and Development
Development
Longmont, CO
60,900 Manufacturing, Customer Support,
Vacuum & Analysis
February 29, 2020
Service, Research and Development
Methuen, MA
85,000 Manufacturing, Customer Support,
Vacuum & Analysis Owned
Rochester, NY
46,000 Manufacturing, Customer Support,
Light & Motion
(7)
Service, Research and Development
Rochester, NY
Research and Development
156,000 Manufacturing, Sales, Customer
Support, Service, Research and
Development
Vacuum & Analysis Owned
Santa Clara, CA
139,500 Manufacturing, Customer Support,
Light & Motion
March 31, 2021
Wilmington, MA 118,000 Manufacturing, Customer Support,
Vacuum & Analysis Owned
Service, Research and Development
Research and Development
(1) MKS owns two facilities, one in Beaune-la-Rolande with 57,000 square feet and one in Brigueil with 126,000 square feet.
(2) MKS owns one facility with 70,000 square feet and leases two other facilities with 38,000 square feet and 10,000 square feet, both with a
lease expiration date of December 31, 2020.
(3) MKS Vacuum & Analysis leases a facility with 124,200 square feet with a lease expiration date of September 1, 2023 and also leases
another facility for Light & Motion with 50,500 square feet with a lease expiration date of July 31, 2028.
(4) MKS owns one facility with 82,000 square feet and leases another facility with 76,000 square feet with a lease expiration date of
November 30, 2026. In addition to the Company’s Corporate Headquarters, manufacturing and research and development activities for
Vacuum & Analysis take place in Andover, MA.
(5) MKS owns two facilities which aggregate to 47,000 square feet and leases another facility with 39,000 square feet with a lease expiration
date of May 31, 2020.
(6) MKS leases a facility with 212,300 square feet with a lease expiration date of February 28, 2022, of which 20,000 square feet is vacant.
MKS leases another facility with 42,600 square feet with a lease expiration date of February 28, 2022, which is currently vacant.
(7) MKS leases one facility with 6,000 square feet with a lease expiration date of September 27, 2184 and leases another facility with 40,000
square feet with a lease expiration date of July 31, 2021.
In addition to the material manufacturing and other operations conducted at the above listed leased or owned
facilities, MKS also provides manufacturing, worldwide sales, customer support and services from various other
leased and owned facilities throughout the world not listed in the table above. See “Business—Sales, Marketing,
Service and Support.”
32
Item 3.
Legal Proceedings
Newport Litigation
In March 2016, two putative class actions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.
A-16-733154-C and Hubert C. Pincon v. Newport Corp., et al., Case No. A-16-734039-B were filed in the
District Court, Clark County, Nevada on behalf of a putative class of stockholders of Newport Corporation
(“Newport”) for claims related to the Merger Agreement between the Company, Newport, and Merger Sub. The
lawsuits named as defendants the Company, Newport, Merger Sub, and certain then current and former members
of Newport’s board of directors. Both complaints alleged that Newport directors breached their fiduciary duties
to Newport’s stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to
inadequate and unfair consideration, by agreeing to unfair deal protection devices and by omitting material
information from the proxy statement. The complaints also alleged that the Company, Newport, and Merger Sub
aided and abetted the directors’ alleged breaches of their fiduciary duties. The complaints sought injunctive
relief, including to enjoin or rescind the Merger Agreement, and an award of attorneys’ and other fees and costs,
among other relief. On April 14, 2016, the Court consolidated the actions.
On October 19, 2016, plaintiffs in the consolidated action filed an amended complaint captioned In re
Newport Corporation Shareholder Litigation, Case No. A-16-733154-B, in the District Court, Clark County,
Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Merger Agreement. The
amended complaint contained substantially similar allegations related to Newport’s former board of directors’
alleged breaches of their fiduciary duties to Newport’s stockholders. The amended complaint sought monetary
damages, including pre- and post-judgment interest. On June 22, 2017, the Court granted Defendants’ motion to
dismiss and dismissed the amended complaint against all defendants but granted plaintiffs leave to amend.
On July 27, 2017, plaintiffs filed a second amended complaint containing substantially similar allegations
but naming only Newport’s former directors as defendants. On August 8, 2017, the Court dismissed the
Company and Newport from the action. The second amended complaint seeks monetary damages, including pre-
and post-judgment interest. The Court granted a motion for class certification on September 27, 2018, appointing
Mr. Pincon and Locals 302 and 612 of the International Union of Operating Engineers—Employers Construction
Industry Retirement Trust as class representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily
dismissed from the litigation. Discovery is ongoing in this action.
ESI Litigation
On November 29, 2018, a complaint captioned Brian Morris et. al. v. Electro Scientific Industries, Inc. et al.
was filed in the U.S. District Court for the District of Oregon by alleged former stockholders of ESI in
connection with the acquisition of ESI by the Company. The complaint named the Company’s subsidiary, Electro
Scientific Industries, Inc. (“ESI”), and the former members of ESI’s board of directors as defendants. Five
additional complaints were subsequently filed, two in the U.S. District Court for the District of Oregon and three
in the Multnomah County Circuit Court in the State of Oregon. The cases filed in the U.S. District Court were
dated December 6, 2018 and December 12, 2018 and captioned Melvyn Klein et. al. v. Electro Scientific
Industries, Inc. et al. and Donald Mager et. al. v. Electro Scientific Industries, Inc. et al., respectively. The
complaints filed in Multnomah County Circuit Court were dated December 5, 2018, December 5, 2018 and
December 13, 2018 and captioned Michael Kent et. al v. Electro Scientific Industries, Inc. et al., Christopher
Stanley et. al v. Electro Scientific Industries, Inc. et al. and Eduardo Colmenares et. al. v. Electro Scientific
Industries, Inc., MKS Instruments, Inc., et al., respectively (collectively with Brian Morris et. al. v. Electro
Scientific Industries, Inc. et. al., the “Lawsuits”). On February 16, 2019, the parties came to an agreement on a
settlement in principle that would resolve the Lawsuits, which is subject to the execution of a settlement
agreement and dismissal of the Lawsuits with prejudice.
These lawsuits are purported class actions brought on behalf of former ESI stockholders, asserting various
claims against the former members of the ESI board of directors, ESI, MKS, and MKS’ merger subsidiary,
including breach of fiduciary duty and aiding and abetting the breach of fiduciary duty. The lawsuits allege that
the consideration paid to the ESI shareholders did not appropriately value ESI, and that ESI’s merger related
disclosures failed to disclose certain material information regarding the merger. These complaints purport to seek
unspecified damages.
33
The Company believes that the claims in these complaints are without merit and intends to vigorously
defend this litigation. ESI provided supplemental merger related disclosures to eliminate the burden and expense
of litigation and to avoid any possible disruption to the merger that could result from further litigation.
We are subject to various legal proceedings and claims, which have arisen in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse
effect on our results of operations, financial condition or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
34
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol MKSI.
On February 19, 2019, we had 89 stockholders of record.
Dividend Policy and Cash Dividends
Holders of our common stock are entitled to receive dividends when and if they are declared by our Board
of Directors. During 2018, our Board of Directors declared a cash dividend of $0.18 per share during the first
quarter of 2018 and $0.20 per share for the second, third and fourth quarters of 2018, which totaled $42.4 million
or $0.78 per share. During 2017, our Board of Directors declared a cash dividend of $0.175 per share during the
first, second and third quarters of 2017 and $0.18 per share during the fourth quarter of 2017, which totaled
$38.2 million or $0.71 per share.
On February 11, 2019, our Board of Directors declared a quarterly cash dividend of $0.20 per share to be
paid on March 8, 2019 to shareholders of record as of February 25, 2019.
Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject
to the final determination of our Board of Directors. The Board of Directors intends to declare and pay cash
dividends on our common stock based on our financial conditions and results of operations of the Company,
although it has no obligation to do so. Our credit facilities contain covenants that restrict our ability to grant cash
dividends in certain circumstances.
Purchase of Equity Shares
On July 25, 2011, our Board of Directors approved and on July 27, 2011, we publicly announced, a share
repurchase program for the repurchase of up to an aggregate of $200 million of our outstanding common stock
from time to time in open market purchases, privately negotiated transactions or through other appropriate means
(the “Program”). The timing and quantity of any shares repurchased depends upon a variety of factors, including
business conditions, stock market conditions and business development activities, including, but not limited to,
merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any
time without prior notice.
During 2018,
the Company repurchased approximately 818,000 shares of
its common stock for
$75.0 million, or an average price of $91.67 per share. During 2017, the Company did not repurchase any shares
of common stock. We have repurchased approximately 2,588,000 shares of common stock for approximately
$127.0 million pursuant to the program since its adoption.
35
Comparative Stock Performance
The following graph compares the cumulative total shareholder return (assuming reinvestment of dividends)
from investing $100 on December 31, 2013, and plotted at the last trading day of each of the fiscal years ended
December 31, 2014, 2015, 2016, 2017 and 2018, in each of MKS’ common stock; a peer group index which
represents a combination of all companies comprising the Morningstar Semiconductor Equipment & Materials
Industry Group Index and Morningstar Scientific & Technical Instruments Industry Group Index, published by
Zacks Investment Research, Inc., with these indices weighted one-half (1/2) and one-half (1/2), respectively; and
the Nasdaq Market Index. The stock price performance on the graph below is not necessarily indicative of future
price performance. Our common stock is listed on the Nasdaq Global Select Market under the ticker symbol
MKSI.
Performance Graph
MKS Instruments, Inc.
Semiconductor Equipment & Materials/Scientific & Technical Instruments*
NASDAQ Market Index
$400
$350
$300
$250
$200
$150
$100
$50
$0
2013
2014
2015
2016
2017
2018
MKS Instruments, Inc.
Nasdaq Market Index
Morningstar Semiconductor Equipment &
Materials/Scientific & Technical
Instruments
2013
2014
2015
2016
2017
2018
$100.00
$124.90
$125.20
$209.90
$336.91
$232.26
$100.00
$114.75
$122.74
$133.62
$173.22
$168.30
$100.00
$116.67
$102.09
$131.35
$197.23
$165.05
*
Semiconductor Equipment & Materials and Scientific & Technical Instruments indices weighted 1⁄ 2 and 1⁄ 2,
respectively.
36
Item 6.
Selected Financial Data
Selected Consolidated Financial Data
Statement of Operations Data(1)
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit(2) . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations(3) . . . . . . . . . . . . . .
Net income(4) . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per share . . . . . . . . . . . . . .
Diluted net income per share . . . . . . . . . . . . .
Cash dividends paid per common share . . . .
Balance Sheet Data(1)
Cash and cash equivalents, including
2018
2017
2016
2015
2014
(in thousands, except per share data)
$2,075,108
979,476
494,059
$ 392,896
7.22
$
7.14
$
0.78
$
$1,915,977
891,451
406,634
$ 339,132
6.26
$
6.16
$
0.71
$
$1,295,342
565,619
157,267
$ 104,809
1.96
$
1.94
$
0.68
$
$ 813,524
362,872
156,612
$ 122,297
2.30
$
2.28
$
0.68
$
$ 780,869
337,766
135,142
$ 115,778
2.17
$
2.16
$
0.66
$
restricted cash . . . . . . . . . . . . . . . . . . . . . .
Short-term investments(5) . . . . . . . . . . . . . . .
Working capital(5)
. . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt(6) . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net(6)
. . . . . . . . . . . . . . . . .
Other liabilities(7) . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . .
$ 644,345
73,826
1,200,819
2,614,246
3,986
343,842
133,932
$1,873,187
$ 333,887
209,434
946,431
2,414,018
2,972
389,993
145,296
$1,588,907
$ 233,910
189,463
761,469
2,212,242
10,993
601,229
131,921
$1,241,792
$ 227,574
430,663
848,527
1,273,347
—
—
21,482
$1,160,881
$ 305,437
286,795
791,665
1,224,044
—
—
38,595
$1,081,822
(1) The Statement of Operations Data and the Balance Sheet Data for 2018, 2017 and 2016 include statement of
operations data and assets and liabilities acquired as a result of the acquisition of Newport Corporation
(“Newport”) in April 2016 (the “Newport Merger”).
(2) Gross profit for 2016 includes a $15.1 million charge for the amortization of the inventory step-up to fair
value related to the Newport Merger.
(3)
Income from operations for 2018 includes $3.6 million of restructuring charges and $3.1 million of
acquisition and integration costs, which is primarily comprised of acquisition costs related to our acquisition
of Electro Scientific Industries, Inc., which closed on February 1, 2019. Income from operations for 2017
includes $6.7 million of an asset impairment charge, primarily related to the write-off of goodwill and
intangible assets in conjunction with the consolidation of two manufacturing plants, $5.3 million of
acquisition and integration costs from the Newport Merger and $3.9 million of restructuring charges.
Income from operations for 2016 includes a $15.1 million charge for the amortization of the inventory
step-up to fair value, $27.3 million of acquisition and integration costs from the Newport Merger and
$5.0 million of an asset impairment charge. Income from operations for 2015 includes $2.1 million of
restructuring charges. Income from operations for 2014 includes $2.5 million of restructuring charges.
(4) Net
income for 2018 includes an $8.3 million windfall
tax benefit on the vesting of stock-based
compensation and $5.0 million of accrued taxes on MKS subsidiary distributions. Net income for 2017
includes charges, net of tax, of $6.7 million of an asset impairment charge, $3.4 million of acquisition and
integration costs and $3.7 million of restructuring charges. Net income for 2017 also includes a gain, net of
tax of $72.0 million related to the sale of a business, a $28.7 million transition tax on accumulated foreign
earnings, a $14.0 million tax accrual on a distribution to a subsidiary, a $24.5 million deferred tax
adjustment, which also includes the reversal of a tax accrual on a French dividend related to the 2017 Tax
Cut and Jobs Act, a $11.1 million windfall tax benefit on the vesting of stock-based compensation and an
adjustment, net of tax of $5.9 million of amortization of debt issuance costs relating to the term loan credit
agreement used to partially finance the Newport Merger. Net income for 2016 includes charges, net of tax,
of $9.8 million of amortization of inventory step-up to fair value, $19.0 million of acquisition and
37
integration costs, $5.0 million of asset impairment charges and a $2.0 million withholding tax on dividends.
These charges are offset by a tax benefit of $5.0 million for a legal entity restructuring. Net income for 2015
includes charges, net of tax, of $1.4 million of restructuring costs and also includes $7.7 million in tax
credits for reserve releases related to the settlement of tax audits. Net income for 2014 includes charges, net
of tax, of $1.5 million of restructuring costs and also includes $14.6 million in tax credits for reserve
releases related to the settlement of tax audits and the expiration of the statute of limitations.
(5) Effective December 31, 2015, the Company changed the method of classification of its investments
previously classified as long-term investments to short-term investments within current assets. For the year
ended December 31, 2014, short-term investments have been re-classified to include investments with
contractual maturities greater than one year from the date of purchase as management had the ability and
intent, if necessary, to liquidate any of its cash equivalents and investments in order to meet the Company’s
includes investments with
twelve months. Accordingly, working capital
liquidity needs in the next
contractual maturities greater than one year from the date of purchase.
(6) Long-term debt, net includes $343.8 million in 2018, $389.3 million in 2017 and short-term and long-term
debt, net includes $6.3 million and $600.7 million, respectively, in 2016, related to the term loan credit
agreement.
(7) Other liabilities include non-current deferred taxes and non-current accrued compensation.
38
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are 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. 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, RF & DC 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 are manufacturers of capital equipment for semiconductor manufacturing,
industrial technologies, life and health sciences, as well as research and defense.
Recent Events
Acquisition of Electro Scientific Industries, Inc.
On February 1, 2019, we completed our previously announced acquisition of Electro Scientific Industries,
Inc., an Oregon corporation (“ESI”), pursuant to the Agreement and Plan of Merger (the “ESI Merger”). ESI is
an innovator in laser-based manufacturing solutions for micro-machining applications. Micro-machining
applications are used extensively in the manufacture of mobile devices, electronic components, thin film devices
and semiconductor packaging. At the effective time of the ESI Merger and pursuant to the terms and conditions
of the Agreement and Plan of Merger, each share of ESI’s common stock issued and outstanding as of
immediately prior to the effective time of the ESI Merger was converted into the right to receive $30.00 per share
in cash, without interest and subject to deduction for any required withholding tax. We paid to the former ESI
stockholders aggregate consideration of approximately $1 billion, excluding related transaction fees and
expenses. We funded the payment of the aggregate consideration with a combination of our available cash on
hand and proceeds from our term loan facility described below.
In connection with the completion of the ESI Merger, we entered into an amendment (“Amendment No. 5”)
to our Term Loan Credit Agreement with Barclays Bank PLC as administrative agent and collateral agent, that
provided additional tranche B-5 term loan commitment in the principal amount of $650.0 million, which we used
to partially fund the ESI Merger.
Also, in connection with the completion of the ESI Merger, we terminated our $50.0 million asset-based
credit agreement with Deutsche Bank AG New York Branch as administrative and collateral agent, and we
entered into an asset-based credit agreement with Barclays Bank PLC, as administrative agent and collateral
agent, that provides senior secured revolving credit financing of up to $100.0 million, subject to a borrowing base
limitation.
We currently have two reportable segments, the Vacuum & Analysis segment and the Light & Motion
segment. With the acquisition of ESI, we will be adding a third segment.
The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which
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, RF & DC power, reactive gas generation and vacuum technology. The Light & Motion
segment provides a broad range of instruments, components and subsystems which are derived from our core
competencies in lasers, photonics, sub-micron positioning, vibration control, and optics.
We have a diverse base of customers and our primary served markets are manufacturers of capital
equipment for semiconductor manufacturing, industrial technologies, life and health sciences, as well as research
39
and defense. Approximately 55%, 57% and 56% of our net revenues for the years 2018, 2017 and 2016,
respectively, were from sales to semiconductor capital equipment manufacturers and semiconductor device
manufacturers. While our acquisition of Newport Corporation (“Newport”) in 2016 reduced our concentration of
customers in these markets and we expect some additional reduction as a result of the ESI Merger, we anticipate
that sales to such customers will continue to account for a substantial portion of our net revenues. Approximately
45%, 43% and 44% of our net revenues in the years 2018, 2017 and 2016, respectively, were from advanced
manufacturing applications. These include, but are not limited to, industrial
technologies, life and health
sciences, and research and defense.
Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture
customers increased by $48 million or 4% in 2018 compared to 2017, and increased by $373 million or 52% in
2017 compared to 2016. The increase in 2018 compared to 2017 is driven by strong sales to semiconductor
customers during the first half of 2018 and is comprised of an increase in net semiconductor revenues of
$26 million in the Vacuum & Analysis segment and $22 million in the Light & Motion segment. We have seen a
decrease in sales to semiconductor customers during the second half of 2018 and we expect that to continue into
the first half of 2019. The increase in 2017 compared to 2016 is comprised of an increase in net semiconductor
revenues of $315 million in the Vacuum & Analysis segment and $58 million in the Light & Motion segment.
These increases were primarily due to volume increases from our semiconductor customers. The semiconductor
capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain
as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment
industry.
Our net revenues from customers in advanced markets, which exclude semiconductor capital equipment and
semiconductor device manufacture customers, increased by $111 million or 14% in 2018 compared to 2017, and
increased by $248 million or 43% in 2017 compared to 2016. The increase in 2018 compared to 2017, is
attributed to an increase in net revenues from customers in our advanced markets of $83 million in the Light &
Motion segment and $28 million in the Vacuum & Analysis segment. These increases are primarily due to
revenue from customers in our industrial technologies market. The increase in 2017 compared to 2016 is
primarily attributed to a $228 million increase in net revenues from customers in our Light & Motion segment
due to the fact that 2016 only included eight months of revenue in the Light & Motion segment. In addition, net
revenues from customers in our Vacuum & Analysis segment increase primarily due to revenues from the
industrial technologies market of $20.1 million.
A significant portion of our net revenues are from sales to customers in international markets. For the years
ended December 31, 2018, 2017 and 2016, international net revenues accounted for approximately 51%, 50%
and 48% of our total net revenues, respectively. A significant portion of our international net revenues were in
South Korea, Japan, Germany and Israel. We expect that international revenues will continue to account for a
significant portion of total net sales for the foreseeable future, and that in particular, the proportion of our sales of
Asian customers will continue to increase, due in large part to our acquisition of ESI, as approximately ninety
percent of ESI’s customers are located in Asia. Long-lived assets,
located in the United States, were
$147 million, $125 million and $123 million as of December 31, 2018, 2017 and 2016, respectively, excluding
goodwill and intangibles and long-term tax-related accounts. Long-lived assets, located outside of the United
States, were $77 million, $78 million, and $78 million as of December 31, 2018, 2017 and 2016, respectively,
excluding goodwill and intangibles and long-term tax-related accounts.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these 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 financial statements and the reported amounts of revenues and expenses
40
during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those
related to revenue recognition, allowance for doubtful accounts, pension plan valuations, inventory, warranty
costs, stock-based compensation expense, intangible assets, goodwill and other long-lived assets, in-process
research and development and income taxes. We base our 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.
We believe the following critical accounting policies affect the most significant judgments, assumptions and
estimates we use in preparing our consolidated financial statements:
Revenue Recognition and Allowance for Doubtful Accounts.
We 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 twelve months ended December 31, 2018 reflect the application of ASC 606 guidance while the reported
results for 2017 and 2016 were prepared under the guidance of ASC 605, Revenue Recognition.
We recorded a net increase to opening retained earnings of $1.8 million 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 adoption of ASC 606 represents a change in accounting principle that will more closely align revenue
recognition with the delivery of our goods or services. To achieve this core principle, we apply the following five
steps when recording revenue:
• 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 our
customer has been satisfied and control has transferred to the customer. The majority of our 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, we make an
accrual at each quarter end based upon historical repair times within our 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 us, and that have an enforceable right to payment for performance
completed to date, are also recorded over time. We consider 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 we expect 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
41
from third parties or from us, 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 we collect
concurrent with revenue-producing activities are excluded from revenue. Our normal payment terms are 30 to 60
days but vary by the type and location of our 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, we
require payment before the products or services are delivered to, or performed for, the customer. None of our
contracts as of December 31, 2018 contained a significant financing component.
We periodically enter into contracts with our 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 we evaluate to determine if the promises are separate performance
obligations. Once we determine the performance obligations, we then determine 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, we estimate 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 we expect to better predict the amount of consideration to which it will be
entitled. There are no constraints on the variable consideration recorded. We then allocate 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
has been immaterial.
Our standard assurance warranty period is normally 12 to 24 months and we provide for estimated warranty
costs at the time of sale based upon historical experience. We sometimes sell separately-priced service contracts
and extended warranty contracts related to certain of our products, especially our laser products. The separately
priced contracts generally range from 12 to 60 months. We normally receive payment at the inception of the
contract and recognize revenue over the term of the agreement in proportion to the costs expected to be incurred
in satisfying the obligations under the contract.
We monitor and track the amount of product returns, provide for sales return allowances and reduce revenue
at the time of shipment for the estimated amount of such future returns, based on historical experience. While
product returns have historically been within our expectations and the provisions established, there is no
assurance that we will continue to experience the same return rates that we have in the past. Any significant
increase in product return rates could have a material adverse impact on our operating results for the period or
periods in which such returns materialize.
While we maintain a credit approval process, significant judgments are made by management in connection
with assessing our customers’ ability to pay at the time of shipment. Despite this assessment, from time to time,
our customers are unable to meet their payment obligations. We continuously monitor our customers’ credit
worthiness, and use our judgment in establishing a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified. While such credit losses have
historically been within our expectations and the provisions established, there is no assurance that we will
continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or
financial position of our customers could have a material adverse impact on the collectability of accounts
receivable and our future operating results.
Inventory. We value our inventory at the lower of cost (first-in, first-out method) or market. We regularly
review inventory quantities on hand and record a provision to write-down excess and obsolete inventory to its
estimated net realizable value, if less than cost, based primarily on our estimated forecast of product demand.
Once our inventory value is written-down and a new cost basis has been established, the inventory value is not
increased due to demand increases. Demand for our products can fluctuate significantly. A significant increase in
the demand for our products could result in a short-term increase in the cost of inventory purchases as a result of
42
supply shortages or a decrease in the cost of inventory purchases as a result of volume discounts, while a
significant decrease in demand could result in an increase in the charges for excess inventory quantities on hand.
In addition, our industry is subject to technological change, new product development and product technological
obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore,
any significant unanticipated changes in demand or technological developments could have a significant impact
on the value of our inventory and our reported operating results. For 2018, 2017 and 2016, our charges for excess
and obsolete inventory totaled $22.3 million, $20.2 million and $16.0 million, respectively.
Warranty Costs. We provide for the estimated costs to fulfill customer warranty obligations upon the
recognition of the related revenue. We provide warranty coverage for our products for periods ranging from 12 to
36 months, with the majority of our products for periods ranging from 12 to 24 months. Short-term accrued
warranty obligations, which expire within one year, are included in other current liabilities and long-term accrued
warranty obligations are included in other liabilities in the consolidated balance sheets. We estimate the
anticipated costs of repairing our products under such warranties based on the historical costs of the repairs and
any known specific product issues. The assumptions we use to estimate warranty accruals are re-evaluated
periodically in light of actual experience and, when appropriate, the accruals are adjusted. Our determination of
the appropriate level of warranty accrual is based upon estimates. Should product failure rates differ from our
estimates, actual costs could vary significantly from our expectations. Defective products will be either repaired
or replaced, generally at our option, upon meeting certain criteria.
Pension Plans. Several of our non-U.S. subsidiaries have defined benefit pension plans covering
substantially all full-time employees of those subsidiaries. Some of the plans are unfunded, as permitted under
the plans and applicable laws. For financial reporting purposes, the calculation of net periodic pension costs is
based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of
return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan.
All of these assumptions are based upon our judgment, considering all known trends and uncertainties. Actual
results that differ from these assumptions would impact future expense recognition and the cash funding
requirements of our pension plans.
Stock-Based Compensation Expense. We record compensation expense for all share-based compensation
awards to employees and directors based upon the estimated fair market value of the underlying instrument.
Accordingly, share-based compensation cost is measured at the grant date, based upon the fair value of the
award.
We typically issue restricted stock units (“RSUs”) as stock-based compensation. We also provide employees
the opportunity to purchase shares through an Employee Stock Purchase Plan (“ESPP”). For RSUs, the fair value
is the stock price on the date of grant. We estimate the fair value of stock appreciation rights and shares issued
under our ESPP using the Black Scholes pricing model, which is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These variables include our expected stock
price volatility over the term of the awards, expected life, risk free interest rate and expected dividends.
Management determined that blended volatility, a combination of historical and implied volatility, is more
reflective of market conditions and a better indicator of expected volatility than historical or implied volatility
alone. We are also required to estimate forfeitures at the time of grant and revise those estimates in subsequent
periods if actual forfeitures differ from those estimates.
Certain RSUs involve stock to be issued upon the achievement of performance conditions (“performance
shares”) under our stock incentive plans. Such performance shares become available subject to time-based
vesting conditions if, and to the extent that, financial or operational performance criteria for the applicable period
are achieved. Accordingly, the number of performance shares earned will vary based on the level of achievement
of financial or operational performance objectives for the applicable period. Until such time that our performance
can ultimately be determined, each quarter we estimate the number of performance shares to be earned based on
an evaluation of the probability of achieving the performance objectives. Such estimates are revised, if necessary,
43
in subsequent periods when the underlying factors change our evaluation of the probability of achieving the
performance objectives. Accordingly, share-based compensation expense associated with performance shares
may differ significantly from the amount recorded in the current period.
As part of our acquisition of Newport (the “Newport Merger”), we assumed the outstanding stock
appreciation rights (“SARs”) of Newport. For SARs, the converted number of shares, fair value, vesting schedule
and expiration dates are all based on the original grant date information. The stock-based compensation reflects
the remaining fair value for all unvested SARs as of the acquisition date, recognized over the remaining time to
vest.
The assumptions used in calculating the fair value of share-based compensation awards represents
management’s best estimates, but
these estimates involve inherent uncertainties and the application of
management’s judgment. As a result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future.
