Advanced Energy Industries Inc (AEIS) 2002 Q4 法說會逐字稿

My name is Derek and I will be your conference facilitator today. At this time I would like to welcome everyone to the fourth quarter and year-end 2002 results conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

Thank you everyone for joining us this afternoon to discuss our financial results for the fourth quarter and year- year-end 2002.

Today's speakers be Doug Schatz our Chairman and Chief Executive Officer and Mike El-Hillow our Vice President and Chief Financial Officer.

They will provide an overview of the results and then they will be available to take your questions.

By now you should have received your copy of the press release we issued approximately one hour ago.

If you need a copy of the press release, call us at 970-221-4670 or you can view the release on our Website, advanced-energy.com.

Before we get started this afternoon, I would like to re remind everyone that except for any historical information contained here in, the matters discussed in this conference call contain certain forward- 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 uncertainty is include bud are not limited to the volatility and siclicality of the semi-conductor industries industries, two weightings in quarterly and annual operating results, advance energy's ability to develop new products in a high school except competitive industry, characterized by rapid technological changes our ability to integrate the company's operations and other risks described in our form 10-K 10-K, forms 10-Q and other reports and statements as filed with the SEC.

In addition, we assume know obligation to update the information contained in this conference call. With that, I'm pleased to go ahead and introduce Doug Schatz.

Thank you, Kathy. Thanks for joining us this afternoon.

Before I begin my discussion about our performance for the quarter, I'd like to highlight the recent announcement of our new executive vice president and chief operating officer Dennis F Farber.

We're excited to have Dennis join our team following his 28- 28-year career with HP and Agilent. Most recently he was vice president and general manager of US operations for Agilent technologies, electronic products and solutions group.

He initiated outsourcing programs in channel and supply chain management programs that resulted in higher value to customers and a world class manufacturing efficiency combined with quality. His experience fits well with AE AE's strategy to pursue similar initiatives as we continue our drive for operational excellence at every level throughout the organization.

I'll discuss our progress with these initiatives in greater detail in a moment. As we had anticipated in the guidance we provided on our October conference call, order patterns continue to soften.

This was broad based across all semi-conductor equipment customers and semi-conductor related product lines. As a result fourth quarter revenue declined 19% sequentially to 57.4 million. The one end market that somewhat offset this decline was flat plan panel display.

This market showed continuous momentum momentum in the corner and sales to flat panel OEM customers increased 49% sequentially. Michael will provide details in his financial review.

Despite a continued difficult operating environment, we continue to make gains in the market place with our products, and extend our technology lead.

We also continue to gain traction with our power products products, next generation tools and have several key programs under way with our OEM customers to further extend that lead. Several of our design wins during the fourth quarter were for non-power products.

We expanded our product breadth into the architectural glass market with our first ion source and mass flow control design wins. This is previously been a power only market for us.

We also announced last month that our Aera mass flow controllers were named the default standard for several CDB platforms at a major OEM due to its superior performance, reliability and value.

Another product in the Aera important foal yarks the premier mass flow controller received accolades from micro magazine recently, being named a top 25 product all-star in 2002.

The primary ra product allows users to select a wide range of gases without having to re recalibrate making it possible to reduce MFC inventories.

These highlights demonstrate our continued technology leadership, particularly in the critical areas around the process chamber chamber, Butch such as power and flow where we're also the market leaders.

We're able to leverage the strong product portfolio and to process critical systems for our customers where we maximize process impact, improve productivity and throughput and ultimately lower the cost of ownership.

We've been successfully integrating power supplies with matching networks and instrumentation within our exist existing product line for several years, adding higher value products at lower costs to our customers.

As our product portfolio has expanded beyond power, however, we are now successfully integrating different technologies, such as power and flow, or power instrumentation and software in order to have significant processing process impact.

Our closed loop control is stems for reacting sprout sputtering is another example of combine multiple technologies, such as power delivery, mass flow and advance control, in such a way that it creates a new and unique solution to a highly sensitive manufacturing process.

These are the types of programs that are currently under way with our customers as we find new ways to use these interactive technologies to address processing challenges where we can make a significant impact to improve our customers' processes and profits.

Last October, we set a goal to reach break-even at 55 to 60 million dollar level by the fourth quarter of 2003. This will significantly change our operating model, and should allow us to remain profitable throughout future down cycles and return to historical AE financial performance during peak quarters.

In October we consolidated product groups into three core areas, power systems, which includes our RF and DC product groups, control systems and instrumentation which includes mass flow thermal interviews instriewm station and sources and the IKOR brand of power supplies for high-end work stations and server markets.

This consolidation significantly reduces the number of touch points throughout the organizations, improves efficiency, reduces redundancies and encourages more collaboration across product areas.

