萬機儀器 (MKSI) 2003 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, welcome to the MKS fourth quarter and year end 2003 earnings conference call.

At this time, all participants are in a listen-only mode. On today's presentation, instructions will be given for the question-and-answer section. If anyone needs assistance at any time during the conference, please press the star followed by a zero.

As a reminder, this conference is being recorded Tuesday, February 3, 2004.

I would like to now turn the conference over to Jonna Manes, the Director of Investor Relations. Please go ahead, ma'am.

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, and if you did not 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 future expectations, plans and prospects for MKS constitute 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 -- December 31, 2002, 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 expectations only as of today. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statements should not be relied upon as representing the company's estimates or views as of any date subsequent to today.

Finally I would like to remind that everyone during the Q & A period, each person would be limited to two questions. We will circle back for further questions as time allows.

Now I would like to introduce John Bertucci, Chairman, Chief Executive Officer and President of MKS.

Thanks, Jonna and thanks, everyone, for joining us. Joining us is Ron Weigner, our Chief Financial Officer.

I will give an overview of the fourth quarter and year and then Ron will give a detailed review the results. I will make some closing comments and then we will answer your questions.

Our fourth quarter results reflect a turnaround year in the semiconductor equipment industry. I am pleased to report a 25% increase in sequential quarterly sales to $102 million and a return to profitability.

GAAP net income was $2 million or 4 cents per share. On an ongoing operating basis, non-GAAP net earnings were almost $6 million or 11 cents per share, excluding amortization of acquired intangibles and special items.

Revenues increased across all of our product groups across the 4th quarter as higher utilization at all nodes drove capital investment.

As you know, our OEM customers have said they are seeing increased adoption of 300 millimeter equipment. This is good news for MKS. Revenue opportunity for MKS of 300 millimeter have increased through product development and through acquisition. And as 300 millimeter tools supersede 200 millimeter tools, MKS can generate revenue growth.

The ongoing transition to smaller device geometry, such as 130 and 90 nanometers, also creates an opportunity for MKS.

Wafers become more valuable as device dimensions shrinks and more and thinner layers are deposited. More processed steps are also required to produce these devices. We believe that higher value wafers will drive demand for web-enabled sensors and control and information management products that enable advanced process control.

By embedding digital connectivity into our sophisticated process sensors, we enable information to flow from sensors around the process chamber to the factory network. This information flow enables customers to optimize the processes, which reduces material costs and the use of test wafers. It can also improve uptime yield and throughput and enhance the fab's return on significantly higher capital investments.

Returning to the highlights of the quarter, we introduced E-Vision, the first web enabled residual gas analyzer in the fourth quarter.

Speaking of RGAs, we had orders in the quarters to equip new fabs in China, which reinforced our position as a market leader for RGAs in this emerging market. We also won a major contract to equip a new high energy physics facility in Europe with RGA's. Our broad product offering has enabled us to leverage sales into this important nonsemiconductor market, and we will be supplying vacuum gauging and vacuum subsystems to this customer. In the area of vacuum management, our next generation 46 Series heaters were designed in by major OEMs and specified by the world's leading fabs for use on equipment they buy.

In the quarter we gained design wins at U.S. and Asian companies delivering high purity gases with the latest versions of our Micro-Baratron high pressure gas transducers. Significantly, we continue to be selected over lower-price competitors because of the stability, robustness and precision of these products.

We are seeing a lot of interest in a new generation of mass flow verification products based on our successful web enabled IMFC technology. This verification product is being designed into gas delivery systems for next generation process tools at major OEMs. As processes get more complex and process windows shrink, the accuracy of flow control becomes more critical.

Many fabs are insisting that leading tool manufacturers build flow verification systems into gas panels so they can monitor critical flow rates without reducing process tool throughput. MKS has built up a strong base of IP in this area and is the leading supplier of on-tool match flow verification systems.

Sales of our Astron products were strong in the quarter to both semiconductor OEMs and flat-panel OEMS. Our ozone technology continues to do well in the marketplace and we achieved a significant design win for a new cleaning tool for a major OEM.

We also continued to expand our technology portfolio in the quarter. We acquired RF power amplifier technology to enhance our current product offering for MRI medical equipment. This technology will help us develop a range of power solutions for MRI equipment in established markets, such as the U.S., Europe, and Japan, and also in rapidly developing markets such as China.

We continue to see strong demand for the top lid resistor of subsystem which is one of our highly integrated subsystems. As you know, MKS' value-added strategy is to develop best of breed products, acquire leading-edge technologies and integrate our technologies into higher subsystems. This strategy differentiates MKS and provides a competitive advantage.

