MKS INSTRUMENTS, INC. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding the future financial performance, business prospects and growth of MKS. These statements are only predictions based on current assumptions and expectations. Any statements that are not statements of historical fact (including statements containing the words "will," "projects," "intends," "believes," "plans," "anticipates," "expects," "estimates," "forecasts," "continues" and similar expressions) should be considered to be forward-looking statements. 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 sales to our major customers, the impact of the COVID-19 pandemic on the global economy and financial markets, including any restrictions on MKS' operations and the operations of MKS' customers and suppliers resulting from public health requirements and government mandates, the terms of our Term Loan Facility, competition from larger or more established companies in MKS' markets, MKS' ability to successfully grow its business and particularly that of ESI's business, the challenges, risks and costs involved with integrating the operations of the companies we have acquired, potential fluctuations in quarterly results, 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 endedDecember 31, 2019 and any subsequent Quarterly Reports on Form 10-Q, as filed with theU.S. Securities and Exchange Commission (the "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 presentation. The Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes principal factors affecting the results of our operations, financial condition and liquidity, as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements. This section provides an analysis of our financial results for the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 30, 2019 .
Overview
We are a global provider of instruments, systems, 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, electronic control technology, reactive gas generation and delivery, power generation and delivery, vacuum technology, lasers, photonics, optics, precision motion control, vibration control and laser-based manufacturing systems solutions. 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.
Recent Events
Impact of COVID-19
TheWorld Health Organization formally declared the outbreak of COVID-19 a pandemic inMarch 2020 . This pandemic has impacted the global economy and we have devoted considerable resources to address the impact to our employees and manufacturing capacity, as well as how to manage government mandates reacting to the pandemic, supply chain disruptions, and changing demand from our customers for our products and services.
In
Health and Safety of our Workforce
• Expediting social distancing and facility sanitation measures
• Establishing work-from-home policy and return to work policies
• Implementing and applying key safety precautions
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Continuity of Operations
• Securing critical components amidst disruptions to supply chain
• Addressing rapid changes in workforce availability to ensure timely
response to customer needs
• Harnessing our global services footprint to respond to the repair and
maintenance needs of our customers
While our operations and financial performance in certain areas of our business
have been negatively impacted by the COVID-19 pandemic, the impact to our
financial results for the three and nine months ended September 30, 2020 has
been minimal due to strong demand for our products from our semiconductor
customers. However, the situation remains dynamic and there remains significant
uncertainty as to the length and severity of the pandemic, the actions that may
be taken by government authorities, the impact to the business of our customers
and suppliers, the long-term economic implications and other factors identified
in Part II, Item IA "Risk Factors" in our Quarterly Report on Form 10-Q for the
three months ended March 31, 2020 , which was filed with the SEC on May 6, 2020 .
We believe the longer the COVID-19 pandemic continues, the more material the
adverse impact could be on our business, financial condition and operating
results. We will continue to evaluate the nature and extent of the impact to our
business, financial condition and operating results.
Segments and Markets
The Vacuum & Analysis segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, and vacuum technology. The Light & Motion segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in lasers, photonics, optics, precision motion control and vibration control. The Equipment & Solutions segment was created in conjunction with the completion of our acquisition ofElectro Scientific Industries, Inc. onFebruary 1, 2019 (the "ESI Merger"). The Equipment & Solutions segment provides laser-based manufacturing systems solutions for the micro-machining industry that enable customers to optimize production. The primary served markets for the Equipment & Solutions segment include flexible and rigid printed circuit board ("PCB") processing/fabrication, semiconductor wafer processing and passive component manufacturing and testing. The Equipment & Solutions segment's systems incorporate specialized laser technology and proprietary control software to efficiently process the materials and components that are an integral part of electronic devices and systems.