In November, we began the consolidation of our domestic manufacturing locations and bringing them into Fort Collins. We completed the consolidation of our Austin, Texas Area mass flow production lines into our Hachiogi Japan location and re relocated the the product design and engineering in mid Movember as planned.

Austin continues now as a sales and support office to our southwest United States installed base for all product lines.

We also moved the litmus sources facility in North Carolina to Fort Collins and closed that location. These actions, in addition to tight expense control, headcount reductions and shutdown days contributed to our ability to meet our end of year 2002 break-even goal of $70 million in revenue.

As we continue to drive our break-even to 55 to $60 million sales level, we're aggressively pursuing an Asian manufacturing strategy to reduce manufacturing

costs and to take better advantage of the outstanding out outsourcing opportunities located there. We've signed a lease for 87,000 square feet of manufacturing space in a facility located in China.

Operationally, everything is on schedule and we're now waiting final approval our business license from the government. By mid-year, we will begin moving some of our power and mass flow production lines to the China facility. Pilot production will begin early in the second quarter of 2003.

We expect to be manufacturing a large percentage of our products at that location by the end of 2003 or early 2004.

We expect to manufacture a significant percentage of our high revenue products in China by the end of 2004.

Having an Asian based manufacturing operation will also allow us to make better use of the outsourcing opportunities in the region.

We've already identified out outsourcing partners in China, Singapore, and Malaysia that will help us reduce inventory and lower manufacturing costs.

In addition we plan further consolidation in our U.S. manufacturing operations involving our New Jersey and Longmont, Colorado location. [Inaudible] is in the process of being transformed to a lean product design enter and all of its power supply production lines are being moved to Fort Collins.

We anticipate this activity to continue through the second quarter of this year. In addition, we're in the process of closing our Longmont mass facility and moving its lines to the new china facility while R&D and other function shuns are being consolidated into Fort Collins.

These actions should be pleat by mid-year along with streamlining of our international sales and service operations. We're well under way with several significant changes within the organization, both in how we collaborate across product groups and how we are re- reengineering our business model model.

With the addition of Dennis, we have the management team in place to execute these changes.

In summary, these critical initiatives represent the things that we can control, and our management team has the leadership and experience needed to execute these plans as we re reshape our business model and best position the company for the opportunities ahead. I'll now turn call over to Mike El Hillow so he can review the financial results with you.

Thanks, Doug. Thank you for joining us today. I will review the results of the fourth quarter and full year 2002 and then provide guidance for the first quarter 2003.

Fourth quarter revenue was $57.4 million, down 19% from 70.7 million in the third quarter of 2002 and up 69% from $34 million for the fourth quarter, 2001.

The net loss in the fourth quarter 2002 was $22 million or 68 cents per share, compared to the fourth quarter 2001 net loss of 14.4 million or 45 cents per share and compared to the third quarter 2002 net loss of 5.6 million or 17 cents per share.

Included in our fourth quarter 2002 results is a $22.7 million dollar charge resulting from excess inventory; product transition and warranty costs, restructuring charges and other pretax items reduced by the gain related to the buyback of a portion of our convertible bonds bonds.

These charges increase the fourth quarter 2000 net loss from $7.8 million or $24 cents per share. The majority of the charges were the result of the furthest slump in the semi-conductor industry combined with the overall worth wide economic conditions.

However, beyond that and as Doug mentioned, over the last six months, we've restructured into a more efficient operating unit and begun an initiative of a significant portion of our manufacturing to China.

We're also developing new generations of power source, thermal and flow products and at the same time discontinuing some legacy products as part of an aggressive product life-cycle management program.

In addition, some of our newer products have significantly improved the performance and reliability over the products that they are replacing.

To help accelerate conversion to these products, we may incur product transition costs. These new products will enhance our customers' product performance and reduce future service and warranty costs.

Although these changes resulted in charges for the quarter, each of these programs and initiatives has significant near and long-term operational and financial benefit.

Both fourth quarter gross margin was 7.8%. A 14.2 million charge for excess amount inventory and product transition and warranty costs reduced the fourth quarter gross margin from 32.5%.

This compares to the third quarter gross margin of 37.6% on a a much lower fourth quarter 2002 revenue level. This compares to a 21.7% gross margin in the fourth quarter of 2001.

As you can see, we have begun to realize the benefits of our out sourcing and other cost re reduction programs. Continued straight in flat panel display related demand helped to offset softness during the quarter and we continued to have success in winning new tool designs for a number of our products, particularly in the non power areas.

