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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission File number 0-23621
MKS Instruments, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Massachusetts
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04-2277512 |
(State or other Jurisdiction of
Incorporation or Organization) |
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(IRS Employer
Identification No.) |
90 Industrial Way, Wilmington, Massachusetts
(Address of Principal Executive Offices) |
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01887
(Zip Code) |
Registrants Telephone Number, including area code:
(978) 284-4000
Securities registered pursuant to Section 12(b) of the
Act:
None.
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, no par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
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 o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
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 registrants
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
Aggregate market value of the voting and non-voting common
equity held by nonaffiliates of the registrant as of
June 30, 2005 based on the closing price of the
registrants Common Stock on such date as reported by the
Nasdaq National Market: $595,265,198; Number of shares
outstanding of the issuers Common Stock, no par value, as
of February 24, 2006: 54,783,234.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for MKS Annual
Meeting of Stockholders to be held on May 8, 2006 are
incorporated by reference into Part III of this
Form 10-K.
TABLE OF CONTENTS
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
MKS management believes that this Annual Report on
Form 10-K contains
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. 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. These
forward-looking statements reflect managements 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.
PART I
MKS Instruments, Inc. (the Company or
MKS) was founded in 1961 as a Massachusetts
corporation. We are a leading worldwide provider of instruments,
components, subsystems and process control solutions that
measure, control, power and monitor critical parameters of
semiconductor and other advanced manufacturing processes.
We are managed as one operating segment which is organized
around three product groups: Instruments and Control Systems,
Power and Reactive Gas Products and Vacuum Products. Our
products are derived from our core competencies in pressure
measurement and control, materials delivery, gas and thin-film
composition analysis, electrostatic charge control, control and
information management, power and reactive gas generation and
vacuum technology.
Our products are used in diverse markets and applications
including the manufacture of, among other things:
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semiconductor devices for diverse electronics applications; |
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flat panel displays for hand-held devices, laptop computers,
desktop computer monitors and television sets; |
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magnetic and optical storage media; |
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optical filters and fiber optic cables for data and
telecommunications; |
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optical coatings for eyeglasses, architectural glass and solar
panels; and |
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magnetic resonance imaging (MRI) medical equipment. |
For over 40 years, we have focused on satisfying the needs
of our customers by establishing long-term, collaborative
relationships. We have a diverse base of customers that includes
manufacturers of semiconductor capital equipment, semiconductor
devices, data storage equipment, medical equipment and flat
panel displays, as well as industrial and biopharmaceutical
manufacturing companies, and university, government and
industrial research laboratories. During the years ended
December 31, 2005, 2004 and 2003, we estimate that
approximately 71%, 74% and 69% of our net sales, respectively,
were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers. Our top 10 customers for the
year ended December 31, 2005 were Applied Materials, ASM
International, Celerity Group, General Electric, Lam Research,
Novellus Systems, Phillips, PSK Tech, Tokyo Electron and Ulvac.
We file reports, proxy statements and other documents with the
Securities and Exchange Commission. You may read and copy any
document we file at the SEC Headquarters at Office of Investor
Education and Assistance, 100 F Street, NE,
Washington, D.C. 20549. You should call
1-800-SEC-0330 for more
information on the public reference room. Our SEC filings are
also available to you on the SECs Internet site at
http://www.sec.gov.
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Our internet address is www.mksinstruments.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 web 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, or the Exchange Act, as soon as reasonably
practicable after we electronically file such materials with the
Securities and Exchange Commission.
Markets and Applications
We are focused on improving process performance and productivity
by controlling advanced manufacturing processes in
semiconductor, thin-film and other non-semiconductor market
sectors. We estimate that approximately 71%, 74% and 69% of our
net sales for the years ended December 31, 2005, 2004 and
2003, respectively, were to semiconductor capital equipment
manufacturers and semiconductor device manufacturers.
Approximately 8%, 8% and 10% of our net sales in the years ended
December 31, 2005, 2004 and 2003, respectively, were for
thin-film processing equipment applications, including compact
discs, digital video discs (DVDs) and other digital storage
media; flat panel displays for computer and television screens;
and thin-film coatings for architectural glass and optics.
Approximately 21%, 18% and 21% of our net sales in the years
ended December 31, 2005, 2004 and 2003, respectively, were
for other non-semiconductor manufacturing applications. These
include, but are not limited to, industrial manufacturing,
magnetic resonance imaging (MRI) medical equipment,
biopharmaceutical manufacturing, and university, government and
industrial research laboratories.
We estimate that approximately 37%, 34% and 41% of our net sales
for the years ended December 31, 2005, 2004 and 2003,
respectively, were to customers located in international
markets. International sales include sales by our foreign
subsidiaries, but exclude direct export sales. Please refer to
Note 11 in the Notes to Consolidated Financial Statements
for further information.
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Semiconductor Manufacturing Applications |
The majority 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 materials onto
substrates and etching and cleaning circuit patterns.
Our products are also used for process facility applications
such as gas distribution, pressure control and vacuum
distribution, and electrostatic charge control in clean rooms
where semiconductor manufacturing takes place. In addition, we
provide specialized instruments that monitor the performance of
manufacturing equipment and products that distribute, manage,
and classify process control information. 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 Europe,
Japan and the United States.
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Thin-Film Manufacturing Applications |
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Flat Panel Display Manufacturing. |
Our products are used in the manufacture of flat panel displays,
which require the same or similar fabrication processes as
semiconductor manufacturing. Flat panel displays are used in
electronic hand-held devices, laptop computers, desktop computer
monitors, and television sets. Flat panel display technology is
designed to replace bulkier cathode ray tube
(CRT) technology in computer monitors and television sets.
We sell products to flat panel display equipment manufacturers
and to end-users in the flat panel display market. The major
manufacturers of flat panel displays are concentrated in Japan,
Korea and Taiwan, and the major manufacturers of flat panel
display equipment are concentrated in Japan and the United
States. The transition to larger panel sizes and higher display
resolution is driving the need for improved process controls to
reduce defects.
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Magnetic and Optical Storage Media. |
Our products are used to manufacture:
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magnetic storage media which store and read data magnetically; |
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optical storage media which store and read data using laser
technology; |
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compact discs; |
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hard disks; |
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data storage devices; and |
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digital video discs. |
The transition to higher density storage capacity requires
manufacturing processes incorporating tighter process controls.
The major manufacturers of storage media are concentrated in
Japan and the Asia Pacific region, and the major manufacturers
of storage media capital equipment are concentrated in Europe,
Japan and the United States.
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Optical Filters, Optical Fibers and Other Coating
Processes. |
Our products are used in optical filter, optical fiber and other
optical thin-film coating processes. Our products are sold both
to coating equipment manufacturers and to manufacturers of
products made using optical thin-film coating processes. Optical
filters and fibers used for data transmission are manufactured
using processes to deposit chemical vapors that are similar to
those used in semiconductor manufacturing. The requirement for
higher data transmission rates is driving the need for improved
control of optical filters and fiber coating processes. Optical
thin film coating for eyeglasses, solar panels and architectural
glass are deposited using processes similar to those used in
semiconductor manufacturing. Optical filter, optical fiber and
other optical thin-film processing manufacturers are
concentrated in Europe, Japan and the United States.
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Other Non-Semiconductor Manufacturing Applications |
Our products are used in advanced applications such as high
energy physics, emission control, chemical agent detection, fuel
cell research, vacuum freeze drying of pharmaceuticals, foods
and beverages, and in vacuum processes involved in light bulb
and gas laser manufacturing. Our power delivery products are
also incorporated into other end-market products such as MRI
medical equipment. In addition, our products are sold to
government, university and industrial laboratories for vacuum
applications involving research and development in materials
science, physical chemistry and electronics materials. The major
equipment and process providers and research laboratories are
concentrated in Europe, Japan and the United States.
Product Groups
We group our products into three product groups: Instruments and
Control Systems, Power and Reactive Gas Products and Vacuum
Products. Also, please refer to Note 11 in the Notes to
Consolidated Financial Statements for further information.
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Instruments and Control Systems |
This product group includes pressure measurement and control
products, materials delivery products, gas and thin film
composition analysis products, electrostatic charge control
products, and control and information technology products.
Pressure Measurement and Control Products. Each of
our pressure measurement and control product lines consists of
products that are designed for a variety of pressure ranges and
accuracies.
Baratron Pressure Measurement Products. These products
are typically used to measure the pressure of the gases being
distributed upstream of the process chambers, to measure process
chamber pressures and to
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measure pressures between process chambers, vacuum pumps and
exhaust lines. We believe we offer the widest range of gas
pressure measurement instruments in the semiconductor and
advanced thin-film materials processing industries.
Automatic Pressure and Vacuum Control Products. These
products enable precise control of process pressure by
electronically actuating valves that control the flow of gases
in and out of the process chamber to minimize the difference
between desired and actual pressure in the chamber.
In most cases, Baratron pressure measurement instruments provide
the pressure input to the automatic pressure control device.
Together, these components create an integrated automatic
pressure control subsystem. Our pressure control products can
also accept inputs from other measurement instruments, enabling
the automatic control of gas input or exhaust based on
parameters other than pressure.
Materials Delivery Products. Each of our materials
delivery product lines consists of products that are designed
for a variety of flow ranges and accuracies.
Flow Measurement and Control Products. Flow measurement
products include gas, vapor and liquid flow measurement products
based upon thermal conductivity, pressure and direct liquid
injection technologies. The flow control products combine the
flow measurement device with valve control elements based upon
solenoid, piezo-electric and piston pump technologies. These
products measure and automatically control the mass flow rate of
gases and vapors into the process chamber. Our thermal-based
mass flow controllers control gas flow based on the molecular
weight of gases and our pressure-based mass flow controllers,
based on Baratron pressure instrument measurement and control
technology, restrict flow in the gas line to transform pressure
control into mass flow control.
Our flow measurement products also include a calibration system
that independently measures mass flow and compares this
measurement to that of the process chamber mass flow controller.
The demand for our calibration system is driven by the
increasingly stringent process control needs of the
semiconductor industry and the need to reduce costly downtime
resulting from stopping operations to address mass flow
controller problems.
Gas and Thin-Film Composition Analysis Products.
Gas and thin-film composition analysis instruments are sold to a
variety of industries including the semiconductor industry.
Mass Spectrometry-Based Gas Composition Analysis
Instruments. These products are based on quadruple mass
spectrometer sensors that separate gases based on molecular
weight. These sensors include built-in electronics and are
provided with software that analyzes the composition of
background and process gases in the process chamber. These
instruments are provided both as portable laboratory systems and
as process gas monitoring systems used in the diagnosis of
semiconductor manufacturing process systems.
Fourier Transform Infra-Red (FTIR) Based Gas and
Thin-Film Composition Analysis Products. FTIR-based products
provide information about the composition of gases and
thin-films by measuring the absorption of infra-red light as it
passes through the sample being measured. Gas analysis
applications include measuring the compositions of mixtures of
reactant gases; measuring the purity of individual process
gases; measuring the composition of process exhaust gas streams
to determine process health; monitoring gases to ensure
environmental health and safety; and monitoring combustion
exhausts. These instruments are provided as portable laboratory
systems and as process gas monitoring systems used in the
diagnosis of manufacturing processes.
Mass spectrometry-based and FTIR-based gas monitoring systems
can indicate
out-of-bounds
conditions, such as the presence of undesirable contaminant
gases and water vapor or
out-of-tolerance
amounts of specific gases in the process, which alert operators
to diagnose and repair faulty equipment.
Leak Detection Products. Helium leak detection is used in
a variety of industries including semiconductor, HVAC,
automotive and aerospace to ensure the leak integrity of both
manufactured products and manufacturing equipment. We believe
that our products are the smallest mass spectrometer-based
helium leak detectors currently available.
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Optical Monitoring Instruments. We manufacture a range of
optical monitoring instruments that are sold primarily for
thin-film coating applications such as the manufacture of
optical filters. The optical monitors measure the thickness and
optical properties of a film being deposited, allowing the user
to better control the process.
Electrostatic Charge Control Products. Industries
that rely on high technology manufacturing, such as the
semiconductor, flat panel display, and data storage industries,
are vulnerable to electrostatic charge-related contamination and
yield problems. We design and manufacture products to control
electrostatic attraction, electrostatic discharge, and
electromagnetic interference.
Control and Information Technology Products. We
design and manufacture a suite of products that allow
semiconductor manufacturing customers to better control their
processes through computer-controlled automation. These products
include digital control network products, process chamber and
system controllers, data analysis products and connectivity
products. Digital control network products are used to connect
sensors, actuators and subsystems to the chamber and system
control computers. They support a variety of industry-standard
connection methods including DeviceNet, Profibus, ethernet and
conventional discrete digital and analog signals. Chamber and
system control computers process these signals in real time and
allow customers to precisely manage the process conditions.
Connectivity products allow information to flow from the process
sensors and subsystems and from the process tool control
computer to the factory network. By enabling this information
flow, we believe that we help customers optimize their processes
through Advanced Process Control (APC), and diagnose equipment
problems from a remote location (e-diagnostics).
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Power and Reactive Gas Products |
This product group includes power delivery products and reactive
gas generation products.
Power Delivery Products. Our power delivery products are
used in the semiconductor, flat panel display, data storage and
medical markets. In the semiconductor, flat panel and data
storage markets, our microwave, RF and DC power supplies are
used to provide energy to various etching, stripping and
deposition processes. A range of impedance matching units
transfer power from the power supplies to the customers
process. We also provide sensors to measure delivered voltage
and current along with plasma impedance. This information is
used both to better control the generator output and as a
process chamber diagnostic. Our power amplifiers are also used
in MRI medical equipment including the most advanced 3T (three
Tesla) machines.
Reactive Gas Generation Products. Reactive gases are used
to etch, strip and deposit films on wafers, to clean wafers
during processing, and to clean process chambers to reduce
particle contamination. A reactive gas is created when energy is
added to a stable gas to break apart its molecules. The
resulting dissociated gas produces rapid chemical reactions when
it comes into contact with other matter. Our reactive gas
products include ozone generators and subsystems used for
deposition of insulators onto semiconductor devices, ozonated
water delivery systems for advanced semiconductor wafer and flat
panel display cleaning, atomic fluorine generators for process
chamber cleaning, microwave plasma based products for photo
resist removal and a new line of generators based on the
fluorine cleaning architecture which provide reactive gases for
a wide range of semiconductor, flat panel and thin film
applications.
This product group consists of vacuum technology products,
including vacuum gauges, valves and components.
Vacuum Gauging Products. We offer a wide range of vacuum
instruments consisting of vacuum measurement sensors and
associated power supply and readout units. These vacuum gauges
measure phenomena that are related to the level of pressure in
the process chamber and downstream of the process chamber
between the chamber and the pump. These gauges are used to
measure vacuum at pressures lower than those measurable with a
Baratron instrument or to measure vacuum in the Baratron
instrument range where less accuracy is required. Our indirect
pressure gauges use thermal conductivity and ionization gauge
technologies to measure pressure from atmospheric pressure to
one trillionth of atmospheric pressure.
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Vacuum Valves and Components. Our vacuum valves are used
on the gas lines between the process chamber and the pump
downstream of the process chamber. Our vacuum components consist
of flanges, fittings, traps and heated lines that are used
downstream from the process chamber to provide leak free
connections and to prevent condensable materials from depositing
particles near or back into the chamber. The manufacture of
devices with small circuit patterns cannot tolerate
contamination from atmospheric leaks or particles. Our vacuum
components are designed to minimize such contamination and thus
increase yields and reduce downtime.
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Application-Specific Integrated Subsystems |
We also combine these products and technologies into
application-specific integrated subsystems. Integrated
subsystems are made by each product group, and typically provide
higher functionality in a smaller footprint, depending upon the
application.
For example, we have a line of integrated flow and pressure
control subsystems that combine two or more of our products and
technologies into products for specific process applications. We
have developed a range of Back-Side Wafer Cooling Subsystems
which are needed to control the flow and pressure of the helium
used to effect the cooling of wafers in semiconductor
manufacturing. By combining the functions of our Baratron
pressure measurement instruments, flow measurement instruments,
control electronics and valves into a range of compact
subsystems, this product line addresses the need for smaller
components that save valuable clean room space.
Integrated subsystems represented approximately 27% of revenues
for the year ended December 31, 2005 compared to
approximately 25% and 20% of revenues for the years ended
December 31, 2004 and 2003, respectively.
Our largest customers include leading semiconductor capital
equipment manufacturers such as Applied Materials, Lam Research,
Novellus Systems and Tokyo Electron. Sales to our top ten
customers accounted for approximately 48%, 49% and 42% of net
sales for the years ended December 31, 2005, 2004 and 2003,
respectively. Applied Materials accounted for approximately 18%,
20% and 18% of our net sales for the years ended
December 31, 2005, 2004 and 2003, respectively.
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Sales, Marketing and Support |
Our worldwide sales, marketing and support organization is
critical to our strategy of maintaining close relationships with
semiconductor capital equipment manufacturers and semiconductor
device manufacturers. We sell our products primarily through our
direct sales force. As of December 31, 2005, we had 155
sales employees worldwide, located in China, France, Germany,
Japan, Korea, the Netherlands, Singapore, Taiwan, the United
Kingdom and the United States. We also maintain sales
representatives and agents in a number of countries, which
supplement this direct sales force. We maintain a marketing
staff that identifies customer requirements, assists in product
planning and specifications, and focuses on future trends in the
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 service
and close 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 maintain a
worldwide sales and support organization in 14 countries.
Technical support is provided by applications engineers located
at offices in China, France, Germany, Japan, Korea, the
Netherlands, Singapore, Taiwan, the United Kingdom and the
United States. Repair and calibration services are provided at
28 service depots located worldwide. We provide warranties from
one to three years, depending upon the type of product.
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Research and Development
Our products incorporate sophisticated technologies to power,
measure, control and monitor increasingly complex gas-related
semiconductor manufacturing processes, thereby enhancing uptime,
yield and throughput for our semiconductor device manufacturing
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 transition from 200mm wafers to 300mm wafers
and the shrinking of integrated circuit line-widths from 90
nanometers to 65 nanometers and below. In addition, we have
developed, and continue to develop, products that support the
migration to new classes of materials, such as copper for low
resistance conductors, high-k dielectric materials for
capacitors and gates and low-k dielectric materials for low loss
insulators that are used in small geometry manufacturing. We
have undertaken an initiative to involve our marketing,
engineering, manufacturing and sales personnel in the concurrent
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. These relationships
help us 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. At December 31,
2005, we had 377 research and development employees, primarily
located in the United States. Our research and development
expenses were $55.9 million, $57.0 million and
$47.7 million for the years ended December 31, 2005,
2004 and 2003, respectively. Our research and development
efforts include numerous projects, none of which are
individually material, and generally have a duration of 12 to
30 months.
Manufacturing
Our manufacturing facilities are located in China, Germany,
Israel, Japan, Mexico, the United Kingdom and the United States.
Manufacturing activities include the assembly and testing of
components and subassemblies, which are integrated into
products. We outsource some of our subassembly work. We purchase
a wide range of electronic, mechanical and electrical
components, some of which are designed to our specifications. We
consider our responsiveness to our customers significantly
fluctuating product demands by using lean manufacturing
techniques to be a distinct competitive advantage.
Competition
The market for our products is highly competitive. Principal
competitive factors include:
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historical customer relationships; |
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product quality, performance and price; |
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breadth of product line; |
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manufacturing capabilities; and |
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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 us. In some cases,
competitors are smaller than we are, but well established in
specific product niches. Celerity offers products that compete
with our pressure and materials delivery products. Advanced
Energy and Horiba each offer materials delivery products that
compete with our product line of mass flow controllers. Nor-Cal
Products, Inc. and VAT, Inc., each offer products that compete
with our vacuum components. Inficon offers products that compete
with our vacuum measurement and gas analysis products. Brooks
Automation and Inficon each offer products that compete with our
vacuum gauging products. Advanced Energy offers products that
compete with our power delivery and reactive gas generator
products.
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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, 2005, we
owned 253 U.S. patents, 170 foreign patents and had 104
pending U.S. patent applications. Foreign counterparts of
certain of these 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.
For a discussion of litigation relating to our intellectual
property, see Item 3. Legal Proceedings.
Employees
As of December 31, 2005, we employed 2,270 persons. We
believe that our ongoing success depends upon our continued
ability to attract and retain highly skilled employees for whom
competition is intense. None of our employees are represented by
a labor union or are party to a collective bargaining agreement.
We believe that our employee relations are good.
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.
We estimate that approximately 71%, 74% and 69%, of our net
sales for the years ended December 31, 2005, 2004 and 2003,
respectively, were to semiconductor capital equipment
manufacturers and semiconductor device manufacturers, and we
expect that sales to such customers will continue to account for
a substantial majority of our sales. Our business depends upon
the capital expenditures of semiconductor device manufacturers,
which in turn depend upon the demand for semiconductors.
Periodic reductions in demand for the products manufactured by
semiconductor capital equipment manufacturers and semiconductor
device manufacturers may adversely affect our business,
financial condition and results of operations.
Historically, the semiconductor market has been highly cyclical
and has experienced periods of overcapacity, resulting in
significantly reduced demand for capital equipment. For example,
in 2001 through the first half of 2003, we experienced a
significant reduction in demand from OEM customers, and lower
gross margins due to reduced absorption of manufacturing
overhead. 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.
