Advanced Energy Industries Inc (AEIS) 2004 Q1 法說會逐字稿

Good afternoon. My name is Michael, and I will be your conference facilitator. At this time I would like to welcome everyone to the Advanced Energy first quarter 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 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. Thank you. I will now turn the call over to Cathy Kawakami. Ma'am, you may begin your conference.

Thanks very much. Good afternoon, everyone, and thank you for joining us today. Doug Schatz, the chairman and chief executive officer, and Mike El-Hillow, executive vice president and chief financial officer will be today's speakers and will provide an overview of the results before they open the call to take your questions.

By now you should have received your copy of the release that we issued approximately one hour ago. If you still a need a copy of the release, please contact us at 970-221-4670 or view the release on our website at advanced-energy.com.

Before we get started this afternoon, 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 the semiconductor and semiconductor capital equipment industries, the timing of orders received from our customers, and our ability to execute on the cost production initiatives currently underway. Other risks are described in our Form 10K, 10Q, and other reports that are filed with the SEC. In addition, we assume no obligation to update the information that we provide to you during this conference call.

I'd like to now go ahead and turn the call over to Doug Schatz.

Thanks, Cathy, and thank you for joining us this afternoon. We are pleased to report a 40% sequential increase in revenue to $104.5m. This is based on strong demand across all of our product lines. This also represents the second highest percentage of quarter-to-quarter growth we have ever reported. It's a tangible indicator of our worldwide employees' hard work, diligent efforts, and execution capabilities. This growth is also an indicator of our leading technology that is part of the comprehensive solution that supports our customers' critical plasma processing challenges.

The sales growth was primarily driven by customers in the semiconductor capital equipment industry. This growth reflects expansion of our leadership position on high-growth applications that further illustrates the leg of our returns due to continued investment in R&D during the downturn. The results of the design wins are enabling us to gain significant traction in next-generation processing needs.

Another highlight of the first quarter is, of course, our return to profitability. We generated net income of nearly $7m, our first profit since the first quarter of 2001 when the severe industry downturn began. It's been a challenging three years, as we all know, and we took several aggressive initiatives to transition our operating model to be a more variable cost base model. The intent is to enable to stay in profitability through future cycles.

Specifically we changed our manufacturing infrastructure by consolidation facilities and opening our manufacturing facility in Shenzhen, China, which began initial production one year ago. The facility is now delivering product directly to all of our major customers and is in volume production on six product families from our power division. We received ISO 9001 certification for this location last month. Shenzhen has also successfully stringent customer audits and is leading our corporate pursuit of six sigma quality.

Mass flow control, or MFC sensor production began in Shenzhen at the end of 2003, and our MFC product lines are currently ramping up for production volumes. Two of our major OEM customers have already approved China-built MFCs. We are currently working to transition over 10 additional product families to China. These include some of our source production. We continue to be on track to produce the majority of our total manufacturing output on this facility by the end of the year. In addition to the progress we've made in redesigning our manufacturing infrastructure, we have shifted a portion of our supplier base to lower-cost, higher-quality, Asian-based manufacturers. We have also continued our product innovation activity, further solidifying our leading market positions.

During the first quarter, we've had key design wins in Generation 7 flat-panel display applications. These are RF delivery solutions, incorporating our highly differentiated Navigator digital matching networks. The digital match technology, much like the highest performance racing transmissions, enables rapid, reliable, and repeatable transfer of power in an RF delivery system. These systems have become an essential part of the most advanced DVD etched strip and RF sputtering applications.

Our Pinnacle DC power delivery systems continue to win more platforms. Now on the even more demanding copper PVD area. The combination of technologies integrated in these products offer significant increases in profitability for the end user. The most important impact comes from our proprietary arc control technologies. These technologies minimize arcing which, in turn, minimizes wafer and flat-panel defects, and the impact of even a single arc on the much-larger 300 mm wafer or a 2x3 meter flat-panel display substrate is substantial.

We have also introduced two new products during this quarter. Last week we announced the Aera transformer, a highly flexible mass flow controller that will run any gas and any flow range. This multi-gas, multi-range functionality enables our customers to reduce spares inventories, because as few as eight transformer MFCs can support all of the fab's flow requirements. This is a solid addition to our 780 series of MFCs that are known already for their reliability and key contributions to process repeatability.

We also introduced the Litmas linear inducted plasma source. It is a new RF-based source that is used in abatement of PFC emissions from the semiconductor etch processes. Because this product is targeted at the fab facilities level, we have partnered with a company that has expertise in this market. The product will be jointly branded by CS Clean Systems, and they will integrate the RF source into a complete abatement delivery system. CS Clean will be responsible for marketing and sales, given their customer relationships and knowledge of the abatement market.

A tightened focus on our core competencies is another critical piece of our strategy and our progress as we reconfigure our operating infrastructure to support sustainable cyclic profitability. The CS Clean relationship is a good example as is our recent sale of the Noah chiller business. We acquired Noah because the company had developed disruptive technology to displace one of the most unreliable components of the semiconductor fab. While we had success and profitability contributions from the product line, the next steps required incremental resources from both a marketing and product support standpoint that we chose not to commit. We are directing these resources instead to support core initiatives where they can have even greater impact. We remain committed to our Sekidenko thermal sensing business, which is the market leader of an established niche market that effectively leverages our existing engineering, marketing, and sales resources.

Although it's been a challenging three years, we made the right decisions to narrow and deepen our focus on the business objectives critical to long-term growth and sustained profitability. We emerge from the downturn with an improved manufacturing infrastructure, expanded and innovated product portfolio, and a more flexible operating model.

As we approach Q2, we saw a leveling of order patterns. We are currently anticipating potentially flat to modestly up second quarter revenues as the industry absorbs the spike in equipment purchases that began in late 2003. As I mentioned earlier, given the significant enhancements we have made to the organization on many levels, we continue to improve our ability to perform through the next industry cycle, whatever shape or pattern it may take.

I'd like to turn the call over now to Mike so he can go ahead with further details about our financial performance and expectations.

Thanks, Doug, and good afternoon, everyone. I will review the results of the first quarter and then provide guidance to the second quarter of 2004. Revenue for the first quarter of 2004 of $104.5m was ahead of expectations and 39.8% higher than the fourth quarter 2003 revenue of $75.7m. Year-over-year revenue increased 85.9% compared to the first quarter 2003 revenue of $56.2m. Gross margin was 36.8% for the first quarter compared to 35.6% of the sales for the fourth quarter of 2003. Results compares to a 32% gross margin for the first quarter 2003.

