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MKS Instruments Reports Second Quarter 2018 Financial Results

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  • Achieved new quarterly records for revenue and Non-GAAP net earnings
  • Achieved new quarterly record for revenue to the semiconductor market
  • Quarterly revenue up 19% compared to Q2 2017
  • Light and Motion Division achieves new Non-GAAP operating income record

ANDOVER, Mass., July 24, 2018 (GLOBE NEWSWIRE) -- MKS Instruments, Inc. (NASDAQ:MKSI), a global provider of technologies that enable advanced processes and improve productivity, today reported second quarter 2018 financial results.

Quarterly Financial Results
(in millions, except per share data)
  Q2 2018 Q1 2018
GAAP Results    
Net revenues $573 $554
Gross margin  48.0% 47.4%
Operating margin  26.4%  23.8%
Net income $123 $105
Diluted EPS $2.22 $1.90
Non-GAAP Results    
Gross margin 48.0% 47.4%
Operating margin  28.3%  26.2%
Net earnings $129 $114.3
Diluted EPS $2.33 $2.07

Second Quarter 2018 Financial Results  

Revenue was $573 million, an increase of 3% from $554 million in the first quarter of 2018 and an increase of 19% from $481 million in the second quarter of 2017.

Net income was $123 million, or $2.22 per diluted share, compared to net income of $105 million, or $1.90 per diluted share, in the first quarter of 2018, and $120.4 million, or $2.19 per diluted share, in the second quarter of 2017, which included a gain of $72 million from the sale of its Data Analytics Business Unit.

Non-GAAP net earnings, which exclude special charges and credits, were $129 million, or $2.33 per diluted share, compared to $114.3 million, or $2.07 per diluted share, in the first quarter of 2018, and $77.7 million, or $1.41 per diluted share, in the second quarter of 2017.

Sales to semiconductor customers were a record $336 million, an increase of 19% compared to the second quarter of 2017, and sales to Advanced Markets were $237 million, an increase of 19% compared to the second quarter of 2017. 

Sales in the Vacuum and Analysis Division were $368 million, an increase of 19% from the second quarter a year ago. Sales in the Light and Motion Division were $205 million, an increase of 20% from the prior year period.

"We are very pleased with our results for the second quarter of 2018, as we achieved new records for total and semiconductor revenue as well as Non-GAAP net earnings," said Gerald Colella, Chief Executive Officer.  "We set a strategy five years ago to augment our semi-focused business model with additional solutions that serve the industrial technology sector and other Advanced Markets. Our results demonstrate that this strategy is working, and we are confident that our diverse end markets, combined with our global leadership position in Semiconductor, will continue to drive sustainable and profitable growth for MKS."

"Since acquiring Newport Corporation two years ago, we have expanded the portion of our revenue from Advanced Markets from approximately 25% to over 40%, a nearly $1 billion annual run rate, based on second quarter revenue," said Seth Bagshaw, Chief Financial Officer.  "At the same time, we more than doubled the Non-GAAP operating margin for our Light and Motion Division, from approximately 11% in the second quarter of 2016 to over 27% in the second quarter of 2018, demonstrating our ability to drive profitable growth."

Additional Financial Information

The Company had $631 million in cash and short-term investments and $348 million of Term Loan Debt as of June 30, 2018 and during the second quarter of 2018, MKS paid a dividend of $10.9 million or $0.20 per diluted share, an 11% increase over the previous quarter.

Third Quarter 2018 Outlook  

Based on current business levels, the Company expects that revenue in the third quarter of 2018 could range from $470 to $510 million.

At these volumes, GAAP net income could range from $1.40 to $1.66 per diluted share and Non-GAAP net earnings could range from $1.60 to $1.86 per diluted share. This financial guidance incorporates assumptions made based upon the Company's current interpretation of the 2017 Tax Cut and Jobs Act and may change as additional clarification and implementation guidance is issued.

Conference Call Details

A conference call with management will be held on Wednesday, July 25, 2018 at 8:30 a.m. (Eastern Time).  To participate in the conference call, please dial (877) 212-6076 for domestic callers and (707) 287-9331 for international callers, and an operator will connect you.  Participants will need to provide the operator with the Conference ID of 4876837, which has been reserved for this call.  A live and archived webcast of the call will be available on the Company's website at www.mksinst.com, along with the Company's earnings press release and supplemental financial information. 

About MKS Instruments

MKS Instruments, Inc. is a global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for our customers. Our products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, residual gas analysis, leak detection, control technology, ozone generation and delivery, power, reactive gas generation, vacuum technology, lasers, photonics, sub-micron positioning, vibration control and optics. We also provide services relating to the maintenance and repair of our products, installation services and training. Our primary served markets include semiconductor, industrial technologies, life and health sciences, research and defense.  Additional information can be found at www.mksinst.com.

