MKS Instruments - 10-Q quarterly report FY

 

 

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o   No þ

     Number of shares outstanding of the issuer’s common stock as of July 31, 2008: 49,199,555

 

 

MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX

     ITEM 1. FINANCIAL STATEMENTS.

MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements.

MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)

MKS INSTRUMENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(Tables in thousands, except share and per share data)

MKS INSTRUMENTS, INC.

          We believe that 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 and Section 21E of the Securities Exchange Act. When used herein, the words “believes,” “anticipates,” “plans,” “expects,” “estimates,” “would,” “will,” “intends” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect management’s current opinions and are subject to certain risks and uncertainties that could cause results to differ materially from those stated or implied. While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates or expectations change. Risks and uncertainties include, but are not limited to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 in the section entitled “Risk Factors.”

          We are a leading worldwide provider of instruments, components, subsystems and process control solutions that measure, control, power, monitor and analyze critical parameters of semiconductor and other advanced manufacturing processes.

          We are managed as one operating segment which is organized around three product groups: Instruments and Control Systems, Power and Reactive Gas Products and Vacuum Products. Our products are derived from our core competencies in pressure measurement and control, materials delivery, gas composition analysis, electrostatic charge management, control and information technology, power and reactive gas generation and vacuum technology. Our products are used in diverse markets, applications and processes. Our primary served markets are manufacturers of capital equipment for semiconductor devices, and for other thin film applications including flat panel displays, solar cells, data storage media and other advanced coatings. We also leverage our technology in other markets with advanced manufacturing applications including medical equipment, pharmaceutical manufacturing, energy generation and environmental monitoring.

          Our customers include manufacturers of semiconductor capital equipment and semiconductor devices; thin film capital equipment used in the manufacture of flat panel displays, solar cells, data storage media, and other coating applications; other industrial, medical and manufacturing companies; and university, government and industrial research laboratories. For the six months ended June 30, 2008 and the full year ended December 31, 2007, we estimate that approximately 61% and 68% of our net revenues, respectively, were to semiconductor capital equipment manufacturers and semiconductor device manufacturers. We expect that revenues to the semiconductor capital equipment manufacturers and semiconductor device manufacturers will continue to account for a substantial majority of our revenues.

          During 2007 and 2008, quarterly revenues ranged from $171.0 million to $211.4 million. For the third quarter of 2008, we expect that our net revenues could be slightly below this range. However, the semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain how long revenue levels may be maintained or the timing or extent of any future downturn or upturn in the semiconductor capital equipment industry.

          A portion of our net revenues is to operations in international markets. For the six months ended June 30, 2008 and full year ended December 31, 2007, international revenues accounted for approximately 39% and 39% of net revenues, respectively.

          The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. There have been no material changes in our critical accounting policies since December 31, 2007. For further information, please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2007 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”

          The following table sets forth, for the periods indicated, the percentage of total net revenues of certain line items included in MKS’ consolidated statements of operations data.

          Product revenues decreased $37.8 million during the three month period ended June 30, 2008 mainly due to a decrease in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers, which resulted in a decrease in revenues of $46.6 million or 36.9% compared to the same period for the prior year. This decrease was partially offset by an increase in revenues related to other markets, mainly solar, of $8.8 million or 14.8%.

          Product revenues decreased $59.7 million during the six month period ended June 30, 2008 mainly due to a decrease in worldwide demand from our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers, which resulted in a decrease in revenues of $74.5 million or 27.9% compared to the same period for the prior year. This decrease was partially offset by an increase in revenues related to other markets, mainly solar, of $14.8 million or 13.2%.

          Service revenues consist mainly of fees for services relating to the maintenance and repair of our products, software maintenance, installation services and training. Service revenue increased $4.8 million and $8.7 million during the three and six month periods ended June 30, 2008, respectively, mainly due to a higher installed base of products and increased software maintenance fees.

          Total international net revenues, including product and service, were $73.1 million and $143.5 million for the three and six months ended June 30, 2008 or 42.8% and 39.4% of net revenues, respectively, compared to $76.5 million and $157.6 million for the three and six months ended June 30, 2007 or 37.5% and 37.9% of net revenues, respectively.

          Gross profit on product revenues decreased 0.5 percentage points for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Our margin was negatively impacted by approximately 3.2 percentage points from lower revenue volumes and 0.8 percentage points from unfavorable foreign currency fluctuations, largely offset by 2.7 percentage points from lower overhead spending and 0.8 percentage points from reduced warranty costs and favorable product mix.

          Gross profit on product revenues decreased by 1.0 percentage point during the six months ended June 30, 2008 consisting of approximately 2.2 lower percentage points from decreased revenue volumes and 0.8 percentage point from unfavorable product mix, partially offset by 2.1 percentage points from lower overhead spending.

