萬機儀器 (MKSI) 2002 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to the MKS fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If any one does need assistance at any time during the conference, please press the star followed by zero. As a remainder, this conference is being recorded today Tuesday, February 4, 2003. I would now like to turn the conference over to Miss. Jonna Manes. Please go ahead madam.

Thank you, good afternoon and welcome to our fourth quarter earnings conference call. By now you should have received a copy of our earnings release. If you did not, please go to our website at www.mksinstruments.com or you can call 978-975-2350 extension 5524 after this call. As a remainder, various remarks that we may make of our future expectations, plans and prospects for MKS constitutes forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors including what's discussed in this afternoon's press release, and in the company's annual report on Form 10-K for the fiscal year ended December 31, 2001, and most recent quarterly report on Form 10-Q, each of which is on file with the SEC. In addition, these forward-looking statements represent the company's expectation only as of today. While the company may elect to update these forward-looking statements it specifically disclaims any obligations to do so. Any forward-looking statements should not rely upon as representing the company's estimates or views as of any date subsequent to today. Finally, I would like to remind everyone that during the Q&A period, each person will be limited two questions initially. We will circle back for further questions if time allows. And now I would like to introduce John Bertucci, Chairman, Chief Executive Officer and President of MKS.

Thanks Jonna, and I want to thank everyone for joining our conference call. With me today is Ron Weigner, our Chief Financial Officer. I'll give an overview of the fourth quarter and year and then Ron will give a detailed review of the results. I'll make some closing comments and then we'll answer your questions. It's clear that the semi-conductor capital equipment sector redounded in the first half of 2002 and then declined in the second half. MKS fourth quarter 2002 revenues totaled 77.6m, which was slightly above our guidance and 16% below our third quarter revenues of 92.2m. Reported revenues for the fourth quarter of 2001 were 50.1m. The pro forma net loss for the fourth quarter of 2002 was $0.07 per share excluding a special non-cash deferred tax charge of $13.4m or $0.26 per share, which Ron would discuss later.

Reported revenues for 2002 were up approximately 10% over 2001. But on pro forma basis year-to-year sales declined by approximately 15% in 2002 when including the revenues of companies we acquired in 2002 and to MKS 2001 sales. Preliminary industry estimates indicate that the semi-conductor capital equipment sector declined in the range of 25 to 35% in 2002. The pro forma net loss for the year was $0.15 per share excluding special items. In reviewing the year, I am encouraged by our continued success in new product introductions and in being selected for new application. I am also pleased with our progress in increasing our flexibility and customer responsiveness. Let me turn to the first area of focus. In the quarter, we continued to take advantage of opportunities that the leading edge of semi-conductor processing technology. Increasingly, we are designing process expertise into all of the products we make. Here are some examples of recent successes. We achieved design wins and pressure measurement in integrated pressure control sub-systems in the fourth quarter. Measurement stability of MKS manometer product in actual process manufacturing environment and our understanding of process applications was the key factor in our customer's decisions. In the quarter, customers chose our full management sub-systems for advanced

H-applications. One of these sub-systems, the true flow was named as one of semi-conductor international magazines `Best products of 2002`. We continue to provide advanced control and information technologies that enable our OEM and Fab customers to roll out their programs for E-diagnostics and advanced process control. We are also integrating these critical information products with many of our other sensor products. For example, we have integrated The ITC Blue Box, data management module with our process module, which allows our customers to more easily access, process data over the Fab network. By integrating our sensor products with information technology, we enable our customers to make more informed decisions and increased tool, and Fab productivity. MKS was also selected as a preferred supplier to provide infrared gas analysis products to a key specialty gas company. We believe that the need for process monitoring, process analysis and e-diagnostics is likely to increase significantly as the industry continues to move to finer and larger more valuable wafers. We continue to introduce new RF and DC power generation products for HCVD and PVD applications and we are successful in being selected by key OEMs in the fourth quarter. In addition our Colorado Springs design center continued to focus on providing the medical equipment industry with high power RF products for magnetic resonance imaging or MRI equipment. The major MRI manufacture continuous to be one of our top ten customers. As the industry leader in reactive gas and plasma generation technology MKS continues to develop an electrical property. We have received three additional patents in this area in the quarter and released new versions of highly successful ASTRON reactive gas generator product.