We have a diverse base of customers. Approximately 60% and 52% of our net
revenues, for the nine months ended
Approximately 40% and 48% of our net revenues, for the nine months ended
Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers increased by$136.1 million , or 61%, for the three months endedSeptember 30, 2020 , compared to the same period in the prior year, primarily due to an increase of$125.1 million from our Vacuum & Analysis segment. Net revenues from semiconductor capital equipment manufacture and semiconductor device manufacture customers increased by$335.9 million , or 51%, for the nine months endedSeptember 30, 2020 , compared to the same period in the prior year, primarily due to an increase of$305.9 million from our Vacuum & Analysis segment. These increases were primarily driven by broad-based demand across foundry, logic and memory manufacturing activities. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we cannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry. Net revenues from customers in our advanced markets decreased by$8.7 million , or 4%, for the three months endedSeptember 30, 2020 , compared to the same period in the prior year, primarily due to a decrease of$6.2 million from our Light & Motion segment. Net revenues from customers in our advanced markets decreased by$66.1 million , or 9%, for the nine months endedSeptember 30, 2020 , compared to the same period in the prior year, primarily due to a decrease of$62.8 million from our Light & Motion segment. Our advanced markets experienced an overall decline for the nine months endedSeptember 30, 2020 driven by a general slowdown in our industrial markets as well as in our research market which was negatively impacted by university and research lab closures resulting from the COVID-19 pandemic. A significant portion of our net revenues is from sales to customers in international markets. For the nine months endedSeptember 30, 2020 and 2019, international net revenues accounted for approximately 55% and 53%, respectively, of our total net revenues. A significant portion of our international net revenues was fromSouth Korea ,China ,Japan ,Israel andGermany . We expect international net revenues will continue to represent a significant percentage of our total net revenues. Long-lived assets located in the 34
--------------------------------------------------------------------------------United States were$353.1 million and$208.3 million , as ofSeptember 30, 2020 andDecember 31, 2019 , respectively, excluding goodwill, intangible assets, and long-term tax-related accounts. The increase in long-lived assets inthe United States , comparingSeptember 30, 2020 toDecember 31, 2019 , was primarily related to an increase in the right-of-use asset for new facility leases. Long-lived assets located outside ofthe United States were$126.0 million and$131.0 million , as ofSeptember 30, 2020 andDecember 31, 2019 , respectively, excluding goodwill, intangible assets, and long-term tax-related accounts.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States requires management to make judgments, assumptions and estimates that affect the amounts reported. There have been no material changes in our critical accounting policies sinceDecember 31, 2019 . While we do not believe that the impact on the business to date of the COVID-19 pandemic has triggered the need to perform an impairment test on goodwill, we will continue to assess the impact of the pandemic on our business. For further information about our critical accounting policies, please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year endedDecember 31, 2019 in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates."
Results of Operations
The following table sets forth for the periods indicated the percentage of total net revenues of certain line items included in our condensed consolidated statements of operations and comprehensive income data.
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net revenues:
Product 85.9 % 83.5 % 86.3 % 84.6 %
Services 14.1 16.5 13.7 15.4
Total net revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues 47.6 46.8 47.6 48.0
Cost of service revenues 8.0 8.9 7.6 8.1
Total cost of revenues (exclusive of
amortization shown separately below) 55.6 55.7 55.2 56.1
Gross profit 44.4 44.3 44.8 43.9
Research and development 7.2 9.0 7.7 8.8
Selling, general and administrative 14.7 17.8 15.6 17.7
Acquisition and integration costs 0.1 0.5 0.2 2.5
Restructuring and other 0.5 0.3 0.4 0.3
Amortization of intangible assets 2.1 3.7 2.5 3.6
Asset impairment - - 0.1 -
COVID-19 related net credits - - (0.1 ) -
Fees and expenses related to repricing
of Term Loan - 0.1 - 0.5
Gain on sale of long-lived assets - (1.5 ) - (0.5 )
Income from operations 19.8 14.4 18.4 11.0
Interest income - 0.3 0.1 0.3
Interest expense 1.1 2.9 1.4 2.5
Other expense (income), net 0.2 (0.2 ) 0.2 -
Income before income taxes 18.5 12.0 16.9 8.8
Provision for income taxes 2.9 1.7 2.9 1.8
Net income 15.6 % 10.3 % 14.0 % 7.0 %
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Net Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Product $ 506.8 $ 386.2 $ 1,441.0 $ 1,184.9
Service 83.0 76.3 228.8 215.2
Total net revenues $ 589.8 $ 462.5 $ 1,669.8 $ 1,400.1
Product revenues increased $120.6 million and $256.1 million during the three
and nine months ended September 30, 2020 , respectively, compared to the same
periods in the prior year. These increases were primarily attributed to
increases in net product revenues from our semiconductor customers, primarily
due to higher volume, of $128.5 million and $326.5 million , for these same
periods, respectively, partially offset by a decrease in net product revenues
from customers in our advanced markets of $7.9 million and $70.4 million , for
these same periods, respectively.
Service revenues consisted mainly of fees for services related to the
maintenance and repair of our products, sales of spare parts, and installation
and training. Service revenues increased $6.7 million and $13.5 million during
the three and nine months ended September 30, 2020 , compared to the same periods
in the prior year. The increase in service revenues for the three months ended
September 30, 2020 was primarily attributed to an increase in service revenues
from customers in our semiconductor market in our Vacuum & Analysis and Light &
Motion segments. The increase in service revenues for the nine months ended
September 30, 2020 , was primarily attributed to an increase in service revenues
from customers in our advanced markets in our Equipment & Solutions segment and
from customers in our semiconductor market in our Vacuum & Analysis segment.