We cannot be certain that semiconductor downturns will not
continue or recur. A decline in the level of orders as a result
of any downturn or slowdown in the semiconductor capital
equipment industry could 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 operate with a 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. A significant percentage of
our expenses is relatively fixed and based in part on
expectations of future net sales. The inability to adjust
spending quickly enough to compensate for any shortfall would
magnify the adverse impact of a shortfall in net sales on our
results of operations. Factors that could cause fluctuations in
our net sales include:
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the timing of the receipt of orders from major customers; |
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shipment delays; |
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disruption in sources of supply; |
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seasonal variations of capital spending by customers; |
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production capacity constraints; and |
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specific features requested by customers. |
In addition, our quarterly operating results may be adversely
affected due to charges incurred in a particular quarter, for
example, relating to inventory obsolescence, bad debt or asset
impairments.
As a result of the factors discussed above, 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 decline significantly.
The loss of net sales to any one of our major customers
would likely have a material adverse effect on us.
Our top ten customers accounted for approximately 48%, 49% and
42% of our net sales for the years ended December 31, 2005,
2004 and 2003, respectively. 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. During the years ended December 31,
2005, 2004 and 2003, one customer, Applied Materials, accounted
for approximately 18%, 20% and 18%, respectively, of our net
sales. None of our significant customers, including Applied
Materials, has entered into an agreement requiring it to
purchase any minimum quantity of our products. The demand for
our products from our semiconductor capital equipment customers
depends in part on orders received by them from their
semiconductor device manufacturer customers.
Attempts to lessen the adverse effect of any loss or reduction
of net sales through the rapid addition of new customers could
be difficult because prospective customers typically require
lengthy qualification periods prior to placing volume orders
with a new supplier. Our future success will continue to depend
upon:
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our ability to maintain relationships with existing key
customers; |
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our ability to attract new customers; |
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our ability to introduce new products in a timely manner for
existing and new customers; and |
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the success of our customers in creating demand for their
capital equipment products which incorporate our products. |
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 and costly to integrate, may
be disruptive to our business, may dilute stockholder value or
may divert management attention.
We made several acquisitions in the years 2000 through 2002 and,
more recently, in January 2006. As a part of our business
strategy, we may enter into additional business combinations and
acquisitions. Acquisitions are typically accompanied by a number
of risks, including the difficulty of integrating the
operations, technology and personnel of the acquired companies,
the potential disruption of our ongoing business and distraction
of management, expenses related to the acquisition and potential
unknown liabilities associated with acquired businesses. If we
are not successful in completing acquisitions that we may pursue
in the future, we may be required to reevaluate our growth
strategy, and we may incur substantial expenses and devote
significant management time and resources in seeking to complete
proposed acquisitions that will 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,
10
which could cause significant stockholder dilution. 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 added several
different decentralized operating and accounting systems,
resulting in a complex reporting environment. We expect that we
will need to continue to modify our accounting policies,
internal controls, procedures and compliance programs to provide
consistency across all our operations. In order to increase
efficiency and operating effectiveness and improve corporate
visibility into our decentralized operations, we are currently
implementing a new worldwide Enterprise Resource Planning
(ERP) system. We completed our first site
implementation in October 2005 and we expect to continue to
implement the ERP system by converting our remaining operations
in phases over the next few years. Although we have a plan to
accomplish the ERP implementation, we may risk potential
disruption of our operations during the conversion periods and
the implementation could require significantly more management
time and we could incur significantly 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 are highly competitive. Our
competitive success often depends upon factors outside of our
control. For example, in some cases, particularly with respect
to mass flow controllers, semiconductor device manufacturers may
direct semiconductor capital equipment manufacturers to use a
specified suppliers 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
fabrication facilities. 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.
If our products are not designed into successive
generations of our customers products, we will lose
significant net sales during the lifespan of those
products.
New products designed by semiconductor capital equipment
manufacturers typically have a lifespan of five to ten years.
Our success depends on our products being designed into new
generations of equipment for the semiconductor industry. We must
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 customers do
not choose our products, our net sales 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.
The semiconductor industry is subject to rapid demand
shifts which are difficult to predict. As a result, our
inability to expand our manufacturing capacity in response to
these rapid shifts may cause a reduction in our market
share.
Our ability to increase sales of certain products depends in
part upon our ability to expand our manufacturing capacity for
such products in a timely manner. If we are unable to expand our
manufacturing capacity on a timely basis or to manage such
expansion effectively, our customers could implement our
competitors products and, as a result, our market share
could be reduced. Because the semiconductor industry is subject
to rapid demand shifts which are difficult to foresee, we may
not be able to increase capacity quickly enough to respond to a
rapid increase in demand. Additionally, capacity expansion could
increase our fixed operating expenses and if sales levels do not
increase to offset the additional expense levels associated with
any
11
such expansion, our business, financial condition and results of
operations could be materially adversely affected.
We operate in a highly competitive industry.
The market for our products is highly competitive. Principal
competitive factors include:
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historical customer relationships; |
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product quality, performance and price; |
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breadth of product line; |
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manufacturing capabilities; and |
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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 have greater financial and other
resources than we have. 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 or performance features superior to
those of our products. If our competitors develop superior
products, we may lose existing customer and market share.
Sales to foreign markets constitute a substantial portion
of our net sales; therefore, our net sales and results of
operations could be adversely affected by downturns in economic
conditions in countries outside of the United States.
International sales include sales by our foreign subsidiaries,
but exclude direct export sales. International sales accounted
for approximately 37%, 34% and 41%, of net sales for the years
ended December 31, 2005, 2004 and 2003, respectively, a
significant portion of which were sales to Japan.
We anticipate that international sales will continue to account
for a significant portion of our net sales. In addition, certain
of our key domestic customers derive a significant portion of
their revenues from sales in international markets. Therefore,
our sales and results of operations could be adversely affected
by economic slowdowns and other risks associated with
international sales.
We have significant foreign operations, and outsource
certain operations offshore, which pose significant
risks.
We have significant international sales, service, engineering
and manufacturing operations in Europe and Asia, and have
outsourced a portion of our manufacturing to Mexico. We may
expand the level of manufacturing and certain other operations
that we do 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 anticipate from this program. These foreign operations expose
us to operational and political risks that may harm our
business, including:
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political and economic instability; |
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fluctuations in the value of currencies and high levels of
inflation, particularly in Asia and Europe; |
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changes in labor conditions and difficulties in staffing and
managing foreign operations, including, but not limited to,
labor unions; |
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reduced or less certain protection for intellectual property
rights; |
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greater difficulty in collecting accounts receivable and longer
payment cycles; |
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burdens and costs of compliance with a variety of foreign laws; |
12
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increases in duties and taxation; |
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imposition of restrictions on currency conversion or the
transfer of funds; |
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changes in export duties and limitations on imports or exports; |
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expropriation of private enterprises; and |
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unexpected changes in foreign regulations. |
If any of these risks materialize, our operating results may be
adversely affected.
Unfavorable currency exchange rate fluctuations may lead
to lower operating margins or may cause us to raise prices,
which could result in reduced sales.
Currency exchange rate fluctuations could have an adverse effect
on our net sales and results of operations and we could
experience losses with respect to our hedging activities.
Unfavorable currency fluctuations could require us to increase
prices to foreign customers, which could result in lower net
sales by us to 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. 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 and may enter into local
currency purchased options to reduce currency exposure arising
from intercompany sales of inventory. 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.
Key personnel may be difficult to attract and
retain.
Our success depends to a large extent upon the efforts and
abilities of a number of key employees and officers,
particularly those with expertise in the semiconductor
manufacturing and similar industrial manufacturing industries.
The loss of key employees or officers could have a material
adverse effect on our business, financial condition and results
of operations. We believe that our future success will depend in
part on our ability to attract and retain highly skilled
technical, financial, managerial and marketing personnel. We
cannot be certain that we will be successful in attracting and
retaining such personnel.
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.
As of December 31, 2005, we owned 253 U.S. patents,
170 foreign patents and had 104 pending U.S. patent
applications. Although we seek to protect our intellectual
property rights through patents, copyrights, trade secrets and
other measures, we cannot be certain that:
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we will be able to protect our technology adequately; |
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competitors will not be able to develop similar technology
independently; |
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any of our pending patent applications will be issued; |
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domestic and international intellectual property laws will
protect our intellectual property rights; or |
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third parties will not assert that our products infringe patent,
copyright or trade secrets of such parties. |
Protection of our intellectual property rights may result
in costly litigation.
Litigation may be necessary in order to enforce our patents,
copyrights or other intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of
infringement. We are, from time to time, involved in lawsuits
enforcing or defending our intellectual property rights and may
be involved in such litigation in the future. Such litigation
could result
13
in substantial costs and diversion of resources and could have a
material adverse effect on our business, financial condition and
results of operations.
We may need to expend significant time and expense to protect
our intellectual property regardless of the validity or
successful outcome of such intellectual property claims. If we
lose any litigation, we may be required to seek licenses from
others or change, stop manufacturing or stop selling some of our
products.
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. The market price of shares of our common stock has
fluctuated greatly since our initial public offering 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 securities class action
litigation, it could result in substantial costs and a diversion
of our managements attention and resources.
Our dependence on sole, limited source suppliers, and
international suppliers, could affect our ability to manufacture
products and systems.
We rely on sole, limited source suppliers and international
suppliers for a few of our components and subassemblies that are
critical to the manufacturing of our products. This reliance
involves several risks, including the following:
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the potential inability to obtain an adequate supply of required
components; |
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reduced control over pricing and timing of delivery of
components; and |
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the potential inability of our suppliers to develop
technologically advanced products to support our growth and
development of new systems. |
We believe that in time we could obtain and qualify alternative
sources for most sole, limited source and international supplier
parts. Seeking alternative sources of the parts could require us
to redesign our systems, resulting in increased costs and likely
shipping delays. We may be unable to redesign our systems, which
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.
We are subject to governmental regulations. If we fail to
comply with these regulations, our business could be
harmed.
We are subject to federal, state, local and foreign regulations,
including environmental regulations and regulations relating to
the design and operation of our products. We must ensure that
the affected products meet a variety of standards, many of which
vary across the countries in which our systems are used. For
example, the European Union has published directives
specifically relating to power supplies. In addition, the
European Union has issued directives relating to regulation of
recycling and hazardous substances, which may be applicable to
our products, or to which some customers may voluntarily elect
to adhere to. We must comply with any applicable regulation
adopted in connection with these directives in order to ship
affected products into countries that are members of the
European Union. We believe we are in compliance with current
applicable regulations, directives and standards and have
obtained all necessary permits, approvals, and authorizations to
conduct our business. However, compliance with future
regulations, directives and standards, or customer demands
beyond such requirements, could require us to modify or redesign
certain systems, make
14
capital expenditures or incur substantial costs. If we do not
comply with current or future regulations, directives and
standards:
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we could be subject to fines; |
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our production could be suspended; or |
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we could be prohibited from offering particular systems in
specified markets. |
Certain stockholders have a substantial interest in us and
may be able to exert substantial influence over our
actions.
As of December 31, 2005, John R. Bertucci, our Executive
Chairman, and certain members of his family, in the aggregate,
beneficially owned approximately 17% of our outstanding common
stock. As a result, these stockholders, acting together, may be
able to exert substantial influence over our actions. Pursuant
to the acquisition of the ENI Business of Emerson Electric Co.
(Emerson), we issued approximately
12,000,000 shares of common stock to Emerson and its wholly
owned subsidiary, Astec America, Inc. Emerson owned
approximately 18% of our outstanding common stock as of
December 31, 2005, and a representative of Emerson is a
member of our board of directors. Accordingly, Emerson may be
able to exert substantial influence over our actions.
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 of us.
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 the
common stock. Such provisions may also inhibit increases in the
market price of the 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. The classified board
could also have the effect of delaying, deterring or preventing
a change in control of us.
Changes in financial accounting standards may adversely
affect our reported results of operations.
A change in accounting standards or practices could have a
significant effect on our reported results and may even affect
our reporting of transactions completed before the change was
effective. New accounting pronouncements and varying
interpretations of existing accounting pronouncements have
occurred and may occur in the future. Such changes may adversely
affect our reported financial results or may impact our related
business practice.
For example, Statement on Financial Accounting Standards
No. 123R Share-Based Payment, which requires us
to measure all employee stock-based compensation awards using a
fair value method and record such expense in our consolidated
financial statements, when adopted in the first quarter of 2006,
will have a material adverse impact on our consolidated
financial statements as reported under generally accepted
accounting principles in the United States. The adoption of this
statement will adversely impact our gross margin as well as our
operating expenses in 2006.
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Item 1B. |
Unresolved Staff
Comments |
None.
15
The following table provides information concerning MKS
principal and certain other owned and leased facilities as of
December 31, 2005:
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Location |
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Sq. Ft. |
|
Activity |
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Products Manufactured |
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Lease Expires |
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Andover, Massachusetts
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82,000 |
|
Manufacturing, and Research & Development |
|
Pressure Measurement and Control Products |
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(1) |
Austin, Texas
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20,880 |
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Manufacturing, Sales, Customer Support, Service and
Research & Development |
|
Control & Information Management Products |
|
May 31, 2012 |
Berlin, Germany
|
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20,750 |
|
Manufacturing, Customer Support, Service and Research &
Development |
|
Reactive Gas Generation Products |
|
March 31, 2006 |
Boulder, Colorado
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124,000 |
|
Manufacturing, Customer Support, Service and Research &
Development |
|
Vacuum Products |
|
(2) |
Carmiel, Israel
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7,000 |
|
Manufacturing and Research & Development |
|
Control & Information Management Products |
|
December 31, 2006 |
Cheshire, U.K
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13,000 |
|
Manufacturing, Sales, Customer Support and Service |
|
Materials Delivery Products |
|
(3) |
Colorado Springs, Colorado
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32,200 |
|
Manufacturing, Customer Support, Service and Research &
Development |
|
Power Delivery Products |
|
(4) |
Lawrence, Massachusetts
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40,000 |
|
Manufacturing |
|
Pressure Measurement and Control Products |
|
(1) |
Methuen, Massachusetts
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85,000 |
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Manufacturing, Customer Support, Service and Research &
Development |
|
Pressure Measurement and Control Products; Materials Delivery
Products |
|
(1) |
Morgan Hill, California
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27,600 |
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Vacated |
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Not applicable |
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(5) |
Munich, Germany
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14,000 |
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Manufacturing, Sales, Customer Support, Service and
Research & Development |
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Pressure Measurement and Control Products; Materials Delivery
Products |
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(1) |
Nogales, Mexico
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36,700 |
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Manufacturing |
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Pressure Measurement and Control Products; Reactive Gas
Generation Products |
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March 31, 2009 |
Richardson, Texas
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8,800 |
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Sales, Customer Support and Service |
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Not applicable |
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November 30, 2012 |
Rochester, New York
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156,000 |
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Manufacturing, Sales, Customer Support, Service and
Research & Development |
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Power Delivery Products |
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(6) |
San Jose, California
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32,000 |
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Sales, Customer Support and Service |
|
Not applicable |
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April 30, 2009 |
Seoul, Korea
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10,000 |
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Sales, Customer Support and Service |
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Not applicable |
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May 31, 2008 |
Shenzhen, China
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130,000 |
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Manufacturing |
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Power Delivery Products |
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December 31, 2007 |
Shropshire, U.K
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25,000 |
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Manufacturing |
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Vacuum Products |
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October 18, 2010 |
Taiwan
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19,300 |
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Sales, Customer Support and Service |
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Not applicable |
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August 25, 2007 |
16
|
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Location |
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Sq. Ft. |
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Activity |
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Products Manufactured |
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Lease Expires |
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Tokyo, Japan
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31,600 |
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Manufacturing, Sales, Customer Support, Service and
Research & Development |
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Materials Delivery Products |
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(7) |
Wilmington, Massachusetts
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118,000 |
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Headquarters, Manufacturing, Customer Support, Service and
Research & Development |
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Reactive Gas Generation Products; Power Delivery Products |
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(8) |
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(1) |
This facility is owned by MKS. |
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(2) |
MKS leases two facilities, one has 39,000 square feet of
space and the other has 38,000 square feet of space. Both
leases expire on May 31, 2015. MKS also owns a third and
fourth facility with 27,000 and 20,000 square feet of
space, respectively. |
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(3) |
MKS leases two facilities, one has 2,000 square feet of
space and a lease term which expires October 5, 2009 and
the second has 11,000 square feet of space and a lease term
which expires November 30, 2009. |
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(4) |
MKS leases one facility with 8,200 square feet of space and
a lease term which expires on April 30, 2006. MKS owns
another facility with 24,000 square feet. |
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(5) |
This facility is entirely subleased. The lease term expires on
June 30, 2007. |
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(6) |
MKS owns this facility and has an Industrial Development Revenue
Bond of $5.0 million, due in 2014, that is collateralized
by the building. |
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(7) |
MKS leases two facilities, one has 14,500 square feet of
space with a lease term that expires April 30, 2007 and the
second has 10,500 square feet of space and a lease term
that expires on September 30, 2006. MKS owns a third
facility of 6,600 square feet. |
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(8) |
MKS owns this facility and has a mortgage note payable of
approximately $1.7 million outstanding at December 31,
2005, which is payable in monthly installments with final
payment due in March 2007. |
In addition to manufacturing and other operations conducted at
the foregoing leased or owned facilities, MKS provides worldwide
sales, customer support and services from various other leased
facilities throughout the world not listed in the table above.
See Business Sales, Marketing and
Support.
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Item 3. |
Legal Proceedings |
On April 3, 2003, Advanced Energy Industries, Inc.
(Advanced Energy) filed suit against us in federal
district court in Colorado (Colorado Action),
seeking a declaratory judgment that Advanced Energys
Xstream product does not infringe three patents held by our
subsidiary, Applied Science and Technology, Inc.
(ASTeX). On May 14, 2003, we brought suit in
federal district court in Delaware against Advanced Energy for
infringement of five ASTeX patents, including the three patents
at issue in the Colorado Action. We sought injunctive relief and
damages for Advanced Energys infringement. On
December 24, 2003, the Colorado court transferred Advanced
Energys Colorado Action to Delaware. In connection with
the jury trial, the parties agreed to present the jury with
representative claims from three of the five ASTeX patents. On
July 23, 2004, the jury found that Advanced Energy
infringed all three patents. On October 3, 2005, we entered
into a settlement agreement with Advanced Energy, pursuant to
which Advanced Energy paid us $3,000,000 in cash in October
2005. The settlement agreement also provided that Advanced
Energy would not make, use, sell or offer to sell its Rapid,
Rapid FE, Rapid OE and Xstream products (or related products) in
the United States or any other country in which we held a
relevant patent or had pending a patent application on the date
of the settlement agreement, during the life of any such patent
(or resulting patent, in the case of patent applications). On
October 6, 2005, the federal district court in Delaware
issued a final judgment of infringement and an injunction
prohibiting Advanced Energy from making, using, selling,
offering to sell, or importing into the United States such
products.
17
On November 3, 1999, On-Line Technologies, Inc.
(On-Line), which we acquired in 2001, brought suit
in federal district court in Connecticut against Perkin-Elmer,
Inc. and certain other defendants for infringement of
On-Lines patent related to its FTIR spectrometer product
and related claims. The suit sought injunctive relief and
damages for infringement. Perkin-Elmer, Inc. filed a
counterclaim seeking invalidity of the patent, costs and
attorneys fees. In June 2002, the defendants filed a
motion for summary judgment. In April 2003, the court granted
the motion and dismissed the case. We appealed this decision to
the federal circuit court of appeals. On October 13, 2004,
the federal circuit court of appeals reversed the lower
courts dismissal of certain claims in the case.
Accordingly, the case has been remanded to the United States
District Court in Connecticut for further proceedings on the
merits of the remaining claims. On March 11, 2005,
Perkin-Elmer, Inc. submitted to the court a stipulation that it
infringed a specified claim of On-Lines patent and filed a
motion for summary judgment that such patent claim is invalid.
On April 6, 2005, we filed a reply to the summary judgment
motion. The parties are awaiting the courts response to
the motion.
We are subject to other 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.
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Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during
the fourth quarter of 2005 through the solicitation of proxies
or otherwise.
PART II
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Item 5. |
Market for the Registrants Common Equity and Related
Stockholder Matters |
Price Range of Common Stock
Our common stock is traded on the Nasdaq National Market under
the symbol MKSI. On February 24, 2006, the closing price of
our common stock, as reported on the Nasdaq National Market, was
$22.55 per share. The following table sets forth for the
periods indicated the high and low bid prices per share of our
common stock as reported by the Nasdaq National Market.
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2005 |
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2004 |
|
|
|
|
|
Price Range of Common Stock |
|
High |
|
Low |
|
High |
|
Low |
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
19.00 |
|
|
$ |
14.46 |
|
|
$ |
29.97 |
|
|
$ |
21.08 |
|
Second Quarter
|
|
|
18.10 |
|
|
|
13.96 |
|
|
|
26.20 |
|
|
|
18.62 |
|
Third Quarter
|
|
|
20.69 |
|
|
|
15.29 |
|
|
|
22.79 |
|
|
|
12.44 |
|
Fourth Quarter
|
|
|
19.72 |
|
|
|
17.02 |
|
|
|
18.84 |
|
|
|
14.36 |
|
On February 24, 2006, we had approximately 239 stockholders
of record.
Dividend Policy
We have never declared or paid any cash dividends. We currently
intend to retain earnings, if any, to support our growth
strategy and do not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be
at the discretion of our board of directors after taking into
account various factors, including our financial condition,
operating results, current and anticipated cash needs, plans for
expansion, and changes in tax and regulatory rulings.
