Entegris Inc (ENTG) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Entegris fourth-quarter 2010 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Steve Cantor, Vice President of Corporate Relations.

Thank you, Christy. Good morning, everyone. Thank you for joining our call today. Earlier we announced the financial results for our fourth quarter and fiscal year ended December 31, 2010. You can access a copy of our press release on our website, entegris.com.

Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, which are outlined in detail in our reports and filings with the SEC.

On this call we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find a reconciliation table in today's press release, as well as on our website.

On the call today are Gideon Argov, President and CEO; Bertrand Loy, Chief Operating Officer; and Greg Graves, Chief Financial Officer. Gideon will now begin the call.

Thanks, Steve, and good morning. Thank you for joining the call. The fourth quarter marked a strong finish to an excellent year. Here's a few of the highlights. We achieved sustained growth throughout the year, attaining record level sales, operating margin, and cash flow from operations for fiscal 2010. We made good progress in our share gain initiatives, and several product lines achieved record revenue levels. The $141 million of operating cash flow in fiscal 2010 allowed us to fully repay our debt. We have no debt. We closed the year with a strong balance sheet, and our momentum is accelerating going into the new year as we see continuing strength in the market environment, and positive results from our new product and market initiatives.

Fourth-quarter sales of $182 million marked the seventh consecutive quarter of growth. For the year, sales reached $688 million, which is 73% above 2009 levels, and eclipses our previous high water mark in 2006. These are record yearly levels of revenue for the Company of all time. We have clearly benefited from the strong recovery in our markets, but in addition to the recovery we have demonstrated the effectiveness of our strategies and the ability to execute operationally. Our unit-driven sales grew 54% for the year, well in excess of the estimated 40% increase industry-wide semiconductor device production, and our capital-driven sales were up 117% from 2009.

We were very pleased with 2010 progress on a number of key growth initiatives. Our fight-back efforts to retake market share are yielding results and lead to significantly higher sales growth in the fourth quarter than for the Company as a whole. In our other initiatives, we achieved design wins for a number of our contamination control and wafer handling technologies, specifically targeted to fabs implementing 32-nanometer and below processes. Some of these fabs are in construction now as you know, and will be production-ready this year or next. We also launched a number of fluidics and wafer-handling products to new markets such as solar and LED, which offer these customers innovative solutions for reducing manufacturing defects and costs.

In the fourth quarter specifically, we continued to see positive trends across our markets. Sales to semi customers grew 1% sequentially and accounted for 73% of total revenues. Sales outside semi grew 5%. Looking at the performance across each of our divisions -- the Contamination Control Solutions division, CCS, our largest division, had an outstanding year. In 2010, CCS recorded sales of $436 million, which is an 81% increase over the prior year and 7% higher than the division's prior peak in 2006. This is all organic growth, and reflects a record year for a number of product segments within CCS, including liquid filtration, gas, microcontamination, and fluid handling components and systems. Much of this success is coming from our unique ability to apply a wide breadth of filtration and fluid-handling technologies, to increasingly complex contamination issues facing our customers. In addition to that, our partnerships with leading industry consortia such as IMEC and IBM are further enabling these efforts.

Q4 was another great quarter for CCS. Sales were $118 million, up 5% sequentially, driven by strong sales for liquid filters, particularly for advanced photolithography processes. In addition, sales of fluid-handling products used in wet etch and clean tools and in the infrastructure of a number of fabs reached an all-time high. We are very pleased with CCS's achievements of a 29% operating margin before corporate costs.

For the microenvironments division, fiscal 2010 was a year of transition. Now the year before, this business was totally overhauled. We reduced its operating costs by 20%, we moved most of its manufacturing from the US to Asia, and we transformed its product development, leveraging our core materials and filtration technologies to address the most demanding and challenging wafer-handling requirements of the advanced nodes.

I am very pleased with ME's results for 2010. Revenues were up 64% from the prior year, and the division generated an operating margin of 22% before corporate costs. The ME division is now structured to be substantially more profitable at lower revenue levels, and is poised to capitalize on a number of new market opportunities in semi, as well as in the adjacent solar and LED spaces. In the fourth quarter, sales in our microenvironments division were $46 million, which was down slightly from the third quarter. We saw growth in shipping products reflecting share gains in the solid wafer start environment, which were offset by lower sales of wafer carriers. Demand for carriers is driven by fab expansion, and we are currently pursuing a number of sizable opportunities that have emerged for more stringent contamination control requirements for these carriers at 32-nanometers and below.