Integrated subsystem sales increased year-over-year to 20% of sales in 2003 from the high teens in 2002. We are making good progress toward our goal of 30% or more of sales from these value-added products, and we expect these sales to continue to grow in 2004.

Our order momentum in the fourth quarter has continued into the first quarter. Therefore we are raising our first-quarter revenue guidance to a range of $120 to $125 million, for a sequential increase of approximately 20%.

Fab capacity is tight and we expect fabs will continue to make significant investments to add capacity. We have the capacity and ability to respond effectively to our fab and OEM customers with short lead times and reliable products.

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

Thank you, John. And good afternoon, everyone.

Fourth quarter 2003 net sales of $101.8 million were up 25% sequentially from $81.6 million and up 31% from $77.6 million in the prior year fourth quarter. GAAP net earnings for the fourth quarter 2003 were $2.1 million or 4 cents per diluted share. By comparison, the third quarter 2003 net loss was $5.6 million or 11 cents per basic share and the fourth quarter 2002 net loss was $19.2 million or 37 cents per basic share. The net loss in the prior year fourth quarter included a special non-cash charge of $13.4 million or 26 cents per share for the reversal of MKS's net deferred tax assets. These assets remain available for use as deductions against future taxable income.

On an ongoing operating basis, or non-GAAP basis, net earnings for the fourth quarter 2003 were $5.9 million or 11 cents per diluted share compared to a net loss of $1.7 million or 3 cents per basic share in the third quarter. Non-GAAP earnings exclude amortization of acquired intangibles and special items. Excluding these items, the fourth quarter 2002 non-GAAP net loss was $3.3 million or 6 cents per basic share.

Sales for the year were $337.3 million, up 7% from $314.8 million in 2002.

Gross margin for 2003 increased by 1.4 percentage points to 35% of sales. This improvement results from increased absorption of fixed overhead costs and higher margin on foreign sales.

R&D spending was up slightly on a dollar basis as we maintained a steady level of investment.

SG&A expense is decreased by 10% on a dollar basis, to 20.7% of sales as we gained leverage by integrating acquired companies.

The GAAP net loss for 2003 was $16.4 million or a 32 cents per basic share compared to net loss of $39.5 million or 79 cents per basic share in 2002.

On an ongoing basis, operating -- on an ongoing operating basis or non-GAAP basis, the net loss was $1 million or 2 cents per basic share in 2003 compared to the net loss of $7.4 million or 15 cents per basic share in 2002.

Looking at the market mix in the fourth quarter, sales to semiconductor OEMs and end users were up 36% sequentially and represented 74% of sales in the fourth quarter, compared to 68% of sales in the third quarter. Thin film sales, which include equipment for flat-panel display, data storage and architectural glass, decreased by 11% sequentially and represented 8% of sales in the fourth quarter, compared to 11% in the third quarter. Flat-panel sales remain strong in the quarter, but the lumpy order pattern in the data storage sector reduced total thin film sales. Sales to other markets increased by 7% sequentially and represented 18% of sales compared to 22% in the third quarter. This increase reflects our strength across an array of markets.

Our top ten customers accounted for 44% of fourth quarter sales. The same as the third quarter. Applied Materials continued to be our largest customer at 19% of fourth quarter sales compared to 17% in the third quarter. Combined sales to Applied and one of its subcontractors who is also a customer of MKS represented 21% of fourth quarter sales compared to 20% in the third quarter. A major manufacturer of medical imaging equipment continues to be one of our top ten customers.

Looking at the fourth quarter geographic sales mix. Sales to U.S. customers were up 29% sequentially and were 60% of total sales, compared to 58% in the third quarter. Sales to Asia were up 28% sequentially and represented 29% of sales compared to 28% in the third quarter. Most of the incremental increase in Asia in sales came from key semiconductor OEMs in Japan. Sales to Europe were flat sequentially and were 11% of sales, compared to 14% in the third quarter.

Gross margin increased sequentially to approximately 37% in the fourth quarter as we leveraged our manufacturing overhead on an increased sales volume. This compares to 30% -- 34% gross margin in the third quarter and 32% in the fourth quarter of 2002.

Fourth quarter R&D spending increased sequentially by approximately $1 million to $12.9 million, as a result of increased cost for project materials and a slight increase in staffing. We plan to maintain approximately this level of R&D spending as volume increases. We are continuing to use our centers of excellence in various technologies to leverage our R&D across our product lines. We are also standardizing best design practices across our product groups.