On the detailed level, sales in the forth quarter to the semi-conductor capital customers represented 52% of total sales or $29.9 million. This is a quarter over quarter decrease of 32% from 43.9 million.

In the fourth quarter of 2000 to 2001, sales of semi-conductor capital equipment customers represented 51% of total sales or $17.4 million.

Applied materials is our largest customer and represented 22% of total sales quarter sales or $12.5 million, compared to 27% of total third quarter sales or $18.9 million.

In the fourth quarter of 2001, applied represented 24% of total sales or 8.11 million. Sales of flat panel display customers were 8 million or 14% of quarterly sales a 49% sequentially increase from fourth quarter 2002 amounts of $5.4 million or 8% of sales. In the prior year quarter, this end market provided 12% of sales or $4 million.

We've continued to experience an increase from demand from our Asia flat panel OEM customers as end users pass through the manufacturing the new generation of large displays.

Currently our customers expect demand to soften somewhat mid- mid-2003 as the next generation fabs jen six come on line.

Beta storage which is a combination of digital video disk, compact disk and computer storage market was 2% of total fourth quarter sales or $1.5 million.

This represents a 70% decrease in dollar terms compared to the 2002 third quarter amount of $5 million.

This market represents 4% of sales or $1.5 million in the fourth quarter of 2001.

This is a seasonal market and the see Yen recall decrease is driven by companies given gearing up for the holiday season.

Advanced product applications were 11.2 million or 19% of fourth quarter sales up 8% from third quarter sales of 10.4 million or 15% of sales.

The category was 22% or 7.3 million in the fourth quarter of 2001.

This category include a variety of applications, such as our IKOR power supply for the market and some optical coding such as architectural glass coatings and the laser and medical imaging markets.

Global support was 6.9 million or 11% of fourth quarter sales, compared with 6 million or 8% of sales for the third quarter. Global support represented 11% or 3.8 million of total sales in the fourth quarter of 2001.

The year over year increase in global support was due to a higher level of activity related to Aera.

Looking at sales by geographic region, domestic sales represented 53% of total sales in the fourth quarter, compared to 58% of total sales in the prior quart and 64% of total sales in the fourth quarter of 2001.

Europe was 14% in the fourth quarter, compared to 15% in the prior quarter, and 14% in the fourth quarter of 2001.

Asia Pacific represented 33% of sales in the fourth quarter, compared with 27% in the third quarter and 21% a year ago.

R&D spending was $13 million or 22.6% of sales for the fourth quarter, an increase in absolute dollars from the 12.2 million or 17.2% of sales during the third quarter.

In the fourth quarter of 2001, R&D was 10.8 million or 31.6% of sales.

Our R&D programs are critical in

maintaining our technology lead and help to deepen relationships we have with our customers, particularly during downturns.

SG&A was 19.2 million or 33.4% of sales in the fourth quarter of 2002 compared to 17 million or 24% of sales in the third quarter and compared to 10.4 million at 30.5 million in the fourth quarter of 2001.

Fourth quarter 2002 SG&A Includes approximately 3.4 million of the 22.7 million in charges I summarized earlier which resulted in the higher sequential dollar amount.

For the year, revenue increased 22% to 238.9 million from 193.6 million for the year 2001.

2002 revenue includes the contributions from Aera and Andreser acquisitions, excluding the revenue contribution from these acquisitions revenue for the full year 2002 would have been flat year over year.

Net loss for the full year 2002 was 41.4 million or $1.29 per share, compared to 31.4 million or 99 cents per share for the full year 2001.

Gross profit for the full year 2002 was 68.8 million or 28.8%. The charges for excess amounts of inventory and product technology and warranty costs reduced gross profit for the full year 2002 from 83 million or 34.7%.

Gross profit for the full year 2001 was 57.4 million, or 29.6%.

Our R&D was 49 million or 25.4% of sales for 2002 compared to 23.2% in 2001.

SG&A expense was 65.5 million or 27.4% of sales for the full year 2002 compared to 45.3 million or 23.4% in the prior year.

The majority of the year over year increase was due to the acquisition of Aera Andresar.

Headcount at the end of the fourth quarter was 1,398, up from 1,319 in full time and 79 temporary employees.

That compares with a headcount of 1,495 people including 83 temporary employees at the end of the third quarter.

The decrease is due in part to the headcount reductions related to the manufacturing facility closure in Austin, completed mid-fourth quarter.

Our balance sheet continues to be strong with cash equivalent for marketable securities of 172 million. Trade accounts receivable decreased to 31 million compared to 35 million at the end of the third quarter.

[Inaudible]65 decreased in the fourth quarter, up slightly compared to the 59 days in the third quarter and down from 76 days in the fourth quarter of 2001.