18
|
|
Item 6. |
Selected Financial Data |
Selected Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
509,294 |
|
|
$ |
555,080 |
|
|
$ |
337,291 |
|
|
$ |
314,773 |
|
|
$ |
286,808 |
|
Gross profit(1)
|
|
|
200,434 |
|
|
|
219,371 |
|
|
|
118,109 |
|
|
|
105,795 |
|
|
|
85,583 |
|
Income (loss) from operations(2),(3)
|
|
|
40,548 |
|
|
|
59,913 |
|
|
|
(15,717 |
) |
|
|
(43,047 |
) |
|
|
(47,360 |
) |
Net income (loss)(4)
|
|
$ |
34,565 |
|
|
$ |
69,839 |
|
|
$ |
(16,385 |
) |
|
$ |
(39,537 |
) |
|
$ |
(31,043 |
) |
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.64 |
|
|
$ |
1.30 |
|
|
$ |
(0.32 |
) |
|
$ |
(0.79 |
) |
|
$ |
(0.83 |
) |
|
Diluted
|
|
$ |
0.63 |
|
|
$ |
1.28 |
|
|
$ |
(0.32 |
) |
|
$ |
(0.79 |
) |
|
$ |
(0.83 |
) |
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
220,573 |
|
|
$ |
138,389 |
|
|
$ |
74,660 |
|
|
$ |
88,820 |
|
|
$ |
120,869 |
|
Short-term investments
|
|
|
72,046 |
|
|
|
97,511 |
|
|
|
54,518 |
|
|
|
39,894 |
|
|
|
16,625 |
|
Working capital
|
|
|
410,060 |
|
|
|
347,700 |
|
|
|
210,468 |
|
|
|
192,008 |
|
|
|
216,855 |
|
Long-term investments
|
|
|
857 |
|
|
|
4,775 |
|
|
|
13,625 |
|
|
|
15,980 |
|
|
|
11,029 |
|
Total assets
|
|
|
863,740 |
|
|
|
828,677 |
|
|
|
692,032 |
|
|
|
685,623 |
|
|
|
411,189 |
|
Short-term obligations
|
|
|
18,886 |
|
|
|
24,509 |
|
|
|
20,196 |
|
|
|
18,472 |
|
|
|
14,815 |
|
Long-term obligations, less current portion
|
|
|
6,152 |
|
|
|
6,747 |
|
|
|
8,810 |
|
|
|
11,726 |
|
|
|
11,257 |
|
Stockholders equity
|
|
|
762,843 |
|
|
|
726,634 |
|
|
|
608,310 |
|
|
|
610,690 |
|
|
|
352,871 |
|
|
|
(1) |
Gross profit for the year ended December 31, 2001 includes
significant charges for excess and obsolete inventory of
$16.6 million. These charges were primarily caused by a
significant reduction in demand, including reduced demand for
older technology products. |
|
(2) |
Income from operations for the years ended December 31,
2005 and December 31, 2004 include restructuring, asset
impairment and other charges of $0.1 million and
$0.4 million, respectively. Loss from operations for the
year ended December 31, 2003 includes restructuring, asset
impairment and other charges of $1.6 million. Loss from
operations for the year ended December 31, 2002 includes
restructuring and asset impairment charges of $2.7 million
and purchase of in-process technology of $8.4 million. Loss
from operations for the year ended December 31, 2001
includes restructuring and asset impairment charges of
$3.7 million, merger expenses of $7.7 million and
purchase of in-process technology of $2.3 million. |
|
(3) |
Income from operations for the year ended December 31, 2005
includes income from a litigation settlement of
$3.0 million. |
|
(4) |
Net income for the year ended December 31, 2004 includes a
gain from the collection of a note receivable of
$5.0 million which had been written off in 2002. During the
years ended December 31, 2002 and 2003, a valuation
allowance against net deferred tax assets was maintained. Net
loss for the years ended December 31, 2002 and 2003 include
tax expense which is comprised primarily of state and foreign
taxes. During 2004, the valuation allowance was reduced against
the net deferred tax assets and net income for the year ended
December 31, 2004 includes a deferred tax benefit of
$10.2 million. See Note 9 of the Notes to the
Consolidated Financial Statements. |
19
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
We are a leading worldwide provider of instruments, components,
subsystems and process control solutions that measure, control,
power and monitor critical parameters of semiconductor and other
advanced manufacturing processes.
We are managed as one operating segment which is organized
around three product groups: Instruments and Control Systems,
Power and Reactive Gas Products and Vacuum Products. Our
products are derived from our core competencies in pressure
measurement and control, materials delivery, gas and thin-film
composition analysis, electrostatic charge control, control and
information management, power and reactive gas generation and
vacuum technology. Our products are used to manufacture
semiconductors and thin film coatings for diverse markets such
as flat panel displays, optical and magnetic storage media,
architectural glass and electro-optical products. We also
provide technologies for medical imaging equipment.
We have a diverse base of customers that include semiconductor
capital equipment manufacturers, semiconductor device
manufacturers, industrial and biopharmaceutical manufacturing
companies, medical equipment manufacturers and university,
government and industrial research laboratories. During the
years ended December 31, 2005, 2004 and 2003, we estimate
that approximately 71%, 74% and 69% of our net sales,
respectively, were to semiconductor capital equipment
manufacturers and semiconductor device manufacturers. We expect
that sales to semiconductor capital equipment manufacturers and
semiconductor device manufacturers will continue to account for
a substantial majority of our sales.
During the latter half of 2003 and continuing into the first
half of 2004, the semiconductor capital equipment market
experienced a market upturn after a downturn of almost three
years. Starting in the fourth quarter of 2003, we experienced an
increase in sales. Beginning in the third quarter of 2004 and
continuing through the fourth quarter of 2005, our quarterly
sales were below the level of sales achieved in the second
quarter of 2004. We currently expect our first quarter 2006
sales to be significantly higher than the fourth quarter of 2005
based on apparent spending trends in the semiconductor capital
equipment market towards the end of 2005. The semiconductor
capital equipment industry is subject to rapid demand shifts
which are difficult to predict.
A significant portion of our net sales is to operations in
international markets. International net sales include sales by
our foreign subsidiaries, but exclude direct export sales.
International net sales accounted for approximately 37%, 34% and
41% of net sales for the years ended December 31, 2005,
2004 and 2003, respectively, a significant portion of which were
sales in Japan. We expect that international net sales will
continue to represent a significant percentage of our net sales.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition
and Results of Operations discusses 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 during the
reporting period. On an on-going basis, we evaluate our
estimates and judgments, including those related to revenue
recognition, inventory, warranty costs, 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.
20
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements:
Revenue recognition. Revenue from product sales is
recorded upon transfer of title and risk of loss to the customer
provided that there is evidence of an arrangement, the sales
price is fixed or determinable, and collection of the related
receivable is reasonably assured. In most transactions, we have
no obligations to our customers after the date products are
shipped other than pursuant to warranty obligations. In some
instances, we provide installation and training to customers
after the product has been shipped. We defer the fair value of
any undelivered elements until the undelivered element is
delivered. Fair value is the price charged when the element is
sold separately. Shipping and handling fees billed to customers,
if any, are recognized as revenue. The related shipping and
handling costs are recognized in cost of sales.
We monitor and track the amount of product returns, provide for
accounts receivable 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 our estimated net realizable value, if less than
cost, based primarily on our estimated forecast of product
demand. 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 from
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.
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 ranging from 12 to 36 months, with the majority of
our products ranging from 12 to 24 months. 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 reevaluated 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.
Intangible assets, goodwill and other long-lived assets.
We review intangible assets and other long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of these assets may not be recoverable.
Factors we consider important, which could indicate an
impairment, include significant under performance relative to
expected historical or projected future operating results,
significant changes in the manner of our use of the asset or the
strategy for our overall business and significant and negative
industry or economic trends. When we determine that the carrying
value of the asset may not be
21
recoverable based upon the existence of one or more of the above
indicators of impairment, we compare the undiscounted cash flows
to the carrying value of the asset. If an impairment is possible
and indicated, the asset is written down to its estimated fair
value. Intangible assets, such as purchased technology, are
generally recorded in connection with a business acquisition.
The fair value initially assigned to intangible assets is
determined based on estimates and judgment regarding
expectations for the success and life cycle of products and
technology acquired. If actual product acceptance differs
significantly from the estimates, we may be required to record
an impairment charge to write down the asset to its estimated
fair value.
We assess goodwill for impairment at least annually, or more
frequently when events and circumstances occur indicating that
the recorded goodwill at the reporting unit level may be
impaired. Reporting units are defined as operating segments or
one level below an operating segment, referred to as a
component. We have determined that our reporting units are
components of our one operating segment. We allocate goodwill to
reporting units at the time of acquisition and base that
allocation on which reporting units will benefit from the
acquired assets and liabilities. If the book value of a
reporting unit exceeds its fair value, the implied fair value of
goodwill is compared with the carrying amount of goodwill. If
the carrying amount of goodwill exceeds the implied fair value,
an impairment loss is recorded in an amount equal to that
excess. The fair value of a reporting unit is estimated using
the discounted cash flow approach, and is dependent on estimates
and judgments related to future cash flows and discount rates.
If actual cash flows differ significantly from the estimates
used by management, we may be required to record an impairment
charge to write down the goodwill to its estimated fair value.
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 expense
IPR&D when technical feasibility is not reached. 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 innovations included, the utilization of core
technology, the complexity, cost and time to complete
development, any alternative future use or current technological
feasibility and the stage of completion. If we acquire other
companies with IPR&D in the future, we will value the
IPR&D through established valuation techniques and will
incur future IPR&D charges if those products under
development have not reached technical feasibility.
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 to realize the assets.
We record a valuation allowance to reduce our net deferred tax
assets to the amount that may be more likely than not to be
realized. To the extent we established a valuation allowance, an
expense is recorded within the provision for income taxes line
on the statement of operations. During the year ended
December 31, 2002, we established a full valuation
allowance for our net deferred tax assets. During the fourth
quarter of 2004, after examining a number of factors, including
historical results and near term earnings projections, we
determined that it was more likely than not that we would
realize all of our net deferred tax assets, except for those
relating to certain state tax credits. An adjustment to the
valuation allowance was recorded as a reduction to income tax
expense. In future periods, if we were to determine that it was
more likely than not that we would not be able to realize the
recorded amount of our remaining net deferred tax assets, an
adjustment to the valuation allowance would be recorded as an
increase to income tax expense in the period such determination
was made.
22
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of total net sales of certain line items included in
our consolidated statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales
|
|
|
60.6 |
|
|
|
60.5 |
|
|
|
65.0 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
39.4 |
|
|
|
39.5 |
|
|
|
35.0 |
|
Research and development
|
|
|
11.0 |
|
|
|
10.3 |
|
|
|
14.1 |
|
Selling, general and administrative
|
|
|
18.3 |
|
|
|
15.7 |
|
|
|
20.7 |
|
Amortization of acquired intangible assets
|
|
|
2.7 |
|
|
|
2.6 |
|
|
|
4.4 |
|
Restructuring and asset impairment charges
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.5 |
|
Income from litigation settlement
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8.0 |
|
|
|
10.8 |
|
|
|
(4.7 |
) |
Interest income, net
|
|
|
1.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Other income, net
|
|
|
|
|
|
|
1.0 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
9.2 |
|
|
|
12.1 |
|
|
|
(4.1 |
) |
Provision (benefit) for income taxes
|
|
|
2.4 |
|
|
|
(0.5 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
6.8 |
% |
|
|
12.6 |
% |
|
|
(4.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2005 Compared to 2004 and 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
% Change |
|
% Change |
|
|
2005 |
|
2004 |
|
2003 |
|
in 2005 |
|
in 2004 |
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$509.3 |
|
$555.1 |
|
$337.3 |
|
|
(8.2 |
) |
|
|
64.6 |
|
Net sales decreased $45.8 million during the year ended
December 31, 2005 mainly due to a decrease in worldwide
demand from our semiconductor capital equipment manufacturer
customers, which decreased $58.8 million or 16.1% compared
to the same period for the prior year. Primarily offsetting this
decrease was a net sales increase of $9.4 million or 9.5%
for other non-semiconductor manufacturing applications and a net
sales increase of $6.3 million or 12.9% for semiconductor
device manufacturer customers compared to the same period for
the prior year. International net sales were approximately
$188.5 million for the year ended December 31, 2005 or
37.0% of net sales compared to $187.8 million for the same
period of 2004 or 33.8% of net sales.
Net sales increased $217.8 million during the year ended
December 31, 2004 primarily driven by stronger worldwide
demand for our products from our semiconductor capital equipment
manufacturer and semiconductor device manufacturer customers,
which increased $193.2 million or 83.5% compared to the
same period for the prior year. International net sales were
approximately $138.1 million for the year ended
December 31, 2003 or 41.0% of net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
% Points Change |
|
% Points Change |
|
|
2005 |
|
2004 |
|
2003 |
|
in 2005 |
|
in 2004 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a percentage of sales
|
|
39.4% |
|
39.5% |
|
35.0% |
|
|
(0.1 |
) |
|
|
4.5 |
|
23
Gross profit as a percentage of net sales decreased slightly
during the year ended December 31, 2005 compared to the
same period in 2004 mainly due to overhead costs representing a
higher percentage of lower sales, partially offset by lower
material and labor costs as a percentage of sales, which
reflected the net effect of a gradual transition to lower cost
material and manufacturing sources.
Gross profit as a percentage of net sales increased
4.5 percentage points during the year ended
December 31, 2004 compared to the same period in 2003. Of
the 4.5 increase in percentage points, 3.4 percentage
points of gross margin improvement were mainly related to
overhead costs becoming a lower percentage of a higher sales
volume. The additional 1.1 percentage points of gross
margin improvement primarily reflected the net effect of a
gradual transition to lower cost material and manufacturing
sources, offset by unfavorable changes in warranty cost and
product mix.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
% Change |
|
% Change |
|
|
2005 |
|
2004 |
|
2003 |
|
in 2005 |
|
in 2004 |
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$55.9 |
|
$57.0 |
|
$47.7 |
|
|
(1.9 |
) |
|
|
19.6 |
|
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 hundreds 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 a duration of 12 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. These
projects support in large part the transition in the
semiconductor industry to larger wafer sizes and smaller
integrated circuit geometries, 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.
Research and development expenses decreased $1.1 million
for the year ended December 31, 2005 compared to the same
period for 2004 primarily due to lower project material and
other related costs. Staffing levels during 2005 were consistent
with staffing levels during 2004.
Research and development expenses increased $9.3 million
for the year ended December 31, 2004 compared to the same
period for 2003 primarily due to increased compensation expense
of $5.9 million as a result of higher staffing levels,
restored compensation levels, salary increases and incentive
compensation, $2.1 million of higher project material
expenses, mainly related to our power and reactive gas products,
and $1.3 million of increased consulting costs. At
December 31, 2004, we had 383 research and development
employees as compared to 326 research and development employees
at December 31, 2003.
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 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. 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 sales may be reduced
during the lifespan of those products.
24
|
|
|
Selling, General and Administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
% Change |
|
% Change |
|
|
2005 |
|
2004 |
|
2003 |
|
in 2005 |
|
in 2004 |
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$ |
93.0 |
|
|
$ |
87.3 |
|
|
$ |
69.9 |
|
|
|
6.6 |
|
|
|
24.9 |
|
Selling, general and administrative expenses increased
$5.7 million during the year ended December 31, 2005
compared to the same period in the prior year mainly due to
higher costs of $3.9 million primarily for IT related
services and for our ERP implementation, increased foreign
currency losses of $1.5 million, higher professional fees
of $2.2 million principally related to higher audit costs
and fees for compliance with the Sarbanes Oxley Act of 2002
(Sarbanes Oxley), partially offset by decreased
legal fees of $2.6 million mainly related to litigation
which had been subsequently resolved. We anticipate that the
costs relating to our ERP implementation, primarily
depreciation, will continue to increase in 2006, but to a lesser
extent than in 2005.
Selling, general and administrative expenses increased
$17.4 million for the year ended December 31, 2004
compared to the same period in the prior year. The increase was
due primarily to increased compensation expense of
$8.4 million, as a result of restored compensation levels,
salary increases, incentive compensation and higher sales
commissions, $2.8 million in higher legal fees related
mainly to our patent infringement litigation against Advanced
Energy, $2.0 million in increased consulting fees primarily
for IT related services, and $2.0 million in increased
professional fees primarily related to compliance with Sarbanes
Oxley.
|
|
|
Amortization of Acquired Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
% Change |
|
% Change |
|
|
2005 |
|
2004 |
|
2003 |
|
in 2005 |
|
in 2004 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangible assets
|
|
$ |
13.9 |
|
|
$ |
14.8 |
|
|
$ |
14.7 |
|
|
|
(6.1 |
) |
|
|
|
|
Amortization expense for the years ended December 31, 2005,
2004 and 2003, respectively, represents amortization of
identifiable intangible assets resulting from our completed
acquisitions. The decrease during the year ended
December 31, 2005 compared to the same period in the prior
year was due to certain identifiable intangible assets becoming
fully amortized during 2005.
Amortization expense for the year ended December 31, 2004
was consistent with amortization expense for the year ended
December 31, 2003. We did not acquire any material
identifiable intangible assets in 2005, 2004 or 2003.
|
|
|
Restructuring, Asset Impairment and Other Charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Restructuring, asset impairment and other charges
|
|
$ |
0.1 |
|
|
$ |
0.4 |
|
|
$ |
1.6 |
|
As a result of our various acquisitions from 2000 through 2002
and the downturn in the semiconductor capital equipment market
which began in 2000, we had redundant activities and excess
manufacturing capacity and office space. Therefore in 2002, and
continuing through the first quarter of 2004, we implemented
restructuring activities to rationalize manufacturing operations
and reduce operating expenses. As a result, in 2002 we took a
restructuring charge of $2.7 million which consisted of
$1.2 million related to exiting leased facilities,
$0.6 million of severance costs related to a workforce
reduction and an asset impairment charge of $0.9 million.
During 2003, we recorded restructuring, asset impairment and
other charges of $1.6 million related to our restructuring
activities. The charges consisted of $0.4 million of
severance costs related to workforce reductions,
$1.1 million of lease costs, professional fees and other
costs related to facility consolidations and an asset impairment
charge of $0.1 million.
25
During 2004, we completed our restructuring activities related
to the consolidation of operations from acquired companies when
we exited an additional leased facility and recorded a
restructuring charge of $0.4 million.
During 2005, we initiated a restructuring plan related to our
Berlin, Germany location. This consolidation of activities
included the reduction of 16 employees. The total restructuring
charge related to this consolidation was $0.5 million,
which consisted of $0.3 million related to the repayment of
a government grant and $0.2 million in severance costs.
Also during 2005, we terminated a lease related to a facility
previously exited. At the date the lease was terminated, we had
an accrual of approximately $0.8 million related to this
facility. After making the lease settlement payment and payments
for other contractual obligations, the remaining balance of
approximately $0.3 million was reversed as there was no
remaining obligation.
A summary of the restructuring charges, asset impairments and
other charges during 2003, 2004 and 2005, and the related
accrual balance is outlined as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce |
|
|
|
Facility |
|
|
|
|
Reductions |
|
Other |
|
Consolidations |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
Reserve balance as of December 31, 2002
|
|
$ |
326 |
|
|
$ |
|
|
|
$ |
1,164 |
|
|
$ |
1,490 |
|
Restructuring provision in 2003
|
|
|
356 |
|
|
|
92 |
|
|
|
1,145 |
|
|
|
1,593 |
|
Charges utilized in 2003
|
|
|
(483 |
) |
|
|
(92 |
) |
|
|
(478 |
) |
|
|
(1,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance as of December 31, 2003
|
|
|
199 |
|
|
|
|
|
|
|
1,831 |
|
|
|
2,030 |
|
Restructuring provision in 2004
|
|
|
|
|
|
|
|
|
|
|
437 |
|
|
|
437 |
|
Charges utilized in 2004
|
|
|
(110 |
) |
|
|
|
|
|
|
(736 |
) |
|
|
(846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance as of December 31, 2004
|
|
|
89 |
|
|
|
|
|
|
|
1,532 |
|
|
|
1,621 |
|
Restructuring provision in 2005
|
|
|
199 |
|
|
|
251 |
|
|
|
(365 |
) |
|
|
85 |
|
Charges utilized in 2005
|
|
|
(204 |
) |
|
|
|
|
|
|
(852 |
) |
|
|
(1,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance as of December 31, 2005
|
|
$ |
84 |
|
|
$ |
251 |
|
|
$ |
315 |
|
|
$ |
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining facilities consolidation obligation at
December 31, 2005 will be paid over the remaining lease
term which ends in 2007. These payments will be made out of
current working capital. The accrual for workforce reductions
and lease payments is recorded in Other accrued expenses and
Other liabilities in our consolidated balance sheet.
|
|
|
Income from Litigation Settlement |
During the fourth quarter of 2005, we executed a settlement
agreement with Advanced Energy Industries, Inc. (Advanced
Energy) in connection with the patent infringement suit we
had brought against Advanced Energy in federal district court in
Delaware. Pursuant to the settlement agreement, Advanced Energy
paid us $3.0 million in cash in October 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
% Change |
|
% Change |
|
|
2005 |
|
2004 |
|
2003 |
|
in 2005 |
|
in 2004 |
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
$ |
6.5 |
|
|
$ |
1.9 |
|
|
$ |
1.1 |
|
|
|
237.6 |
|
|
|
81.2 |
|
Net interest income increased $4.5 million during the year
ended December 31, 2005 compared to the same period in the
prior year, mainly related to higher interest rates on higher
average investment balances in those periods.
