Advanced Energy Industries Inc (AEIS) 2001 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Advanced Energy (Company: Advanced Energy Industries; Ticker: AEIS; URL: http://www.advanced-energy.com/) quarterly conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference please press star, then zero on your touch-tone telephone. As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Cathy Kawakami. You may begin your conference.

Thank you. I want to thank everyone for joining us this morning to discuss Advanced Energy's fourth quarter and full year 2001 results. Today's speakers will be Doug Schatz, Chairman and Chief Executive Officer, and Mike El-Hillow, our Senior Vice President and Chief Financial Officer.

They'll provide an overview of the 2001 fourth quarter and full year results and then will be available along with Dick Beck, our Senior Vice President, to take your questions.

By now you should have received your copy of the press release that we distributed prior to the market open today. If you still need a copy, you can contact us at 970-407-6732 or view the release on our Web site, which is www.advanced-energy.com.

Before we get started this morning, I would like to remind everyone that except for any historical information contained herein, the matters discussed in this conference call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of semiconductor and semiconductor capital equipment industries; fluctuations in quarterly and annual revenues and operating results; Advanced Energy's ongoing ability to develop new products in a highly competitive industry characterized by increasingly rapid technological changes; our ability to successfully integrate acquired companies' operations and other risks described in Advanced Energy's Form 10-K, Form 10-Q and other reports and statements as filed with the SEC.

In addition, Advance Energy assumes no obligation to update the information that we provide on this conference call.

With that I'd like to go ahead and introduce Doug Schatz.

Thank you, Cathy, and thank you all for joining us today. The fourth quarter continued to be challenging although we were able to slightly exceed our revenue expectations. During the quarter, we experienced a decreasing number of customer order push outs and cancellations, which we believe was a positive sign that the worst is likely behind us now.

We reported fourth quarter revenues of 34 million -- a decrease of 12 percent compared to 39 million in the third quarter and a decrease of 67 percent compared to the fourth quarter 2000 revenue of 103 million.

For the year, revenue was 194 million, a decrease of 46 percent compared to revenue of 360 million for the year 2000.

Preliminary data from VLSI estimates that the overall market for our products used in backing based plasma processes declined 56 percent compared to the year 2000. So, our smaller 46 percent decrease in the same period indicates a gain in AE market share during this very difficult year.

The preliminary 2001 marketing report for VLSI completed last week indicates that our 300-mm market share is now greater than our 200-mm market share. This is based on several key design wins at majors OEMs that we have made throughout the last year.

Approximately 31 percent of our 2001 semiconductor revenue represented 300-mm sales compared to eight percent of semiconductor revenue in the year 2000.

These 300-mm design wins, which were made throughout 2001 include power conversion technology designs for Etch, CVD and PVD including copper , liner barrier and electroplating applications.

Our thermal division, which includes Seccy Denkle Temperature and Noah Precision Temperature Control also had key design wins at semiconductor capital equipment OEMs for RTP and PVD and Etch applications.

In addition to increasing our market share depth, we've increased our market share breadth in 2001. We entered the mass flow control market through our January acquisition of Emco (Company: Emco Limited; Ticker: EMLTF; URL: http://www.emcoltd.com/), a technology company, and although Emco had served primarily industrial markets, we saw great potential for semiconductor applications.

Emco's Mach One Mass Flow Controller achieved its first design wins at both OEMs and end users in 2001.

And last month, we strengthened our position in this market by completing the acquisition of Aera, which is a worldwide leader in the mass flow market.

As we've discussed, Aera has the infrastructure to leverage Emco technology within the semiconductor market given its strong worldwide customer reach.

In the past month, we have been working closely with Aera employees in all locations around the world to insure a smooth and efficient integration into the AE family.

We are excited about the opportunities ahead of us in this market, given the solid product portfolio, infrastructure and technological synergies that will enable us to further our leadership positions.

2001 was a challenging year, but we took the right steps to reduce our cost structure and streamline our infrastructure to better reflect the low revenue levels. Our ongoing investment in technology development helped to secure these design wins among critical customers and further our market share lead in 300-mm applications.

Looking ahead, we believe we are well positioned to outpace the industry as we have done throughout our history.

I'd like to turn it over to Mike now.

El-hillow: Thanks, Doug, and thank you for joining us this morning. First, I will review the results of the fourth quarter and the full year of 2001 and then provide some guidance for the first quarter of 2002.

For the 2001 fourth quarter, revenues were 34 million -- down 67 percent from 102.7 million for the fourth quarter of 2000 and down 12 percent from 38.7 million for the third quarter of 2001.

Gross margin was 21.7 percent of net sales for the fourth quarter compared with 49.3 percent for the year ago period and 28.5 percent for the third quarter of 2001.

Included in the quarter was a write down of inventory of approximately $1.5 million, which reduced our gross margin by 4.5 percentage points. Even taking that adjustment into account, our gross margin was still lower than we normally expect for our level of sales. As Doug explained, we continue to gain market share with our new products.

While these products position us to take significant advantage of the next up cycle, they have the lower margins that you would expect of products early in their life cycle and at low production volumes.

While these times are challenging, our operating model is still highly and we expect to see significant improvement in our margins as industry conditions improve, again achieving gross margins at the peak of almost 50 percent.

The net loss for the fourth quarter 2001 was 14.4 million or 45 cents per share compared to the fourth quarter 2000 net income of 27.4 million or 83 cents per diluted share. This compares to the third quarter 2001 net loss of 7.5 million or 24 cents per share.

The fourth quarter included a 5.6 million write-off representing a significant portion of our investment in Symphony Systems.

As many of you know, we and other parties have been investing in Symphony for several years. While Symphony has developed software that is currently being used or evaluated by both OEM and end users, demand for its products has been limited by the extended downturn and its ability to obtain additional funding has been hampered. Therefore we wrote down our investment to 1.5 million that relates to our exclusive license to the Symphony equipment service software. This license allows us to connect into the tool and its subsystems to implement e-diagnostics and advanced process controls in support of our convergent technology strategy.