Intangible Assets, Goodwill and Other Long-Lived Assets. As a result of our acquisitions, we have
identified intangible assets and generated significant goodwill. Definite-lived intangible assets are valued based
on estimates of future cash flows and amortized over their estimated useful life. Goodwill and indefinite-lived
intangible assets are subject to annual impairment testing as well as testing upon the occurrence of any event that
indicates a potential impairment. Intangible assets and other long-lived assets are also subject to an impairment
test if there is an indicator of impairment. If our expectations of future results and cash flows are significantly
diminished, intangible assets and goodwill may be impaired and the resulting charge to operations may be
material. When we determine that the carrying value of intangibles or other long-lived assets may not be
recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted
cash flow method to determine whether an impairment exists, and then measure the impairment using discounted
cash flows. To measure impairment for goodwill, we compare the fair value of our reporting units by measuring
discounted cash flows to the book value of the reporting units. Goodwill would be impaired if the resulting
implied fair value was less than the recorded book value of the goodwill.
The estimation of useful lives and expected cash flows require us to make significant judgments regarding
future periods that are subject to some factors outside of our control. Changes in these estimates can result in
significant revisions to the carrying value of these assets and may result in material charges to the results of
operations.
We have elected to perform our annual goodwill impairment test as of October 31 of each year, or more
often if events or circumstances indicate that there may be impairment. Goodwill is the amount by which the cost
of acquired net assets exceeded the fair value of those net assets on the date of acquisition. We allocate goodwill
to reporting units at the time of acquisition or when there is a change in the reporting structure and base that
allocation on which reporting units will benefit from the acquired assets and liabilities. Reporting units are
defined as operating segments or one level below an operating segment, referred to as a component. The
estimated fair value of our reporting units was based on discounted cash flow models derived from internal
earnings and internal and external market forecasts. Determining fair value requires the exercise of significant
judgment, including judgments about appropriate discount rates, perpetual growth rates, projected revenues and
projected profit margins. Discount rates are based on a weighted average cost of capital (“WACC”), which
represents the average rate a business must pay its providers of debt and equity. The WACC used to test goodwill
is derived from a group of comparable companies. Assumptions in estimating future cash flows are subject to a
high degree of judgment and complexity. We make every effort to forecast these future cash flows as accurately
as possible with the information available at the time the forecast is developed.
In performing our annual goodwill impairment test, we are permitted to first assess qualitative factors to
determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying
In performing the qualitative assessment, we consider certain events and
amount,
including goodwill.
44
circumstances specific to the reporting unit and to the entity as a whole, such as macroeconomic conditions,
industry and market considerations, overall financial performance and cost factors when evaluating whether it is
more likely than not that the fair value of the reporting unit is less than its carrying amount. We are also
permitted to bypass the qualitative assessment and proceed directly to the quantitative test. If we choose to
undertake the qualitative assessment and we conclude that it is more likely than not that the fair value of the
reporting unit is less than its carrying amount, we would then proceed to the quantitative impairment test. In the
quantitative assessment, we compare the fair value of the reporting unit to its carrying amount, which includes
goodwill. If the fair value exceeds the carrying value, no impairment loss exists. If the fair value is less than the
carrying amount, a goodwill impairment loss is measured and recorded.
On July 1, 2018, we reassigned goodwill to certain reporting units within the Light & Motion reportable
segment resulting from a reorganization of the composition of reporting units. The goodwill was reassigned to
the reporting units affected using the relative fair value approach. In conjunction with this goodwill
reassignment, we performed an interim quantitative impairment test as of July 1, 2018 for all of our reporting
units and concluded that the fair values of each reporting unit exceeded their respective carrying values.
As of October 31, 2018, we performed our annual impairment assessment of goodwill using the qualitative
assessment and determined that it is more likely than not that the fair values of the reporting units exceed their
carrying amount. We will continue to monitor and evaluate the carrying value of goodwill. If market and
economic conditions or business performance deteriorate, this could increase the likelihood of us recording an
impairment charge. However, we believe it is not reasonably likely that an impairment will occur at any of its
reporting units over the next twelve months.
In-Process Research and Development. We value tangible and intangible assets acquired through our
business acquisitions, including in-process research and development (“IPR&D”), at fair value. We determine
IPR&D through established valuation techniques for various projects for the development of new products and
technologies and capitalize IPR&D as an intangible asset. If the projects are completed, the intangible asset will
be amortized to earnings over the expected life of the completed product. If the R&D projects are abandoned, we
will write-off the related intangible asset.
The value of IPR&D is determined using the income approach, which discounts expected future cash flows
from projects under development to their net present value. Each project is analyzed and estimates and judgments
are made to determine the technological
the
complexity, cost, time to complete development, any alternative future use or current technological feasibility
and the stage of completion.
innovations included in the utilization of core technology,
Income Taxes.
We evaluate the realizability of our net deferred tax assets and assess the need for a valuation allowance on
a quarterly basis. The future benefit to be derived from our deferred tax assets is dependent upon our ability to
generate sufficient future taxable income in each jurisdiction of the right type to realize the assets. We record a
valuation allowance to reduce our net deferred tax assets to the amount that is expected to be realized. To the
extent we establish a valuation allowance an expense is recorded within the provision for income taxes line in the
consolidated statements of operations and comprehensive income.
Accounting for income taxes requires a two-step approach to recognize and measure uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is
more likely than not that the position will be sustained upon audit, including resolutions of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than
50% likely of being realized upon ultimate settlement. We re-evaluate these uncertain tax positions on a quarterly
basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes
in tax law, effectively settled issues under audit and new audit activity. Any change in these factors could result
in the recognition of a tax benefit or an additional charge to the tax provision.
45
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the
“Act”), which included significant changes to U.S. tax law. Some of the more significant changes impacting us
are the reduction of the U.S. federal corporate income tax rate from 35.0% to 21.0% as of January 1, 2018, the
implementation of a territorial tax system and the imposition of a transition tax on deemed repatriated cumulative
earnings of foreign subsidiaries (“Transition Tax”).
Income tax effects resulting from changes in tax are generally accounted for in the period in which the law
is enacted and the effects are recorded as a component of provision for income taxes from continuing operations.
On December 22, 2017, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 118
(“SAB 118”) to provide guidance for reporting entities’ ability to timely complete the accounting for certain
income tax effects of the Act and allowed a measurement period up to one year from the enactment date of the
Act. We have obtained, prepared and analyzed the information needed to complete the accounting requirements
under ASC Topic 740 and, as a result, in accordance with SAB 118 we finalized and recorded the effects of the
Act during the quarter ended December 31, 2018. The ultimate impact of the Act
is based upon our
understanding and interpretation of the regulatory guidance that has been issued regarding the Act. There remain
significant provisions of the Act that impact us for which no regulatory guidance has yet been issued. Our
estimated accruals for 2018 and future periods expected income tax expense may change as regulatory guidance
on provisions of the Act are released.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of total net revenues of certain line
items included in our consolidated statements of operations and comprehensive income data:
Years Ended December 31,
2018
2017
2016
Net revenues:
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88.4% 88.8% 86.4%
11.2
11.6
13.6
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0% 100.0%
Cost of revenues:
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees and expenses related to repricing of term loan . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net
46.7
6.1
52.8
47.3
6.2
53.5
48.6
7.7
56.3
47.2% 46.5% 43.7%
6.9
6.5
15.2
14.4
0.3
0.1
0.2
0.2
—
0.1
0.3
—
—
—
2.4
2.1
8.5
17.6
2.1
—
—
0.4
0.1
2.8
23.8% 21.2% 12.2%
0.2
0.3
1.6
0.8
3.9
—
0.3
0.1
0.2
2.4
—
0.1
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.2% 23.4%
4.3
5.7
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.9% 17.7%
9.9%
1.8
8.1%
46
Year Ended December 31, 2018, Compared to 2017 and 2016
Net Revenues
(Dollars in millions)
Years Ended December 31,
2017
2018
2016
Product
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,835.2
239.9
$1,701.3
214.7
$1,118.5
$ 176.8
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,075.1
$1,916.0
$1,295.3
Product revenues increased $133.9 million during 2018, compared to 2017. Product revenues for the
Vacuum & Analysis segment increased by $32.7 million during 2018 compared to 2017, due to an increase in
product revenues from customers in our advanced markets of $30.9 million and an increase in product revenues
from our semiconductor customers of $1.8 million. Product revenues for our Light & Motion segment increased
by $101.2 million during 2018, compared to 2017, due to an increase in product revenues from customers in our
advanced markets of $77.2 million and an increase in product revenues from our semiconductor customers of
$24.0 million. The increase in product revenues from customers in our advanced markets for both the Vacuum &
Analysis segment and the Light & Motion segment were primarily due to volume increases in revenues from
customers in our industrial technologies market.
Product revenues increased $582.8 million during 2017, compared to 2016. Product revenues for the
Vacuum & Analysis segment increased by $316.2 million during 2017 compared to 2016, due to an increase in
product revenues from our semiconductor customers of $293.9 million, primarily due to volume increases, and
an increase in product revenues from customers in our advanced markets of $22.3 million. Product revenues for
our Light & Motion segment increased by $266.6 million during 2017, compared to 2016, primarily due to the
Newport Merger and consisted of an increase in product revenues from customers in our other advanced markets
of $215.5 million and an increase in product revenues from our semiconductor customers of $51.1 million.
Service revenues consisted mainly of fees for services related to the repair of our products, maintenance,
installation services and training. In 2018, we started to record the sales of spare parts in our service revenue and
related cost of sales line items rather than in our product revenue and related cost of sales line items. As a result,
for 2017 and 2016, we reclassified $22.1 million and $15.4 million, respectively, of product revenue for spare
parts from product to service revenue. Service revenues increased $25.2 million during 2018, compared to 2017,
primarily due to an increase in service revenues from the Vacuum & Analysis segment of $20.7 million,
primarily from semiconductor customers. The remaining increase of $4.5 million was primarily due to an
increase in service revenues from our industrial technologies market from our Light & Motion segment.
Service revenues increased $37.9 million during 2017, compared to 2016, primarily due to an increase in
service revenues from the Light & Motion segment of $19.0 million, due to the fact that 2016 only included eight
months of revenue from Newport as the Newport Merger occurred in April 2016. The remaining increase of
$18.9 million was primarily due to an increase in service revenues from our semiconductor customers from our
Vacuum & Analysis segment.
Total international net revenues, including product and service, were $1.1 billion or 50.7% of total net
revenues for 2018, $960.7 million or 50.1% of total net revenues for 2017 and $619.7 million or 47.8% of total
net revenues for 2016. A significant portion of the increases in 2018 and 2017 international net revenue, were in
China, Germany and Japan. The increase in 2017, compared to 2016 was partially the result of the Newport
Merger and consisted of increases mainly in South Korea, Japan, Israel and Germany. We expect
that
international revenues will continue to account for a significant percentage of total net sales for the foreseeable
future, and that in particular, the proportion of our sales to Asian customers will continue to increase, due in large
part to our acquisition of ESI, as approximately ninety percent of ESI’s customers are located in Asia.
47
The following table sets forth our net revenues by reportable segment:
Net Revenues
(Dollars in millions)
Years Ended December 31,
2018
2017
2016
Vacuum & Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Light & Motion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,260.9
814.2
$1,207.5
708.5
$ 872.3
423.0
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,075.1
$1,916.0
$1,295.3
Net revenues for our Vacuum & Analysis segment increased $53.4 million in 2018, compared to 2017, due
to an increase in net revenues from customers in our advanced markets of $27.9 million, primarily due to
increases in net revenues from customers in our industrial technologies market, and from our semiconductor
customers of $25.5 million. Net revenues for our Vacuum & Analysis segment increased $335.2 million in 2017,
compared to 2016, due to an increase in net revenues from our semiconductor customers of $315.0 million and
an increase in net revenues from customers in our advanced markets of $20.2 million, primarily due to increases
in net revenues from customers in our industrial technologies markets.
Net revenues from our Light & Motion segment increased $105.7 million in 2018, compared to 2017, due to
an increase in net revenues from customers in our advanced markets of $83.3 million, primarily due to volume
increases in net revenues from customers in our industrial technologies market of $58.5 million and an increase
in revenues from customers in our semiconductor market of $22.4 million. Net revenues from our Light &
Motion segment increased $285.5 million in 2017, compared to 2016, primarily due to the Newport Merger and
consisted of an increase in net revenues from customers in our advanced markets of $228.1 million, primarily
due to increases in net revenues from customers in our industrial technologies and research and defense markets
and an increase in revenues from customers in our semiconductor market of $57.4 million. Net revenues from
our Light & Motion segment in 2016 were $423.0 million and only represented eight months of revenue in 2016,
as the Newport Merger occurred in April 2016.
The following is gross profit as a percentage of net revenues by product and service:
Gross Profit
(As a percentage of net revenues)
Years Ended December 31,
2018
2017
2016
% Points
Change
in 2018
% Points
Change
in 2017
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47.2% 46.7% 43.7% 0.5%
47.3% 45.0% 43.7% 2.3%
Total gross profit percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47.2% 46.5% 43.7% 0.7%
3.0%
1.3%
2.8%
Gross profit on product revenues increased by 0.5 percentage points during 2018 compared to 2017. The
increase was primarily due to an increase of 0.9 percentage points due to higher revenue volumes and 0.6
percentage points due to favorable product mix, partially offset by a decrease of 0.6 percentage points due to
higher material costs and a decrease of 0.5 percentage points due to higher overhead costs.
Gross profit on product revenues increased by 3.0 percentage points during 2017 compared to 2016. The
increase was primarily due to an increase of 5.5 percentage points due to higher revenue volumes, partially offset
by 1.6 percentage points due to higher overhead costs, both mainly related to the Newport Merger.
Cost of service revenues consists primarily of costs for providing services for repair and training which
includes salaries, related expenses and other overhead costs. Service gross profit increased by 2.3 percentage
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points during 2018 compared to 2017, primarily due to an increase of 5.3 percentage points due to lower
overhead paid and favorable overhead absorption, partially offset by a 2.8 percentage points decrease due to
higher material costs.
Service gross profit increased by 1.3 percentage points during 2017, compared to 2016, primarily due to a
net increase of 1.6 percentage points due to net favorable direct labor and overhead absorption, partially offset by
0.4 percentage points due to unfavorable product mix.
The following is gross profit as a percentage of net revenues by reportable segment.
Gross Profit
(As a percentage of net revenues)
Years Ended December 31,
2018
2017
2016
% Points
Change
in 2018
% Points
Change
in 2017
Vacuum & Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Light & Motion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.8% 45.6% 44.5% 0.2%
49.3% 48.0% 41.9% 1.3%
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47.2% 46.5% 43.7% 0.7%
1.1%
6.1%
2.8%
Gross profit for our Vacuum & Analysis segment remained relatively flat in 2018, compared to 2017. Gross
profit for our Vacuum & Analysis segment increased by 1.1 percentage points in 2017, compared to 2016,
primarily due to higher revenue volumes related to revenues from customers in our semiconductor market,
partially offset by unfavorable product mix.
Gross profit for our Light & Motion segment increased 1.3 percentage points in 2018, compared to 2017,
primarily due to higher revenue volumes and favorable product mix, partially offset by higher material costs.
Gross profit for our Light & Motion segment increased 6.1 percentage points in 2017, compared to 2016,
primarily due to higher revenue volumes and lower material costs, as the prior year included $15.1 million of
inventory step-up amortization charges related to the Newport Merger, and favorable product mix, partially offset
by higher overhead costs.
Research and Development
(Dollars in millions)
Years Ended December 31,
2018
2017
2016
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$135.7
$132.6
$110.6
Research and development expenses increased $3.1 million during 2018, compared to 2017, primarily due
to an increase in compensation costs and related benefits of $2.6 million.
Research and development expenses increased $22.0 million during 2017, compared to 2016. The increase
was primarily due to the fact that the Newport Merger occurred in 2016 and thus the Light & Motion segment
only accounted for eight months of expense in 2016. The increase included $13.4 million of compensation costs
and related benefits, $5.7 million for project materials and $1.1 million of occupancy costs.
Our research and development
is primarily focused on developing and improving our instruments,
components, subsystems and process control solutions to improve process performance and productivity.
We have thousands of products and our research and development efforts primarily consist of a large
number of projects related to these products, none of which is individually material to us. Current projects
typically have durations of 3 to 30 months depending upon whether the product is an enhancement of existing
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technology or a new product. Our current initiatives include projects to enhance the performance characteristics
of older products, to develop new products and to integrate various technologies into subsystems. These projects
support in large part, the transition in the semiconductor industry to smaller integrated circuit geometries and in
the flat panel display and solar markets to larger substrate sizes, which require more advanced process control
technology. Research and development expenses consist primarily of salaries and related expenses for personnel
engaged in research and development, fees paid to consultants, material costs for prototypes and other expenses
related to the design, development, testing and enhancement of our products.
We believe that the continued investment in research and development and ongoing development of new
products are essential to the expansion of our markets, and we expect to continue to make significant investment
in research and development activities. We are subject to risks if products are not developed in a timely manner,
due to rapidly changing customer requirements and competitive threats from other companies and technologies.
Our success primarily depends on our products being designed into new generations of equipment for the
semiconductor industry and advanced technology markets. We develop products that are technologically
advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital
equipment. If our products are not chosen to be designed into our customers’ products, our net revenues may be
reduced during the lifespan of those products.
Selling, General and Administrative
(Dollars in millions)
Years Ended December 31,
2018
2017
2016
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . .
$298.1
$290.1
$227.9
Selling, general and administrative expenses increased $8.0 million during 2018, compared to 2017. The
increase was primarily due to an increase of $7.4 million of compensation costs and related benefits and
$4.8 million of consulting and professional fees, primarily information technology and business development
related expenses, partially offset by a decrease of $1.3 million of commissions expense, $0.9 million in travel and
entertainment expenses and $0.9 million of occupancy costs.
Selling, general and administrative expenses increased $62.2 million during 2017, compared to 2016. The
increase was primarily due to the fact that the Newport Merger occurred in April 2016 and thus the Light &
Motion segment only accounted for eight months of expense in 2016. The increase included $37.6 million of
compensation costs and related benefits, $6.4 million of commissions expense, $4.0 million of information
technology related expenses, $3.3 million of consulting and professional fees and $2.5 million of depreciation
expense.
Acquisition and Integration Costs
(Dollars in millions)
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
$3.1
2017
$5.3
2016
$27.3
We incurred $4.2 million of acquisition costs during 2018 related to the announced acquisition of ESI which
closed on February 1, 2019. We recorded acquisition and integration costs related to the Newport Merger during
2017 and 2016 of $5.3 million and $27.3 million, respectively, which consisted primarily of information
technology related expenses, legal and other professional fees, as well as compensation expenses related to
change in control provisions in agreements for certain executives of Newport. During 2018, we reversed
$1.1 million of these Newport Merger acquisition costs related to severance provisions that were not met.
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Restructuring
(Dollars in millions)
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
$3.6
2017
$3.9
2016
$0.6
During 2018, we recorded $3.6 million of restructuring charges, which was primarily comprised of
severance costs related to a worldwide reduction in workforce during the third quarter of 2018 and transferring a
portion of our shared accounting functions in the United States to a third party, as well as the consolidation of
certain shared accounting functions in Asia.
During 2017, we recorded $3.9 million of restructuring charges related to the consolidation of two
manufacturing plants, the restructuring of one of our international facilities and the consolidation of sales offices.
During 2016, we recorded $0.6 million of restructuring charges primarily related to the closing of one of our
international facilities.
Environmental Costs
(Dollars in millions)
Environmental costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
$1.0
2017
$—
2016
$—
We recorded environmental costs during the twelve months ended December 31, 2018, related to a U.S.
Environmental Protection Agency-designated Superfund site, acquired as part of the Newport Merger.
Asset Impairment
(Dollars in millions)
Asset impairment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
$—
2017
$6.7
2016
$5.0
During 2017, we recorded $6.7 million of impairment charges related to the consolidation of two
manufacturing plants. These charges primarily related to the write-off of certain goodwill and intangible assets.
During 2016, we recorded an asset impairment charge of $5.0 million on our investment in a private company.
Fees and Expenses Related to Repricing of Term Loan
(Dollars in millions)
Fees and expenses related to repricing of term loan . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
$0.4
2017
$0.5
2016
$1.2
We recorded fees and expenses related to repricings of our Term Loan Facility (as defined below under
“Liquidity and Capital Resources – Term Loan Credit Agreement.”
Amortization of Intangible Assets
(Dollars in millions)
Years Ended December 31,
2018
2017
2016
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$43.5
$45.7
$35.7
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Amortization of intangible assets decreased by $2.2 million in 2018, due to certain intangible assets
becoming fully amortized.
Amortization increased by $10.0 million during 2017, compared to 2016. The increase in 2017, compared to
prior year, was primarily related to the amortization of intangible assets acquired through the Newport Merger.
The increase during 2017, compared to 2016 was primarily due to the fact that the Light & Motion segment only
accounted for eight months of expense in 2016.
Interest Expense, Net
(Dollars in millions)
Years Ended December 31,
2018
2017
2016
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11.2
$28.0
$28.0
Interest expense, net, decreased by $16.8 million in 2018, compared to 2017, primarily related to principal
prepayments of $275.0 million since the beginning of 2017, and three repricings of our Term Loan Facility in
2017 and 2018.
Interest expense, net, remained flat and during 2017 and 2016.
Gain on Sale of Business
(Dollars in millions)
Gain on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
$—
2017
$74.9
2016
$—
We recorded a $74.9 million gain for 2017 on the sale of our Data Analytics Solutions business during the
second quarter of 2017.
Other Expense, Net
(Dollars in millions)
Other expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
$1.9
2017
$5.9
2016
$1.2
Other expense, net for 2018 and 2017 primarily related to changes in foreign exchange rates.
Other expense, net for 2016 includes $2.8 million of foreign exchange losses and other income, net of
$1.6 million, primarily attributed to $1.3 million of net proceeds received from a Company-owned life insurance
policy.
Provision for Income Taxes
(Dollars in millions)
Years Ended December 31,
2018
2017
2016
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$88.1
$108.5
$23.2
Our effective tax rate for the years 2018, 2017 and 2016 was 18.3%, 24.2% and 18.1%, respectively. The
effective tax rate in 2018 and related income tax expense was impacted by the Tax Cuts and Jobs Act which was
enacted into law on December 22, 2017. We account for income tax effects resulting from changes in tax laws in
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accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in
which the law is enacted and that the effects are recorded as a component of provision for income taxes from
continuing operations. As a result, we recorded provisional amounts as of December 31, 2017 related to the
one-time Transition Tax and the change in U.S. net deferred tax liabilities resulting from the change in the U.S.
statutory rate resulting from the enactment of the Act in accordance with SAB 118. The provisional amounts
recorded for the Act were finalized as of December 22, 2018 and resulted in a net decrease to our annual tax
expense of approximately $0.6 million. The effective tax rate for the period ending December 31, 2018 was
lower than the U.S. statutory rate due to foreign earnings taxed at lower rates, windfall benefits of stock
compensation and the new deduction for foreign derived intangible income from the Act, offset by state income
taxes.
The effective tax rate in 2017 was lower than the U.S. statutory tax rate due to foreign earnings taxed at
lower rates, windfall benefits of stock compensation and the domestic production deduction offset by deferred
taxes recorded as a result of a change in the indefinite reinvestment assertion with respect to certain foreign
subsidiaries.
At December 31, 2018, the total amount of gross unrecognized tax benefits, which excludes interest and
penalties, was approximately $32.7 million. At December 31, 2017, the total amount of gross unrecognized tax
benefits, which excludes interest and penalties, was approximately $27.3 million. The net
increase from
December 31, 2017 was primarily attributable to the addition of reserves for the federal Transition Tax from the
Act along with certain non-U.S. items offset by decreases from settlement of an audit by the U.S. Internal
Revenue Service (“IRS”) and the expiration of certain statutes of limitations. At December 31, 2018, excluding
interest and penalties,
if
recognized, would impact our annual effective tax rate. We accrue interest and, if applicable, penalties for any
uncertain tax positions. Interest and penalties are classified as a component of income tax expense. At December
2018, 2017 and 2016, we had accrued interest on unrecognized tax benefits of approximately $0.6 million,
$0.3 million and $0.5 million, respectively.
there were approximately $25.1 million of net unrecognized tax benefits that,
Over the next 12 months it is reasonably possible that we may recognize approximately $2.1 million of
previously net unrecognized tax benefits, excluding interest and penalties, related to federal, state and foreign tax
positions as a result of the expiration of statutes of limitations. The U.S. statute of limitations remains open for
tax years 2015 through present. The statute of limitations for our tax filings in other jurisdictions varies between
fiscal years 2013 through the present. We also have certain federal credit carry-forwards and state tax loss and
credit carry-forwards that are open to examination for tax years 2000 through the present.
We are subject to examination by U.S. federal, state and foreign tax authorities. The IRS commenced an
examination of our U.S. federal income tax filings for tax years 2015 and 2016 during the quarter ended
September 30, 2017. This audit was effectively settled during the quarter ended March 31, 2018. During the
quarter ended March 31, 2018 we received notification from the IRS of its intent to audit our U.S. subsidiary,
Newport, for tax year 2015. This audit commenced during the quarter ended June 30, 2018 and there have been
no proposed adjustments through December 31, 2018.
On a quarterly basis, we evaluate both positive and negative evidence that affects the realizability of net
deferred tax assets and assess the need for a valuation allowance. The future benefit to be derived from our
deferred tax assets is dependent upon our ability to generate sufficient future taxable income in each jurisdiction
of the right type to realize the assets.
In 2018 we recorded a net benefit to income tax expense of $1.6 million, excluding interest and penalties,
due to reserve releases related to the expiration of certain statutes of limitations for previously open tax years and
the effective settlement of an IRS audit. In 2017 we recorded a net benefit to income tax expense of $3.1 million,
excluding interest and penalties, due to reserve releases related to the expiration of statutes of limitations for
previously open tax years. For 2016 we recorded a net benefit to income tax expense of $2.6 million, excluding
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interest and penalties, due to reserve releases related to the expiration of the statutes of limitations for previously
open tax years.
The United Kingdom is negotiating its withdrawal from the European Union (“EU”). It is possible that the
United Kingdom may leave the EU without having negotiated terms of its withdrawal (no deal Brexit). If there is
a no deal Brexit, tax treaties between the United Kingdom and member states of the EU will displace certain EU
directives now in effect including the Parent / Subsidiary Directive. The Parent Subsidiary Directive currently
eliminates withholding taxes on the payment of dividends between associated companies of different EU member
states. The United Kingdom tax treaties with EU member states generally permit withholding taxes to be applied
at reduced rates. If there is a no deal Brexit, our tax expense may increase due to the imposition of withholding
taxes on dividends paid from our EU subsidiaries to our United Kingdom subsidiaries.
Our future effective tax rate depends on various factors, including further interpretations and guidance from
U.S. federal and state governments on the impact of the enactment of the Act, the adoption of the proposed
regulations issued by the U.S. IRS on the one-time transition tax and the global intangible low-taxed income
provision, as well as the geographic composition of our pre-tax income, and changes in income tax reserves for
unrecognized tax benefits. We monitor these factors and timely adjust our estimates of the effective tax rate
accordingly. We expect that the geographic mix of pre-tax income will continue to have a favorable impact on
our effective tax rate, however the geographic mix of pre-tax income can change based on multiple factors
resulting in changes to the effective tax rate in future periods. While we believe we have adequately provided for
all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a
result of uncertain and complex application of tax law and regulations. Additionally, the recognition and
measurement of certain tax benefits include estimates and judgment by management. Accordingly, we could
record additional provisions or benefits for U.S. federal, state, and foreign tax matters in future periods as new
information becomes available.
Liquidity and Capital Resources
Cash, cash equivalents and short-term marketable investments totaled $718.2 million at December 31, 2018,
an increase of $174.9 million compared to $543.3 million at December 31, 2017. This increase and the primary
driver in our current and anticipated future cash flows is and will continue to be cash generated from operations,
consisting primarily of our net income, excluding non-cash changes and changes in operating assets and
liabilities. In periods when our sales are growing, higher sales to customers will result in increased trade
receivables, and inventories will generally increase as we build products for future sales. This may result in lower
cash generated from operations. Conversely, in periods when our sales are declining, our trade accounts
receivable and inventory balances will generally decrease, resulting in increased cash from operations.