          Cost of service revenues consists primarily of costs of providing services for repair and training which includes salaries and related expenses and other fixed costs. Service gross profit decreased by 1.4 and 0.5 percentage points for the three and six month periods ended June 30, 2008, respectively, compared to the corresponding periods of the prior year, primarily as a result of higher overhead costs partially offset by increased revenue volumes.

          Research and development expense increased $2.1 million during the three months ended June 30, 2008 mainly due to increased compensation expense of $0.8 million, as a result of higher staffing levels, $0.6 million of higher consultant costs and $0.7 million in other research and development costs, including patent related costs.

          Research and development expense increased $3.1 million during the six months ended June 30, 2008 mainly due to $1.1 million of higher consultant costs, increased compensation expense of $1.0 million, as a result of higher staffing levels and $1.0 million in other research and development costs, including patent related costs.

          Our research and development is primarily focused on developing and improving our instruments, components, subsystems and process control solutions to improve process performance and productivity.

          We have hundreds of products and our research and development efforts primarily consist of a large number of projects focused on developing and improving our instruments, components, subsystems and process control solutions to improve process performance and productivity, none of which is individually material to us. Current projects typically have a duration of 12 to 30 months depending upon whether the product is an enhancement of existing technology or a new product. Our current initiatives include projects to enhance the performance characteristics of older products, to develop new products and to integrate various technologies into subsystems. These projects support in large part the transition in the semiconductor industry to larger wafer sizes and smaller integrated circuit geometries, which require more advanced process control technology. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, fees paid to consultants, material costs for prototypes and other expenses related to the design, development, testing and enhancement of our products.

          We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets, and expect to continue to make significant investment in research and development activities. We are subject to risks if products are not developed in a timely manner, due to rapidly changing customer requirements and competitive threats from other companies and technologies. Our success primarily depends on our products being designed into new generations of equipment for the semiconductor industry. We develop products that are technologically advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital equipment. If our products are not chosen to be designed into our customers’ products, our net revenues may be reduced during the lifespan of those products.

          Selling, general and administrative expenses decreased $0.8 million for the three months ended June 30, 2008 due mainly to a $1.6 million decrease in consulting costs, primarily related to IT infrastructure, and $0.6 million decrease in professional fees, partially offset by $0.7 million in foreign exchange losses and $0.5 million in higher facilities costs.

          Selling, general and administrative expenses decreased $3.7 million for the six months ended June 30, 2008 mainly due to $2.9 million in lower consulting costs, primarily related to IT infrastructure, a $2.2 million reduction in foreign exchange as a result of foreign exchange gains of $1.5 million in 2008 compared to foreign exchange losses of $0.7 million in 2007, partially offset by $0.9 million in higher facility costs. The foreign exchange gains in 2008 were primarily attributable to the settlement of cash and intercompany loans at different foreign exchange rates in connection with a legal entity consolidation in the first quarter between some of our foreign subsidiaries.

          Amortization expense for the three and six months ended June 30, 2008 decreased $2.1 million and $3.1 million, respectively, as certain acquired intangible assets became fully amortized during 2007 and 2008.

          Interest income, net decreased $2.0 million and $3.1 million during the three and six month periods ended June 30, 2008, respectively, mainly as a result of lower average cash and cash equivalent balances and lower interest rates in 2008. The lower outstanding cash balances are primarily a result of our stock repurchase program.

          During the fourth quarter of 2007, we determined that declines in the fair value of our investments in certain commercial paper were other-than-temporary. This commercial paper was issued by two structured investment vehicles (SIVs) that entered into receivership during the fourth quarter of 2007 and failed to make payments at maturity. Due to the mortgage-related assets these issuers held, they were exposed to the adverse market conditions that affected the value of their collateral and their ability to access short-term funding. These investments were not currently trading on active markets, and therefore, had no readily determinable market value. As a result of our assessment as of December 31, 2007, we recorded a $1.5 million impairment charge to earnings, based upon the Company receiving contemporaneous quotes from established third-party pricing services.

          During the three and six months ended June 30, 2008, we determined that further declines in the value of these two investments were other-than-temporary. As a result we recorded additional impairment charges of $0.3 million and $1.4 million, respectively. This resulted in a new cost basis for these securities of $2.4 million at June 30, 2008.

          Our effective tax rate for the three and six month periods ending June 30, 2008 was 35.4% and 31.4%, respectively. The effective tax rate for the six months ended June 30, 2008, is less than the statutory tax rate primarily due to the profits of our international subsidiaries being taxed at rates lower than the U.S. statutory tax rate.