We also had a 2.5 million restructuring charge related to our October 2001 cost containment initiatives. Those initiatives were detailed in our October 22nd press release and included the closing of our Austin, Texas manufacturing operations and the eight percent reduction in force.

If we adjust for those two items plus the inventory write down, our fourth quarter pro forma net loss from operations would have been 8.4 million or 26 cents for share.

If we look at the fourth quarter sales by end market, semiconductor capital equipment represented 51 percent of total sales or 17.4 million. This is a slight decrease compared to 18.1 million in semiconductor capital equipment sales in the third quarter of 2001.

In the fourth quarter of 2000, sales from semiconductor capital equipment customers represented 72 percent of total sales or 73.7 million.

Applied Materials (Company: Applied Materials Inc.; Ticker: AMAT ; URL: http://www.appliedmaterials.com/), our largest semiconductor capital equipment customer, represented 24 percent of total fourth quarter sales or 8.1 million, a quarter-over-quarter increase of 26 percent in dollar terms.

Flat-panel display applications represented 12 percent of total fourth quarter revenues or four million. In dollars, flat-panel increased from 3.7 million in the third quarter of 2001 and decreased from 7.9 million in the fourth quarter of 2000.

A November 2001 report by "Display Search" anticipates worldwide revenues for flat-panel displays will increase 17.8 percent in 2002 after falling 8.2 percent in 2001 to 22.5 billion.

It lowered its four year forecast for flat-panel display growth because of the weakness in mobile phones and some price erosion on large panel displays. It now predicts that flat-panel revenues will reach 49.3 billion in 2005, still a healthy compound annual growth rate of 21 percent from 2001.

Entertainment data storage, which is comprised of digital video disc and compact disc markets, was two percent of total fourth quarter sales or $800,000 compared to eight percent or 3.2 million in the third quarter of 2001.

"Data Quest" predicts the recordable and rewritable DVD drive unit shipments will grow from 600,000 units in 2001 to 1.5 million in 2002 and to more than 14 million units in 2005.

This will drive purchases of recordable and rewritable DVDs, which use our technology to deposit a thin film coating on the disks.

The computer data storage industry also represented two percent of fourth quarter sales or 675,000 compared to two percent or 860,000 of total third quarter 2001 sales. This segment continues to decline compared to fourth quarter 2000 sales of 1.7 million. We expect sales for this market to remain relatively flat until capacity utilization improves.

Advanced product applications represented 22 percent of total fourth quarter sales or 7.3 million compared to 23 percent or 9.1 million for the third quarter of 2001. This category includes a variety of applications such as our power supply, formerly , for the high end computing market, industrial coatings and architectural glass coatings.

Global support was 11 percent of total fourth quarter sales or 3.8 million and held relatively constant in both dollar in percentage terms compared to the third quarter of 2001.

Looking at sales by geographic region, domestic sales represented 64 percent of total sales compared to 56 percent in the prior quarter and 73 percent in the fourth quarter of 2000.

Europe decreased to 14 percent of sales compared to 22 percent in the prior quarter and 15 percent a year ago.

Asia Pacific represented 21 percent of sales -- a modest decrease in dollar terms -- compared to 22 percent of sales in the third quarter of 2001. This region represented 12 percent of sales in the fourth quarter of 2000.

We ended the fourth quarter with a total backlog of 16.3 million, which represents a 32 percent decrease from the third quarter backlog of 24.3 million.

R&D spending was 10.8 million or 32 percent of sales during the fourth quarter. This compares to 11 million or 28 percent of sales in the third quarter and 10.7 million or 10 percent of sales in the fourth quarter of 2000.

Given our commitment to ongoing investment in technology innovation, we expect that our quarter R&D spending will be in the 10.5 to 11.5 million range for the near term. Maintaining our R&D spending and down cycles have enabled us to gain market share even in the industry downturns and further strengthens our technology leads.

Sales and marketing was 5.5 million or 16 percent of sales in the fourth quarter, which is relatively flat compared to the prior quarter.

G&A was 4.8 million in both the third and fourth quarter or 12 percent of sales and 15 percent of sales respectively.

For the year, revenue decreased 46 percent to 193.6 million from 359.8 million for the year 2000. Gross profit was 57.4 million -- a decrease of 67 percent from the prior year period and was 30 percent for the full year 2001. The net loss for the year 2001 was 31.4 million or 99 cents per share compared with net income of 68 million or $2.10 per diluted share for the full year 2000. Operating expenses for the year were 47 percent of total sales, excluding one time items, compared to 24 percent a year ago.

R&D was 23 percent of revenues for the year 2001 compared to 10 percent in 2000.

R&D was up 22 percent in dollar terms year-over-year and reflects our ongoing commitment to technology innovation, which is particularly important during industry downturns.

Sales and marketing was 12 percent of sales for the full year 2001 compared to seven percent in the prior year, representing a slight decrease in dollar terms year-over-year. This reflects reduced expenses due to travel and discretionary spending controls we have implemented during the year.

G&A was 11 percent of revenues in 2001 compared to seven percent in 2000.

For the year, we reported a loss from operations, excluding one time items, of 33 million compared to income from operations of 90.8 million in the prior year.

Headcount at the end of the fourth quarter was 1,185 people of which there were 1,164 full-time and 24 temporary employees. That compares with a headcount of 1,290 people at the end of the third quarter and takes into account the reduction in force in October.

Our balance sheet continues to be strong with cash -- cash equivalents and marketable securities of 272 million.

Our cash position will reflect a decrease of 44 million in the first quarter of 2002 due to the purchase of Aera Japan Ltd.

Our accounts receivable decreased to 30.8 million compared to the prior quarter.

DSOs was 76 days -- a decrease from 80 days from the third quarter of 2001 and an increase compared to 58 days in the fourth quarter of 2000.