Use of Non-GAAP Financial Results

This release includes measures that are not in accordance with U.S. generally accepted accounting principles ("Non-GAAP measures"). Non-GAAP measures exclude amortization of acquired intangible assets, asset impairments, costs associated with completed and announced acquisitions, acquisition integration costs, an inventory step-up adjustment related to an acquisition, restructuring charges, certain excess and obsolete inventory charges, fees and expenses related to the re-pricings of our term loan, amortization of debt issuance costs, net proceeds from an insurance policy, costs associated with the sale of a business, the tax effect of the 2017 Tax Cut and Jobs Act, the tax effect of legal entity restructurings, other discrete tax benefits and charges, and the related tax effect of these adjustments. These Non-GAAP measures should be viewed in addition to, and not as a substitute for, MKS' reported results, and may be different from Non-GAAP measures used by other companies.  In addition, these Non-GAAP measures are not based on any comprehensive set of accounting rules or principles. MKS management believes the presentation of these Non-GAAP measures is useful to investors for comparing prior periods and analyzing ongoing business trends and operating results.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the future financial performance, business prospects and growth of MKS.  These statements are only predictions based on current assumptions and expectations.  Actual events or results may differ materially from those in the forward-looking statements set forth herein.  Among the important factors that could cause actual events to differ materially from those in the forward-looking statements are the conditions affecting the markets in which MKS operates, including the fluctuations in capital spending in the semiconductor industry and other advanced manufacturing markets, fluctuations in net sales to our major customers, the challenges, risks and costs involved with integrating the operations  of the companies we have acquired, including our most recent acquisition of Newport Corporation, the Company's ability to successfully grow our business, potential fluctuations in quarterly results, the terms of our term loan, dependence on new product development, rapid technological and market change, acquisition strategy, manufacturing and sourcing risks, volatility of stock price, international operations, financial risk management, and the other factors described in MKS' most recent Annual Report on Form 10-K for the year ended December 31, 2017 filed with SEC. MKS is under no obligation to, and expressly disclaims any obligation to, update or alter these forward-looking statements, whether as a result of new information, future events or otherwise after the date of this press release.

Company Contact:  Seth H. Bagshaw
Senior Vice President, Chief Financial Officer and Treasurer
Telephone:  978.645.5578

Investor Relations Contacts
Monica Gould
The Blueshirt Group
Telephone:  212.871.3927
Email:  monica@blueshirtgroup.com 

Lindsay Grant Savarese
The Blueshirt Group
Telephone:  212.331.8417
Email:  lindsay@blueshirtgroup.com 

             
MKS Instruments, Inc.    
Unaudited Consolidated Statements of Operations    
(In thousands, except per share data)    
             
             
             
    Three Months Ended 
      June 30,       June 30,       March 31,  
      2018     2017 (Note 19)     2018  
             
Net revenues:            
  Products   $   509,999     $   426,317     $   496,677  
  Services       63,141         54,440         57,598  
  Total net revenues       573,140         480,757         554,275  
Cost of revenues:            
  Products       266,890         230,706         261,321  
  Services       31,373         30,468         30,099  
  Total cost of revenues       298,263         261,174         291,420  
             
Gross profit       274,877         219,583         262,855  
             
Research and development       36,504         33,680         34,857  
Selling, general and administrative       76,181         71,979         82,949  
Acquisition and integration costs       (1,168 )       790         -   
Restructuring       790         2,064         1,220  
Environmental costs       -          -          1,000  
Asset impairment       -          6,719         -   
Fees and expenses related to repricing of term loan       378         -          -   
Amortization of intangible assets       10,901         11,468         11,190  
Income from operations       151,291         92,883         131,639  
             
Interest income       1,456         507         1,105  
Interest expense       3,922         6,997         5,430  
Gain on sale of business       -          74,856         -   
Other expense, net       281         3,277         572  
Income from operations before income taxes       148,544         157,972         126,742  
Provision for income taxes        25,682         37,532         21,621  
Net income   $   122,862     $   120,440     $   105,121  
             
Net income per share:            
  Basic   $   2.25     $   2.22     $   1.93  
  Diluted   $   2.22     $   2.19     $   1.90  
             
Cash dividends per common share   $   0.20     $   0.18     $   0.18  
             
Weighted average shares outstanding:             
  Basic       54,719         54,178         54,423  
  Diluted       55,274         55,001         55,286  
             
The following supplemental Non-GAAP earnings information is presented             
to aid in understanding MKS' operating results:            
             
Net income   $   122,862     $   120,440     $   105,121  
             
Adjustments:            
  Acquisition and integration costs (Note 1)       (1,168 )       790         -   
  Expenses related to sale of a business (Note 2)       -          436         -   
  Excess and obsolete inventory charge (Note 3)       -          1,160         -   
  Fees and expenses related to repricing of term loan (Note 4)        378         -          -   
  Amortization of debt issuance costs (Note 5)       660         694         1,831  
  Restructuring (Note 6)       790         2,064         1,220  
  Environmental costs (Note 7)       -          -          1,000  
  Asset impairment (Note 8)       -          6,719         -   
  Gain on sale of business (Note 9)       -          (74,856 )       -   
  Amortization of intangible assets       10,901         11,468         11,190  
  Windfall tax benefit on stock-based compensation (Note 10)       (4,752 )       (3,169 )       (3,036 )
  Tax adjustment related to the sale of a business (Note 11)       -          15,007         -   
  Deferred tax adjustment (Note 12)       -          -          878  
  Transition tax on accumulated foreign earnings (Note 13)       (659 )       -          (1,668 )
  Pro-forma tax adjustments       (200 )       (3,047 )       (2,247 )
             