Net cash provided by operating activities was $413.8 million for 2018 and resulted from net income of
$392.9 million, which included non-cash net charges of $118.9 million, offset by an increase in working capital
of $98.0 million. The increase in working capital consisted primarily of an increase in inventories of
$73.8 million, a decrease in income taxes of $11.4 million, a decrease in accrued compensation of $8.7 million
and a decrease in other current and non-current liabilities of $4.0 million.
Net cash provided by operating activities was $355.2 million for 2017 and resulted from net income of
$339.1 million, which included non-cash net charges of $66.5 million, offset by an increase in working capital of
$50.4 million. The increase in working capital consisted of an increase in inventories of $72.4 million, an
increase in trade accounts receivable of $44.1 million and an increase in current and non-current assets of
$8.6 million, all as a result of a significant increase in our business in 2017. These increases were offset by an
increase in accrued compensation of $32.5 million mainly related to variable compensation, other current and
non-current liabilities of $18.0 million, income taxes of $12.8 million and accounts payable of $11.4 million.
Net cash provided by operating activities was $180.1 million for 2016 and resulted from net income of
$104.8 million, which included non-cash net charges of $97.6 million, offset by an increase in working capital of
54
$22.3 million. The increase in working capital consisted of an increase in trade accounts receivable of
$58.1 million, an increase in inventories of $13.8 and an increase in current and non-current assets of
$12.2 million. These increases were offset by an increase in income taxes of $30.9 million, accounts payable of
$16.2 million, an increase in accrued compensation of $11.0 million and an increase in other current and
non-current liabilities of $3.7 million.
Net cash provided by investing activities was $72.8 million for 2018, due to net sales and maturities of
short-term investments of $135.7 million, offset by the purchases of production-related equipment of
$62.9 million. Net cash provided by investing activities was $22.6 million for 2017 and resulted primarily from
proceeds received of $72.5 million from the sale of our Data Analytics Solutions business, partially offset by
purchases of production-related equipment of $31.3 million and net purchases of short-term investments of
$18.7 million. Net cash used in investing activities was $727.0 million for 2016 and resulted primarily from
$939.6 million of cash, primarily used for the Newport Merger and $19.1 million used for the purchase of
production-related equipment, partially offset by net proceeds from sales and maturities of investments of
$231.5 million. The purchase of production-related equipment could increase to support future sales growth.
Net cash used in financing activities was $178.0 million for 2018 and primarily resulted from the repurchase
of common stock of $75.0 million, partial repayment of our Term Loan Facility of $50.0 million, dividend
payments made to common stockholders of $42.4 million and net payments related to tax payments for employee
stock awards of $11.1 million. Net cash used in financing activities was $279.7 million and resulted primarily
from partial repayment of the Term Loan Facility of $228.1 million, dividend payments made to common
stockholders of $38.2 million and net payments related to tax payments for employee stock awards of
$12.2 million. Net cash provided by financing activities was $560.1 million for 2016 and resulted from net
proceeds of $598.5 million, primarily related to the Term Loan Facility used to finance the Newport Merger,
offset by dividend payments made to common stockholders of $36.4 million and net payments related to tax
payments made for employee stock awards of $1.9 million.
On July 25, 2011, our Board of Directors approved a share repurchase program for the repurchase of up to
an aggregate of $200 million of our common stock from time to time in open market purchases, privately
negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased
depends upon a variety of factors,
including business conditions, stock market conditions and business
development activities, including, but not limited to, merger and acquisition opportunities. These repurchases
may be commenced, suspended or discontinued at any time without prior notice. During 2018, we repurchased
approximately 818,000 shares of our common stock for $75.0 million, or an average price of $91.67 per share.
During 2017, we did not repurchase any shares of our common stock. During 2016, we repurchased
approximately 45,000 shares of our common stock for $1.5 million at an average price of $34.50 per share.
Holders of our common stock are entitled to receive dividends when and if they are declared by our Board
of Directors. For the year ended December 31, 2018, we paid cash dividends of $42.4 million in the aggregate, or
$0.78 per share. For the year ended December 31, 2017, we paid cash dividends of $38.2 million in the
aggregate, or $0.71 per share. For the year ended December 31, 2016, we paid cash dividends of $36.4 million in
the aggregate, or $0.68 per share. Future dividend declarations, if any, as well as the record and payment dates
for such dividends, are subject to the final determination of our Board of Directors. In addition, under the terms
of our Term Loan Facility and our senior secured asset-based revolving credit facility, we may be restricted from
paying dividends under certain circumstances.
On February 11, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per
share to be paid on March 8, 2019 to shareholders of record as of February 25, 2019.
Acquisition of Electro Scientific Industries, Inc.
On February 1, 2019, we completed our previously announced acquisition of ESI pursuant to the ESI
Merger. At the effective time of the ESI Merger and pursuant to the terms and conditions of the Agreement and
55
Plan of Merger, each share of ESI’s common stock issued and outstanding as of immediately prior to the
effective time of the ESI Merger was converted into the right to receive $30.00 per share in cash, without interest
and subject to deduction for any required withholding tax. We paid to the former ESI stockholders aggregate
consideration of approximately $1 billion, excluding related transaction fees and expenses. We funded the
payment of the aggregate consideration with a combination of our available cash on hand and proceeds from our
term loan facility described below.
Sale of Data Analytics Solutions Business
In April 2017, we completed the sale of our Data Analytics Solutions business for total proceeds of
$72.5 million, net of cash sold, and we recorded a pre-tax gain of $74.9 million. This business, which had net
revenues in 2016 of $12.7 million and was included in the Vacuum & Analysis segment, was no longer a part of
our long-term strategic objectives.
Term Loan Credit Agreement
In connection with the completion of the Newport Merger, we entered into a term loan credit agreement (the
“Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from
time to time party thereto (the “Lenders”), that provided senior secured financing in the original principal amount
of $780.0 million, subject to increase at our option and subject to the receipt of lender commitments in
accordance with the Credit Agreement (the “Term Loan Facility”). Borrowings under the Term Loan Facility
bear interest per annum at one of the following rates selected by the Company: (a) a base rate determined by
reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in The Wall
Street Journal, (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an
interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of 1.75%, plus, in
each case, an applicable margin; or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar
deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a
LIBOR rate floor of 0.75%, plus an applicable margin. We have elected the interest rate as described in clause
(b). The Credit Agreement provides that all loans will be determined by reference to the Base Rate if the LIBOR
rate cannot be ascertained, if regulators impose material restrictions on the authority of a lender to make LIBOR
rate loans, and for other reasons. The Term Loan Facility was issued with original issue discount of 1.00% of the
principal amount thereof.
In June 2016, we entered into Amendment No. 1 (the “Repricing Amendment 1”) to the Credit Agreement
by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent
for the Lenders. The Repricing Amendment 1 decreased the applicable margin for borrowings under our Term
Loan Facility to 2.50% for base rate borrowings and 3.50% for LIBOR borrowings and extended the period
during which a prepayment premium may be required for a “Repricing Transaction” (as defined in the Credit
Agreement) until six months after the effective date of the Repricing Amendment 1. In connection with the
execution of the Repricing Amendment 1, we paid a prepayment premium of 1.00%, or $7.3 million, as well as
certain fees and expenses of the administrative agent and the Lenders, in accordance with the terms of the Credit
Agreement. Immediately prior to the effectiveness of the Repricing Amendment 1, we prepaid $50.0 million of
principal under the Credit Agreement. In September 2016, we prepaid an additional $60.0 million under the
Credit Agreement.
In September 2016, we entered into an interest rate swap agreement, which has a maturity date of
September 30, 2020, to fix the rate on $335.0 million of the then-outstanding balance under the Credit
Agreement. The rate is fixed at 1.198% per annum plus the applicable credit spread, which was 1.75% at
December 31, 2018. The notional amount of the interest rate swap agreement was $290.0 million and had a fair
value of $6.1 million at December 31, 2018.
In December 2016, we entered into Amendment No. 2 (the “Repricing Amendment 2”) to the Credit
Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and
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collateral agent for the Lenders. The Repricing Amendment 2 decreased the applicable margin for our term loan
under the Credit Agreement to 2.75% for LIBOR borrowings and 1.75% for base rate borrowings and reset the
period during which a prepayment premium may be required for a Repricing Transaction until six months after
the effective date of the Repricing Amendment 2. In November 2016, prior to the effectiveness of the Repricing
Amendment 2, we prepaid an additional $40.0 million of principal under the Credit Agreement. In March 2017,
we prepaid an additional $50.0 million of principal under the Credit Agreement.
In July 2017, we entered into Amendment No. 3 (the “Repricing Amendment 3”) to our Credit Agreement
by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent
for the Lenders. The Repricing Amendment 3 decreased the applicable margin for our term loan under the Credit
Agreement to 2.25% for LIBOR rate loans when the Total Leverage Ratio (as defined in the Credit Agreement)
is at or above 1.25:1 and decreased to 2.00% when the Total Leverage Ratio was below 1.25:1, both with a
LIBOR floor of 0.75%. The margin for base rate borrowings decreased to 1.25% when our Total Leverage Ratio
was at or above 1.25:1 and will decrease to 1.00% when the Total Leverage Ratio is below 1.25:1. The period in
which a prepayment premium may be required for a Repricing Transaction was reset to six months after the
effective date of the Repricing Amendment 3.
In April 2018, we entered into Amendment No. 4 (the “Repricing Amendment 4”) to the Credit Agreement
by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and collateral agent
for the Lenders. The Repricing Amendment 4 decreased the applicable margin for our term loan under the Credit
Agreement to 1.75% for LIBOR rate loans, with a LIBOR rate floor of 0.75%. The margin for base rate
borrowings decreased to 0.75% with a base rate floor of 1.75%. The period during which a prepayment premium
may be required for a Repricing Transaction was reset to six months after the effective date of the Repricing
Amendment 4.
In July 2017, August 2017, November 2017 and March 2018 we voluntarily prepaid $50.0 million,
$75.0 million, $50.0 million and $50.0 million, respectively, of principal under the Credit Agreement. As of
December 31, 2018, after total principal prepayments of $425.0 million and regularly scheduled principal
payments of $6.5 million, the total outstanding principal balance was $348.5 million. The interest rate as of
December 31, 2018 was 4.1%.
We incurred $28.7 million of deferred finance fees, original issue discount and repricing fees related to the
term loans under the Term Loan Facility, which are included in long-term debt in the accompanying consolidated
balance sheets and are being amortized to interest expense over the estimated life of the term loans using the
effective interest method. A portion of these fees have been accelerated in connection with the various debt
prepayments during 2016, 2017 and 2018. As of December 31, 2018, the remaining balance of the deferred
finance fees, original issue discount and repricing fees related to the Term Loan Facility was $4.7 million.
Under the Credit Agreement, we are required to prepay outstanding term loans, subject
to certain
exceptions, with portions of our annual excess cash flow as well as with the net cash proceeds of certain asset
sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. As a result of our
Total Leverage Ratio, we were not required to make a prepayment of excess cash flow for fiscal year end 2018.
We are also required to make scheduled quarterly payments each equal to 0.25% of the principal amount of the
term loan, less the amount of certain voluntary and mandatory repayments after such date, with the balance due
on the seventh anniversary of the closing date. As a result of making total prepayments of $425.0 million through
December 31, 2018, we are no longer required to make any scheduled quarterly principal payments on the Term
Loan Facility we had in place as of December 31, 2018 until maturity of the loan.
All obligations under the Term Loan Facility are guaranteed by certain of our domestic subsidiaries, and are
secured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and
exclusions.
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The Credit Agreement contains customary representations and warranties, affirmative and negative
covenants and provisions relating to events of default. If an event of default occurs, the Lenders under the Term
Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term
Loan Facility and all actions generally permitted to be taken by a secured creditor. At December 31, 2018, we
were in compliance with all covenants under the Credit Agreement.
Incremental Term Loan Facility
On February 1, 2019, in connection with the completion of the ESI Merger, we entered into Amendment
No. 5 to the Credit Agreement. Amendment No. 5 provides an additional tranche B-5 term loan commitment in
the principal amount of $650.0 million (the “Incremental Term Loan Facility”), all of which was drawn down in
connection with the closing of the ESI Merger. The Incremental Term Loan Facility matures on February 1, 2026
and bears interest at a rate per annum equal to, at our option, any of the following, plus, in each case, an
applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate
plus 0.50%, (2) the prime rate quoted in The Wall Street Journal, (3) a LIBOR rate determined by reference to
the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs,
plus 1.00% and (4) a floor of 1.00%; and (b) a LIBOR rate determined by reference to the costs of funds for U.S.
dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, with a floor
of 0.00%. The Incremental Term Loan Facility was issued with original issue discount of 1.00% of the principal
amount thereof and the applicable margin for borrowings under the Incremental Term Loan Facility is 1.25%
with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. As a consequence of the
pricing of the Incremental Term Loan Facility, the applicable margin for the existing Term Loan Facility
currently outstanding under the Credit Agreement (in the approximate outstanding principal amount of $348.0
million) was increased to 1.00% (from 0.75%) with respect to base rate borrowings and 2.00% (from 1.75%)
with respect to LIBOR borrowings.
We are required to make scheduled quarterly payments each equal to 0.25% of the original principal amount
of the tranche B-5 term loans, with the balance due on the seventh anniversary of the closing date of Amendment
No. 5. If on or prior to the date that is six months after the closing date of Amendment No. 5 we prepay any
tranche B-5 term loan in connection with a repricing transaction, we must pay a prepayment premium of 1.00%
of the aggregate principal amount of the loans so prepaid.
Except as described above, the terms, covenants and events of default applicable to the Incremental Term
Loan Facility are materially consistent with the terms, covenants and events of default applicable to tranche B-4
term loans currently outstanding under the Credit Agreement. The Incremental Term Loan Facility is guaranteed
and secured on the same basis as the tranche B-4 term loans currently outstanding under the Credit Agreement.
Pursuant to Amendment No. 5, we also effectuated certain amendments to the Credit Agreement which make
certain of the negative covenants and other provisions less restrictive and, therefore, provide us with additional
flexibility.
Senior Secured Asset-Based Revolving Credit Facility
In connection with the completion of the Newport Merger, we entered into an asset-based credit agreement
with Deutsche Bank AG New York Branch, as administrative agent and collateral agent, the other borrowers
from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto, that
provided senior secured financing of up to $50.0 million, which we never borrowed against. On February 1,
2019, in connection with the completion of the ESI Merger, we terminated the $50.0 million asset-based credit
agreement with Deutsche Bank AG New York Branch and entered into an asset-based credit agreement with
Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party
issuers from time to time party thereto (the “ABL Credit
thereto, and the lenders and letters of credit
Agreement”), that provides senior secured revolving credit financing of up to $100.0 million, subject to a
borrowing base limitation (the “ABL Facility”). The borrowing base for the ABL Facility at any time equals the
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sum of: (a) 85% of certain eligible accounts; plus (b) subject to certain notice and field examination and appraisal
requirements, the lesser of (i) the lesser of (A) 65% of the lower of cost or market value of certain eligible
inventory and (B) 85% of the net orderly liquidation value of certain eligible inventory and (ii) 30% of the
borrowing base; minus (c) reserves established by the administrative agent; provided that until the administrative
agent’s receipt of a field examination of accounts receivable (and certain eligible inventory if eligible inventory
is included in the borrowing base) the borrowing base shall be equal to the greater of $50.0 million and the
borrowing base otherwise in effect. If such field exam has not occurred by the 90th day after the closing date
(subject to certain extensions), the borrowing base shall be reduced to zero on such 90th day until such field
exam occurs. The ABL Facility includes borrowing capacity in the form of letters of credit up to $25.0 million.
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option, any of the
following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of
(1) the federal funds effective rate plus 0.50%, (2) the “prime rate” quoted in The Wall Street Journal, (3) a
LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one
month adjusted for certain additional costs, plus 1.00% and (4) a floor of 0.00%; and (b) a LIBOR rate
determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such
borrowing adjusted for certain additional costs, with a floor of 0.00%. The initial applicable margin for
borrowings under the ABL Facility is 0.50% with respect to base rate borrowings and 1.50% with respect to
LIBOR borrowings. Commencing with the completion of the first fiscal quarter ending after the closing of the
ABL Facility, the applicable margin for borrowings thereunder is subject to upward or downward adjustment
each fiscal quarter, based on the average historical excess availability during the preceding quarter.
In addition to paying interest on any outstanding principal under the ABL Facility, we are required to pay a
commitment fee in respect of the unutilized commitments thereunder equal to 0.25% per annum. We must also
pay customary letter of credit fees and agency fees.
Mandatory Prepayments. If at any time the aggregate amount of outstanding loans, protective advances,
unreimbursed letter of credit drawings and undrawn letters of credit under the ABL Facility exceeds the lesser of
(a) the commitment amount and (b) the borrowing base, we are required to repay outstanding loans and/or cash
collateralize letters of credit, with no reduction of the commitment amount. During any period that the amount
available under the ABL Facility is less than the greater of (i) $8.5 million and (ii) 10.0% of the lesser of (1) the
commitment amount and (2) the borrowing base for three consecutive business days, until the time when excess
availability has been at least the greater of (i) $8.5 million and (ii) 10.0% of the lesser of (1) the commitment
amount and (2) the borrowing base, in each case, for 30 consecutive calendar days (a “Cash Dominion Period”),
or during the continuance of an event of default, we are required to repay outstanding loans and/or cash
collateralize letters of credit with the cash that it is required to deposit daily in a collection account maintained
with the administrative agent under the ABL Facility. During a Cash Dominion Period, we may make borrowings
under the ABL Facility subject to the satisfaction of customary funding conditions.
Voluntary Prepayments. We may voluntarily reduce the unutilized portion of the commitment amount and
repay outstanding loans from time to time. Prepayments of the loans may be made without premium or penalty
other than customary “breakage” costs with respect to LIBOR loans.
Amortization and Final Maturity. There is no scheduled amortization under our ABL Facility. The principal
amount outstanding under the ABL Facility is due and payable in full on the fifth anniversary of the closing date;
provided, that if any balance of the Term Loan Facility remains outstanding under the Credit Agreement on the
date that is 180 days prior to April 29, 2023, then the ABL Facility will become due and payable in full on the
date that is 91 days prior to April 29, 2023.
Guarantees and Security. All obligations under the ABL Facility are unconditionally guaranteed by certain
of our existing domestic subsidiaries and are required to be guaranteed by certain of our future domestic
subsidiaries. All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject
59
to certain exceptions, by substantially all of our assets and the assets of our subsidiaries that have guaranteed the
ABL Facility (referred to herein as the subsidiary guarantors), including, in each case subject to customary
exceptions and exclusions:
• a first-priority security interest
in personal property consisting of, among other things, accounts
receivable,
inventory, deposit accounts, securities accounts, commodities accounts, cash and cash
equivalents, instruments, chattel paper, and certain assets related to the foregoing and, in each case,
proceeds thereof (such property, the “Current Asset Collateral”);
• a second-priority pledge of all of the capital stock directly held by us and any subsidiary guarantors
(which pledge, in the case of the capital stock of each (a) domestic subsidiary that is directly owned by us
or by any subsidiary guarantor and that holds no material assets other than equity interests in one or more
controlled foreign corporations or (b) foreign subsidiary,
is limited to 65% of the stock of such
subsidiary); and
• a second-priority security interest in substantially all other tangible and intangible assets, including
substantially all of our owned equipment and intellectual property.
Certain Covenants and Events of Default. The ABL Credit Agreement contains a number of negative
covenants that, among other things and subject to certain exceptions, restrict the ability of us and each of our
subsidiaries to:
• incur additional indebtedness;
• incur liens;
• pay dividends on our capital stock or redeem, repurchase or retire our capital stock or our other
indebtedness;
• make investments, loans and acquisitions;
• create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries;
• engage in transactions with its affiliates;
• sell assets, including capital stock of its subsidiaries;
• materially alter the business it conducts;
• consolidate or merge; and
• engage in sale-leaseback transactions.
From the time when we have excess availability less than the greater of (a) 10.0% of the lesser of (1) the
commitment amount and (2) the borrowing base and (b) $8.5 million, until the time when we have excess
availability equal to or greater than the greater of (a) 10.0% of the lesser of (1) the commitment amount and
(2) the borrowing base and (b) $8.5 million for 30 consecutive days, or during the continuance of an event of
default, the ABL Credit Agreement requires us to maintain a Fixed Charge Coverage Ratio (as defined in the
ABL Credit Agreement) tested on the last day of each fiscal quarter of at least 1.0 to 1.0.
The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants
and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will
be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all
actions permitted to be taken by a secured creditor.
Lines of Credit and Short-Term Borrowing Arrangements
One of our Japanese subsidiaries has lines of credit and short-term borrowing arrangements with two
financial institutions which arrangements generally expire and are renewed at three-month intervals. The lines of
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credit provide for aggregate borrowings as of December 31, 2018, of up to an equivalent of $20.9 million U.S.
dollars. One of the borrowing arrangements has an interest rate based on the Tokyo Interbank Offer Rate at the
time of borrowing and the other has an interest rate based on the Japanese Short-Term Prime Lending Rate.
There were no borrowings outstanding under these arrangements at December 31, 2018 and 2017.
We assumed various revolving lines of credit and a financing facility with the completion of the Newport
Merger. These revolving lines of credit and financing facility have no expiration date and provide for aggregate
borrowings as of December 31, 2018 of up to an equivalent of $11.3 million U.S. dollars. These lines of credit
have a base interest rate of 1.25% plus a Japanese Yen overnight LIBOR rate. Total borrowings outstanding
under these arrangements were $3.4 million and $3.0 million at December 31, 2018 and 2017.
One of our Austrian subsidiaries has various outstanding loans from the Austrian government to fund
research and development. These loans are unsecured and do not require principal repayment as long as certain
conditions are met. Interest on these loans is payable semi-annually. The interest rates associated with these loans
range from 0.75% – 2.00%.
We have provided financial guarantees for certain unsecured borrowings and have standby letters of credit,
some of which do not have fixed expiration dates. At December 31, 2018, our maximum exposure as a result of
these financial guarantees and standby letters of credit was approximately $5.4 million.
Our total cash and cash equivalents, including restricted cash and short-term marketable investments at
December 31, 2018 consisted of $464.7 million held in the United States and $253.5 million held by our foreign
subsidiaries. We believe that our current cash and investments position and available borrowing capacity,
together with the cash anticipated to be generated from our operations, will be sufficient to satisfy our estimated
working capital, planned capital expenditure requirements, and any future cash dividends declared by our Board
of Directors or share repurchases through at least the next 12 months and the foreseeable future.
Contractual Obligations
In connection with the ESI Merger, which closed in February 2019, in addition to the entry into the
amendment to our Term Loan Facility described above, we assumed certain contractual lease obligations and
purchase obligations. None of those items are included in the table below.
Future contractual obligations as of December 31, 2018 are as follows:
Contractual Obligations (In thousands)
Operating lease obligations . . . . . . . . . . . . . . .
Purchase obligations(2) . . . . . . . . . . . . . . . . . .
Pension obligations . . . . . . . . . . . . . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities reflected on the
Payment Due By Period
Total
$ 66,296
295,194
31,548
352,536
Less than
1 Year
$ 20,106
254,069
1,046
3,986
1-3 years
3-5 years
$27,467
26,474
2,462
86
$
9,984
11,008
2,441
348,464
After
5 years
$ 8,739
3,643
25,599
—
Other(1)
$ —
—
—
—
Balance Sheet under U.S. GAAP(3) . . . . . .
102,383
881
20,033
449
56,096
24,924
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$847,957
$280,088
$76,522
$372,346
$94,077
$24,924
(1) This balance relates to our reserve for uncertain tax positions.
(2) As of December 31, 2018, we have entered into purchase commitments for certain inventory components
and other equipment and services used in our normal operations. The majority of these purchase
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commitments covered by these arrangements are for periods less than a year and aggregate to approximately
$254.1 million.
(3) The majority of this balance relates to deferred tax liabilities.
Derivatives
We enter into derivative instruments for risk management purposes only, including derivatives designated as
hedging instruments and those utilized as economic hedges. We operate internationally, and in the normal course
of business, are exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can
increase the costs of financing, investing and operating the business. We have used derivative instruments, such
as forward exchange contracts and an interest rate hedge to manage certain foreign currency and interest rate
exposures.
By nature, all financial instruments involve market and credit risks. We enter into derivative instruments
with major investment grade financial institutions and no collateral is required. We have policies to monitor the
credit risk of these counterparties. While there can be no assurance, we do not anticipate any material
non-performance by any of these counterparties.
We hedge a portion of our forecasted foreign currency denominated intercompany sales of inventory, over a
maximum period of eighteen months, using forward foreign exchange contracts accounted for as cash-flow
these
hedges related to Japanese, South Korean, British, Euro and Taiwanese currencies. To the extent
derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the hedge
accounting criteria, changes in the derivatives’ fair value are not included in current earnings but are included in
accumulated other comprehensive income in stockholders’ equity. These changes in fair value will subsequently
be reclassified into earnings, as applicable, when the forecasted transaction occurs. To the extent that a
previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the
hedging relationship is recorded currently in earnings in the period it occurs. The cash flows resulting from
forward exchange contracts are classified in the consolidated statements of cash flows as part of cash flows from
operating activities. We do not enter into derivative instruments for trading or speculative purposes.
We also enter into forward exchange contracts to hedge certain balance sheet amounts. To the extent the
hedge accounting criteria is not met, the related foreign currency forward contracts are considered as economic
hedges and changes in the fair value of these contracts are recorded immediately in earnings in the period in
which they occur. These include hedges that are used to reduce exchange rate risks arising from the change in
fair value of certain foreign currency-denominated assets and liabilities (i.e., payables, receivables) and other
economic hedges where the hedge accounting criteria were not met.
We had forward exchange contracts with notional amounts totaling $159.4 million outstanding at
December 31, 2018 of which $59.1 million were outstanding to exchange South Korean Won to U.S. dollars and
$43.8 million were outstanding to exchange Japanese Yen to U.S. dollars. We had forward exchange contracts
with notional amounts totaling $208.9 million outstanding at December 31, 2017 of which $79.7 million were
outstanding to exchange South Korean Won to U.S. dollars and $70.2 million were outstanding to exchange
Japanese Yen to U.S. dollars.
As of December 31, 2018,
the unrealized loss that will be reclassified from accumulated other
comprehensive income to earnings over the next twelve months is immaterial. Gains and losses on forward
exchange contracts that qualify for hedge accounting are classified in cost of products in 2018, 2017 and 2016
and totaled a loss of $3.4 million, a loss of $2.7 million and a loss of $1.4 million, respectively. There were no
ineffective portions of the derivatives recorded in 2018, 2017 and 2016.
We hedge certain intercompany accounts receivable and intercompany loans with forward exchange
contracts. Typically, as these derivatives hedge existing amounts that are denominated in foreign currencies, the
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derivatives do not qualify for hedge accounting. Realized and unrealized gains and losses on forward exchange
contracts that do not qualify for hedge accounting are recognized currently in earnings. The net foreign exchange
losses on these derivatives were immaterial in each of 2018, 2017 and 2016. Foreign currency gains or losses are
classified in other expense, net. The cash flows resulting from forward exchange contracts are classified in our
consolidated statements of cash flows as part of cash flows from operating activities. We do not hold or issue
derivative financial instruments for trading purposes.
We have also entered into an interest rate swap agreement related to our Credit Agreement. See details
above under “Term Loan Credit Agreement.”
Off-Balance Sheet Arrangements
We do not have any financial partnerships with unconsolidated entities, such as entities often referred to as
structured finance, special purpose entities or variable interest entities which are often established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we
are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.
