萬機儀器 (MKSI) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the MKS third quarter 2003 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 anyone needs assistance at any time during the conference, please press the "star" followed by the "zero". As a reminder, this conference is being recorded today, Tuesday, October 21, 2003.

I would now like to turn the conference over to Ms. Joanna Mains, the Director of Investor Relations. Please go ahead.

Thank you very much. Good afternoon and welcome to our third quarter earnings conference call. By now you should have received a copy of our earnings release, if you did not please go to our Web site at www.mskinstruments.com or call 978-975-2350 extension 5524 after this call.

As a reminder various remarks that we may make about the company's future expectations, plans and prospects constitue forward-looking statements for purposes of the 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 those 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, 2002 and most recent quarterly report on Form 10-Q, each of which is on file with the SEC.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically, disclaim any obligation to do so. Even if our estimate change and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we will be referring to non-GAAP financial measures which exclude certain charges and special items. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the investor relations section of our Web site under the heading, quarterly earning releases.

Finally, I would like to remind everyone that during the Q & A period, each person will be limited to 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 Joanna and thanks everyone for joining our conference call. With me today is Ron Weigner, our Chief Financial Officer. I will give an overview of the third quarter and then Ron will review the financial results. I will make some closing comments and then we will answer your questions. Third quarter revenues of $81.6 million were within our guidance and essentially flat, after a stronger than expected second quarter when orders were pulled in from the third quarter.

Excluding amortization of acquired intangibles and a restructuring charge that Ron will discuss the third quarter net loss was $1.7 million or three cents per share which was essentially the same as the second quarter.

Orders continued to trend higher through the third quarter and we now estimate a fourth quarter revenues could increase by 4 to 9%. With the continuous improvement we have made to our cost structure, we expect it to achieve break even results or better in the fourth quarter. We estimate a revenue range of $85 to $89 million for the fourth quarter with earnings ranging from break even to income of 3 cents per share, excluding estimated amortization and restructuring charges. We will continue to work on cost reduction at all revenue levels.

Turning to the highlights of the third quarter, we posted an 11% increase in thin film revenues as we continued to make inroads in flat panel display optical storage and architectural glass applications. We also penetrated leading edge applications for semi-conductor manufacturing in the quarter.

In addition, we expanded our broad technology portfolio by acquiring leading edge MIMS technology and we participated in more customer evaluations of our products including those that integrate multiple technologies. Let me give you some details.

The MIMS technology we acquired is designed to leapfrog decades old technology in most vacuum gauges on the market today by providing higher accuracy and faster response in a smaller foot print. It enhances the competitiveness of our vacuum gauge product line and positions us to gain share in gas-based manufacturing processes in the semiconductor, flat panel and data storage, high-energy physics bio-tech and pharmaceutical markets.

Industry analysts forecast the vacuum gauging market opportunity in semiconductor and thin film manufacturing at almost $40 million for 2003. Equally important, this technology leverages our core competency and pressure in vacuum. With it, we can provide multiple sensor transducers that measure a wide dynamic range from above atmospheric pressure to high vacuum.

We have already incorporated this leading edge technology into other instruments such as our portable PICO leak detectors. Consistent with an improving outlook, we're participating in many more customer evaluations of our technology.

For example the ALTA Mass Flow Controller with multi range, multigas capability and the pressure insensitive piMFC, a new integrated subsystem with ethernet conductivity have now been qualified for use in several applications at major OEMs.

Our customers also continue to engage us in qualifying our RF and DC power supply products in a broad range of applications. As device layers get thinner, precise and stable pressure measurement and control becomes more critical. We recently saw the challenging problem in critical pressure control in an leading edge application. Our solution offered unparallel precision and stability and we were designed into this customer's 300 millimeter tool.