          Our effective tax rate for the three and six month periods ended June 30, 2007 was 27.9% and 29.2%, respectively. The effective tax rate is less than the statutory tax rate primarily due to the profits of our international subsidiaries being taxed at rates lower than the U.S. statutory tax rate and the benefit from U.S. research and development credits.

          We adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) in 2007. At December 31, 2007, the total amount of gross unrecognized tax benefits, which excludes interest and penalties discussed below, was approximately $16.1 million. If these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of approximately $13.2 million would impact the Company’s effective tax rate. The total amount of gross unrecognized tax benefits at June 30, 2008 was approximately $16.9 million. The increase from January 1, 2008 was primarily attributable to tax positions taken by the Company in the six months ended June 30, 2008.

          MKS and its subsidiaries are subject to U.S. federal income tax as well as the income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal income tax matters for years through 2002. The 2003 federal tax year remains open to the extent of the loss carryforward to 2004 and 2005. Currently the Company is under a federal income tax audit for the 2005 tax year. As of June 30, 2008, there were ongoing audits in various other tax jurisdictions. We do not expect any material changes to the returns as filed from these open audits.

          Within the next 12 months, it is reasonably possible that the Company may recognize $4.5 million to $5.0 million of previously unrecognized tax benefits related to various federal, state, and foreign tax positions as a result of the conclusion of various audits and the expiration of the statute of limitations. The following tax years, in the major tax jurisdictions noted, are open for assessment or refund: U.S. Federal: 2003 to 2007, Germany: 2001 to 2007, Korea: 2005 to 2007, Japan: 2001 to 2007, and the United Kingdom: 2006 and 2007.

          We will accrue interest and, if applicable, penalties, for any uncertain tax positions. This interest and penalty expense will be a component of income tax expense. At December 31, 2007 and June 30, 2008, we had $1.5 million and $1.9 million, respectively, accrued for interest on unrecognized tax benefits.

          The U.S. Research and Development Tax Credit expired at the end of 2007 and to date has not been reinstated. As a result, we did not take any benefit for this credit in the three and six month periods ending June 30, 2008. The benefits taken in the three and six month periods ending June 30, 2007 for this credit were approximately $0.5 million and $0.8 million, respectively.

          Cash, cash equivalents and short-term investments totaled $259.9 million at June 30, 2008 compared to $323.8 million at December 31, 2007. This decrease was attributable to our share repurchase program through which we repurchased $101.9 million of our common stock during the first six months of fiscal 2008. The primary source of funds for the first six months of fiscal 2008 was cash provided by operating activities of $42.2 million.

          Net cash provided by operating activities of $42.2 million for the six months ended June 30, 2008, resulted mainly from net income of $29.6 million and non-cash charges of $12.2 million for depreciation and amortization and $6.2 million for stock-based compensation and related tax benefits, offset by an increase in net operating assets of $4.1 million and a decrease in net operating liabilities of $2.5 million. The $4.1 million increase in operating assets consisted primarily of a $2.4 million increase in other current assets, mainly due to increases in value added tax receivables at foreign locations and a $1.0 million increase in accounts receivable. The net decrease in operating liabilities is mainly caused by a decrease of $4.4 million in accounts payable and $2.0 million in income taxes payable, offset by an increase of $3.9 million in accrued expenses and other liabilities. Net cash provided by operating activities of $45.2 million for the six months ended June 30, 2007, resulted mainly from net income of $49.8 million, non-cash charges of $15.4 million for depreciation and amortization and $8.4 million for stock-based compensation and related tax benefits, offset by an increase in net operating assets of $21.7 million and an $8.2 million decrease in net operating liabilities. The $21.7 million increase in net operating assets consisted primarily of a $14.2 million increase in inventory, to support our then increased revenues and to support the increased inventory levels required for our planned China facility

relocation in the second half of 2007, and a $4.8 million increase in other current assets, primarily related to prepaid taxes. The decrease in net operating liabilities of $8.2 million is mainly caused by a decrease of $16.7 million in current income taxes payable, primarily due to payments of estimated U.S. taxes, offset by an increase of $8.9 million in accrued expenses and other liabilities.

          Net cash provided by investing activities of $4.3 million for the six months ended June 30, 2008, resulted primarily from net sales of $9.2 million of available for sale investments, offset by $5.5 million in purchases of property, plant and equipment. Net cash used in investing activities of $50.4 million for the six months ended June 30, 2007, resulted primarily from net purchases of $44.1 million of available for sale investments.

          Net cash used in financing activities of $97.5 million for the six months ended June 30, 2008, consisted primarily of repurchases of common stock of $101.9 million and $2.6 million in net payments on short-term borrowings, offset by $6.5 million in proceeds from the exercise of stock options and purchases under our employee stock purchase plan. Net cash provided by financing activities of $10.7 million for the six months ended June 30, 2007, consisted primarily of $39.0 million in proceeds from the exercise of stock options and purchases under our employee stock purchase plan, offset by repurchases of common stock of $31.7 million.