In addition the ASTRON was selected from a number new tools, including next generation flat panel display in 300-millimeter CVD tools. Market researches predict substantial growth for the flat panel display segment. We introduced a new Ozone delivery subsystem that is targeted for manufactures who are using ultra-high-purity ozone for the latest atomic layer deposition or ALD processes. In the quarter this integrated ozone delivery subsystem was shipped for use in a number of ALD tools for advanced high-K dielectrics. Substantial growth is also predicted for the use of ALD in semiconductor manufacturing. They continue to see key semiconductor customers migrating to environmentally but benign ozone based wet clean processes. And we've gained number of orders for LIQUOZON system in the quarter. LIQUOZON is also named a best product of 2002 by semiconductor international magazine. It's unusual to win two awards in one year and believe this shows MKS technical breadth and depth. Our process expertise in affluent management continues to differentiate us in back-end technology and we gained business in major fabs in the quarter. Two orders for vacuum instrumentation also came from a major national lab for high-energy physics applications. Our penetration of the biopharmaceutical market continued in a key customer selected MKS as a preferred supplier. The development of integrated subsystems also differentiates MKS. In 2002, the percentage of sales from integrated subsystems remained in the high teen. We are encouraged by the number of integrated subsystems we have in development. We expect the percentage of integrated subsystem sales to increase in 2003 as we move toward our long-term goal of 30% of total sales from such products.

Now let me turn to the second area of focus, increased flexibility and customer responsiveness. In the fourth quarter, we reorganized into three product groups, Instruments and Control Systems, Power and Reactive Gas products and Vacuum products. This organizational structure enables us to transfer technologies, process control knowledge and customer feedback across product line. We are working closely with customers across diverse markets and we are beginning to see technical synergies from adopting a more integrated approach to the market place. Looking forward, we expect semiconductor capital equipment spending to stabilize in the first quarter and our revenue level to remain in the 73m to 78m range. We are looking closely at order activities levels in this cautious spending environment and will manage the business accordingly.

And now, I will turn the call over to Ron to discuss our financial results.

Thank you John and good afternoon everyone. Fourth quarter 2002 sales were 77.6m or slightly above the high end of our guidance's of 65m to 75m. The fourth quarter represented a 16% decrease compared to third quarter 2002 sales of 92.2m. Reported fourth quarter 2001sales were 50.1m. Our fourth quarter GAAP net loss was 19.2m or $0.37 per share and 51.3m basic shares outstanding. The fourth quarter 2002 GAAP loss includes a special non-cash charge of 13.4m or $0.26 per share for the reversal of MKS' net deferred tax assets, the special non-cash charges required for GAAP purposes. However, these assets remained available for use as deductions against future taxable income.

Fourth quarter pro forma net loss which excludes the amortization of intangibles related to acquisitions was 16.9m or $0.33 per share on 51.3m basic shares outstanding. Accruing the special non-cash deferred tax charge, the fourth quarter 2002, pro forma net loss was 3.5m or $0.07 per share at the high-end of our guidance. The third quarter 2002 pro forma net loss was 1.5m or $0.03 cents per share. Excluding special items, the third quarter 2002 pro forma net loss was $8000 or essentially break even on a per share basis. Fourth quarter 2001 pro forma net loss was 12.8m or $0.34 per share on approximately 37.9m basic shares outstanding. Excluding the special items, the fourth quarter 2001 pro forma net loss was $4.8m, or $0.13 per share. Sales for calendar year 2002 were approximately $350m compared to 2001 reported sales of approximately $287m and pro forma 2001 sales of approximately $370m. GAAP net loss for 2002 was $39.5m, or $0.79 per share on $50m basic shares outstanding, compared to the GAAP net loss for 2001 of $31m or $0.83 per share, on $37.5m basic shares outstanding. The 2002 pro forma net loss was $22.4m or $0.45 per share. Excluding special items, the 2002 pro forma net loss was $7.6m or $0.15 per basic share. The 2001 pro forma net loss was $9m or $0.24 per basic share. Excluding special items, 2001 pro forma net earnings were $668,000 or $0.02 per diluted share.