Fourth quarter inventory is 57.3 million down from 67.4 million at the end of the third quarter.

Much of the reduction was due to special charges in the quarter. Inventory turns returns, quarter over quarter 2.7 times compared with 2.2 times in the fourth quarter of 2001. Total days inventory was 135, the same as in the third quarter quarter.

Capital expenditures in the quarter were 2.6 million bringing full year capex to 10.7 million.

Depreciation of amortization was 7.2 mill million for the quarter. We expect capex be 10 to 12 million in 2003.

As Doug said we anticipate a relatively flat operating environment near term and anticipate a first quarter 2003 revenue level of 54 to 57 million with an operating loss per share in the range of 21 to 26 cents.

Gross margins should be approximately 29% or 32%. R&D should be in the 11.5 to 12.5 million range and SG&A should be approximately 14 to 14.5 million million.

Our tax rate in the quarter is 37% up from the 35% rate in 2002, and we do not expect changes in this rate in the foreseeable future.

As we have said, the operational changes we made late in 2002 principally related to the United States operations.

Over the next few months, we will streamline our international operations and will incur additional charges of 3 to 5 million.

However by the end of 2003, we will have a significantly reduced break-even level and have a much more variable operating model.

Doug and I will be happy to answer any questions, so operator, please open for questions. Thank you.

At this time if you would like to ask a question question, press star then the number 1 on your telephone keypad. We'll pause for a moment to compile the Q & A roster.

Your first question comes from Steven Pelayo with Morgan Stanley.

First, on the service infrastructure I was surprised it was up sequentially. I thought we heard some of your large customers [inaudible] organization needs were pretty poor in the fourth quarter and they shut down days

I'm curious if you can comment about the service infrastructures and then you know relative to the Aera business, the end user portion, I guess.

Steve, this is Mike. We continue to integrate sales forces. As we said when we bought Aera, we were particularly impressed with their end-user business.

Quite frankly, we've continued to leverage that throughout the year to bring our sales forces together, cross train the sales forces and we've been seeing a quarter over quarter increases in that business throughout the year.

Despite, as you say the fourth quarter shutdowns.

You would expect that to continue, Mike?

Well, we certainly expect to see progress there, but obviously, Steve, looking at a first quarter where both OEMs and end users are cautious. We expect that our penetration will continue, but there may be some slow down in just end user capex.

Operationally, we think we will continue to make progress in that area.

Last question is just relative to your largest customer and it goes down fairly significantlyquarter over quarter. We know they were doing shutdown days there.

Do you feel like the inventory levels that your major customers are purged to a level now or maybe we could have a restocking phase at some point and see some sharper recovery there?

Well, we've got closer and closer relationships, meaning we're on the MRP, we can see not only the inventory in the finished goods locations now, but we can see inventories more generally all over the company. We're pretty convinced that it's fairly lean now. They are obviously only taking what they need.

They've gotten much better at management of their own work process flow in the past quarter , so we don't see any risk that's concerning us with any inventory buildup.

All right. And I'm just curious, in light of their -- it seems like in the last 90 days ago, they were talking about making sure everybody is ramp ready and now in light of their announcement you've got a rolling six-month forecast from your larger customers SRP.

Have you seen many of those changes and do they match what I've heard on Tuesday?

As you know, we did get the M MRPs, but we have to be cautious about responding to that information. We will let each, you know, company answer their own MRPs.

Just in general, Steve, I think that there is a lot of concern right now and care that all of our larger customers are applying to the viability of their suppliers, and so part of the ramp readiness is a ping, if you will, to make sure that most capable suppliers, the ones they depend on the most have programs and capacity that can support them in an upturn.

A little bit of the ramp readiness, I think, is supplier qualification program.

Okay. Fair enough. Thanks, guys.

Thank you.

Your next question comes from Mark FitzGerald of Bank of America.

Thank you. I'm a little curious, why pick $60 million for a break even here? Does that say something about your view of the recovery and where we're going go to in the next 12 months or so?

Mark, I think the way to look at that is we're doing things in a series of steps, and so that's the next phase of a program to roll in cost savings and a higher variable content to our business model. As we go to 60, then we'll target a -- even a more variable model.

We want to do these things in chunks where we can have action actionable plans and we can execute them and close on them. So that's the next stage that we're in right now.

So basically if the environment is just doesn't pick up at some point, $60 isn't the be all and end all?

Oh, no way.

Okay. And then with your move into this off-shore manufacturing focus in China, what kind of communication sort of skills do you need at this point to kind of have the same responses when you had manufacturing -- when you add manufacturing in and is there lags or hurdles here that you foresee in terms of making this a smooth transition?