R&D has also improved to 109 days compared to 126 days in the third quarter and compared to 96 days in the fourth quarter of 2000.

Domestic DSOs increased to 58 days compared to 42 days in the third quarter of 2001 and compared to 44 days in the fourth quarter of 2000.

Inventory at year end was 45.2 million, which compares to 45.3 million in the fourth quarter of 2000. Inventory turns decreased slightly to 2.2 turns compared to 2.3 in the prior quarter and 4.7 in the prior year. Total days inventory was 164 days -- a slight increase from 158 days in the third quarter and 78 days in the year ago period.

Our working capital increased to 350.4 million in the fourth quarter of 2001 from 277.2 million at the end of fourth quarter 2000. Total assets were 450.2 million and stockholders' equity was 214.3 million.

Our capital expenditures in the fourth quarter were 1.7 million compared with 5.4 million in the fourth quarter of 2000.

Depreciation was 2.6 million in the fourth quarter compared with 2.3 million one year ago.

As Doug mentioned, in January 2000 we completed the acquisition of Aera Japan Ltd. Aera has 220 employees, principally at its headquarters in Hachioji, Japan, and its major United States operations in Austin, Texas.

For the fiscal year ended June 2001, Aera had revenues of 114 million and operating income of 17 million or 15 percent of sales.

For perspective, AE had revenues of 320 million in the 12 month period ended June 2001 and operating income of 42 million or 13 percent of sales excluding one time items.

For a combined cash investment of approximately 75 million plus assumption of 35 million of debt in Japan, Aera and Emco give AE a market leader in mass flow control technology with customers throughout the world, especially in the important Japanese market, such as Tokyo Electron. Aera also has a strong end user customer base that AE will leverage.

Since Aera was an all cash transaction, it will be accretive in mid to late 2002 as the company returns to profitability.

As we enter 2002, the company is experiencing a stabilization of orders when compared with the later part of the fourth quarter. While our visibility is still limited, we expect our first quarter sales will be in the range of 38 to 40 million with a loss per share in the range of 32 to 35 cents, excluding one time charges relating to the acquisition of Aera.

I should also point out that our loss per share has increased since no shares were issued in the Aera transaction.

Now I'll turn the call back to Doug and we'll open it for questions.

Thanks, Mike. We'd now like to open up the call to take your questions.

Thank you. Ladies and gentlemen, if you have question at this time, please press the one key on your touch-tone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key.

Our first question comes from Ted Berg of Lehman Brothers (Company: Lehman Brothers Holdings Inc.; Ticker: LEH ; URL: http://www.lehman.com/). Your question, please?

Hi. I was wondering if you could talk about the order trends just in the quarter, in the fourth quarter and then what you are seeing in January so far? Has it been a linear trend or is it still somewhat volatile?

Hi, Ted. We've seen the orders come in still fairly lumpy because we're looking at a smaller base. And we still do see some cancellations and push-outs, but overall there's been a leveling. And there's some anticipation that things could improve.

We've gotten positive input from the North America market, positive input from Europe and some parts of Asia, excluding Japan, look like they're strengthening.

And any update on what's going on with some of your -- the key OEM customers in Japan? I know in the past you've been working on some design wins at some of the larger equipment companies there. Do you have any update on what's going on there?

Well, we definitely have review of our products and technologies going on with the larger semiconductor equipment companies in Japan and that's definitely different and much more positive than, say, a year ago at this time.

And with the combination with Aera -- who has, as one of their largest customers , then we've got both immediate access and a lot more credibility and a real customer there. So, I think we've established a much stronger platform for development of sales in Asia in general and Japan in particular.

OK. And then one final question I had is -- how much -- just for the first quarter since this is the first quarter of the acquisition -- how much does Aera add to your revenue guidance?

About $5 to $7 million.

OK -- thanks a lot -- appreciate it.

Thank you. Our next question comes from Brett Hodess of Merrill Lynch (Company: Merrill Lynch & Co. Inc.; Ticker: MER; URL: http://www.ml.com/). Your question, please?

Hi. Can I ask about a couple of the sub-markets that you mentioned -- data storage and flat-panel? You gave the percentages in the business but can you talk about what you're seeing in a trend there since we've seen obviously stronger business in the flat-panel market and we've heard some companies talking about a pick up in data storage?

Hi, Brett. This is Dick. Yes -- if we -- let's take them one at a time. The entertainment side of data storage is one that's seasonal for us and I think that you recognize that the sales of DVD players in the U.S. hit -- broke all kinds of records for home entertainment devices during the holiday season and for the entire year last year.

We saw a decrease of our sales into that segment, which is a little bit unusual. The magnitude of the decrease is a little bit unusual. We do see seasonality there always because the entertainment data storage equipment is built up during Q3 and the early part of Q4. But we'll see a pick up there.

And I think the people were anticipating a fairly good revenue stream from the players -- DVD players. So built up equipment to get the capacity into place and now we'll see that turning around and getting back up.

The computer side of data storage is one that's been very bumpy for us. When we look back a year ago, we had about a million seven in revenue and it's down to 640 in this past quarter. And that is bumpy. There is a lot of capacity out there. It doesn't take a lot of additional capacity to produce more discs on the computer side.

Flat-panel -- we've seen a little bit of growth there. We went from about 3.7 in Q3 up to about four million in Q4 and we would expect that trend to continue.

The Gen 5 standard has been put in place now and we see fabs coming on stream in Korea and in Taiwan for production of Gen 5 glass.

As Mike mentioned, one of the issues in the flat-panel area is in the small panels -- the -- typically the PDA cell phone-sized panels where we saw huge amounts of capacity and inventory built up in 2000 that the industry is continuing to see as a drag. And that capacity is probably not going to need to be increased until sometime late this year. But we do expect good increases in the applications for the larger panel sizes, including Gen 5.

Great -- thank you.

Thank you. Our next question comes from Alexander Paris of Barrington Research. Your question, please?