We have a highly differentiated FOUP offering, which is designed for these demanding applications. And adoption of these FOUPs is happening faster than anticipated. This has put pressure on manufacturing as we move these products from design to high-volume production. These efforts are resulting in some increased investments, as well as ramp-up costs related to the manufacturing of these new products, both of which impacted the ME margin negatively in the fourth quarter. Operating income for the ME division was $8 million or an 18% operating margin. We expect the ME margin to improve as we achieve high-volume manufacturing of our new products in the first half of 2011.

For the Specialty Materials division, fiscal 2010 was the year of recovery as its industrial markets slowly but steadily improved in line with the overall economy throughout the year. In the fourth quarter, we changed the reporting relationship of the Specialty Materials division to report directly to Bertrand Loy, our Chief Operating Officer. About 40% of this division serves the semiconductor and solar markets, and this change enables us to realize the increasing synergies with the rest of the Company in three ways -- through closer alignment with our global field operations team, through improved alignment with engineering, and by reducing administrative costs.

For the quarter, sales in our Specialty Materials division grew 4%, reflecting the continuing rebound in the industrial side of this business, and strong demand related to ion implant applications. Operating margin for specialty materials was 13% in the fourth quarter.

Before Greg Graves provides some additional detail on the fourth quarter and our expectations for Q1, I want to add this comment on the current year, 2011. Today, we feel excited about our prospects for the current year. Our market environment is strong, as a number of key semiconductor device makers have announced major increases in capital spending plans for the year. The global demand for electronics, which drives our markets in our unit-driven sales, is showing signs of continued strength. With these winds at our backs, and our growth strategies in place, we believe Entegris is in the best position in the Company's history to deliver strong value to our shareholders, which in my view is still not fully recognized by the financial markets.

I will now turn it over to Greg for some additional commentary on the financials, as well as our outlook for the first quarter. Greg?

Thank you, Gideon. I am pleased with our financial results for the fourth-quarter and full-year 2010. The results capped an outstanding year for the Company. We reached a new level in terms of overall financial performance. Revenue of $688 million was up 73% versus 2009, and surpassed our previous peak level achieved in 2006. Adjusted operating margin was ahead of the profitability achieved in prior cycle. Non-GAAP EPS of $0.71 were 9% higher than the previous record of $0.62 achieved in 2006. Cash flow from operations of $141 million, and EBITDA of $148 million, were also at record levels. In addition to this excellent performance, we demonstrated the ability to consistently manage to the target operating model we introduced externally in 2009.

Turning to the quarter specifically, Q4 sales of $182 million were up from Q3, and reflected solid growth in most regions. In Asia, our largest region, sales grew 3% sequentially. Japan was also up 3%, and Europe grew 9% versus Q3, while North America sales declined 3%. For the full-year 2010, all regions had a strong revenue performance. It is worth noting that Asia, our largest region, was up almost 90% for the year. The unit CapEx mix for the quarter was 63% unit-driven, and 37% capital-driven.

Fourth-quarter gross margin was 44%, at the low end of our target model range. The lower margin was attributable to the ME division, where the sales mix for the quarter was less favorable than in Q3, and we incurred higher than anticipated costs to ramp certain new carrier products. Q4 operating expenses of $49 million were in line with our guidance and consistent with our target model. R&D expense was $11 million, roughly the same as in Q3. During the quarter we continued to make significant investments in new ways for handling solutions, as well as reticle handling for EUV applications.

Q4 SG&A was $38 million. The increase from Q3 included severance costs related to the strategic realignment of the Specialty Materials division, as well as higher sales incentive compensation. These increases were offset in part by lower variable compensation in the quarter. Our adjusted operating margin was 17.2%. This was within the target model range we would expect at approximately $180 million in quarterly revenue. Excluding severance costs, our operating margin was slightly over 18%.

Our tax rate for the quarter was essentially zero, driven by the lower than anticipated full-year effective tax rate of 15%. The full-year rate was lower than expected as the final geographic mix of income shifted from our earlier projection. Non-GAAP EPS were $0.23 per share, and GAAP EPS were $0.20 per share. The non-GAAP number excludes amortization and the write-down of a minority equity investment in the quarter.