Looking at the market net sales to semi-conductor OEMs and end users decreased by 21% sequentially and were 69% of total sales in the fourth quarter, compared to 73% in the third quarter. Fourth quarter thin film sales decreased by 8% and were 9% of total sales compared to 8% in the third quarter. Sales through other markets grew by 1% and were 22% in the fourth quarter compared to 19% in the third quarter. Our top ten customers accounted for approximately 46% of fourth quarter sales compared to 53% of third quarter sales. Applied Materials continue to be our largest customer at 20% of fourth quarter sales compared to 25% in the third quarter. Combined sales to Applied in one of its sub-contractors who is also a customer of MKS, represented approximately 21% of fourth quarter sales compared to 28% in the third quarter. A major manufacturer of medical imaging equipment continues to be one of our top ten customers. Looking at the geographic sales next, fourth quarter sales to US customers were 57%, compared to 63% in the third quarter. Sales to Asia were 29% compared to 25% in the third quarter. Sales to Europe were 14% compared to 12% in the third quarter. Gross margin was 32.3% in the fourth quarter, which was at the high-end of our guidance. This compares to 34.5% in the third quarter and 28.8% in the fourth quarter of 2001, excluding the charge for excess and obsolete inventory. Fourth quarter R&D spending was $12.2m compared to $12.7m in the third quarter.

Fourth quarter SG&A expense was $19.9m compared to $20.5m in the third quarter. Amortization of intangible assets was $3.8m. In the fourth quarter, we reduced our worldwide workforce by 6% to 2,040 people from 2,168 at the end of the third quarter. We also took up to 10 days of mandatory time off in addition to holidays at our US location. As a result of benefits related to foreign operations, our effective tax rate for the third quarter was a 45% benefit. Our pro forma tax rate was 45% benefit for the fourth quarter excluding the special non-cash deferred tax charge. Looking at the balance sheet, total cash and investment, net of debt for the fourth quarter increased by approximately $14.5m to a $114.5m from approximately $100m in the third quarter. The increase in cash, primarily relates to reductions in accounts receivable, lower inventory, income tax refund, and the sale of an investment. We reduced accounts receivable by $7m to $45.5m in the fourth quarter from $52.2m in the third quarter. Days sales outstanding for the fourth quarter were 53 days compared to 52 days in the third quarter.

As a result of our continued focus on inventory level, our inventory decreased by $9.6m to $73.2m and fourth quarter inventory turns were 2.9 turns, the same as the third quarter. Capital expenditures of $2.6m in the fourth quarter was primarily for new and replacement manufacturing equipment. Depreciation was $3.8m in the fourth quarter compared to $3.9m in the third quarter. Looking forward, we estimate that first quarter revenues could remain steady or be slightly below the fourth quarter and could range from $73m to $78m. Given this environment, we are scheduling up to 10 days of mandatory time off in the first quarter. Based on the sales volume range, first quarter gross margin could range from 31% to 33%. We estimate that first quarter R&D spending could decrease to a range of $10.7m to $11.2m; SG&A expense could also decrease to a range of $18.1m to $18.6m.

Amortization of acquired intangible assets, which is excluded from pro forma earnings, is estimated to be approximately $3.7m in the first quarter. Net interest income for the first quarter could be approximately $0.3m. For GAAP purposes, we will not generate deferred tax benefits from our first quarter net operating loss. Therefore, our tax expense through the first quarter proportionally reflects estimated full year tax cost, primarily related to profitable foreign operation. We estimate our income tax expense in the first quarter could be approximately $400,000. Based on our estimated sales range, the first quarter pro forma net loss could range from $0.05 to $0.10 per share based on approximately 51.5m basic shares outstanding. Our net cash position should remain relatively unchanged. This concludes our financial discussion, and I will turn the call back to John.