Well, we're doing several things. One, we have people here being trained right here. Primary criteria is that everyone that works for us speaks English with a level of proficiency.

For the top management in China, they are either ex-pats or they are people where English is a first language for them. So from a language communication basis, I don't think there is much of an issue there.

There is some real jewels in this, because we have to be so specifically clear in order to be able to transfer these products seamlessly This forces us to be a lot more rigorous and rigor in this situation means clarity.

It'll be a lot easier to set goals and to set metrics around those goals so that the performance can be very specific .

We're also only transferring products right now that we've also outsourced the core parts of before.

So we're minimizing the risk. We're working with global CMs that we already have relationships with.

With Dennis' background, he shares a working relationship with many of these same people in many of these same locations.

So we don't look at communication as being a heavy risk for the company right now.

And one additional point is that the -- we have hired out four senior managers in China within the last two weeks. Each of them has worked for an American company.

So they understand the vague grease of dealing in the American environment. As Doug said, we're using world worldwide EMS companies who are are -- so the understand the need for quick communications both verbally and also shipping products to and from China.

It's speed that will meet the worldwide demand.

When does this system turn on for you, the first product run through the system?

We're looking right now in the April time frame.

Okay. And then, Mike, can you just give us a little detail on the long-term debt that's out outstanding in terms of the maturity on it?

We have two convertible bonds outstanding. One has a balance of approximately $80 million and that becomes due in August 2006. The other has a balance of approximately $102 million, and that becomes due in November 2006.

So we have almost four years of head room with our convertible debt.

As we pointed out earlier, we have been back in the market. We've been buying. During the quarter we bought approximately $19 million and recognized a gain of approximately $4 million.

Okay. Thank you.

You're welcome. Thanks, mark.

Your next question comes from Stuartuart Muter with Adams Harkness and Hill Inc.

Good afternoon. I've just got a question trying to figure out the linearity of the cost improvement and so it's a hypothetical question. If June quarter is flat in revenues, what was the bottom line look like?

The linearity, Stuart on the opex level is quite linear. This quarter will be a little bit of a slowdown.

There'll be a little bit of a pickup as we streamline sales and service, but the next big improvement will be the significant production and out outsourcing out of China.

In answer to your question, if we had a $55 million just in round terms, second quarter, we would have an operating loss in the neighborhood of $6 to $7 million.

And then as we pointed out, by the third quarter, end of third quarter, if we were at 6 are $60 million run wait rate, we should be making money, probably around a million to $2 million operating income.

Thanks a lot, Mike.

You're welcome, Stuart.

Your next question comes from Ben Pang with JP Morgan.

A couple of quick questions here.

You talked earlier about your interactive solutions or interactive technologies. In your new organization where you are organized around the three product groups, how do you account for that synergy or integration between the different groups?

Okay, we have the -- in the power group, there is quite a bit of -- lets say multi multiple technologies anyway, because we've been shipping particularly sputtering products into the architectural glass, the reactive sputtering markets, and a lot of the reactive processes are extremely sensitive.

So we've been able to take some of the control capability, communication software capability that's now located in the CS&I group as well as some other instrument takes as well as the flow controllers that they are responsible for and provide an integrated system, if you will, that's -- it's a -- basically a value provider module for a customer that is trying to develop a reactive process.

So we've got the two groups (A) that are working with each other but then in the CS & I group, they have the sources where they are integrating power supplies with flow controllers and thermal sensors and we also have the thermal group and the thermal group is integrating the software communications and power sensors and what they are doing, so we're starting to find elements within our technologies that satisfy real problems that the customers have.

And those problems could be like yield, performance, through put, being able to do preventative maintenance.

We'll be announcing some other products using similar techniques over the balance of the year.

Do you have any targets for, you know, the percentage of revenue from the integrated solutions? And if so, where are you guys at right now on that metric?

We don't really, but one of the things is that a large percentage of our business has always been about providing more than a single component.

So if you would, it was kind of unusual for us to pick up something like Aera where the 3WU8 bulk of their product line was a component, because if you look at the power supplies, they were really integrated systems that had sophisticated instrumentation and controls and often specialized controls that worked with other sensors in the system.

So we -- what we don't do is we don't take a lot of pieces, cable and piping and put it together into a box, but -- and so we don't have that part of a business except partially Aera.

What we to do is try and look at the process and how we can help our customers create value and then it's kind of whatever we need to put into a box to do that, we do.

But usually that isn't just hardware, it's some kind of control algorithm, et cetera. So we have a real hard time trying to estimate what percentage of our business that is.

If you would have asked us, let's say, two years ago, I think it could have been 90% based on some people's --

Okay. Two quick questions on China. What's the goal for the percentage of products that are going to be shipped out of China by the first quarter of next year.