Recently Issued Accounting Pronouncements
In October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2018-16, “Derivatives and Hedging (Topic 815).” This standard permits the use of the Overnight Index
Swap Rate (“OIS”) based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge
accounting purposes under Topic 815 in addition to the interest rates on direct treasury obligations of the U.S.
government, the London Interbank Offered Rate (“LIBOR”) swap rate, the OIS rate based on the Federal Funds
Effective Rate and the Securities industry and Financial Markets Association Municipal Swap Rate. This
standard is effective for annual periods beginning after December 15, 2018, including interim periods within
those fiscal years. We are currently evaluating the requirements of this standard and have not yet determined its
impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract.” This standard aligns the requirements for capitalizing implementation
is a service contract with the requirements for capitalizing
costs incurred in a hosting arrangement
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include
an internal-use software license). The accounting for the service element of a hosting arrangement that is a
service contract is not affected by the amendments of this update. This standard is effective for annual periods
beginning after December 15, 2019, including interim periods within those fiscal years. We are currently
evaluating the requirements of this standard and have not yet determined its impact on our consolidated financial
statements.
that
In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740).” This standard is an
amendment that adopts the language of SAB 118 and aims to address certain circumstances that may arise for
registrants in accounting for the income tax effects of 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 our December 31, 2017 financial statements. We
recorded provisional amounts with respect to the Act at December 31, 2017 and for the nine months ended
September 30, 2018. During the quarter ended December 31, 2018, we completed our analysis and finalized the
provisional amounts that were previously recorded. The ultimate impact of this Act
is based upon our
understanding and interpretation of the regulatory guidance that has been issued regarding the Act.
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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. We do not expect adoption of this ASU
to have a material impact on our 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). We have reviewed the requirements of the new standard and have formulated a
plan for implementation. We have communicated our approach to our Audit Committee and have provided
regular updates as appropriate. We have accumulated details on the population of leases and entered these
details into a selected software database, which will be a repository and accounting solution for reporting and
disclosure requirements required by the standard. We estimate that the balance sheet gross up (recording the
right-of-use asset and lease liability) will be approximately $60 to $65 million at adoption on January 1, 2019.
We will continue to assess and disclose the impact that this ASU will have on our consolidated financial
statements, disclosures and related controls, when known.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk and Sensitivity Analysis
Our primary exposures to market risks include fluctuations in interest rates on our Term Loan Facility and
investment portfolio, as well as fluctuations in foreign currency exchange rates.
Foreign Exchange Rate Risk
We mainly enter into forward exchange contracts to reduce currency exposure arising from intercompany
sales of inventory. We also enter into forward exchange contracts to reduce foreign exchange risks arising from
the change in fair value of certain foreign currency denominated assets and liabilities.
We had forward exchange contracts with notional amounts totaling $159.4 million outstanding and a net fair
value liability totaling $1.3 million at December 31, 2018. We had forward exchange contracts with notional
amounts totaling $208.9 million outstanding and a net fair value asset of $6.0 million at December 31, 2017. The
potential fair value loss for a hypothetical 10% adverse change in the currency exchange rate on our forward
exchange contracts at December 31, 2018 and 2017 would be immaterial.
Interest Rate Risk
We hold our cash, cash equivalents and short-term investments for working capital purposes. Some of the
securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause
the principal amount of such investments to fluctuate. To minimize this risk, we maintain our portfolio of cash,
cash equivalents and short-term investments in a variety of securities including money market funds and
government debt securities. Due to the short-term nature of these instruments, we believe that we do not have any
material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.
Declines in interest rates, however, would reduce future interest income. The effect of a hypothetical 10%
increase or decrease in overall interest rates would not have had a material impact on our operating results or the
total fair value of the portfolio.
64
We are exposed to market risks related to fluctuations in interest rates related to our Term Loan Facility. As
of December 31, 2018, we owed $348.5 million with $290.0 million at a fixed interest rate of 1.198%, plus the
applicable credit spread which was 1.75% at December 31, 2018, and $58.5 million at a variable interest rate of
1.75% plus LIBOR. We performed a sensitivity analysis on the outstanding portion of our debt obligations as of
December 31, 2018. The effect of a hypothetical 10% increase or decrease in overall interest rates would not
have had a material impact on our operating results or the total fair value of the portfolio.
From time to time, we have outstanding lines of credit and short-term borrowings with variable interest
rates, primarily denominated in Japanese Yen. As of December 31, 2018, $3.4 million was outstanding under
these arrangements. These lines of credit have a base interest rate of 1.25% plus a Japanese Yen overnight
LIBOR rate. A 10% change in interest rates would not have had a material impact on our operating results.
65
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of MKS Instruments, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of MKS Instruments, Inc. and its
subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of
operations and comprehensive income, stockholders’ equity and cash flows for each of the three years in the
period ended December 31, 2018, including the related notes and schedule of valuation and qualifying accounts
for each of the three years in the period ended December 31, 2018 appearing under Item 15(a)(2) (collectively
referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which
it accounts for revenue from contracts with customers in 2018.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial
statements and on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement, whether due to error or fraud, and whether effective internal control over
financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting
66
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2019
We have served as the Company’s auditor since 1981.
67
MKS Instruments, Inc.
Consolidated Balance Sheets
December 31,
2018
2017
(in thousands, except share data)
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade accounts receivable, net of allowance for doubtful accounts of $5,243 and
$4,135 at December 31, 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 644,345
73,826
$ 333,887
209,434
295,454
384,689
65,790
300,308
339,081
53,543
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,464,104
1,236,253
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
194,367
586,996
319,807
10,290
38,682
171,782
591,047
366,398
10,655
37,883
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,614,246
$2,414,018
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,986
83,825
82,350
16,358
14,246
62,520
263,285
343,842
48,223
55,598
30,111
741,059
$
2,972
82,518
96,147
21,398
26,194
60,593
289,822
389,993
61,571
51,700
32,025
825,111
Commitments and contingencies (Note 21)
Stockholders’ equity:
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, no par value, 200,000,000 shares authorized; 54,039,554 and
54,355,535 shares issued and outstanding at December 31, 2018 and 2017,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . .
113
793,932
1,084,797
(5,655)
113
789,644
795,698
3,452
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,873,187
1,588,907
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,614,246
$2,414,018
The accompanying notes are an integral part of the consolidated financial statements.
68
MKS Instruments, Inc.
Consolidated Statements of Operations and Comprehensive Income
Years Ended December 31,
2018
2017
(in thousands, except per share data)
2016
Net Revenues:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,835,202 $1,701,301 $1,118,579
176,763
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,295,342
Cost of revenues:
214,676
1,915,977
239,906
2,075,108
Cost of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues (exclusive of amortization shown separately below) . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees and expenses related to repricing of term loan . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
630,208
99,515
729,723
565,619
110,579
227,932
27,279
642
—
5,000
1,239
35,681
157,267
2,560
30,611
—
1,239
127,977
23,168
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 392,896 $ 339,132 $ 104,809
906,369
118,157
1,024,526
891,451
132,555
290,056
5,332
3,920
—
6,719
492
45,743
406,634
3,021
30,990
74,856
5,896
447,625
108,493
969,288
126,344
1,095,632
979,476
135,720
298,118
3,113
3,567
1,000
—
378
43,521
494,059
5,775
16,942
—
1,942
480,950
88,054
Other comprehensive income:
Changes in value of financial instruments designated as cash flow hedges,
net of tax expense (benefit)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,942 $
(4,568) $
3,380
Foreign currency translation adjustments, net of tax of $0 for 2018, 2017 and
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized pension gain (loss), net of tax benefit(2) . . . . . . . . . . . . . . . . . .
Unrealized (loss) gain on investments, net of tax (benefit) expense(3) . . . . . .
(14,161)
149
(37)
37,172
323
1,072
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 383,789 $ 373,131 $
(22,713)
(266)
223
85,433
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash dividends paid per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7.22 $
7.14 $
0.78 $
6.26 $
6.16 $
0.71 $
1.96
1.94
0.68
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,406
54,992
54,137
55,074
53,472
54,051
(1) Tax expense (benefit) was $1,347, $(1,468), and $2,535 for the years ended December 31, 2018, 2017 and 2016,
respectively.
(2) Tax expense (benefit) was $86, $(88) and $(199) for the years ended December 31, 2018, 2017 and 2016,
respectively.
(3) Tax expense (benefit) was $2, $(769), and $167 for the years ended December 31, 2018, 2017 and 2016,
respectively.
The accompanying notes are an integral part of the consolidated financial statements.
69
MKS Instruments, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Balance at December 31, 2015 . . . . . . . . 53,199,720
517,939
Net issuance under stock-based plans . .
Stock-based compensation . . . . . . . . . . .
Tax effect from stock-based plans . . . . .
Stock repurchase . . . . . . . . . . . . . . . . . . .
Cash dividend . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (net of tax):
(44,798)
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . 53,672,861
Net issuance under stock-based plans . .
682,674
Stock-based compensation . . . . . . . . . . .
Cash dividend . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (net of tax):
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . 54,355,535
502,150
Net issuance under stock-based plans . .
Stock-based compensation . . . . . . . . . . .
Stock repurchase . . . . . . . . . . . . . . . . . . .
Cash dividend . . . . . . . . . . . . . . . . . . . . .
Accounting Standards Codification
(818,131)
Topic 606 adjustment . . . . . . . . . . . . .
Comprehensive income (net of tax):
Net income . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . .
$113
$744,725 $ 427,214
$(11,171)
6,902
25,228
1,254
(627)
(918)
(36,361)
104,809
$113
$777,482 $ 494,744
$(30,547)
(19,376)
(12,216)
24,378
(38,178)
339,132
33,999
$113
$789,644 $ 795,698
$ 3,452
(11,104)
27,262
(11,870)
(63,130)
(42,405)
1,738
392,896
(9,107)
Total
Stockholders’
Equity
$1,160,881
6,902
25,228
1,254
(1,545)
(36,361)
104,809
(19,376)
$1,241,792
(12,216)
24,378
(38,178)
339,132
33,999
$1,588,907
(11,104)
27,262
(75,000)
(42,405)
1,738
392,896
(9,107)
Balance at December 31, 2018 . . . . . . . . 54,039,554
$113
$793,932 $1,084,797
$ (5,655)
$1,873,187
The accompanying notes are an integral part of the consolidated financial statements.
70
MKS Instruments, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of inventory step-up adjustment to fair value . . . . . . .
Amortization of debt issuance cost and original issue discount
. . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for excess and obsolete inventory . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation . . . . . . . . . . . . .
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current assets . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current liabilities . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Acquisition of business, net of cash acquired . . . . . . . . . . . . . . . . . .
Net proceeds from sale of business . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property, plant and equipment
. . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Proceeds from short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . .
Payments of short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds related to employee stock awards . . . . . . . . . . . . . . . .
Dividend payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . .
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, including restricted cash, at beginning of
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, including restricted cash, at end of year . . . . . . .
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
2017
2016
$ 392,896
$ 339,132
$ 104,809
79,853
—
4,718
27,262
22,324
1,435
(19,388)
—
—
—
2,649
(546)
(73,779)
(11,430)
(1,639)
(8,649)
(3,948)
2,023
413,781
—
—
(253,598)
181,749
207,542
(62,941)
—
72,752
67,629
(67,163)
40
(50,003)
(75,000)
(11,104)
(42,405)
—
(178,006)
1,931
310,458
82,556
—
10,699
24,378
20,213
825
(4,831)
—
6,719
(74,856)
824
(44,077)
(72,471)
12,805
(8,631)
32,502
18,030
11,405
355,222
65,926
15,090
9,265
25,228
16,039
1,109
(38,822)
(1,468)
5,000
—
256
(58,111)
(13,798)
30,914
(12,165)
10,965
3,681
16,180
180,098
— (939,591)
—
(268,458)
160,917
338,996
(19,123)
273
(726,986)
72,509
(229,557)
157,342
53,564
(31,287)
66
22,637
28,360
(29,711)
191
(228,141)
—
(12,216)
(38,178)
—
(279,695)
1,813
99,977
18,964
(11,742)
744,653
(153,395)
(1,545)
(1,922)
(36,361)
1,468
560,120
(6,896)
6,336
333,887
$ 644,345
233,910
$ 333,887
227,574
$ 233,910
$ 14,593
$ 91,765
$ 20,467
$ 104,691
$ 20,839
$ 44,967
The accompanying notes are an integral part of the consolidated financial statements.
71
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1) Business Description
MKS Instruments, Inc. (“MKS” or the “Company”) was founded in 1961 and 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. The
Company’s products are derived from its 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. The primary served markets are manufacturers
of capital equipment for semiconductor manufacturing, industrial technologies, life and health sciences, as well
as research and defense. The Company groups its products into six product groups based upon the similarity of
the product function, type of product and manufacturing processes. These six groups are: Analytical and Controls
Solutions Products; Power, Plasma and Reactive Gas Solutions Products; Vacuum Solutions Products; Photonics
Products; Optics Products; and Laser Products.
The Company has two reportable segments: Vacuum & Analysis and Light & Motion.
2) Basis of Presentation
The consolidated financial statements include the accounts of MKS Instruments, Inc. and its wholly owned
subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”). The preparation of these 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 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 and allowance for doubtful accounts, inventory
valuation, warranty costs, stock-based compensation, intangible assets, goodwill, other long-lived assets, in
process research and development and other acquisition expenses and income taxes. 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.
72
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
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 it service 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.
Twelve Months Ended December 31, 2017
As previously
reported
Adjustment
As revised
Net revenues:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,723,433
192,544
$(22,132)
22,132
$1,701,301
214,676
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,915,977
—
1,915,977
Cost of revenues:
Cost of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
901,546
122,980
4,823
(4,823)
906,369
118,157
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,024,526
$
— $1,024,526
Twelve Months Ended December 31, 2016
As previously
reported
Adjustment
As revised
Net revenues:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,134,013
161,329
$(15,434)
15,434
$1,118,579
176,763
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,295,342
—
1,295,342
Cost of revenues:
Cost of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
627,850
101,873
2,358
(2,358)
630,208
99,515
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 729,723
$
— $ 729,723
3)
Summary of Significant Accounting Policies
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 twelve months ended December 31, 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 year ended December 31, 2018 as a result of applying
ASC 606 was immaterial.
73
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
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 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
December 31, 2018 contained a significant financing component. Contract assets as of January 1 and
December 31, 2018 were $3,065 and $3,624, 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
74
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
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 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 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
December 31, 2018, as the majority have a duration of less than one year.
A rollforward of the Company’s deferred revenue and customer advances is as follows:
Year Ended
December 31,
2018
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning balance, January 1(1)
Amount of deferred revenue and customer advances recognized in income(3)
. . . . . . . . . . . . . . . . .
Additions to deferred revenue and customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 27,800
(83,497)
73,171
Ending balance, December 31(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,474
(1) Beginning deferred revenue and customer advances as of January 1, 2018 included $12,842 of current
deferred revenue, $3,126 of long-term deferred revenue and $13,352 of current customer advances, net of a
$1,520 adjustment related to the adoption of ASC 606.
(2) Ending deferred revenue and customer advances as of December 31, 2018 included $8,134 of current
deferred revenue, $3,228 of long-term deferred revenue and $6,112 of current customer advances.
(3) The deferred revenue and customers advances recognized in income that relates to fiscal year 2018 was
$61,012.
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
75
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
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:
Year Ended December 31, 2018
Vacuum &
Analysis
Light &
Motion
Total
Net revenues:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,080,343
180,519
$754,859
59,387
$1,835,202
239,906
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,260,862
$814,246
$2,075,108
Year Ended December 31, 2017
Vacuum &
Analysis
Light &
Motion
Total
Net revenues:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,047,639
159,818
$653,662
54,858
$1,701,301
214,676
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,207,457
$708,520
$1,915,977
Year Ended December 31, 2016
Vacuum &
Analysis
Light &
Motion
Total
Net revenues:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$731,364
140,927
$387,215
35,836
$1,118,579
176,763
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$872,291
$423,051
$1,295,342
Product revenue, excluding revenue from certain custom products, is recorded at a point in time, while the
majority of service revenue and revenue from certain custom products is recorded over time.
Refer to Note 19 for revenue by reportable segment, geography and groupings of similar products.
Accounts Receivable Allowances
Accounts receivable allowances include sales returns and bad debt allowances. The Company monitors and
tracks the amount of product returns and reduces revenue at the time of shipment for the estimated amount of
such 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.
76
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Research and Development
Research and development costs are expensed as incurred and consist mainly of compensation-related
expenses and project materials. The Company’s research and development efforts include numerous projects,
which generally have a duration of 3 to 30 months. Acquired in-process research and development (“IPR&D”)
expenses, which are capitalized at fair value as an intangible asset until the related project is completed, are then
amortized over the estimated useful life of the product. The Company monitors projects and, if they are
abandoned, the Company immediately writes them off.
Advertising Costs
Advertising costs are expensed as incurred and were immaterial in 2018, 2017 and 2016.
Stock-Based Compensation
The accounting for share-based compensation expense requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors based on estimated
fair values. For restricted stock units (“RSUs”), the fair value is the fair value on the date of grant that normally
vests over a three year period. The Company also provides employees the opportunity to purchase shares through
an employee stock purchase plan. For shares issued under its employee stock purchase plan, the Company has
estimated the fair value on the date of grant using the Black Scholes pricing model, which is affected by the
Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These
variables include the Company’s expected stock price volatility over the term of the awards, expected life, risk-
free interest rate and expected dividends. The Company is also required to estimate forfeitures at the time of
grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.
Management determined that blended volatility, a combination of historical and implied volatility, is more
reflective of market conditions and a better indicator of expected volatility than historical or implied volatility
alone. The assumptions used in calculating the fair value of share-based payment awards represent
these estimates involve inherent uncertainties and the application of
management’s best estimates, but
management judgment. As a result, if factors change and the Company uses different assumptions, its stock-
based compensation expense could be materially different in the future.
Accumulated Other Comprehensive Income
For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are
translated into U.S. dollars at the current exchange rate on the balance sheet date. Revenue and expenses are
translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this
process are recorded to Accumulated Other Comprehensive Income (“OCI”). Unrealized gains and losses on
securities classified as available-for-sale and unrecognized pension gains and losses are included in OCI in
consolidated stockholders’ equity. For derivative instruments designated as cash-flow hedges, the effective
portion of the derivative’s gain (loss) is initially reported as a component of OCI and is subsequently recognized
in earnings when the hedged exposure is recognized in earnings.
Net Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding, and
diluted net income per share is based on the weighted average number of common shares outstanding and all
77
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
potential dilutive common equivalent shares outstanding. The dilutive effect of options is determined under the
treasury stock method using the average market price for the period. Common equivalent shares are included in
the per share calculations when the effect of their inclusion would be dilutive.
Cash and Cash Equivalents and Investments
All highly liquid investments with a maturity date of three months or less at the date of purchase are
considered to be cash equivalents. The appropriate classification of investments in securities is determined at the
time of purchase. Debt securities that the Company does not have the intent and ability to hold to maturity are
classified as “available-for-sale” and are carried at fair value.
The Company classifies investments with maturity dates greater than twelve months in short-term
investments rather than long-term investments. This method classifies these securities as current based on the
nature of the securities and the availability for use in current operations. The Company believes this method is
preferable because it is more reflective of the Company’s assessment of its overall liquidity position.
The Company reviews its investment portfolio on a quarterly basis to identify and evaluate individual
investments that have indications of possible impairment. The factors considered in determining whether a loss is
other-than-temporary include: the length of time and extent to which fair market value has been below the cost
basis, the financial condition and near-term prospects of the issuer, credit quality, and the Company’s ability to
hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
Concentrations of Credit Risk
The Company’s significant concentrations of credit risk consist principally of cash and cash equivalents,
investments, forward exchange contracts and trade accounts receivable. The Company maintains cash and cash
equivalents with financial institutions including some banks with which it had borrowings. The Company
maintains investments primarily in U.S. Treasury and government agency securities and corporate debt
securities. The Company enters into forward currency contracts with high credit-quality financial institutions in
order to minimize credit risk exposure. The Company’s largest customers are primarily concentrated in the
semiconductor industry, and a limited number of these customers account for a significant portion of the
Company’s revenues. The Company regularly monitors the creditworthiness of its customers and believes it has
adequately provided for potential credit loss exposures. Credit is extended for all customers based primarily on
financial condition, and collateral is not required.
The Company had one customer, Applied Materials, Inc., comprising 12%, 13% and 14% of net revenues
for 2018, 2017 and 2016, respectively, and another customer, Lam Research Corporation, comprising 11%, 12%
and 11% of net revenues for 2018, 2017 and 2016, respectively. During the years 2018, 2017 and 2016,
approximately 55%, 57% and 56% of the Company’s net revenues, respectively, were from sales to
semiconductor capital equipment manufacturers and semiconductor device manufacturers. There were no
customers that represented 10% or more of the Company’s accounts receivable balance as of December 31, 2018.
One customer, Applied Materials, Inc., represented 10% or more of the Company’s accounts receivable balance
as of December 31, 2017.
Inventories
Inventories are stated at the lower of cost or market, cost being determined using a standard costing system
which approximates cost based on a first-in, first-out method. The Company regularly reviews inventory
78
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
quantities on hand and records a provision to write-down excess and obsolete inventory to its estimated net
realizable value, if less than cost, based primarily on its estimated forecast of product demand.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for major renewals and betterments that
extend the useful lives of property, plant and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are eliminated from the accounts and any resulting gain or loss is recognized in
earnings.
Depreciation is provided on the straight-line method over the estimated useful lives of ten to fifty years for
buildings and three to sixteen years for machinery and equipment, furniture and fixtures and office equipment,
which includes enterprise resource planning software. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life of the leased asset.
Intangible Assets
Intangible assets resulting from the acquisitions of businesses are estimated by management based on the
fair value of assets acquired. These include acquired customer lists, technology, patents, trade names, covenants
not to compete and IPR&D. Intangible assets are amortized from one to eighteen years on a straight-line basis
which represents the estimated periods of benefit and the expected pattern of consumption.
Goodwill
Goodwill is the amount by which the cost of acquired net assets exceeded the fair value of those net assets
on the date of acquisition. The Company allocates goodwill to reporting units at the time of acquisition or when
there is a change in the reporting structure and bases that allocation on which reporting units will benefit from the
acquired assets and liabilities. Reporting units are defined as operating segments or one level below an operating
segment, referred to as a component. The Company assesses goodwill for impairment on an annual basis as of
October 31 or more frequently when events and circumstances occur indicating that the recorded goodwill may
be impaired.
The estimated fair value of the Company’s reporting units are based on discounted cash flow models
derived from internal earnings and internal and external market forecasts. Determining fair value requires the
exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates,
projected revenues and projected profit margins. Discount rates are based on a weighted average cost of capital
(“WACC”), which represents the average rate a business must pay its providers of debt and equity. The WACC
used to test goodwill is derived from a group of comparable companies. Assumptions in estimating future cash
flows are subject to a high degree of judgment and complexity. The Company makes every effort to forecast
these future cash flows as accurately as possible with the information available at the time the forecast is
developed.
In performing the Company’s annual goodwill impairment test, the Company is permitted to first assess
qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less
than its carrying amount, including goodwill. In performing the qualitative assessment, the Company considers
certain events and circumstances specific to the reporting unit and to the entity as a whole, such as
79
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
macroeconomic conditions, industry and market considerations, overall financial performance and cost factors
when evaluating whether it is more likely than not that the fair value of the reporting unit is less than its carrying
amount. The Company is also permitted to bypass the qualitative assessment and proceed directly to the
quantitative test. If the Company chooses to undertake the qualitative assessment and concludes that it is more
likely than not that the fair value of the reporting unit is less than its carrying amount, the Company would then
proceed to the quantitative impairment test. In the quantitative assessment, the Company compares the fair value
of the reporting unit to its carrying amount, which includes goodwill. If the fair value exceeds the carrying value,
no impairment loss exists. If the fair value is less than the carrying amount, a goodwill impairment loss is
measured and recorded.
Effective July 1, 2018, the Company reassigned goodwill to certain reporting units within the Light &
Motion reportable segment resulting from a reorganization of the composition of reporting units. The goodwill
was reassigned to the reporting units affected using the relative fair value approach. In conjunction with this
goodwill reassignment, the Company performed an interim quantitative impairment test as of July 1, 2018 for all
of its reporting units and concluded that the fair values of each reporting unit exceeded their respective carrying
values.
As of October 31, 2018, the Company performed its annual impairment assessment of goodwill using the
qualitative assessment and determined that it is more likely than not that the fair values of the reporting units
exceed their carrying amount.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets whenever events and changes in
circumstances indicate that the carrying amount of an asset may not be fully recoverable. This periodic review
may result in an adjustment of estimated depreciable lives or asset impairment. When indicators of impairment
are present, the carrying values of the asset are evaluated in relation to their operating performance and future
undiscounted cash flows of the underlying business. If the future undiscounted cash flows are less than their
carrying value, impairment exists. The impairment is measured as the difference between the carrying value and
the fair value of the underlying asset. Fair values are based on estimates of market prices and assumptions
concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying
degrees of perceived risk. In 2017, the Company recorded an impairment charge of $6,719 related to certain
long-lived assets as a result of consolidating two manufacturing plants.
Foreign Exchange
The functional currency of the majority of the Company’s foreign subsidiaries is the applicable local
currency. For those subsidiaries, assets and liabilities are translated to U.S. dollars at year-end exchange rates.
Income and expense accounts are translated at the average exchange rates prevailing during the year. The
resulting translation adjustments are included in accumulated other comprehensive income (loss) in consolidated
stockholders’ equity. Foreign exchange transaction gains and losses are classified in other income/expense in the
statement of operations.
Net foreign exchange losses resulting from re-measurement were $2,497 and $6,132 for the years ended
December 31, 2018 and 2017, respectively, and are included in other expense (income). Net foreign exchange
losses resulting from re-measurement were $2,823 for the year ended December 31, 2016. In 2016, we
reclassified the impact of foreign exchange losses (gains), from selling, general and administrative expenses to
other expense (income), net. These amounts do not reflect the corresponding gain (loss) from foreign exchange
contracts. See Note 7 “Derivatives” regarding foreign exchange contracts.
80
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Income Taxes
The Company records income taxes using the asset and liability method. Deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective income tax bases, and also for
operating loss and tax credit carry-forwards. On a quarterly basis, the Company evaluates both the positive and
negative evidence that affects the realizability of net deferred tax assets and assesses the need for a valuation
allowance. The future benefit to be derived from its deferred tax assets is dependent upon its ability to generate
sufficient future taxable income in each jurisdiction of the right type to realize the assets. The Company records a
valuation allowance to reduce its net deferred tax assets to the amount that is expected to be realized. To the
extent the Company establishes a valuation allowance an expense will be recorded as a component of the
provision for income taxes on the statement of operations.
During 2016, the Company increased its valuation allowance by $6,400 primarily related to the addition of
historical valuation allowances for Newport Corporation (“Newport”) and its subsidiaries which were included as
a result of the acquisition in April 2016. As a result, the valuation allowance was $12,527 at December 31, 2016.
During 2017, the Company increased its valuation allowance by $1,102, primarily related to certain state tax
credits. As a result, the valuation allowance was $13,629 at December 31, 2017. During 2018, the Company
increased its valuation allowance by $4,307 which is attributable to certain tax credit and net operating loss carry
forward amounts. As a result, the valuation allowance was $17,936 at December 31, 2018.
Accounting for income taxes requires a two-step approach to recognize and measure uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is
more likely than not that the position will be sustained upon audit, including resolutions of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than
50% likely of being realized upon ultimate settlement. The Company re-evaluates these uncertain tax positions
on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or
circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any change in
these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the
“Act”), which included significant changes to U.S. tax law. Some of the more significant changes impacting the
Company are the reduction of the U.S. federal corporate income tax rate from 35.0% to 21.0% as of January 1,
2018, the implementation of a territorial tax system and the imposition of a transition tax on deemed repatriated
cumulative earnings of foreign subsidiaries (“Transition Tax”).
Income tax effects resulting from changes in tax are generally accounted for by the Company in the period
in which the law is enacted and the effects are recorded as a component of provision for income taxes from
continuing operations. On December 22, 2017, the Securities and Exchange Commission Staff issued Staff
Accounting Bulletin No. 118 (“SAB 118”) to provide guidance for reporting entities’ ability to timely complete
the accounting for certain income tax effects of the Act and allowed a measurement period up to one year from
the enactment date of the “Act”. The Company has obtained, prepared and analyzed the information needed to
complete the accounting requirements under Accounting Standards Codification (“ASC”) Topic 740 and as a
result, in accordance with SAB 118, the Company has finalized and recorded the effects of the Act during the
quarter ended December 31, 2018. The ultimate impact of the Act on the Company is based upon the Company’s
understanding and interpretation of the regulatory guidance that has been issued regarding the Act.