We were also leveraging our core competency in pressure control by introducing a range of pendulum-type throttle valves. These larger valves are used to control pressure in the most advanced Etch and CVD applications. You may recall that Samsung has selected our SEMOZON ozone generator for manufacturing advanced semiconductor memory devices. SEMOZON delivers ultra high concentrations of ozone at low flow rates, in a compact footprint.

Samsung a leading supplier of DRAM devices and uses ALD equipment from multiple manufacturers. We expect more SEMOZON orders as ALD technology is implemented on leading edge memory devices. Over the next 5 years ALD tools are forecasted to grow at a 65% rate. The highest rate of all deposition equipment.

Speaking of higher growth applications our ASTRON reactive gas generators continue to be selected for flat panel display equipment in the quarter because it excels at chamber cleaning with ultra high clean rates. Our InDuct gas analyzer has achieved early success in 300 millimeter production at multiple fabs worldwide.

For example, InDuct has been integrated to process exhaust line to provide realtime data on gas concentrations in process chambers. This has enabled real time process optimization and fault protection resulting in significant production cost savings of hundreds of thousands of dollars due to a reduction in lost wafers and increased production time.

As we look ahead, we will continue to enhance our technology and our customer support while maintaining an ongoing focus on improving our operating efficiency.

And now, I'll turn over to Ron to discuss our financial results.

Thank you, John and good afternoon, everyone. I'll review the financial results, provide some details on the quarter, and provide guidance for the fourth quarter. Third quarter financial results were essentially unchanged compared to second quarter. Net sales were $81.6 million in the third quarter of 2003, compared to $81.2 million in the second quarter.

The GAAP net loss was also unchanged at 11 cents per share or a loss of $5.6 million in the third quarter of 2003. Compared to $5.5 million in the second quarter.

However, the third quarter included only five days of mandatory time off, compared to ten days taken in the second quarter. Excluding amortization of intangible assets related to acquisitions and restructuring charges, the net loss would have been 3 cents per share or a loss of $1.7 million in the third quarter of 2003. Compared to $1.5 million in the second quarter.

The third quarter restructuring charge of 300,000 reflects the consolidation of a small facility in Germany into our larger operations to better support customer requirements. We are continuing to evaluate opportunities to consolidate operations, improve operating efficiency and reduce our fixed costs. Semiconductor revenues grew 2% quarter over quarter with growth in sales to both OEM's and end users. As John said, we posted 11% sequential growth in thin film revenues which reflects growth in flat panel display, optical storage and architectural glass markets.

Our market mix was 67% of net revenues from semi-conductor, 12% from thin film and 21% from other markets. The top ten customers accounted for 44% of third quarter sales up slightly from 43 % in the second quarter. Applied Materials remained our largest customer representing 17% of third quarter sales compared to 18% in the second quarter. Combined sales to Applied and one of its subcontractors, who is also a customer to MKS, increased to 20% in the third quarter from 19% in the second quarter.

Third quarter geographic sales were essentially unchanged from the second quarter at 58% to North America, 28% to Asia and 14% to Europe.

Gross margin improved by 20 basis points to 34% in the third quarter. Higher cost materials are still being consumed and our transition of material sourcing and manufacturing to low-cost countries requires customer qualifications.

Some products are qualified now, and others won’t be qualified until the first or second quarter. We expect to see gradual improvement in gross margin beginning in the first quarter of 2004 as we consume higher cost materials, continued transitioning material sourcing and manufacturing to low-cost countries, and reduce duplicate labor and overhead cost. R&D increased slightly and SG&A expenses decreased slightly in the quarter for a net increase of approximately 200,000.

For the past five quarter, we've continued our R&D investment at approximately $12 million per quarter, while reducing our SG&A Expenses by approximately 15%. This reflects the improving trend in our cost structure.

In the third quarter, our worldwide workforce decreased by 36 people to 2048 which was primarily a reduction in temporary manufacturing labor.

Turning to the balance sheet, our financial position remains strong. With total cash and investments of approximately $134 million in the third quarter. Our cash and investment net of debt decreased about $2 million to approximately $108 million. Accounts receivable increased approximately $3 million due to the timing of shipments during the quarter.