Thank you Ron. Despite this leveling in capital equipment spending, our strategy has not changed. We believe that our breadth of technology, and depth of application expertise differentiate cost and strengthens our position for the next upturn. Ron and I would now take your questions.

Thank you sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you do have a question, please press the star followed by one on your push button phone. If you would like to decline from the polling process, simply press the star followed by two. You will hear a three-tone prompt acknowledging your selection, and your questions will be polled in the order in which they are received. If you are using speakerphone equipment today, you will need to lift the handset before pressing the numbers. One moment please for the first question. Our first question is from Brett Hodess with Merrill Lynch.

Good afternoon. First of my two questions is, the revenue upside or in other words the lower decline that you saw. Can you characterize for us, where that better than expected revenue came from? Was it broad based or from a single customer or was it out of the semi business, John?

Well, as Ron indicated, the sales outside of semi were up above 1% to 22% of total sales, and the thin film markets were down 1%, but increased again as a percent of sales from 8% to 9% of sales. Though, sort of the decrease was in semi, but in our guidance that we gave at the beginning in October, the guidance we gave for Q4, in looking at the market. I think we did better overall, and particularly in semi. It did not drop as much as we though it might.

Was the lower decline in semi, do you think because of share gains, new product momentum or customer mix. Can you give us some color on that John?

It's difficult to measure the share gains, because of mix and because of what is going on individually with customers. So, I would say that it's more - it was more broad based, and that it was more result of indications that we had at the beginning of the quarter when we gave the guidance. Those expectations didn't happen pretty much with the OEM's, and everyone was pretty much above the guidance that we felt we were looking at.

Okay. And the follow-on question of that is, when you look at the beginning at the long list of momentum you have the on new products and applications at this point. Can you characterize for us with the two larger acquisitions ASTeX and ENI . At this stage do you have, you started to be able to turn the MKS business mode along with those described to capture sales, that you don't think you would have captured without MKS?

Yes, there we think that integration is going well. In the case of ASTeX for example, the business [Inaudible] They had virtually no coverage in Asia and when we have strong Asia operations and as Ron did also quote our sales in Asia were, did become a higher percent of our total sales and ASTeX is stronger there, with E&I, as we have combined both E&I and ASTeX under the same management structure. We are beginning to make some headway there in product reliability, which we think is critical to gaining market share in that segment of the business and we have seen some successes there. So, we are optimistic about that business and as we go forward, as long we can maintain the reliability of the products and improve the delivery performance and quality of their products and that's the part of the MKS culture that we are putting into that operation.

Well, thank you.

Welcome.

Thank you. Our next question is from Jim Covello with Goldman Sachs.

Hi, good afternoon. Thanks so much. Couple of quick questions. One, what do you think it's going to take to drive the growth in the integrated subsystems from where you are today to where your target for integrated subsystems sales is and second, could you spend a little bit of time talking about how you are managing your business given, what we are hearing and what you are hearing are pretty different expectations from your different customer base, obviously Applied Materials. I took down their expectations last week and yet a lot of your other customers are talking about business getting a little better. So, maybe if you could talk about how you are thinking about that in terms of managing your business that would be helpful as well. Thanks very much.

Okay. Well, the drivers for subsystems are the new designs for OEMs and also for end users that are productivity enhancers and we look at that as a building of that percent of our sales, as I said, were in the high teens as a percent of our total sales. We have a number of products and developments going on, which I mentioned, which I will not get into for competitive reasons, but there are a number of products that we are working on, that are integrated subsystems that will be coming out in new systems overtime. And third, the building of momentum as new product designs are introduced by our customers for OEM business and also our new applications are worked on with some of the Fabs for the installed base. Since we have both areas of market for us for integrated subsystems, both Fabs and OEMs. So, that will drive that business. As far as the mix or customer mix, we are supplier to all of the OEMs in the industry and basically all of the end users, the Fabs and have good relationships with all of them. We try to service the business worldwide and follow the business wherever it is. So, we have strong position in the US with OEMs, both here in the east coast and in the west coast with OEMs in Japan and in Europe and as I said, we follow the business for where it is and typically many of the products are, that we saw the OEMs are standard products that are sold across the broad, some are custom and so that business varies by OEM. But basically, we are selling to the industry and our results will follow more the total industry results rather than the results of any particular OEM or set of OEMs.

