Azenta Inc (AZTA) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Helix Technology fourth quarter and full year 2004 results conference call. At this time, all participants are in a listen-only mode. Later we will conduct an question-and-answer session, instructions will be given at that time If you should require assistance during the call please press star, then 0. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. James Gentilcore. Please go ahead.

Thank you, Operator. Welcome, ladies and gentlemen, and thank you for joining our fourth quarter and year-end conference call. We will share some brief introductory remarks about our fourth quarter and 2004 performance before we take your questions. And in light of the many and sometimes conflicting views about the near-term industry outlook, we will share the Helix views, and they are our views only about the near-term outlook. Joining me on the call this morning are Jay Zager, our Chief Financial Officer; and Bev Couturier, our Director of Investor Relations. I will ask Bev to advise you of our Safe Harbor disclosure, and then we can begin. Bev?

Thank you, Jim, and good morning, everyone. We assume that each of you has received a copy of our earnings release that we issued this morning. If that is not the case, please call 508-337-5172, and we will fax one to you immediately.

Now I'd like to take a moment to read our Safe Harbor statement. The following conference call contains forward-looking statements, including statements regarding the future performance of the Company's business and the semiconductor capital equipment industry, which are subject to a number of important factors that may cause actual results to differ materially from those indicated. These factors include, among others, market acceptance of and demand for the Company's products; the success of the Company's strategic initiatives, including global support operations; the health of the global semiconductor capital equipment market and the timing and scope of any change in industry conditions; the Company's success in sustaining order bookings; and other risks contained in Exhibit 99.1 to the Company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission. The Company assumes no obligation to update the information in this call.

Thank you, Bev. Before we begin, I want to take a moment to thank Bob Lepofsky, our Chairman, for his long and successful service leading Helix to where we are today. Over the past 2 years, I have had the chance to work closely with Bob to understand, embrace, and now deploy the strategy that he saw so clearly from his many years in our industry and his unique perspective. Our shareholders should know that the management team still has the benefits of his guidance from his new role as Chairman. Your current management team will continue to lead Helix to greater heights, and will be positioned to respond to the opportunities that abound in our industry, regardless of where we are in a particular phase of the growth cycle.

And speaking of opportunities, 2004 clearly presented several to Helix. We were able to grow our revenue by just over 50 percent, while keeping very tight control of operating expenses and continuing to improve our already strong balance sheet. Our business model demonstrated that we could be profitable and generate cash, even in the softer quarters of this cycle. We finished 2004 with our first full year of profitability since the last cyclical peak in 2000. The four quarter reinforced the capital expenditure slowdown that is effecting our industry. In our last earnings conference call we said that we believed fourth quarter revenues would be at least 10 percent lower than Q3, and they were. And we said that we would mitigate the full impact of the lower revenue through continuous improvement in our manufacturing operations and close management of our discretionary spending, and we did. We also said that we remain committed to generating operating profit and cash flow on the lower revenue projections, and we delivered on that commitment.

Jay will discussion the financials in much greater detail in a minute, but we are confident that some of our higher G&A costs were specific to the fourth quarter, and our tight operating expense control will continue into 2005. We continue to have market validation of our TrueBlue Service offerings. With more of the world's semiconductors coming from Asia every day, we are pleased that our relationship-based long-term service contracts are gaining acceptance in Taiwan and Japan, and in the fourth quarter we signed our first agreement in mainland China. The acquisition of Polycold Systems is on track for a February 15th close, which will immediately add to revenue and profit performance. As we get to know the Polycold people better through our integration teams, we're even more impressed with their commitment to understanding the needs of their customers and delivering superior value in their products and services. Their business model is very much aligned with the Helix model, and we expect that the complimentary nature of their products and markets will deliver top-line synergy in the quarters ahead. So we are very positive about the prospects of Polycold as an integral part of Helix. Now let me turn the call over to Jay for more detailed financial discussions. And then we will finish our prepared remarks with our views on the near-term outlook. Jay?