We had another excellent quarter of operating cash flow performance, generating $40 million in cash from operations. Cash flow from operations for the full year was $141 million. Adjusted EBITDA for the year was $148 million.

Turning to the balance sheet, we ended the quarter $134 million net cash positive. This is an increase of $41 million over Q3. Over the course of 2010, our cash position went from net debt of $3 million to net cash of $134 million. We continue to remain focused on cash and working capital management. Even with increasing sales and order trends, we kept a tight hold on inventory in the quarter. Inventory turns were 4.1 times.

Depreciation expense was $7.3 million in Q4, and CapEx was $4.6 million. For the year, CapEx was $17 million. Looking ahead to Q1, business trends continue to be favorable and we currently expect sales of $185 million to $190 million. At these revenue levels, our target model calls for operating margins of 18% to 20%, and non-GAAP EPS of $0.18 to $0.20 per share. In 2011, we expect the tax rate to be 17% to 19%; capital spending will be approximately $30 million. The increase in CapEx from 2010 levels reflects increased investment in our Asia operations, and an initial investment in 450-millimeter wafer-handling products.

In summary, bolstered by a strong industry environment, share gains in our core markets, and revenue gains from our new market initiatives, we completed 2010 with record revenue, operating margin, earnings per share, and operating cash flow. The industry outlook remains positive, and our largest customers are forecasting solid growth in wafer starts, and record levels of capital spending in 2011. Finally, we remain committed to delivering financial results consistent with our target model. This commitment, combined with a favorable industry outlook, position Entegris for continued strong growth in profitability and cash flow.

With that, we will now take your questions. Operator?

(Operator Instructions) And we'll go to our first question from Timothy Arcuri from Citi. Your line is open.

This is Wenge Yang for Tim. A couple questions. First one, if you look at the 2011 outlook, we see CapEx to go up about 15% with the current CapEx plan, and also different utilization -- starting to see utilization go up in the mid teens. With that as a background is it safe to assume that for Entegris, the revenue should grow at the same pace or even faster to low to mid teens?

So, good morning. We do not forecast the full year obviously. While we do not have a sense of how fast the industry will grow, I think it's fair to say that a number of large consumers of capital have announced that they're going to be spending healthy amounts of capital in this year. It's hard to see capital going down versus 2010 and then, on the unit driven side which I would stress is 60% -- 65% of our revenue is unit driven, we're heavily weighted to that. As you know, fabs are operating at a high utilization. That is expected to continue over the next few quarters. That bodes well for our unit driven products. It is hard to see that side of the business, that production of devices not increasing by low to mid single digits. Regardless, we plan to grow faster than the industry and to do that we are taking market share in a number of areas so we are very comfortable that we will grow faster than those indexes.

Okay. You have a target of $900 million by 2012 through the market share gain and new product development. So 2011 will be the midpoint of reaching the target. What kind of initiative you are taking in 2011 and where do you see your numbers to go in 2011? Can we assume somewhere in the middle between $700 million right now and $900 million by 2012?

Yes. I think somewhere in the middle would be a good way to put it. I am not saying we'll be at the midpoint or the high point. But, I think, absolutely, somewhere in the middle. We will continue in 2011 to drive our fight back initiatives which contributed meaningfully in 2010. We'd expect that to continue to 2011. We are committed to the investments in the new market initiatives and then the migration to advanced technologies is helping us and we're gaining share both in the ME business as well as the filtration business just as in our core products. So we continue to feel good about that strategy and that target that we've laid out in the strategy.

One last question regarding gross margins. Gross margin has declined in two quarters for specific reasons. What is your outlook for Q1 in terms of gross margin. Based on your guidance we do not see a big improvement on gross margin in Q1. So what are the variables that could move your gross margin in Q1 and for the year 2011?

Let me first comment on the gross margin in Q4. The margin in Q4 was weak. It was very discreet, limited to the microenvironment business. If you were to look at our operating margins on a segment basis, the other two businesses had very strong performance. So the margins relate specifically to ramping new products, specifically 300 millimeter process products that are using advanced materials. If you peel the onion back a little bit we have made FOUPs for about 10 years. We have made them out of a polycarbonate material. We are migrating to some new advanced materials and we have had some growing pains in doing that. The good news is they are growing pains because new advanced materials are gaining share in these product lines. So margin in Q1 I would expect to be up modestly, slightly from Q4.