Non-GAAP net earnings (Note 14)    $   128,812     $   77,706     $   114,289  
             
Non-GAAP net earnings per share (Note 14)   $   2.33     $   1.41     $   2.07  
             
Weighted average shares outstanding       55,274         55,001         55,286  
             
Income from operations   $   151,291     $   92,883     $   131,639  
             
Adjustments:            
  Acquisition and integration costs (Note 1)       (1,168 )       790         -   
  Expenses related to sale of a business (Note 2)       -          436         -   
  Excess and obsolete inventory charge (Note 3)       -          1,160         -   
  Fees and expenses related to repricing of term loan (Note 4)        378         -          -   
  Restructuring (Note 6)       790         2,064         1,220  
  Environmental costs (Note 7)       -          -          1,000  
  Asset impairment (Note 8)       -          6,719         -   
  Amortization of intangible assets       10,901         11,468         11,190  
             
Non-GAAP income from operations (Note 15)   $   162,192     $   115,520     $   145,049  
             
Non-GAAP operating margin percentage (Note 15)     28.3 %     24.0 %     26.2 %
             
Gross profit   $   274,877     $   219,583     $   262,855  
  Excess and obsolete inventory charge (Note 3)       -          1,160         -   
           
Non-GAAP gross profit (Note 16)   $   274,877     $   220,743     $   262,855  
           
Non-GAAP gross profit percentage (Note 16)     48.0 %     45.9 %     47.4 %
           
Interest expense   $   3,922     $   6,997     $   5,430  
  Amortization of debt issuance costs (Note 5)       660       694         1,831  
             
Non-GAAP interest expense   $   3,262     $   6,303     $   3,599  
           
Net income   $   122,862     $   120,440     $   105,121  
  Interest expense, net       2,466         6,490         4,325  
  Provision for income taxes       25,682         37,532         21,621  
  Depreciation       8,984         9,120         9,302  
  Amortization       10,901         11,468         11,190  
EBITDA (Note 17)   $   170,895     $   185,050     $   151,559  
  Stock-based compensation       6,366         6,207         10,426  
  Acquisition and integration costs (Note 1)       (1,168 )       790         -   
  Expenses related to sale of a business (Note 2)       -          436         -   
  Excess and obsolete inventory charge (Note 3)       -          1,160         -   
  Fees and expenses related to repricing of term loan (Note 4)        378         -          -   
  Restructuring (Note 6)       790         2,064         1,220  
  Environmental costs (Note 7)       -          -          1,000  
  Asset impairment (Note 8)       -          6,719         -   
  Gain on sale of business (Note 9)       -          (74,856 )       -   
  Other adjustments       -          822         772  
Adjusted EBITDA (Note 18)   $   177,261     $   128,392     $   164,977  
 


Note 1: We recorded acquisition and integration costs related to the Newport Corporation acquisition, which closed during the second quarter of 2016, during the three months ended June 30, 2017. During the second quarter of 2018, we reversed a portion of these costs related to severance agreement provisions that were not met.
 
Note 2: We recorded legal and consulting expenses during the three months ended June 30, 2017 related to the sale of a business, which was completed in April 2017.
 
Note 3: We recorded excess and obsolete inventory charges in cost of sales during the three months ended June 30, 2017, related to the discontinuation of a product line in connection with the consolidation of two manufacturing sites.
 
Note 4: We recorded fees and expenses during the three months ended June 30, 2018 related to the fourth repricing of our Term Loan Credit Agreement.
 
Note 5: We recorded additional interest expense related to the amortization of debt issuance costs affiliated with our Term Loan Credit Agreement and ABL Facility.
 
Note 6: We recorded restructuring costs during the three months ended June 30, 2018 and March 31, 2018 which were primarily comprised of severance costs related to transferring a portion of our shared services functions to a third party as well as the consolidation of certain shared service functions in Asia. We recorded restructuring costs during the three months ended June 30, 2017, primarily related to the restructuring of one of our international facilities and the consolidation of sales offices.
 
Note 7: We recorded additional environmental costs during the three months ended March 31, 2018, related to an EPA-designated Superfund site, which was acquired as part of our Newport acquisition.
 
Note 8: We recorded an asset impairment charge, primarily related to the write-off of goodwill and intangible assets during the three months ended June 30, 2017, in connection with the consolidation of two manufacturing plants.
 
Note 9: We recorded a gain during the three months ended June 30, 2017, related to the sale of our Data Analytics Solutions business.
 
Note 10: We recorded windfall tax benefits on the vesting of stock-based compensation related to an accounting standard issued by the Financial Statement Accounting Standards Board (Accounting Standards update 2016-09).
 
Note 11: We recorded taxes related to the sale of our Data Analytics Solutions business during the three months ended June 30, 2017.
 