26
Net interest income increased $0.8 million during the year
ended December 31, 2004 compared to the same period in the
prior year, mainly related to higher average investment balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Other income, net
|
|
|
|
|
|
$ |
5.4 |
|
|
$ |
0.9 |
|
During 2001, we sold certain assets for proceeds of
approximately $9.0 million, including a note receivable of
approximately $3.9 million and warrants of
$0.2 million. During 2002, due to the downturn in the
semiconductor industry and its result on the acquirers
operations, and the acquirers inability to raise
financing, we considered the value of the note and warrants to
be impaired. Accordingly, during 2002, we recorded a charge of
$4.1 million to other expense for our estimate of the
impairment on the note receivable and warrants. During the
second quarter of 2004, we received $5.0 million and
recorded a gain to other income related to the collection of the
note receivable and accrued interest and the cancellation of the
warrants.
During 2003, we recorded a gain of $0.9 million from the
early repayment of premiums related to a split dollar life
insurance policy covering our Chairman and CEO.
|
|
|
Provision (Benefit) for Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$ |
12.4 |
|
|
$ |
(2.6 |
) |
|
$ |
2.7 |
|
We recorded a provision for income taxes of $12.4 million
for the year ended December 31, 2005, as compared to a tax
benefit of $2.6 million for the year ended
December 31, 2004. As a result of incurring significant
operating losses since 2001, during 2002 we determined that it
was more likely than not that our deferred tax assets may not
have been realizable, and since the fourth quarter of 2002 had
established a full valuation allowance for our net deferred tax
assets. During the fourth quarter of 2004, after examining a
number of factors, including historical results and near term
earnings projections, we determined that it was more likely than
not that we would realize all of our net deferred tax assets,
except for those related to certain state tax credits. An
adjustment was made to reduce the valuation allowance to reflect
the amount of the realizable net deferred tax assets at
December 31, 2004. The provision for income taxes in 2005
is comprised of federal, state and foreign income taxes and an
increase in the valuation allowance from an increase in state
tax credit carryovers for which we determined that it is more
likely than not that they will not be realized.
Our effective tax rate for the year ended December 31, 2005
and December 31, 2004 was 26.5% and (3.9)%, respectively.
The effective tax rate in 2005 is less than the statutory tax
rate primarily due to a tax benefit recorded as the result of
the completion of the Internal Revenue Service (IRS)
examination (see below), the benefit from U.S. research and
development credits and the profits of our international
subsidiaries being taxed at rates lower than the
U.S. statutory tax rate. The effective tax rate for 2004 is
lower than the 2005 rate due to the fact that during the fourth
quarter of 2004, after examining a number of factors, including
historical results and near term earnings projections, we
determined that it was more likely than not that we would
realize all of our net deferred tax assets, except for those
related to certain state tax credits. An adjustment was made to
reduce a previously recorded valuation allowance to reflect the
amount of the realizable net deferred tax assets at
December 31, 2004. The benefit for income taxes in 2004 is
comprised of tax expense from foreign operations and state
taxes, offset by a deferred tax benefit of approximately
$10.2 million. The provision for income taxes in 2003 was
comprised of tax expense from foreign operations and state taxes.
During 2005, the IRS completed its examination of our federal
tax returns for the tax years 1999 through 2002. As a result of
this examination, during the year ended December 31, 2005,
we recorded a benefit to income tax expense of $1.9 million
and a $0.6 million reduction of goodwill related to a
previous acquisition.
27
Liquidity and Capital Resources
Cash, cash equivalents and short-term marketable securities
totaled $292.6 million at December 31, 2005 compared
to $235.9 million at December 31, 2004. This increase
is mainly due to an increase of $64.2 million of cash
generated from operations during 2005. The primary driver in our
current and anticipated future cash flows is and will continue
to be cash generated from operations, consisting mainly of our
net income 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 of $64.2 million
for the year ended December 31, 2005, resulted mainly from
net income of $34.6 million, non-cash charges of
$26.2 million for depreciation and amortization and an
increase in operating liabilities of $7.7 million, offset
by an increase in operating assets of $6.2 million. The
increase in operating liabilities is primarily the result of a
$6.4 million increase in accounts payable and a
$1.4 million increase in taxes payable. The increase in
operating assets is primarily the result of a $4.7 million
increase in accounts receivable and a $1.8 million increase
in inventories as a result of increased production volumes in
late 2005 to support higher revenues expected in the first
quarter of 2006. Net cash provided by operating activities of
$66.4 million for the year ended December 31, 2004
resulted primarily from net income of $69.8 million, an
increase in operating liabilities of $16.8 million,
non-cash charges of $27.8 million for depreciation and
amortization, offset by an increase in operating assets of
$32.4 million, a deferred tax benefit of $10.2 million
and a $5.0 million gain related to the collection of a
previously written off note receivable. The increase in
operating assets consisted mainly of an increase in accounts
receivable of $15.2 million due to increased shipments
resulting in increased sales of $29.1 million in the fourth
quarter of 2004 as compared to the fourth quarter of 2003 and an
increase in inventory of $15.9 million as a result of
increased production volumes in 2004 to support higher revenues.
The increase in operating liabilities consisted primarily of an
increase in accounts payable and accrued expenses of
$7.2 million resulting from increased accrued compensation,
warranty reserves, accrued professional fees and non-income tax
related tax accruals and a $9.6 million increase in income
taxes payable.
Net cash provided by investing activities of $20.0 million
for the year ended December 31, 2005 resulted primarily
from the net maturities and sales of $29.2 million of
available for sale investments offset by the purchase of
property, plant and equipment of $10.3 million for
investments in manufacturing equipment and for the consolidation
of our IT infrastructure. Net cash used in investing activities
of $44.2 million for the year ended December 31, 2004
resulted primarily from the net purchases of $34.1 million
of available for sale investments mainly from the net proceeds
received from our stock offering, and the purchase of property,
plant and equipment of $18.3 million for investments in
manufacturing equipment and for the consolidation of our IT
infrastructure, partially offset by the $5.0 million
proceeds received from the collection of a note receivable
previously written off.
Net cash provided by financing activities of $0.9 million
for the year ended December 31, 2005 consisted primarily of
$6.1 million in proceeds from the exercise of stock options
and purchases under our employee stock purchase plan, partially
offset by $2.0 million in principal payments on long-term
debt and net payments of $2.7 million on short-term
borrowings. Net cash provided by financing activities of
$39.7 million for the year ended December 31, 2004
consisted primarily of $32.5 million in net proceeds
received from our common stock offering during 2004,
$6.0 million in proceeds from the exercise of stock options
and purchases under the employee stock purchase plan, net
proceeds of $3.7 million from short-term borrowings, offset
by $2.6 million of principal payments on long-term debt.
On August 1, 2005, we renewed an unsecured short-term LIBOR
based loan agreement with a bank to be utilized primarily by our
Japanese subsidiary for short-term liquidity purposes. The
credit line, which expires on July 31, 2006, provides for
us to borrow in multiple currencies of up to an equivalent of
$35.0 million U.S. dollars. At December 31, 2005,
we had outstanding borrowings of $11.0 million
U.S. dollars, payable on demand, at an interest rate of
1.31%, with $24.0 million available for future borrowings.
28
Our Japanese subsidiary also has credit lines and short-term
borrowing arrangements with a financial institution, which
provide for aggregate borrowings as of December 31, 2005 of
up to $12.7 million, which generally expire and are renewed
in three month intervals. At December 31, 2005, total
borrowings outstanding under these arrangements totaled
$5.9 million, at interest rates ranging from 1.21% to
1.24%, with $6.8 million available for future borrowings.
We have provided financial guarantees for certain unsecured
borrowings and have standby letters of credit and performance
bonds, some of which do not have fixed expiration dates. At
December 31, 2005, our maximum exposure as a result of
these standby letters of credit and performance bonds was
approximately $1.0 million.
Future payments due under debt, lease and purchase commitment
obligations as of December 31, 2005 (in thousands) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
Contractual Obligations |
|
Total |
|
1 Year |
|
1-3 Years |
|
3-5 Years |
|
After 5 Years |
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations
|
|
$ |
23,633 |
|
|
$ |
18,395 |
|
|
$ |
238 |
|
|
$ |
|
|
|
$ |
5,000 |
|
Interest on Debt
|
|
|
1,803 |
|
|
|
259 |
|
|
|
343 |
|
|
|
344 |
|
|
|
857 |
|
Operating Lease Obligations
|
|
|
20,034 |
|
|
|
5,760 |
|
|
|
7,039 |
|
|
|
3,102 |
|
|
|
4,133 |
|
Purchase Obligations(1)
|
|
|
100,768 |
|
|
|
80,909 |
|
|
|
11,027 |
|
|
|
8,832 |
|
|
|
|
|
Capital Leases
|
|
|
1,405 |
|
|
|
491 |
|
|
|
914 |
|
|
|
|
|
|
|
|
|
Interest in Capital Leases
|
|
|
114 |
|
|
|
71 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities
Reflected on the Registrants
Balance Sheet under GAAP
|
|
|
3,505 |
|
|
|
|
|
|
|
339 |
|
|
|
178 |
|
|
|
2,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
151,262 |
|
|
$ |
105,885 |
|
|
$ |
19,943 |
|
|
$ |
12,456 |
|
|
$ |
12,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The majority of the outstanding inventory purchase commitments
of approximately $69.8 million at December 31, 2005
are to be purchased within the next 12 months.
Additionally, approximately $26.0 million represents a
commitment, as of December 31, 2005, to a third party
engaged to provide certain computer equipment, IT network
services and IT support. This contract is for a period of
approximately six years that began in September 2004 and has a
significant penalty for early termination. The actual timing of
payments and amounts may vary based on equipment deployment
dates. However, the amount noted represents our expected
obligation based on anticipated deployment. |
We believe that our working capital, together with the cash
anticipated to be generated from operations, will be sufficient
to satisfy our estimated working capital and planned capital
expenditure requirements through at least the next
12 months.
During the fourth quarter of 2005, we executed a settlement
agreement with Advanced Energy in connection with the patent
infringement suit we had brought against Advanced Energy in
federal district court in Delaware. Pursuant to the settlement
agreement, Advanced Energy paid us $3.0 million in cash in
October 2005. See Item 3. Legal Proceedings.
On January 3, 2006, we completed our acquisition of Ion
Systems, Inc, a leading provider of electrostatic management
solutions located in Alameda, California, pursuant to an
Agreement and Plan of Merger dated November 25, 2005. Ion
Systems ionization technology controls electrostatic
charge to reduce process contamination and improve yields, which
complements the Companys process monitoring and control
technologies. The aggregate purchase price consisted of
$73.1 million in cash and $0.8 million in acquisition
related costs.
Additionally, on January 3, 2006, we completed our
acquisition of Umetrics, AB, a leader in multivariate data
analysis and modeling software located in Umea, Sweden, pursuant
to a Sale and Purchase Agreement dated December 15, 2005.
Umetrics multivariate data analysis and modeling software
converts process data
29
into useable information for yield improvement, when linked with
the Companys open and modular platform of process sensors
and data collection, integration, data storage, and
visualization capabilities. The purchase price consisted of
$30.1 million in cash and $0.3 million in acquisition
related costs.
To the extent permitted by Massachusetts law, our Restated
Articles of Organization, as amended, require us to indemnify
any of our current or former officers or directors or any person
who has served or is serving in any capacity with respect to any
of our employee benefit plans. Because no claim for
indemnification has been pursued by any person covered by the
relevant provisions of our Restated Articles of Organization, we
believe that the estimated exposure for these indemnification
obligations is currently minimal. Accordingly, we have no
liabilities recorded for these requirements as of
December 31, 2005.
We also enter into agreements in the ordinary course of business
which include indemnification provisions. Pursuant to these
agreements, we indemnify, hold harmless and agree to reimburse
the indemnified party, generally our 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 our products. The terms of these indemnification
obligations are generally perpetual after execution of the
agreements. The maximum potential amount of future payments we
could be required to make under these indemnification agreements
is, in some instances, unlimited. We have never incurred costs
to defend lawsuits or settle claims related to these
indemnification obligations. As a result, we believe the
estimated fair value of these obligations is minimal.
Accordingly, we have no liabilities recorded for these
obligations as of December 31, 2005.
When, as part of an acquisition, we acquire all of the stock or
all of the assets and liabilities of another company, we assume
liability for certain events or occurrences that took place
prior to the date of acquisition. The maximum potential amount
of future payments we 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 we have not made significant payments
for these indemnifications. Accordingly, no liabilities have
been recorded for these obligations.
In conjunction with certain asset sales, we may provide routine
indemnifications whose terms range in duration and often are not
explicitly defined. Where appropriate, an obligation for such
indemnifications 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 we have not made significant
payments for these indemnifications.
Derivatives
We conduct our operations globally. Consequently, the results of
our operations are exposed to movements in foreign currency
exchange rates. We hedge a portion of our forecasted foreign
currency denominated intercompany sales of inventory, over a
maximum period of 15 months, using forward foreign exchange
contracts (forward exchange contracts) primarily
related to Japanese and European currencies. These derivatives
are designated as cash-flow hedges, and changes in their fair
value are carried in accumulated other comprehensive income in
our consolidated statements of stockholders equity until
the hedged transaction affects earnings. When the hedged
transaction affects earnings, the appropriate gain or loss from
the derivative designated as a hedge of the transaction is
reclassified from accumulated other comprehensive income to cost
of sales in the consolidated statements of operations. As of
December 31, 2005, the amount that will be reclassified
from accumulated other comprehensive income to cost of sales
over the next twelve months is an unrealized gain of
$0.8 million, net of taxes. The ineffective portions of the
derivatives are recorded in cost of sales and were immaterial in
2005, 2004 and 2003, respectively.
We also hedge certain intercompany and other payables with
forward exchange contracts. Typically, as these derivatives
hedge existing amounts that are denominated in foreign
currencies, the derivatives do not qualify for hedge accounting.
The foreign exchange gain or loss on these derivatives was
immaterial in 2005, 2004 and 2003.
30
Realized and unrealized gains and losses on forward exchange
contracts that do not qualify for hedge accounting are
recognized immediately in earnings. The cash flows resulting
from forward exchange contracts that qualify for hedge
accounting are classified in our consolidated statements of cash
flows as part of cash flows from operating activities. Cash
flows resulting from forward exchange contracts that do not
qualify for hedge accounting are classified in our statements of
cash flows as investing activities. We do not hold or issue
derivative financial instruments for trading purposes.
We had forward exchange contracts with notional amounts totaling
$35.3 million outstanding at December 31, 2005, of
which, $28.5 million were outstanding to exchange Japanese
yen for U.S. dollars. We had forward exchange contracts
with notional amounts totaling $26.3 million outstanding at
December 31, 2004 of which $21.6 million were
outstanding to exchange Japanese yen for U.S. dollars.
There were forward exchange contracts with notional amounts
totaling $41.0 million outstanding at December 31,
2003 of which $32.5 million were outstanding to exchange
Japanese yen for U.S. dollars.
Gains and losses on forward exchange contracts that qualify for
hedge accounting are classified in cost of goods sold and
totaled a gain of $0.8 million for the year ended
December 31, 2005 and loss of $1.7 million and
$1.4 million for the years ended December 31, 2004 and
2003, respectively.
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 May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements
(SFAS 154). SFAS 154 provides guidance on
the accounting for and reporting of accounting changes and error
corrections. It establishes, unless impracticable, retrospective
application as the required method for reporting a change in
accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle.
SFAS 154 also provides guidance for determining whether
retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective
application is impracticable. The provisions of this Statement
are effective for accounting changes and corrections of errors
made in fiscal periods beginning after December 15, 2005.
The adoption of the provisions of SFAS 154 is not expected
to have a material impact on our financial position or results
of operations.
In November 2004, the FASB issued Statement of Financial
Accounting Standards No. 151, Inventory Costs
(SFAS 151). SFAS 151 amends ARB
No. 43, Chapter 4, Inventory Pricing. This
statement clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material,
and requires those items be recognized as current period charges
regardless of whether they meet the criterion of so
abnormal. In addition, this statement requires that
allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
We are currently assessing the potential impact of SFAS 151.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123R, Share-Based
Payment (SFAS 123R). SFAS 123R
replaces SFAS 123 and supersedes APB 25.
SFAS 123R focuses primarily on the accounting for
transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R requires
companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards
(with limited exceptions). This statement is effective as of the
first annual reporting period that begins after June 15,
2005. Accordingly, we will adopt SFAS 123R in the first
quarter of fiscal
31
2006 and expect to use the modified-prospective transition
method and will not restate prior periods for the adoption of
SFAS 123R. Although we are currently evaluating the
provisions of SFAS 123R and its implications on our
employee benefit plans, we believe that the adoption of this
standard, based on the terms of our options outstanding at
December 31, 2005, will have a material effect on net
income in 2006.
|
|
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 investment portfolio, short and long term
debt as well as fluctuations in foreign currency exchange rates.
|
|
|
Foreign Exchange Rate Risk |
We enter into forward exchange contracts to reduce currency
exposure arising from intercompany sales of inventory.
There were forward exchange contracts with notional amounts
totaling $35.3 million and $26.3 million outstanding
at December 31, 2005 and 2004, respectively. Of such
forward exchange contracts, $28.5 million and
$21.6 million, respectively, were outstanding to exchange
Japanese yen for U.S. dollars with the remaining amounts
relating to contracts to exchange the British pound and Euro for
U.S. dollars. The potential fair value loss for a
hypothetical 10% adverse change in the forward currency exchange
rate on our forward exchange contracts at December 31, 2005
and 2004 would be $3.4 million and $3.1 million,
respectively. The potential losses in 2005 and 2004 were
estimated by calculating the fair value of the forward exchange
contracts at December 31, 2005 and 2004 and comparing that
with those calculated using the hypothetical forward currency
exchange rates.
At December 31, 2005 we had $59.4 million in loans
outstanding between subsidiaries that were subject to foreign
exchange exposure. At December 31, 2005 a hypothetical 10%
adverse change in foreign exchange rates would result in a net
transaction loss of $6.6 million that would be recorded in
current earnings. Subsequent to December 31, 2005, we
initiated a plan to convert approximately $10.0 million of
these loans to equity which will reduce the loan balance to
approximately $49.4 million. We may enter into forward
currency exchange contracts to further reduce our foreign
exchange exposure related to these remaining loans.
At December 31, 2005, we had $17.0 million related to
short-term borrowings and current portion of long-term debt
denominated in Japanese yen. The carrying value of these
short-term borrowings approximates fair value due to their short
period to maturity. Assuming a hypothetical 10% adverse change
in the Japanese yen to U.S. dollar year end exchange rate,
the fair value of these short-term borrowings would increase by
$1.9 million. The potential increase in fair value was
estimated by calculating the fair value of the short-term
borrowings at December 31, 2005 and comparing that with the
fair value using the hypothetical year end exchange rate.
At December 31, 2004, we had $22.4 million related to
short-term borrowings and current portion of long-term debt
denominated in Japanese yen. The carrying value of these
short-term borrowings approximates fair value due to their short
period to maturity. Assuming a hypothetical 10% adverse change
in the Japanese yen to U.S. dollar year end exchange rate,
the fair value of these short-term borrowings would increase by
$2.5 million. The potential increase in fair value was
estimated by calculating the fair value of the short-term
borrowings at December 31, 2004 and comparing that with the
fair value using the hypothetical year end exchange rate.
Due to its short-term duration, the fair value of our cash and
investment portfolio at December 31, 2005 and 2004
approximated its carrying value. Interest rate risk was
estimated as the potential decrease in fair
32
value resulting from a hypothetical 10% increase in interest
rates for securities contained in the investment portfolio. The
resulting hypothetical fair value was not materially different
from the year-end carrying values.
Our total long-term debt outstanding, including the current
portion, at December 31, 2005 and 2004, was
$6.7 million and $8.7 million, respectively, and
consisted mainly of a mortgage note and industrial development
revenue bond. The interest rates on these debt instruments are
primarily variable and range from 3.0% to 5.6% at
December 31, 2005 and 1.8% to 4.0% at December 31,
2004. Due to the immaterial amounts of the outstanding debt, a
hypothetical change of 10% in interest rates would not have a
material effect on our near-term financial condition or results
of operations.
From time to time, MKS has outstanding short-term borrowings
with variable interest rates, primarily denominated in Japanese
yen. At December 31, 2005 and 2004, we had
$17.0 million and $22.4 million, respectively,
outstanding related to these short-term borrowings at interest
rates ranging from 1.21% to 1.31%. Due to the short-term nature
and amount of this short-term debt, a hypothetical change of 10%
in interest rates would not have a material effect on our
near-term financial condition or results of operations.