Thank you.

And our next question comes from Krish Sankar with Bank of America Merrill Lynch. Your line is open.

Good morning. This is Paul Thomas for Krish Sankar. Maybe a bit more on the gross margins. Greg, you have talked in the past about the $26 million fixed component and maybe $39 million to $40 million in variable. Can you talk about Q4 and Q1 with respect to that with the respect to the ME investment a little higher on the fixed side of that or how should we think about that?

Yes, our fixed cost structure has remained relatively constant so clearly as we ramp these products we are seeing higher variable costs in areas like product sampling, like scrap rates, and those ultimately are variable costs. As we get better at manufacturing those variable costs, it comes down. I guess what I would focus you on, though Paul, is on the target model where we talk about $190 million in revenue. We talked about gross margins of 45 to 46 in that target model. As we get out toward the middle of the year we will be back in that range.

Okay. That makes sense. And also maybe with the new product development what is the right R&D level to be thinking about?

The R&D level - we were $11 million in the most recent quarter and we were pretty consistent at that level. If our revenues continue to increase, I think you will see some incremental spending on R&D. But regardless of where the business goes, the thing I really want to iterate is we are committed to achieving the target model so we will clearly make reductions in SG&A before we will in R&D. You should think about focus on maintaining R&D and making the target model in all environments.

Okay. And then maybe the last one for Gideon. You talked about the share gains and fight back already having some benefit in 2010. You guys have put out targets of $45 million in just share gains and about $35 million in fight back. You can't give us an exact dollar amount in the benefit of the past year, but maybe just a relative sense. Are we still in the early stages of those targets or where do you think we are or are going to be in Q1?

I think that on our fight back initiatives in the fourth quarter we actually grew those at 15%. That's considerably in excess of what the company grew overall. I think we continue to make progress in those areas. One of those is in the FOSB we are pleased with the progress we have made there. In the market share, as it relates to advanced technology products, as you know Paul, we are seeing a fairly dramatic shift here now and over the next few quarters into 45-, 32- nanometer technologies. That is really a wind at our backs and it turns out both in our filtration business but also in our ME business. We have considerable, considerable opportunities on the table to take share, and really cement our leading position in the process carrier business in the 300 millimeter area. So we feel very comfortable with those targets over the next couple of years.

Okay. Thank you a lot.

And our next question comes from Christian Schwab from Craig-Hallum Capital Group. Your line is open.

Thank you. Good quarter. As far as the share gains Gideon, I understand your explanation of the specifics at 32 nanometer and below on the contamination control systems. I was just wondering if you would like to share your current market share and market share goals in the microenvironment area in particular at the 300 millimeter level?

This is Bertrand. We remain very committed to the original target of 20% market share for our 300 millimeter filter products. As Gideon stated, we have been very pleased with the results of this product line in Q4. We posted a record quarter for the new FOSB products for the year in Q4. And we are exiting the year with a lot of momentum, again, based on very nice progress with our wafer grower customers and users. So market share is about, again, 20% is what we are aiming for in the next two years. Going to the 300 millimeter process carriers, the historical market share was about 50%.

Let me tell you that we are right now in position to significantly increase this market share based on some initial feedback we are getting from all of the major device makers. You should know that we have active evaluations and qualifications of our Spectra products at all at the top five device makers right now, which is something that had never happened in the history of Entegris. And this technology is also being conducted at a much faster rate than anything we had anticipated. And that is creating the growing pains that Greg was referring to when he was talking about the impact of all of that on our gross margins. So, the way I would frame it, is if you had asked me two years ago to define success for the ME division I probably would have described a situation that is not very different from where we are closing the year end, 2010.

Great. That is helpful. And then on the new market initiatives, are you in a position yet to give a revenue goal for some of the new market initiatives from zero a few years ago for your solar and LED and consumer electronics, some of these other initiatives that you have? What it could mean in revenues in 2011 or 2012 yet?

No. We have not quantified those targets. But I will only share with you that the momentum is real. The momentum is starting to really accrue significantly through to the top line. Just to illustrate this point I will tell you that on the solar side of our business, over the last eight quarters we increased by a factor of ten, the revenue into those applications. And the opportunity is they are not only for filtration products but for fluid handling products and hopefully we'll start seeing some meaningful traction for our microenvironment products in 2011 as well. So great momentum on solar. We expect that to continue into 2011 and beyond. We have talked in numerous calls before about the success in SMD and I think again we are very pleased with our ability to expand our plans in new markets and new applications.