Note 12*: We recorded a provisional deferred tax adjustment, which also includes the reversal of a tax accrual on a French dividend, related to U.S. tax reform legislation during the fourth quarter of 2017 and updated the provisional transition tax during the three months ended June 30, 2018 and March 31, 2018.
 
Note 13*: We adjusted the transition tax on accumulated foreign earnings related to the 2017 Tax Cut and Jobs Act during  the three months ended June 30, 2018.
 
Note 14: The Non-GAAP net earnings and Non-GAAP net earnings per share amounts exclude acquisition and integration costs, expenses related to the sale of a business, an excess and obsolete inventory charge, fees and expenses related to the repricing of the Term Loan Credit Agreement, amortization of debt issuance costs, restructuring costs, environmental costs, an asset impairment charge, a gain on the sale of a business, amortization of intangible assets, a windfall tax benefit related to stock compensation expense, taxes related to the sale of a business, a deferred tax adjustment, transition tax on accumulated foreign earnings and the related tax effect of these adjustments to reflect the expected full year effective tax rate in the related period.
 
Note 15: The Non-GAAP income from operations and Non-GAAP operating margin percentages exclude acquisition and integration costs, expenses related to the sale of a business, an excess and obsolete inventory charge, fees and expenses related to the repricing of the Term Loan Credit Agreement, restructuring costs, environmental costs, an asset impairment charge and amortization of intangible assets.
 
Note 16: The Non-GAAP gross profit amounts and Non-GAAP gross profit percentages exclude an excess and obsolete inventory charge related to the discontinuation of a product line.
 
Note 17: EBITDA excludes net interest, income taxes, depreciation and amortization of intangible assets.
 
Note 18: Adjusted EBITDA excludes stock-based compensation, acquisition and integration costs, expenses related to the sale of a business, an excess and obsolete inventory charge, fees and expenses related to the repricing of the Term Loan Credit Agreement, restructuring costs, environmental costs, an asset impairment charge, a gain on the sale of a business and other adjustments as defined in our Term Loan Credit Agreement.
 
*The computation of the one-time tax on our offshore earnings pursuant to the 2017 Tax Cut and Jobs Act (the "Tax Act") as well as our net deferred tax liability is based on our current understanding and assumptions regarding the impact of the Tax Act, and may change as additional clarification and implementation guidance is issued and as the interpretation of the Tax Act evolves over time.
 
Note 19: We historically recorded the revenue and related cost of revenue for our spare parts within Products in our Statement of Operations for the Vacuum and Analysis Division. We have now determined that these items are better reflected within Services in our Statement of Operations and have revised the presentation of our previously issued financial statements as shown below:


                     
                  Three Months Ended June 30, 2017
                  As previously
reported
    Adjustment       As revised
Net revenues:                                  
Products                  $ 431,950   $ (5,633 )   $  426,317
Services                 48,807     5,633       54,440
Total net revenues                 480,757     -       480,757
Cost of revenues:                                
Cost of products                  229,304     1,402       230,706
Cost of services                  31,870     (1,402 )     30,468
Total cost of revenues                  $ 261,174   $ -     $ 261,174
                             


             
MKS Instruments, Inc.  
Unaudited Consolidated Statements of Operations  
(In thousands, except per share data)  
         
      Six Months Ended   
      June 30,  
        2018     2017 (Note 19)  
             
Net revenues:            
  Products     $   1,006,676     $   814,255    
  Services         120,739         103,655    
  Total net revenues         1,127,415         917,910    
Cost of revenues:            
  Products         528,211         436,540    
  Services         61,472         56,240    
  Total cost of revenues         589,683         492,780    
             
Gross profit         537,732         425,130    
             
Research and development         71,361         66,962    
Selling, general and administrative         159,130         146,199    
Acquisition and integration costs         (1,168 )       2,232    
Restructuring         2,010         2,586    
Environmental costs         1,000         -     
Asset impairment          -          6,719    
Fees and expenses related to repricing of term loan         378         -     
Amortization of intangible assets         22,091         23,969    
Income from operations         282,930         176,463    
             
Interest income         2,561         1,023    
Interest expense         9,352         15,829    
Gain on sale of business         -          74,856    
Other expense, net         853         1,256    
Income from operations before income taxes         275,286         235,257    
Provision for income taxes          47,303         49,757    
Net income     $   227,983     $   185,500    
             
Net income per share:            
  Basic     $   4.18     $   3.44    
  Diluted     $   4.12     $   3.37    
             
Cash dividends per common share     $   0.38     $   0.35    
             
Weighted average shares outstanding:             
  Basic         54,571         53,973    
  Diluted         55,280         54,979    
             
The following supplemental Non-GAAP earnings information is presented             
to aid in understanding MKS' operating results:            
             