While we are striving for increasing efficiency, customer commitment takes priority in meeting a 40% sequential sales growth result in higher-than-normal cost including logistics costs that we incurred to meet our customers' significant demands. This impacted our sequential margin leverage. Also the sequential sales growth was driven by the semiconductor industry to a much greater extent than we anticipated. The customer and product mix in this industry segment delivers gross margins that are a bit below our other smaller industry segments.

Net income for the first quarter of 2004 was $6.9m, or 21 cents per diluted share compared to the fourth quarter 2003 net loss of $2.4m, or 8 cents per share and the first quarter 2003 net loss of $8.6m, or 27 cents per share.

The first quarter 2004 net income includes a $700,000 pretax gain related to the sale of certain marketable securities and a $400,000 pretax gain related to the sale of the company's thermal control business. The first quarter 2004 also included $220,000 of pretax restructuring charges.

The fourth quarter 2003 net loss included $1m in pretax restructuring charges and the first quarter 2003 net loss included $1.5m of pretax restructuring charges.

Looking at market sales, semiconductor capital equipment represented 66% of total sales, or $69m, up 49% compared to $46.3m in the fourth quarter of 2003. As we mentioned, our strong sales growth was larger driven by demand from our semiconductor equipment customers across our product line. In the first quarter of 2003, sales of semiconductor capital equipment customers represented 59% of total sales, or $33.1m.

Applied Materials, our largest semiconductor capital equipment customer, represented 28% of total first quarter 2004 sales, or $29.4m, up from fourth quarter 2003 sales of $16.2m. In the first quarter of 2003, Applied was 23% of total sales, or $13.1m. Flat-panel display sales represented 10% of total first quarter revenue, or $10.6m. This represents a sequential increase of 7.4% in dollar terms compared to $9.9m of total sales in the fourth quarter of 2003. Flat-panel display represented 12% of total sales in the first quarter of 2003, a year-over-year increase of 58.6% in dollar terms.

We are well positioned for the Gen-7 panel production, although customers are indicating a Q2 pause as they transition to the new panel size in the second half of the year.

The data storage industry, which is comprised of optical data storage markets including digital video disk and compact disk and magnetic data storage market was 8% of total first quarter sales, or $8.6m, which represents an increase in dollar terms of 69.3% when compared to fourth quarter 2003 sales of $5.1m. The growth is attributable to strong sequential growth in the CD/DVD side. This market represented 7% of total sales, or $3.9m in the first quarter of 2003.

Advanced product applications represented 16% of first quarter 2004 revenue, or $16.3m, a 20.6% sequential increase in dollar terms compared to the fourth quarter of 2003 of $13.5m. Advanced product applications represented 22% of total sales, or $12.5m in the first quarter of 2003. In addition to architectural glass, this division includes a variety of applications such as our IKOR power supply for the high-end computing market, industrial coating, and laser and medical applications. We continue to see strength in sales to the industrial coating market.

Looking at sales by geographic region, United States sales represented 56% of total first quarter sales, an increase of 59% in dollar terms compared to 50% of total fourth quarter 2003 sales and 52% of total sales in the first quarter of 2003. Sales in Europe represented 15% of total first quarter sales, an increase of 60.2% in dollar terms compared to 13% of total sales in the fourth quarter, and 17% of total sales in the year-ago period. Asia Pacific represented 28% of sales, up 8.6% in dollar terms compared to 36% of total sales in the prior quarter and 31% of total sales in the year-ago period.

We ended the first quarter of 2004 with a backlog of $59.9m compared to the fourth quarter backlog of $53.7m. R&D spending was $13.4m, or 12.8% of sales during the quarter. This compares to $12.8m, or 17.1% of sales in the fourth quarter of 2003 and $13.4m, or 23.8% of sales in the first quarter of 2003.

SG&A was $13.8m in first quarter of 2003, or 13.2% compared to $11.3m in the fourth quarter of 2003, or 15.2% of sales. This compares to $12.9m, or 22.9% of sales in the first quarter of 2003. Amortization of intangible assets was $1.2m in the first quarter of 2004, $1.2m in the fourth quarter 2003, and $1.1m in the first quarter of 2003.

Headcount at the end of the first quarter was 1,547 people of whom there were 1,266 full time and 281 temporary employees. That compares with a headcount of 1,442 people at the end of the fourth quarter of 2003.

Our balance sheet continues to be strong with cash, cash equivalents, and marketable securities of $120m. Our accounts receivable were $79m for the first quarter of 2004 compared to $61.9m at the end of Q4. DSOs remained constant at 60 days compared to the fourth quarter of 2003 and decreased compared to 62 days in the first quarter of 2003.

First quarter inventory was $72.1m compared to $65.7m in the fourth quarter of 2003. Inventory turns were 3.8 turns in the first quarter, 3.0 turns in the fourth quarter 2003, and 2.7 turns in the first quarter of 2003. Total base inventory was 95 days down from 123 days in the fourth quarter of 2003 and 137 days in the first quarter of 2003.

Our capital expenditures in the first quarter were $3.8m compared to $4.9m in the fourth quarter of 2003 and $3.4m in the first quarter of last year. We expect capex in the range of $3.5m to $4.5m in the second quarter of 2004 as we invest in our manufacturing operations and IT infrastructure and approximately $12m to $14m for the entire year.

Depreciation was $3.2m in the first quarter, which is equivalent to the fourth quarter of 2003 and the year-ago period.

Our second quarter expectations are based on an environment of flattening order patterns. We believe second quarter sales could range from $107m to $115m with earnings per share of 20 to 25 cents.

We will continue to make improvements to gross margin, although we expect some of the same customer mix and product factors that I discussed earlier. Second quarter gross margin should range between 37.5% and 38.5%. Our ongoing investment R&D will be approximately $13m to $13.5m in the second quarter. SG&A will be approximately $15.5m to $16m including amortization of intangible assets. We also anticipate further restructuring charges of approximately $300,000.

Similar to other companies in the industry, we provided a valuation allowance for our deferred tax assets in the third quarter 2003 resulting in the first quarter and expected full year 2004 effective tax rate of 20%, substantially below our historical normalized rate of approximately 35%.