Okay. Thanks very much.

Welcome.

Thank you. Our next question is from Jay Deanha with JP Morgan. Please go ahead. Please go ahead Mr. Deanha. And our next question is from Ben Pang with J.P. Morgan.

Hi, this Ben Pang for Jay Deanha. A couple of questions on the sub-system side, can you comment on your gross margin there and the pricing are you able to generate higher gross margins and - as it will deviate some of the pricing pressure you are seeing and also in terms of your different division, do you have different, like turns business for the different divisions, in other words now with power generation, are you getting better visibility because lead times are longer there and also for your customers, is it easier to project out the business on the, - other business like the MRI systems and stuff like that ? Thanks a lot.

Okay. For sub-systems, we certainly target margins that would be higher for sub-systems in the range of 40% to 50% gross margin range, for products like that. As far as the different product groups that we have. Since turns business is pretty much the same in all of them other, -- we may have longer lead times in the power business, but the projections we get and the information we get for production visibility is pretty much the same across all of the product areas.

And what about for your customers, -- I mean is it easier to project out the non-semiconductor part of the business?

The non-semiconductor part is more statistical for the product groups that are outside of the power business and within the power business, that business because of the lead times is a little more predictable.

And the last question I have is, on kind of the design activity. I mean things like, most of the, -- there is a not a whole lot of new tools being introduced right now because people are, -- most of the 300mm stuff is already done. Are there particular areas other than the ALD where you are seeing, a lot of new tools come online, any specific like technology area within semiconductor manufacturing?

Well, some of that is sensitive, so I won't answer it, but there are always new chambers, the new applications even on tools that are existing, 300mm is been going on as you know for a long time and there are improvements that are being made in 300mm and enhancements and so there is a lot of design activity in that area.

Would you classify that this period now is, I guess the period of like, -- high-design activity or kind of a lower level? I guess, overall versus 2000?

It is high-design activity from our point of view.

Okay, great. Thank you very much.

Thank you, our next question is from Jay Deanha with J.P. Morgan.

Hi can you hear me now?

Yes.

Okay, great. John on the power business, ENI and ASTeX together, can you give me a sense what your market share was in '02 and what you think it could be in '03 and why and the same thing for MFCs?

I'm sorry, but we don't give market share information.

Do you sense that, you know, your chunk in the business is on the upswing in both power supplies and MFCs and if so can you put a little color into that?

Market share is -- VLSI now has a subsystems group and they do report information, that kind of information, and there are companies, subsystem companies to provide information for that. And so I think it's best to get the information from a source like that. I could say that in ASTeX for example, we did -- we have talked in the past and it's public that we did have a patent suit and we won that patent suit and so that has helped the market share of the Reactive Gas products considerably. We are working on improving the delivery and reliability performance of the ENI products and if we can do that, we believe that we will see market share gains. Market share is an elusive thing in that you can have a design win but the design win can be on a chamber that has no sales by the OEM and so it's a design win but it's not -- necessarily doesn't have any impact in the market. So market share is very -- as I said, is very elusive, I think it turns out to be best to look at some of the VLSI numbers.

Okay and then the other question I had is if you look at the average selling price shift for your customers' products in the move to 300 millimeters from 200 millimeters, generally speaking especially kind of in the etch and the depreciation areas, it's a significantly smaller increase than the industry experience that moved to 200 millimeters from 150millimeters, just kind of curious, can you identify you know in some areas the impact that you have had that maybe you know has essentially allowed larger customers to deliver 300 millimeter product with a significantly less ASP compared to the last transition?