Net income     $   227,983     $   185,500    
             
Adjustments:            
  Acquisition and integration costs (Note 1)         (1,168 )       2,232    
  Expenses related to sale of a business (Note 2)         -          859    
  Excess and obsolete inventory charge (Note 3)         -          1,160    
  Fees and expenses related to repricing of term loan (Note 4)          378         -     
  Amortization of debt issuance costs (Note 5)         2,491         3,108    
  Restructuring (Note 6)         2,010         2,586    
  Environmental costs (Note 7)         1,000         -     
  Asset impairment (Note 8)         -          6,719    
  Gain on sale of business (Note 9)         -          (74,856 )  
  Amortization of intangible assets         22,091         23,969    
  Windfall tax benefit on stock-based compensation (Note 10)         (7,788 )       (9,819 )  
  Tax adjustment related to the sale of a business (Note 11)         -          15,007    
  Deferred tax adjustment (Note 12)         878         -     
  Transition tax on accumulated foreign earnings (Note 13)         (2,327 )       -     
  Pro-forma tax adjustments         (2,447 )       (9,710 )  
             
Non-GAAP net earnings (Note 14)      $   243,101     $   146,755    
             
Non-GAAP net earnings per share (Note 14)     $   4.40     $   2.67    
             
Weighted average shares outstanding         55,280         54,979    
             
Income from operations     $   282,930     $   176,463    
             
Adjustments:            
  Acquisition and integration costs (Note 1)         (1,168 )       2,232    
  Expenses related to sale of a business (Note 2)         -          859    
  Excess and obsolete inventory charge (Note 3)         -          1,160    
  Fees and expenses related to repricing of term loan (Note 4)          378         -     
  Restructuring (Note 6)         2,010         2,586    
  Environmental costs (Note 7)         1,000         -     
  Asset impairment (Note 8)         -          6,719    
  Amortization of intangible assets         22,091         23,969    
             
Non-GAAP income from operations (Note 15)     $   307,241     $   213,988    
             
Non-GAAP operating margin percentage (Note 15)       27.3 %     23.3 %  
             
Gross profit     $   537,732     $   425,130    
  Excess and obsolete inventory charge (Note 3)         -          1,160    
         
Non-GAAP gross profit (Note 16)     $   537,732     $   426,290    
         
Non-GAAP gross profit percentage (Note 16)       47.7 %     46.4 %  
             
Interest expense     $   9,352     $   15,829    
  Amortization of debt issuance costs (Note 5)         2,491         3,108    
             
Non-GAAP interest expense     $   6,861     $   12,721    
             
Net Income     $   227,983     $   185,500    
  Interest expense, net         6,791         14,806    
  Provision for income taxes         47,303         49,757    
  Depreciation         18,286         18,452    
  Amortization         22,091         23,969    
EBITDA (Note 17)     $   322,454     $   292,484    
  Stock-based compensation         16,792         14,989    
  Acquisition and integration costs (Note 1)         (1,168 )       2,232    
  Expenses related to sale of a business (Note 2)         -          859    
  Excess and obsolete inventory charge (Note 3)         -          1,160    
  Fees and expenses related to repricing of term loan (Note 4)          378         -     
  Restructuring (Note 6)         2,010         2,586    
  Environmental costs (Note 7)         1,000         -     
  Asset impairment (Note 8)         -          6,719    
  Gain on sale of business (Note 9)         -          (74,856 )  
  Other adjustments         772         1,569    
Adjusted EBITDA (Note 18)     $   342,238     $   247,742    
             
Note 1: We recorded acquisition and integration costs related to the Newport Corporation acquisition, which closed during the second quarter of 2016, during the six months ended June 30, 2017. During the second quarter of 2018, we reversed a portion of these costs related to severance agreement provisions that were not met.   
             
Note 2: We recorded legal and consulting expenses during the six months ended June 30, 2017 related to the sale of a business, which was completed in April 2017.  
             
Note 3: We recorded excess and obsolete inventory charges in cost of sales during the six months ended June 30, 2017, related to the discontinuation of a product line in connection with the consolidation of two manufacturing sites.  
             
Note 4: We recorded fees and expenses during the six months ended June 30, 2018 related to the fourth repricing of our Term Loan Credit Agreement.  
             
Note 5: We recorded additional interest expense related to the amortization of debt issuance costs affiliated with our Term Loan Credit Agreement and ABL Facility.  
             
Note 6: We recorded restructuring costs during the six months ended June 30, 2018, which were primarily comprised of severance costs related to transferring a portion of our shared services functions to a third party as well as the consolidation of certain shared service functions in Asia. We recorded restructuring costs during the six months ended June 30, 2017, primarily related to the restructuring of one of our international facilities and the consolidation of sales offices.   
             
Note 7: We recorded additional environmental costs during the six months ended June 30, 2018, related to an EPA-designated Superfund site, which was acquired as part of our Newport acquisition.  
             
Note 8: We recorded an asset impairment charge, primarily related to the write-off of goodwill and intangible assets, during the six months ended June 30, 2017, in connection with the consolidation of two manufacturing plants.  
             
Note 9: We recorded a gain during the six months ended June 30, 2017, related to the sale of our Data Analytics Solutions business.  
             
Note 10: We recorded windfall tax benefits on the vesting of stock-based compensation related to an accounting standard issued by the Financial Statement Accounting Standards Board (Accounting Standards update 2016-09).  
             
Note 11: We recorded taxes related to the sale of our Data Analytics Solutions business during the six months ended June 30, 2017.  
             