Total international net revenues, including product and service, were $308.6
million and $912.1 million for the three and nine months ended September 30,
2020 , respectively, compared to $251.3 million and $747.1 million for the three
and nine months ended September 30, 2019 , respectively. These increases were
primarily attributed to increases in net revenues in South Korea and China .
The following table sets forth our net revenues by reportable segment:
Nine Months Ended
Three Months Ended September 30 , September 30 ,(dollars in millions) 2020 2019 2020 2019 Net revenues: Vacuum & Analysis $ 361.3 $ 240.7$ 995.1 $ 710.7 Light & Motion 175.9 172.5 507.3 549.0 Equipment & Solutions 52.6 49.3 167.4 140.4 Total net revenues $ 589.8 $ 462.5$ 1,669.8 $ 1,400.1 Net revenues from our Vacuum & Analysis segment increased$120.6 million and$284.4 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to the same periods in the prior year, due to volume increases in net revenues from semiconductor customers of$125.1 million and$305.9 million for the three and nine months endedSeptember 30, 2020 , respectively, offset by decreases in net revenues from customers in our advanced markets of$4.5 million and$21.5 million for the same periods, respectively, primarily from customers in our industrial technologies market. Net revenues from our Light & Motion segment increased$3.4 million and decreased$41.7 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to the same periods in the prior year. The decrease for the nine months endedSeptember 30, 2020 was attributed to a decrease in revenues from customers in our advanced markets of$62.8 million , primarily from customers in our industrial technologies and research and defense markets, offset by an increase of$21.1 million in net revenues from semiconductor customers. Net revenues from our Equipment & Solutions segment increased$3.3 million and$27.0 million for the three and nine months endedSeptember 30, 2020 , compared to the same periods in the prior year, due to increases in net revenues from customers in our advanced markets of$1.9 million and$18.1 million , respectively, and increases in net revenues from semiconductor customers of$1.4 million and$8.9 million , respectively. 36 -------------------------------------------------------------------------------- Gross Margin Three Months Ended Nine Months Ended September 30, September 30, % Points % Points 2020 2019 Change 2020 2019 Change Gross margin as a percentage of net revenues: Product 44.6 % 44.0 % 0.6 % 44.9 % 43.3 % 1.6 % Service 43.2 46.0 (2.8 ) 44.4 47.1 (2.7 ) Total gross margin 44.4 % 44.3 % 0.1 % 44.8 % 43.9 % 0.9 % Gross margin as a percentage of net product revenues increased by 0.6 and 1.6 percentage points for the three and nine months endedSeptember 30, 2020 , respectively, compared to the same periods in the prior year, primarily due to higher revenue volumes and favorable absorption, partially offset by unfavorable product mix and higher logistics costs. Gross margin as a percentage of net service revenues decreased by 2.8 and 2.7 percentage points for the three and nine months endedSeptember 30, 2020 , respectively, compared to the same periods in the prior year, primarily due to unfavorable absorption partially offset by favorable mix of products serviced. The following table sets forth gross margin as a percentage of net revenues by reportable segment: Three Months Ended Nine Months Ended September 30, September 30, % Points % Points 2020 2019 Change 2020 2019 Change Gross margin as a percentage of net revenues: Vacuum & Analysis 45.3 % 42.7 % 2.6 % 44.6 % 42.6 % 2.0 % Light & Motion 42.8 46.0 (3.2 ) 44.7 46.5 (1.8 ) Equipment & Solutions 43.0 44.5 (1.5 ) 45.4 38.5 6.9 Total gross margin 44.4 % 44.3 % 0.1 % 44.8 % 43.9 % 0.9 %
Gross margin for our Vacuum & Analysis segment increased by 2.6 and 2.0
percentage points for the three and nine months ended
Gross margin for our Light & Motion segment decreased by 3.2 percentage points for the three months endedSeptember 30, 2020 , compared to the same period in the prior year, primarily due to unfavorable product mix and higher excess and obsolete inventory charges. Gross margin decreased by 1.8 percentage points for the nine months endedSeptember 30, 2020 compared to the same period in the prior year primarily due to lower revenue volumes, unfavorable product mix and higher excess and obsolete inventory charges. Gross margin for our Equipment & Solutions segment decreased by 1.5 percentage points for the three months endedSeptember 30, 2020 , compared to the same period in the prior year, mainly due to unfavorable product mix. Gross margin increased by 6.9 percentage points for the nine months endedSeptember 30, 2020 , compared to the same period in the prior year, mainly as a result of an inventory step-up adjustment to fair value from purchase accounting of$7.6 million for the nine months endedSeptember 30, 2019 . Excluding this adjustment, gross margin for our Equipment & Solutions segment for the nine months endedSeptember 30, 2019 would have been 43.6%. Research and Development Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2020 2019 2020 2019
Research and development expenses
$ 122.4 Research and development expenses increased$0.9 million for the three months endedSeptember 30, 2020 , compared to the same period in the prior year. The increase was primarily related to an increase of$3.0 million in compensation-related costs, partially offset by a decrease of$2.2 million in project materials. Research and development expenses increased$5.3 million for the nine months endedSeptember 30, 2020 , compared to the same period in the prior year. The increase was primarily related to an increase of$6.8 million in compensation-related costs, mainly related to variable compensation,$1.1 million in professional fees,$1.1 million in software maintenance, partially offset by a decrease of$3.3 million in project materials and$1.0 million in travel costs. 37