81
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
4) Recently Issued Accounting Pronouncements
In October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2018-16, “Derivatives and Hedging (Topic 815).” This standard permits the use of the Overnight Index
Swap Rate (“OIS”) based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge
accounting purposes under Topic 815 in addition to the interest rates on direct treasury obligations of the U.S.
government, the London Interbank Offered Rate (“LIBOR”) swap rate, the OIS rate based on the Federal Funds
Effective Rate and the Securities industry and Financial Markets Association Municipal Swap Rate. This
standard is effective for annual periods beginning after December 15, 2018, including interim periods within
those fiscal years. The Company is currently evaluating the requirements of this standard and has not yet
determined the impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract.” This standard aligns the requirements for capitalizing implementation
costs incurred in a hosting arrangement
is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include
an internal-use software license). The accounting for the service element of a hosting arrangement that is a
service contract is not affected by the amendments of this update. This standard is effective for annual periods
beginning after December 15, 2019, including interim periods within those fiscal years. The Company is
currently evaluating the requirements of this standard and has not yet determined the impact on its consolidated
financial statements.
that
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 for the nine months ended
September 30, 2018. During the quarter ended December 31, 2018, the Company completed its analysis and
finalized the provisional amounts that were previously recorded. The ultimate impact of the Act is based upon the
Company’s understanding and interpretation of the regulatory guidance that has been issued regarding the Act.
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
82
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
those fiscal years. The Company adopted this ASU during the first quarter of 2018 and 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 first quarter of 2018 and 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 first quarter of
2018 and the adoption of this ASU did not have a material impact on the Company’s consolidated financial
statements.
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 first quarter of 2018 and 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 first quarter of 2018 and 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
83
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
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 have provided regular updates as appropriate. The Company has accumulated details on the
population of leases and entered 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 estimates
that the balance sheet gross up (recording the right-of-use asset and lease liability) will be approximately $60,000
to $65,000 at adoption on January 1, 2019. 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 first quarter of 2018 and 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.
84
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
5)
Investments
Investments classified as short-term consist of the following:
Years Ended December 31,
2018
2017
Available-for-sale investments:
Time deposits and certificates of deposit
. . . . . . . . . . . . . . . . . . . . . . . . . .
Bankers’ acceptance drafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
102
989
9,113
19,359
9,352
—
13,298
21,613
$
9,757
5,330
36,990
13,750
77,821
1,970
28,078
35,738
Investments classified as long-term consist of the following:
$73,826
$209,434
Years Ended December 31,
2018
2017
Available-for-sale investments:
Group insurance contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,890
$ 6,255
Cost method investments:
Minority interest in a private company . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,400
4,400
$10,290
$10,655
The following table shows the gross unrealized gains and (losses) aggregated by investment category for
available-for-sale investments:
As of December 31, 2018:
Short-term investments:
Available-for-sale investments:
Time deposits and certificates of deposit . . . . . . . .
Bankers’ acceptance drafts . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate obligations . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury obligations . . . . . . . . . . . . . . . . . . . .
U.S. agency obligations . . . . . . . . . . . . . . . . . . . . .
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
Cost
$
102
989
9,121
19,504
9,367
13,294
21,617
$73,994
$—
—
1
—
—
4
2
$ 7
$ —
—
(9)
(145)
(15)
—
(6)
$(175)
$
102
989
9,113
19,359
9,352
13,298
21,613
$73,826
85
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
As of December 31, 2018:
Long-term investments:
Available-for-sale investments:
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair Value
Cost
Group insurance contracts . . . . . . . . . . . . . . . . . .
$5,546
$344
$—
$5,890
As of December 31, 2017:
Short-term investments:
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair Value
Cost
Available-for-sale investments:
. . . . . .
Time deposits and certificates of deposit
Bankers’ acceptance drafts . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . .
Corporate obligations . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury obligations . . . . . . . . . . . . . . . . . . .
U.S. agency obligations . . . . . . . . . . . . . . . . . . . .
$
9,756
5,330
37,017
13,810
77,788
1,970
28,054
35,728
$
1
—
15
—
58
—
24
10
$209,453
$108
$ —
—
(42)
(60)
(25)
—
—
—
$(127)
$
9,757
5,330
36,990
13,750
77,821
1,970
28,078
35,738
$209,434
As of December 31, 2017:
Long-term investments:
Available-for-sale investments:
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair Value
Cost
Group insurance contracts . . . . . . . . . . . . . . . . . .
$6,006
$249
$—
$6,255
The tables above, which show the gross unrealized gains and (losses) aggregated by investment category for
available-for-sale investments as of December 31, 2018 and 2017, reflect the inclusion within short-term
investments of investments with contractual maturities greater than one year from the date of purchase.
Management has the ability, if necessary, to liquidate any of its investments in order to meet the Company’s
liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than
one year from the date of purchase are classified as short-term on the accompanying balance sheets.
Interest income is accrued as earned. Dividend income is recognized as income on the date the stock trades
“ex-dividend.” The cost of marketable securities sold is determined by the specific identification method and
realized gains or losses are reflected in income and were not material in 2018, 2017 and 2016.
6) Fair Value Measurements
In accordance with the provisions of fair value accounting, a fair value measurement assumes that the
transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the
absence of a principal market, the most advantageous market for the asset or liability and defines fair value based
upon an exit price model.
86
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The fair value measurement guidance establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets
are those in which transactions for the asset or liability occur in sufficient frequency and volume to
provide pricing information on an ongoing basis.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and
liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded
instruments or securities or derivative contracts that are valued using a pricing model with inputs that
are observable in the market or can be derived principally from or corroborated by observable market
data.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value
is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well
as instruments for which the determination of fair value requires significant management judgment or
estimation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the Company categorizes such assets and liabilities based on the lowest level input that
is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a
particular input to the fair value measurement in its entirety requires judgment and considers factors specific to
the asset.
87
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2018,
are summarized as follows:
Description
Assets:
Cash equivalents:
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2018
Money market funds . . . . . . . . . . . . . . . . . .
Time deposits and certificates of deposit . . .
Commercial paper . . . . . . . . . . . . . . . . . . . .
U.S. agency obligations . . . . . . . . . . . . . . . .
Restricted cash – money market funds . .
$180,340
850
2,687
3,418
110
$180,340
—
—
—
110
Available-for-sale securities:
Time deposits and certificates of deposit . . .
Bankers’ acceptance drafts . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . .
Corporate obligations . . . . . . . . . . . . . . . . . .
U.S. treasury obligations . . . . . . . . . . . . . . .
U.S. agency obligations . . . . . . . . . . . . . . . .
Group insurance contracts . . . . . . . . . . . . . .
Derivatives – currency forward contracts . . . .
Funds in investments and other assets:
Israeli pension assets . . . . . . . . . . . . . . . . . .
Derivatives – interest rate hedge –
102
989
9,113
19,359
9,352
13,298
21,613
5,890
2,485
14,408
—
—
—
—
—
—
—
—
—
—
$
—
850
2,687
3,418
—
102
989
9,113
19,359
9,352
13,298
21,613
5,890
2,485
14,408
non-current . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . .
6,083
$290,097
—
$180,450
6,083
$109,647
Liabilities:
Derivatives – currency forward contracts . . . .
$
1,168
$
—
$
1,168
Reported as follows:
Assets:
Cash and cash equivalents, including restricted
cash(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . .
Long-term investments(2) . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term assets . . . . . . . . . . . . . . .
$187,405
73,826
2,485
$263,716
$
5,890
20,491
$ 26,381
Liabilities:
Other current liabilities . . . . . . . . . . . . . . . . . .
$
1,168
$180,450
—
—
$180,450
$
$
$
—
—
—
—
$
6,955
73,826
2,485
$ 83,266
$
5,890
20,491
$ 26,381
$
1,168
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
$—
—
—
$
$—
—
$—
$—
(1) The cash and cash equivalent amounts presented in the table above does not include cash of $456,940 as of
December 31, 2018.
(2) The long-term investments presented in the table above do not include our minority interest investment in a
private company, which is accounted for under the cost method.
88
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2017,
are summarized as follows:
Description
Assets:
Cash equivalents:
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2017
Money market funds . . . . . . . . . . . . . . . . . .
Time deposits and certificates of deposit . . .
Commercial paper . . . . . . . . . . . . . . . . . . . .
Restricted cash – money market funds . . . .
$
Available-for-sale securities:
Time deposits and certificates of deposit . . .
Bankers’ acceptance drafts . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . .
Corporate obligations . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury obligations . . . . . . . . . . . . . . .
U.S. agency obligations . . . . . . . . . . . . . . . .
Group insurance contracts . . . . . . . . . . . . . .
Derivatives – currency forward contracts . . . .
Funds in investments and other assets:
Israeli pension assets . . . . . . . . . . . . . . . . . .
Derivatives – interest rate hedge –
4,987
2,100
30,475
119
9,757
5,330
36,990
13,750
77,821
1,970
28,078
35,738
6,255
168
15,048
non-current . . . . . . . . . . . . . . . . . . . . . . . .
6,179
$4,987
—
—
119
—
—
—
—
—
—
—
—
—
—
—
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . .
$274,765
$5,106
$
—
2,100
30,475
—
9,757
5,330
36,990
13,750
77,821
1,970
28,078
35,738
6,255
168
15,048
6,179
$269,659
Liabilities:
Derivatives – currency forward contracts . .
$
6,198
$ —
$
6,198
Reported as follows:
Assets:
Cash and cash equivalents, including restricted
cash(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . .
$ 37,681
209,434
168
Total current assets . . . . . . . . . . . . . . . . . .
$247,283
Long-term investments(2) . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,255
21,227
Total long-term assets . . . . . . . . . . . . . . .
$ 27,482
$5,106
—
—
$5,106
$ —
—
$ —
$ 32,575
209,434
168
$242,177
$
6,255
21,227
$ 27,482
Liabilities:
Other current liabilities . . . . . . . . . . . . . . . . . .
$
6,198
$ —
$
6,198
89
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
$—
—
—
$—
$—
—
$—
$—
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
(1) The cash and cash equivalent amounts presented in the table above do not include cash of $292,808 and
non-negotiable time deposits of $3,398 as of December 31, 2017.
(2) The long-term investments presented in the table above do not include our minority interest investment in a
private company, which is accounted for under the cost method.
Money Market Funds
Money market funds are cash and cash equivalents and are classified within Level 1 of the fair value
hierarchy.
Available-For-Sale Investments
As of December 31, 2018, available-for-sale investments consisted of time deposits and drafts denominated
in the Euro currency, certificates of deposit, bankers’ acceptance drafts, asset-backed securities (which include
auto loans, credit card receivables and equipment trust receivables), commercial paper, corporate obligations,
municipal bonds, U.S. treasury, U.S. agency obligations and group insurance contracts.
The Company measures its debt and equity investments at fair value. The Company’s available-for-sale
investments are classified within Level 1 and Level 2 of the fair value hierarchy.
Israeli Pension Assets
Israeli pension assets represent investments in mutual funds, government securities and other time deposits.
These investments are set aside for the retirement benefit of the employees at the Company’s Israeli subsidiaries.
These funds are classified within Level 2 of the fair value hierarchy.
Derivatives
As a result of the Company’s global operating activities, the Company is exposed to market risks from
changes in foreign currency exchange rates and variable interest rates, which may adversely affect its operating
results and financial position. When deemed appropriate, the Company minimizes its risks from foreign currency
exchange rate and interest rate fluctuations through the use of derivative financial instruments. The principal
market in which the Company executes its foreign currency contracts and interest rate swaps is the institutional
market in an over-the-counter environment with a relatively high level of price transparency. The market
participants usually are large commercial banks. The forward foreign currency exchange contracts and interest
rate hedge are valued using broker quotations, or market transactions and are classified within Level 2 of the fair
value hierarchy.
7) Derivatives
The Company enters into derivative instruments for risk management purposes only, including derivatives
designated as hedging instruments and those utilized as economic hedges. The Company operates internationally
and, in the normal course of business, is exposed to fluctuations in interest rates and foreign exchange rates.
These fluctuations can increase the costs of financing, investing and operating the business. The Company has
used derivative instruments, such as forward contracts, to manage certain foreign currency exposure, and interest
rate swaps to manage interest rate exposure.
90
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
By nature, all financial instruments involve market and credit risks. The Company enters into derivative
instruments with major investment grade financial institutions, for which no collateral is required. The Company
has policies to monitor the credit risk of these counterparties. While there can be no assurance, the Company
does not anticipate any material non-performance by any of these counterparties.
Interest Rate Swap Agreement
On September 30, 2016, the Company entered into an interest rate swap agreement to fix the rate on
approximately 50% of its then outstanding term loan balance, as described further in Note 13. This hedge fixes
the interest rate paid on the hedged debt at 1.198% per annum plus the credit spread, which was 1.75% as of
December 31, 2018, through September 30, 2020. The interest rate swap will be recorded at fair value on the
balance sheet and changes in the fair value will be recognized in OCI. To the extent that this arrangement is no
longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in
earnings in the period it occurs. The notional amount of this transaction was $290,000 and had a fair value of
$6,083 at December 31, 2018. The notional amount of this transaction was $305,000 and had a fair value of
$6,179 at December 31, 2017.
Foreign Exchange Contracts
The Company hedges a portion of its forecasted foreign currency-denominated intercompany sales of
inventory, over a maximum period of eighteen months, using forward foreign exchange contracts accounted for
as cash-flow hedges related to Japanese, South Korean, British, Euro and Taiwanese currencies. To the extent
these derivatives are effective in off-setting the variability of the hedged cash flows, and otherwise meet the
hedge accounting criteria, changes in the derivatives’ fair value are not included in current earnings but are
included in OCI in stockholders’ equity. These changes in fair value will subsequently be reclassified into
earnings, as applicable, when the forecasted transaction occurs. To the extent that a previously designated
hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship will
be recorded currently in earnings in the period in which it occurs. The cash flows resulting from forward
exchange contracts are classified in the consolidated statements of cash flows as part of cash flows from
operating activities. The Company does not enter into derivative instruments for trading or speculative purposes.
As of December 31, 2018 and 2017, the Company had outstanding forward foreign exchange contracts with
gross notional values of $159,394 and $208,922, respectively. The following tables provide a summary of the
primary net hedging positions and corresponding fair values held as of December 31, 2018 and 2017:
Currency Hedged (Buy/Sell)
December 31, 2018
Gross Notional
Value
Fair Value(1)
U.S. Dollar/Japanese Yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Dollar/South Korean Won . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Dollar/Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Dollar/U.K. Pound Sterling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Dollar/Taiwan Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 43,770
59,149
23,515
11,827
21,133
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$159,394
$ (478)
570
688
323
214
$1,317
91
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Currency Hedged (Buy/Sell)
December 31, 2017
Gross Notional
Value
Fair Value(1)
U.S. Dollar/Japanese Yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Dollar/South Korean Won . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Dollar/Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Dollar/U.K. Pound Sterling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Dollar/Taiwan Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 70,175
79,672
26,140
12,104
20,831
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$208,922
$ (233)
(3,799)
(1,047)
(337)
(614)
$(6,030)
(1) Represents the receivable (payable) amount included in the consolidated balance sheet.
The following table provides a summary of the fair value amounts of the Company’s derivative instruments:
Derivatives Designated as Hedging Instruments
Derivative assets:
Years Ended December 31,
2018
2017
Forward exchange contracts(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency interest rate hedge(2) . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,485
6,083
Derivative liabilities:
Forward exchange contracts(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,168)
Total net derivative asset designated as hedging instruments . . . . . . . . .
$ 7,400
$
168
6,179
(6,198)
$
149
(1) The derivative asset of $2,485 and derivative liability of $1,168 related to the forward foreign exchange
contracts are classified in other current assets and other current liabilities in the consolidated balance sheet
as of December 31, 2018. The derivative asset of $168 and derivative liability of $6,198 related to the
forward foreign exchange contracts are classified in other current assets and other current liabilities in the
consolidated balance sheet as of December 31, 2017. These forward foreign exchange contracts are subject
to a master netting agreement with one financial institution. However, the Company has elected to record
these contracts on a gross basis in the balance sheet.
(2) The foreign currency interest rate hedge asset of $6,083 and $6,179 is classified in other assets in the
consolidated balance sheet as of December 31, 2018 and 2017, respectively.
The net amount of existing gains as of December 31, 2018 that is expected to be reclassified from OCI into
earnings within the next 12 months is immaterial.
The following table provides a summary of the gains (losses) on derivatives designated as cash flow
hedging instruments:
Derivatives Designated as Cash Flow Hedging Instruments
Years Ended December 31,
2018
2017
2016
Forward exchange contracts:
Net gain (loss) recognized in OCI(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Net loss reclassified from OCI into income(2)
$ 6,289
$(3,367)
$(6,036)
$(2,685)
$ 5,914
$(1,414)
(1) Net change in the fair value of the effective portion classified in OCI.
(2) Effective portion classified as cost of products.
92
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The following table provides a summary of losses on derivatives not designated as cash flow hedging
instruments:
Derivatives Not Designated as Hedging Instruments
Years Ended December 31,
2018
2017
2016
Forward exchange contracts:
Net gain (loss) recognized in income (1) . . . . . . . . . . . . . . . . . . . . . .
$105
$(3,416)
$(31)
(1) The Company enters into forward foreign exchange contracts to hedge against changes in the balance sheet
for certain subsidiaries to mitigate the risk associated with certain foreign currency transactions in the
ordinary course of business. These derivatives are not designated as cash flow hedging instruments and
gains or losses from these derivatives are recorded immediately in other expense, net in 2018 and 2017.
8)
Inventories
Inventories consist of the following:
Raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
2017
$235,593
61,908
87,188
$384,689
$191,351
54,050
93,680
$339,081
Inventory-related excess and obsolete charges of $22,324, $20,213 and $16,039 were recorded in cost of
products in the years ended December 31, 2018, 2017 and 2016, respectively.
9) Property, Plant and Equipment
Property, plant and equipment consist of the following:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
Furniture and fixtures, office equipment and software . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
2017
$ 11,448
104,023
330,821
149,145
66,569
44,823
706,829
512,462
$ 11,650
103,563
317,073
145,945
65,293
13,619
657,143
485,361
$194,367
$171,782
Depreciation of property, plant and equipment totaled $36,332, $36,813 and $30,245 for the years ended
2018, 2017 and 2016, respectively.
93
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
10) Acquisitions and Dispositions
Electro Scientific Industries, Inc.
See Note 22 for information on the acquisition of Electro Scientific Industries, Inc.
Newport Corporation
On April 29, 2016, the Company completed its acquisition of Newport pursuant to an Agreement and Plan
of Merger, dated as of February 22, 2016 (the “Merger Agreement”), by and among the Company, PSI
Equipment, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), and Newport (the “Newport
Merger”). At the effective time of the Newport Merger and pursuant to the terms and conditions of the Merger
Agreement, each share of Newport’s common stock that was issued and outstanding immediately prior to the
effective time of the Newport Merger was converted into the right to receive $23.00 in cash, without interest and
subject to deduction for any required withholding tax.
Newport’s innovative solutions leverage its expertise in advanced technologies, including lasers, photonics
and precision motion equipment, and optical components and sub-systems, to enhance the capabilities and
productivity of its customers’ manufacturing, engineering and research applications. Newport is a global supplier
of advanced-technology products and systems to customers in the scientific research and defense/security,
microelectronics, life and health sciences and industrial manufacturing markets.
The purchase price of Newport consisted of the following:
Cash paid for outstanding shares(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement of share-based compensation awards(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for Newport debt(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 905,254
8,824
93,200
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,007,278
Less: cash and cash equivalents acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(61,463)
Total purchase price, net of cash and cash equivalents acquired . . . . . . . . . . . . . . . . . . . .
$ 945,815
(1) Represents cash paid of $23.00 per share for approximately 39,359,000 shares of Newport common stock,
without interest and subject to a deduction for any required withholding tax.
(2) Represents the vested but unissued portion of Newport share-based compensation awards as of the
acquisition date of April 29, 2016.
(3) Represents the cash paid for the outstanding balance of Newport’s senior secured revolving credit
agreement.
The Company funded the payment of the aggregate consideration with a combination of the Company’s
available cash on hand and the proceeds from the Company’s senior secured term loan facility, as described in
Note 13.
Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the
acquired tangible and intangible assets and assumed liabilities of Newport based on their fair values as of the
acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities
assumed is allocated to goodwill. Goodwill and intangible assets will not be amortizable for tax purposes.
94
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The following table summarizes the allocation of the purchase price to the fair values assigned to assets
acquired and liabilities assumed at the date of the Newport Merger:
Current assets (including cash) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment
Long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 186,137
142,714
404,506
396,027
119,932
22,725
1,272,041
95,156
4,302
165,305
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
264,763
Fair value of assets acquired and liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,007,278
Less: cash and cash equivalents acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(61,463)
Total purchase price, net of cash and cash equivalents acquired . . . . . . . . . . . . . . . . . . . .
$ 945,815
The fair value write-up of acquired finished goods inventory was $15,090, the amount of which will be
amortized over the expected period during which the acquired inventory is sold. Accordingly, the Company
recorded $15,090 of incremental costs of sales charges associated with the fair value write-up of inventory
acquired in the Newport Merger for the year ended December 31, 2016.
The fair value write-up of acquired property, plant and equipment of $36,242 will be amortized over the
useful life of the assets. Property, plant and equipment is valued at its value-in-use, unless there was a known
plan to dispose of the asset.
The acquired intangible assets are being amortized on a straight-line basis, which approximates the
economic use of the asset.
The following table reflects the allocation of the acquired intangible assets and liabilities and related
estimate of useful lives:
Order backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold interest (favorable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 12,100
247,793
55,900
75,386
6,899
6,428
1 year
6-18 years
Indefinite
4-8 years
Undefined(1)
4-5 years
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$404,506
Leasehold interest (unfavorable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,302
(1) The useful lives of in-process research and development will be defined in the future upon further
evaluation of the status of these programs.
95
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The fair value of the acquired intangibles was determined using the income approach. In performing these
valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected
revenues, gross margin expectations and operating cost estimates. The valuations were based on the information
that was available as of the acquisition date and the expectations and assumptions that have been deemed
reasonable by the Company’s management. There are inherent uncertainties and management judgment required
in these determinations. This acquisition resulted in a purchase price that exceeded the estimated fair value of
tangible and intangible assets, the excess amount of which was allocated to goodwill.
The Company believes the amount of goodwill relative to identifiable intangible assets relates to several
factors including: (1) potential buyer-specific synergies related to market opportunities for a combined product
offering; and (2) potential to leverage the Company’s sales force to attract new customers and revenue and cross
sell to existing customers.
The results of this acquisition were included in the Company’s consolidated operations beginning on
April 29, 2016. Newport constitutes the Company’s Light & Motion reportable segment (Note 19).
Certain executives from Newport had severance provisions in their respective Newport employment
agreements. The agreements included terms that were accounted for as dual-trigger arrangements. Through the
Company’s acquisition accounting, the expense relating to these benefits was recognized in the combined
entity’s financial statements, however, the benefit itself will not be distributed until the final provision is met by
each eligible executive. The Company recorded costs of $6,635 and $3,334 as compensation expense and stock-
based compensation expense, respectively, during 2016 in connection with these severance provisions. The
shares underlying the restricted stock units and stock appreciation rights that are eligible for accelerated vesting if
the executive exercises his rights are not issued as of each reporting period-end and are excluded from the
computation of basic earnings per share and included in the computation of diluted earnings per share for each
reporting period.
Pro Forma Results
The following unaudited pro forma financial information presents the combined results of operations of the
Company as if the Newport Merger had occurred on January 1, 2015. The unaudited pro forma financial
information is not necessarily indicative of what the Company’s condensed consolidated results of operations
actually would have been had the acquisition occurred at the beginning of each year. In addition, the unaudited
pro forma financial information does not attempt to project the future results of operations of the combined
company.
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,475,637
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111,076
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.08
2.06
2016
The unaudited pro forma financial information above gives effect primarily to the following:
(1)
Incremental amortization and depreciation expense related to the estimated fair value of identifiable
intangible assets and property, plant and equipment from the purchase price allocation.
96
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
(2) Revenue adjustments as a result of the reduction in deferred revenue related to its estimated fair value.
(3)
(4) The exclusion of acquisition costs and inventory step-up amortization from the year ended
Incremental interest expense related to the Company’s term loan credit agreement.
December 31, 2016.
(5) The estimated tax impact of the above adjustments.
Cost Method Investment in a Private Company
In April 2016, the Company invested $9,300 for a minority interest in a private company, which operates in
the field of semiconductor process equipment instrumentation. The Company accounted for this investment using
the cost method of accounting. During the fourth quarter of 2016, the Company recognized an impairment loss
on this investment of $5,000 based upon financial information of this private company. In July 2017, the
Company invested an additional $100 in this private company.
Sale of Data Analytics Solutions
In April 2017, the Company completed the sale of its Data Analytics Solutions business for total proceeds of
$72,509, net of cash sold and recorded a gain of $74,856. This business, which had revenues in 2016 of $12,700
and was included in the Vacuum & Analysis segment, was no longer a part of the Company’s long-term strategic
objectives.
The business did not qualify as a discontinued operation as this sale did not represent a strategic shift in the
Company’s business, nor did the sale have a major effect on the Company’s operations. Therefore, the results of
operations for all periods are included in the Company’s income from operations. The assets and liabilities of this
business have not been reclassified or segregated in the consolidated balance sheet or consolidated statements of
cash flows as the amounts were immaterial.
11) Goodwill and Intangible Assets
Goodwill
The Company’s methodology for allocating the purchase price relating to purchase acquisitions is
determined through established and generally accepted valuation techniques. Goodwill is measured as the excess
of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets
acquired less liabilities assumed. The Company assigns assets acquired (including goodwill) and liabilities
assumed to one or more reporting units as of the date of acquisition. Typically acquisitions relate to a single
reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products
obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective
reporting units as part of the purchase price allocation process.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for
impairment annually during the fourth quarter of each fiscal year and whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the
potential impairment of goodwill and intangible assets requires significant judgment. The Company regularly
monitors current business conditions and other factors including, but not limited to, adverse industry or economic
trends, restructuring actions and lower projections of profitability that may impact future operating results.
97
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Effective July 1, 2018, the Company reassigned goodwill to certain reporting units within the Light &
Motion reportable segment resulting from a reorganization of the composition of reporting units. The goodwill
was reassigned to the reporting units affected using the relative fair value approach. In conjunction with this
goodwill reassignment, the Company performed an interim quantitative impairment test as of July 1, 2018 for all
of its reporting units and concluded that the fair values of each reporting unit exceeded their respective carrying
values.
The changes in the carrying amount of goodwill and accumulated impairment losses were as follows:
2018
2017
Gross
Carrying
Amount
Accumulated
Impairment
Loss
Net
Gross
Carrying
Amount
Accumulated
Impairment
Loss
Net
Beginning balance at January . . . . . . .
Sale of business(1)
. . . . . . . . . . . . .
Impairment loss(2) . . . . . . . . . . . . .
Foreign currency translation . . . . . .
$735,323
—
—
(4,051)
$(144,276) $591,047
—
—
(4,051)
—
—
—
$727,999
(3,115)
—
10,439
$(139,414) $588,585
(3,115)
(4,862)
10,439
—
(4,862)
—
Ending balance at December 31 . . . . .
$731,272
$(144,276) $586,996
$735,323
$(144,276) $591,047
(1)
(2)
In 2017, the Company sold its Data Analytics business and, as a result, charged the related goodwill of
$3,115 to the gain on sale of business.
In 2017, the Company recorded an impairment loss of $4,862 related to the write-off of goodwill as a result
of the discontinuation of a product line and consolidation of two manufacturing plants.
Intangible Assets
The Company is required to test certain long-lived assets when indicators of impairment are present. For the
purposes of the impairment test, long-lived assets are grouped with other assets and liabilities at the lowest level
for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. During
2017, the Company recorded impairment charges of $1,511 related to the write off of intangible assets as a result
of the discontinuation of a product line and consolidation of two manufacturing plants.