And are those products shipped directly from China to the primary equipment supplier?

Do you ship directly to Applied Materials or does that go back to another final test site or how does that work?

It will be shipped directly to our customers. As part of the pilot program, we'll be manufacturing product over there, and we've put together a test plan back here in Fort Collins. It'll be a rigorous test so we can ship it directly to OEMs otherwise we just in consider additional shipping cost that we don't have to.

In response to the first wart of the question, we've been giving some guidance on percentages, but we're going to back off a little bit, not because of any uncertainty, but because it comes down to percentage of dollar value, percentage of product volume, unit volume, but we tell you that by the first quarter of next year, a significant part of our business , which would be certainly around 50 or north of 50 would be coming out of china. That's safe to say.

And there's a longer range view in this. I think we've estimated and communicated before that somewhere around 60 to 70% of our products wind up somewhere in Asia where they add value eventually.

We know as our products get to be more and more focused and wind up with our OEMs testing capability, it won't be making sense to ship those products back to the U.S. and then they'll already be in Asia and it'll be very easy and low cost for our customers and for us to have those products arrive at the site where they are integrated with their tools.

Thank you very much.

You are welcome.

Your next question comes from Martin Teng with Needham & Company.

Hi, I have a question on your orders and backlog. Do you have a number for that?

Backlog at the end of the quarter was $28.8 million. We don't give out order information. But there wasn't much in the way of cancellations. So you can do the math. Backlog would be 32.5 million.

Okay. And you know, assuming that you were saying in the second quarter arcs supervening a revenue of $60 million, you should be break even at the operating line.

Third quarter.

Third quarter?

What kind of gross margins would you be talking about?

The model would envision right around 40%.

Okay. 40%.

Yes.

Also, you said there is going to be charges of 3 to 5 million in 2003. How is the charges going be spread out over the year?

It'll be -- it should be before the end of the second quarter, and there's -- the timing issues of dealing in those sovereignty tease and the labor rules, but we don't expect they'll be on the second quarter quarter. My guess is, if I had to guess right now, they'll be second quarter charges.

Okay. So between 3 to 5. What does it relate -- related to?

[inaudible] and facilities closures.

Just one last question. I didn't get the R&D guidance for the first quarter. Could you say it again?

Yes, about 11 and a half to 12 million -- 12 and a half.

Thank you very much.

Your next question comes from Kevin Vassily with Thomas Weisel Partners.

This is Andrew Biggs for Kevin Vassily. You mentioned that you expected to finalize your business license for Shing Zen in late February sometime. I was wondering if that is still on track and if I could get an update on that.

Andrew, as far as I know, if it's on track, we go to the governmental bureau almost every other day to run through. There is nothing holding it up other than normal bureaucracy. The thing about the people we've hired, they know their way around the bureaucracy there. We don't see it as being a problem.

Okay, great. And I know that you mentioned earlier in the call that you expected maybe a little bit of a softening end for the flat panel in the mid-year. Do you see the momentum could continue in the march quarter?

Potentially. There will be a little bit of softening. I say that because of the un uncertainty of the economy, nothing in the market in particular. The first quarter should stay strong compared to the fourth.

Okay, great. One last question, in terms ICP source product, could you just give me an update on where you are there?

I guess I'm a little -- ICP?

Yeah. Just in terms of the infringement deal with your competitor.

Okay.

Any kind of redesigns that have occurred there and how that's progressing.

We, you know, have said before we lost the case with the competitor. Part of the issue there was what's described in the market ruling. Essentially the strength of the patent but the width of the patent, and the market ruling was upheld in an attempt to appeal, so there is a very narrow patent claim that can be not gotten around, but disregarded, if you would, because the designs that we're considering now don't even come anywhere near infringement and interestingly enough, the designs that we're working with are much higher performance.

Okay, greate. Thank you very much.

Thank you, Andrew.

Your next question comes from Ted Berg with Lehman Brothers.

Hi, thanks. I was wondering in the first quarter here so far, you are guiding flat revenue trends. Do you feel pretty comfortable with that? Is there a large amount of variability around that? Does a lot of the business have to come in towards the end of the quarter in

We feel fairly comfortable. And I'd say unless something really strange happens in the next couple of weeks, the first quarter guidance is pretty solid solid.

Okay. And then regarding Aera, when did you anticipate that they would, I guess, reach a break- break-even level or turn profit profitable?

I would say, Ted, at the same time of the rest of the business turns profitable. Aera had a business moderate that will quite frankly at peak of cycle was proportionate to the AE business model. In fact, for the 12 months before we bought Aera, for the 12 months ended June of 2001, their operating performance exceeded AE a little bit.