Good morning. You mentioned a lot of design wins and a pick up particularly in 300-mm and other, I presume, newer technologies. There's still a big question I guess as to once you've got the design win just how long it takes to put the programs into effect? Is there any pressure in this -- in the -- in the newer technology to get the programs launched relative to the need to just add new capacity of older technology?

Well, , the way it generally works is that our customer will come out with a new tool or a new version of a tool. So there will be a competitive situation. The design win will be based at the -- will be based on what the customer's needs are. Specification will have been pre-competitive. And then the -- it turns into a project. Projects go from a two to three month period for design qualification all the way out to an 18 month period.

The thing that drives volume though is the acceptance of the products and, of course, going -- you have an initial surge in the products and a demand when you're going through technology buys at the end user because they have to get the tools established in their lines -- their performance qualifies. They have to become the tool of record and then when the capacity is turned on, that's when the volume really starts following through the OEM.

We believe that the 300-mm position that we're in now is -- of course, as we said, it's stronger even in the 200-mm. But we think the 300-mm will turn on pretty dramatically during this upturn.

We've got indications that companies are not only looking at 300-mm technology for the next fab investments, but they're actually looking at turning on 300-mm fabs that they have in place now.

So, we think that the next big growth will really transition 2/300-mm potentially even more rapidly than people have estimated.

OK. And let me ask a similar question. When we're looking at a company, say, Applied Materials because that's a big customer, and you can see from the reports that there's a definite upturn in orders for Applied Materials and they're getting more upbeat what kind of a lag would there be between that kind of news and the time they really start to -- you start seeing orders and shipments presuming that the inventories of your products are depleted by now?

Yes -- usually -- well, they don't get depleted, but they're certainly a lot lower than they were a year ago, which is good. Typically we're one of the first products that gets purchased -- the power parts of our products -- because they're staged to a different point in the manufacturing process and if you take an example like Applied Materials are now using large outsourcers, so there's an extra part of the supply chain that we have to supply.

So if you look at all of the suppliers going into a tool, we're one of the first ones that actually starts filling out inventory locations and starts appearing at staged -- onto the tools that are going to be manufactured.

Alex, let me just add to that. As you know, we're pretty much a turns business so that if we see our customers with bookings that are going to be shipped by them in the next one to two quarters, we would be shipping to them probably in less than 60 days from the date that they ship.

So it comes in very quickly for us and goes out very quickly. But it is still a turns business. Although we do look at their forecast, of course. And the backlog is something that we haven't relied on a lot historically.

Yes -- just one other comment there is -- when their booking isn't so important to us as what their delivery date is.

Yes.

So is there -- could you make some kind of a conclusion from, say, the book to bill ratio on the equipment area? I think the last time I saw it, it was still -- it's improving but it's still like 73 or something like that? Can you relate at all from past cycles of your turn up relative to book to bill?

Does it have to go over one before you really see an upturn from your customers because of the lags or …

All we need to see is an inflection point.

Yes.

OK. And then at -- and then at some point -- about that time you'd expect your orders to start picking up?

Correct.

But even an inflection point at a fairly low level from 70 to 68 to 73 or something like that?

Well, unless it's just because of a change of their actual shipments, but if it's -- if it actually represents a change in order demand on their part, then that will drive our business immediately.

OK. Just one more quick question. You talked about cost cutting measures. Are you pretty much through with those? And is there some number in terms of cost savings that you would expect to be benefiting from this year?

EL-HILLOW: Alex, this is Mike El-Hillow. I would say that from the standpoint of the large layoff that we had in October absolutely, but as part of the Aera acquisition and just as the part of the continuous improvement, we're always going to be looking to maintain our cost levels at the minimum level to meet market needs. So we don't expect any of this to be significant, but we do expect to get some synergies from the Aera acquisition certainly towards the end of the first quarter -- no later than mid second quarter.

As Doug said, we're having very good integration meetings. We've bought a world class company that has tremendous market recognition and tremendous product so we're bringing them into the family. But we have to make the tough choices to have the right people in the right place.

So we'll get -- we'll be giving you more detail on that over the next few weeks.

OK -- thank you very much.

EL-HILLOW: You're welcome.

Thank you. Our next question comes from Steve Pelayo of Morgan Stanley (Company: Morgan Stanley Dean Witter & Company ; Ticker: MWD ; URL: http://www.msdw.com/). Your question, please?

Sure -- Steve Pelayo, actually. I guess -- let's see -- rolling forecast from your customers -- sorry. I'm curious if you can take a little look at applied guiding roughly to flat revenue guidance. Are you at least getting some type of hockey stick out there -- forecast? And possibly -- what about the inventory levels at your customers' -- subcontractors? And have those been purged? And could there be an inventory restocking rebound?

OK -- I think, during the last upturn, the sense of there was going to be a huge ramp was pervasive. And so the OEMs were coming to us saying, "Don't let us down on the ramp."

So if that's a magnitude indicator of a hockey stick, we aren't seeing them say the same thing at this time. But we are hearing of cautiously optimistic inputs on growth rates that would be certainly more than flat or up five percent or so.

So we're starting to hear the descriptions of growth that goes out beyond a couple of quarters. But it's not at the level yet or maybe not even -- it won't happen during this cycle where people are just bracing to figure out how to handle a vertical ramp, which is probably a good sign for all of us.

I think the biggest issue people have is whether or not this outlook is sustainable. And, , filling the inventory pipelines -- those are real things. And it's -- we have been managing both our direct customers and their suppliers' inventory levels. And I mean by "managing" we're working with them closely to make sure that they've gotten as much out of the system as possible and it's been identified, which has been some of the problems in the past.

So we know that the inventory levels to revenues have significantly improved and so any turn on at all fills a lot of empty com squares and there would be a restocking surge or at least increase as part of our overall revenue that's a little bit hard to predict but typically it's -- we would guess it's in the 20 to 30 percent of total shipments on the turn on.