Day sales outstanding were 60 days compared to 57 days in the second quarter. Inventory increased approximately $1 million in the third quarter to support the transition of products to lower cost regions. Third quarter inventory turns were 2.8 compared to 2.9 turns in the second quarter.

We continued to manage capital spending and expenditures totaled $1.8 million in the third quarter. Depreciation was $3.6 million for the third quarter.

For 2003 we expect capital spending to total approximately $7 million and depreciation expense to total approximately $15 million.

Looking forward, we estimate that fourth quarter revenues could range from $85 to $ 89 million. Gross margin could range from 35 to 36%, resulting from higher volume in the fourth quarter. As I mentioned earlier, we expect to see gradual improvements in gross margin beginning in the first quarter of 2004 as we begin to realize the benefits of sourcing materials at lower cost, transitioning some products to low-cost regions, and reducing duplicated overhead cost.

We expect to maintain the current level of R&D spending of approximately $12 million. SG&A expense in the fourth quarter could increase to a range of $17.8 million to $18.2 million. Primarily representing higher professional fees and litigation costs related to our claim of patent infringement.

During the fourth quarter, we will further reduce mandatory time off and we will take only three days off in addition to the scheduled holidays at the end of December. This is a reduction from five mandatory day off in the third quarter and ten days off in each of the prior four quarters.

Amortization of acquired intangible assets is estimated to be approximately $3.6 million in the fourth quarter. We expect to continue to consolidate some small operations in the fourth quarter and restructuring charges are not expected to exceed $2 million dollars in the fourth quarter. Net interest income could be approximately $200,000.

We estimate our income tax expense for the fourth quarter could be approximately 600,000, which represents taxes on state and foreign income. Based on these assumptions, the fourth quarter GAAP net loss could range from a loss of 8 cents per share to 11 cents per share. Amortization of acquired intangible assets and restructuring charges are excluded from our operating performance metrics.

Excluding these charges, which together would total approximately 5.6 million. Fourth quarter earnings could range from break-even to income of 3 cents per share, based on approximately $54 million diluted shares outstanding.

On October 16th, MKS filed a shelf registration statement with the FCC in conjunction with a prior shelf registration statement, which allows MKS to offer up to 2.3 million shares of its common stock and allows certain stockholders to offer for resale up to 6.3 million shares.

The company intends to use the net proceeds from any sale of MKS shares for general corporate purposes including working capital, product development and capital expenditures and for potential acquisitions. This concludes our financial discussion, and I will turn the call now back to John.

Thank you, Ron. Let me conclude by saying that we see significant opportunities ahead. The ongoing increase in semiconductor device complexity also increases the number of process steps, which in turn creates new manufacturing challenges for OEMs and end users.

As devices get more difficult to make, customers are finding solutions for improving their productivity in our portfolio of process-controlled technologies. We believe that our broad process expertise will increasingly help us leverage opportunities to improve our customer's yields, uptime and throughput.

We are working hard to translate our expertise into profitable solutions for MKS and our customers.

Ron and I will now take your questions.

Thank you, sir. Ladies and gentlemen at this time we'll begin the question and answer session. If you have a question, please press the "star", followed by the "one" on your push-button phone. If you would like to decline from the polling process, press the "star" followed by the "two". If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

One moment please, for the first question.

Our first question comes from Brett Hodess with Merrill Lynch. Please go ahead.

Good afternoon, gentlemen. Two questions. First, given that the quarter was essentially in line, your outlook is actually stronger than most of the other sub-component, companies have had for the December quarter so far. Do you think that your stronger growth is an indication of industry trends or are you also seeing share gains in that?

Well, that is little difficult to answer, Brett. We certainly see more optimism in the industry. And share gains could be share gains related to things we have done over a long period of time. And particularly in 300 milliliter as 300 millimeter becomes more prevalent.