Note 12*: We recorded a provisional deferred tax adjustment, which also includes the reversal of a tax accrual on a French dividend, related to U.S. tax reform legislation during the fourth quarter of 2017 and updated the provisional transition tax during the six months ended June 30, 2018.  
             
Note 13*: We adjusted the transition tax on accumulated foreign earnings related to the 2017 Tax Cut and Jobs Act during  the six months ended June 30, 2018.  
             
Note 14: The Non-GAAP net earnings and Non-GAAP net earnings per share amounts exclude acquisition and integration costs, expenses related to the sale of a business, an excess and obsolete inventory charge, fees and expenses related to the repricing of the Term Loan Credit Agreement, amortization of debt issuance costs, restructuring costs, environmental costs, an asset impairment charge, a gain on the sale of a business, amortization of intangible assets, a windfall tax benefit related to stock compensation expense, taxes related to the sale of a business, a deferred tax adjustment, transition tax on accumulated foreign earnings and the related tax effect of these adjustments to reflect the expected full year effective tax rate in the related period.   
             
Note 15: The Non-GAAP income from operations and Non-GAAP operating margin percentages exclude acquisition and integration costs, expenses related to the sale of a business, an excess and obsolete inventory charge, fees and expenses related to the repricing of the Term Loan Credit Agreement, restructuring costs, environmental costs, an asset impairment charge and amortization of intangible assets.  
             
Note 16: The Non-GAAP gross profit amounts and Non-GAAP gross profit percentages exclude an excess and obsolete inventory charge related to the discontinuation of a product line.  
             
Note 17: EBITDA excludes net interest, income taxes, depreciation and amortization of intangible assets.   
     
Note 18: Adjusted EBITDA excludes stock-based compensation, acquisition and integration costs, expenses related to the sale of a business, an excess and obsolete inventory charge, fees and expenses related to the repricing of the Term Loan Credit Agreement, restructuring costs, environmental costs, an asset impairment charge, a gain on the sale of a business and other adjustments as defined in our Term Loan Credit Agreement.
             
*The computation of the one-time tax on our offshore earnings pursuant to the 2017 Tax Cut and Jobs Act (the "Tax Act") as well as our net deferred tax liability is based on our current understanding and assumptions regarding the impact of the Tax Act, and may change as additional clarification and implementation guidance is issued and as the interpretation of the Tax Act evolves over time.  
             
Note 19: We historically recorded the revenue and related cost of revenue for our spare parts within Products in our Statement of Operations for the Vacuum and Analysis Division. We have now determined that these items are better reflected within Services in our Statement of Operations and have revised the presentation of our previously issued financial statements as shown below:  
       
  Six Months Ended June 30, 2017  
  As previously reported   Adjustment   As revised  
Net revenues:            
  Products  $ 824,872   $   (10,617 )   $   814,255    
  Services  93,038       10,617         103,655    
Total net revenues  917,910       -          917,910    
Cost of revenues:            
  Cost of products  434,364       2,176         436,540    
  Cost of services  58,416       (2,176 )       56,240    
Total cost of revenues  $ 492,780   $   -      $   492,780    
     


           
MKS Instruments, Inc.
Unaudited Consolidated Statements of Cash Flows
(In thousands, except per share data)
           
  Three Months Ended 
  June 30,   June 30,   March 31,
    2018       2017       2018  
Cash flows from operating activities:          
Net income $   122,862     $   120,440     $   105,121  
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization     19,885       20,588         20,492  
Amortization of debt issuance costs and original issue discount     868       1,027         2,019  
Asset impairment     -        6,719         -   
Gain on sale of business     -        (74,856 )       -   
Stock-based compensation     6,366       6,207         10,426  
Provision for excess and obsolete inventory     4,959       5,971         5,333  
Provision for doubtful accounts     261       195         335  
Deferred income taxes     1,875       9,607         (705 )
Other     426       711         34  
Changes in operating assets and liabilities     (47,891 )       12,807         (70,299 )
           
Net cash provided by operating activities     109,611         109,416         72,756  
           
Cash flows from investing activities:          
  Net proceeds from sale of business     -        72,509         -   
Purchases of investments     (99,063 )       (27,290 )       (49,753 )
Sales of investments     54,433         4,140         8,930  
Maturities of investments     41,138         29,562         49,596  
Purchases of property, plant and equipment     (12,428 )       (5,640 )       (9,390 )
           
Net cash (used in) provided by investing activities     (15,920 )       73,281         (617 )
           
Cash flows from financing activities:          
Payments of short-term borrowings     (17,788 )       (7,863 )       (10,274 )
Proceeds from short and long-term borrowings     25,082         7,901         11,907  
Payments of long-term borrowings     -          (1,571 )       (50,000 )
Dividend payments     (10,942 )       (9,484 )       (9,808 )
Net payments related to employee stock awards     (4,131 )       (10,519 )       (8,921 )
           
Net cash used in financing activities     (7,779 )       (21,536 )       (67,096 )
           
Effect of exchange rate changes on cash and cash equivalents     631         5,765         1,958  
           