The gross margin was lower, but their operating margin was a couple of percent higher. I don't want anyone to believe that the Aera business is not contributing to the other parts of our business.

Obviously there's two answers to your question. One is time and the other is revenue, and on the revenue side side, it would be profitable tomorrow if they got up to whatever would create break even even. The thing that's exciting for us is we're actually working over on the time access on things that really drive the cost down. And so they'll have a potentially much more profitable model assuming there isn't huge pricing pressure by the time there is a recovery.

Okay. And I had one last question on that same topic that you just concluded with. With the pricing pressure, how would you -- I imagine it's more intense with the MSCs than with your power supplies. Could you provide some detail on that and you mentioned that you didn't think inventory was an issue with your products, just specifically with Aera. Does that comment apply directly to that as well?

Well, we're less familiar with the how the stocking locations work with all of the end users. We're pretty comfortable with that in the OEM and finished goods space. The -- the pricing pressure has been significant, but Aera has always been able to hold the premium because of the out outstanding reliability and the customer support in the end user area. So we're still able to maintain a premium there, although there is a lot of pressure throughout the industry on anything that looks like a component, and anything that might be replace replaceable without too much qualification by another component.

Okay, thank you.

Your next question comes from James Covello with Goldman Sachs.

Hi, thanks very much. A couple quick questions. The cash burn for the march quarter, if we could get that number, please. A little bit of insight into Japan, you know, in terms of the end market growth in Japan. We understand from your biggest customers that there is grumbling in Japan to the upside. I'd like to understand your perspective on that. And then finally, if I understood the press release right, stripping out the acquisitions, you would have been flat year over year in revenue, with capex, global capex somewhere between 25 and 30%. Can you talk about how you were able to achieve that? Thanks a lot.

You're welcome. The first quarter would be $6 to $10 million. That was part one. On the rumblings in Japan, I don't have any -- I can't say specifically.

We have seen some order pick up, and I don't know if it's "of course" we ship a lot of product into Japan for flat panel. Flat panel has been going strong strong.

We've also picked up other Japanese business as far as design wins go. Awe I think we've seen -- but I think we've seen a slight up TICK in Japan in the activity not related to flat panel.

Okay. And then the difference between the industry growth rates and your growth rates last year?

We think last year the industry growth rate was down a little. We were flat. We figured we picked up market share.

Right. And what made your product lines lines -- what major product lines accounted for that?

RF would be a significant percentage of it. I think as you know, we've been focusing on etch and some other large accounts that we haven't penetrated before, and we grew there. The other areas that we picked up some business that we didn't have before were the emerging products, the IKOR products, et et cetera.

And we've -- the other piece that we picked up is DC high power which goes into a lot of industrial, architectural glass applications. We finished the development of the first wave of projects there and they've been very successful successful.

Thanks very much.

Thanks, Jim.

Your next question comes from Henry Voskoboynik with wau coveia securities.

Thank you. A couple of questions. Your guidance in the next quarter is slightly down. Will that come from flat panel or would you expect the semi conductor business to be down as well.

I would say we don't expect semi-conductor to be down significantly, it's flat across the board.

The reason I'm asking, pretty much every one of your larger customers on equipment side is guiding for some kind of pickup in quarters orders for next quart. I understand that's unstable, but is that what you're seeing as well in terms of your own relationship with the groups guys for next quarter?

Well next quarter would be the quarter we're in, right, Henry?

We're seeing a fairly steady order flow. If something substantially changes in the next couple of weeks, we don't see something changing significantly quarter over quarter.

Okay.

Flat panel being essentially the same and everything else should be fairly steady, maybe a little bit of -- I think the weakest could be across the board and retrenching a little bit in global support.

I see. In terms operating cash flow in Q4, I'm getting somewhere around only $3 million bucks is that correct or am I off somewhere?

That's close. Why don't we call off-line I'll give you more details.

Thanks.

And last question, actually, for Doug, there was an article in the "Wall Street Journal" this morning about greenhouse gases and how the Bush Administration is proposing new plants plans to cut it 18%. Is litmus still a business for you guys? Is there an opportunity? Thanks.

Okay. Yeah, there is an opportunity. We took the fella who had -- who was one of the teams who founded litmus who lived in North Carolina.

We mentioned earlier, we shut down the North Carolina operation and he moved here and he became the chief technology officer for the CS & I group. So we support those products and we're developing new ones.

We're taking a look at the whole plasma abatement opportunity, and we think it's real, but we're very nervous about count counting on any business that's driven by a regulatory parameter parameter.

I think we've all got stuck in that before. And when -- we had some business lined up before the elections and when bush came on board and made it clear that he wasn't driving EPA at that time, almost all of those orders dried up.