33
|
|
Item 8. |
Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
MKS Instruments, Inc.:
We have completed integrated audits of MKS Instruments,
Inc.s 2005 and 2004 consolidated financial statements and
of its internal control over financial reporting as of
December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of MKS
Instruments, Inc. and its subsidiaries at December 31, 2005
and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Annual Report on Internal Control over
Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial
reporting as of December 31, 2005 based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material
respects, based on those criteria. Furthermore, in our opinion,
the Company maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express
opinions on managements assessment and on the
effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
34
A companys 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 companys
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
companys 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2006
35
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
(In thousands, except |
|
|
share data) |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
220,573 |
|
|
$ |
138,389 |
|
|
Short-term investments
|
|
|
72,046 |
|
|
|
97,511 |
|
|
Trade accounts receivable, net of allowances of $3,178 and
$3,238 at December 31, 2005 and 2004, respectively
|
|
|
82,610 |
|
|
|
82,315 |
|
|
Inventories
|
|
|
98,242 |
|
|
|
99,633 |
|
|
Deferred income taxes
|
|
|
15,165 |
|
|
|
12,129 |
|
|
Other current assets
|
|
|
10,511 |
|
|
|
9,908 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
499,147 |
|
|
|
439,885 |
|
Property, plant and equipment, net
|
|
|
78,726 |
|
|
|
80,917 |
|
Long-term investments
|
|
|
857 |
|
|
|
4,775 |
|
Goodwill, net
|
|
|
255,243 |
|
|
|
255,740 |
|
Acquired intangible assets, net
|
|
|
27,422 |
|
|
|
41,604 |
|
Deferred income taxes
|
|
|
|
|
|
|
2,184 |
|
Other assets
|
|
|
2,345 |
|
|
|
3,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
863,740 |
|
|
$ |
828,677 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$ |
16,966 |
|
|
$ |
22,400 |
|
|
Current portion of long-term debt
|
|
|
1,429 |
|
|
|
2,069 |
|
|
Current portion of capital lease obligations
|
|
|
491 |
|
|
|
40 |
|
|
Accounts payable
|
|
|
27,955 |
|
|
|
23,338 |
|
|
Accrued compensation
|
|
|
13,583 |
|
|
|
13,767 |
|
|
Income taxes payable
|
|
|
9,564 |
|
|
|
9,133 |
|
|
Other accrued expenses
|
|
|
19,099 |
|
|
|
21,438 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
89,087 |
|
|
|
92,185 |
|
Long-term debt
|
|
|
5,238 |
|
|
|
6,667 |
|
Long-term portion of capital lease obligations
|
|
|
914 |
|
|
|
80 |
|
Deferred income taxes
|
|
|
2,153 |
|
|
|
|
|
Other liabilities
|
|
|
3,505 |
|
|
|
3,111 |
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
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;
54,397,267 and 53,839,098 shares issued and outstanding at
December 31, 2005 and 2004, respectively
|
|
|
113 |
|
|
|
113 |
|
|
Additional paid-in capital
|
|
|
639,152 |
|
|
|
631,760 |
|
|
Retained earnings
|
|
|
116,642 |
|
|
|
82,077 |
|
|
Accumulated other comprehensive income
|
|
|
6,936 |
|
|
|
12,684 |
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
762,843 |
|
|
|
726,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
863,740 |
|
|
$ |
828,677 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
36
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
(In thousands, except share data) |
Net sales
|
|
$ |
509,294 |
|
|
$ |
555,080 |
|
|
$ |
337,291 |
|
Cost of sales
|
|
|
308,860 |
|
|
|
335,709 |
|
|
|
219,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
200,434 |
|
|
|
219,371 |
|
|
|
118,109 |
|
Research and development
|
|
|
55,916 |
|
|
|
56,973 |
|
|
|
47,650 |
|
Selling, general and administrative
|
|
|
93,021 |
|
|
|
87,284 |
|
|
|
69,891 |
|
Amortization of acquired intangible assets
|
|
|
13,864 |
|
|
|
14,764 |
|
|
|
14,692 |
|
Restructuring and asset impairment charges
|
|
|
85 |
|
|
|
437 |
|
|
|
1,593 |
|
Income from litigation settlement
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
40,548 |
|
|
|
59,913 |
|
|
|
(15,717 |
) |
Interest expense
|
|
|
810 |
|
|
|
510 |
|
|
|
689 |
|
Interest income
|
|
|
7,269 |
|
|
|
2,423 |
|
|
|
1,745 |
|
Other income, net
|
|
|
|
|
|
|
5,402 |
|
|
|
927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
47,007 |
|
|
|
67,228 |
|
|
|
(13,734 |
) |
Provision (benefit) for income taxes
|
|
|
12,442 |
|
|
|
(2,611 |
) |
|
|
2,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
34,565 |
|
|
$ |
69,839 |
|
|
$ |
(16,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.64 |
|
|
$ |
1.30 |
|
|
$ |
(0.32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.63 |
|
|
$ |
1.28 |
|
|
$ |
(0.32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
54,067 |
|
|
|
53,519 |
|
|
|
51,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
54,633 |
|
|
|
54,656 |
|
|
|
51,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
37
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005, 2004 and 2003 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
Common Stock |
|
Additional |
|
|
|
Comprehensive |
|
|
|
Total |
|
|
|
|
Paid-In |
|
Retained |
|
Income |
|
Comprehensive |
|
Stockholders |
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
(Loss) |
|
Income (loss) |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share data) |
Balance at December 31, 2002
|
|
|
51,359,753 |
|
|
$ |
113 |
|
|
$ |
579,175 |
|
|
$ |
28,623 |
|
|
$ |
2,779 |
|
|
|
|
|
|
$ |
610,690 |
|
Issuance of common stock from exercise of stock options and
Employee Stock Purchase Plan
|
|
|
680,266 |
|
|
|
|
|
|
|
8,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,603 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132 |
|
Comprehensive loss (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,385 |
) |
|
|
|
|
|
$ |
(16,385 |
) |
|
|
(16,385 |
) |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in value of financial instruments designated as cash
flow hedges and unrealized gain (loss) on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,780 |
) |
|
|
(1,780 |
) |
|
|
(1,780 |
) |
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,050 |
|
|
|
7,050 |
|
|
|
7,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
52,040,019 |
|
|
|
113 |
|
|
|
587,910 |
|
|
|
12,238 |
|
|
|
8,049 |
|
|
|
|
|
|
|
608,310 |
|
Issuance of common stock from exercise of stock options and
Employee Stock Purchase Plan
|
|
|
484,793 |
|
|
|
|
|
|
|
6,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,030 |
|
Issuance of common stock through public offering, net of
issuance costs of $399
|
|
|
1,314,286 |
|
|
|
|
|
|
|
32,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,549 |
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
5,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,271 |
|
Comprehensive income (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,839 |
|
|
|
|
|
|
|
69,839 |
|
|
|
69,839 |
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in value of financial instruments designated as cash
flow hedges and unrealized gain (loss) on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
973 |
|
|
|
973 |
|
|
|
973 |
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,662 |
|
|
|
3,662 |
|
|
|
3,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
53,839,098 |
|
|
|
113 |
|
|
|
631,760 |
|
|
|
82,077 |
|
|
|
12,684 |
|
|
|
|
|
|
|
726,634 |
|
Issuance of common stock from exercise of stock options and
Employee Stock Purchase Plan
|
|
|
558,169 |
|
|
|
|
|
|
|
6,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,058 |
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
1,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,102 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232 |
|
Comprehensive income (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,565 |
|
|
|
|
|
|
|
34,565 |
|
|
|
34,565 |
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in value of financial instruments designated as cash
flow hedges and unrealized gain (loss) on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,663 |
|
|
|
1,663 |
|
|
|
1,663 |
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,411 |
) |
|
|
(7,411 |
) |
|
|
(7,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
54,397,267 |
|
|
$ |
113 |
|
|
$ |
639,152 |
|
|
$ |
116,642 |
|
|
$ |
6,936 |
|
|
|
|
|
|
$ |
762,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
38
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
(In thousands) |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
34,565 |
|
|
$ |
69,839 |
|
|
$ |
(16,385 |
) |
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
26,215 |
|
|
|
27,838 |
|
|
|
28,198 |
|
|
|
|
Deferred taxes
|
|
|
303 |
|
|
|
(10,229 |
) |
|
|
716 |
|
|
|
|
Gain on collection of note receivable
|
|
|
|
|
|
|
(5,042 |
) |
|
|
|
|
|
|
|
Other
|
|
|
1,569 |
|
|
|
(426 |
) |
|
|
151 |
|
|
|
|
Changes in operating assets and liabilities, net of effects of
businesses acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(4,702 |
) |
|
|
(15,197 |
) |
|
|
(17,426 |
) |
|
|
|
|
Inventories
|
|
|
(1,829 |
) |
|
|
(15,919 |
) |
|
|
(6,656 |
) |
|
|
|
|
Other current assets
|
|
|
307 |
|
|
|
(1,244 |
) |
|
|
1,328 |
|
|
|
|
|
Accrued expenses
|
|
|
(2 |
) |
|
|
10,790 |
|
|
|
169 |
|
|
|
|
|
Accounts payable
|
|
|
6,362 |
|
|
|
(3,632 |
) |
|
|
9,720 |
|
|
|
|
|
Income taxes payable
|
|
|
1,372 |
|
|
|
9,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
64,160 |
|
|
|
66,399 |
|
|
|
(185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term and long-term available-for-sale
investments
|
|
|
(215,551 |
) |
|
|
(218,478 |
) |
|
|
(93,999 |
) |
|
Maturities and sales of short-term and long-term
available-for-sale investments
|
|
|
244,736 |
|
|
|
184,422 |
|
|
|
80,046 |
|
|
Purchases of property, plant and equipment
|
|
|
(10,281 |
) |
|
|
(18,270 |
) |
|
|
(6,348 |
) |
|
Proceeds from sale of assets
|
|
|
241 |
|
|
|
1,619 |
|
|
|
|
|
|
Business combinations, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(2,150 |
) |
|
Proceeds from collection of note receivable
|
|
|
|
|
|
|
5,042 |
|
|
|
|
|
|
Other
|
|
|
901 |
|
|
|
1,422 |
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
20,046 |
|
|
|
(44,243 |
) |
|
|
(21,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
79,005 |
|
|
|
67,844 |
|
|
|
69,791 |
|
|
Payments on short-term borrowings
|
|
|
(81,729 |
) |
|
|
(64,127 |
) |
|
|
(67,619 |
) |
|
Payments on long-term debt
|
|
|
(2,036 |
) |
|
|
(2,539 |
) |
|
|
(5,029 |
) |
|
Principal payments on capital lease obligations
|
|
|
(377 |
) |
|
|
(39 |
) |
|
|
(456 |
) |
|
Proceeds from exercise of stock options and employee stock
purchase plan
|
|
|
6,058 |
|
|
|
6,030 |
|
|
|
8,603 |
|
|
Proceeds from the sale of common stock, net
|
|
|
|
|
|
|
32,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
921 |
|
|
|
39,718 |
|
|
|
5,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(2,943 |
) |
|
|
1,855 |
|
|
|
2,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
82,184 |
|
|
|
63,729 |
|
|
|
(14,160 |
) |
Cash and cash equivalents at beginning of period
|
|
|
138,389 |
|
|
|
74,660 |
|
|
|
88,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
220,573 |
|
|
$ |
138,389 |
|
|
$ |
74,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
784 |
|
|
$ |
447 |
|
|
$ |
664 |
|
|
|
Income taxes
|
|
$ |
10,213 |
|
|
$ |
4,923 |
|
|
$ |
512 |
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment capital leases
|
|
$ |
1,666 |
|
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
39
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
1) Description of Business
MKS Instruments, Inc. was founded in 1961 and is a leading
worldwide provider of instruments, components, subsystems and
process control solutions that measure, control, power and
monitor critical parameters of semiconductor and other advanced
manufacturing processes. MKS is managed as one operating segment
which is organized around three product groups: Instruments and
Control Systems, Power and Reactive Gas Products and Vacuum
Products. MKS products are derived from its core
competencies in pressure measurement and control, materials
delivery, gas and thin-film composition analysis, electrostatic
change control, control and information management, power and
reactive gas generation and vacuum technology.
2) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of
MKS Instruments, Inc. and its wholly owned subsidiaries
(collectively, the Company). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Net Income Per Share
Basic earnings per share is based on the weighted average number
of common shares outstanding, and diluted earnings per share is
based on the weighted average number of common shares
outstanding and all dilutive potential 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.
The following is a reconciliation of basic to diluted net income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
34,565 |
|
|
$ |
69,839 |
|
|
$ |
(16,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income (loss) per common share
basic
|
|
|
54,067,000 |
|
|
|
53,519,000 |
|
|
|
51,581,000 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
566,000 |
|
|
|
1,137,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income (loss) per common share
diluted
|
|
|
54,633,000 |
|
|
|
54,656,000 |
|
|
|
51,581,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic
|
|
$ |
0.64 |
|
|
$ |
1.30 |
|
|
$ |
(0.32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$ |
0.63 |
|
|
$ |
1.28 |
|
|
$ |
(0.32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding of 5,957,682, 5,513,054 and 8,897,899 during
the years ended December 31, 2005, 2004 and 2003,
respectively, are excluded from the calculation of diluted net
income (loss) per common share because their inclusion would be
anti-dilutive.
Stock-Based Compensation
The Company has several stock-based employee compensation plans.
The Company accounts for stock-based awards to employees using
the intrinsic value method as prescribed by Accounting
Principles Board
40
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations.
Accordingly, no compensation expense is recorded for options
issued to employees in fixed amounts with fixed exercise prices
at least equal to the fair market value of the Companys
common stock at the date of grant. The Company has adopted the
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure,
(SFAS 123) through disclosure only.
The following table illustrates the effect on net income and net
income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based
employee awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Net income (loss) as reported
|
|
$ |
34,565 |
|
|
$ |
69,839 |
|
|
$ |
(16,385 |
) |
|
Add: Stock-based employee compensation expense included in
reported net income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all awards, net
of tax
|
|
|
(24,321 |
) |
|
|
(15,933 |
) |
|
|
(21,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
10,244 |
|
|
$ |
53,906 |
|
|
$ |
(38,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
0.64 |
|
|
$ |
1.30 |
|
|
$ |
(0.32 |
) |
|
|
Basic Pro forma
|
|
$ |
0.19 |
|
|
$ |
1.01 |
|
|
$ |
(0.74 |
) |
|
|
Diluted as reported
|
|
$ |
0.63 |
|
|
$ |
1.28 |
|
|
$ |
(0.32 |
) |
|
|
Diluted Pro forma
|
|
$ |
0.19 |
|
|
$ |
0.99 |
|
|
$ |
(0.74 |
) |
There is no tax benefit included in the stock-based employee
compensation expense determined under the fair-value-based
method for the year ended December 31, 2003, as the Company
had a full valuation allowance for its net deferred tax assets
at December 31, 2003. For the years ended December 31,
2005 and 2004, stock-based employee compensation expense
included a tax benefit.
The weighted average grant date fair value of options granted
during 2005, 2004 and 2003 was $8.27, $11.24 and $15.91 per
option, respectively. The fair value of options at the date of
grant was estimated using the Black-Scholes option-pricing model
with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Expected life (years)
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Interest rate
|
|
|
4.0 |
% |
|
|
3.6 |
% |
|
|
3.3 |
% |
Volatility
|
|
|
51.0 |
% |
|
|
74.0 |
% |
|
|
78.0 |
% |
Dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The weighted average fair value of employee stock purchase
rights granted in 2005, 2004 and 2003 was $4.18, $7.05 and
$7.08, respectively. The fair value of the employees
purchase rights was estimated using the Black-Scholes
option-pricing model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Expected life (years)
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Interest rate
|
|
|
2.7 |
% |
|
|
1.3 |
% |
|
|
1.2 |
% |
Volatility
|
|
|
34.0 |
% |
|
|
73.0 |
% |
|
|
78.0 |
% |
Dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
41
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R,
Share-Based Payment (SFAS 123R).
SFAS 123R replaces SFAS 123 and supersedes
APB 25. SFAS 123R focuses primarily on the accounting
for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R requires
companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards.
SFAS 123R is effective for the Company as of the first
annual period that begins after June 15, 2005. Accordingly,
the Company will adopt SFAS 123R in its first quarter of
fiscal 2006. The Company expects to use the modified-prospective
transition method and will not restate prior periods for the
adoption of SFAS 123R. Although the Company is currently
evaluating the provisions of SFAS 123R and its implications
on its employee benefit plans, it believes that the adoption of
this standard, based on the terms of the options outstanding at
December 31, 2005, will have a material effect on the
Companys net income for the year ending December 31,
2006.
On January 7, 2005, the Company accelerated the vesting of
outstanding stock options granted to employees and officers with
an exercise price of $23.00 or greater. As a result of this
action, options to purchase approximately 1.6 million
shares of the Companys common stock became exercisable on
January 7, 2005. No compensation expense was recorded in
the Companys consolidated statement of operations for the
year ended December 31, 2005 related to this action as
these options had no intrinsic value on January 7, 2005.
For purposes of the SFAS 123 pro forma calculation above,
the expense related to the options that were accelerated was
$16,886,000, net of tax, for the year ended December 31,
2005. The reason that the Company accelerated the vesting of the
identified stock options was to reduce the Companys
compensation expense in periods subsequent to the adoption of
SFAS 123R.
Foreign Exchange
The functional currency of the majority of the Companys
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 in
consolidated stockholders equity. Foreign exchange
transaction gains and losses, which arise from transaction
activity and are reflected in operations, were immaterial in
2005, 2004 and 2003.
Revenue Recognition
Revenue from product sales is recorded upon transfer of title
and risk of loss to the customer provided that there is evidence
of an arrangement, the sales price is fixed or determinable, and
collection of the related receivable is reasonably assured. In
most transactions, the Company has no obligations to customers
after the date products are shipped other than pursuant to
warranty obligations. In some instances, the Company provides
installation and training to customers after the product has
been shipped. In accordance with the Emerging Issues Task Force
(EITF) 00-21 Accounting For Revenue
Arrangements With Multiple Deliverables, the Company
defers the fair value related to any undelivered elements until
the undelivered element is delivered. Fair value is the price
charged when the element is sold separately. The Company
provides for the estimated costs to fulfill customer warranty
obligations upon the recognition of the related revenue.
Shipping and handling fees, if any, billed to customers are
recognized as revenue. The related shipping and handling costs
are recognized in cost of sales. 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
42
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
credit losses based upon its historical experience and any
specific customer collection issues that it has identified.
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 fair value of short-term available-for-sale investments with
maturities or estimated lives of less than one year consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Federal Government and Government Agency Obligations
|
|
$ |
15,336 |
|
|
$ |
60,445 |
|
Commercial Paper and Corporate Obligations
|
|
|
56,710 |
|
|
|
37,066 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
72,046 |
|
|
$ |
97,511 |
|
|
|
|
|
|
|
|
|
|
The fair value of long-term available-for-sale investments with
maturities or estimated lives of one to five years consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Commercial Paper and Corporate Obligations
|
|
$ |
857 |
|
|
$ |
3,989 |
|
Mutual Funds
|
|
|
|
|
|
|
786 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
857 |
|
|
$ |
4,775 |
|
|
|
|
|
|
|
|
|
|
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. Unrealized gains and losses on securities
classified as available-for-sale are included in accumulated
other comprehensive income in consolidated stockholders
equity. Gross unrealized gains and gross unrealized losses on
available-for-sale investments were not material at
December 31, 2005 and 2004. At December 31, 2005, the
fair value of available-for-sale investments with gross
unrealized losses was $16,993,000. Realized gains (losses) on
securities were immaterial in 2005, 2004 and 2003. The cost of
securities sold is based on the specific identification method.
Inventories
The Company values its inventory at the lower of cost
(first-in, first-out
method) or market. The Company regularly reviews inventory
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. Equipment
acquired under capital leases is recorded at the present value
of the minimum lease payments required during the lease period.
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.
43
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
Depreciation is provided on the straight-line method over the
estimated useful lives of twenty to thirty-one and one-half
years for buildings and three to seven years for machinery and
equipment and furniture and fixtures and office equipment, which
includes ERP 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 entities
accounted for using the purchase method of accounting are
estimated by management based on the fair value of assets
acquired. These include acquired customer lists, technology,
patents, trade name and covenants not to compete. Intangible
assets are amortized from three to eight years on a
straight-line basis which represents the estimated periods of
benefit.
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 assesses goodwill for impairment on an
annual basis during the fourth quarter of each fiscal year, or
more frequently when events and circumstances occur indicating
that the recorded goodwill may be impaired. If the book value of
a reporting unit exceeds its fair value, the implied fair value
of goodwill is compared with the carrying amount of goodwill. If
the carrying amount of goodwill exceeds the implied fair value,
an impairment loss is recorded equal to that excess.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived
assets which include acquired amortizable intangible assets, in
accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144).
SFAS 144 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds
the future undiscounted cash flows attributable to such assets.
If an impairment is indicated, the assets are written down to
their estimated fair value.
Research and Development
Research and development costs are expensed as incurred and
consist mainly of compensation related expenses and project
materials. The Companys research and development efforts
include numerous projects which generally have a duration of 12
to 30 months.
In-Process Research and Development
The Company values tangible and intangible assets acquired
through its business acquisitions at fair value including
in-process research and development (IPR&D). The
Company determines IPR&D through established valuation
techniques for various projects for the development of new
products and technologies and expenses IPR&D when technical
feasibility is not reached.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs
were immaterial in 2005, 2004 and 2003.
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
44
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
operating loss and tax credit carryforwards. The Company
evaluates the realizability of its net deferred tax assets and
assesses the need for a valuation allowance on a quarterly
basis. 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. The Company records
a valuation allowance to reduce its net deferred tax assets to
the amount that is more likely than not to be realized. To the
extent the Company establishes a valuation allowance, an expense
will be recorded within the provision for income taxes line on
the statement of operations. During the year ended
December 31, 2002 the Company established a full valuation
allowance for its net deferred tax assets. In periods subsequent
to establishing a valuation allowance, if the Company were to
determine that it would be able to realize its net deferred tax
assets in excess of their net recorded amount, an adjustment to
the valuation allowance would be recorded as a reduction to
income tax expense in the period such determination was made.