-------------------------------------------------------------------------------- Our research and development efforts are primarily focused on developing and improving our instruments, components, subsystems and process control solutions to improve process performance and productivity. We have thousands of products and our research and development efforts primarily consist of a large number of projects related to these products, none of which is individually material to us. Current projects typically have durations of 3 to 30 months depending upon whether the product is an enhancement of existing technology or a new product. Our current initiatives include projects to enhance the performance characteristics of older products, to develop new products and to integrate various technologies into subsystems. These projects support, in large part, the transition in the semiconductor industry to smaller integrated circuit geometries and in the flat panel display and solar markets to larger substrate sizes, which require more advanced process control technology. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, fees paid to consultants, material costs for prototypes and other expenses related to the design, development, testing and enhancement of our products. We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets. We expect to continue to make significant investment in research and development activities. We are subject to risks from products not being developed in a timely manner, as well as from rapidly changing customer requirements and competitive threats from other companies and technologies. Our success primarily depends on our products being designed into new generations of equipment for the semiconductor industry and advanced technology markets. We develop products that are technologically advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital equipment. If our products are not chosen to be designed into our customers' products, our net revenues may be reduced during the lifespan of those products.
Selling, General and Administrative
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Selling, general and administrative expenses $ 87.0 $ 82.1 $ 260.3 $ 247.8
Selling, general and administrative expenses increased $4.9 million for the
three months ended September 30, 2020 , compared to the same period in the prior
year. The increase was primarily related to an increase of $6.8 million in
compensation-related costs and $1.0 million in information technology costs,
partially offset by a decrease of $2.2 million in travel costs, mainly as a
result of the COVID-19 pandemic, and a decrease of $1.0 million in bad debt
expense.
Selling, general and administrative expenses increased $12.5 million for the
nine months ended September 30, 2020 , compared to the same period in the prior
year. The increase was primarily related to an increase of $14.1 million in
compensation-related costs, $3.3 million in information technology costs and
$0.8 million in commissions expense, partially offset by a $6.3 million decrease
in travel costs, mainly as a result of the COVID-19 pandemic.
Acquisition and Integration Costs
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Acquisition and integration costs
$ 35.5 We recorded acquisition and integration costs related to the ESI Merger, which closed onFebruary 1, 2019 , during the three and nine months endedSeptember 30, 2020 and 2019. The costs for the three and nine months endedSeptember 30, 2020 consisted of cash bonus and stock-based compensation for certain ESI executives assisting in the integration process. The costs for the three and nine months endedSeptember 30, 2019 consisted primarily of compensation costs for certain executives from ESIwho had change in control provisions in their respective ESI employment agreements that were accounted for as dual-trigger arrangements and other stock vesting accelerations, as well as consulting and professional fees associated with the ESI Merger. Restructuring and Other Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2020 2019 2020 2019 Restructuring and other$ 3.1 $ 1.5 $ 6.8 $ 4.7 38
-------------------------------------------------------------------------------- Restructuring and other related costs during the three and nine months endedSeptember 30, 2020 primarily related to duplicate facility costs attributed to entering into new facility leases, costs related to the exit of certain product groups and costs related to the pending closure of a facility inEurope . Such costs for the nine months endedSeptember 30, 2020 were offset by an insurance reimbursement related to a legal settlement. Restructuring and other related costs during the three and nine months endedSeptember 30, 2019 consisted primarily of severance costs related to an organization-wide reduction in workforce, the consolidation of service functions inAsia and the movement of certain products to low cost regions. During the nine months endedSeptember 30, 2019 , we also recorded a charge from a contractual obligation we assumed as part of the Newport Merger.
Amortization of Intangible Assets
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Amortization of intangible assets
$ 50.3
Amortization of intangible assets decreased by
Asset Impairment
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Asset impairment $ - $ - $ 1.2 $ -
We recorded an asset impairment charge during the nine months ended
COVID-19 Related Net Credits
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
COVID-19 related net credits $ - $ -
$ - We recorded costs and credits related to the COVID-19 pandemic during the nine months endedSeptember 30, 2020 . The credits related toU.S. and foreign payroll-tax related credits for maintaining our workforce during the pandemic, offset by costs, which included shift premiums and bonuses.