So I would say it is -- it's a combination. Of both the industry and share gains and I would call it more penetration. Just through the acquisitions we have made over several years, I think that that strategy is really beginning to help us in being able to sell product across the wide -- a wide spectrum of applications and end users and OEMs.

The second question, John, is regarding the margins, they're improving at about the rates that we have been modeling based on, you know, your comments over time. But it does sound like that the March quarter of '04 could be the time we see a faster acceleration given the reduction in the duplication of -- you know, expenses as the low-cost regions ramp up and some of the other programs you're working on. I was wondering if you or Ron could give us an idea of what type of incremental margin leverage we might see in the March quarter?

Brett, that's a little bit difficult to quantify, because the improvement in the variable margin would depend upon the product mix. So to really say what that would be would be difficult without knowing what the actual product mix would be.

And that can also affect how quickly we would burn up some of the higher-cost inventory. But as I said, we expect to see some improvement as a result of our low-cost sourcing. And we expect to see some improvement in the margin in the variable margin in the first quarter. And going forward.

Just if I can sort of finish that off. So if revenues in the first quarter just for -- with the mix was similar to what it is in the fourth quarter outlook and, you know, if the revenues were, you know, let's say on the high end or a little bit better than the high end of the fourth quarter guidance, would we see a similar kind of gross margin movement that we're seeing in the third to fourth quarter -- it would be at a higher rate than that?

I don't want to give specific guidance on the gross margin for first quarter other than that as you suggest, if it was a similar mix of products, at the same volume that we would see some variable improvement in the margin.

OK. Thank you.

Our next question comes from Ben Pang with J.P. Morgan. Please go ahead.

Hello, a couple of questions here to follow-up on the gross margin issue and kind of the outsourcing. Does it depend on like what your product mix is in terms of whether or not you get rid of the second sourcing?

I'm sorry, the mix to get rid of second sourcing?

Or -- I mean, you mentioned that part of the reason or the problem with the gross margin is that you have some higher cost sources now and you are transitioning to the second source, right? The lower cost source. And I'm wondering -

Yes. The mix would affect that. That's correct.

What really drives that mix? I mean, is it semiconductor business or the other type of business?

It's pretty broad. It's -- and we don't want to get into specific product areas for competitive reasons.

OK and then two other questions. What is your break-even goal now and, you know, what are the major steps that you would take to get there? And one comment or can you make some comments on the (inaudible) flow, like how much market you are picking up on flow control? Can you give us color on that and that will be it?

First on the break even I think as we suggested that on the guidance of the revenue from 85 to 89, we said that we would expect to break even at $85 million.

Well, wasn't your goal for break even much lower than that previously?

Well, it was in the low 80s. But that was -- and that change is a function of gross margin.

OK.

There were certain assumptions made there as to what the variable contribution would be, and as I said, I think we'll start realizing some of those benefits now beginning in the first quarter.

OK Then can you comment on the Intelli (ph) flow? What do you think your market share is from ALTA controllers, and where is that going? Can you see some product momentum?

In tele flow, is not one of our products, but the ALTA mass flow controller you may be referring to?

Yes. Your integrated mass flow controller.

Yes, the pi and the CD. We have a small market share in that area. However, we have seen some -- we do have some design wins and some applications where we have been qualified and that would --we expect that to grow steadily over time. But I can't quantify what that growth would be. For competitive reasons we don't get into that kind of quantifying the mix.

: Are those projects pretty mature now?

Products?

: Yes, meaning you are well accepted in the field?

Well, we have been plying flow controllers for many years, but this is a new generation.

Right. Is there any break in time for that? Meaning - the

That system has been evaluated for perhaps eight or nine months now for various applications.

Thank you very much.

Our next question comes from Jim Covello with Goldman Sachs. Please go ahead.