Steve, another comment on that. If we look back on the -- at the last cycle -- going into the last cycle, we've been bouncing along at some pretty low levels. And then all of a sudden some of our large customers in the semi space told us that we should get ready to double our shipments to them in the next quarter.

And that came with less than a one quarter notice. And while in the -- when we're in what we can call maybe a normal part of a cycle -- I'm not sure how that's defined -- but where we're seeing fairly steady growth, albeit not substantial sequentially, we get good forecasts. And within some parameters they're fairly descent.

But when we go back into the start of the cycle, we don't see the forecast until just before that big jump. And, in fact, when we were warned about that the last time around within six to eight weeks, we were getting up to running at a rate of almost doubling our shipments. And that ramp was about as steep as the Olympic downhill course is in Utah right now.

So while we don't see that today it doesn't mean that next week we might start to get some indications that that's going to take place again.

Thank you. Our next question comes from Kevin Vassily of Thomas Weisel Partners. Your question, please?

Yes -- good morning. Not to continue to harp on the inventory question and the pull through question, but in a very public forum, one of your big customers made a comment in the last downturn -- and I don't think this was specific to you but more specific to their supplier base that they felt like they got caught short in terms of having enough inventory to build tools to supply the demand that they were seeing.

Have any of the conversations you've had with your best customers revolved around wanting to be in a better inventory position this time around whatever the ramp of this upturn is but to be in a better position in an inventory perspective this time around than they were last time? And then, is that having an effect on how you are either proceeding with your own projections or planning or how that might effect business going forward?

Yes -- hi, Kevin. We were not a limit to their growth in the last upturn. I think we're probably one of the few companies that can say that.

We've designed our products and designed our manufacturing flow to be able to support that kind of a demand. We know they -- that a lot of the customers really do have some significant problems particularly from suppliers that don't understand this kind of a cyclical business.

And so they basically know we're there to support them and I'm sure we're not on the radar screen from companies with problems that they have to solve. So it's -- we've demonstrated capability over multiple cycles and we were one of the -- one of the companies for all of our customers that was able to deliver when they needed to meet the last requirements.

OK -- and kind of following on this theme with the recently completed Aera acquisition -- what is your sense right now on Aera's ability to respond to demand, be it a gradual upturn or a steep upturn knowing that a steep upturn is possible given a history of this industry.

Well, of course, we don't have any firsthand knowledge. We know that they increased market share during the last upturn. If -- I think one of the best indicators right now is at what key capability were all of these peer companies operating at during the last cycle?

And, of course, it's a lot easier to get back to your peak capability than to go beyond it. And we saw Aera really grow in capability. They changed their entire manufacturing outsourcing competency. They've got a very flexible workforce. They've -- and they've got core group of loyal employees and a very, very refined -- as you can imagine -- Japanese manufacturing process that they've been able to extend into the U.S. and even into Europe.

So we're pretty optimistic that they can respond to any challenge like that that the market will put in front of it.

EL-HILLOW: Let me add something along those same lines. Obviously doing due diligence we talked to most of Aera's -- all of Aera's largest customers -- many of whom are our largest customers -- and the great thing about buying a company that has the same reputation as you have -- people are willing to talk to you about them and they know who they are.

And so in every case -- every case -- it was this is a product we've relied on and used for years. They've always met our needs from a technology standpoint and a delivery standpoint. Not one situation did anyone say that they were dissatisfied with the Aera product. So that would obviously address the technology but the delivery aspect.

OK -- great -- thanks.

Kevin, they've had a very flexible business model as well and -- particularly in Japan where they bring -- they have the ability to bring in people on a very short notice on a temporary basis to meet big run ups in demand. And they've been able to control their costs as well by doing that. So they have a temporary work force that is -- much of my understanding a quote "stable" workforce. In other words, the same people will come back for a part-time position during periods of upramps and that's been a major plus for them both in a -- from a cost point of view and also from the ability to deliver.

Right -- OK. Actually one very quick follow-up question on that. Do you expect that given the nature of their business, which tends to send a lot of this stuff directly to the device manufacturers that they would begin to see a pick up in demand before your core product line?

Well, it's a little like I said earlier where we get put onto the products or we get staged into the products a little bit earlier in the manufacturing cycles than some other companies do. And I think Aera is probably about in the same position that we are as far as the OEMs go.

Right.

Most of the business, Kevin, is driven through -- or a lot of the business is driven through end user preference and as they recommission fab lines as they -- as they bring in new equipment that's when you see the -- a growth in their business. But primarily you see it on the OEM side, which is much like us. And, of course, we don't have the experience yet but I -- we're all assuming that it's going to happen at about the same time.

OK -- OK -- thank you.

Thank you. Our next question comes from Jim Covello of Goldman Sachs (Company: The Goldman Sachs Group Inc.; Ticker: GS; URL: http://www.gs.com/). Your question, please?

Good morning, guys. One quick clarification question. The 21.7 percent gross margin includes the inventory write down?

Yes, it does, Jim.

OK. And then if you could give us some margin guidance because I don't think you provided that in your guidance section?

EL-HILLOW: Well, I think we have a very flexible model. I think as you're going through our modeling out quarters, what I'd recommend you think about -- as sales increase we're going to control our fixed overhead so it will absorb the sales increase. Use a model that gets you about 55 cents for every increase in -- dollar increase in sales as a contribution to gross margin.

And as the products get more mature in the production level, that should continue to increase to the point of close to 60 percent. But over the near term, I'd say 50 to 55 cents additional gross margin.

Maybe another way to look at it, too -- and I don't think it's a straight line but there isn't any fundamental change that's gone on in our cost structure products go. And if you look back when we were at -- roughly at 100 million and the power -- in our core power products we were pretty close to a 15 percent gross margin.

And I think if you -- Aera has a little bit lower gross margins. But if you went back to something above 100 million in quarterly revenues and set a target at somewhere pretty close to the 15 percent gross margin it will give you a better idea of what that variable component is.