During the fourth quarter of 2004, after examining a number of
factors, including historical results and near term earnings
projections, the Company determined that it was more likely than
not that it would realize all of its net deferred tax assets,
except for those related to certain state tax credits and
adjusted the valuation allowance at December 31, 2004.
On October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was signed into law. The Act contains a
provision allowing U.S. multinational companies a one-time
incentive to repatriate foreign earnings at an effective tax
rate of 5.25%. During 2005, the Company conducted an extensive
study of the new provision and concluded that no opportunities
existed from which the Company could benefit from repatriation
of its undistributed foreign earnings. Through December 31,
2005, the Company has not provided deferred U.S. income
taxes on the undistributed earnings of its foreign subsidiaries
because such earnings were intended to be permanently reinvested
outside the U.S. Determination of the potential deferred
income tax liability on these undistributed earnings is not
practicable because such liability, if any, is dependent on
circumstances existing if and when remittance occurs. At
December 31, 2005, the Company had $80,173,000 of
undistributed earnings in its foreign subsidiaries.
New Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements
(SFAS 154). SFAS 154 provides guidance on
the accounting for and reporting of accounting changes and error
corrections. It establishes, unless impracticable, retrospective
application as the required method for reporting a change in
accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle.
SFAS 154 also provides guidance for determining whether
retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective
application is impracticable. The provisions of this Statement
are effective for accounting changes and corrections of errors
made in fiscal periods beginning after December 15, 2005.
The adoption of the provisions of SFAS 154 is not expected
to have a material impact on the Companys financial
position or results of operations.
In November 2004, the FASB issued Statement of Financial
Accounting Standards No. 151, Inventory Costs
(SFAS 151). SFAS 151 amends ARB
No. 43, Chapter 4, Inventory Pricing. This
statement clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material,
and requires those items be recognized as current period charges
regardless of whether they meet the criterion of so
abnormal. In addition, this statement requires that
allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
The Company is currently assessing the potential impact of
SFAS 151.
45
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
Use of Estimates
The consolidated financial statements 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 during the reporting period. On an on-going basis,
management evaluates its estimates and judgments, including
those related to revenue recognition, inventory, intangible
assets, goodwill, and other long-lived assets, in-process
research and development, merger expenses, income taxes and
investments. Management bases its estimates and judgments on
historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Reclassifications
Certain prior year amounts have been reclassified to be
consistent with the current year classifications.
3) Financial Instruments and Risk Management
Foreign Exchange Risk Management
The Company hedges a portion of its forecasted foreign currency
denominated intercompany sales of inventory, over a maximum
period of fifteen months, using forward exchange contracts
primarily related to Japanese and European currencies. These
derivatives are designated as cash-flow hedges, and changes in
their fair value are carried in accumulated other comprehensive
income until the hedged transaction affects earnings. When the
hedged transaction affects earnings, the appropriate gain or
loss from the derivative designated as a hedge of the
transaction is reclassified from accumulated other comprehensive
income to cost of sales. As of December 31, 2005, the
amount that will be reclassified from accumulated other
comprehensive income to cost of sales over the next twelve
months is an unrealized gain of $829,000, net of taxes. The
ineffective portion of the derivatives is recorded in cost of
sales and was immaterial in 2005, 2004 and 2003.
The Company hedges certain intercompany and other payables with
forward foreign exchange contracts (forward exchange
contracts). Since these derivatives hedge existing amounts
that are denominated in foreign currencies, the derivatives do
not qualify for hedge accounting under SFAS No. 133.
The foreign exchange gain or loss on these derivatives was
immaterial in 2005, 2004 and 2003.
Realized and unrealized gains and losses on forward exchange
contracts that do not qualify for hedge accounting are
recognized immediately in earnings. The cash flows resulting
from forward exchange contracts that qualify for hedge
accounting are classified in the consolidated statement of cash
flows as part of cash flows from operating activities. Cash
flows resulting from forward exchange contracts that do not
qualify for hedge accounting are classified in the consolidated
statement of cash flows as investing activities. The Company
does not hold or issue derivative financial instruments for
trading purposes.
There were forward exchange contracts with notional amounts
totaling $35,299,000 outstanding at December 31, 2005. Of
such forward exchange contracts, $28,461,000 were outstanding to
exchange Japanese yen for US dollars. There were forward
exchange contracts with notional amounts totaling $26,301,000
outstanding at December 31, 2004. Of such forward exchange
contracts, $21,550,000 were outstanding to exchange Japanese yen
for US dollars. There were forward exchange contracts with
notional amounts totaling $41,018,000 outstanding at
December 31, 2003 of which $32,488,000 were outstanding to
exchange Japanese yen for U.S. dollars.
46
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
Gains and losses on forward exchange contracts that qualify for
hedge accounting are classified in cost of goods sold and
totaled a gain of $812,000 for the year ended December 31,
2005 and a loss of $1,666,000 and $1,411,000 for the years ended
December 31, 2004 and 2003, respectively.
The fair values of forward exchange contracts at
December 31, 2005 and 2004, determined by applying period
end currency exchange rates to the notional contract amounts,
amounted to an unrealized gain of $1,237,000 and an unrealized
loss of $1,479,000, respectively.
Concentrations of Credit Risk
The Companys 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 has borrowings.
The Company maintains investments primarily in
U.S. Treasury and government agency securities and
corporate debt securities, rated AA or higher. The Company
enters into forward currency contracts with high credit-quality
financial institutions in order to minimize credit risk
exposure. The Companys customers are primarily
concentrated in the semiconductor industry, and a limited number
of customers account for a significant portion of the
Companys 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.
Fair Value of Financial Instruments
The fair value of the term loans, including the current portion,
approximates its carrying value given its variable rate interest
provisions. The fair value of marketable securities is based on
quoted market prices. The fair value of mortgage notes is based
on borrowing rates for similar instruments and, therefore,
approximates its carrying value. For all other balance sheet
financial instruments, the carrying amount approximates fair
value because of the short period to maturity of these
instruments.
4) Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Raw material
|
|
$ |
48,235 |
|
|
$ |
46,479 |
|
Work in process
|
|
|
18,283 |
|
|
|
18,330 |
|
Finished goods
|
|
|
31,724 |
|
|
|
34,824 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
98,242 |
|
|
$ |
99,633 |
|
|
|
|
|
|
|
|
|
|
47
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
5) Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Land
|
|
$ |
11,291 |
|
|
$ |
11,820 |
|
Buildings
|
|
|
62,963 |
|
|
|
62,608 |
|
Machinery and equipment
|
|
|
79,839 |
|
|
|
77,196 |
|
Furniture and fixtures and office equipment
|
|
|
36,692 |
|
|
|
29,984 |
|
Leasehold improvements
|
|
|
6,966 |
|
|
|
5,413 |
|
Construction in progress
|
|
|
1,681 |
|
|
|
8,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
199,432 |
|
|
|
195,528 |
|
Less: accumulated depreciation and amortization
|
|
|
120,706 |
|
|
|
114,611 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
78,726 |
|
|
$ |
80,917 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment
totaled $12,351,000, $13,074,000 and $13,508,000 for the years
ended December 31, 2005, 2004 and 2003, respectively.
6) Debt
Credit Agreements and Short-Term Borrowings
On August 1, 2005, the Company renewed an unsecured
short-term LIBOR based loan agreement with a bank to be utilized
primarily by its Japanese subsidiary for short-term liquidity
purposes. The credit line, which expires on July 31, 2006,
provides for the Company to borrow in multiple currencies of up
to an equivalent of $35,000,000 U.S. dollars. At
December 31, 2005, the Company had outstanding borrowings
of $11,028,000 U.S. dollars, payable on demand, at an
interest rate of 1.31%.
Additionally, the Companys Japanese subsidiary has lines
of credit and short-term borrowing arrangements with one
financial institution which provide for aggregate borrowings as
of December 31, 2005 of up to $12,725,000, which generally
expire and are renewed at three month intervals. At
December 31, 2005 and 2004, total borrowings outstanding
under these arrangements were $5,938,000 and $7,790,000,
respectively, at interest rates ranging from 1.21% to 1.24% at
December 31, 2005 and 1.24% at December 31, 2004.
Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Term loans
|
|
$ |
|
|
|
$ |
640 |
|
Mortgage notes
|
|
|
6,667 |
|
|
|
8,096 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
6,667 |
|
|
|
8,736 |
|
Less: current portion
|
|
|
1,429 |
|
|
|
2,069 |
|
|
|
|
|
|
|
|
|
|
Long-term debt less current portion
|
|
$ |
5,238 |
|
|
$ |
6,667 |
|
|
|
|
|
|
|
|
|
|
In connection with an acquisition in 2002, the Company assumed a
long-term debt agreement with the County of Monroe Industrial
Development Agency (COMIDA) for a manufacturing facility
located in
48
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
Rochester, New York. The terms are the same as that of the
underlying Industrial Development Revenue Bond which calls for
payments of interest only through July 1, 2014, at which
time the Bond is repayable in a lump sum of $5,000,000. Interest
is reset annually based on bond remarketing, with an option by
the Company to elect a fixed rate, subject to a maximum rate of
13% per annum. At December 31, 2005 the interest rate
was 3%. The bond is collateralized by the building. The
remaining principal balance outstanding at December 31,
2005 was $5,000,000. The net book value of the building at
December 31, 2005 was approximately $10,075,000.
On March 6, 2000, the Company entered into a mortgage note
payable with a bank to borrow $10,000,000 to finance the
purchase of land and a building. Principal and interest of
$119,000 is being paid in monthly installments with final
payments due in March 2007. The remaining principal as of
December 31, 2005 was $1,667,000 with a variable interest
rate of 5.55%. The net book value of the land and building,
including improvements, at December 31, 2005 was
approximately $17,474,000.
In connection with the purchase of Telvac Engineering, Ltd., the
Company issued term loans of $752,000. Principal payments of
$61,000 were due on an annual basis through December 1,
2004 and the remaining principal was paid in full in 2005.
The Company had an outstanding term loan from a foreign bank,
with principal due on April 2, 2004. This loan was paid in
full in 2004.
Aggregate maturities of long-term debt over the next five years
are as follows:
|
|
|
|
|
|
|
Aggregate Maturities |
|
|
|
Year ending December 31,
|
|
|
|
|
2006
|
|
$ |
1,429 |
|
2007
|
|
|
238 |
|
2008
|
|
|
|
|
2009
|
|
|
|
|
2010
|
|
|
|
|
Thereafter
|
|
|
5,000 |
|
|
|
|
|
|
|
|
$ |
6,667 |
|
|
|
|
|
|
7) Commitments and Contingencies
On April 3, 2003, Advanced Energy Industries, Inc.
(Advanced Energy) filed suit against MKS in federal
district court in Colorado (Colorado Action),
seeking a declaratory judgment that Advanced Energys
Xstream product does not infringe three patents held by
MKS subsidiary, Applied Science and Technology, Inc.
(ASTeX). On May 14, 2003, MKS brought suit in
federal district court in Delaware against Advanced Energy for
infringement of five ASTeX patents, including the three patents
at issue in the Colorado Action. MKS sought injunctive relief
and damages for Advanced Energys infringement. On
December 24, 2003, the Colorado court transferred Advanced
Energys Colorado Action to Delaware. In connection with
the jury trial, the parties agreed to present the jury with
representative claims from three of the five ASTeX patents. On
July 23, 2004, the jury found that Advanced Energy
infringed all three patents. On October 3, 2005, MKS and
Advanced Energy entered into a settlement agreement, pursuant to
which Advanced Energy paid MKS $3,000,000 in cash in October
2005. The settlement agreement also provided that Advanced
Energy would not make, use, sell or offer to sell its Rapid,
Rapid FE, Rapid OE and Xstream products (or related products) in
the United States or any other country in which MKS held a
relevant patent or had pending a patent application on the date
of the settlement agreement, during the life of any such patent
49
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
(or resulting patent, in the case of patent applications). On
October 6, 2005, the federal district court in Delaware
issued a final judgment of infringement and an injunction
prohibiting Advanced Energy from making, using, selling,
offering to sell, or importing into the United States such
products.
On November 3, 1999, On-Line Technologies, Inc.
(On-Line), which MKS acquired in 2001, brought suit
in federal district court in Connecticut against Perkin-Elmer,
Inc. and certain other defendants for infringement of
On-Lines patent related to its FTIR spectrometer product
and related claims. The suit sought injunctive relief and
damages for infringement. Perkin-Elmer, Inc. filed a
counterclaim seeking invalidity of the patent, costs and
attorneys fees. In June 2002, the defendants filed a
motion for summary judgment. In April 2003, the court granted
the motion and dismissed the case. MKS appealed this decision to
the federal circuit court of appeals. On October 13, 2004,
the federal circuit court of appeals reversed the lower
courts dismissal of certain claims in the case.
Accordingly, the case has been remanded to the United States
District Court in Connecticut for further proceedings on the
merits of the remaining claims. On March 11, 2005,
Perkin-Elmer, Inc. submitted to the court a stipulation that it
infringed a specified claim of On-Lines patent and filed a
motion for summary judgment that such patent claim is invalid.
On April 6, 2005, MKS filed a reply to the summary judgment
motion. The parties are awaiting the courts response to
the motion.
The Company is subject to other 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 the Companys
results of operations, financial condition or cash flows.
The Company leases certain of its facilities and machinery and
equipment under capital and operating leases expiring in various
years through 2010 and thereafter. Generally, the facility
leases require the Company to pay maintenance, insurance and
real estate taxes. Rental expense under operating leases totaled
$7,439,000, $8,344,000 and $7,253,000, for the years ended
December 31, 2005, 2004 and 2003, respectively.
Minimum lease payments under operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
Capital Leases |
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
5,760 |
|
|
$ |
562 |
|
|
2007
|
|
|
4,364 |
|
|
|
684 |
|
|
2008
|
|
|
2,674 |
|
|
|
273 |
|
|
2009
|
|
|
1,862 |
|
|
|
|
|
|
2010
|
|
|
1,240 |
|
|
|
|
|
|
Thereafter
|
|
|
4,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$ |
20,034 |
|
|
|
1,519 |
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
|
|
|
|
1,405 |
|
Less: current portion
|
|
|
|
|
|
|
491 |
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
|
|
|
|
$ |
914 |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, the Company has entered into
non-cancelable 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 $69,835,000. Additionally, the
Company has engaged a third party to provide certain computer
equipment, IT network services and IT support. This contract is
for a period of approximately six years beginning in September
2004 and has a significant penalty for early termination. The
50
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
obligation of approximately $26,000,000, excluding capital lease
and interest payments of $1,519,000, will be paid over the term
of the arrangement. Average annual payments are expected to be
approximately $5,200,000.
To the extent permitted by Massachusetts law, the Companys
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 Companys employee
benefit plans. Because no claim for indemnification has been
pursued by any person covered by the relevant provisions of the
Companys Restated Articles of Organization, the Company
believes that the estimated exposure for these indemnification
obligations is currently minimal. Accordingly, the Company has
no liabilities recorded for these requirements as of
December 31, 2005.
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 Companys
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, unlimited. 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, 2005.
When, as part of an acquisition, the Company acquires all of the
stock or all of the assets and liabilities of another company,
the Company assumes liability for certain events or occurrences
that took place prior to the date of acquisition. 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
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 indemnifications 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.
8) Stockholders Equity
Issuance of Common Stock
On January 21, 2004, the Company issued
1,142,857 shares of its common stock at $26.25 per
share through a public offering. Proceeds of the offering, net
of underwriters discount and offering expenses, were
$28,251,000. On January 23, 2004, the underwriters
exercised their over-allotment option and therefore, the Company
issued an additional 171,429 shares of its common stock,
which generated net proceeds of $4,298,000.
Stock Purchase Plans
The Companys Third Amended and Restated 1999 Employee
Stock Purchase Plan (the Purchase Plan) authorizes
the issuance of up to an aggregate of 1,250,000 shares of
Common Stock to participating
51
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
employees. Offerings under the Purchase Plan commence on
June 1 and December 1 and terminate, respectively, on
November 30 and May 31. Under the Purchase Plan,
eligible employees may purchase shares of Common Stock through
payroll deductions of up to 10% of their compensation. The price
at which an employees option is exercised is the lower of
(1) 85% of the closing price of the Common Stock on the
Nasdaq National Market on the day that each offering commences
or (2) 85% of the closing price on the day that each
offering terminates. During 2005 and 2004 the Company issued
113,525 and 100,867 shares, respectively, of Common Stock
to employees who participated in the Purchase Plan at exercise
prices of $14.19 and $14.27 in 2005 and $19.86 and $14.44 in
2004. As of December 31, 2005 there were
592,087 shares reserved for future issuance under the
Purchase Plan.
The Companys Second Amended and Restated International
Employee Stock Purchase Plan (the Foreign Purchase
Plan) authorizes the issuance of up to an aggregate of
250,000 shares of Common Stock to participating employees.
Offerings under the Foreign Purchase Plan commence on
June 1 and December 1 and terminate, respectively, on
November 30 and May 31. Under the Foreign Purchase
Plan, eligible employees may purchase shares of Common Stock
through payroll deductions of up to 10% of their compensation.
The price at which an employees option is exercised is the
lower of (1) 85% of the closing price of the Common Stock
on the Nasdaq National Market on the day that each offering
commences or (2) 85% of the closing price on the day that
each offering terminates. During 2005 and 2004, the Company
issued 24,933 and 21,786 shares of Common Stock to
employees who participated in the Foreign Purchase Plan at
exercise prices of $14.19 and $14.27 and $19.86 and
$14.44 per share, respectively. As of December 31,
2005 there were 138,456 shares reserved for future issuance
under the Foreign Purchase Plan.
Stock Option Plans
The Companys 2004 Stock Incentive Plan (the 2004
Plan) was adopted by the board of directors on
March 4, 2004 and approved by the stockholders on
May 13, 2004. As of December 31, 2005, there were
2,691,955 shares authorized for issuance under the 2004
Plan, which amount shall increase each year by an amount equal
to 5% of the total outstanding shares of the Companys
common stock outstanding on January 1 of such year, provided
that the maximum aggregate number of shares of common stock
which may be issued under the 2004 Plan is
15,000,000 shares (subject to adjustment for certain
changes in MKS capitalization). The Company may grant
options, restricted stock awards, stock appreciation rights and
other stock-based awards to employees, officers, directors,
consultants and advisors under the 2004 Plan. As of
December 31, 2005 there were 2,599,955 shares
available for future grant under the 2004 Plan.
The Companys Second Restated 1995 Stock Incentive Plan
(the 1995 Plan) authorized, as of December 31,
2005, 15,000,000 shares of common stock for issuance
thereunder. Pursuant to the terms of the 1995 Plan, the number
of shares available for issuance under the 1995 Plan was
increased annually by an amount equal to 5% of the total
outstanding shares of the Companys common stock
outstanding on January 1 of such year, provided that the maximum
aggregate number of common stock which could be issued under the
1995 Plan was 15,000,000 shares (subject to adjustment for
certain changes in MKS capitalization). Pursuant to the
1995 Plan, the Company could grant options, restricted stock or
other stock-based awards to employees, officers, directors,
consultants and advisors. The 1995 Plan expired in November 2005
and no further awards may be granted under the 1995 Plan,
although there are still outstanding options available for
exercise under this plan.
The Companys 1997 Director Stock Plan (the
1997 Director Plan) provides for (i) the
initial grant of options to purchase 20,000 shares of
common stock to each person who first becomes an outside
director and (ii) annual grants of options to
purchase 12,000 shares of common stock on the date of
the annual meeting of stockholders. In December 2004, the board
of directors amended the 1997 Director Plan to allow for
all options granted on or after May 17, 2000 to be
exercisable within the three year period from the date of the
52
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
directors termination as director. On March 4, 2004,
the board of directors approved, and on May 13, 2004, the
stockholders approved, an increase in the number of shares
available for issuance under the 1997 Director Plan from
300,000 shares to 750,000 shares. As of
December 31, 2005 there were 415,500 shares available
for future grant under the 1997 Director Plan.
On January 7, 2005, the Company accelerated the vesting of
outstanding options with an exercise price of $23.00 or greater.
As a result of this action, options to purchase approximately
1.6 million shares became exercisable on January 7,
2005. No compensation expense was recorded in 2005 related to
this action as these options had no intrinsic value on
January 7, 2005. Under the recently issued SFAS 123R,
the Company will be required to apply the expense recognition
provisions under SFAS 123R beginning in the first quarter
of 2006. The reason that the Company accelerated the vesting of
the identified stock options was to reduce the Companys
compensation charge in periods subsequent to the adoption of
SFAS 123R.
The Company has granted options to employees under the 2004
Plan, 1995 Plan and the 1993 Stock Option Plan and to directors
under the 1997 Director Plan and the 1996 Director
Stock Option Plan (collectively, the Plans). The
Plans are administered by the compensation committee of the
Companys board of directors.
At December 31, 2005, 3,015,455 shares of the
Companys common stock were available for future grants
under the Plans. Stock options are granted at an exercise price
equal to 100% of the fair value of the Companys common
stock. Generally, stock options granted to employees under the
Plans between 2001 and 2005 vest 25% after one year and
6.25% per quarter thereafter and expire 10 years after
the grant date. Generally, stock options granted under the Plans
prior to 2000 vest 20% after one year and 5% per quarter
thereafter, and expire 10 years after the grant date.
Generally, options granted to directors vest at the earliest of
(1) the next annual meeting, (2) 13 months from
date of grant, or (3) the effective date of an acquisition.