Well, there are a lot of things that don't scale. For example, pressure is pressure and there maybe more -- perhaps more transducers or more pressure instruments on 300 millimeters but in many cases they are not, and so it's not really an increase -- or much of an increase in the pressure business or pressure transducers business going from 200 millimeters to 300 millimeters other than maybe more sites on the machine for pressure and so there are some things that don't scale. Other things do scale, for example with reactive gases, with higher volumes required, and therefore they are larger pieces of equipment and more expensive. So I think overall we have done some estimates of what this might be and it's probably 1.2, in that range, a difference in revenue apples-to-apples and of course there is no such thing but apples-to-apples maybe 1.2 times chamber-to-chamber going from 200 millimeter to 300 millimeter.

Great, thank you.

Thank you. Our next question is from Stuart Muter with Adams, Harkness & Hill.

Good evening. Couple of questions. First is John, could you comment a little more on the geographical mix of the business in Q4 and do you expect any changes going into Q1?

Asia was stronger in Q4, at this point we don't see any dramatic shifts for Q1 from Q4. There is nothing in our projections. We don't tend to look at the business so much geographically, except by hindsight. It's more by product area and so I don't have a good, I don't really have a good feel for that geographically, except that there is nothing that stands out that says that the US, as you saw, the US drop significantly from Q3 to Q4. Part of that because of some of the OEM business. We are projecting more flat revenues this quarter and we think, are pretty much the geographic mix will look more like it did in the fourth quarter.

Okay, in terms of Asia, can you outweigh a little more granularity in terms of Korea or Japan and Taiwan?

We just report, the Asia is just the Far East. But there was, we did see strength in Japan in the quarter.

Thanks a lot. And one more question in terms of pricing pressure that you see now. Do you think this is just driven by a long downturn or do you think this is more of an effect that would flow through into the upturn, and perhaps pressure peak margins?

Well, I think-, as you know, we have seen consolidations by the Fabs, by the end users, and so, they were fewer Fabs buying fewer entities, fewer purchasers. So, when they purchase thing, I think, they have a lot of purchasing power and that flows down through the supply chain. I would expect that in an upturn, there would be less pressure, at least, that's what's happened in the past because there are more, by definition, there are more people, more customers buying, deliveries get tighter and delivery becomes more important than the price you need to have supply. So, typically there is less pressure on pricing as you go up. So, that's what I would expect from previous pattern.

Thanks John.

You are welcome.

Thank you. Our next question is from Ali Irani with CIBC World Markets.

Yes. Good afternoon, gentlemen. Clearly, you have been doing a tremendous stride in cost free (ph) engineering in bringing the mobile down. I am wondering, looking forward through 2003, how much more you can go towards re-establishing a new base and where do you think the business can be in the year-end in terms of marginal average?

Well, Ali, on the, as far as lowering the break even, now we have made some good progress last quarter in reducing our fixed costs and as we previously announced, we are still working on some consolidation of some manufacturing facilities. So, we should see some more benefits, reduction in fixed cost there as we go forward, and we are going to continue to look at pockets of cost and try to target the break even of, maybe $75b to $78b by the time we get into the third quarter. And, we are just going to have to continuously work on that.

That sounds great. And, how much will China contribute to that? Could you give us an update on your product transitions to that geography? For both plant?

In cost reduction?

Yeah.

Well, as you know, although we don't report or break out material, labor, and overhead, labor is a relatively small part of cost of most of the products. In the industry, it is, material is certainly the higher cost. So, there is some savings in going to low-cost countries, but that savings, we have been in, as you know, ENI has been in China for a number of years and when we did that acquisition we acquired their facility in China. And so, there are savings there, but I would not say that the savings in going to that area. I think that the bigger savings come from outsourcing rather than doing manufacturing yourself. It comes from outsourcing and perhaps some material cost-savings that come about. So, China certainly comes into that, but we believe that it is not a significant impact on the overall costs.

Okay. Thank you very much.

Thank you. Our next question is from Ted Berg with Lehman Brothers.