OK -- and then -- that's very helpful. And then specifically for next quarter since we're new working with the Aera acquisition and they have slightly lower margins -- any specific guidance for nest quarter?

No -- we don't want to give specific guidance today, but over the next week we will be giving more color on Aera. And, in fact, at our analysts meeting next week, we will give more information. We will Webcast that section of the presentation so we get the information out to the broadest dissemination.

Sounds great. Thanks very much.

Thank you. Our next question comes from Ali Irani of World Markets (Company: Canadian Imperial Bank of Commerce; Ticker: BCM; URL: http://www.cibc.com/). Your question, please?

Yes -- thank you. That's CIBC World Markets. I wanted to talk a little bit about the end user sales channel. I remember last year at your analysts meeting you had stressed the importance of building that up, especially as it related to the string of acquisitions you've made over the last two years.

Could you talk about how much of -- you've explored existing infrastructured Aera and how you believe that's going to help some of the other product lines that you've acquired?

And also the second question -- could you give us a little bit of an update on where the market demand stands for the , the products and the product?

We created an end user sales force last year. We maintained it through the downturn, which was pretty -- it took a lot of commitment internally because it's an expensive part of -- it's a new and expensive part for the company. And I think that's why you saw the sales numbers and our SG&A actually go higher.

The -- that capability has served us well and actually has helped on pull through of some products. And particularly, Noah products and exploring applications of Mach One, which is the Emco product and the Seccy , Aera brings a whole new level of capability and we've had fantastic meetings with these guys and that's really world wide. The depth of penetration that they have in Europe and Asia and the U.S. is consistent. We're just really excited about that.

And they have an orientation to identify the OEMs and then to work through the end users that define preference for those OEMs. So they're establishing really a supply chain capability.

And we really need to be able to take a product like Emco and to be able to look at being able to load a product like that into a marketplace like this. So we're just really -- we thought it was a good idea and now we see it in operation, it's just really neat.

As far as , which we finally came up with a name for it -- . Again, we've got some really good news on that. It's -- we haven't gotten approval yet to publish the most recent order that we have, but it's one of the first high volume orders that we've received on this product from a significant customer and -- in high volume, I guess I've got to put in the context of that's high volume for , but it's really positive for us to look into the future and see that this Company can potentially ramp it up into years that go beyond the potentially tens of millions of dollars in revenues. So we feel pretty good about and we're getting more design wins all the time. We just ...

Doug, this first volume customer, is this OEM directly, or is this a contract manufacturer for an OEM?

Actually, it's an OEM and we're -- it's -- we're really trying to play this, Ali, the same way that we establish relationships with our core customers. We don't want to sell to people where we can't leverage more of a value, so we're looking at actually being an outsource engineering capability for the larger companies. And we've gotten a pretty good reception there and it's unusual for them to find a company to do that because they're very used to working with basically high-volume contract manufacturers that have a very small engineering component. So they're not able to go after some of these technology based solutions as rapidly as they'd like to.

Would it be fair to say that you're expecting significant growth here in calendar year '02 for the product and could you give us some general idea on the magnitude of revenue that you're expecting for this product one or two years ago?

Yes, I think that we can definitely say that as a percentage for this business unit there is the opportunity for significant growth in 2002. But we don't want to give any guidance as to what it is as a percent of our total revenue. As we get some -- we're getting one or two orders here and there and all we have to do is have a one-quarter push out and we'd be misstating what we could deliver so, until the business gets to be more consistent, I think we're going to stay away from giving any kind of guidance on it. But it's growing, though.

Perfect. Thank you very much.

Thank you. Our next question is a follow-up question from Steve Pelayo. Your question, please.

Yes, the revenues from Applied Materials -- you mentioned that you are 24 percent sequentially so, how can we reconcile that with, you know, applied revenue growth or decline, actually, the last quarter and their guidance were kind of flat. Is that kind of an inventory restocking?

It probably is, Steve, but it's a little bit difficult for us to see. We -- you know, they typically don't carry a lot of our inventory, but, in getting ready for an upturn, they would do some of that -- and it's difficult to comment on, you know, on their outlook -- but I think from both the conference call yesterday and from presentations that have been made by senior management recently, they're clearly seeing an upturn here. The steepness of that turn, I think, is sub -- still subject to question by all of us.

Well, when you look at the sequential increase in their business, was it really from core products, or was it really -- was it broad-based, or was it really just from new product that they're kind of starting to get out the door?

I don't know the answer to that. Do you, Dick?

I think, as Doug pointed out, we're continuing to see growth in the 200-mm area, so we're sure it's more from new products and that's also reflected in our margin.

We have that information. I just don't know it off the top of my head.

Right. Thanks, a lot, then.

Thank you. Our next question comes from Stuart Muter of Adams . Your question, please.

Oh, hi. Adams, Hockness and . Good morning. I have a couple of questions. The first is on . Have you identified some potential integration opportunities and when could we expect to see some announcements on that front?

As I think we said earlier, Steuart, we are in the process of identifying the synergies. The one thing that's important to note is we've said these are two world-class companies so, what we have to do, is sit back and take the best from both and that's critical to us, so, is that going to take a little bit longer? Maybe, but we're talking terms of weeks, not months so, as we get to the end of the third -- first quarter, we'll have the detailed plans rolling and we expect to see improvements in the second quarter on our overall cost structure on a consolidated basis.

To point out, again, reinforcing what Dick said, you've got a company with 220 people that was running at 114 -- their run rate was actually higher than that just a few months ago, so they've got a pretty exceptional capability of reducing their workforce in order to respond to demand. Now, it doesn't mean there aren't synergies there, but it means that they've built another hinge into their company where they're capable of working through these big changes in demand and not having that impact, the gross margins, as much as some other models, but we are going to find opportunities. Hopefully they're more on the revenue side.

Well, I was thinking more in terms of new products and integrating different elements of your business with Aera's business.