Fees and Expenses Related to Repricing of Term Loan Facility
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Fees and expenses related to repricing
of Term Loan Facility $ - $ 0.6 $ - $ 6.5
We recorded fees and expenses related to Amendment No. 5 and Amendment No. 6 to
our Term Loan Credit Agreement, as defined and as described further below, which
provided for the 2019 Incremental Term Loan Facility, as defined and as
described further below, and which related to the ESI Merger, during the three
and nine months ended September 30, 2019 .
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--------------------------------------------------------------------------------Gain on Sale of Long-Lived Assets
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Gain on sale of long-lived assets $ -
We recorded a net gain on the sale of two of our buildings inBoulder, Colorado and three of our buildings inPortland, Oregon during the three and nine months endedSeptember 30, 2019 . Interest Expense, Net Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2020 2019 2020 2019 Interest expense, net$ 6.5 $ 12.3 $ 21.6 $ 31.0 Interest expense, net, decreased by$5.8 million and$9.4 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to the same periods in the prior year, primarily due to lower interest expense as a result of lower interest rates and lower average debt balances as a result of various debt prepayments made in 2019 and the nine months endedSeptember 30, 2020 .
Other Expense (Income), Net
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Other expense (income), net
The changes in other expense (income), net, for the three and nine months ended
Provision for Income Taxes
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Provision for income taxes
Our effective tax rates for the three and nine months endedSeptember 30, 2020 were 15.7% and 17.0%, respectively. Our effective tax rates for the three and nine months endedSeptember 30, 2020 and related income tax expense, were lower than theU.S. statutory tax rate mainly due to the geographic mix of income earned by the international subsidiaries being taxed at rates lower than theU.S. statutory tax rate, windfall benefits of stock compensation, and the deduction for foreign derived intangible income offset by the tax effects of the global intangible low taxed income inclusion and the write-off of deferred tax assets related to certain foreign net operating losses. As ofSeptember 30, 2020 andDecember 31, 2019 , the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately$47.5 million and$43.5 million , respectively. As ofSeptember 30, 2020 , if these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of$39.2 million , excluding interest and penalties, would impact our effective tax rate. Over the next 12 months it is reasonably possible that we may recognize approximately$0.9 million of previously net unrecognized tax benefits, excluding interest and penalties, related to federal, state and foreign tax positions as a result of the expiration of statutes of limitation. TheU.S. federal statute of limitations remains open for tax years 2016 through present. The statute of limitations for our tax filings in other jurisdictions varies between fiscal years 2014 through the present. We also have certain foreign, federal and state tax loss and credit carry-forwards that are open to examination for tax years 2000 through the present.
On a quarterly basis, we evaluate both positive and negative evidence that affects the realizability of net deferred tax assets and assess the need for a valuation allowance. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income in each jurisdiction of the right type to realize the assets.
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Our future effective tax rate depends on various factors, including further
interpretations and guidance from federal, foreign and state governments, the
geographic composition of our pre-tax income, the results of tax audits and
changes in income tax reserves for unrecognized tax benefits. We monitor these
factors and timely adjust our estimates of the effective tax rate accordingly.
We expect that the geographic mix of pre-tax income will continue to have a
favorable impact on our effective tax rate, however the geographic mix of
pre-tax income can change based on multiple factors resulting in changes to the
effective tax rate in future periods. While we believe we have adequately
provided for all tax positions, amounts asserted by taxing authorities could
materially differ from our accrued positions as a result of uncertain and
complex application of tax law and regulations. Additionally, the recognition
and measurement of certain tax benefits include estimates and judgment by
management. Accordingly, we could record additional provisions or benefits for
U.S. federal, state, and foreign tax matters in future periods as new
information becomes available.
During the three months ended September 30, 2020 , the U.S. Treasury Department
and the U.S. Internal Revenue Service issued proposed and final regulations
regarding various tax provisions of the Tax Cuts and Jobs Act of 2017 that could
impact our provision for income taxes. We do not expect the impact of any
changes to have a material impact on our results of operations, financial
condition or cash flows.