Hi, thanks. Following on in the outsourcing question, I think in the past you mentioned a very large majority of your parts of your components, or your bill materials already outsourced, I don't know if I have the number right, but that was high as 80% or so. Are there, does that mean you are pretty much of mixed out the opportunity to outsource and, -- is that the case, how will you take the breakeven from, I think it's in the mid 80m to 83m today down to 75 to 78 or can you identify --?

I don't believe that we said that we have 80%, we are already 80% outsourced. I think that the number is more in the 50% or 60% range.

That was prior to the acquisition of ASTeX and ENI that, Ted, I think that we said we had about 60% of our parts were being outsourced.

There is opportunity there at ASTeX and ENI, of course it will be more as well as that MKS.

Now there is also opportunity for purchasing materials outside of the customer, where the supply base that we have been dealing with. So there are opportunity, some of it, to get to the breakeven issue, there are both fixed cost and variable cost that we are dealing with and when we are dealing with both, outsourcing typically applies to both and that we might cut off manufacturing overhead and as Ron said, that's part of what we are doing. We are outsourcing some manufacturing one of the things that we had announced tender for example is that we would be outsourcing more of those products and not manufacturing them. Same thing is true with some of the ENI and ASTeX's products. So, there is more outsourcing going on and you reduced indirect labor and overhead in doing that. That takes time, however and as we had announced back in September, many of those outsourcing activities and the consolidation of manufacturing wouldn't be completed until the end of second quarter into the third quarter of this year. But there are opportunities and we are continuing to pursue those.

Okay. So, most of the reduction in the breakeven will come into the cost of good sold line and not really the SG&A?

I think Ron gave you the guidance on the SG&A and R&D for Q1 compared to Q4 and I believe there is a reduction there.

I am certainly looking forward as John said, we are going to look in both areas as far as improvement in gross margin and certainly looking at ways to further reduce our operating expenses that we are appropriate.

Okay. And secondly, I will ask another question on the power business. I was wondering if you could give an update on specifically the power products for PECVD and PVD. I am wondering if you make any headway in those two specific areas and then I think [Inaudible] is very strong and HD PECVD and outside (ph) edge) areas wondering if, still hanging on to your share there or attain a vast energy come in there more aggressively, recently at all ?

We don't really talk about, not specific customers, but it is almost specific customers when you start talking about some of those applications. I think what I said was that we are working on reliability of those products and delivery and working on increasing the market share of ENI products. But to get in, I won't get into specifics about particular areas and for competitive reasons.

There is another question, when you talked about improving the reliability making ground on product reliability as we said early on, what exactly did you mean by that, I mean if there had been the expansion of, just briefly the history of reliability issues?

Well, I think power supplies in general by any suppler have had, in the industry, I think it's certainly when we did our due diligence, we found that reliability is in the industry for all of the players with problem and our feeling was that improving the reliability of ENI products would be a differentiative. There wasn't any specific issue of ENI or any other supplier, it's just that when the power supply goes down or causes an event on the tool it's a significant issue.

Okay, thank you.

Thank you sir. Our next question is from Kevin Vassily with Thomas Weisel Partner.

Yes, hi gentlemen. This is Mark Bachman standing in for Kevin Vassily. I was just wondering, can you just talk a little bit about inventory in that channel or at the OEMs right now? I think during your Q3 conference call, you mentioned that inventories were kind of built during Q2, and then again at beginning of Q3. I am just wondering, has there been any change here or you still think that there are excess inventories in the channel?

Yeah, I don't think so. I think the inventories are pretty well balanced with what we expect demand is going to be. We don't see large, we are not having discussions about either taking inventory back, or short supply. So I think things are in pretty good balance at this point.

Okay, and then just one quick question. What was your percentage of revenues coming from Asia this quarter?

29%.

29%?

Right.

Okay.

Thank you. Our next question is from Mark Fitzgerald with Banc of America Securities.

Thank you. I was wondering if you could give us a couple of numbers here; free cash flow for the quarter?

Mark, there are different ways of looking at that, but if I look at cash from operations generated by the P&L it was probably a net loss, so use of cash was about 2m.