Components of the Company’s acquired intangible assets are comprised of the following:
As of December 31, 2018
Completed technology . . . . . . . . .
Customer relationships . . . . . . . . .
Patents, trademarks, trade names
Gross
$172,431
282,744
Impairment
Charges(1)
Accumulated
Amortization
Foreign
Currency
Translation
Net
$ (105)
(1,406)
$(137,283)
(63,788)
$ (73)
(269)
$ 34,970
217,281
and other . . . . . . . . . . . . . . . . . .
110,523
—
(42,954)
(13)
67,556
$565,698
$(1,511)
$(244,025)
$(355)
$319,807
As of December 31, 2017
Completed technology . . . . . . . . .
Customer relationships . . . . . . . . .
Patents, trademarks, trade names
Gross
$172,431
282,744
Impairment
Charges(1)
Accumulated
Amortization
Foreign
Currency
Translation
$ (105)
(1,406)
$(115,371)
(45,518)
$ 333
1,571
Net
$ 57,288
237,391
and other . . . . . . . . . . . . . . . . . .
110,523
—
(38,730)
(74)
71,719
$565,698
$(1,511)
$(199,619)
$1,830
$366,398
98
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
(1)
In 2017, the Company recorded impairment charges of $1,511 related to the write-off of intangible assets as
a result of the discontinuation of a product line and consolidation of two manufacturing plants.
Aggregate amortization expense related to acquired intangible assets for the years 2018, 2017 and 2016 was
$43,521, $45,743 and $35,681, respectively. The amortization expense in 2018, 2017 and 2016 is net of $885,
$811 and $569, respectively, of amortization income from unfavorable lease commitments. Aggregate net
amortization expense related to acquired intangible assets and unfavorable lease commitments for future years is:
Year
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$ 40,073
$ 28,076
$ 20,206
$ 17,584
$ 17,220
$138,693
12) Product Warranties
The Company provides for the estimated costs to fulfill customer warranty obligations upon the recognition
of the related revenue. While the Company engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty
obligation is affected by shipment volume, product failure rates, utilization levels, material usage and supplier
warranties on parts delivered to the Company. Should actual product failure rates, utilization levels, material
usage, or supplier warranties on parts differ from the Company’s estimates, revisions to the estimated warranty
liability would be required.
Product warranty activities were as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for product warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct and other charges to warranty liability . . . . . . . . . . . . . . . . . . . . .
$ 10,104
15,987
(15,692)
Ending balance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,399
$ 8,261
15,884
(14,041)
$ 10,104
Years Ended December 31,
2018
2017
(1) Short-term product warranty of $9,986 and long-term product warranty of $413, each as of December 31,
2018, are included within other current liabilities and other liabilities, respectively, within the accompanying
consolidated balance sheet. Short-term product warranty of $9,719 and long-term product warranty of $385
as of December 31, 2017, are included within other current liabilities and other liabilities, respectively,
within the accompanying consolidated balance sheet.
13) Debt
Term Loan Credit Agreement
In connection with the completion of the Newport Merger, the Company entered into a term loan credit
agreement (the “Credit Agreement”) with Barclays Bank PLC, as administrative agent and collateral agent, and
99
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
the lenders from time to time party thereto (the “Lenders”), that provided senior secured financing in the original
principal amount of $780,000, subject to increase at the Company’s option and subject to receipt of lender
commitments in accordance with the Credit Agreement (the “Term Loan Facility”). Borrowings under the Term
Loan Facility bear interest per annum at one of the following rates selected by the Company: (a) a base rate
determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the “prime rate”
quoted in The Wall Street Journal, (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar
deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of
1.75%, plus, in each case, an applicable margin; or (b) a LIBOR rate determined by reference to the costs of
funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional
costs, subject to a LIBOR rate floor of 0.75%, plus an applicable margin. The Company has elected the interest
rate as described in clause (b). The Credit Agreement provides that all loans will be determined by reference to
the Base Rate if the LIBOR rate cannot be ascertained, if regulators impose material restrictions on the authority
of a lender to make LIBOR rate loans, or for other reasons. The Term Loan Facility was issued with original
issue discount of 1.00% of the principal amount thereof.
On June 9, 2016, the Company entered into Amendment No. 1 (the “Repricing Amendment 1”) to the Credit
Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and
collateral agent for the Lenders. The Repricing Amendment 1 decreased the applicable margin for borrowings
under the Company’s Term Loan Facility to 2.50% for base rate borrowings and 3.50% for LIBOR borrowings
and extended the period during which a prepayment premium may be required for a “Repricing Transaction” (as
defined in the Credit Agreement) until six months after the effective date of the Repricing Amendment 1. In
connection with the execution of the Repricing Amendment 1, the Company paid a prepayment premium of
1.00%, or $7,300, as well as certain fees and expenses of the administrative agent and the Lenders, in accordance
with the terms of the Credit Agreement. Immediately prior to the effectiveness of the Repricing Amendment 1,
the Company prepaid $50,000 of principal under the Credit Agreement. In September 2016, the Company
prepaid an additional $60,000 under the Credit Agreement.
On September 30, 2016, the Company entered into an interest rate swap agreement, which has a maturity
date of September 30, 2020, to fix the rate on $335,000 of the then-outstanding balance of the Credit Agreement.
The rate is fixed at 1.198% per annum plus the applicable credit spread, which was 1.75% at December 31, 2018.
The notional amount of this transaction was $290,000 and had a fair value of $6,083 at December 31, 2018.
On December 14, 2016, the Company entered into Amendment No. 2 (the “Repricing Amendment 2”) to the
Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and
collateral agent for the Lenders. The Repricing Amendment 2 decreased the applicable margin for the
Company’s term loan under the Credit Agreement to 2.75% for LIBOR borrowings and 1.75% for base rate
the period during which a prepayment premium may be required for a Repricing
borrowings and reset
Transaction until six months after the effective date of the Repricing Amendment 2. In November 2016, prior to
the effectiveness of the Repricing Amendment 2, the Company prepaid an additional $40,000 of principal under
the Credit Agreement. In March 2017, the Company prepaid an additional $50,000 of principal under the Credit
Agreement.
On July 6, 2017, the Company entered into Amendment No. 3 (the “Repricing Amendment 3”) to the Credit
Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and
collateral agent for the Lenders. The Repricing Amendment 3 decreased the applicable margin for the
Company’s term loan under the Credit Agreement to 2.25% for LIBOR rate loans when the Total Leverage Ratio
(as defined in the Credit Agreement) was at or above 1.25:1 and decreased to 2.00% when the Total Leverage
100
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Ratio was below 1.25:1, both with a LIBOR floor of 0.75%. The margin for base rate borrowings decreased to
1.25% when the Total Leverage Ratio is at or above 1.25:1 and to 1.00% when the Total Leverage Ratio is below
1.25:1. The period during which a prepayment premium may be required for a Repricing Transaction was reset to
six months after the effective date of the Repricing Amendment 3.
On April 11, 2018, the Company entered into Amendment No. 4 (the “Repricing Amendment 4”) to the
Credit Agreement by and among the Company, the Lenders and Barclays Bank PLC, as administrative agent and
collateral agent for the Lenders. The Repricing Amendment 4 decreased the applicable margin for the
Company’s LIBOR rate term loan under the Credit Agreement to 1.75%, with a LIBOR rate floor of 0.75%. The
margin for base rate borrowings decreased to 0.75% with a base rate floor of 1.75%. The period during which a
prepayment premium may be required for a Repricing Transaction was reset to six months after the effective date
of the Repricing Amendment 4.
In July 2017, August 2017, November 2017 and March 2018, the Company voluntarily prepaid $50,000,
$75,000, $50,000 and $50,000, respectively, of principal under the Credit Agreement. As of December 31, 2018,
after total prepayments of $425,000 and regularly scheduled principal payments of $6,536, the total outstanding
principal balance was $348,464. The interest rate as of December 31, 2018 was 4.1%.
The Company incurred $28,747 of deferred finance fees, original issue discount and repricing fees related to
the term loans under the Term Loan Facility, which are included in long-term debt in the accompanying
consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans
using the effective interest method. A portion of these fees has been accelerated in connection with the various
debt prepayments during 2016, 2017 and 2018. As of December 31, 2018, the remaining balance of the deferred
finance fees, original issue discount and repricing fee related to the Term Loan Facility was $4,708.
Under the Credit Agreement, the Company is required to prepay outstanding term loans, subject to certain
exceptions, with portions of its annual excess cash flow as well as with the net cash proceeds of certain asset
sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. As a result of our
Total Leverage Ratio, we were not required to make a prepayment of excess cash flow for the fiscal year end
2018. The Company is also required to make scheduled quarterly payments each equal to 0.25% of the principal
amount of the term loans outstanding, less the amount of certain voluntary and mandatory repayments after such
date, with the balance due on the seventh anniversary of the closing date. As a result of making total prepayments
of $425,000 through December 31, 2018 on the Term Loan Facility we had in place as of December 31, 2018.
The Company is no longer required to make any scheduled principal payments on the Term Loan Facility we had
in place as of December 31, 2018 until maturity date of the loan.
All obligations under the Term Loan Facility are guaranteed by certain of the Company’s domestic
subsidiaries, and are collateralized by substantially all of the Company’s assets and the assets of such
subsidiaries, subject to certain exceptions and exclusions.
The Credit Agreement contains customary representations and warranties, affirmative and negative
covenants and provisions relating to events of default. If an event of default occurs, the Lenders under the Term
Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term
Loan Facility and all actions generally permitted to be taken by a secured creditor. At December 31, 2018, the
Company was in compliance with all covenants under the Credit Agreement.
101
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Senior Secured Asset-Based Revolving Credit Facility
In connection with the completion of the Newport Merger, the Company also entered into an asset-based
credit agreement with Deutsche Bank AG New York Branch, as administrative agent and collateral agent, the
other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time
party thereto (the “ABL Facility”), that provides senior secured financing of up to $50,000, subject to a
borrowing base limitation. The borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of
certain eligible accounts; plus (b) subject to certain notice and field examination and appraisal requirements, the
lesser of (i) the lesser of (A) 65% of the lower of cost or market value of certain eligible inventory and (B) 85%
of the net orderly liquidation value of certain eligible inventory and (ii) 30% of the borrowing base; minus
(c) reserves established by the administrative agent; provided that until the administrative agent’s receipt of a
field examination of accounts receivable the borrowing base shall be equal to 70% of the book value of certain
eligible accounts. The ABL Facility includes borrowing capacity in the form of letters of credit up to $15,000.
The Company has not drawn against the ABL Facility as of December 31, 2018.
Borrowings under the ABL Facility bear interest per annum at one of the following rates selected by the
Company: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus
0.50%, (2) the “prime rate” quoted in The Wall Street Journal, and (3) a LIBOR rate determined by reference to
the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs,
plus 1.00%, plus, in each case, an initial applicable margin of 0.75%; and (b) a LIBOR rate determined by
reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted
for certain additional costs, plus an initial applicable margin of 1.75%. Commencing with the completion of the
first fiscal quarter ending after the closing of the ABL Facility, the applicable margin for borrowings thereunder
is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess
availability during the preceding quarter.
The Company incurred $1,201 of costs in connection with the ABL Facility, which were capitalized and
included in other assets in the accompanying consolidated balance sheets and are being amortized to interest
expense using the straight-line method over the contractual term of five years of the ABL Facility.
In addition to paying interest on outstanding principal under the ABL Facility, the Company is required to
pay a commitment fee in respect of the unutilized commitments thereunder. The initial commitment fee is
0.375% per annum. The total commitment fees recognized in interest expense during 2018 was immaterial.
Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the
commitment fee is subject to downward adjustment based on the amount of average unutilized commitments for
the three month period immediately preceding such adjustment date. The Company must also pay customary
letter of credit fees and agency fees.
Lines of Credit and Short-Term Borrowing Arrangements
One of the Company’s Japanese subsidiaries has lines of credit and short-term borrowing arrangements with
two financial institutions, which arrangements generally expire and are renewed at three month intervals. The
lines of credit provided for aggregate borrowings as of December 31, 2018 of up to an equivalent of $20,856 U.S.
dollars. One of the borrowing arrangements has an interest rate based on the Tokyo Interbank Offer Rate at the
time of borrowing and the other has an interest rate based on the Japanese Short-Term Prime Lending Rate.
There were no borrowings outstanding under these arrangements at December 31, 2018 and 2017.
The Company assumed various revolving lines of credit and a financing facility with the completion of the
Newport Merger. These revolving lines of credit and financing facility have no expiration date and provided for
102
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
aggregate borrowings as of December 31, 2018 of up to an equivalent of $11,335 U.S. dollars. These lines of
credit have a base interest rate of 1.25% plus a Japanese Yen overnight LIBOR rate. Total borrowings
outstanding under these arrangements were $3,389 and $2,965 at December 31, 2018 and 2017.
One of the Company’s Austrian subsidiaries has various outstanding loans from the Austrian government to
fund research and development. These loans are unsecured and do not require principal repayment as long as
certain conditions are met. Interest on these loans is payable semi-annually. The interest rates associated with
these loans range from 0.75%—2.00%.
Short-term debt:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japanese lines of credit
Japanese receivables financing facility . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt
Long-term debt:
Austrian loans due through March 2020 and other debt . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term Loan Facility, net(1)
December 31, 2018
December 31, 2017
$2,724
665
597
$3,986
$2,750
215
7
$2,972
December 31, 2018
December 31, 2017
86
$
343,756
$343,842
714
$
389,279
$389,993
(1) Net of deferred financing fees, original issuance discount and re-pricing fee in the aggregate of $4,708 and
$9,185 as of December 31, 2018 and 2017, respectively.
The Company recognized interest expense of $16,942, $30,990 and $30,611 for the twelve months ended
December 31, 2018, 2017 and 2016, respectively.
Contractual maturities of the Company’s debt obligations as of December 31, 2018 are as follows:
Year
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
3,986
$
72
$
14
$
—
$
$348,464
14) Income Taxes
The Act, which was enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35% to
21% effective January 1, 2018, required companies to pay a one-time transition tax on earnings of certain foreign
subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. The
Company applied SAB 118 when accounting for the enactment effects of the Act. As of December 22, 2018 the
company has completed, and recorded, the impacts of the Act based on its understanding and interpretation of the
regulatory guidance that has been issued.
103
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
For the year ended December 31, 2018, the Company recognized a tax benefit of $625 related to an
adjustment of the provisional estimates that had been previously recorded for the Act and included these
adjustments as a component of income tax expense from continuing operations.
The global intangible low-taxed income (“GILTI”) provision from the Act subjects a U.S. shareholder to
current tax on GILTI earned by certain foreign subsidiaries. Under FASB Staff Q&A, Topic 740 No. 5, the
Company has elected to recognize the resulting tax on GILTI as a period expense in the period the tax is
incurred. Based upon the proposed GILTI regulations, the Company has estimated that the impact of the GILTI
tax, net of foreign tax credits, will increase its effective tax rate for the year ended December 31, 2018 by
approximately 0.4%.
A reconciliation of the Company’s effective tax rate to the U.S. federal statutory rate is as follows:
U.S. Federal income tax statutory rate . . . . . . . . . . . . . . . . . . . . . . . .
Federal tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign operations taxed at various rates . . . . . . . . . . . . . . .
Qualified production activity tax benefit
. . . . . . . . . . . . . . . . . . . . . .
Foreign derived intangible income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global intangible low taxed income, net of foreign tax credits . . . . .
Transition tax, net of foreign tax credits . . . . . . . . . . . . . . . . . . . . . . .
Revaluation of U.S. deferred income taxes . . . . . . . . . . . . . . . . . . . .
Revaluation of prepaid taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset valuation allowance . . . . . . . . . . . . . . . . . . . . . . .
Release of income tax reserves (including interest) . . . . . . . . . . . . . .
Taxes on foreign dividends, net of foreign tax credits . . . . . . . . . . . .
Acquisition and integration related costs . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
21.0%
(0.7)
1.3
(1.3)
—
(2.1)
0.4
(0.1)
(0.3)
1.6
(1.3)
—
(0.4)
(1.0)
—
1.2
18.3%
2017
2016
35.0%
(0.7)
1.0
(12.1)
(1.4)
—
—
6.4
(5.0)
—
(2.5)
(0.1)
(0.4)
3.3
—
0.7
24.2%
35.0%
(1.8)
0.8
(12.7)
(2.9)
—
—
—
—
—
—
2.1
(2.4)
(2.2)
1.5
0.7
18.1%
104
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The components of income from operations before income taxes and the related provision for income taxes
consist of the following:
Income from operations before income taxes:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current taxes:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
2017
2016
$287,309
193,641
$224,979
222,646
$ 42,491
85,486
$480,950
$447,625
$127,977
$ 41,428
8,094
57,920
$ 77,023
6,149
30,152
$ 17,693
2,359
41,938
107,442
113,324
61,990
(2,533)
(16,855)
(19,388)
(16,250)
11,419
(23,604)
(15,218)
(4,831)
(38,822)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 88,054
$108,493
$ 23,168
The significant components of the deferred tax assets and deferred tax liabilities are as follows:
Years Ended December 31,
2018
2017
Deferred tax assets:
Carry-forward losses and credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory and warranty reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive supplemental retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,675
17,945
10,260
5,351
5,972
2,396
$ 25,834
17,734
15,393
5,092
4,984
597
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,599
$ 69,634
Deferred tax liabilities:
Acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign withholding taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(74,120)
(8,332)
(1,108)
(3,176)
(1,952)
$ (83,092)
(10,150)
(2,157)
(16,206)
(469)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(88,688)
(112,074)
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,936)
(13,629)
Net deferred tax (liabilities) assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(41,025)
$ (56,069)
Due to the reduction in U.S. federal statutory tax rate resulting from the enactment of the Act, the Company
recorded a provisional adjustment reducing its net deferred tax liabilities by $22,345 as of December 31, 2017.
105
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
This provisional adjustment was finalized during the year ended December 31, 2018 and an additional tax
provision of $2,614 was recorded.
As of December 31, 2018, the Company has federal, state and foreign gross research and other tax credit
carry-forwards of $29,858. Included in the total carry-forward are $15,081 of credits that can be carried forward
indefinitely and the remaining credits expire at various dates through 2035. The Company also had, state and
foreign gross net operating loss and capital loss carry-forwards of $43,715. Included in the total carry-forward
are $36,057 of losses that can be carried forward indefinitely while the remaining losses expire at various dates
through 2035.
Although the Company believes that its tax positions are consistent with applicable U.S. federal, state and
international laws, it maintains certain tax reserves as of December 31, 2018 in the event its tax positions were to
be challenged by the applicable tax authority and additional tax assessed upon audit.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases/(decreases) for prior years . . . . . . . . . . . . . . . . . . . . . . . . .
Increases for the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions related to expiration of statutes of limitations and audit
Years Ended December 31,
2018
2017
2016
$27,345
934
6,091
$25,465
640
4,340
$ 4,332
(195)
23,940
settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,686)
(3,100)
(2,612)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$32,684
$27,345
$25,465
As of December 31, 2018, the total amount of gross unrecognized tax benefits, which excludes interest and
penalties, was $32,684. As of December 31, 2017, the total amount of gross unrecognized tax benefits, which
increase from December 31, 2017 was primarily
excludes interest and penalties, was $27,345. The net
attributable to the addition of reserves for the federal transition tax from the Act along with certain non-U.S.
items offset by decreases from settlement of an audit by the U.S. Internal Revenue Service (“IRS”) and the
expiration of certain statutes of limitations.
The Company accrues interest and, if applicable, penalties for any uncertain tax positions. Interest and
penalties are classified as a component of income tax expense. As of December 31, 2018, 2017 and 2016, the
Company had accrued interest on unrecognized tax benefits of approximately $568, $327 and $491, respectively.
Over the next 12 months it is reasonably possible that the Company may recognize approximately $2,150 of
previously net unrecognized tax benefits, excluding interest and penalties, related to various U.S. federal, state
and foreign tax positions primarily due to the expiration of certain statutes of limitations.
The Company and its subsidiaries are subject to examination by U.S. federal, state and foreign tax
authorities. The IRS commenced an examination of our U.S. federal income tax filings for tax years 2015 and
2016 during the quarter ended September 30, 2017. This audit was effectively settled during the quarter ended
March 31, 2018 and the impact was not material. During the quarter ended March 31, 2018 the Company
received notification from the United States Internal Revenue Service of its intent to audit the Company’s U.S.
subsidiary, Newport Corporation, for tax year 2015. This audit commenced during the quarter ended June 30,
2018 and there have been no proposed adjustments through December 31, 2018. The U.S. statute of limitations
106
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
remains open for tax years 2015 through present. The statute of limitations for the Company’s tax filings in other
jurisdictions varies between fiscal years 2013 through present. The Company has certain federal credit carry-
forwards and state tax loss and credit carry-forwards that are open to examination for tax years 2000 through the
present.
On a quarterly basis,
the Company evaluates both positive and negative evidence that affects the
realizability of net deferred tax assets and assesses the need for a valuation allowance. The future benefit to be
derived from its deferred tax assets is dependent upon its ability to generate sufficient future taxable income to
realize the assets.
During 2018, the Company increased its valuation allowance by $4,307, primarily attributable to certain tax
credit and net operating loss carryforward amounts. During 2017, the Company increased its valuation allowance
by $1,102, primarily related to certain state tax credits. During 2016, the Company increased its valuation
allowance by $6,400, primarily related to the addition of historical valuation allowances for Newport and its
subsidiaries which were included as a result of the acquisition in April 2016.
The Act provided for a mandatory one-time transition tax on deemed repatriation of the post-1986
undistributed cumulative earnings and profits of the Company’s foreign subsidiaries. As of the year ended
December 31, 2017 the Company estimated that it had approximately $560,000 of undistributed foreign earnings
subject to the Transition Tax and recognized approximately $27,610 of income tax expense, net of foreign tax
credits, in its consolidated statement of operations for the Year ended December 31, 2017. In accordance with
SAB 118 the Company finalized the provisional amounts it previously recorded for the Transition Tax during the
year ended December 31, 2018. As a result of finalizing the Transition Tax amount the Company recorded an
additional tax benefit, net of foreign tax credits, of $4,624 in its consolidated statement of operations for the year
ended December 31, 2018. The reduction in Transition Tax was based upon a final amount of undistributed
foreign earnings of approximately $521,000.
No provision has been made for the deferred taxes related to certain outside basis differences in the
Company’s non-US subsidiaries. The Company continues to assert indefinite reinvestment in these outside basis
differences generated through December 31, 2018. Determination of the amount of unrecognized deferred tax
liability on outside basis differences is not practicable because the amount of such liability, if any, is dependent
upon circumstances existing and tax planning choices available when a transaction using outside basis occurs.
The Company’s Israeli subsidiaries have elected to be treated under a preferential Israeli tax regime under
which their taxable income is taxed at reduced rates. These reduced rates range anywhere between 7.5% and
16%. One of the Company’s Israeli subsidiaries effectively settled an examination for tax years 2012 and 2013
during the quarter ended June 30, 2017.
15) Stockholders’ Equity
Stock Repurchase Program
On July 25, 2011, the Company’s Board of Directors approved a share repurchase program for the
repurchase of up to an aggregate of $200,000 of its outstanding common stock from time to time in open market
purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any
shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions
and business development activities, including, but not limited to, merger and acquisition opportunities. These
repurchases may be commenced, suspended or discontinued at any time without prior notice.
107
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
During 2018, the Company repurchased approximately 818,000 shares of its common stock for $75,000 at
an average price of $91.67 per share. During 2017, there were no repurchases of common stock. During 2016, the
Company repurchased 44,798 shares of its common stock for $1,545 at an average price of $34.50 per share.
The Company has repurchased approximately 2,588,000 shares of common stock for approximately
$127,000 pursuant to the program since its adoption.
Cash Dividends
Holders of the Company’s common stock are entitled to receive dividends when and if they are declared by
the Company’s Board of Directors. The Company’s Board of Directors declared a cash dividend of $0.18 per
share during the first quarter of 2018 and $0.20 per share during the second, third and fourth quarters of 2018,
which totaled $42,405. The Company’s Board of Directors declared a cash dividend of $0.175 per share during
the first, second, and third quarters of 2017, and $0.18 per share during the fourth quarter of 2017, which totaled
$38,178.
Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject
to the final determination of the Company’s Board of Directors.
On February 11, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per
share to be paid on March 8, 2019 to Stockholders of record as of February 25, 2019.
16) Stock-Based Compensation
Employee Stock Purchase Plans
The 2014 ESPP Plan was adopted by the Board of Directors on February 10, 2014 and approved by the
Company’s stockholders on May 5, 2014. The 2014 ESPP Plan authorizes the issuance of up to an aggregate of
2,500,000 shares of common stock to participating employees. Offerings under the 2014 ESPP Plan commence
on June 1 and December 1 and terminate, respectively, on November 30 and May 31. Historically, under the
2014 ESPP Plan, eligible employees could purchase shares of common stock through payroll deductions of up to
10% of their compensation or up to an annual maximum amount of $21,250. The price at which an employee’s
purchase option was exercised for each offering period was the lower of (1) 85% of the closing price of the
common stock on the Nasdaq Global Select Market on the day that each offering commences, or (2) 85% of the
closing price on the day that the offering terminated. On January 31, 2017, the Compensation Committee of the
Board of Directors approved an increase in the exercise price to the lower of (1) 90% of the closing price of the
common stock on the Nasdaq Global Select Market on the day that each offering commences, or (2) 90% of the
closing price on the day that each offering terminates. The increase in the exercise price became effective for the
Offering commencing on June 1, 2017. As a result of this change, the annual maximum payroll deduction was
increased from $21,250 to $22,500. During 2018, 2017, and 2016, the Company issued 105,672, 105,506, and
139,079 shares, respectively, of common stock to employees who participated in the 2014 ESPP Plan at exercise
prices of $84.11 and $70.61 per share in 2018, $46.37 and $74.12 per share in 2017, and $31.40 and $35.16 per
share in 2016. As of December 31, 2018, there were 1,926,731 shares reserved for future issuance under the 2014
ESPP Plan.
Equity Incentive Plans
The Company has granted RSUs to employees and directors under the 2014 Stock Incentive Plan (the “2014
Plan”). The 2014 Plan is administered by the Compensation Committee of the Company’s Board of Directors.
108
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The 2014 Plan is intended to attract and retain employees and directors, and to provide an incentive for these
individuals to assist the Company to achieve long-range performance goals and to enable these individuals to
participate in the long-term growth of the Company.
The 2014 Plan was adopted by the Board of Directors on February 10, 2014 and was approved by the
Company’s stockholders on May 5, 2014. Up to 18,000,000 shares of common stock (subject to adjustment in the
event of stock splits and other similar events) may be issued pursuant to awards granted under the 2014 Plan. The
Company may grant options, RSUs, restricted stock, stock appreciation rights (“SARs”) and other stock-based
awards to employees, officers, directors, consultants and advisors under the 2014 Plan. Any full-value awards
granted under the 2014 Plan will be counted against the shares reserved for issuance under the 2014 Plan as 2.4
shares for each share of common stock subject to such award and any award granted under the 2014 Plan that is
not a full-value award (including, without limitation, any option or SAR) will be counted against the shares
reserved for issuance under the plan as one share for each one share of common stock subject to such award.
“Full-value award” means any RSU, or other stock-based award with a per share price or per unit purchase price
lower than 100% of fair market value on the date of grant. To the extent a share that was subject to an award that
counted as one share is returned to the 2014 Plan, each applicable share reserve will be credited with one share.
To the extent that a share that was subject to an award that counts as 2.4 shares is returned to the 2014 Plan, each
applicable share reserve will be credited with 2.4 shares. As of December 31, 2018, there were 14,079,849 shares
reserved for future issuance under the 2014 Plan.
The Company’s 2004 Stock Incentive Plan (the “2004 Plan”) expired in March 2014 and no further awards
may be granted under the 2004 Plan, although there are still outstanding RSUs which may vest under the 2004
Plan. The 2004 Plan, the 1995 Plan, the 1997 Director Stock Plan and the 2014 Plan are referred to herein as the
“Plans.”