Last quarter we mentioned that we are targeting sequential quarterly incremental operating margin of 30 to 40 cents early in the cycle with the expectations that we will gradually increase that contribution, over time, to approximately 50 cents. In the first quarter our incremental operating margin was 32 cents, and we have plans in place to increase that within our target range.

We expect to generate cash in the second quarter and should end the quarter with cash and marketable securities of approximately $130m to $135m. Doug and I will now be happy to answer questions. Operator, please open the lines. Thank you.

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

Your first question is from Jim Covello with Goldman Sachs. Please go ahead, sir.

Good afternoon, guys, thanks so much. A quick question on the gross margins -- if I'm not mistaken, the guidance had been for 37.5 to 40% for the March quarter. It came a little low. Mike, you had talked about higher logistics costs driving that. Can you talk about the drivers behind the slower gross margin guidance in the second quarter? Thanks.

Jim, logistics costs accounted for most of it. We're taking shipment from our suppliers and from to two different manufacturing locations. Our customers had significant demands, and we wanted to meet those demands. We want to try to keep our lead times in place. Our customers are the most important thing to us, long-term, for us. If you strip out the significant logistics costs, you're getting much closer to 40%. We also talked about the mix of product -- in the last few years we have talked about the pricing pressure that capital equipment companies are experiencing in the semiconductor area. When asked the question is margin significantly different among product lines, we've always said no. But then you have to define "significant." They are a couple to 3 percentage points on average, and so if you look at the higher weight that we had in the first quarter, that accounts for the approximate -- I'll say -- 2% to 2.5% shortfall.

And then, so the idea is that some of those logistics costs carry over into the second quarter, is that it?

They should carry over somewhat, Jim, but, quite frankly, we're not looking at a significant increase quarter-over-quarter as we forecasted. So hopefully we'll be able to, I'll say, train our suppliers and also get used to the higher demand. But, by the same token, we aren't expecting a significant reduction, and that's why we did the moderate gross margin projections.

That's helpful, thank you. One quick follow-up on the comment about the orders leveling off at the end of the quarter. How long would you expect before we could see a re-acceleration of orders after the digestion phase would be over? Thanks.

This is Doug, Jim. Of course, we're waiting for that, too. I think the most positive thing we've seen is that the following quarters in the forecast are filling up. We heard from one customer yesterday that they were pretty excited about things that are happening out on their horizon. So I think the good news is we're not seeing the -- in the business scenario that you usually see at about this point in time where people know that there's business out there, but there's no forecast to support it. We're seeing pretty solid forecast to support the current operating level, current revenue levels, and we're still hearing some good news.

Thanks so much.

You're welcome.

Your next question is from Mark FitzGerald with Banc of America Securities. Please go ahead, sir.

-- Thanks. Just a follow-on here in terms of that sort of flattening out. If you look at two of your customers who have reported already, we really haven't seen any sort of de-acceleration of the bookings here, so are you talking about forecast shipments? What are you talking about in terms of this flattening out?

Well, when we get, I guess, insight into bill plans, and so when we're looking at bill plans and we may continue with adjustments for our manufacturing forecast, that's what we're basing this on. And the typical amount of response time that we have for any kind of an inflection, up or down, is in the 60-day area.

Does what Novellus and Lamb have said on guidance orders into the next quarter -- does that at all change, quarter out, your view of what's going to go on for your own shipment?

I don't think we can comment on what they say.

Well, I mean, they said -- I can tell you, they -- or -- Novellus said 8% to 12% growth in orders in the June quarter and Lamb said 10% to 15%. I'd assume that translates into business for you, you know, three to six months down the road after those orders are booked.

Mark, this is Mike. Obviously, their lead times are much longer than ours, so this is one thing. And you've got to look at the upper range of our guidance -- we are guiding to, on the upper side, 10%, which kind of ties into what the other companies are saying. We tend to be level loaded [sp] with our orders. We are a good supplier. Our customers aren't worried about us, and so our order [inaudible] have leveled, which is very unusual in this industry. You don't typically see it. There seems to be a pause, and I think another indication of how we feel about the near term is we are not talking about taking costs out near term. We have added capacity, and we are expecting, over the next six to 12 months that there will be some positive news. We're not disagreeing with our customers. We're in position.

Yeah, there's another thing that's going on, too, we think, and that's that some suppliers and, of course, I include us in that list -- have been amazingly responsive in their ability to support the ramps, so far, and that's how you can see this -- like this huge 40% increase in the quarter, and so their confidence level is a lot greater if they don't have to place orders until a little bit later when they need them. Our products get integrated with theirs near the end of their formal integration. So if they're looking at lead times that are out in the timeframe that you're looking at, we could easily get orders and deliver them within a four-week to six-week timeframe, which is down around where our -- I think our average lead time for all products now is well under six weeks.

Okay, and then just one other question here -- the thermal business or the chiller business, if you spin it off, is that a low-margin business? Will that help the profitability story in terms of gross margins and operating margins?

It has, over the last couple of years, it has been a bit lower but, by the same token, the volume is not substantial. So it will help a bit, but it is not a high-volume, top-line business.

Okay, thank you.

You're welcome.

Your next question is from Stuart Muter with RBC Capital Markets. Please go ahead, sir.

Thank you and good afternoon. Just following up on the previous line of questioning -- do you think your customers, in terms of semi equipment guys, have built up some inventory, and they're a little bit happier with that and perhaps before they start to ramp the inventories of your products were very lean?

We don't see any inventory build anywhere, and in some cases we are actually counting all the machines on the floor and our forecast is the projection to fill those specific machines. And that's pretty much the way the semiconductor industry has been working lately. So we don't see much risk at all that there has been a lot of inventory builds and then, all of a sudden, there's going to be expansion based on that inventory.

Okay, that's good to know. And in terms of end markets, what are you guys seeing in terms of demand from the magnetic data storage market?

Well, it's been up continuously. I don't know specifically right now. I think it's -- you know, we know they were under capacity, we know they've been investing in the future or for future capacity for the first time in a long time, and I believe that's continuing.

Excellent, thank you.

Your next question is from Jay Deahna with J.P. Morgan. Please go ahead, sir.

I have two questions -- the first one is what are your plans for the Colorado plant as we get towards the end of the year? You indicated that the majority of your manufacturing output should be China by year-end, and then I have a follow-up.