Thank you, Jim, and good morning, everyone. Today I'd like to provide some insight into the financial results we just released and offer some perspective on the current quarter. Sales for the fourth quarter 2004 were $34.9 million, a reduction of 5.4 million, or 13 percent, from our Q3 results and 10 percent higher than a year ago. For the full year, sales were $159.7 million, compared with 105.9 million in 2003, an increase of slightly over 50 percent. Our net income for the quarter was $6.2 million, or $0.24 per share. Included in these results was a tax adjustment of $3.7 million, or $0.14 per share, reflecting the reversal of most of the remaining balance of the deferred tax valuation allowance that we established in the third quarter of 2003. Excluding this adjustment, our net income for the quarter was $2.5 million, or $0.10 per share. For the full year, our net income was $23.0 million, or $0.88 per share. Excluding the impact of the reversal of the deferred tax valuation allowance, our net income was $19.3 million, or $0.74 per share. Orders for the quarter were $34.2 million, down about 8 percent from our Q3 levels. Our book-to-bill ratio was about 0.98. For the full year, orders were $158.1 million, up about 38 percent from 2003.

Let's look behind these revenue levels. Sales to semiconductor customers were about 65 percent of consolidated sales for the quarter, down about 5 points from Q3. For the full year, semiconductor sales were slightly over two-thirds of our total. Sales attributable to our CTI-Cryogenics vacuum pump products were about 85 percent of our total, with sales of our Granville-Phillips vacuum measurement and controls instrumentation products at about 15 percent. These percentages remained relatively stable for the entire year. Our global customer support business contributed about 34 percent of total revenues in the quarter and about 31 percent of total revenues for the full year. As in prior quarters, we continue to see increasing customer acceptance of our TrueBlue Service offerings, with several new contracts, including agreements signed in the United States, Europe, Taiwan, and our first contract in the People's Republic of China. We are continuing to build a steady, sustainable revenue stream for 2005 and beyond. OEM sales as a percent of revenue were slightly under half of consolidated sales for the quarter, and were about 54 percent of total sales for the full year. And sales attributable to our largest customer, including outsourcing partners were 19 percent of our business, down from 28 percent in Q3. For the full year, sales to our largest customer were about 28 percent of our total, compared with 20 percent in 2003. And we ended the year with a backlog of $13.4 million, compared with a backlog of $14.2 million in Q3. As we have mentioned in previous calls, it should be noted that a growing portion of this backlog is attributable to our service contracts.

Headcount at the end of the year was 601 people, including temporaries, down about 7 people from our Q3 levels. Permanent headcount remains at about 500 people. Our permanent headcount has remained essentially flat for 7 quarters, or since we completed our restructuring actions in the first quarter of 2003. Our gross margin in Q4 was $13.7 million, or 39.4 percent of sales, a reduction of 80 basis points from our Q3 levels. This reduction was due entirely to the lower volumes. Continued improvements in our manufacturing operations and favorable component costs from our low-cost sourcing activities has helped to mitigate this reduction. We are beginning to see the benefits of our low-cost sourcing strategy, and we expect to realize cost savings throughout 2005.

R&D expenditures for the quarter were $3 million, compared with 2.7 million in Q3. This increase was due entirely to contracted costs for a specific technical program. Selling general and administrative expenses for the quarter were $9.5 million, compared with $8.9 million in Q3. The sequential increase was due primarily to higher compliance costs associated with the implementation of Sarbanes-Oxley Section 404, increased legal fees, and employee-related costs. Sales and marketing expenses were actually lower on a quarter-over-quarter basis. As a result of these factors, our operating profit for the quarter was $1.2 million, or 3.5 percent of revenue, compared with $4.6 million in Q3. For the full year, operating profits were $17.4 million or 10.9 percent of revenue, compared with a operating loss of $5.3 million in 2003. The contribution to our profits from our joint venture in Japan was 1.3 million, compared with 800,000 in Q3. And net interest and other income for the quarter was $373,000, compared with $256,000 in Q3.

Profit before taxes was $2.9 million. As a result of the reversal of most of our deferred tax valuation allowance, we had a favorable tax benefit of $3.3 million, resulting in net income of 6.2 million. As you may recall, Helix established a full valuation allowance against our deferred tax assets in Q3 of 2003 in the amount of $8.6 million. A significant portion of this allowance has been used to offset our taxes in 2004. As of today, with this reversal, we are only carrying a modest allowance to cover certain foreign tax credits. Excluding this adjustment, our tax rate for the quarter and for the full year was 12 percent, unchanged from our previous quarter. And, as a result, of this reversal, we anticipate that our tax rate will return to more historic levels of about 30 to 33 percent in 2005.