Great. Thank you.

And our next question comes from Kelly Anderson with Sidoti & Company. Your line is open.

Good morning. Thank you for taking my questions and congratulations on hitting some huge balance sheet milestones during the fourth quarter. The first thing I wanted to touch on was just a clarification about the microenvironments business in particular. Are you suggesting that you're actually capacity constrained in that business, and if so has that since been remedied?

No Kelly, we are not capacity constrained in that business. Today I guess you would say we are capacity constrained only in that as we introduce these new products, our ability to produce them at high volumes has not been up to what we would like to see it to be and what we'd expect it to be over the coming quarter. We have in terms of the floor space and the facilities size we have adequate capacity.

Okay. And then in terms of the margin issues for that segment, I understand that some of these micro E products come with a lot of different bells and whistles, be it the special Clarilite wafers and things like that. As you introduce more, the value-add to the product, does that also help solve the margin problem?

Kelly, that it's actually exactly the way you want to look at that. Just to add to Greg's comment, I will only tell you that in the past historically, qualifications of FOUP products, that are most demanding to end users would take up to 12 months -- 12 months to 18 months. What we're seeing right now is our major customers expediting the qualifications of those products and really turning around those qualifications. And that's in my mind is the best testament to the type of benefits they are seeing in their processes on the adoption of our technology. So we are very pleased with where we are right now. We just need to move very quickly some of those technologies from an engineering control status to a release to manufacturing.

Okay. Great. In terms of the Specialty Materials segment I was just wondering -- I don't even know if you can answer this -- whether this is partly due to some of the new design wins you have seen bearing fruit. Is this a situation where you are kind of riding off the success of some of your key customers like in the IBM case. As we look forward to 2011 what is the kind of new linearity in some of the new design activity there versus just market growth.

This story of specialty materials has been a gradual improvement in the legacy business which continues and then as you have just said, Kelly, a number of design wins. Those design wins are in the ion implant area, they are also in the photolithography area where we have some coatings applications that are now embedded in some new products that are unit driven and will run for many years. And then as well in aerospace as well. I would say a balanced portfolio of new applications, and all of which we like to say are singles but not triples or home runs but collectively they begin to add up. So, this business continues to grow and will continue to grow over the next few quarters.

Okay, great. Last one for me. I am actually surprised a lot of the different equipment vendors out there are reporting surprising amounts of business from the kind of solar arena. I am just wondering if you could talk about what you're hearing from your customers and maybe even break it down on a geographic basis of where you're seeing the most interest coming from.

We are not going to talk about specific customers. I will tell you though this. The solar industry is a new industry. And as our volumes ramp up in this business and a lot of it is in Asia obviously. There are issues that relate to yield that were not encountered when the industry was operating at much lower volumes. Those kind of issues lend themselves to the products that we make. So as the industry matures, as volumes goes up, the same kind of process control and requirements for contamination control become really critical and that's where we come in.

Excellent. Thank you for taking my questions.

And our next question comes from Avinash Kant from DA Davidson and Company. Your line is open.

Quick question. I am still not able to reconcile the guidance, and it may be some conservatism on your part. If I just look at the low end of the guidance, you are talking about $0.18 on $185 million in revenues, you did $0.23 and $182 million, and your margin guidance for Q1 is slightly up from Q4, so how are you getting those EPS numbers?

In Q4, Avinash, there is $0.03 to $0.04 related to the fact that we had a zero tax rate in the quarter. If you strip that out you really get a like comparison. The guidance, in terms of the EPS is based right on going to the target model. If you go to our target model, at revenues -- it's in our investor presentation, at revenues of $185 million to $190 million, the EPS number is $0.18 to $0.20. We are constantly going to come back to that model because that is our commitment.

Is just the tax rate that you were talking about?

I mean, the tax rate had $0.03 to $0.04. Had we had normalized tax rate in the quarter, taxes would have been somewhere around $5 million and they were essentially zero.

And also you talked about write-down which was not included in the operating number. What was that and which line item did that go into?