Okay, the -- hi, Jay -- the products that we're transferring to China are those that benefit most from high volume and, let's say, lower mix. So that's where we can train people faster, the products tend to be more mature, or they're running higher volumes so we're up the learning curve. We're looking at Fort Collins having three primary keys to the future. One of them, of course, is, by far, the largest product development launch center that we have, which, the first part of launch is product stabilization lining up with the supply chains, et cetera, so there's a lot of logistics efforts.

The second is we've got a lot of legacy products that are all potentially high-margin products but the way that you manage the logistics, the response times, the support levels, are completely different than a higher volume flow, and so that's another role for Fort Collins. And then the other one is the North America service capability, the specialized product capability. So Fort Collins has a rich future.

Okay. Do you see any reduction in your footprint of PP&E in Fort Collins once we get past the end of the year?

We've already reduced quite a bit. I think the Fort Collins campus is pretty much intact. We don't have any plans for it in the long term. Basically we've been able to -- as we've moved product lines out and shipped them to China, then we've been either able to expand manufacturing here where we need it. And, by the way, we're almost at our peak manufacturing in Fort Collins that we've ever had and, at the same time, we've been able to put in more of the development programs and to give them a little bit more space with some of the products that we've been developing, particularly the higher power products. They take a lot more room -- for safety perspective, we want to make sure that room is there. Some of our reactive gas product development and early manufacturing takes up more room. So there -- I think we've got a pretty reasonable footprint for the future.

Okay, and then the last question is if you look at the mix -- 200 mm to 300 mm, it's pretty clear that orders for 200 mm equipment coming off the bottom of the cycle have been a lot bigger than a lot of people have expected. So do you think that this whole situation, where you've got the surge and then the pause and then maybe another go again is a situation where the 200 mm bulge works its way through the pipeline, and then we focus on incremental strategic expansion -- 300 mm as the next year or so progresses?

That's exactly how we're looking at it. We've launched quarter-over-quarter that we didn't see the big transition. It hasn't gone above 50 percent yet, but, of course, the absolute volumes are going up tremendously. But we're -- that's what we're anticipating -- is there is a shift to 300 mm, which we believe is great for us.

Okay, thank you.

Your next question is from Avinash Kant with Adams, Harkness and Hill. Please go ahead.

Good afternoon, Doug and Mike. My question was -- once you anticipate the manufacturing transition to the China facility by the end of the year, what kind of model or operating model should we expect? Like, what kind of gross margins or net margins could be achieved after that transition has happened? And I have a follow-up after that.

In this particular quote we focused on operating margin, but I'll bill it up to gross margin a little bit. We have incremental of operating margins of about 32 cents for every dollar. We are driving to 50 cents of every dollar on the operating margin line. You could model the gross margin line anywhere from, say, 5 to 10 cents, so 55 to 60 cents, and as we're driving towards that, the higher incremental operating margin, using a 5% to 10% higher improvement in gross margin should work into the model pretty well.

And in terms of the industrial forecast, what do you have where the industry goes in 2004 at this time?

Would you repeat that?

In terms of your expectation for the growth in the industry, what are you thinking about '04 at this point year-over-year?

Avinash, we won't go that long. We give guidance the current quarter or end. We will not go beyond that.

Okay, thanks.

You're welcome.

Your next question is from [Kevin Wenk] with [Polliness] Capital Management. Please go ahead, sir.

Mike, concerning the 50% incremental operating margin, at what revenue level do you think that you'll get there?

Well, Kevin, this is not so much the revenue level, per se, it's our ability to become much more efficient in our organization. We continue to qualify new suppliers, new TO1 [sp] suppliers. We made great progress in 2003 but obviously the higher demand has slowed that down because you've got to requalify the product -- that's number one. Number two, the ability to take out the higher logistics costs -- that's volume-related, and then as Doug just said, continued focus on operating expenses, especially R&D. So we'd expect a gradual improvement. You look at the numbers we're forecasting for the second quarter, we're obviously talking about -- we're forecasting in the 35% to 40% range. Could it be accelerated potentially? But it all depends upon demand from the industry, but certainly by the end of the year we'd be very disappointed if we didn't have an operating model that wasn't delivering 50% incremental operating margin.

Okay. And then, Doug, a question for you -- with some of the stories about there possibly having been front-loading of orders, given that customers might have been concerned about how much the -- or how much capacity had been cut out during the downturn, and then some other potential rumors or stories about because of bottlenecks and people not being able to schedule equipment deliveries when they want, there could possibly be push-outs of other equipment. What are you doing to gather your own intelligence about how much of this is going on and what are your thoughts about the validity of some of these stories and rumors?

Well, actually, I think some people have tried to use their manufacturing supply chain competencies as a weapon at the first part of this ramp. We can't really see outside of the front end. If you're alluding to a whole process chain, then we don't have much knowledge. But if you look at the front end, we think that there's been some changes in market share because of ability to respond. Most of the dynamics we see might be a little bit of a bungie in the changes in the market share as it ships back a little bit, but we don't see anything where our customers that come to us specifically and try to turn the tap down because there's other holes in the supply chain. I think people have just been aggressive about going and working the bottlenecks, as you describe. We haven't seen -- or at least aren't aware of much else going on.

Okay, thanks.

Your next question is from Alexander Paris with Barrington Research Associates. Please go ahead, sir.

I'm sure we came around this question a number of times, but when we first started seeing the spurt, particularly from semiconductor equipment in December and booming at January, I kind of got the feeling that people were sitting around watching the semiconductor business go up and putting things off as far as they could and then suddenly realize they better start catching up, and then they did it, and I thought then they would may slow down a little bit when they got caught up and taking a breath. Is that what you see, just kind of generally, what's happened?

Well, we --

Without getting into all the bottlenecks and so forth?

Yeah, hi, Alex. The time that it takes to integrate these products is real, and there's been a lot of turnover with supplier engineers just the last surge. So the integration time in the fab is creating a bottleneck of its own. We're seeing the news like everyone else is that, particularly some of the Asian foundries are still running at over 100% capacity. Based on what we're hearing, we don't see any change in the potential demand. If you look at the whole supply chain, I think it's the ability to get the whole supply chain lined up and coordinated. But we're in a much higher demand level than, on average, and looking forward, of course, than we've for years.

Just looking at this transition, just to get a feel for it, your original goal was, by year-end, to have 70% of your manufacturing in China and 50% of your material purchasing from tier one Asian suppliers, and I think you gave a number of where you were at the end of 2003. Could you roughly say where you are in terms of that 50% and 70%?