: Thanks so much. Couple of quick questions, sticking with the gross margins, can you give -- can you explain to us again -- I think gross margins were at the low end of the guidance range even though revenues were in the midpoint of the guidance range. I know you had said that you had to run higher cost inventory through, but you would have known about that heading into the quarter. So can you talk a little bit more about the gross margins being at the low end?

Well, it is a turns business, and we don't know the mix at the beginning of the quarter exactly.

So it's more a function of product mix? It's using higher cost inventory associated with product mix?

That's right.

OK. And then can you talk -- just a couple of things on the tax rate for next year, how should we think about the tax -- the tax rate next year as you begin to make profits again?

Well, the way that works is you really don't make a determination until it becomes likely that you'll remain profitable. So most likely we wouldn't make a decision on that until later in the year or even early next year. Then what happens is you do reverse the tax - write off that we took last year. Now, if the in -- in normal times we would expect that our tax rate would be around 31%.

OK.

But that won't be what we'll be actually reporting. We will still next year be just showing taxes in the first quarter on state and foreign incomes. So it would be a small amount.

But when the tax rate does come back, is it offset by tax loss carry forwards or how does that work?

Well, there will be one adjustment to bring back the deferred tax asset and then ongoing it would be about 31% ongoing.

So, 31% is inclusive of that?

It would be reasonable, yes.

Thanks so much.

Your next question comes from Stuart Muter with Adams, Harkness & Hill.

Thank you. Good afternoon. A couple of questions for John. First you made some comments about vacuum transducers, and you have had some HPS product out there for a while. I was just wondering if you could talk about how the progress goes in terms of load locks transfer chamber design wins?

The MIMS device that we have just acquired, we have been purchasing HPS has been -- the vacuum products group has been purchasing that for about a year and a half now. And has worked on incorporating that with other gauging that comes from the HPS operation. And there have been some --several design wins in that.

And there are a lot of evaluations going on as we speak. So I can't quantify it more than that. But to say that it's generated a lot of interest. The basic improvement of that product is that at atmospheric pressure it makes very accurate measurement at atmospheric pressure, and typically in a load lock, you want to be able to open or close the load lock, just at about atmospheric pressure or slightly above or slightly below it.

And otherwise you can cause turbulence in the chamber. And that instrument is very accurate in being able to do that, and then continues on with other instruments down through the whole vacuum range. So it has a lot of interest.

And John, when do you think that will begin to show up in terms of revenues?

Well, it's part of the revenue mix now. And as we pointed out, it's about a total of $40 -- about a $40 million market. We don't expect that we will have 100% of that market, and so in looking at it as part of our total results, it's one of the product lines we have and one of the -- one of those elements that adds to the total that we do. But I can't make it a significant part of what our revenues are going to be.

Fair enough. In terms of RF, there's a plot of activity in terms of high frequency for Etch. Could you tell us how some of your evaluations are going there?

Well, for competitive reasons I won't tell you that. But just suffice it to say that there are evaluations going on in -- with high frequency generators in a number of -- a number of OEMs.

Fair enough. Thank you.

Our next question comes from Ali Irani with CIBC World Markets. Please go ahead.

Good afternoon, gentlemen. I was hoping you could address a little bit of the mix and how you see it changing in the fourth quarter? Clearly, the little bit of semi-strength and a lot of thin film market strength this quarter offset the other markets decline. I'm wondering how those three moving parts fit into your guidance in the fourth quarter?

We typically don't forecast or give guidance on the mix, Ali. So it's -- typically, we don't do that because of the short lead times that we have.

OK.

But as you -- if you track our mix over time, it can --quarter to quarter can change several percent in any direction for -- by market. And we don't -- we don't give guidance on the mix of product at all.

Qualitatively, John, it would seem that MBN (ph) markets, at least the flat panel and hard disk markets are still carrying momentum and there seems to be some potential in the fourth quarter for the semi-market continuing its modest pickup in the third quarter.