          On February 12, 2007, our Board of Directors approved a share repurchase program (the “Program”) for the repurchase of up to $300.0 million of our outstanding stock over two years. The repurchases may be made from time to time on the open market or through privately negotiated transactions. The timing and amount of any shares repurchased under the Program will depend on a variety of factors, including the price of our common stock, corporate and regulatory requirements, capital availability, and other market conditions. The Program may be discontinued at any time at the discretion of the Company and our Board of Directors. During the six months ended June 30, 2008, we repurchased 5.1 million shares of common stock for $101.9 million for an average price of $20.18 per share and during the six months ended June 30, 2007, we repurchased 1.2 million shares of common stock for $31.7 million for an average price of $26.42 per share.

          We believe that our working capital, together with the cash anticipated to be generated from operations, will be sufficient to satisfy our estimated working capital, stock repurchase program activity and planned capital expenditure requirements through at least the next 12 months.

          To the extent permitted by Massachusetts law, our Restated Articles of Organization, as amended, require us to indemnify any of our current or former officers or directors or any person who has served or is serving in any capacity with respect to any of our employee benefit plans. Because no claim for indemnification has been pursued by any person covered by the relevant provisions of our Restated Articles of Organization, we believe that the estimated exposure for these indemnification obligations is currently minimal. Accordingly, we have no liabilities recorded for these requirements as of June 30, 2008.

          We also enter into agreements in the ordinary course of business which include indemnification provisions. Pursuant to these agreements, we indemnify, hold harmless and agree to reimburse the indemnified party, generally our customers, for losses suffered or incurred by the indemnified party in connection with certain patent or other intellectual property infringement claims, and, in some instances, other claims, by any third party with respect to our products. The terms of these indemnification obligations are generally perpetual after execution of the agreements. The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in some instances, not contractually limited. We have never incurred costs to defend lawsuits or settle claims related to these indemnification obligations. As a result, we believe the estimated fair value of these obligations is minimal. Accordingly, we have no liabilities recorded for these obligations as of June 30, 2008.

          When, as part of an acquisition, we acquire all of the stock or all of the assets and liabilities of another company, we assume liability for certain events or occurrences that took place prior to the date of acquisition. The maximum potential amount of future payments we could be required to make for such obligations is undeterminable at this time. Other than obligations recorded as liabilities at the time of the acquisitions, historically we have not incurred significant costs relating to these acquired liabilities. Accordingly, no liabilities have been recorded for these obligations as of June 30, 2008.

          In conjunction with certain asset sales, we may provide routine indemnifications whose terms range in duration and often are not explicitly defined. Where appropriate, an obligation for such indemnifications is recorded as a liability. Because the amounts of liability under these types of indemnifications are not explicitly stated, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of the asset sale, historically we have not made significant payments for these obligations.

          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 are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.

     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which replaces SFAS No. 141. This revised standard requires assets, liabilities and non-controlling interests acquired to be measured at fair value and requires that costs incurred to effect the acquisition be recognized separately from the business combination. In addition, this statement expands the scope to include all transactions and other events in which one entity obtains control over one or more businesses. This statement is effective for all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are in the process of evaluating whether the adoption of this standard will have a material effect on our consolidated financial results.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS No. 160”). This statement establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years beginning on or after December 15, 2008. We are in the process of evaluating whether the adoption of this standard will have a material effect on our consolidated financial statements.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133” (SFAS 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently evaluating the disclosure implications of this statement.

          Information concerning market risk is contained in the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on February 28, 2008. There were no material changes in our exposure to market risk from December 31, 2007.

     Evaluation of Disclosure Controls and Procedures.

     Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of June 30, 2008. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act was recorded, processed, summarized and reported within the requite time periods.

     Our management has concluded that our disclosure controls and procedures and internal controls provide reasonable assurance that the objectives of our control system are met. However, our management (including our Chief Executive Officer and Chief Financial Officer) does not expect that the disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their

costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the Company have been or will be detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurances that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

     There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

          ITEM 1. LEGAL PROCEEDINGS.

          We are subject to various legal proceedings and claims, which have arisen in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.

          Information regarding risk factors affecting the Company’s business are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 in the section entitled “Risk Factors.” As of June 30, 2008, there have been no material changes from the risks disclosed therein.

          The following table provides information about purchases by MKS during the quarter ended June 30, 2008, of equity securities that are registered by MKS pursuant to Section 12 of the Exchange Act:

          At our Annual Meeting of Shareholders on May 5, 2008, the following proposals were voted upon as further specified below:

SIGNATURE

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.