The following table presents the activity for options under the
Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
|
|
Exercise |
|
|
|
Exercise |
|
|
|
Exercise |
|
|
Options |
|
Price |
|
Options |
|
Price |
|
Options |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding beginning of period
|
|
|
10,023,717 |
|
|
$ |
20.25 |
|
|
|
8,897,899 |
|
|
$ |
20.69 |
|
|
|
8,284,693 |
|
|
$ |
19.33 |
|
Granted
|
|
|
316,500 |
|
|
$ |
16.93 |
|
|
|
2,227,830 |
|
|
$ |
17.87 |
|
|
|
1,603,552 |
|
|
$ |
24.64 |
|
Exercised
|
|
|
(382,211 |
) |
|
$ |
10.70 |
|
|
|
(362,140 |
) |
|
$ |
10.66 |
|
|
|
(565,134 |
) |
|
$ |
11.52 |
|
Forfeited or Expired
|
|
|
(498,735 |
) |
|
$ |
23.34 |
|
|
|
(739,872 |
) |
|
$ |
23.30 |
|
|
|
(425,212 |
) |
|
$ |
21.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period
|
|
|
9,459,271 |
|
|
$ |
20.36 |
|
|
|
10,023,717 |
|
|
$ |
20.25 |
|
|
|
8,897,899 |
|
|
$ |
20.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
7,750,739 |
|
|
$ |
21.45 |
|
|
|
5,763,521 |
|
|
$ |
20.42 |
|
|
|
4,880,231 |
|
|
$ |
19.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
The following table summarizes information with respect to
options outstanding and exercisable under the Plans at
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
Weighted |
|
|
|
|
Average |
|
Remaining |
|
|
|
Average |
|
|
Number of |
|
Exercise |
|
Contractual |
|
Number of |
|
Exercise |
|
|
Shares |
|
Price |
|
Life (In Years) |
|
Shares |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
$4.43 - $8.92
|
|
|
583,412 |
|
|
$ |
5.81 |
|
|
|
1.91 |
|
|
|
583,412 |
|
|
$ |
5.81 |
|
$10.86 - $19.00
|
|
|
4,216,259 |
|
|
$ |
15.84 |
|
|
|
7.24 |
|
|
|
2,540,950 |
|
|
$ |
16.20 |
|
$19.18 - $29.50
|
|
|
3,701,450 |
|
|
$ |
24.77 |
|
|
|
6.54 |
|
|
|
3,668,227 |
|
|
$ |
24.80 |
|
$29.93 - $61.50
|
|
|
958,150 |
|
|
$ |
32.05 |
|
|
|
6.14 |
|
|
|
958,150 |
|
|
$ |
32.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,459,271 |
|
|
$ |
20.36 |
|
|
|
6.53 |
|
|
|
7,750,739 |
|
|
$ |
21.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income
The balance of accumulated other comprehensive income (loss) was
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
Accumulated |
|
|
|
|
Instruments |
|
Unrealized |
|
Other |
|
|
Cumulative |
|
Designated as |
|
Gain |
|
Comprehensive |
|
|
Translation |
|
Cash Flow |
|
(Loss) on |
|
Income |
|
|
Adjustments |
|
Hedges |
|
Investments |
|
(Loss) |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
$ |
10,043 |
|
|
$ |
(1,950 |
) |
|
$ |
(44 |
) |
|
$ |
8,049 |
|
Foreign currency translation adjustment, net of taxes of $0
|
|
|
3,662 |
|
|
|
|
|
|
|
|
|
|
|
3,662 |
|
Changes in value of financial instruments designated as cash
flow hedges, net of taxes of $(244)
|
|
|
|
|
|
|
847 |
|
|
|
|
|
|
|
847 |
|
Change in unrealized gain (loss) on investments, net of tax of
$(36)
|
|
|
|
|
|
|
|
|
|
|
126 |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
13,705 |
|
|
|
(1,103 |
) |
|
|
82 |
|
|
|
12,684 |
|
Foreign currency translation adjustment, net of taxes of $0
|
|
|
(7,411 |
) |
|
|
|
|
|
|
|
|
|
|
(7,411 |
) |
Changes in value of financial instruments designated as cash
flow hedges, net of taxes of $(1,019)
|
|
|
|
|
|
|
1,697 |
|
|
|
|
|
|
|
1,697 |
|
Change in unrealized gain (loss) on investments, net of tax
benefit of $21
|
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
6,294 |
|
|
$ |
594 |
|
|
$ |
48 |
|
|
$ |
6,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
9) Income Taxes
A reconciliation of the Companys 2005, 2004 and 2003
effective tax rate to the U.S. federal statutory rate
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
U.S. Federal income tax statutory rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
(35.0 |
)% |
Federal and state tax credits
|
|
|
(4.7 |
) |
|
|
(3.5 |
) |
|
|
(2.6 |
) |
State income taxes, net of federal benefit
|
|
|
1.7 |
|
|
|
0.7 |
|
|
|
2.3 |
|
Effect of foreign operations taxed at various rates
|
|
|
(5.3 |
) |
|
|
(6.9 |
) |
|
|
(11.1 |
) |
Foreign sales corporation and qualified production activity tax
benefit
|
|
|
(2.0 |
) |
|
|
(0.5 |
) |
|
|
(0.6 |
) |
Deferred tax asset valuation allowance
|
|
|
1.3 |
|
|
|
(30.7 |
) |
|
|
67.3 |
|
Other
|
|
|
0.5 |
|
|
|
2.0 |
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.5 |
% |
|
|
(3.9 |
)% |
|
|
19.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income before income taxes and the related
provision (benefit) for income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
14,872 |
|
|
$ |
37,098 |
|
|
$ |
(23,737 |
) |
Foreign
|
|
|
32,135 |
|
|
|
30,130 |
|
|
|
10,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,007 |
|
|
|
67,228 |
|
|
|
(13,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Federal
|
|
|
1,958 |
|
|
|
841 |
|
|
|
|
|
State
|
|
|
1,259 |
|
|
|
716 |
|
|
|
477 |
|
Foreign
|
|
|
8,922 |
|
|
|
6,061 |
|
|
|
1,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,139 |
|
|
|
7,618 |
|
|
|
1,935 |
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Federal
|
|
|
856 |
|
|
|
(9,141 |
) |
|
|
|
|
State and Foreign
|
|
|
(553 |
) |
|
|
(1,088 |
) |
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303 |
|
|
|
(10,229 |
) |
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$ |
12,442 |
|
|
$ |
(2,611 |
) |
|
$ |
2,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
At December 31, 2005 and 2004 the significant components of
the deferred tax assets and deferred tax liabilities were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating losses and credits
|
|
$ |
5,709 |
|
|
$ |
11,563 |
|
|
Inventory and warranty reserves
|
|
|
12,447 |
|
|
|
11,304 |
|
|
Accounts receivable and other accruals
|
|
|
3,938 |
|
|
|
4,018 |
|
|
Depreciation and amortization
|
|
|
5,665 |
|
|
|
5,442 |
|
|
Other
|
|
|
2,077 |
|
|
|
2,458 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
29,836 |
|
|
|
34,785 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets
|
|
|
(13,192 |
) |
|
|
(17,066 |
) |
|
Other
|
|
|
(135 |
) |
|
|
(536 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(13,327 |
) |
|
|
(17,602 |
) |
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(3,497 |
) |
|
|
(2,870 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
13,012 |
|
|
$ |
14,313 |
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company had federal net operating
loss carryforwards of $836,000, the utilization of which are
limited by the change in ownership rules under Section 382
of the Internal Revenue Code (Section 382). The
Company also had federal general business, foreign tax and
minimum tax credit carryforwards (credit
carryforwards) of $576,000, $289,000 and $1,053,000,
respectively. The federal net operating losses, foreign tax and
general business credit carryforwards begin to expire in 2021,
2013 and 2025, respectively. Under the provisions of
Section 382, certain substantial changes in the
Companys ownership may result in a limitation on the
amount of net operating loss and credit carryforwards that can
be used in future periods.
Although the Company believes that its tax positions are
consistent with applicable U.S. federal and state and
international laws, certain tax reserves are maintained at
December 31, 2005 should these positions be challenged by
the applicable tax authority and additional tax assessed on
audit. During 2005, the Internal Revenue Service
(IRS) completed its examination of the
Companys tax returns for the tax years 1999 through 2002.
As a result of this examination, during the year ended
December 31, 2005, the Company recorded a reduction in this
reserve of $1,621,000, a benefit to income tax expense of
$1,901,000 and a $576,000 reduction of goodwill related to a
previous acquisition.
The change in the valuation allowance of $627,000 for the year
ended December 31, 2005 resulted from an increase in state
tax credit carryovers for which the Company determined that it
is more likely than not that they will not be realized.
The Company incurred significant operating losses in fiscal
2003, 2002 and 2001. At December 31, 2003 a $22,293,000
valuation allowance was maintained against the Companys
net deferred tax assets. This valuation allowance was maintained
because the Company determined that it was more likely than not
that all of the deferred tax assets may not be realized.
During the year ended December 31, 2004, after examining a
number of factors, including historical results and near term
earnings projections, the Company determined that it was more
likely than not that it would realize all of its net deferred
tax assets, except for those related to certain state tax
credits.
56
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
As a result of this analysis the Company reduced its valuation
allowance by $20,063,000 at December 31, 2004 resulting in
a net deferred tax asset of $14,313,000. Of the total tax
benefit from the reversal of the valuation allowance, $3,850,000
was recorded as a reduction of goodwill and $5,271,000 was
recorded to additional paid-in capital for the tax benefit from
the exercise of stock options during both the current and prior
years. The remaining valuation allowance of $2,870,000 at
December 31, 2005 relates to state tax credits for which it
is more likely than not that they will not be realized.
Beginning in 2001, we were granted a tax holiday for our
manufacturing operations in Israel. This tax holiday resulted in
income tax savings of $1,190,000, $2,547,000 and $247,000 for
the years ended December 31, 2005, 2004 and 2003,
respectively. The tax holiday period expires at the end of 2010.
On October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was signed into law. The Act contains a
provision allowing U.S. multinational companies a one-time
incentive to repatriate foreign earnings at an effective tax
rate of 5.25%. During 2005, the Company conducted an extensive
study of the new provision and concluded that no opportunities
existed from which the Company could benefit from repatriation
of its undistributed foreign earnings. Through December 31,
2005, the Company has not provided deferred income taxes on the
undistributed earnings of its foreign subsidiaries because such
earnings were intended to be permanently reinvested outside the
U.S. Determination of the potential deferred income tax
liability on these undistributed earnings is not practicable
because such liability, if any, is dependent on circumstances
existing if and when remittance occurs. At December 31,
2005 the Company had $80,173,000 of undistributed earnings in
its foreign subsidiaries.
10) 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 20% 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, may
provide a matching contribution which will generally match up to
the first 2% of each participants compensation, plus 25%
of the next 4% of compensation. At the discretion of the board
of directors, the Company may also make additional contributions
for the benefit of all eligible employees. The Companys
contributions were $1,655,000, $1,685,000 and $1,503,000 for
2005, 2004 and 2003, 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. The bonus expense was $2,402,000 in 2005,
$4,617,000 in 2004 and was immaterial in 2003.
The Company provides supplemental retirement benefits for
certain of its officers and executive officers. This obligation
was not material at December 31, 2005 and at
December 31, 2004.
11) Segment and Geographical Information and Significant
Customer
The Company operates in one segment for the development,
manufacturing, sales and servicing of products that measure,
control, power and monitor critical parameters of advanced
manufacturing processes. The Companys chief decision-maker
reviews consolidated operating results to make decisions about
allocating resources and assessing performance for the entire
Company.
57
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
Information about the Companys operations in different
geographic regions is presented in the tables below. Net sales
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 sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Geographic net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
320,816 |
|
|
$ |
367,233 |
|
|
$ |
199,118 |
|
|
Japan
|
|
|
79,820 |
|
|
|
85,571 |
|
|
|
59,664 |
|
|
Europe
|
|
|
52,687 |
|
|
|
46,868 |
|
|
|
43,339 |
|
|
Asia
|
|
|
55,971 |
|
|
|
55,408 |
|
|
|
35,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
509,294 |
|
|
$ |
555,080 |
|
|
$ |
337,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Long lived assets
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
66,588 |
|
|
$ |
68,719 |
|
|
Japan
|
|
|
5,679 |
|
|
|
6,202 |
|
|
Europe
|
|
|
4,311 |
|
|
|
5,544 |
|
|
Asia
|
|
|
4,493 |
|
|
|
4,024 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
81,071 |
|
|
$ |
84,489 |
|
|
|
|
|
|
|
|
|
|
The Company groups its products into three product groups. Net
sales for these product groups are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Instruments and Control Systems
|
|
$ |
233,279 |
|
|
$ |
253,422 |
|
|
$ |
163,410 |
|
Power and Reactive Gas Products
|
|
|
215,858 |
|
|
|
234,230 |
|
|
|
132,263 |
|
Vacuum Products
|
|
|
60,157 |
|
|
|
67,428 |
|
|
|
41,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
509,294 |
|
|
$ |
555,080 |
|
|
$ |
337,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had one customer comprising 18%, 20% and 18% of net
sales for the years ended December 31, 2005, 2004 and 2003,
respectively. During the years ended December 31, 2005,
2004 and 2003, the Company estimates that approximately 71%, 74%
and 69% of its net sales, respectively, were to semiconductor
capital equipment manufacturers and semiconductor device
manufacturers.
12) Acquisitions
On September 30, 2003, the Company acquired Wenzel
Instruments, a privately held developer of solid state
MicroElectroMechanical System (MEMS) based vacuum sensor
technology for advanced manufacturing processes. This
acquisition expands our vacuum gauge product line offering to
help meet current demand for process control sensors with higher
accuracy and a faster response in a smaller footprint. The
purchase price was $2,150,000 and was accounted for under the
purchase method of accounting. The purchase price was primarily
allocated to the assets acquired based upon their estimated fair
values, with the full purchase price being allocated to
intangible assets as completed technology. This intangible asset
is being amortized over its
58
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
estimated useful life of 5 years. The results of operations
are included in the Companys consolidated statement of
income as of and since the date of the purchase.
Also, see Note 19) Subsequent Events
Acquisitions.
13) Sale of Assets
In August 2001, the Company sold certain assets for proceeds of
approximately $9,000,000, consisting of approximately $4,700,000
in cash, $3,900,000 in a note receivable and $200,000 of
warrants. The note receivable had an annual interest rate of
9.0% and was scheduled to mature on August 7, 2004. The
loss on the transaction was $1,246,000 before taxes. During
2002, due to the downturn in the semiconductor industry and its
result on the acquirers operations, and the
acquirers inability to raise financing, the Company
considered the value of the note and warrants to be impaired.
Accordingly, during 2002, MKS recorded a charge of $4,121,000 to
other expense for the Companys estimate of the impairment
on the note receivable and warrants. During 2004, the Company
received $5,042,000 related to the collection of the note
receivable and accrued interest and the cancellation of the
warrants. This amount was recorded as a gain and included in
other income.
14) Restructuring and Asset Impairment Charges
As a result of the Companys various acquisitions from 2000
through 2002 and the downturn in the semiconductor capital
equipment market which began in 2000, the Company had redundant
activities and excess manufacturing capacity and office space.
Therefore in 2002, and continuing through the first quarter of
2004, the Company implemented restructuring activities to
rationalize manufacturing operations and reduce operating
expenses. As a result of these actions, the Company recorded
restructuring and asset impairment charges of $2,726,000 in
2002. The charges consisted of $631,000 of severance costs
related to a workforce reduction, $1,228,000 related to
consolidation of leased facilities, and an asset impairment
charge of $867,000 primarily related to the impairment of an
intangible asset from the discontinuance of certain product
development activities. The fair value of the impaired
intangible asset was determined using the expected present value
of future cash flows. The workforce reduction was across all
functional groups and consisted of 225 employees.
During 2003, the Company continued the consolidation it
initiated in 2002 related to various acquisitions, and recorded
restructuring, asset impairment and other charges of $1,593,000.
The charges in 2003 consisted of $356,000 of severance costs
related to workforce reductions, $1,145,000 of lease cost,
professional fees and other costs related to facility
consolidations and an asset impairment charge of $92,000. The
workforce reduction was across all functional groups.
During 2004, the Company completed its enacted restructuring
activities related to the consolidation of operations from
acquired companies when it exited an additional leased facility
and recorded a restructuring charge of $437,000.
During 2005, the Company initiated a restructuring plan related
to its Berlin, Germany location. This consolidation of
activities included the reduction of 16 employees. The total
restructuring charge related to this consolidation was $454,000,
which consisted of $251,000 related to the repayment of a
government grant and $203,000 in severance costs.
Also during 2005, the Company terminated a lease related to a
facility previously exited. Prior to the lease being terminated,
the Company had an accrual of approximately $784,000 related to
this facility. After making the lease settlement payment and
payments for other contractual obligations, the remaining
balance of approximately $278,000 was reversed as there was no
remaining obligation.
59
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
The following table sets forth the components of the
restructuring activities initiated during 2005, 2004 and 2003,
and the related accruals remaining at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce |
|
|
|
Facility |
|
|
|
|
Reductions |
|
Other |
|
Consolidations |
|
Total |
|
|
|
|
|
|
|
|
|
Reserve balance as of December 31, 2002
|
|
$ |
326 |
|
|
$ |
|
|
|
$ |
1,164 |
|
|
$ |
1,490 |
|
Restructuring provision in 2003
|
|
|
356 |
|
|
|
92 |
|
|
|
1,145 |
|
|
|
1,593 |
|
Charges utilized in 2003
|
|
|
(483 |
) |
|
|
(92 |
) |
|
|
(478 |
) |
|
|
(1,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance as of December 31, 2003
|
|
|
199 |
|
|
|
|
|
|
|
1,831 |
|
|
|
2,030 |
|
Restructuring provision in 2004
|
|
|
|
|
|
|
|
|
|
|
437 |
|
|
|
437 |
|
Charges utilized in 2004
|
|
|
(110 |
) |
|
|
|
|
|
|
(736 |
) |
|
|
(846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance as of December 31, 2004
|
|
|
89 |
|
|
|
|
|
|
|
1,532 |
|
|
|
1,621 |
|
Restructuring provision in 2005
|
|
|
199 |
|
|
|
251 |
|
|
|
(365 |
) |
|
|
85 |
|
Charges utilized in 2005
|
|
|
(204 |
) |
|
|
|
|
|
|
(852 |
) |
|
|
(1,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance as of December 31, 2005
|
|
$ |
84 |
|
|
$ |
251 |
|
|
$ |
315 |
|
|
$ |
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining facilities consolidation charges will be paid over
the remaining lease term, which ends in 2007. The accrual for
severance costs and lease payments are recorded in Other accrued
expenses and Other liabilities in the consolidated balance
sheets.
15) Goodwill and Intangible Assets
The Company is required to perform an annual impairment test of
its goodwill under the provisions of SFAS 142.
SFAS 142 requires that companies identify and assess
goodwill at the reporting unit level. Reporting units are
defined as operating segments or one level below an operating
segment, referred to as a component. The Company has determined
that its reporting units are components of its operating
segment. The Company allocates goodwill to reporting units at
the time of acquisition and bases that allocation on which
reporting units will benefit from the acquired assets and
liabilities. The fair value of each reporting unit with goodwill
is compared to its recorded book value. An excess of book value
over fair value indicates that an impairment of goodwill exists.
Fair value is based on a discounted cash flow analysis of
expectations of future earnings for each of the reporting units
with goodwill. The Company completed its annual impairment test
for 2005 and 2004 and concluded that no impairment of goodwill
existed as of October 31, 2005 or October 31, 2004,
the annual goodwill measurement dates for 2005 and 2004,
respectively.
The changes in the carrying amount of goodwill during the years
ended December 31, 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
December 31, 2005 |
|
December 31, 2004 |
|
|
|
|
|
Balance, beginning of year
|
|
$ |
255,740 |
|
|
$ |
259,924 |
|
Reduction for reversal of tax valuation allowance
|
|
|
|
|
|
|
(3,850 |
) |
IRS settlement adjustment and foreign currency translation
|
|
|
(497 |
) |
|
|
(334 |
) |
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$ |
255,243 |
|
|
$ |
255,740 |
|
|
|
|
|
|
|
|
|
|
60
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
Components of the Companys acquired intangible assets are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
December 31, 2004 |
|
|
|
|
|
|
|
Gross |
|
|
|
Gross |
|
|
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
Accumulated |
|
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
|
|
|
|
|
|
|
|
Completed technology
|
|
$ |
72,421 |
|
|
$ |
(51,520 |
) |
|
$ |
72,738 |
|
|
$ |
(39,969 |
) |
Customer relationships
|
|
|
6,640 |
|
|
|
(4,481 |
) |
|
|
6,640 |
|
|
|
(3,581 |
) |
Patents, trademarks, tradenames and other
|
|
|
12,395 |
|
|
|
(8,032 |
) |
|
|
12,395 |
|
|
|
(6,619 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91,456 |
|
|
$ |
(64,033 |
) |
|
$ |
91,773 |
|
|
$ |
(50,169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense related to acquired intangibles
for the years ended December 31, 2005, 2004 and 2003 were
$13,864,000, $14,764,000 and $14,692,000, respectively.