Liquidity and Capital Resources
Cash and cash equivalents and short-term marketable investments totaled$715.7 million atSeptember 30, 2020 , compared to$524.0 million atDecember 31, 2019 . The primary driver in our current and anticipated future cash flows is and will continue to be cash generated from operations, consisting primarily of our net income, excluding non-cash charges and changes in operating assets and liabilities. In periods when our sales are growing, higher sales to customers will result in increased trade receivables, and inventories will generally increase as we build products for future sales. This may result in lower cash generated from operations. Conversely, in periods when our sales are declining, our trade accounts receivable and inventory balances will generally decrease, resulting in increased cash from operations. Net cash provided by operating activities was$366.0 million for the nine months endedSeptember 30, 2020 and resulted from net income of$234.5 million , which included non-cash charges of$122.7 million , and a net decrease in working capital of$8.8 million . The net decrease in working capital was primarily due to an increase in other current and non-current liabilities of$25.8 , an increase in accounts payable of$24.5 million an increase in income taxes of$21.4 and a decrease in other current and non-current assets of$10.9 , offset by an increase in inventories of$47.1 million , an increase in trade accounts receivable of$20.9 million and a decrease in accrued compensation of$5.8 million . The increases in accounts receivable, inventory and accounts payable are all the result of increased business levels during the nine months endedSeptember 30, 2020 . Net cash used in investing activities was$172.3 million for the nine months endedSeptember 30, 2020 and was primarily due to net purchases of short-term investments of$112.4 million and the purchases of production-related equipment of$59.9 million . Net cash used in financing activities was$115.3 million for the nine months endedSeptember 30, 2020 and was primarily due to net payments on short and long-term borrowings of$77.0 million , dividend payments of$33.0 million and net payments related to tax payments on the vesting of employee stock awards of$25.4 million . These uses were partially offset by net proceeds from short-term borrowings of$20.1 million . OnJuly 25, 2011 , our Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of$200 million of our outstanding common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased depends upon a variety of factors, including business conditions, stock market conditions and business development activities, including but not limited to merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any time without prior notice. We have repurchased approximately 2.6 million shares of common stock for approximately$127 million pursuant to the program since its adoption. During the nine months endedSeptember 30, 2020 and 2019, there were no repurchases of common stock. Holders of our common stock are entitled to receive dividends when and if they are declared by our Board of Directors. In addition, we accrue dividend equivalents on the restricted stock units we assumed in the ESI Merger when dividends are declared by the Company's Board of Directors. Our Board of Directors declared a cash dividend of$0.20 per share during each of the first, second and third quarters of 2020, which totaled$33.0 million , or$0.60 per share. Our Board of Directors declared a cash dividend of$0.20 per share during each of the first, second and third quarters of 2019, which totaled$32.6 million , or$0.60 per share. OnOctober 26, 2020 , our Board of Directors declared a quarterly cash dividend of$0.20 per share to be paid onDecember 4, 2020 to stockholders of record as ofNovember 23, 2020 .
Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our Board of Directors. In addition, under the terms of our Term Loan Facility and ABL Facility, we may be restricted from paying dividends under certain circumstances.
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--------------------------------------------------------------------------------Senior Secured Term Loan Credit Facility
In connection with the completion of the acquisition ofNewport Corporation ("Newport") inApril 2016 (the "Newport Merger"), we entered into a term loan credit agreement (the "Term Loan Credit Agreement") with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto (the "Lenders"), that provided a senior secured term loan credit facility in the original principal amount of$780.0 million (the "2016 Term Loan Facility"), subject to increase at our option and subject to receipt of lender commitments in accordance with the Term Loan Credit Agreement (the 2016 Term Loan Facility, together with the 2019 Incremental Term Loan Facility and 2019 Term Loan Refinancing Facility (each as defined below), the "Term Loan Facility"). Prior to the effectiveness of Amendment No. 6 (as defined below), the 2016 Term Loan Facility had a maturity date ofApril 29, 2023 . As ofSeptember 30, 2020 , borrowings under the Term Loan Facility bear interest per annum at one of the following rates selected by us: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the "prime rate" quoted in The Wall Street Journal, (3) a London InterbankOffer Rate ("LIBOR") rate determined by reference to the costs of funds forU.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of 1.75%, plus, in each case, an applicable margin; or (b) a LIBOR rate determined by reference to the costs of funds forU.