Increase in cash and cash equivalents and restricted cash     86,543         166,926         7,001  
           
Cash and cash equivalents, including restricted cash at beginning of period     340,888       261,186         333,887  
           
Cash and cash equivalents, including restricted cash at end of period $   427,431     $   428,112     $   340,888  
           


                         
MKS Instruments, Inc.  
Reconciliation of GAAP Income Tax Rate to Non-GAAP Income Tax Rate  
(In thousands)  
                       
    Three Months Ended June 30, 2018   Three Months Ended March 31, 2018
  Income Before   Provision (benefit)   Effective      Income Before   Provision (benefit)   Effective 
  Income Taxes   for Income Taxes   Tax Rate   Income Taxes   for Income Taxes   Tax Rate
         
GAAP   $   148,544     $   25,682       17.3 %   $   126,742     $   21,621     17.1 %
                         
Adjustments:                        
  Acquisition and integration costs (Note 1)       (1,168 )       -              -          -       
  Fees and expenses related to repricing of term loan (Note 4)        378         -              -          -       
  Amortization of debt issuance costs (Note 5)       660         -              1,831         -       
  Restructuring (Note 6)       790         -              1,220         -       
  Environmental costs (Note 7)       -          -              1,000         -       
  Amortization of intangible assets       10,901         -              11,190         -       
  Windfall tax benefit on stock-based compensation (Note 10)       -          4,752             -          3,036      
  Deferred tax adjustment (Note 12)       -          -              -          (878 )    
  Transition tax on accumulated foreign earnings (Note 13)       -          659             -          1,668      
  Tax effect of pro-forma adjustments       -          200             -          2,247      
                         
Non-GAAP   $   160,105     $   31,293       19.5 %   $   141,983     $   27,694     19.5 %
                         
                         
    Three Months Ended June 30, 2017            
    Income Before   Provision (benefit)   Effective             
    Income Taxes   for Income Taxes   Tax Rate            
                         
GAAP   $   157,972     $   37,532       23.8 %            
                         
Adjustments:                        
  Acquisition and integration costs (Note 1)       790         -                   
  Expenses related to sale of a business (Note 2)       436         -                   
  Excess and obsolete inventory charge (Note 3)       1,160         -                   
  Amortization of debt issuance costs (Note 5)       694         -                   
  Restructuring (Note 6)       2,064         -                   
  Asset impairment (Note 8)       6,719         -                   
  Gain on sale of business (Note 9)       (74,856 )       -                   
  Amortization of intangible assets       11,468         -                   
  Windfall tax benefit on stock-based compensation (Note 10)       -          3,169                  
  Tax adjustment related to the sale of a business (Note 11)       -          (15,007 )  
  Adjustment to pro-forma tax rate       -          3,047                  
Non-GAAP   $   106,447     $   28,741       27.0 %            
                         
                         
    Six Months Ended June 30, 2018   Six Months Ended June 30, 2017
  Income Before   Provision (benefit)   Effective    Income Before   Provision (benefit)   Effective 
  Income Taxes   for Income Taxes   Tax Rate   Income Taxes   for Income Taxes   Tax Rate
         
GAAP   $   275,286     $   47,303       17.2 %   $   235,257     $   49,757     21.2 %
                         
Adjustments:                        
  Acquisition and integration costs (Note 1)       (1,168 )       -              2,232         -       
  Expenses related to sale of a business (Note 2)       -          -              859         -       
  Excess and obsolete inventory charge (Note 3)       -          -              1,160         -       
  Fees and expenses related to repricing of term loan (Note 4)        378         -              -          -       
  Amortization of debt issuance costs (Note 5)       2,491         -              3,108         -       
  Restructuring (Note 6)       2,010         -              2,586         -       
  Environmental costs (Note 7)       1,000         -              -          -       
  Asset impairment (Note 8)       -          -              6,719         -       
  Gain on sale of business (Note 9)       -          -              (74,856 )       -       
  Amortization of intangible assets       22,091         -              23,969         -       
  Windfall tax benefit on stock-based compensation (Note 10)       -          7,788             -          9,819      
  Tax adjustment related to the sale of a business (Note 11)       -          -              -          (15,007 )    
  Deferred tax adjustment (Note 12)       -          (878 )           -          -       
  Transition tax on accumulated foreign earnings (Note 13)       -          2,327             -          -       
  Tax effect of pro-forma adjustments       -          2,447             -          9,710      
                         
Non-GAAP   $   302,088     $   58,987       19.5 %   $   201,034     $   54,279     27.0 %
                         
                         
Note 1: We recorded acquisition and integration costs related to the Newport Corporation acquisition, which closed during the second quarter of 2016, during the three and six months ended June 30, 2017. During the second quarter of 2018, we reversed a portion of these costs related to severance agreement provisions that were not met.
 
Note 2: We recorded legal and consulting expenses during the three and six months ended June 30, 2017 related to the sale of a business, which was completed in April 2017.
                         
Note 3: We recorded excess and obsolete inventory charges in cost of sales during the three and six months ended June 30, 2017, related to the discontinuation of a product line in connection with the consolidation of two manufacturing sites.
 