It goes through the equity line in the P&L and it relates to variable joint -- manufacturing joint venture that we have in Japan. At this point we are evaluating the future of that venture and whether or not we use that venture or not going forward and as we have done the analytics around it we thought it was prudent to write that down. Like I said it is a venture we have been involved with for the last 15 years or 20 years.

And how much was the write-down pre tax or post tax?

The write-down pre tax was just over $2 million.

And post-tax, what are the tax on this one?

I do not believe there was a tax impact on it.

It was all post. Okay. Yes, because the tax rate was pretty much zero this quarter anyway. So the $2 million went into which line item of your P&L?

The equity line in the P&L.- Equity and affiliates.

Okay. Got it. So that is not $1.8 million it appears here, it is close to $2 million, there's something else in there?

That includes all of our income and loss from affiliates that we account for on an equity basis. So, there is some profit from some other ventures that come through there as well.

Okay. And the other question I had was, could you talk a little bit about the lead times that you see compared to -- what has been the trend in the lead time? Has it been going up or has been stabilizing? Where are you? And you can talk the same about your utilization base too.

This is Bertrand. The lead times for most product lines have been either constant or steadily going down. As you expect for any manufacturing company we have ongoing efforts to improve our lead times and to maintain them competitive. The only exception as you have gathered by now would be for the most advanced Spectra FOUPs where lead times today are longer than for our traditional product lines. I am not going to give you a quantification of that statement because, the lead times would vary considerably whether you talk about a PEI FOUP as opposed to a EBM FOUP or standard FOUPs so that's the only area where some of our lead times are being challenged.

At your utilization rates you are running at --

Utilization rates, again we are operating fairly comfortably between I would say the high 70%, 80% utilization rate in most of our plants. Again in most cases we're not -- our manufacturing processes are not necessarily very capital intensive so I am not sure that utilization rate is necessarily a really good index or metrics for us. The only case it would be one would be in the microenvironment division where as Greg mentioned earlier we do not see any constraints in terms of our capacity.

Okay. And one final question. If you could talk a little bit about, in the guidance for Q1, what is your expectation for the unit side of the business to grow and what is the expectation from the CapEx side of the business, roughly?

We expect the mix to be relatively similar in Q1 to what it's been in 2010. If you look at 2010, Avinash, our unit CapEx mix with the exception of the third quarter, was 63/37 in Q1, Q2 and Q4. So, we'd expect it to be in that general range as well, so. In a relatively -- it would imply consistent growth between the two sides of the business.

Okay. Perfect. Thank you so much.

And your next question comes from Dick Ryan from Dougherty. Your line is open.

When you look at Q1, Greg, are there any variances on the cash flow side when you compare that to what we have seen in Q3 and Q4?

In Q1 the primary difference is we will pay out variable compensation in Q1. That is a number in the $25 million range. So in Q1, if the performance were identical in Q1 to what it is in Q4, we are obviously expecting it to be better, but we would generate $15 million to $20 million in operating cash.

Okay. And when you look at the segment, operating margin goals, with the investments being made particularly on the microenvironment side, especially materials. Can those margins over the next couple of years, can microenvironments get into the upper 20% range and specialty kind of approach 20%? Are those reasonable expectations?

If you look at microenvironments for the year, the most recent year, for the whole year it was 22.4% and Q3 it was 24.6% so not that far from the high 20s. That is a relatively capital intensive business. So with higher volume that is certainly possible.

And specialty, Greg?

Specialty as I think we have said pretty consistently is probably our highest in terms of operating leverage business because today as a percentage of revenue we're probably making the greatest investment in new market initiatives in that business. So, there is meaningful leverage there, I think as Gideon said we think that business on 25 a quarter in revenue can get to 20% operating margin.

Great. Thank you.

And your next question comes from Steve Schwartz with First Analysis. Your line is open.

Just a couple quick short ones. As far as the ME ramp in the fourth quarter is there any carryover into the first quarter as far as those costs are concerned?

There will be some carryover in the first quarter which is why I suggested in Q1 we'd expect the margins would be up only slightly from where they were in Q4 versus the target model which would be 45 to 46. So we will have some of that as we move into Q1.

Okay. And then how much was the severance charge in the fourth quarter? You said it was in SG&A?

The severance charge in aggregate was just a little bit more than $1.5 million.

Once again, any of that in the first quarter?

No meaningful amount.

In other income, actually other expense turned into income on a year-over-year comparison, is that just FX or are their other things in there?