Estimated amortization expense related to acquired intangibles
for each of the five succeeding years is as follows:
|
|
|
|
|
Year |
|
Amount |
|
|
|
2006
|
|
$ |
11,763 |
|
2007
|
|
|
11,129 |
|
2008
|
|
|
3,213 |
|
2009
|
|
|
1,205 |
|
2010
|
|
|
112 |
|
16) 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
Companys warranty obligation is affected by 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 Companys
estimates, revisions to the estimated warranty liability would
be required.
Product warranty activity for the years ended December 31,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Balance at beginning of year
|
|
$ |
7,601 |
|
|
$ |
5,804 |
|
Provisions for product warranties
|
|
|
8,392 |
|
|
|
8,256 |
|
Direct charges to the warranty liability
|
|
|
(8,227 |
) |
|
|
(6,459 |
) |
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$ |
7,766 |
|
|
$ |
7,601 |
|
|
|
|
|
|
|
|
|
|
61
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
17) Other Accrued Expenses
Other accrued expenses consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Product warranties
|
|
$ |
7,766 |
|
|
$ |
7,601 |
|
Accrued restructuring costs
|
|
|
550 |
|
|
|
625 |
|
Other
|
|
|
10,783 |
|
|
|
13,212 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,099 |
|
|
$ |
21,438 |
|
|
|
|
|
|
|
|
|
|
18) Related Party Transactions
The Vice President and General Manager of the Companys
Vacuum Products Group is the general partner of Aspen Industrial
Park Partnership, LLLP (Aspen). The Company leases
from Aspen certain facilities occupied by the Companys
Vacuum Products Group in Boulder, Colorado. The Company paid
Aspen $835,000, $1,111,000 and $1,106,000 in 2005, 2004 and
2003, respectively, to lease such facilities.
Emerson Electric Co. (Emerson) was the beneficial
owner of approximately 18% of the outstanding shares of the
Companys common stock at December 31, 2005 and a
representative of Emerson is a member of the Companys
board of directors. During 2005, 2004 and 2003, the Company
purchased materials and administrative services from Emerson and
its subsidiaries totaling approximately $800,000, $1,854,000 and
$1,403,000, respectively. In addition, in accordance with the
terms of a Shareholders Agreement between the Company and
Emerson, the Company paid the expenses of Emerson relating to
the registration of shares in connection with a public offering
of Common Stock that closed in January 2004. Such expenses were
$176,000.
In 2003, the Company recorded a gain of $927,000 from the early
repayment of premiums related to a split dollar life insurance
policy covering the Chairman of the Company. This gain was
recorded in other income in the consolidated statement of
operations.
19) Subsequent Events Acquisitions
On January 3, 2006, the Company completed its acquisition
of Ion Systems, Inc, a leading provider of electrostatic
management solutions located in Alameda, California, pursuant to
an Agreement and Plan of Merger dated November 25, 2005.
Ion Systems ionization technology controls electrostatic
charge to reduce process contamination and improve yields, which
complements the Companys process monitoring and control
technologies. The aggregate purchase price consisted of
$73,129,000 in cash and $774,000 in acquisition related costs.
62
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
The following table summarizes the preliminary
(unaudited) estimated fair value of the assets acquired and
liabilities assumed at the date of the acquisition. The Company
is in the process of finalizing the purchase price allocation
and, accordingly, the allocation of the purchase price is
subject to adjustment:
|
|
|
|
|
|
Current assets
|
|
$ |
14,728 |
|
Intangible assets
|
|
|
26,700 |
|
Other assets
|
|
|
3,377 |
|
Goodwill
|
|
|
51,606 |
|
|
|
|
|
|
|
Total assets acquired
|
|
|
96,411 |
|
Current liabilities
|
|
|
(12,777 |
) |
Deferred tax liability
|
|
|
(9,731 |
) |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(22,508 |
) |
|
|
|
|
|
Total purchase price including acquisition costs
|
|
$ |
73,903 |
|
|
|
|
|
|
Of the $26,700,000 of acquired intangible assets, the following
table reflects the preliminary allocation of the acquired
intangible assets and related estimates of useful lives:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$ |
12,600 |
|
|
|
8-year useful life |
|
Current developed technology
|
|
|
10,300 |
|
|
|
6-year useful life |
|
Tradenames
|
|
|
2,400 |
|
|
|
8-year useful life |
|
Order backlog
|
|
|
1,000 |
|
|
|
Less than 6 months |
|
In-process research and development
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 3, 2006, the Company completed its acquisition
of Umetrics, AB, a leader in multivariate data analysis and
modeling software located in Umea, Sweden, pursuant to a Sale
and Purchase Agreement dated December 15, 2005.
Umetrics multivariate data analysis and modeling software
converts process data into useable information for yield
improvement when linked with the Companys open and modular
platform of process sensors and data collection, integration,
data storage, and visualization capabilities. The purchase price
consisted of $30,082,000 cash and $332,000 in acquisition
related costs.
The following table summarizes the preliminary
(unaudited) estimated fair value of the assets acquired and
liabilities assumed at the date of the acquisition. The Company
is in the process of finalizing the purchase price allocation
and, accordingly, the allocation of the purchase price is
subject to adjustment:
|
|
|
|
|
|
Current assets
|
|
$ |
4,243 |
|
Intangible assets
|
|
|
7,450 |
|
Other assets
|
|
|
400 |
|
Goodwill
|
|
|
22,720 |
|
|
|
|
|
|
|
Total assets acquired
|
|
|
34,813 |
|
Current liabilities
|
|
|
(2,425 |
) |
Deferred tax liability
|
|
|
(1,974 |
) |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(4,399 |
) |
|
|
|
|
|
Total purchase price including acquisition costs
|
|
$ |
30,414 |
|
|
|
|
|
|
63
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
Of the $7,450,000 of acquired intangible assets, the following
table reflects the preliminary allocation of the acquired
intangible assets and related estimates of useful lives:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$ |
2,100 |
|
|
|
8-year useful life |
|
Current developed technology
|
|
|
4,150 |
|
|
|
4-6-year useful life |
|
Tradenames
|
|
|
800 |
|
|
|
8-year useful life |
|
In-process research and development
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,450 |
|
|
|
|
|
|
|
|
|
|
|
|
Ions ionization technology and Umetrics multivariate
data analysis technology both complement our process control and
monitoring technologies and will support the Companys
mission to improve process performance and productivity. The
results of these acquisitions will be included in the
Companys consolidated operations beginning in January 2006.
64
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(Tables in thousands, except share and per share data)
MKS INSTRUMENTS, INC.
SUPPLEMENTAL FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
March 31 |
|
June 30 |
|
Sept. 30 |
|
Dec. 31 |
|
|
|
|
|
|
|
|
|
|
|
(Table in thousands, except per share data) |
|
|
(Unaudited) |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
127,407 |
|
|
$ |
130,193 |
|
|
$ |
122,520 |
|
|
$ |
129,174 |
|
Gross profit
|
|
|
49,362 |
|
|
|
51,786 |
|
|
|
47,657 |
|
|
|
51,629 |
|
Income from operations(1)
|
|
|
6,820 |
|
|
|
10,364 |
|
|
|
8,528 |
|
|
|
14,836 |
|
Net income(1,2)
|
|
|
5,458 |
|
|
|
9,778 |
|
|
|
7,224 |
|
|
|
12,105 |
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.10 |
|
|
$ |
0.18 |
|
|
$ |
0.13 |
|
|
$ |
0.22 |
|
|
Diluted
|
|
$ |
0.10 |
|
|
$ |
0.18 |
|
|
$ |
0.13 |
|
|
$ |
0.22 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
132,985 |
|
|
$ |
151,585 |
|
|
$ |
139,651 |
|
|
$ |
130,859 |
|
Gross profit
|
|
|
54,229 |
|
|
|
61,393 |
|
|
|
55,606 |
|
|
|
48,143 |
|
Income from operations
|
|
|
15,611 |
|
|
|
20,421 |
|
|
|
14,745 |
|
|
|
9,136 |
|
Net income(3)
|
|
|
12,706 |
|
|
|
20,868 |
|
|
|
12,150 |
|
|
|
24,115 |
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.24 |
|
|
$ |
0.39 |
|
|
$ |
0.23 |
|
|
$ |
0.45 |
|
|
Diluted
|
|
$ |
0.23 |
|
|
$ |
0.38 |
|
|
$ |
0.22 |
|
|
$ |
0.44 |
|
|
|
(1) |
Income from operations and Net income for the quarter ended
December 31, 2005, include income from a litigation
settlement of $3.0 million and $1.9 million, net of
tax, respectively. |
|
(2) |
Net income for the quarter ended June 30, 2005 includes a
benefit of $1.9 million in connection with closing an IRS
audit. |
|
(3) |
Net income for the quarter ended June 30, 2004 includes a
gain of $5.0 million on the collection of a note receivable
which had been written off in 2002. During the year ended
December 31, 2003 and for the quarters ended March 31,
June 30 and September 30, 2004, a valuation allowance
against net deferred tax assets was maintained. Net income for
those periods includes tax expense which is comprised primarily
of state and foreign taxes. During the quarter ended
December 31, 2004, the valuation allowance was reduced
against the net deferred tax assets. Net income for the quarter
ended December 31, 2004 includes a net benefit for income
taxes of $14.1 million, primarily from the benefit from the
reduction of the valuation allowance. |
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
Item 9A. |
Controls and Procedures |
Effectiveness of Disclosure Controls and Procedures
MKS 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, 2005. 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 a
65
company that are designed to ensure that information required to
be disclosed by the company 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 SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the
companys management, including its principal executive and
principal financial officers, 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, 2005, 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.
Managements Annual Report on Internal Control over
Financial Reporting
The management of MKS 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, the companys principal executive
and principal financial officers and effected by the
companys 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 receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and |
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys 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.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2005.
In making this assessment, MKS management used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment, management concluded that, as of
December 31, 2005, our internal control over financial
reporting was effective based on those criteria.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears on
page 34.
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) that occurred during the quarter ended
December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
66
|
|
Item 9B. |
Other Information |
None.
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
The information required by this item is set forth under the
captions Election of Directors, Executive
Officers, Code of Ethics and
Directors Audit Committee Financial
Expert in our definitive proxy statement for the 2006
Annual Meeting of Stockholders, 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 is listed under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance in our definitive proxy statement for the 2006
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. This information is incorporated herein
by reference.
|
|
Item 11. |
Executive Compensation |
The information required by this item is set forth under the
caption Executive Officers Executive
Compensation in our definitive proxy statement for the
2006 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. This information is
incorporated herein by reference.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by Item 403 of
Regulation S-K is
set forth under the caption Security Ownership of Certain
Beneficial Owners and Management in our definitive proxy
statement for the 2006 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. This information
is incorporated herein by reference.
The information required by Item 201(d) of
Regulation S-K is
set forth under the caption Executive Officers
Equity Compensation Plan Information in our definitive
proxy statement for the 2006 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. This
information is incorporated herein by reference.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required by this item is set forth under the
caption Executive Officers Certain
Relationships and Related Transactions in our definitive
proxy statement for the 2006 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. This
information is incorporated herein by reference.
|
|
Item 14. |
Principal Accounting Fees and Services |
The information required by this item is set forth under the
caption Independent Registered Public Accounting
Firm in our definitive proxy statement for the 2006 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. This information is incorporated herein by
reference.
67
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a) The following documents are filed as a part of this
Report:
|
|
|
1. Financial Statements. The following Consolidated
Financial Statements are included under Item 8 on this
Annual Report on
Form 10-K.
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Financial Statements:
|
|
|
|
|
|
|
|
34 |
|
|
|
|
36 |
|
|
|
|
37 |
|
|
|
|
38 |
|
|
|
|
39 |
|
|
|
|
40-64 |
|
|
|
|
2. Financial Statement Schedules |
|
|
The following consolidated financial statement schedule is
included in this Annual Report on
Form 10-K of
Item 15(d): |
|
|
|
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 pursuant
to Item 15(c). |
|
|
|
|
|
Exhibit No. |
|
Title |
|
|
|
|
+3 |
.1(1) |
|
Restated Articles of Organization |
|
|
+3 |
.2(2) |
|
Articles of Amendment, as filed with the Secretary of State of
Massachusetts on May 18, 2001 |
|
|
+3 |
.3(3) |
|
Articles of Amendment, as filed with the Secretary of State of
Massachusetts on May 16, 2002 |
|
|
+3 |
.4(4) |
|
Amended and Restated By-Laws |
|
|
+4 |
.1(4) |
|
Specimen certificate representing the common stock |
|
|
+10 |
.1(5)* |
|
Applied Science and Technology, Inc. 1993 Stock Option Plan, as
amended |
|
|
+10 |
.2(6)* |
|
Applied Science and Technology, Inc. 1994 Formula Stock Option
Plan, as amended |
|
|
+10 |
.3(4)* |
|
1996 Amended and Restated Director Stock Option Plan |
|
|
+10 |
.4(7)* |
|
Second Amended and Restated 1997 Director Stock Option
Plan, and forms of option agreements thereto |
|
|
+10 |
.5(8)* |
|
2004 Stock Incentive Plan (the 2004 Plan) |
|
|
+10 |
.6(9)* |
|
Form of Nonstatutory Stock Option Agreement to be granted under
the 2004 Plan |
|
|
+10 |
.7(10)* |
|
Form of Performance Stock Award under the 2004 Plan |
|
|
+10 |
.8(11)* |
|
Form of Restricted Stock Award under the 2004 Plan |
|
|
+10 |
.9(12)* |
|
Second Restated 1995 Stock Incentive Plan (the 1995
Plan) |
|
|
+10 |
.10(8)* |
|
Form of Nonstatutory Stock Option Agreement under the 1995 Plan |
|
|
+10 |
.11(10)* |
|
Form of Performance Stock Award under Registrants 1995 Plan |
|
|
+10 |
.12(8)* |
|
Third Restated 1999 Employee Stock Purchase Plan |
|
|
+10 |
.13(8)* |
|
Second Restated International Employee Stock Purchase Plan |
|
|
10 |
.14* |
|
2006 Management Incentive Bonus Program |
68
|
|
|
|
|
Exhibit No. |
|
Title |
|
|
|
|
+10 |
.15(13)* |
|
Employment Agreement dated as of July 1, 2005 between John
Bertucci and the Registrant |
|
|
+10 |
.16(13)* |
|
Employment Agreement dated July 1, 2005 between Leo
Berlinghieri and the Registrant |
|
|
+10 |
.17(13)* |
|
Employment Agreement dated as of July 1, 2005 between
Ronald C. Weigner and the Registrant |
|
|
+10 |
.18(13)* |
|
Amended and Restated Employment Agreement dated as of
July 1, 2005 between William D. Stewart and the
Registrant |
|
|
+10 |
.19(8)* |
|
Employment Agreement dated as of July 30, 2004 between
Robert Klimm and the Registrant |
|
|
+10 |
.20(8)* |
|
Employment Agreement dated as of July 30, 2004 between John
Smith and the Registrant |
|
|
+10 |
.21(14)* |
|
Employment Agreement dated as of January 25, 2005 between
Ron Hadar and the Registrant |
|
|
+10 |
.22(15)* |
|
Employment Agreement dated as of April 25, 2005 between
Gerald Colella and the Registrant |
|
|
+10 |
.23(16)* |
|
Employment Agreement dated as of November 25, 2005 between
Frank Schneider and the Registrant |
|
|
+10 |
.24(11)* |
|
Summary of 2006 Compensatory Arrangements with Executive Officers |
|
|
+10 |
.25(7)* |
|
Summary of Compensatory Arrangements with Non-Employee Directors |
|
|
10 |
.26 |
|
Lease Agreement dated as of June 25, 2005 by and between
5330 Sterling Drive LLC and the Registrant |
|
|
10 |
.27 |
|
Lease Agreement dated as of June 25, 2005 by and between
Aspen Industrial Park Partnership LLLP and the Registrant |
|
|
10 |
.28 |
|
Optional Advanced Demand Grid Note dated August 3, 2004 in
favor of HSBC Bank USA, and Amendment thereto dated as of
July 29, 2005 |
|
|
+10 |
.29(17) |
|
Loan Agreement between ASTeX Realty Corp. and Citizens Bank of
Massachusetts, dated March 6, 2000, along with
Exhibit A thereto. |
|
|
+10 |
.30(18) |
|
Shareholder Agreement dated as of January 31, 2002 among
the Registrant and Emerson Electric Co. |
|
|
+10 |
.31(19) |
|
Global Supply Agreement dated April 12, 2005 by and between
the Registrant and Applied Materials, Inc. |
|
|
+10 |
.32(20) |
|
Settlement Agreement dated as of October 3, 2005 by and
between the Registrant, Applied Science and Technology, Inc. and
Advanced Energy, Inc. |
|
|
+10 |
.33(21) |
|
Agreement and Plan of Merger dated as of November 25, 2005
among Ion Systems, Inc., the Registrant and TWCP, L.P. |
|
|
21 |
.1 |
|
Subsidiaries of the Registrant |
|
|
23 |
.1 |
|
Consent of PricewaterhouseCoopers LLP |
|
|
31 |
.1 |
|
Certification of Principal Executive Officer pursuant to
Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended |
|
|
31 |
.2 |
|
Certification of Principal Financial Officer pursuant to
Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended |
|
|
32 |
.1 |
|
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 |
+ Previously filed
|
|
|
|
* |
Management contract or compensatory plan arrangement filed as an
Exhibit to this
Form 10-K pursuant
to Item 15(c) of this report. |
|
|
|
|
(1) |
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. |
|
|
(2) |
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q for the
quarter ended June 30, 2001. |
|
|
(3) |
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q for the
quarter ended June 30, 2002. |
|
|
(4) |
Incorporated by reference to the Registration Statement on
Form S-1 filed
with the Securities and Exchange Commission on January 28,
1999, as amended. |
69
|
|
|
|
(5) |
Incorporated by reference to the Registration Statement on
Form S-8 filed
with the Securities and Exchange Commission on January 29,
2001. |
|
|
(6) |
Incorporated by reference to the Registration Statement on
Form S-8 filed
with the Securities and Exchange Commission on January 29,
2001. |
|
|
(7) |
Incorporated by reference to the Registrants Annual Report
on Form 10-K for
the year ended December 31, 2004. |
|
|
(8) |
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q for the
quarter ended June 30, 2004. |
|
|
(9) |
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q for the
quarter ended September 30, 2004. |
|
|
(10) |
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q for the
quarter ended June 30, 2005. |
|
(11) |
Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Securities and Exchange Commission on
February 17, 2006. |
|
(12) |
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q for the
quarter ended September 30, 2002. |
|
(13) |
Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Securities and Exchange Commission on
July 5, 2005. |
|
(14) |
Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Securities and Exchange Commission on
March 24, 2005. |
|
(15) |
Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Securities and Exchange Commission on
April 27, 2005. |
|
(16) |
Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Securities and Exchange Commission on
January 9, 2006. |
|
(17) |
Incorporated by reference to Applied Science and Technology,
Inc.s Quarterly Report on
Form 10-Q for the
quarter ended March 25, 2000. |
|
(18) |
Incorporated by reference to the Registrants Report on
Form 8-K filed
with the Securities and Exchange Commission on February 12,
2002. |
|
(19) |
Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Securities and Exchange Commission on
April 27, 2005. |
|
(20) |
Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Securities and Exchange Commission on
October 7, 2005. |
|
(21) |
Incorporated by reference to the Registrants Current
Report on Form 8-K
filed with the Securities and Exchange Commission on
December 1, 2005. |
(c) Exhibits
|
|
|
MKS hereby files as exhibits to our Annual Report on
Form 10-K those
exhibits listed in Item 15 above. |
(d) Financial Statement Schedules
70
MKS INSTRUMENTS, INC.
SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
Charged to |
|
|
|
|
|
|
Beginning |
|
Costs and |
|
Other |
|
Deductions |
|
Balance at |
Description |
|
of Year |
|
Expenses |
|
Accounts |
|
& Write-offs |
|
End of Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
Accounts receivable allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$ |
3,238 |
|
|
$ |
4,101 |
|
|
$ |
|
|
|
$ |
4,161 |
|
|
$ |
3,178 |
|
|
|
2004
|
|
$ |
2,415 |
|
|
$ |
3,905 |
|
|
$ |
|
|
|
$ |
3,082 |
|
|
$ |
3,238 |
|
|
|
2003
|
|
$ |
4,679 |
|
|
$ |
460 |
|
|
$ |
|
|
|
$ |
2,724 |
|
|
$ |
2,415 |
|
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
Leo Berlinghieri |
|
Chief Executive Officer, President 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 |
|
Executive Chairman of the Board of Directors |
|
March 14, 2006 |
|
/s/ Leo Berlinghieri
Leo Berlinghieri |
|
Chief Executive Officer, President and Director (Principal
Executive Officer) |
|
March 15, 2006 |
|
/s/ Ronald C. Weigner
Ronald C. Weigner |
|
Vice President and Chief Financial Officer (Principal Financial
and Accounting Officer) |
|
March 13, 2006 |
|
/s/ Robert R. Anderson
Robert R. Anderson |
|
Director |
|
March 12, 2006 |
|
/s/ James G. Berges
James G. Berges |
|
Director |
|
March 13, 2006 |
|
/s/ Richard S. Chute
Richard S. Chute |
|
Director |
|
March 11, 2006 |
|
/s/ Hans-Jochen Kahl
Hans-Jochen Kahl |
|
Director |
|
March 13, 2005 |
|
/s/ Owen W. Robbins
Owen W. Robbins |
|
Director |
|
March 11, 2006 |
|
/s/ Louis P. Valente
Louis P. Valente |
|
Director |
|
March 14, 2006 |
72