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a LIBOR rate floor of 0.0%, plus an applicable margin. We have elected the interest rate as described in clause (b) of the foregoing sentence. The Term Loan Credit Agreement provides that, unless an alternate rate of interest is agreed, all loans will be determined by reference to the base rate if the LIBOR rate cannot be ascertained, if regulators impose material restrictions on the authority of a lender to make LIBOR rate loans, or for other reasons. The 2016 Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof. We subsequently entered into four separate repricing amendments to the 2016 Term Loan Facility, which decreased the applicable margin for LIBOR borrowings from 4.0% to 1.75%, with a LIBOR rate floor of 0.75%. As a consequence of the pricing of the 2019 Incremental Term Loan Facility (defined below), the applicable margin for the 2016 Term Loan Facility was increased to 2.00% (from 1.75%) with respect to LIBOR borrowings and 1.00% (from 0.75%) with respect to base rate borrowings. OnSeptember 30, 2016 , we entered into an interest rate swap agreement, which had a maturity date ofSeptember 30, 2020 , to fix the rate on$335.0 million of the then-outstanding balance of the 2016 Term Loan Facility. The rate was fixed at 1.198% per annum plus the applicable credit spread, which was 1.75% atSeptember 30, 2020 . This interest rate swap matured onSeptember 30, 2020 . We incurred$28.7 million of deferred finance fees, original issue discount and repricing fees related to the term loans under the 2016 Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. OnFebruary 1, 2019 , in connection with the completion of the ESI Merger, we entered into an amendment ("Amendment No. 5") to the Term Loan Credit Agreement. Amendment No. 5 provided an additional tranche B-5 term loan commitment in the original principal amount of$650.0 million (the "2019 Incremental Term Loan Facility"), all of which was drawn down in connection with the closing of the ESI Merger. Pursuant to Amendment No. 5, we also effectuated certain amendments to the Term Loan Credit Agreement which make certain of the negative covenants and other provisions less restrictive. Prior to the effectiveness of Amendment No. 6 (as defined below), the 2019 Incremental Term Loan Facility had a maturity date ofFebruary 1, 2026 and bore interest at a rate per annum equal to, at our option, a base rate or LIBOR rate (as described above) plus, in each case, an applicable margin equal to 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The 2019 Incremental Term Loan Facility was issued with original issue discount of 1.00% of the principal amount thereof. OnApril 3, 2019 , we entered into an interest rate swap agreement, which has a maturity date ofMarch 31, 2023 , to fix the rate on$300.0 million of the then-outstanding balance of the 2019 Incremental Term Loan Facility. The rate was fixed at 2.309% per annum plus the applicable credit spread, which was 1.75% atSeptember 30, 2020 . AtSeptember 30, 2020 , the notional amount of this transaction was$300.0 million and it had a fair value liability of$14.0 million . We incurred$11.4 million of deferred finance fees and original issue discount fees related to the term loans under the 2019 Incremental Term Loan Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. OnSeptember 27, 2019 , we entered into an amendment ("Amendment No. 6") to the Term Loan Credit Agreement. Amendment No. 6 refinanced all existing loans outstanding under the 2016 Term Loan Facility and 2019 Incremental Term Loan Facility ("Existing Term Loans") for a tranche B-6 term loan commitment in the original principal amount of$896.8 million ("2019 Term Loan Refinancing Facility"). Each lender of the Existing Term Loans that elected to participate in the 2019 Term Loan Refinancing Facility was deemed to have exchanged the aggregate outstanding principal amount of its Existing Term Loans for an equal aggregate principal amount of tranche B-6 term loans under the 2019 Term Loan Refinancing Facility. On the effective date of Amendment No. 6 and immediately prior to the exchanges described above, we made a voluntary prepayment of$50.0 million , which was applied to the Existing Term Loans on a pro rata basis. 42 -------------------------------------------------------------------------------- We incurred$2.2 million of original issue discount fees related to the term loans under the 2019 Term Loan Refinancing Facility, which are included in long-term debt in the accompanying consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. As ofSeptember 30, 2020 , the remaining balance of deferred finance fees and original issue discount of the Term Loan Facility was$9.8 million . A portion of the deferred finance fees and original issue discount have been accelerated in connection with the various debt prepayments and extinguishments between 2016 and 2020. The 2019 Term Loan Refinancing Facility matures onFebruary 2, 2026 , and bears interest at a rate per annum equal to, at our option, a base rate or LIBOR rate (as described above) plus, in each case, an applicable margin equal to 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings. The 2019 Term Loan Refinancing Facility was issued with original issue discount of 0.25% of the principal amount thereof. We are required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the 2019 Term Loan Refinancing Facility with the balance due onFebruary 2, 2026 . As ofSeptember 30, 2020 , after total principal prepayments of$575.0 million (which includes a$50.0 million prepayment made during the nine months endedSeptember 30, 2020 ) and regularly scheduled principal payments of$19.4 million , the total outstanding principal balance of the Term Loan Facility was$835.6 million and the interest rate was 1.9%. Under the Term Loan Credit Agreement, we are required to prepay outstanding term loans, subject to certain exceptions, with portions of our annual excess cash flow as well as with the net cash proceeds of certain of our asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. All obligations under the Term Loan Facility are guaranteed by certain of our domestic subsidiaries, and are collateralized by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions. The Term Loan Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions generally permitted to be taken by a secured creditor. AtSeptember 30, 2020 , we were in compliance with all covenants under the Term Loan Credit Agreement.