RSUs granted to employees in 2018, 2017 and 2016 generally vest 33% per year on the anniversary of the
date of grant. RSUs granted to certain employees who are at least 60 years old and have a minimum of 10 Years
of Service (as defined in the applicable RSU agreement) are expensed immediately. RSUs granted to directors
generally vest at the earliest of (1) one day prior to the next annual meeting, (2) 13 months from date of grant, or
(3) the effective date of a change in control of the Company. Certain RSUs are subject to performance conditions
(“performance shares”) under the Company’s 2004 Plan and 2014 Plan. Such performance shares are available,
subject to time-based vesting conditions, if, and to the extent that, financial or operational performance criteria
for the applicable period are achieved. Accordingly, the number of performance shares earned will vary based on
the level of achievement of financial or operational performance objectives for the applicable period.
In connection with the completion of the Newport Merger, the Company assumed:
• all RSUs granted under any Newport equity plan that were outstanding immediately prior to the effective
time of the Newport Merger, and as to which shares of Newport common stock were not fully distributed
in connection with the closing of the Newport Merger, and
• all stock appreciation rights granted under any Newport equity plan, whether vested or unvested, that
were outstanding immediately prior to the effective time of the Newport Merger.
As of the effective time of the Newport Merger, based on a formula provided in the Merger Agreement,
(a) the Newport RSUs were converted automatically into RSUs with respect to 360,674 shares of the Company’s
common stock (the “Assumed RSUs”), and (b) the Newport stock appreciation rights were converted
automatically into SARs with respect to 899,851 shares of the Company’s common stock (the “Assumed
SARs”).
109
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Included in the total number of Assumed RSUs were 36,599 RSUs for outside directors that were part of the
Newport Deferred Compensation Plan (the “DC Plan”), from which 19,137 underlying shares were released in
May 2016, 5,515 shares were released in May 2017 and 5,561 shares were released in May 2018. As of
December 31, 2018, 6,694 Company RSUs remained outstanding under the DC Plan, and an additional 66 shares
of the Company’s common stock were added to the DC Plan due to reinvested dividends. As of December 31,
2017, 12,134 Company RSUs remained outstanding under the DC Plan, and an additional 122 shares of the
Company’s common stock were added to the DC Plan due to reinvested dividends. As of December 31, 2016,
17,462 Company RSUs remained outstanding under the DC Plan, and an additional 187 shares of the Company’s
common stock were added to the DC Plan due to reinvested dividends. These Assumed RSUs will not become
issued shares until their respective release dates.
The shares of the Company’s common stock that are subject to the Assumed SARs and the Assumed RSUs
are issuable pursuant to the Company’s 2014 Plan.
The 1,260,525 shares of the Company’s common stock that are issuable pursuant to the Assumed RSUs and
the Assumed SARs under the 2014 Plan were registered under the Securities Act of 1933, as amended
(“Securities Act”), on a registration statement on Form S-8. These shares are in addition to the 18,000,000 shares
of the Company’s common stock reserved for issuance under the 2014 Plan and previously registered under the
Securities Act on a registration statement on Form S-8.
The following table presents the activity for RSUs under the Plans:
Year Ended December 31, 2018
Non-vested RSUs
Weighted Average
Grant Date Fair
Value
Non-vested RSUs — beginning of period . . . . . . . . . . . . . . . . . . .
Accrued dividend shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
943,379
66
266,411
(490,453)
(72,009)
Non-vested RSUs — end of period . . . . . . . . . . . . . . . . . . . . . . . .
647,394
$ 47.57
$ 94.11
$111.64
$ 44.70
$ 66.22
$ 74.04
The following table presents the activity for SARs under the Plans:
SARs — beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
282,907
(103,419)
(1,950)
SARs Outstanding — end of period . . . . . . . . . . . . . . . . . . . . . . . .
177,538
$28.62
$28.78
$29.00
$28.52
Year Ended December 31, 2018
Non-vested SARs
Weighted Average
Base Value
110
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
At December 31, 2018, the Company’s outstanding and exercisable SARs, the weighted-average base value,
the weighted average remaining contractual life and the aggregate intrinsic value thereof, were as follows:
Number
of Shares
Weighted Average
Base Value
Weighted Average
Remaining
Contractual Life
(years)
Aggregate Intrinsic
Value
SARs outstanding and exercisable . .
177,538
$28.52
2.4
$6,408
The Company settles employee RSU vesting and SARs exercises with newly issued shares of the
Company’s common stock.
Stock-Based Compensation Expense
The Company recognized the full impact of its share-based payment plans in the consolidated statements of
operations and comprehensive income for the years 2018, 2017 and 2016. As of December 31, 2018, 2017, and
2016, the Company capitalized $471 of such cost on its consolidated balance sheet. The following table reflects
the effect of recording stock-based compensation for the years 2018, 2017 and 2016:
Years Ended December 31,
2018
2017
2016
Stock-based compensation expense by type of award:
RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Windfall tax effect on stock-based compensation . . . . . . . . . . . . . .
$24,883
98
2,281
$27,262
(8,277)
$ 22,428
529
1,421
24,378
(11,071)
$23,302
700
1,226
25,228
—
Net effect on net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,985
$ 13,307
$25,228
Effect on net earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.35
0.35
$
$
0.25
0.24
$
$
0.47
0.47
The pre-tax effect within the consolidated statements of operations and comprehensive income of recording
stock-based compensation for the years 2018, 2017 and 2016 was as follows:
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expense . . . . . . . . . . . . . . . . . . .
$ 3,516
2,750
20,996
$ 3,894
2,816
17,668
$ 2,997
2,529
19,702
Total pre-tax stock-based compensation expense . . . . . . . . . . . . .
$27,262
$24,378
$25,228
Years Ended December 31,
2018
2017
2016
Valuation Assumptions
The Company determines the fair value of RSUs based on the closing market price of the Company’s
common stock on the date of the award, and estimates the fair value of employee stock purchase plan rights using
111
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
the Black-Scholes valuation model. Such values are recognized as expense on a straight-line basis for time-based
awards and using the accelerated graded vesting method for performance-based awards, both over the requisite
service periods, net of estimated forfeitures except for retirement eligible employees in which the Company
expenses the fair value of the grant in the period the grant is issued. The estimation of stock-based awards that
will ultimately vest requires significant judgment. The Company considers many factors when estimating
expected forfeitures, including types of awards and historical experience. Actual results, and future changes in
estimates, may differ substantially from the Company’s current estimates.
The weighted average fair value per share of employee stock purchase plan rights granted in 2018, 2017 and
2016 was $21.74, $13.14, and $8.52, respectively. The fair value of the employees’ purchase plan rights was
estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
Years Ended December 31,
2018
2017
2016
Employee stock purchase plan rights:
Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected annual dividends per share . . . . . . . . . . . . . . . . . . . . . . .
0.5
1.8%
38.6%
$0.76
0.5
0.8%
26.5%
$0.69
0.5
0.5%
25.4%
$0.68
Expected volatilities for 2018, 2017 and 2016 are based on a combination of implied and historical
volatilities of the Company’s common stock; the expected life represents the weighted average period of time
that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s
historical exercise patterns; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant for periods corresponding with the expected life of the option.
The total intrinsic value of SARs exercised and the total fair value of RSUs vested during 2018, 2017 and
2016 was approximately $61,626, $60,302 and $18,844,
the
unrecognized compensation cost related to RSUs and SARs was approximately $19,039 and will be recognized
over and estimated weighted average amortization period of 0.91 years.
respectively. As of December 31, 2018,
17) Employee Benefit Plans
The Company has a 401(k) profit-sharing plan for U.S. employees meeting certain requirements in which
eligible employees may contribute between 1% and 50% of their annual compensation to this plan, and, with
respect to employees who are age 50 and older, certain specified additional amounts, limited by an annual
maximum amount determined by the Internal Revenue Service. The Company, at its discretion, makes certain
matching contributions to these plans based on participating employees’ contributions to the plans and their total
compensation. The Company’s contributions were $6,093, $5,651 and $6,524 for 2018, 2017 and 2016,
respectively.
The Company maintains a bonus plan which provides cash awards to key employees, at the discretion of the
compensation committee of the Board of Directors, based upon operating results and employee performance. In
addition, the Company’s foreign locations also have various bonus plans based upon local operating results and
employee performance. The total bonus expense was $38,254, $46,783 and $28,097 for 2018, 2017 and 2016,
respectively.
The Company provides supplemental retirement benefits for one of its current executive officers and a
number of former retired executives. The total cost of these benefits was $4,609, $3,478 and $1,805 for 2018,
112
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
2017 and 2016, respectively. The accumulated benefit obligation was $20,644 and $15,929 at December 31, 2018
and 2017, respectively, which was included in other long-term liabilities.
The Company also has a deferred compensation plan for certain Light & Motion segment executives.
Defined Benefit Pension Plans
As a result of the Newport Merger, the Company assumed all assets and liabilities of Newport’s defined
benefit pension plans, which cover substantially all of its full-time employees in France, Germany, Israel and
Japan. In addition, there are certain pension assets and liabilities relating to former employees in the United
Kingdom. The German plan is unfunded, as permitted under the plan and applicable laws.
For financial reporting purposes, the calculation of net periodic pension costs was based upon a number of
actuarial assumptions including a discount rate for plan obligations, an assumed rate of return on pension plan
assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions
were based upon management’s judgment, considering all known trends and uncertainties. Actual results that
differ from these assumptions would impact future expense recognition and the cash funding requirements of the
Company’s pension plans.
The net periodic benefit costs for the plans included the following components:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost on projected benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2018
2017
$ 657
433
(115)
127
$1,102
$ 708
458
(116)
400
$1,450
113
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The changes in projected benefit obligations and plan assets, as well as the ending balance sheet amounts for
the Company’s defined benefit plans, were as follows:
Year Ended December 31,
2018
2017
Change in projected benefit obligations:
Projected benefit obligations, beginning of year . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25,736
657
433
(98)
(895)
(948)
$ 23,450
708
458
(312)
(1,271)
2,703
Projected benefit obligations, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 24,885
$ 25,736
Change in plan assets:
Fair value of plan assets, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .
Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) gain on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,152
324
(56)
(369)
(229)
$ 7,672
324
177
(722)
701
Fair value of plan assets, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,822
8,152
Net underfunded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(17,063)
$(17,584)
Changes in plan assets and benefit obligations recognized in other comprehensive income included the
following components:
Amounts recognized in accumulated comprehensive income:
Accumulated net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2018
2017
$235
(86)
$149
$235
88
$323
As of December 31, 2018, the estimated benefit payments for the Company’s defined benefit plans for the
next 10 years were as follows:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024-2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated benefit
payments
$ 1,046
$ 1,252
$ 1,210
$ 1,312
$ 1,129
$ 7,313
$13,262
114
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The Company expects to contribute $1,660 to the plans during 2019.
The weighted-average rates used to determine the net periodic benefit costs were as follows:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of increase in salary levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term rate of return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.9%
2.1%
1.9%
December 31, 2018
In determining the expected long-term rate of return on plan assets, the Company considers the relative
weighting of plan assets, the historical performance of total plan assets and individual asset classes, and
economic and other indicators of future performance.
Plan assets were held in the following categories as a percentage of total plan assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2018
Amount
$ 193
4,855
1,342
1,432
$7,822
Percentage
2.00%
62
17
19
100%
In general,
the Company’s asset management objectives include maintaining an adequate level of
diversification to reduce interest rate and market risk while providing adequate liquidity to meet immediate and
future benefit payment requirements. In Japan, assets are primarily invested in pooled funds of insurance
companies. The expected long-term rate of return on these assets is approximately 1.5%, which is based on the
general yield environment for high quality instruments in Japan. The United Kingdom pension plan invests in a
combination of equity and bond funds. The allocation mix is designed to minimize risk while providing a rate of
return that will provide asset growth which will be sufficient to cover expected liabilities. The expected long-
term rate of return on these assets is approximately 2.7%, which is a combination of long dated government and
corporate bond yields for the bond funds, and long dated government and corporate bond yields with an
allowance for out-performance for equity funds. In France, assets are invested in group insurance contracts and
the expected long-term rate of return on these assets is approximately 1.6%, which is based on the expected
return on the underlying assets.
The Company’s Israeli plans account for the deferred vested benefits using the shut-down method of
accounting, which resulted in assets of $14,409 and vested benefit obligations of $17,552, as of December 31,
2018 and assets of $15,048 and vested benefit obligations of $17,932, as of December 31, 2017. Under the shut-
down method, the liability is calculated as if it were payable as of the balance sheet date, on an undiscounted
basis.
Other Pension-Related Assets
As of December 31, 2018 and 2017, the Company had assets with an aggregate market value of $5,890 and
$6,255, respectively, which it has set aside in connection with its German pension plans. These assets are
invested in group insurance contracts through the insurance companies administering these plans, in accordance
115
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
with applicable pension laws. The Germany contracts have a guaranteed minimum rate of return ranging from
2.25% to 4.25%, depending on the contract. Because the assets were not separate legal assets of the pension plan,
they were not included in the Company’s plan assets shown above. However, the Company has designated such
assets to pay pension benefits. Such assets are included in other assets in the accompanying consolidated balance
sheet.
18) Net Income Per Share
The following is a reconciliation of basic to diluted net income per share:
Numerator:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
392,896 $
339,132 $
104,809
Denominator:
Years Ended December 31,
2018
2017
2016
Shares used in net income per common share — basic . . . . . $54,406,000 54,137,000 53,472,000
579,000
Effect of dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . .
586,000
937,000
Shares used in net income per common share — diluted . . . . 54,992,000 55,074,000 54,051,000
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7.22 $
7.14 $
6.26 $
6.16 $
1.96
1.94
Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding during the period. The computation of diluted EPS is
similar to the computation of basic EPS except that the denominator is increased to include the number of
additional common shares that would have been outstanding (using the treasury stock method) if securities
containing potentially dilutive common shares (RSUs and SARs) had been converted to such common shares,
and if such assumed conversion is dilutive.
In 2018, 2017 and 2016, the potential dilutive effect of 79,500, 404 and 508 weighted average shares,
respectively, of RSUs, were excluded from the computation of diluted weighted-average shares outstanding, as
the shares would have had an anti-dilutive effect on EPS, and would thus need to be excluded from the
computation of diluted weighted-average shares.
19) Business Segment, Geographic Area, Product and Significant Customer Information
The Company 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 its customers. The Company’s products are derived from its 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,
RF & DC power, reactive gas generation, vacuum technology,
lasers, photonics, sub-micron positioning,
vibration control, and optics. The Company also provides services related to the maintenance and repair of its
products, installation services and training. The Company’s primary served markets are manufacturers of capital
equipment for semiconductor manufacturing, industrial technologies, life and health sciences, as well as research
and defense.
116
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The Company’s Chief Operating Decision Maker (“CODM”) utilizes financial
information to make
decisions about allocating resources and assessing performance for the entire Company, which is used in the
decision making process to assess performance. Based upon the information provided to the CODM, the
Company has determined it has two reportable segments. The Company’s two reportable segments are:
Vacuum & Analysis and Light & Motion.
The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which
are derived from the Company’s 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, RF & DC power, reactive gas generation and vacuum technology.
The Light & Motion segment provides a broad range of instruments, components and subsystems which are
derived from the Company’s core competencies in lasers, photonics, sub-micron positioning, vibration control,
and optics.
The Company derives its segment results directly from the manner in which results are reported in its
management reporting system. The accounting policies that the Company uses to derive reportable segment
results are substantially the same as those used for external reporting purposes. The Company does not disclose
external or intersegment revenues separately by reportable segment as this information is not presented to the
CODM for decision making purposes.
The following are net revenues by reportable segment:
Vacuum & Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Light & Motion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,260,862
814,246
$1,207,457
708,520
$ 872,291
423,051
$2,075,108
$1,915,977
$1,295,342
Years Ended December 31,
2018
2017
2016
117
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The following is a reconciliation of segment gross profit to consolidated net income:
Years Ended December 31,
2018
2017
2016
Gross profit by reportable segment:
Vacuum & Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Light & Motion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$577,552
401,924
$551,078
340,373
$388,220
177,399
Total gross profit by reportable segment . . . . . . . . . . . . . . . . .
979,476
891,451
565,619
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees and expenses related to repricing of term loan . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135,720
298,118
3,113
3,567
1,000
—
378
43,521
494,059
5,775
16,942
—
1,942
480,950
88,054
132,555
290,056
5,332
3,920
—
6,719
492
45,743
406,634
3,021
30,990
74,856
5,896
447,625
108,493
110,579
227,932
27,279
642
—
5,000
1,239
35,681
157,267
2,560
30,611
—
1,239
127,977
23,168
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$392,896
$339,132
$104,809
The following is capital expenditures by reportable segment for the years ended December 31, 2018, 2017
and 2016:
December 31, 2018:
Vacuum & Analysis
Light & Motion
Total
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . .
$40,144
$22,797
$62,941
December 31, 2017:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . .
$17,111
$14,176
$31,287
December 31, 2016:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . .
$11,732
$ 7,391
$19,123
118
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The following is depreciation and amortization of intangible assets by reportable segment for the years
ended December 31, 2018, 2017 and 2016:
Vacuum & Analysis
Light & Motion
Total
December 31, 2018:
Depreciation and amortization . . . . . . . . . . . . . . . .
$20,808
$59,045
$79,853
December 31, 2017:
Depreciation and amortization . . . . . . . . . . . . . . . .
$20,297
$62,259
$82,556
December 31, 2016:
Depreciation and amortization . . . . . . . . . . . . . . . .
$20,820
$45,106
$65,926
Total income tax expense is not presented by reportable segment because the necessary information is not
available or used by the CODM.
The following are segment assets by reportable segment:
Vacuum & Analysis Light & Motion
Corporate,
Eliminations and Other
Total
December 31, 2018:
Segment assets:
Accounts receivable . . . . . .
Inventory . . . . . . . . . . . . . .
Total segment assets . . . . . . . .
$171,604
222,965
$394,569
$140,658
161,658
$302,316
$(16,808)
66
$(16,742)
$295,454
384,689
$680,143
Vacuum & Analysis Light & Motion
Corporate,
Eliminations and Other
Total
December 31, 2017:
Segment assets:
Accounts receivable . . . . . .
Inventory . . . . . . . . . . . . . .
Total segment assets . . . . . . . .
$201,318
197,831
$399,149
$119,934
141,250
$261,184
$(20,944)
—
$(20,944)
$300,308
339,081
$639,389
A reconciliation of segment assets to consolidated total assets is as follows:
Years Ended December 31,
2018
2017
Total segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, restricted cash and investments . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 680,143
728,461
65,790
194,367
906,803
38,682
$ 639,389
553,976
53,543
171,782
957,445
37,883
Consolidated total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,614,246
$2,414,018
119
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Information about the Company’s operations in different geographic regions is presented in the tables
below. Net revenues to unaffiliated customers are based on the location in which the sale originated. Transfers
between geographic areas are at negotiated transfer prices and have been eliminated from consolidated net
revenues.
Net revenues:
Years Ended December 31,
2018
2017
2016
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia (excluding South Korea and Japan) . . . . . . . . . . . .
$1,022,660
203,567
193,264
244,009
411,608
$ 955,284
212,763
167,318
209,912
370,700
$ 675,601
112,432
96,954
156,365
253,990
Long-lived assets:(1)
$2,075,108
$1,915,977
$1,295,342
Years Ended December 31,
2018
2017
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$146,687
26,794
50,572
$124,689
28,820
49,645
$224,053
$203,154
(1) Long-lived assets include property, plant and equipment, net and certain other assets, and exclude goodwill
and intangibles and long-term tax-related accounts.
Goodwill associated with each of our reportable segments is as follows:
Reportable segment:
Vacuum & Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Light & Motion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$197,126
389,870
$197,617
393,430
Total goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$586,996
$591,047
Years Ended December 31,
2018
2017
120
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Worldwide Product Information
Because the reportable segment information above does not reflect worldwide sales of the Company’s
products, the Company groups its products into six groups of similar products based upon the similarity of
product function. Worldwide net revenue for each group of products is as follows:
Years Ended December 31,
2018
2017
2016
Analytical and Control Solutions Products . . . . . . . . . . . . .
Power, Plasma and Reactive Gas Solutions Products . . . . .
Vacuum Solutions Products . . . . . . . . . . . . . . . . . . . . . . . .
Laser Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Optics Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Photonics Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 116,183
610,111
534,568
274,815
227,577
311,854
$ 131,376
564,343
511,738
225,168
203,775
279,577
$ 115,758
367,665
388,868
124,432
124,218
174,401
$2,075,108
$1,915,977
$1,295,342
Sales of Analytical and Control Solutions Products; Power, Plasma and Reactive Gas Solutions Products;
and Vacuum Solutions Products are included in the Company’s Vacuum & Analysis segment. Sales of Laser
Products; Optics Products; and Photonics Products are included in the Light & Motion segment.
Major Customers
The Company had two customers with net revenues greater than 10% of total net revenues in the periods
shown as follows:
Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lam Research Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
11.7%
10.8%
2017
12.7%
11.7%
2016
13.6%
11.2%
Net revenues for each of our reportable segments include revenues from each of the two customers, which
represent net revenues greater than 10% of total net revenues.
20) Restructurings
During 2018, the Company recorded restructuring charges of $3,567, primarily related to severance costs
related to a worldwide reduction in workforce including severance costs related to transferring a portion of our
shared accounting functions in the United States to a third party, as well as the consolidation of certain shared
accounting functions in Asia.
During 2017, the Company recorded restructuring charges of $3,920. The restructuring charges were
primarily severance and facility costs related to the consolidation of two manufacturing plants, a restructuring of
one of our international facilities and the consolidation of sales offices.
121
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
The activity related to the Company’s restructuring accrual is shown below:
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments and adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,244
3,567
(4,179)
$
540
3,920
(1,216)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,632
$ 3,244
2018
2017
21) Commitments and Contingencies
Newport Litigation
In March 2016, two putative class actions lawsuit captioned Dixon Chung v. Newport Corp., et al., Case No.
A-16-733154-C and Hubert C. Pincon v. Newport Corp., et al., Case No. A-16-734039-B were filed in the
District Court, Clark County, Nevada on behalf of a putative class of stockholders of Newport for claims related
to the Merger Agreement between the Company, Newport, and Merger Sub. The lawsuits named as defendants
the Company, Newport, Merger Sub, and certain then current and former members of Newport’s board of
directors. Both complaints alleged that Newport directors breached their fiduciary duties to Newport’s
stockholders by agreeing to sell Newport through an inadequate and unfair process, which led to inadequate and
unfair consideration, by agreeing to unfair deal protection devices and by omitting material information from the
proxy statement. The complaints also alleged that the Company, Newport, and Merger Sub aided and abetted the
directors’ alleged breaches of their fiduciary duties. The complaints sought injunctive relief, including to enjoin
or rescind the Merger Agreement, and an award of attorneys’ and other fees and costs, among other relief. On
April 14, 2016, the Court consolidated the actions.
On October 19, 2016, plaintiffs in the consolidated action filed an amended complaint captioned In re
Newport Corporation Shareholder Litigation, Case No. A-16-733154-B, in the District Court, Clark County,
Nevada, on behalf of a putative class of Newport’s stockholders for claims related to the Merger Agreement. The
amended complaint contained substantially similar allegations related to Newport’s former board of directors’
alleged breaches of their fiduciary duties to Newport’s stockholders. The amended complaint sought monetary
damages, including pre- and post-judgment interest. On June 22, 2017, the Court granted Defendants’ motion to
dismiss and dismissed the amended complaint against all defendants but granted plaintiffs leave to amend.
On July 27, 2017, plaintiffs filed a second amended complaint containing substantially similar allegations
but naming only Newport’s former directors as defendants. On August 8, 2017, the Court dismissed the
Company and Newport from the action. The second amended complaint seeks monetary damages, including pre-
and post-judgment interest. The Court granted a motion for class certification on September 27, 2018, appointing
Mr. Pincon and Locals 302 and 612 of the International Union of Operating Engineers—Employers Construction
Industry Retirement Trust as class representatives. On June 11, 2018, plaintiff Dixon Chung was voluntarily
dismissed from the litigation. Discovery is ongoing in this action.
ESI Litigation
On November 29, 2018, a complaint captioned Brian Morris et. al. v. Electro Scientific Industries, Inc. et al.
was filed in the U.S. District Court for the District of Oregon by alleged former stockholders of ESI in
connection with the acquisition of ESI by the Company. The complaint named the Company’s subsidiary, ESI,
and the former members of ESI’s board of directors as defendants. Five additional complaints were subsequently
122
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
filed, two in the U.S. District Court for the District of Oregon and three in the Multnomah County Circuit Court
in the State of Oregon. The cases filed in the U.S. District Court were dated December 6, 2018 and December 12,
2018 and captioned Melvyn Klein et. al. v. Electro Scientific Industries, Inc. et al. and Donald Mager et. al. v.
Electro Scientific Industries, Inc. et al., respectively. The complaints filed in Multnomah County Circuit Court
were dated December 5, 2018, December 5, 2018 and December 13, 2018 and captioned Michael Kent et. al v.
Electro Scientific Industries, Inc. et al., Christopher Stanley et. al v. Electro Scientific Industries, Inc. et al. and
Eduardo Colmenares et. al. v. Electro Scientific Industries, Inc., MKS Instruments, Inc., et al., respectively
(collectively with Brian Morris et. al. v. Electro Scientific Industries, Inc. et. al., the “Lawsuits”). On February
16, 2019, the parties came to an agreement on a settlement in principle that would resolve the Lawsuits, which is
subject to the execution of a settlement agreement and dismissal of the Lawsuits with prejudice.
These lawsuits are purported class actions brought on behalf of former ESI stockholders, asserting various
claims against the former members of the ESI board of directors, ESI, MKS, and MKS’ merger subsidiary,
including breach of fiduciary duty and aiding and abetting the breach of fiduciary duty. The lawsuits allege that
the consideration paid to the ESI shareholders did not appropriately value ESI, and that ESI’s merger related
disclosures failed to disclose certain material information regarding the merger. These complaints purport to seek
unspecified damages.
The Company believes that the claims in these complaints are without merit and intends to vigorously
defend this litigation. ESI provided supplemental merger related disclosures to eliminate the burden and expense
of litigation and to avoid any possible disruption to the merger that could result from further litigation.
The Company is subject to various legal proceedings and claims, which have arisen in the ordinary course
of business. In the opinion of management, the ultimate disposition of these matters will not have a material
adverse effect on our results of operations, financial condition or cash flows.
The Company leases certain of its facilities and machinery and equipment under operating leases expiring in
various years through 2026. Generally, the facility leases require the Company to pay maintenance, insurance
and real estate taxes. Rental expense under operating leases totaled $20,912, $19,693 and $16,253 for 2018, 2017
and 2016, respectively.
Minimum lease payments under operating leases are as follows:
Year Ending December 31,
Operating Leases
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,106
$17,142
$10,325
$ 5,573
$ 4,410
$ 8,739
$66,295
As of December 31, 2018, the Company has entered into purchase commitments for certain inventory
components and other equipment and services used in its normal operations. The majority of these purchase
commitments covered by these arrangements are for periods of less than one year and aggregate to approximately
$254,069.
To the extent permitted by Massachusetts law, the Company’s Restated Articles of Organization, as
amended, require the Company to indemnify any of its current or former officers or directors or any person who
has served or is serving in any capacity with respect to any of the Company’s employee benefit plans. The
123
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
Company believes that the estimated exposure for these indemnification obligations is currently not material.
Accordingly, the Company has no material liabilities recorded for these requirements as of December 31, 2018.
The Company also enters into agreements in the ordinary course of business which include indemnification
provisions. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the
indemnified party, generally its customers, for losses suffered or incurred by the indemnified party in connection
with certain patent or other intellectual property infringement claims, and, in some instances, other claims, by
any third party with respect to the Company’s products. The term of these indemnification obligations is
generally perpetual after execution of the agreement. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is,
in some instances, not
contractually limited. The Company has never incurred costs to defend lawsuits or settle claims related to these
indemnification obligations. As a result, the Company believes the estimated fair value of these obligations is
minimal. Accordingly, the Company has no liabilities recorded for these obligations as of December 31, 2018.