The primary thing and other income, Steve, on quarter to quarter basis is FX. And in the most recent quarter, FX had a pretty neutral impact. We've had some quarters where it's had a negative impact of $1 million or $1.5 million.

And that FX impact, do you think that will carry through the first half of '11?

It's hard to say. It really depends largely on the movement in the currency. We really don't predict.

Okay. In that impairment on the equity investment. Since that falls below the pre tax line is that still tax affected?

It's not tax affected.

Okay. And then just my last one and just a little bit higher level. On the change to the advanced materials it sounds like that is in the 300 millimeters FOUPs. What is the driver for that change? Is it the smaller nodes or are there cost savings? What is driving the change there?

It is smaller nodes and contamination control requirements that our customers are looking for to get to the type of process productivity that they need in order to adopt those new process nodes. We are working very closely with them to tune the specific design and attributes of Spectra FOUPs but also find the right materials to help them deal with the contamination challenges they are seeing in their fabs. If either one of those customers face these types of challenges we have the unique ability of being able to tailor the types of materials that best meets their requirements.

And you mentioned this was not polycarbonate, can you share with us what the base resin is? Or is it a varied mix?

Again, as I said, it depends. And no, we will not go down that path.

Okay. Understandable. Thank you.

(Operator Instructions) Our next question comes from Mike Crawford with B. Riley & Company. Your line is open.

In the past you have talked about a cross cycle quarterly revenue -- average revenue of $160 million. Do you think that has changed, increased at all?

In the past we have talked about it as a mathematical average of $155 million or $160 million. Obviously as the cycle continues to stretch out, that number moves up.

Okay. Cross cycle. Okay. Thank you. And then also I believe you are expecting some incentive comp payouts in this Q1 of around $30 million. Is that still about the expectation?

Yes, between, $25 million, a little bit more than $25 million.

Great. Thank you.

And our last question comes from Samir Sikka with MetWest Capital Management. Your line is open.

Congratulations on solid cash flows this year. The question I have which nobody has asked so far is there was a change in one of the larger companies that competes with you. The CEO talking about stepping down and talk about the company being acquired. If that were to happen and I know you have a solid balance sheet today and are starting to grow and take some market share back, what are your views? How does that change your outlook in how you are going to compete? Or if you look for the consolidation of industry and what does that do for you as far as challenges and opportunities?

Well, Samir, obviously we do not talk about competitors by name. We respect our competitors. I am assuming by the opacity of your question, you are referring to Pall Corporation which is a fine company and we respect them but I really cannot comment because we have our strategy and we think we are being successful. I really would not want to make a comment on any specific competitor.

Does that create opportunities for you outside of semiconductor space? I know you are investing in other areas.

About 25% of our revenues is outside of semiconductor today. We think some of the most exciting opportunities are in the adjacent spaces and they relate to alternative energy, they relate to solar, they relate to LED, they relate to some aerospace business as Bertrand mentioned earlier in one case in the case of solar we have had literally a tenfold expansion of that business over the past couple of years. So we are obviously in other areas and in some of those areas we compete against the company you mentioned and in some we don't. I would say we like our chances. Let's put it that way.

I know you're not talking about revenues beyond one quarter. But some of the companies in the semiconductor equipment space with very conservative management teams have actually come out and maybe not given guidance on numbers, but they talk about the outlook and how they are looking at their business. It looks like to be a very solid year for the next three or four quarters. So what is the disconnect here do you think?

I think one of my colleagues in the industry said it quite well a few days ago and that is that he has and does not believe anybody can have a great understanding of what the cycle will look like a few quarters down the road. There's a lot that is unknown. I will tell you this, we said here, before today, given the announcements on capital expenditures by device makers, it's hard not to look at 2011 as a at least a reasonable year and possibly better than that so I agree with your thesis.

On the unit driven side given all of the proliferation of devices that you and I and others are aware of either tablets or smartphones, geographically around the world, it is also hard not to look at 2011 as at least a reasonable year of unit growth in the industry and we are hopeful that it translates into an excellent year. I would say the proof will be in the pudding.

Okay. Thank you, Gideon.

At this time I would like to turn the call back over to Mr. Gideon Argov for any closing remarks.

Thank you very much for joining our call. We look forward to updating you in the future.

That concludes our call for today. Thank you for your participation.