Well, we've definitely made progress and, of course, there's two legs to that. One of it to pick up our tier one suppliers in Asia, and the other is the actual manufacturing. We're basically transferring another product line every month, and we're a little bit mix-dependent from a customer-demand point of view on what the 70% would be. But I think I might say this a different way -- if we decided to target 75%, I think we could probably hit it. We could decide to target 65% for efficiency reasons, for profitability reasons, and we could hit that, too. So what we're doing is making the best economic decisions we can right now.

And one additional point there, Alex, and we haven't really talked a whole lot about this -- we have stated the goal of 70% manufacturing from our China facility by the end of 2004, but a lot of that is from independent. Let's say this is a lull, and the second half of the year really takes off. Well, there will be a lot more probably staying in the United States. It really depends upon demand. But when we went down this road a year ago -- we didn't really talk about our forecast for 2004, but it envisioned some type of an up cycle. But if there isn't significant ramp for the second half of the year -- then -- we'll have the same volume that we expected in China, but it could possibly be a lower percentage of total revenue.

One other thing, again, we can't control, either, is that 70%, if it was to be an absolutely controlled plan, it's got to be based on some expectation of customer mix. And if we stay at 200 mm, having such a large proportion, then there would be a lot more 200 mm wouldn't be transitioned to China because there isn't much of a basis for it, going forward. So that's the kind of driver that would affect that percentage, but it's not us missing our plan at all.

So you, I think, at maybe at the last conference call, you were talking, what, five major product families were there, and now you mention seven are there, and then you just mentioned, like, maybe one product line per month? So it's a -- but unless there's a big jump one way or another, it's kind of a slow, gradual transition from where you started to get to the 70% and the 50%?

But it depends on the volume of the product lines.

Right, and then if that's slow and gradual, what about the closing of the duplicate facilities? Is that waiting to get really close to the end of the year or can some of that be slowly trimmed down so that your expenses would be gradually coming down throughout the year rather than back-ended?

When you look at facilities, I don't see us going after that real quickly. As Doug said, we're happy with the footprint. Attacking the other duplicate costs really depends upon demand at the time. If you notice, in this particular conference call, we didn't talk about duplicate process, because it's not that big an impact anymore, because the volume is up so much. If we didn't have the China facility we would have significantly increased our headcount in Fort Collins. So we got a much higher utilization. Where we do have duplicate cost still is that we have -- two logistics, two procurement areas. We have to keep looking at that, but we're not going to do that at a time where we really are planning to go after our supplier base for lower costs. So I don't see any near-term change in the cost of the people or bricks and mortar.

But it looks like your restructuring costs are down from what they were, but that's not the total measure of the duplicated costs. Is that just bunched into the cost of goods mostly?

Yes, primarily cost of goods sold, yes, Alex. The restructuring costs, quite frankly, some of those costs are to roll out the things we announced last year. It's just the economy rules how we kind of roll them out. Years ago, you could do the big bang theory. It doesn't quite work there anymore. The restructuring costs we currently have are -- most of it is due to older actions not newer actions.

Right, so your guidance of 5%, I think, increase in the gross margin -- that kind of reflects what we're talking about as you're making that progress?

Making the progress with TO1 suppliers, especially making not so much duplicate costs but making the progress with TO1 suppliers and getting our material costs down.

And just one other thing -- in your other income and operation, that's where you had the -- was it $700,000 securities sales and the $400,000 gain on the thermal unit and then the rest is mostly interest costs?

Yes, the components of that are interest expense and the debt; interest income on our cash; foreign exchange gain, a loss goes in that; and then the two gains that you're talking about. And so typically that is $2.5m a quarter if you take out the $1.1m, $1.2m gain on those two items. Now you gained out to about the $1.2m, and we had a bit of a foreign exchange gain in the quarter.

So the rest of that is $1.1m, and so it's interest cost?

Correct.

Okay, I think I just wanted to question -- you've been talking about your long-term gain of a breakeven level per quarter in sales, and you didn't talk about -- you didn't mention it today -- where are you at the end of this quarter in terms of your breakeven level of quarterly sales?

Breakeven is still around $72m to $74m.

And when all this gets together -- comes together at the end of 2004, it will be -- what are you hoping for?

That we have an operating model that will get us down to the low $60m, as we've been talking about the last year and a half, and that's going to be a combination of getting rid of the duplicate costs, lower supplier costs, and more focus investment in R&D, and also the use of outsourcing where it makes sense.

Okay, thank you very much.

You're welcome.

Your next question is from [Omar Hassan] with Jefferies and Company. Please go ahead, sir.

Thank you. Good afternoon, Doug and Mike. Mike, you had given us a depreciation figure earlier. I just wanted to confirm if that was solely depreciation or depreciation and amortization?

It is solely depreciation.

All right. Would you happen to have a D&A figure?

The amortization would be another $1.2m or so.

One-point-two -- all right. And also, gross interest expense?

Gross interest expense? We typically don't break it out, but it's approximately $2.8m.

Two-point-eight million -- all right, great, thank you very much.

You're welcome.

Your next question is from Brett Hodess with Merrill Lynch. Please go ahead, sir.

Good afternoon. You know, earlier -- everybody's been harping on the gross margin issue -- earlier you mentioned that some of it was mix dependent, and I was just hoping for a clarification, Mike. Is it mix-dependent between, say, mass flow control and power supplies? Or is it within power supplies? Could you give us a little more color on that?

Generally dependent upon industry, Brett. So it's product and customer mix focused in the semi industry -- both power and mass flow, although mass flow is typically the semi industry. It's within the power supply business that we have some other very important industries. So it's semiconductor industry, customer and product mix within there.

Okay, and then, secondly, on the sequential growth rate issue, again, since the revenues are going to be, you know, as you said, somewhere flat to up 10% kind of thing -- the logistics issues of the first quarter where you had the very rapid ramp -- don't those start to subside more rapidly running at the same run rate you've been at? Or are you still being impacted by those? It seems like you're still being impacted by those that are fairly high level. It would seem that you'd start to move out of that range.

They come down a bit, Brett, but there's a couple of other things going on. One, even though our lead times have really come down, there's still a tremendous amount of expediting going on. It's a little bit like we saw in 2000, where, worldwide, some of the -- I heard today -- flexible circuits are on allocation globally because of the expansion of the cell phone market. And so we're running in the points of supply where we'll have to go through brokers or do something to accelerate deliveries. And so that kind of support, even though the ramp acceleration is over with, there's still the alignment of trying to get certain suppliers, getting them to bring in materials fast enough to meet our customers' needs. And shortages off the supply chain are just, you know, they're just continuous. So there is a large overall demand for a lot of common material, and I know everybody in multiple supply chains are having to deal with that.