As part of past acquisitions and divestitures of businesses or assets, the Company has provided a variety of
indemnifications to the sellers and purchasers for certain events or occurrences that took place prior to the date of
the acquisition or divestiture. Typically, certain of the indemnifications expire after a defined period of time
following the transaction, but certain indemnifications may survive indefinitely. The maximum potential amount
of future payments the Company could be required to make for such obligations is undeterminable at this time.
Other than obligations recorded as liabilities at the time of the acquisitions, historically the Company has not
made significant payments for these indemnifications. Accordingly, no material liabilities have been recorded for
these obligations.
In conjunction with certain asset sales, the Company may provide routine indemnifications whose terms
range in duration and often are not explicitly defined. Where appropriate, an obligation for such indemnification
is recorded as a liability. Because the amounts of liability under these types of indemnifications are not explicitly
stated, the overall maximum amount of the obligation under such indemnifications cannot be reasonably
estimated. Other than obligations recorded as liabilities at the time of the asset sale, historically the Company has
not made significant payments for these indemnifications.
22) Subsequent Event
Acquisition of Electro Scientific Industries, Inc (amounts not in thousands, except per share data).
On February 1, 2019, the Company completed its previously announced acquisition of Electro Scientific
Industries, Inc., an Oregon corporation (“ESI”), pursuant to the Agreement and Plan of Merger (the “ESI
Merger”). ESI is an innovator in laser-based manufacturing solutions for micro-machining applications. Micro-
machining applications are used extensively in the manufacture of mobile devices, electronic components, thin
film devices and semiconductor packaging. At the effective time of the ESI Merger and pursuant to the terms and
conditions of the Agreement and Plan of Merger, each share of ESI’s common stock issued and outstanding as of
immediately prior to the effective time of the ESI Merger, was converted into the right to receive $30.00 per
share in cash, without interest and subject to deduction for any required withholding tax. The Company paid to
the former ESI stockholders aggregate consideration of approximately $1 billion, excluding related transaction
fees and expenses. The Company funded the payment of the aggregate consideration with a combination of its
available cash on hand and the proceeds from the term loan facility described below.
The Company was not able to include certain required disclosures in its annual report on Form 10-K for the
year ended December 31, 2018 because the information necessary to complete the preliminary purchase price
allocation related to the acquisition was not yet available.
124
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(in thousands, except share and per share data)
In connection with the completion of the ESI Merger,
the Company entered into an amendment
(“Amendment No. 5”) to the Term Loan Credit agreement with Barclays Bank PLC as administrative agent and
collateral agent,
in the principal amount of
$650.0 million which was used to partially fund the ESI Merger.
tranche B-5 term loan commitment
that provided additional
Also, in connection with the completion of the ESI Merger, the Company terminated its $50.0 million asset-
based credit agreement with Deutsche Bank AG New York Branch as administrative and collateral agent, and the
Company entered into an asset-based credit agreement with Barclays Bank PLC, as administrative agent and
collateral agent, that provides senior secured revolving credit financing of up to $100.0 million, subject to a
borrowing base limitation.
125
MKS Instruments, Inc.
Supplemental Financial Data
2018
Statement of Operations Data
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share:
Quarter Ended
March 31
June 30
Sept. 30
Dec. 31
(Table in thousands, except per share data)
(Unaudited)
$554,275
262,855
131,639
$105,121
$573,140
274,877
151,291
$122,862
$487,152
231,860
117,045
$ 93,277
$460,541
209,884
94,084
$ 71,636
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid per common share . . . . . . . . . . . . . . . . . . . . .
$
$
$
1.93
1.90
0.18
$
$
$
2.25
2.22
0.20
$
$
$
1.71
1.70
0.20
$
$
$
1.33
1.32
0.20
2017
Statement of Operations Data
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share:
$437,153
205,547
83,580
$ 65,060
$480,757
219,583
92,883
$120,440
$486,267
227,995
110,155
$ 75,994
$511,800
238,326
120,016
$ 77,638
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid per common share . . . . . . . . . . . . . . . . . . . . .
$
$
$
1.21
1.18
0.175
$
$
$
2.22
2.19
0.175
$
$
$
1.40
1.38
0.175
$
$
$
1.43
1.41
0.18
126
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2018. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of an issuer that are
designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal
executive and principal financial officers, or persons performing similar functions as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2018, our Chief Executive
Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow
timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under
the Exchange Act as a process designed by, or under the supervision of our Chief Executive Officer and Chief
Financial Officer or persons performing similar functions and effected by our Board of Directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company;
• Provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that our receipts
and expenditures of the Company are being made only in accordance with authorization of our
management and directors of the Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
127
Under the supervision and with the participation of our management including our Chief Executive Officer
and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2018. In making this assessment, we used the criteria set forth in the
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our assessment, our management concluded that, as of December 31, 2018, our
internal control over financial reporting was effective.
Our
internal controls over
reporting as of December 31, 2018 have been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation
report which appears in Item 8 of this Annual Report on Form 10-K.
financial
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during our fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
128
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item will be set forth under the captions “Proposal One — Election of
Directors,” “Directors,” “Corporate Governance,” “Executive Officers,” “Corporate Governance — Code of
Ethics” and “Corporate Governance — Board of Directors Meetings and Committees of the Board of Directors
— Audit Committee” in our definitive proxy statement for the 2019 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year, and is
incorporated herein by reference.
We are also required under Item 405 of Regulation S-K to provide information concerning delinquent filers
of reports under Section 16 of the Securities and Exchange Act of 1934, as amended. This information will be set
forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy
statement for the 2019 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission
no later than 120 days after the end of our fiscal year, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be set forth under the captions “Executive Officers,” “Executive
Compensation — Compensation Discussion and Analysis,” “Corporate Governance — Compensation
and “Director
Committee
Compensation” in our definitive proxy statement for the 2019 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission no later than 120 days after the end of our fiscal year, and is
incorporated herein by reference.
“Compensation Committee Report”
and Insider Participation,”
Interlocks
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by Item 403 of Regulation S-K will be set forth under the caption “Security
Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for the 2018
Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days
after the end of our fiscal year, and is incorporated herein by reference.
The information required by Item 201(d) of Regulation S-K will be set forth under the caption “Equity
Compensation Plan Information” in our definitive proxy statement for the 2019 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year,
and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item will be set forth under the captions “Corporate Governance — Board
Independence” and “Corporate Governance — Transactions with Related Persons” in our definitive proxy
statement for the 2019 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission
no later than 120 days after the end of our fiscal year, and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item will be set forth under the caption “Audit and Financial Accounting
Oversight — Principal Accountant Fees and Services” in our definitive proxy statement for the 2019 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after
the end of our fiscal year, and is incorporated herein by reference.
129
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as a part of this Report:
PART IV
1. Financial Statements. The following Consolidated Financial Statements are included under Item 8
of this Annual Report on Form 10-K.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2018,
2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016 . .
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66
68
69
70
71
72
2. Financial Statement Schedules. The following consolidated financial statement schedule is included
in this Annual Report on Form 10-K:
Schedule II — Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they are either not required or information
is otherwise included.
3. Exhibits. The following exhibits are filed as part of this Annual Report on Form 10-K.
Exhibit
No.
+2.1(1)
+2.2(17)
+3.1(2)
+3.2(3)
+3.3(4)
+3.4(5)
+4.1(6)
+10.1(7)
+10.2(8)
Title
Agreement and Plan of Merger, by and among the Registrant, PSI Equipment, Inc. and Newport
Corporation, dated February 22, 2016
Agreement and Plan of Merger, by and among the Registrant, Merger Sub and Electro Scientific
Industries, Inc., dated October 29, 2018
Restated Articles of Organization of the Registrant
Articles of Amendment to Restated Articles of Organization, as filed with the Secretary of State
of Massachusetts on May 18, 2001
Articles of Amendment to Restated Articles of Organization, as filed with the Secretary of State
of Massachusetts on May 16, 2002
Amended and Restated By-Laws of the Registrant
Specimen certificate representing the Common Stock
Term Loan Credit Agreement, dated April 29, 2016, by and among the Registrant, Barclays Bank
PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto
Amendment No. 1 to Term Loan Credit Agreement, dated as of June 9, 2016, by and among the
Registrant, the other loan parties party thereto, Barclays Bank PLC, as administrative agent and
collateral agent, and each participating lender party thereto
130
Exhibit
No.
+10.3(9)
+10.4(10)
+10.5(18)
+10.6(19)
+10.7(7)
+10.8(19)
Title
Amendment No. 2 to Term Loan Credit Agreement, dated as of December 14, 2016, by and
among the Registrant, the other loan parties party thereto, Barclays Bank PLC, as administrative
agent and collateral agent, and each participating lender party thereto
Amendment No. 3 to Term Loan Credit Agreement, dated as of July 6, 2017, by and among the
Registrant, the other loan parties party thereto, Barclays Bank PLC, as administrative agent and
collateral agent, and each participating lender party thereto
Amendment No. 4 to Term Loan Credit Agreement, dated as of April 11, 2018, by and among
the Registrant, the other loan parties party thereto, Barclays Bank PLC, as administrative agent
and collateral agent, and each participating lender party thereto
Amendment No. 5 to Term Loan Credit Agreement and Amendment to Term Loan Guaranty and
Term Loan Security Agreement, dated as of February 1, 2019, by and among the Registrant, the
other loan parties party thereto, Barclays Bank PLC, as administrative agent and collateral agent,
and each participating lender party thereto
ABL Credit Agreement, dated April 29, 2016, by and among the Registrant, Deutsche Bank AG
New York Branch, as administrative agent and collateral agent, the other borrowers from time to
time party thereto, and the lenders and letters of credit issuers from time to time party thereto
ABL Credit Agreement, dated as of February 1, 2019, by and among the Registrant, Barclays
Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time
party thereto, and the lenders and letters of credit issuers from time to time party thereto
+10.9(5)*
2014 Stock Incentive Plan
+10.10(5)*
2014 Employee Stock Purchase Plan
+10.11(5)*
Form of Restricted Stock Unit Agreement for Non-Employee Directors under the 2014 Stock
Incentive Plan
10.12*
Form of Restricted Stock Unit Agreement for Employees under the 2014 Stock Incentive Plan
+10.13(11)* MKS Instruments, Inc. Management and Key Employee Bonus Plan
+10.14(11)* MKS Instruments, Inc. Light & Motion Division Management and Key Employee Bonus Plan
+10.15(12)*
Employment Agreement, dated as of July 1, 2005, between John Bertucci and the Registrant
+10.16(13)*
Employment Agreement, dated October 22, 2013, between Gerald Colella and the Registrant
+10.17(11)*
+10.18(14)*
Amendment, dated March 27, 2018, to Employment Agreement, dated as of October 22, 2013,
between Gerald Colella and the Registrant
Amendment No. 2, dated October 29, 2018, to Employment Agreement, dated as of October 22,
2013, between Gerald Colella and the Registrant
+10.19(15)*
Newport Corporation’s 2006 Performance-Based Stock Incentive Plan
+10.20(15)*
Form of Stock Appreciation Right Award Agreement under Newport Corporation’s 2006
Performance-Based Stock Incentive Plan
+10.21(15)*
Newport Corporation’s 2011 Stock Incentive Plan
+10.22(15)*
Newport Corporation’s Amended and Restated 2011 Stock Incentive Plan
+10.23(15)*
Form of Restricted Stock Unit Award Agreement (with performance-based vesting) used under
Newport Corporation’s 2011 Stock Incentive Plan and Amended and Restated 2011 Stock
Incentive Plan
+10.24(15)*
Form of Stock Appreciation Right Award Agreement used under Newport Corporation’s 2011
Stock Incentive Plan and the Amended and Restated 2011 Stock Incentive Plan
+10.25(15)*
Form of Indemnification Agreement between Newport Corporation and Robert Phillippy
131
Exhibit
No.
+10.26(15)*
+10.27(15)*
+10.28(15)*
+10.29(15)*
Title
Form of the Registrant’s RSU Assumption Agreement for U.S. Employees Relating to Newport
Corporation’s Amended and Restated 2011 Stock Incentive Plan and 2011 Stock Incentive Plan
Form of the Registrant’s RSU Assumption Agreement for Employees Outside of the United
States Relating to Newport Corporation’s Amended and Restated 2011 Stock Incentive Plan and
2011 Stock Incentive Plan
Form of the Registrant’s SAR Assumption Agreement for U.S. Employees Relating to Newport
Corporation’s Amended and Restated 2011 Stock Incentive Plan, 2011 Stock Incentive Plan and
2006 Performance-Based Stock Incentive Plan
Form of the Registrant’s SAR Assumption Agreement for Employees Outside of the United
States Relating to Newport Corporation’s Amended and Restated 2011 Stock Incentive Plan,
2011 Stock Incentive Plan and 2006 Performance-Based Stock Incentive Plan
+10.30(16)*
Employment Agreement, dated August 1, 2016, between Seth Bagshaw and the Registrant
+10.31(16)*
Employment Agreement, dated August 1, 2016, between John Abrams and the Registrant
+10.32(20)*
Employment Agreement, dated May 9, 2018, between John Lee and the Registrant
+10.33(16)*
Employment Agreement, dated August 1, 2016, between Dennis Werth and Newport
Corporation
+10.34(16)*
Form of Indemnification Agreement between Newport Corporation and Dennis Werth
+10.35(14)*
+10.36(14)*
+10.37(20)*
Amendment No. 1, dated October 29, 2018, to Employment Agreement, dated as of August 1,
2016, by and between the Registrant and Seth Bagshaw
Amendment No. 1, dated October 29, 2018, to Employment Agreement, dated as of May 9,
2018, by and between the Registrant and John Lee
Transition and Retirement Agreement, dated as of May 9, 2018, by and between the Registrant
and John Abrams
+10.38(21)*
Letter Agreement, dated as of June 5, 2018, by and between the Registrant and Dennis Werth
10.39*
10.40*
10.41*
10.42*
10.43*
10.44*
10.45*
10.46*
10.47*
Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan
Form of Restricted Stock Units Award Agreement (with time-based vesting) used under Electro
Scientific Industries, Inc.’s 2004 Stock Incentive Plan for 2016-2017
Form of Restricted Stock Units Award Agreement (with time-based vesting) used under Electro
Scientific Industries, Inc.’s 2004 Stock Incentive Plan for 2018
Form of Restricted Stock Units Award Agreement (with performance-based vesting) used under
Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan for 2016-2017
Form of Restricted Stock Units Award Agreement (with performance-based vesting) used under
Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan for 2018
Form of the Registrant’s RSU Assumption Agreement (with time-based vesting) for U.S.
Employees Relating to Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan
Form of the Registrant’s RSU Assumption Agreement (with time-based vesting) for Employees
Outside of the United States Relating to Electro Scientific Industries, Inc.’s 2004 Stock Incentive
Plan
Form of the Registrant’s RSU Assumption Agreement (with performance-based vesting) for U.S.
Employees Relating to Electro Scientific Industries, Inc.’s 2004 Stock Incentive Plan
Form of the Registrant’s RSU Assumption Agreement (with performance-based vesting) for
Employees Outside of the United States Relating to Electro Scientific Industries, Inc.’s 2004
Stock Incentive Plan
132
Exhibit
No.
21.1
23.1
31.1
31.2
32.1
Subsidiaries of the Registrant
Consent of PricewaterhouseCoopers LLP
Title
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the
Securities Exchange Act of 1934
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the
Securities Exchange Act of 1934
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Calculation Linkbase
101.LAB
XBRL Taxonomy Labels Linkbase Document
101.PRE
XBRL Taxonomy Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
+ Previously filed
* Management contract or compensatory plan arrangement
The following materials from MKS Instruments, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2018, are formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated
Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the
Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and
(v) Notes to the Consolidated Financial Statements.
(1) Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 23, 2016.
(2) Incorporated by reference to the Registration Statement on Form S-4 (File No. 333-49738), filed with the
Securities and Exchange Commission on November 13, 2000.
(3) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2001 (File No. 000-23621), filed with the Securities and Exchange Commission on August 14, 2001.
(4) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2002 (File No. 000-23621), filed with the Securities and Exchange Commission on August 13, 2002.
(5) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-23621), filed with
the Securities and Exchange Commission on May 6, 2014.
(6) Incorporated by reference to the Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on January 28, 1999.
(7) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 29, 2016.
(8) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 9, 2016.
(9) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 14, 2016.
(10) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 6, 2017.
133
(11) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2018.
(12) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 5, 2005.
(13) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 24, 2013.
(14) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 1, 2018.
(15) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2016.
(16) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2016.
(17) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 30, 2018.
(18) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 12, 2018.
(19) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 1, 2019.
(20) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 11, 2018.
(21) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2018.
(b) Exhibits
MKS hereby files as exhibits to our Annual Report on Form 10-K those exhibits listed in Item 15(a)
above.
(c) Financial Statement Schedules
Item 16. Form 10-K Summary
Not applicable.
134
MKS INSTRUMENTS, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Description
Balance at
Beginning
of Year
Acquisition
Beginning
Balance
Additions
Charged to
Costs and
Expenses
Charged
to Other
Accounts
(in thousands)
Deductions &
Write-offs
Balance at
End of Year
Allowance for doubtful accounts:
Years ended December 31,
2018 . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . .
$4,135
$3,909
$1,760
$ —
$ —
$1,292
$1,435
$ 825
$1,109
$ —
$ —
$(66)
$(327)
$(599)
$(186)
$5,243
$4,135
$3,909
Description
Balance at
Beginning
of Year
Acquisition
Beginning
Balance
Additions
Charged to
Costs and
Expenses
Charged
to Other
Accounts
(in thousands)
Deductions &
Write-offs
Balance at
End of Year
Allowance for sales returns:
Years ended December 31,
2018 . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . .
$1,295
$1,138
$ 601
$ —
$ —
$423
$ 124
$ (142)
$2,262
$—
$—
$—
$ (386)
299
$
$(2,148)
$1,033
$1,295
$1,138
Description
Valuation allowance on deferred tax asset:
Years ended December 31,
Balance at
Beginning
of Year
Acquisition
Beginning
Balance
Additions
Charged to
Costs and
Expenses
Charged
to Other
Accounts Deductions
Balance at
End of Year
(in thousands)
2018 . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,629
$12,527
$ 6,127
$ —
$ —
$3,769
$4,825
$1,603
$2,719
$—
$—
$—
$(518)
$(501)
$ (88)
$17,936
$13,629
$12,527
135
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this annual report on Form 10-K for the fiscal year ended December 31, 2018, to be signed on its
behalf by the undersigned, thereunto duly authorized on the 26th day of February 2019.
MKS INSTRUMENTS, INC.
By: /s/ Gerald G. Colella
Gerald G. Colella
Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURES
TITLE
DATE
/s/
John R. Bertucci
John R. Bertucci
/s/ Gerald G. Colella
Gerald G. Colella
/s/ Seth H. Bagshaw
Seth H. Bagshaw
/s/ Rajeev Batra
Rajeev Batra
/s/ Gregory R. Beecher
Gregory R. Beecher
/s/ Richard S. Chute
Richard S. Chute
/s/ Peter R. Hanley
Peter R. Hanley
/s/ Rick D. Hess
Rick D. Hess
Jacqueline F. Moloney
/s/
Jacqueline F. Moloney
/s/ Elizabeth A. Mora
Elizabeth A. Mora
Chairman of the Board of Directors
February 26, 2019
Chief Executive Officer and
Director (Principal Executive
Officer)
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
BOARD OF DIRECTORS
John R. Bertucci
Chairman
MKS Instruments, Inc.
Rajeev “Raj” Batra
President
Digital Factory Division, Siemens Industry, Inc.
Gregory R. Beecher
Vice President and Chief Financial Officer
Teradyne, Inc.
Richard S. Chute, Esq.
Gerald G. Colella
Chief Executive Officer
MKS Instruments, Inc.
Peter R. Hanley
Former President
Novellus Systems, Inc.
Rick D. Hess
Former Executive Vice President
Analog Devices, Inc.
Jacqueline F. Moloney
Chancellor
University of Massachusetts Lowell
Elizabeth A. Mora
Chief Administrative Officer
The Charles Stark Draper Laboratory, Inc.
MANAGEMENT
Gerald G. Colella
Chief Executive Officer
John T.C. Lee
President and
Chief Operating Officer
SHAREHOLDER CONTACTS
Corporate Headquarters
MKS Instruments, Inc.
2 Tech Drive, Suite 201
Andover, MA 01810
Telephone: 978.645.5500
www.mksinst.com
Seth H. Bagshaw
Senior Vice President, Chief Financial Officer
and Treasurer
Outside Counsel
Wilmer Cutler Pickering Hale and Dorr LLP
Boston, MA
Kathleen F. Burke
Senior Vice President, General Counsel
and Assistant Secretary
Independent Auditors
PricewaterhouseCoopers LLP
Boston, MA
John F. Ippolito
Senior Vice President
Strategic Development
Catherine M. Langtry
Senior Vice President
Global Human Resources
Stock Listing
NASDAQ Global Select Market
Symbol: MKSI
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Telephone: 718.921.8200
Fax: 718.765.8717
www.astfinancial.com
Shareholders may also
direct inquiries to:
Seth H. Bagshaw
Senior Vice President, Chief Financial Officer
and Treasurer
MKS Instruments, Inc.
2 Tech Drive, Suite 201
Andover, MA 01810
Telephone: 978.645.5500
www.mksinst.com
Annual Meeting of Shareholders
Wednesday, May 8, 2019, 10:00 a.m.
MKS Instruments, Inc.
2 Tech Drive, Suite 201
Andover, MA 01810
MKS INSTRUMENTS, INC. (NASDAQ: MKSI) 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.
FINANCIAL HIGHLIGHTS
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
------------------------------------------------------------
2018
-----------------
2017
-----------------
2016
-----------------
2015
-----------------
2014
-----------------
Statement of Operations (1)
Net revenues
Gross profit (2)
Income from operations (3)
Net income (4)
Basic net income per share
Diluted net income per share
$ 2,075,108
$ 1,915,977
$ 1,295,342
$ 813,524
$ 780,869
979,476
494,059
392,896
7.22
7.14
891,451
406,634
339,132
6.26
6.16
565,619
157,267
104,809
1.96
1.94
362,872
156,612
122,297
2.30
2.28
337,766
135,142
115,778
2.17
2.16
Cash dividends paid per common share
------------------------------------------------------------
0.78
-----------------
0.71
-----------------
0.68
-----------------
0.68
-----------------
0.66
-----------------
Balance Sheet (1)
Cash and cash equivalents, including restricted cash
$ 644,345
$ 333,887
$ 233,910
$ 227,574
$ 305,437
Short-term investments (5)
Working capital (5)
Total assets
Short-term debt (6)
Long-term debt, net (6)
Other liabilities (7)
73,826
1,200,819
2,614,246
3,986
343,842
133,932
209,434
946,431
189,463
761,469
430,663
848,527
286,795
791,665
2,414,018
2,212,242
1,273,347
1,224,044
2,972
389,993
145,296
10,993
601,229
131,921
—
—
—
—
21,482
38,595
Stockholders’ equity
------------------------------------------------------------
1,873,187
-----------------
1,588,907
-----------------
1,241,792
-----------------
1,160,881
-----------------
1,081,822
-----------------
(1) The Statement of Operations Data and the Balance Sheet Data for 2018, 2017 and 2016 include statement of operations data and assets and liabilities acquired
as a result of the acquisition of Newport Corporation (“Newport”) in April 2016 (the “Newport Merger”).
(2) Gross profit for 2016 includes a $15.1 million charge for the amortization of the inventory step-up to fair value related to the Newport Merger.
(3) Income from operations for 2018 includes $3.6 million of restructuring charges and $3.1 million of acquisition and integration costs, which is primarily comprised of
acquisition costs related to our acquisition of Electro Scientific Industries, Inc., which closed on February 1, 2019. Income from operations for 2017 includes $6.7
million of an asset impairment charge, primarily related to the write-off of goodwill and intangible assets in conjunction with the consolidation of two manufacturing
plants, $5.3 million of acquisition and integration costs from the Newport Merger and $3.9 million of restructuring charges. Income from operations for 2016
includes a $15.1 million charge for the amortization of the inventory step-up to fair value, $27.3 million of acquisition and integration costs from the Newport
Merger and $5.0 million of an asset impairment charge. Income from operations for 2015 includes $2.1 million of restructuring charges. Income from operations
for 2014 includes $2.5 million of restructuring charges.
(4) Net income for 2018 includes an $8.3 million windfall tax benefit on the vesting of stock-based compensation and $5.0 million of accrued taxes on MKS subsidiary
distributions. Net income for 2017 includes charges, net of tax, of $6.7 million of an asset impairment charge, $3.4 million of acquisition and integration costs
and $3.7 million of restructuring charges. Net income for 2017 also includes a gain, net of tax, of $72.0 million related to the sale of a business, a $28.7 million
transition tax on accumulated foreign earnings, a $14.0 million tax accrual on a distribution to a subsidiary, a $24.5 million deferred tax adjustment, which
also includes the reversal of a tax accrual on a French dividend related to the 2017 Tax Cut and Jobs Act, a $11.1 million windfall tax benefit on the vesting of
stock-based compensation and an adjustment, net of tax, of $5.9 million of amortization of debt issuance costs relating to the term loan credit agreement used
to partially finance the Newport Merger. Net income for 2016 includes charges, net of tax, of $9.8 million of amortization of inventory step-up to fair value, $19.0
million of acquisition and integration costs, $5.0 million of asset impairment charges and a $2.0 million withholding tax on dividends. These charges are offset
by a tax benefit of $5.0 million for a legal entity restructuring. Net income for 2015 includes charges, net of tax, of $1.4 million of restructuring costs and also
includes $7.7 million in tax credits for reserve releases related to the settlement of tax audits. Net income for 2014 includes charges, net of tax, of $1.5 million
of restructuring costs and also includes $14.6 million in tax credits for reserve releases related to the settlement of tax audits and the expiration of the statute of
limitations.
(5) Effective December 31, 2015, the Company changed the method of classification of its investments previously classified as long-term investments to short-term
investments within current assets. For the year ended December 31, 2014, short-term investments have been re-classified to include investments with contractual
maturities greater than one year from the date of purchase as management had the ability and intent, if necessary, to liquidate any of its cash equivalents
and investments in order to meet the Company’s liquidity needs in the next twelve months. Accordingly, working capital includes investments with contractual
maturities greater than one year from the date of purchase.
(6) Long-term debt, net includes $343.8 million in 2018, $389.3 million in 2017 and short-term and long-term debt, net includes $6.3 million and $600.7 million,
respectively, in 2016, related to the term loan credit agreement.
(7) Other liabilities include non-current deferred taxes and non-current accrued compensation.
Non-GAAP amounts exclude certain costs, including acquisition and integration costs, acquisition inventory step-up adjustments, expenses related to the sale of a business, excess and obsolete
inventory charges, adjustments for the sale of inventory previously written-down, fees and expenses related to the repricing of a term loan, amortization of debt issuance costs, restructuring costs,
environmental costs, asset impairment charges, gain on the sale of a business, net proceeds from an insurance policy, amortization of intangible assets, windfall tax benefits on stock-based
compensation, withholding taxes on dividends, special tax benefits and charges, tax benefits from legal entity restructurings, effects of US tax reform and the related tax effects of these adjustments.
These Non-GAAP measures are not in accordance with generally accepted accounting principles in the United States of America (“GAAP”). MKS management believes the presentation of these non-
GAAP financial measures is useful to investors for comparing prior periods and analyzing ongoing business trends and operating results.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, are statements that could be deemed to be forward looking statements. These statements are only
predictions based on current assumptions and expectations of our management. Words such as “may,” “will,” “should,” “could,” “would,” “projects,” “intends,” “believes,” “plans,” “anticipates,” “expects,”
“estimates,” “forecasts,” “intends,” “continues” and variations of such words and similar expressions are intended to identify such forward-looking statements. All forward-looking statements are subject
to risks and uncertainties, including those discussed in Part 1, Item 1A, “Risk Factors,” and elsewhere in this Annual Report on Form 10-K. These and other factors could cause actual events or results
to differ materially from those in the forward-looking statements. 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 filing this Annual Report on Form 10-K, except to the extent required by law.
MKS INSTRUMENTS, INC.
2 TECH DRIVE, SUITE 201
ANDOVER, MA 01810
+1 978.645.5500
WWW.MKSINST.COM
ANNUAL REPORT
2018
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