Well, there's -- the infrastructure issues -- obviously we don't have to build out the sales and marketing capability, the end-user sales capability that we were investing in. They're a conduit and a capability to help us with out Mach 1 technology and move that rapidly into the marketplace and they're already being effective in helping us identify how to refine the product offering and exactly which customers to direct it to and make serious impact in a short period of time. We're expecting those results. We're not going to quantify them for you right now, though.

OK, great and, in terms of 300-mm mockup position on Plasma or Queens, could you provide an update on that, please?

The product growth is successful. We've got expanded capabilities in the products and we're looking at even more applications.

OK, thank you.

Thank you. Our next question comes from Ben Pang of Bank of America Securities (Company: Bank of America Corporation; Ticker: BAC ; URL: http://www.bankamerica.com/). Your question, please.

Couple of questions. On the mass flow controller side, what's your market of share now with and M-Co?

Up 30 percent.

OK and could you go over the numbers again on the flat panel business for this last quarter.

Flat panel displays were $4 million in the fourth quarter, up slightly from $3.7 million in the third quarter 2001, but down from $7.9 million in the fourth quarter of 2000.

OK, and you guys think that the growth rate there will kind of match with the overall growth rate? How does the growth rate for the overall equipment match up with the flat panel display?

It doesn't go at the same rate then because the -- like almost any other technology product, as the yields increase, well, when they first install the equipment, their yields are lower, but then as the yields increase they don't need to add capacity at the same rate that they're shipping screens.

Thank you very much.

Thank you. Our next question comes from Kevin Wenck of Polynous Capital Management. Your question, please.

Good morning, Doug and Dick. A couple of questions. Do you have any rough numbers on a 200/300-millimeter revenue split in Q4 and what might be your thoughts on how that might behave during 2002? I know that 2002 is kind of a moving target at this point, but any thoughts on that would be helpful.

EL-HILLOW: This is Mike here. Hello. We talked about the increase in markets here in 300-mm, but we're not prepared to split out the revenue by the technology at the present time.

Just from -- not wanting to kind of, you know, give more visibility into that part or is it just still difficult to track at this point?

EL-HILLOW: You , there's a lot of things happening in the marketplace so to give out that information and try to project it makes it difficult, but we did say and our revenues went up to 31 percent from 300-mm in 2001 verses eight percent in 2001.

One other question concerning 200-mm. Although you made a comment a minute ago, Mike, that you still expected that to grow, in case the world moves more quickly to 300-mm, is there a chance that the Company is going to have either, sort of, one more restructuring in ramping down the parts of its business that were oriented to 200-mm?

We don't look at 200-mm going down, or the products that support it, which is a key thing for us over the next three or four years, certainly in this cycle. It's a very small percentage of the customers that are actually using 300-mm right now, and it's certainly -- if they have to add capacity, a lot of them are going to be extending their existing processes.

The basic products that we have, the core products, can go into 300-mm as well as 200-mm, and we think that transition will be fairly smooth.

The other thing, if you look at the 30 percent market share of -- that we've seen with 300-mm, that's really good news because that's where the technology buys have been. So, as soon as capacity increases, you see a changing ratio of technology buys to capacity buys and I think our customers are estimating that during at least the front part of a ramp that you might see a 25 percent content of 300-mm. So, I don't think we're going to see a big transition where all of a sudden 200-mm disappears and we -- and the image with AE is you wouldn't see the empty production lines. They switch over; the core technology is applicable in -- at both sizes.

OK. One other question. Is your -- assimilating the Company to a greater extent -- are you seeing more potential sales opportunities with customers that have been strong for them that you haven't had as much of a presence? And, I know that was one of the envision, synergies but any greater visibility into the potential of that at this point?

It's really neat, I mean, we're getting coupled into end-users at fab level, but we really never developed a relationship with before, and whether it turns into pull-through, or just added opportunities, particularly with our other products from the thermal division, I mean it's -- it will definitely increase revenues.

At the same time, we're able to help , because we're an extension of engineering capability inside of all of the OEMs and we've got these great relationships that are established and basically symmetrical with what they have on the end-user side and, so, we're already opening up opportunities for inside of the OEM.

OK …

One other thing that was important to us as part of the acquisition was retention of senior management and, while relations are important in every market, they're especially important in the Japanese market and Peter , the President, is staying with us in a capacity as a senior consultant to our -- Jim , the President of our Group right now, who is in Japan, and also the other senior people are -- will continue with us for at least three years as it stands right now. That could change, obviously, but the transition is going very smoothly and has taken and our Japanese-based salespeople to all of the major customers on numerous occasions to cement that relationship.

Well, it sounds like it is going to be a great deal. One final question. Convergent technologies, the broader vision of surrounding OEM's equipment within integrated subsystems beyond just the software that, you know, exists right now, any, you know, positive data points out of that? I'm not asking for, you know, customer wins or anything like that, but just any anecdotal stories you feel like sharing?

Well, right now we're working at multiple levels with both multiple customers and then working internally on our own products so the -- I think the external tangibility, if you will -- we won't be in place to describe that for -- until later on this year ...

OK.

... but we have a whole group working on that.

All right. Thanks.

Thank you. Again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone.

Our next question is a follow-up from Ted Berg. Your question, please.

Hi, on a conference call last night, they mentioned that they're going to be doing more outsourcing than they are now at 300-mm versus 200-mm. I was wondering how that impacts you; does that allow you to capture more of the build materials for the process chamber, or were they referring to, you know, more of the basic type outsourcing that they have with their subcontract manufacturers like and and some of the other guys?

We think there's opportunities there for higher -- high-value contribution.

Can you be -- give some more specifics on -- qualitatively or, you know, quantitatively, to elaborate on that?

No, I really don't want to do that right now, but we're -- we definitely have some interesting newer types of activities going on with all of our customers.

And, I have a couple of miscellaneous questions on -- somebody might have asked this, but I missed the answer if this was asked -- what's the current break-even? I think it was around $54 million without -- do you have a new break-even number?