We did invest in inventory. Inventory was higher, and we've talked about it in our previous calls, that we plan to invest in longer lead time as a more critical item, but the fact it's our customers are also, you know, facing changes in their customers. And so when that comes down to us, our ability to forecast is only as good as what our customers give us, and if they're facing that pressure every day. And so at the last minute, we think we have to produce Product A and Product B, and we're going out and buying the products to get there.

I think that's another issue on this mix. Our average lead time, if you look at it, is, like I said earlier, it's down below six weeks. If the customer wants it in four weeks, and you've got long lead-time materials that maybe you looked ahead, and you took the 20-week lead-time materials, and you've got enough stock for eight weeks out, then you've got to start pulling them in because -- for a specific product, because it mismatches what your ability to forecast was. And I know everybody is suffering that deal.

The last question I had was, you know, again regarding the sequential change in revenues -- if I look historically, it seems to me that your revenues match more closely with the shipments rather than the order rates of your customers, and that was the case, actually, in the quarter just ended, if we look at what Lamb and Novellus have reported. In the coming quarter, those guys, if you aggregate up their shipment growth rate, it's got to be closer to probably about 20% sequentially. So, Mike, I know you said you don't have much inventory out there, but might part of it be that some of that shipment is already in WIP at those customers?

Let's clarify this, and I agree with the numbers you're coming up with, but are those shipments a revenue for them?

Those would be shipments rather than revenue.

Then we have to go correlating, because the one thing we have faced the last few years is the SAB 101 [sp] deferral. So, all of a sudden, they shipped us machines six months ago, and then they have acceptance issues in a flow through. But, you're right, it should track. We don't expect that there's a lot of inventory, because I've said we track machines and I talked to our head of planning and forecasting every week. I just talked to him today, and we track, and so we don't see it out there. There may be some parkers [sp] but not significant.

I'd guess that, on average, we're probably no more than 45 days in their WIP. And to Mike's point, that's then the shipment, and it could be to integration, and integration, you know, can add an additional delay onto that, and so we know when they're manufacturing they're not holding much inventory.

Right. Okay, very good, thank you.

You're welcome, thank you.

Your next question is from John Pitzer with Credit Suisse First Boston. Please go ahead, sir.

Yes, good afternoon, guys. A couple of follow-ups, first, on Brett's question about mix. Can you help me understand, going into the June quarter, if there are any major changes in the mix of business? I guess, specifically, I'm kind of interested in how the flat panel business is going to trend in the June quarter -- flat, down, or up? And then I have a follow-on.

We believe, as we said in the speech, we believe the flat panel business will be a little bit of a pause. Of course, you never know, but it would seem that way. We've been talking about a pause in the flat panel business now for about a year and a half. It hasn't seemed to happen. So the rest of the strength seems to be coming out of semiconductor.

And so by pause do you mean sequentially down revenues in the June quarter?

For flat panel?

Yes.

No.

So it should be flat still in June?

Essentially.

Okay, and then, secondly, going back to sort of the flattening order book at the end of the March quarter -- you know, one thing you said is you're optimistic as you talk to your customers that things are filling in in the out quarters. I'm just kind of curious -- is the expectation here that this flattening out will lead to re-acceleration to a higher level? Or do you think we're kind of seeing a sustainable business as you look at your long-term forecast from your customers?

Well, the hope that this became a non-sustainable, we talk about every up cycle, and it never seems to happen. I mean, one of the things we haven't talked about is -- I'll just talk on a personal level -- I believe the uncertainty in the economy around the world is causing a bit of a pause. There's been a lot of equipment that's been bought, and a lot of it is 200 mm. We get any capacity up there. The end users have got to decide -- are they going to decide for putting in the dollars between the millimeter machine? I mean, every day we get some good news in the U.S. economy, some bad news in the U.S. economy. We typically see this before a presidential election. And so we've got to get beyond this, and then I believe it could start accelerating again. But it's all economically related.

And then lastly, guys, last night one of your customers basically said that their lead times have come in from five months down to four months. Is that another reason why it help explains some of the flattening out here in your business? You know, if Lamb's lead times did come down from five months to four months, I would assume that their business with you would probably be negatively impacted, at least in the near term.

You know, that all depends upon their production for a week. Their lead time to go down, but their production efficiency could go up. I'm not sure there's a direct correlation, but it could be solved.

Yeah, it depends on, like, if we were a supplier of Chambers, then it's a completely different issue, because then it goes into what their cycle time is in manufacturing. But we get integrated pretty near the last steps, and so we're -- you're not going to see that much of an accumulation there. If their lead time comes down, if their response lead time comes down, it just means that they've worked off their inventory, to some degree. But if they're still running at the same rate, it doesn't change things for us.

Great, thanks, guys.

You're welcome, John.

Your next question is from Ted Berg with Lehman Brothers. Please go ahead, sir.

Yeah, hi, thanks. Regarding the same topic but the sequential growth rate and revenue versus the OEM shipment trends, you said it's not really anything inventory-related. Can you comment on pricing and market shares the best that you can in terms of where that is today?

We continue to increase market share as best we can tell, and, as Doug said, we feel even more strongly with the move to 300 mm. The pricing issue, it's had an impact on us. Not a lot over the last few years, but I think we are one of the few companies that has talked about that. You know, our customers are facing significant pricing pressure. It doesn't help today with the Intel announcement. It's going to go down, I think, in the food chain. And so that's why we continue to invest in R&D. You want to sell value, and technology is important, we believe we have the highest technology value stream in the industry, and we'll continue to invest in R&D.

Everything that we've seen lately, like if we start working in the supply chain, and we watch where it breaks down because a much broader demand into it, particularly from large distributors and large component manufacturers. We're seeing a lot of push-back at that level to start increasing prices. But we think, barring anything else, there might be some inflation coming.

Okay, thank you.

Thanks, Ted.

Your next question is from Kevin Vassily with Susquehanna Financial Group. Please go ahead, sir.