Okay, and then I guess that I'll just subtract CAPEX would, I am not sure if I gave CAPEX, but if you could give it then.

2.6m for the quarter.

Okay, and just for us doing cash flow statements here. Do you have an outlook for CAPEX for 2003? Is there anything you can guide us towards?

Yeah, I think we have said in the previous call, that it could be in 10m, 12m range possibly.

Okay. You did a pretty good job in accounts receivable, in inventories, is there any more to be squeezed out of there?

I think receivables were performing very well on collections there and there is always some opportunity. I think there's ought to be more opportunity as far as the inventory is concerned, and as far as an absolute dollar, getting it down a little bit more. Current they were 2.9, which is certainly not flowing.

Okay. So, bottom line, there is some level to generate cash from those?

There is some more opportunity, yes in the inventory area.

Okay, and then just kind of longer-term question here. I mean when we get back to talking about GAAP earnings at some point. You guys have been very, with ten quarters you are using charges and stuff. Is there.

Well, as you know in the press release we are reporting our GAAP earnings, and we record the pro forma earnings primarily to just eliminate amortization of charges related to acquisitions. It's really unindicative of our operating performance. So, that's why we do give the pro forma results. I guess it will be up to the analyst next year, how they want to handle this situation with the lot of other companies in our industry, riding off their pre-tax assets and not having really any significant income tax benefit or expense going forward. So, I mean that's going to be more of a challenge for comparative analysis.

Okay.

On a per share basis. I think, you had been looking at the operating pro forma. Operating pro forma income is the most meaningful thing for us on a period-to-period basis.

And basically if you had ascribe a tax rate to your company going forward here in a more normalizing environment, are you talking 30% or?

May be around 31%-32% would be in a normal environment.

Right, and did this, did this 13.3m write off, that basically came off the balance sheet, correct?

That is exactly right. But that is still available, for, that we can apply against future taxes payable.

So what is it, just held in some account in advance or something?

Well it just went to equity.

Equity?

Reduction in equity.

We will take the next call now.

Thank you. Our next question is a follow up from Brett Hodess from Merrill Lynch.

I had two quick follow ups. One you mentioned that Japan is stronger. Just wanted to be clear, was it OEMs in Japan given that we are seeing a capital spending from Japanese chip companies pick up. Some of the OEMs in Japan picking up and also since there is a lot of flat panel guys, is that where the pick up came from John?

Yes, that's right.

Okay and the other question I wanted to ask was, you mentioned possible pricing pressure a little bit. On the integrated products where it is really a differentiated solution. Do you see the same kind of pricing there, you would say stay on a standalone instrument?

I am sorry the same kind of pricing?

You see the same kind of pricing pressure on an integrated product, that you would on a stand-alone instrument.

Well, no you don't. There is certainly attention paid to total cost and what the cost of a function is, that if we are looking at the cost of function rather than individual component. And if the overall cause of the function can be done within a budget, then that's were the pressure comes, but we have got then more flexibility to work on the margin by working on the designer cells. That's where the benefit comes I guess.

I understand. Thank you.

Thank you sir. We have time for one final question. Our last question is a follow up question from James Covello with Goldman Sachs.

Thanks very much. Just a very quick question. The $0.05 to $0.10 loss per share guidance, does that reflect the fact that you will not receive the tax benefit or does that - is that pro forma assuming you will get tax benefit?

Thanks, Jim I will assume that there will be no tax benefit from the loss and the only thing is included in that projected EPS is that we would have a tax expense of about $300,000 in the quarter related to our foreign operation.

Thank you.

Thank you very much for tuning in today and we look forward to having you on our next conference call. John did you have anything you wanted to say.

I think that concludes the comments, we just want to thank you for joining us and for your continued interest in MKS. Thank you.

Thank you sir. Ladies and gentlemen this does concludes today's MKS fourth quarter earnings conference call. If you like to listen to a replay of today's call, please dial 303-590-3000 with access number 502-820 followed by the pound sign. Once again thank you for participation today and you may now disconnect.