Senior Secured Asset-Based Revolving Credit Facility
OnFebruary 1, 2019 , in connection with the completion of the ESI Merger, we entered into an asset-based revolving credit agreement with Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto (the "ABL Credit Agreement"), that provides a senior secured asset-based revolving credit facility of up to$100.0 million , subject to a borrowing base limitation (the "ABL Facility"). OnApril 26, 2019 , we entered into a First Amendment to the ABL Credit Agreement which amended the borrowing base calculation for eligible inventory prior to an initial field examination and appraisal requirements. The borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of certain eligible accounts; plus (b) prior to certain notice and field examination and appraisal requirements, the lesser of (i) 20% of net book value of eligible inventory inthe United States and (ii) 30% of the borrowing base, and after the satisfaction of such requirements, the lesser of (i) the lesser of (A) 65% of the lower of cost or market value of certain eligible inventory and (B) 85% of the net orderly liquidation value of certain eligible inventory and (ii) 30% of the borrowing base; minus (c) reserves established by the administrative agent, in each case, subject to additional limitations and examination requirements for eligible accounts and eligible inventory acquired in an acquisition afterFebruary 1, 2019 . The ABL Facility includes borrowing capacity in the form of letters of credit up to$25.0 million . Borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the "prime rate" quoted in The Wall Street Journal, (3) a LIBOR rate determined by reference to the costs of funds forU.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% and (4) a floor of 0.00%; and (b) a LIBOR rate determined by reference to the costs of funds forU.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, with a floor of 0.00%. The initial applicable margin for borrowings under the ABL Facility is 0.50% with respect to base rate borrowings and 1.50% with respect to LIBOR borrowings. Commencing with the completion of the first fiscal quarter ending after the closing of the ABL Facility, the applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.
In addition to paying interest on any outstanding principal under the ABL Facility, we are required to pay a commitment fee in respect of the unutilized commitments thereunder equal to 0.25% per annum. We must also pay customary letter of credit fees and agency fees.
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If at any time the aggregate amount of outstanding loans, protective advances,
unreimbursed letter of credit drawings and undrawn letters of credit under the
ABL Facility exceeds the lesser of (a) the commitment amount and (b) the
borrowing base, we are required to repay outstanding loans and/or cash
collateralize letters of credit, with no reduction of the commitment amount.
During any period that the amount available under the ABL Facility is less than
the greater of (i) $8.5 million and (ii) 10.0% of the lesser of (1) the
commitment amount and (2) the borrowing base for three consecutive business
days, until the time when excess availability has been at least the greater of
(i) $8.5 million and (ii) 10.0% of the lesser of (1) the commitment amount and
(2) the borrowing base, in each case, for 30 consecutive calendar days (a "Cash
Dominion Period"), or during the continuance of an event of default, we are
required to repay outstanding loans and/or cash collateralize letters of credit
with the cash that it is required to deposit daily in a collection account
maintained with the administrative agent under the ABL Facility. During a Cash
Dominion Period, we may make borrowings under the ABL Facility subject to the
satisfaction of customary funding conditions.
There is no scheduled amortization under the ABL Facility. The principal amount outstanding under the ABL Facility is due and payable in full on the fifth anniversary of the closing date.
All obligations under the ABL Facility are guaranteed by certain of our domestic subsidiaries, and are collateralized by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions. From the time when we have excess availability less than the greater of (a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base and (b)$8.5 million , until the time when we have excess availability equal to or greater than the greater of (a) 10.0% of the lesser of (1) the commitment amount and (2) the borrowing base and (b)$8.5 million for 30 consecutive days, or during the continuance of an event of default, the ABL Credit Agreement requires us to maintain a Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) tested on the last day of each fiscal quarter of at least 1.0 to 1.0. The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor. We have not borrowed against the ABL Facility to date.
Lines of Credit and Short-Term Borrowing Arrangements
Our Japanese subsidiaries have lines of credit and a financing facility with various financial institutions, many of which generally expire and are renewed at three-month intervals with the remaining having no expiration date. The lines of credit and financing facility provided for aggregate borrowings as ofSeptember 30, 2020 of up to an equivalent of$31.7 million U.S. dollars. Total borrowings outstanding under these arrangements were$3.0 million and$3.1 million atSeptember 30, 2020 andDecember 31, 2019 , 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 for other contractually narrow or limited purposes. Accordingly, we have no off-balance sheet arrangements that have or are reasonably expected to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Contractual Obligations There have been no other changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Recently Issued Accounting Pronouncements
InMarch 2020 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This standard provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities' financial reporting burdens as the market transitions from the LIBOR and other interbank offered rates to alternative reference rates. The standard was effective upon issuance and generally can be applied throughDecember 31, 2022 . We are in the process of evaluating the requirements of this standard and have not yet determined the impact of adoption on our consolidated financial statements. 44
-------------------------------------------------------------------------------- InDecember 2019 , the FASB issued ASU 2019-12, "Income Taxes (Topic 740)." This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and simplifyU.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This standard is effective for annual periods beginning afterDecember 15, 2021 , including interim periods within those fiscal years beginning afterDecember 15, 2022 . We evaluated the requirements of this ASU and the impact of pending adoption on our consolidated financial statements. We do not expect that the impact of these changes will be material to our financial position, results of operations and cash flows. 45
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