Yeah, hi, good afternoon. A question on just a general kind of economy. There's been some focus recently on rising prices over there, particularly for commodity materials. Do you guys have any concerns yet about what rising prices for materials in that country might be doing to the cost benefits that you're going to see out of that facility?

A lot of our sourcing for tier one is not even in China, Kevin. So we're not feeling direct impact there. I will tell you, one of the reasons we went to Shenzhen is, as opposed to Shanghai, is that Shanghai is a little bit further advanced economically, and so there's more cost pressure in that part of the country. But we are seeing some cost pressure, if you will, in Shenzhen but nothing significant. It's on a much lower base.

The bigger issue that we face, as Doug alluded to it earlier is that maybe all the suppliers -- the supply chain is being back up. And so companies that supply this industry but don't have much of their business based in this industry, I mean, they can demand price increases. And we talk about the move to tier one suppliers and the benefits that we got. One of the things that's hidden is that in a year where we have opened up a new manufacturing facility around the world and have changed our entire supply base, maybe we haven't delivered the gross margin as people would have hoped or expected including ourselves. We've had a pretty good year. We tend to forget that China was strategic for us, and we were willing to make that investment and nevertheless still try to see some growth. But also what's hidden in there is that the move to tier one suppliers, while we may not have seen the savings that we've talked about, I truly believe that we have avoided a lot of significant comparable increases by the time they quantify that. There's a lot of pressure in the supply chain right now. We're facing it like everybody else. But the move to tier one suppliers, early on, when the company decided a year and a half ago, it was the right move. We made our friends before we needed them. And now we're in place to build suppliers and they understand what our needs are, and that we will be a customer of theirs, going forward, and they've seen a significant increase in our own demand. So it's worked out very favorably strategically. On a tactical level, it might have been delayed a little more than we would have hoped.

Okay. If you could venture a guess as to how many of your -- do you want to call them tier one suppliers -- are landed in China versus in Asia but outside of China? Could you split that?

We could, but we haven't gone to that level of granularity. We prefer not to do it.

Yeah, I don't think there's any that have -- are exclusively limited to China. They have a site in China, but part of our relationship with them was to make sure that we had sources of supply that were outside of China, although most of them are located in Asia.

Okay. All right, thanks.

Thanks, Kevin.

Your next question is from Ali Irani with CIBC World Markets. Please go ahead, sir.

Yes, good afternoon, gentlemen. I'm hoping that you could talk a little bit more about the Japanese OEM opportunities. Clearly, that market is on a multi-year tooling track with 300 mm fab announcements, and the local vendors are benefiting. You have a great platform with their acquisition. How are you leveraging that for market share wins with your other problems? Thank you.

I'm trying to just think through Japan. We have picked up considerable market share, we believe, in Japan for 300 mm. Of course, we've always talked -- for the past five years we've talked about the opportunities with TEL [sp]. Those -- we've been able to realize part of those. We're looking for more, going forward. The relationships that we have with other companies there, the OEM companies on flat panel is superb. On hard disk and entertainment is superb. We have a pretty commanding market share there.

The participation of Japanese OEMs in the front end isn't anywhere near what it used to be inside of the semiconductor business. But we think we've really got a pretty good position there, and, you know, in general, we just look at the momentum that we have. We're picking up market share at a fairly high percentage rate every time we've got a design opportunity. But there's not a lot of OEMs that are participating in the front end.

Doug, a follow-up question related to Japan. Looking at your Aera business, there are two directions of thought right now -- one that stand-alone mass flow controllers, if they are the right product at the right price, right technical, are going dominate and gain share, and then there's another thought that believes that it's going to be the integration of mass flow controllers and gas sticks that are going to drive market share. How do you see it and how are you positioning your business for these two themes?

There is one other level, too, Ali, and that's the full gas panel integration, which isn't just the gas sticks. So if you go from the component supplier, the fabs want a component supplier that they can believe in that delivers high performance, low cost of ownership, high reliability. And Aera has this tremendous reputation, and that's one of the reasons why we've been able to build market share. At the same time, we have really injected, I think, more of a spirit of innovation there. So we've developed some of these new products to respond to some technical changes that have come up in the past few years, and so Aera has done extremely well responding to that. And although the AFPs have come down, our cost per unit is coming down pretty dramatically, too. So it's remaining a very good business.

There are people that are trying to integrate both the gas panel and the flow controller and offer a single solution, and what you're doing is merging a very low technology, basically a machining and welding business -- and pass through business -- with a very competitive, fairly high technology business. You wind up with gross margins when you do that, in the low 20s in pretty good times. So like our strategy is a lot more centered around, "Let's come up with good partners that are in the integration business," and we not only become the preferred supplier with them so that we can provide new kinds of leverage, but we also are a preferred supplier with the OEM and a preferred supplier with the particular fabs that you get a mandate from.

So I think -- I mean -- there's a lot of logic behind integrating on a gas stick, and we're doing that as well. But the real dollars are in the -- that the customer has to pay are in the whole panel, and so we think we leverage technology and higher performance at a lower cost or better value -- so the guys that are doing the integration and the cost of ownership in the fabs and the ability to provide rapid response and easier stocking with the OEMs -- I mean -- we're not going toward that fully integrated business model, but we're coming up with a lot more core ideas for the MFC and so on.

Doug, if I could squeeze one last one -- a couple of years ago there was some excitement at AE about the digital mass flow controllers towards the ALD application, and that's seen a slow start and now seems to be accelerating into production in late 90 nanometer [sp], early 65. Could you give us an update as to where you stand with design wins and what you're achieving in that specific application?

They haven't done really well, but I don't think -- one, we've got all the positions, or we've got a reasonable number of positions, where conventional speed, which is 90% of the volume of mass flow controllers are a -- there's different techniques that people are using to get extremely high-speed response, and there's opportunities there, but there's not very much volume there at all. So it's not a missed opportunity, it's just not much of one at the moment.

Great, thank you.

Thanks, Ali.

Your next question is from Jon Evans with Coker and Palmer. Please go ahead, sir.

Can you talk a little bit about your guys' strategy for repaying the converts, especially, I guess, if a lot of the sell side believe the cycle has peaked. I doubt you're going to be able to sell equity a lot higher. So can you talk a little bit about your strategy for that?

Other than we have a self-registration that's out there. At the last call we talked about looking at the opportune time based upon the equity market, the debt market, and also visibility. But short of that, we really don't want to add anymore color to it. We look at it day in and day out, and we'll hit the mark when we think it's appropriate.