It's around $60 million on a comfortable break-even level. If we really wanted to batten down the hatches on the variable costs, it's probably in the $55 to $57 million range. As we move through the year, it's our intention to find the right kind of operation and get it back to the low $50 million range.

So, it's $55 to $57 now with , and you think that can come down some?

No, it's closer to about $60 million right now with ...

OK.

But we can see it coming down as we move forward.

OK. And then, finally, on the inventory write-off, what was -- what type of product was this for, was it obsolete inventory or was it your definition for access inventory?

When we get to the end of product lifecycles and you have an extended downturn, so it's nothing in particular -- general are related to life cycle changes.

OK, thank you.

Thank you. Our next question comes from Henry Vosaboynik of Wachovia Securities (Company: Wachovia Corporation; Ticker: WB; URL: http://www.wachovia.com/). Your question, please?

Good morning. My apologies if this question was asked already. I joined late. It looks like Applied Materials, you said, was up 26 percent sequentially. How do you reconcile that with the rest of equipment companies being down 20 percent sequentially, if my math is correct? And, secondly, I think in the previous conference calls, given us a range of either declines or increases from your equipment customers. Could you give us those numbers -- these numbers ? Thanks.

Hi, Henry. I think the reason for that disparity is if you look at the percentage drop-off that Applied had for our revenues, where they initially -- I think last year they were somewhere around 40 percent of our total business ...

Year before last.

... year before last. And they really dropped down below that, but they managed their inventories and some of the products that we supported in higher volumes were more capacity-related. They dropped off faster. So, they went below in terms of percentage of revenue in the semiconductor industry. They went below the other OEMs and so, with any kind of a pickup, we expected them to come up more rapidly than they have.

One thing, because we're talking about percentages and, as Doug said, it's hard to exactly quantify these things as to the reasons behind them, but we're talking $8.1 million in sales for a company the size of Applied Materials and our relationship, that's a switch of $1 million to $1.5 million but, I mean, when you -- there's no the percentages get way out of whack, so that's ...

What I meant is really the 20 percent decline in business ex-Applied Materials, was it more or less uniform or was there one, you know, that was down another 70 percent sequentially? I mean, you know, was it as uniform to your customers?

EL-HILLOW: Well, they -- the sequential decline in revenue was less than $1 million, Henry. We did $18 million in Q3 -- $18.073 in Q3, and $17.397 million in Q4 ...

Right.

EL-HILLOW: ... so, you know, there's about a $600,000 decrease there.

Excluding Applied, the decrease was larger, right?

EL-HILLOW: Let's see, I haven't done that math.

That's correct. That sounds correct.

EL-HILLOW: It is correct. Yeah, that's 1.7 increase in Applied, 1.6 ...

And the thing, Henry, that can change that to Mike's point is that in Applied or one of our other customers could have had one fairly small order for them that came through and, because it's very lumpy right now, it can change markets -- apparent market shares -- dramatically and I think Mike's right that the noise level -- the noise, the volume level -- is up real high right now.

OK. Let me ask you this: Applied yesterday in the conference call has said they expect the 300-mm market to grow from about $6 billion in total in '01, I think about $10 billion in '02. Do you guys have any comments or opinions on the size and, you know, your internal growth projections for 300-mm?

EL-HILLOW: No, if we use them as a proxy for us that's good news because we'll grow faster than we have -- we'll grow faster than our peers.

As you know, Henry, VOSI does an annual market share study for us. We've had some preliminary numbers from them, which include our share of 300-mm. They aren't final yet. They should be final in the next few weeks.

Two other quick questions. Could you give us an update in terms of your outsourcing programs and, secondly, Mike, is there a guidance for cash flow next quarter? Thanks.

EL-HILLOW: Well, cash flow for the quarter will be down because of the acquisition of being an all-cash deal but, other than that, there's no significant cash in the quarter. We should be essentially cash flow neutral from operation. From the standpoint of outsourcing, we continue down the road of identifying key outsource candidates. We've made tremendous progress in the last couple of months and we expect to be reviewing an overall proposal by the end of this month.

Will that have any meaningful impact on your business model by the middle of the year or ...

EL-HILLOW: I'd prefer to wait until we have, you know, more clarity in that the group that's dealing with the negotiations makes an overall presentation to the senior group, but we do expect it to have an impact, otherwise, we wouldn't be going down that road.

I'm just trying to figure out the time ...

EL-HILLOW: I'm not trying to be evasive, the fact that it will be speculation, but the point is that we know there are benefits to be gained here. So, as soon as we have more clarity, we'll be sharing it with you.

Thank you.

Thank you. Our next question comes from Jeff Laverty of McMahan Securities. Your question, please?

Yes, thank you. Could you give us an update or an outlook on what you expect cap-ex depreciation to look like for this year and how much of that you expect to be contributed from and then have a quick follow-up?

EL-HILLOW: OK. Cap-ex for the year will be in the approximate $10 million range, and depreciation is probably going to be $2.7 or $3 million a quarter.

OK, and how much of that is coming from ? Do you know?

EL-HILLOW: There's not a significant amount from . As Doug said earlier, a world-class organization that's been able to meet the ramp up and down. I would say there is a lot of corporate-wide initiatives on information technology which, obviously, would include and, then there's some -- the major part of the -- the other major part of our cap-ex is testing equipment that we buy for the AE group, so not going to have a significant impact on the cap-ex.

OK. And I just wanted to go over those numbers again. I may have missed this, but you said the total acquisition value was $77 million and that was a $44 million cash outflow from you on the assumption of some debt?

EL-HILLOW: The debt was approximately $35 million.

OK, thank you.

EL-HILLOW: Yes. You're welcome.

Thank you. At this time, there appear to be no further questions. I'd like to turn the program back to you.

Great. Thank you very much. Thanks for participating, and looking forward to speaking to you soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Good day.