Note 4: We recorded fees and expenses during the three and six months ended June 30, 2018 related to the fourth repricing of our Term Loan Credit Agreement.
                         
Note 5: We recorded additional interest expense related to the amortization of debt issuance costs affiliated with our Term Loan Credit Agreement and ABL Facility.
                         
Note 6: We recorded restructuring costs during the three and six months ended June 30, 2018 and three months ended March 31, 2018, primarily comprised of severance costs related to transferring a portion of our shared services functions to a third party as well as the consolidation of certain shared service functions in Asia. We recorded restructuring costs during the three and six months ended June 30, 2017, primarily related to the restructuring of one of our international facilities and the consolidation of sales offices.
 
Note 7: We recorded additional environmental costs during the three months ended March 31, 2018 and six months ended June 30, 2018, related to an EPA-designated Superfund site, which was acquired as part of our Newport acquisition.
 
Note 8: We recorded an asset impairment charge, primarily related to the write-off of goodwill and intangible assets during the three and six months ended June 30, 2017, in connection with the consolidation of two manufacturing plants.
 
Note 9: We recorded a gain during the three and six months ended June 30, 2017, related to the sale of our Data Analytics Solutions business.
 
Note 10: We recorded windfall tax benefits on the vesting of stock-based compensation related to an accounting standard issued by the Financial Statement Accounting Standards Board (Accounting Standards update 2016-09).
                         
Note 11: We recorded taxes related to the sale of our Data Analytics Solutions business during the three and six months ended June 30, 2017.
 
Note 12*: We recorded a provisional deferred tax adjustment, which also includes the reversal of a tax accrual on a French dividend, related to U.S. tax reform legislation during the fourth quarter of 2017 and updated the provisional transition tax during the three and six months ended June 30, 2018 and three months ended March 31, 2018.
 
Note 13*: We adjusted the transition tax on accumulated foreign earnings related to the 2017 Tax Cut and Jobs Act during  the three and six months ended June 30, 2018.
 
*The computation of the one-time tax on our offshore earnings pursuant to the 2017 Tax Cut and Jobs Act (the "Tax Act") as well as our net deferred tax liability is based on our current understanding and assumptions regarding the impact of the Tax Act, and may change as additional clarification and implementation guidance is issued and as the interpretation of the Tax Act evolves over time. 
                           
                         
MKS Instruments, Inc.  
Reconciliation of Q3-18 Guidance - GAAP Net Income to Non-GAAP Net Earnings   
(In thousands, except per share data)    
                         
    Three Months Ended September 30, 2018        
    Low Guidance   High Guidance        
    $ Amount     $ Per Share     $ Amount   $ Per Share        
                         
GAAP net income   $   77,600     $   1.40     $   91,600     $   1.66          
                         
Amortization     10,800         0.20       10,800         0.20          
                         
Deferred financing costs     600         0.01       600         0.01          
                         
Restructuring     300         0.01       300         0.01          
                         
Tax effect of adjustments (Note 1)     (800 )       (0.02 )     (600 )       (0.02 )        
                         
Non-GAAP net earnings   $   88,500     $   1.60     $   102,700     $   1.86          
                         
Q3 -18 forecasted shares         55,300           55,300          
                         
Note 1: The Non-GAAP adjustments are tax effected at the applicable statutory rates and the difference between the GAAP and Non-GAAP tax rates. 
                         


             
MKS Instruments, Inc.  
Unaudited Consolidated Balance Sheet  
(In thousands)  
             
        June 30,     December 31,  
        2018     2017  
             
ASSETS            
             
Cash and cash equivalents, including restricted cash $   427,431   $   333,887  
Short-term investments       203,686       209,434  
Trade accounts receivable, net       339,958       300,308  
Inventories       384,929       339,081  
Other current assets       61,720       53,543  
             
  Total current assets       1,417,724       1,236,253  
             
Property, plant and equipment, net       174,054       171,782  
Goodwill         588,718       591,047  
Intangible assets, net       342,684       366,398  
Long-term investments       10,476       10,655  
Other assets       39,832       37,883  
             
Total assets   $   2,573,488   $   2,414,018  
             
             
LIABILITIES AND STOCKHOLDERS' EQUITY        
             
Short-term debt   $   12,511   $   2,972  
Accounts payable       87,699       82,518  
Accrued compensation       75,637       96,147  
Income taxes payable       17,294       21,398  
Deferred revenue       10,729       12,842  
Other current liabilities       78,201       73,945  
  Total current liabilities       282,071       289,822  
             
Long-term debt, net       342,096       389,993  
Non-current deferred taxes       64,752       61,571  
Non-current accrued compensation       55,627       51,700  
Other liabilities       27,504       32,025  
  Total liabilities       772,050       825,111  
             
Stockholders' equity:          
Common stock       113       113  
Additional paid-in capital       793,384       789,644  
Retained earnings       1,004,698       795,698  
Accumulated other comprehensive income       3,243       3,452  
  Total stockholders' equity       1,801,438       1,588,907  
             
Total liabilities and stockholders' equity   $   2,573,488   $   2,414,018  

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