Okay, I guess, is it fair to say, though, that -- I mean -- can you just give us a sense of the type of financing? I mean -- is there a preference that you have, one to the other?

Not particularly. We just do what we think is the best economic interest of our shareholders.

Okay, thank you so much.

You're welcome.

Your next question is a follow-up from Mark FitzGerald with Banc of America Securities. Please go ahead, sir.

These logistic costs -- do you suspect that we're going to lift this whole cycle just because everybody is trying to keep their lead times as short as possible?

No.

Or do you see lead times for capital equipment going out and giving a you a breather on that?

No, I just think we'll have different things in place, Mark.

I thought --

Something has to change. I mean, we'll absorb them for one quarter, you know, maybe one quarter, but if it continues down that road, and we can't just get better forecasting, et cetera, then something has to happen, and we will not continue to draw these cost levels if they're there. I'm not saying they're going to go away dramatically -- to an earlier question, we've got to see some progress.

Okay, but we don't hear any of the OEMs backing away from this sort of competitive advantage they're trying to gain by the short lead time. So basically what you're saying is pricing has got to go up.

Well, but, understand -- some of the logistics problems are caused by the fact that we are in the process of changing our suppliers, and so now since our suppliers are getting better towards us, we should be able to moderate it. That's why the Noah's in place. We could slow this down a little bit by slowing down new qualifications. We've learned a lot in the quarter. We will apply what we've learned, so we should see some improvement, but we just haven't -- we're just not banking on it. We're driving towards it, but anything that should be different, hopefully, will be a positive -- in a positive direction.

Okay, thanks.

Thanks, Mark.

Your next question is a follow-up from Alexander Paris with Barrington Research Associates. Please go ahead, sir.

Yes, a couple of years ago your strategy was particularly through acquisitions to invest in other products that are somewhere close to where you are in the production line in order to increase the size of your addressable market. Now, this chiller -- getting rid of the chiller operations -- does that at all negate that strategy or is that just that particular operation because of the investment costs involved?

No, we just refined it, Alex. What we're all about is making the -- creating greater value and the impact of the plasma on whatever the substrate or waver is. And the technology and the time content of it, it was just a little bit too far away from the plasma. So we decided that there were other areas that we could put the same R&D investment into and enhance even further the position that we had.

So how would you roughly estimate the size of the market you're addressing with the products that you now have?

I think we reviewed that a while ago. Of course, it depends on when -- when in the cycle. It's certainly north of $500m, for sure, from now. I mean, I think right now with the products we have, if I remember right, and don't hold me to this, Alex, that we were at about $600m in power supplies, about $500m in flow, and about $150m in the source and some of the other affiliated businesses that are a core part of our business. So I think we're looking at something in the billion-and-a-half range.

At peak -- and the mass flow market -- well, they've come down a little bit, because, to an earlier point, there has been pricing pressure in mass flow. By the same token, the power is probably getting a little bit bigger.

Could you say where, roughly, you are in terms of market share? You've talked a lot about it today, at least in the semiconductor space?

Sure. Just a second here, and I'll dig up that information. The power business, we've always been -- over the last Qs [sp] we've been between, I mean, 40% and 50%. Mass flow business typically 20% to 30% trending towards the high, if you will, 20s -- the source business, in the mid 30s. That's been two-and-a-half years ago, and the thermal business, the optical fiber thermometer business in the mid to low 20s.

The market share of OFT?

In the total -- in the addressable market, much bigger, though.

You've said your DVD market share was, like, 100% right?

Yeah, but now you're looking at applications.

You're looking at applications --

Okay.

In data storage it's north of 75%.

Okay, thank you very much.

And we should clarify the optical fiber thermometer market, because we look at a much -- when we get some of our data, we look at a much broader market, but in the market niche, they are well in excess of 50%.

Yeah, I think it's closer to [audio fade].

So I can see with some of these good-sized market shares, you do want to continue increasing the size of the market that you're addressing through acquisitions or something.

Well, we want to take a larger position in the markets we're already in.

Well, just one more real quick thing -- everybody's talking about the saving costs in China, but isn't there a substantial potential for synergistic business -- getting more business just because of your presence there?

Yes. I mean, that's one of the real underlying, long-range, strategic reasons that Mike referred to, is there's a tremendous growth in infrastructure in China. We want to make sure that we're the ones that when they think of everything associated with plasma, they go -- they've got to have AE. We've got a presence there, we've got the relationships, we've got the port systems, and those things all cost money, and so you could almost look at part of this China venture as being part of the sales and marketing infrastructure.

Great, thanks a lot, and you're doing a great job. Thanks.

Thank you.

Your next question is from [Andy Wagstaff] with Touchstone Investments. Please go ahead, sir.

Yeah, hi, guys. I jumped on the call late. I was wondering, could you just recap for me the gross margin guidance and then R&D sales and marketing and G&A in terms of what you guys gave for guidance for the quarter?

Sure. Our gross margin was $37.5m to $38.5m; R&D $13m to $13.5m; SG&A, $15.5m to $16m.

Okay, 15.5 to 16m.

Yeah.

Okay, all right, thanks a lot.

You're welcome.

Your next question is from Whitney Leibel with Merrill Lynch. Please go ahead.

Good afternoon. I'm curious to learn how large a capitalization gap you're trying to fill with your shelf registration?

Well, what we look at is this -- you talk about capitalization gap -- if we decided to go out for debt, we really haven't closed any of the capitalization gap. We'd still have the same debt-to-equity ratio. In an industry like ours, you know, you want to have a pretty healthy equity base. Now, we believe that over the next several years, with a stronger industry and also with a drive to breakeven [sp], we're going to be able to generate cash and equity and, by the same token, we can't be foolhardy and rely on burgeoning economies over the next two or three years. So if we do a convertible offering, then it doesn't -- the capital stays the way it is. If we decide to do an equity offering, more than likely, we would be in a position to get rid of a substantial amount of the debt -- maybe not all of it. So it's facts and circumstances -- it gets back to the earlier question as to what our plans are. It all depends upon the timing and what the market bears. But long term, long term as whether we generate it internally or we raise -- the intent is to have a much more robust equity base.

Thank you.

You're welcome.

There are no further questions at this time. Are there any closing remarks?

Thank you for joining us on the conference call. Everybody is pretty puffed here about the opportunities and, of course, the return to profitability.

This concludes today's Advanced Energy Conference Call. You may now disconnect.