Let me now turn to our balance sheet. At the end of the year, our cash and investments totaled $76.3 million, a slight decline from our Q3 balance. Cash flow from operations was about $2 million, and was slightly under $19 million for the full year. Customer receivables were $24.1 million, a reduction of about $700,000 from Q3. This reduction was due entirely to the lower sales volumes. Our DSO increased modestly in Q4 from 55 days to 62 days reflecting, primarily, a slight shift in the geographic mix of our business. And we did not have any significant collection issues. Inventory levels were $21.6 million, compared with $20.7 million in Q3. This increase is due primarily to changes in the foreign exchange rates and the associated revaluation of our foreign inventories. As a result of this, and as a result of our lower sales volumes in the quarter, our inventory turns declined from 4.7 turns in Q3 to 3.9 turns in Q4. Capital expenditures were about $750,000 for the quarter, a modest increase from Q3. For the full year, capital expenditures were $2.8 million, unchanged from the 2003 levels. And depreciation was about $1.3 million for the quarter and $5.3 million for the year. And earlier this week, our Board approved a quarterly dividend of $0.08 per share, unchanged from the prior quarter.

Now I'd like to provide some insights on the current quarter. As we have indicated, we remain on track to complete the acquisition of Polycold Systems in mid-February. Including the impact of Polycold, we anticipate that Q1 revenues will increase over Q4 by up to 10 percent. SG&A expenses will be reduced and operating margins should also be improved. With the return to more normal tax rates, however, these profit levels should result in earnings per share that will be at or slightly below our Q4 level, excluding the 1-time tax-related adjustment. We are committed to strengthening our bottom line results throughout the cycle, and during 2005 we will see improvements at both the gross margin and operating margin levels. These improvements will be fueled by continued reductions in our manufacturing costs, as we realize significant benefits from our low-cost sourcing strategy and through continued close management of our discretionary spending. We also expect to see strong cash flows from operations throughout the year.

As you know, it has normally been our custom to release our SEC financial data simultaneously with the release of our earnings. From a Company perspective, we have completed our 10-K documents. Due to the impact of Sarbanes-Oxley Section 404, however, our external auditors are not in a position to provide the appropriate review and attestation of our financial results at this time. We will, therefore, be delaying the release of our 10-K until all the external audit work has been completed and reviewed. We anticipate that this should occur at about the end of February. And now I'd like to turn the meeting back to Jim.

Thank you, Jay there are still a lot of mixed signals in the market regarding the timing and strength of the next upleg, but we have good reasons to be at least cautiously optimistic. Our order book early in this quarter is indicating a steady strengthening across all of our businesses. Our new products that are focused on increasing the throughput on ion implanters and reducing the contamination and metrology tools are showing early positive signs. And the momentum from our TrueBlue Service agreements makes us slightly less vulnerable each quarter to the swings that are more typical of our equipment businesses. This, along with the recent news from the 3 largest capital spenders, points to a brighter outlook than we saw only a month ago. But whether things improve in this quarter or later, we are poised to respond to those opportunities. Thank you. And we will now open the lines for your questions. Operator?

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star, then 1 on your touch-tone phone. You will hear a tone indicating that you've been placed into queue, and you may remove yourself from queue at any time by pressing the pound key. If you're using a speaker phone, please pick up your handset before pressing the number. Once again, if you have a question, please press star, then 1 at this time. And our first question will come from the line of Theodore O'Neill from Wells Fargo Securities. Please go ahead.

Thanks, very much. 2 questions for you. Can you tell us what would happen sequentially to revenue in Q1 if Polycold is excluded? And second, can you talk about why the Japan joint venture was so strong this quarter, when the rest of the business was somewhat weaker? Thank you.