I'm just trying to understand what happened in the other businesses and, for example, at least going back forgetting the guidance, what were the factors that depressed those other markets and were there temporary issues and can we see a comeback? These are, you know, broader market share, for example factors?

The major other market, is the medical market. And the medical market is --that's where we supply power supplies for the MRI application. And that would probably account for the major difference quarter to quarter. And that is a lumpy business, and so also it has a lot of spares associated with it. So for example, we could have a quarter with a lot of spares and then a quarter without.

We also had product as we mentioned we had orders pulled in from the third quarter to the second quarter. And that affected the mix for the third quarter also.

Great. One big picture question for you and Ron. Obviously, you are given the acquisition strings from the product announcements. Your general market share of dollars of components and subsystems around the chamber has increased significantly over the last couple of years. Could you help us quantify where you see that in terms of overall penetration over the last year?

Penetration as a percent of the --?

As a dollar amount around the chamber or even a percentage market share if you have any thoughts on that to share with us?

Well, we address -- we believe we address about 70% of the building materials around the process chamber in kind of a general way. Generalized chamber. It is a difficult question, and almost impossible to answer, but we --prior to all the acquisitions, we were addressing we think about 25% of the building materials with our products.

Terrific. Thank you very much.

Our next question comes from Robert Stern with Needham & Company. Please go ahead.

Good afternoon. You talked about the mandatory days off going down in the fourth quarter to three. Can we assume that that will go to zero in the first quarter?

Well, we'd hope so.

And can you talk about the -- any salaries in '04 that have to be brought up and raises that people need because maybe they haven't got them for a while, what that is going to do to the SG&A line and when would you make that decision, what might -- was there some specific level of profitability you have to get to before you trigger that?

Rob, at this point, there are only a few -- few people that are on salary reduction and those reductions will be coming off in the first quarter and it will not have a significant effect on our earnings --quarterly earnings going forward.

OK. Thank you.

Ladies and gentlemen, we have time for one final question. Our last question comes from Richard Tortoriello with Standard & Poor's Equity. Please go ahead.

Yes. Thank you. I wonder if you could give us a sense of how lean you think your inventories are at the OEMs? And also, I wondered if there's a lead time in orders to you from the OEMs in that when they anticipate an increase in order that they might order to you prior to that anticipated increase?

That varies a lot by product and product type. Typically, the higher -- higher dollar items are ordered closer to the time they might be installed and delivered compared to some of the lower cost items. We deliver most -- a high percentage of the products on a just-in-time basis. Meaning we get an order -- there's an order that's delivered -- order and delivery are simultaneous, basically. That's about 25 to 30% of our business, the turns business.

Then typical lead times for most of the products are 7 to 10 days other than some of the more, again, more complex products that are --that can be six to eight weeks. We have moved some of those lead times down to four weeks to six weeks and we are continuing to work on that. But typically, we would be -- we would be seeing orders perhaps in the quarter, for half a quarter before the product by the OEMN in the case of an OEM.

OK. I suppose that your just in time inventory system means that you have some good visibility into inventories. Do you see them as very lean right now or --?

Yes. We haven't had the feeling that there are -- that there are large amounts of inventory at the -- at the OEM level. I think that a year by year, that situation has been improving.

Right. I guess my question is more along the lines of do you think the inventories have gotten unusually low at this point?

I would -- I wouldn't know. I couldn’t tell you that. The inventory -- the inventory being low or high is a function of what their production level is.

OK. Thank you.

Mr. Bertucci, please continue.

Well, thank you. That concludes our comments and I would just like to thank you for joining us today and for your continued interest in MKS. I know there are a lot of companies reporting today. We'll sign off at this point. Thank you very much.

Ladies and gentlemen, this concludes the MKS, third quarter 2003 earnings conference call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000 and enter the access number of 552461. Once again, if you would like to listen to a replay of today's conference, you may dial 303-590-3000 and enter the access number of 552461. Thank you for participating. You may now disconnect.