So I think that there is an opportunity there, and I think that people will take advantage of it, and -- but I don't think it's predictable right now.

How much is it costing you right now per quarter? More than a Penny per share in terms of R&D spending?

On the abatement products?

Uh-huh.

It's negligible.

Negligible?

Yes.

Thanks a lot.

Uh-huh.

Your next question comes from Alexander Paris with Barrington Research.

Yes, thank you. I apologize that I don't have a release you mentioned a lot of one-time numbers. I don't know which are in the re release. Just wanted to go through it. In the cost of goods sold, you said there was 14.2 million of that was added to that from the inventory charge?

Correct, Alex.

14-2 what? What's the next two digits?

We didn't go into that level.

Okay, 14.2. And then you got down -- I think you were talking about sales and marketing and there is a 4.2 million of the inventory charge built into that, too?

No, not into sales and market marketing.

Where was the -- you mentioned 4.2 million.

What was that related to?

Yeah.You said it was also part of the $22 million inventory charge.

Quite frankly, for the time time -- we haven't made public disclosure. We'll break this up more clearly in the form 10-K. I would prefer to wait to give more -- the amount of detail we've given is the amount we would like to give today and that's it.

You mentioned $4.2 million, whatever that was. The other operating expense $1.9 million, what is that?

Well, $1.9 million --

Is that miscellaneous operating expense?

That's the operating arbitrage where we have interest expense on our bonds, but we have interest income on our cash, and then that the -- that would have been changed by the fact that we had the gain on the sale of the bonds, and also, we had a one- one-time foreign currency gain that we back out. We call it a -- kind of a special charge, even though for the gain.

Your extraordinary gain 2.639 million. That was the buyback of the convert I believe so.

The 2.69 million is a combination of the buyback of the convert I believe so, plus also we have a few equity quit investments under the new accounting rules require us if the stock price is down for more than 6 months, we've got to take a write down. They call it a permanent impairment. We call it a stock market siclicality adjustment.

The other expense, 2.56 million, how much of that is interest expense.

About $4 million is the gain on the convertible debt. The rest is write down of the equity investment.

Where is the interest cost then?

The interest cost -- that's the $1.9 million. Any quarter we have about $2.8 million or so of interest expense. And about $800,000 of interest income and that gets you to the $1.92 million.

Okay let me just summarize this. If you want the show everything on a pure operating basis, do you have what your pretax number would be?

I'll tell you what we've tried to do. Actually, Alex, given the new rules from the SEC, we have slowed down showing that, but we do have attached to our attachments a bit of a breakdown breakdown. One of the reasons why is it seems as though we're being reluctant to say it, every day the rules change on what you can say, even using the word "pro forma" we're backing away from that. For the quarter there was 22.7 million in special charges. 14.2 went to costs of goods sold sold, and then some to operating expense and then some to other income.

Okay, so that was the total of all of the one-time, the net total of all of the one time items?

If you adjusted the quarter it would have been a 24 cent loss for the quarter on sales of 57 million.

Okay. So backing everything out, your loss was 24 cents?

That is correct.

Okay. Thank you very much.

)) You're welcome.

You have a follow-up question from Steven Pelayo with Morgan Stanley.

I'm sorry if I missed this. You talked about getting the transferring done of manufacturing by the end of '03, so the $55 to 60 million break-even that's based on target plans of hitting that at the end of the calendar year or when?

The target of 55 to $60 million is towards the end of the year. Our intent is by the end of the third quarter. That envisions our ability to start producing in China and grad gradually increasing throughout the year.

If I heard you correct, you said I 40% gross margin assumption on that break even?

What we're shoot shooting for on the break even is to have a gross margin in the 41% range. That's correct. Which would allow us about 22 to 23 million dollars of -- that's the challenge you and I have talked about that quite often. We have peaked at 29 million.

We've seen gradual improvement, although it was 29 million in Q3 , 28 million in this year if you adjust for the special items items.

Next quarter would be between 25 and a half and 26 and a half half. So this is a glide path down to the third quarter.

If we get to the third quarter, we're looking at about -- we want to have that at 22 to 24 million.

And how does that split up? That was going to be my next question. Is R&D sticky and the rest comes out of SG&A.

R&D we've been in the 11, 12, 13 million dollar range. We would envision a low of 10 and a high of 12.

Okay.

For R&D.

So it's actually a little bit more out of both?

Oh, yes.

Great, thanks, guys.

There no further questions at this time.

Okay, thank you very much for sitting in on our call. We look forward to talking to you later. Thank you. Bye.

This concludes today's conference call. You may now disconnect.