Let me take the second question first, Theodore, and then I'll let Jay answer the first. The business -- our joint venture in Japan is very much dependent on flat panel display capital expenditures. And in that market and with their largest customer being the joint venture partner, we're still doing very well in that business. There's -- they are still performing strongly and, you know, that business is on a slightly different phase than our semi -- than the typical semiconductor capital spending. Jay, do you want to -- ?

Yes. With respect to the first question, Theodore, simplistically, without the acquisition of Polycold, our core business as we see it today, is essentially flat at Q4 levels.

That's terrific, thank you.

Next question.

The next question will be from the line of Mark Miller from Hoefer & Arnett. Please go ahead.

You mentioned you're seeing some strengthening as this quarter goes on. I'm just wondering if you could give us a little more color about how orders went last quarter. And, also, what you're seeing from semiconductor customers.

Okay. First of all, realizing that we're only 3 weeks into the quarter, I want to make sure that we're not suggesting that's an extension that we can -- that we know for certain. So it's strong, it's much better than it was only 6 or 7 weeks ago. At the end of last quarter we were more concerned with a fall off. But it's refilling. And as I said, it's across all of the businesses. Jay, do you want to answer the other part of that question?

No, other than to say that as was true of most of the other people in our space, December in particular, was a weaker month than the first couple of months last quarter. So there was a tail off. And then since, as Jim said, since the start of the year, we've been particularly pleased with the results so far.

There's a rather large number of fabs, I think, 30, 31 fabs in various stages of construction. Have you heard about any of the fabs that should be equipping this year pushing it out -- pushing out major orders for equipment?

Well, I think that the best answer to that comes directly from the OEM customers. Some of them are announcing this week and, you know, they're adding more detail to what they see from the individual fabs. Our view into the fabs is more from a productivity standpoint for the tools that are already up and running. So -- and through our services businesses. And that still remains very strong. But our insight into the actual timing of a fab or a portion of a fab, either moving in or out, comes primarily through our OEM customers.

Thank you.

Thank you. And our next question will come from Tim Summers from Stanford Financial. Please go ahead.

Yes, thanks, good morning. Jay, in your comments regarding SG&A, you indicated that there were several, I guess what you consider 1-time items, legal fees and employee costs. Could you amplify on those 2 items a bit, please?

Yes. Well let me be clear. The biggest -- the biggest factor that drove, by far, the quarter-over-quarter increase in SG&A was the Sarbanes-Oxley compliance costs. You know, like many companies, over the last quarter or the last 2 quarters, as we have worked with our external auditors to get our arms around the work required, both within the Company and from the external order perspective, the magnitude of the work has increased substantially. And so by far and away the biggest contributor to our quarterly sequential growth in SG&A were the compliance costs. It just turned out from our perspective, from a legal cost perspective, you know, with the change in management, and with some changes in some of our benefits compensation and executive compensation, we just incurred some incremental -- some incremental legal costs in the quarter. Again, these are not repeatable. And then, with respect to the employee costs, again, just things like hiring of key employees, some minor benefits adjustments that occurred in the quarter, and some other contribution costs were some of the other factors. But to characterize the increase by far and away, compliance costs were really a key for us. I just want to point out, by the way, Tim, just as an aside, to the best of my knowledge, we're one of the few companies in the industry and, in fact, in the broader public environment that really did not engage external consultants to help us with our 404 compliance activities. We've done virtually all of the work that's been required with our existing employees. And for that, I give them a lot of credit.

Jay, whatever that cost is in the fourth quarter for Sarbanes-Oxley, do you consider that a 1-time cost, and then it should drop out in the first quarter? Or have we just taken a step function up, and it's going to remain at that level?

It's probably somewhere in between. We were, frankly, a little bit surprised as the year played out, the extent to which the costs were increased due to that. Obviously for 2005, the costs won't go away, but they should come down substantially from where they were in 2004, because the procedure in the first year you go through it is much more of an evolutionary process. The other point is as we go to 2005, and we have a better handle on the impact of these costs on our overall audit fees, we will do a much-better job of managing the costs and effectively accruing for them throughout the year, so we don't get a surprise toward the end -- the later stages of 2005.

Okay. Thank you.

At this time there are no further questions in queue. Please continue.

Okay. Well, thank you very much for joining us this morning, and have a good day.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference,. You may now disconnect.