Fourth quarter SG&A expense was $17.5 million or 17% of sales, compared to $17.1 million or 21% in the third quarter. During the quarter, we adjusted an estimate of depreciation expense, which reduced SG&A by $600,000.

Additionally, as a result of collection efforts in the quarter and improved industry conditions, bad debt expense was reduced by $600,000. With these favorable -- without these favorable items, fourth quarter SG&A would have been $18.7 million or approximately 18% of sales.

Amortization of intangible assets totaled $3.7 million in the fourth quarter.

Restructuring charges were approximately $1 million as we continue to consolidate smaller facilities. In addition, we had a one-time gain of approximately $900,000 related to an insurance contract.

Tax on state and foreign income totaled $1.5 million on higher than expected international sales to Asia in the quarter. You may recall that our federal tax rate is currently zero, because of the $13.4 million special non-cash deferred tax charge taken in the fourth quarter of 2002.

Our worldwide workforce increased sequentially to 2144, from 2048, primarily as a result of adding direct labor, mostly on a contract basis, to support the increased levels of shipments, as well as ongoing transition of certain products to lower cost countries. We also had a slight increase in staffing in R&D.

Turning to balance sheet, total cash in investments increased by approximately $9 million to $143 million. Cash and investments net of debt increased by about $6 million to approximately $114 million as of December 31st. After the January offering of our common stock, our cash increased by approximately $30 million.

Days sales outstanding for the fourth quarter decreased to 59 days from 60 days in the third quarter.

Fourth quarter inventory turns improved to 3.1 from 2.8 turns in the third quarter.

Capital expenditures of $1.7 million in the fourth quarter were primarily related to manufacturing equipment for new products and building improvements.

Depreciation was $2.7 million for the fourth quarter compared to $3.6 million for the third quarter, as a result an adjustment to estimated depreciation expense. Going forward, we expect depreciation expense to be approximately $3.6 million.

Looking forward, we estimate that first quarter revenues could increase sequentially by approximately 20% and range from $120 million to $125 million. Gross margin could range from 39% to 41% in the first quarter. Our goal is to gradually improve our gross margin through the year by reducing our variable costs as we source materials from lower cost countries, increase the percentage of sales from integrated subsystems, outsource production of certain products to low cost countries, and consolidate smaller operations.

During the downturn and including 2003, our cost savings initiatives included salary reductions, wage freezes, and curtailment of bonuses. Looking forward, with an improved business outlook, we will begin to restore our operating expenses to normal patterns in the first quarter. Therefore, we expect that the first quarter R&D spending could be within the range of $13 to $13.5 million, compared to $12.9 million in the fourth quarter.

First quarter SG&A expenses could increase to a range of $20.5 million to $21 million, compared to normalized SG&A spending of $18.7 million. Amortization of acquired intangibles is estimated to be approximately $3.7 million in the first quarter. Restructuring charges could be up to $2 million in the first quarter as we finish consolidating smaller facilities to give us better economies of scale. Net interest income for the first quarter could be approximately $400,000.

We estimate our income tax expense for state and foreign income in the first quarter could range from $2 to $2.5 million dollars. We will periodically assess if and when we are required to bring the $13.4 million deferred tax assets back to our balance sheet and begin recording federal income taxes. After that occurs, we could -- we would begin recording our normalized tax rate which could be 31%.

Based on these assumptions, first-quarter GAAP net earnings could range from 10 to 15 cents per share based on approximately 56 million diluted shares outstanding. On a non-GAAP basis, first-quarter earnings could range from 20 to 25 cents per share, excluding amortization and restructuring that together could total $5.7 million.

This concludes our financial discussion.

I would like to turn the call back to John.

Thank you, Ron.

Before we take your questions, I would like to comment specifically on our ramp readiness. We have been recognized for excellence in manufacturing, with short cycle times and lean manufacturing practices. The key part of our manufacturing excellence is strong supply chain management, which minimizes risks and maximizes our ability to execute. We are supporting our customers' requirements today with an on-time flow of reliable products. As OEMS and fabs concentrate on continuing to reduce tool production cycles and ramp wafer production, we have the ability and capacity to support higher demand going forward.

Ron and I would like to now take your questions.

Thank you, sir.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, press the star followed by the 1 on your push button phone. If you would like to decline from the polling process, press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in the order they are received. If you're using speaker equipment, you will need to lift the handset before pressing the numbers.

One moment, please, for our first question.

Our first question comes from Brett Hodess, please state your company name followed by your question.

Good afternoon. Couple of questions.

First, John, I am wondering if you can give us a little color on -- you said the order strength has remained strong. A little color on the order strength in terms of U.S. OEMs versus Japan OEMs or is it across the board, and how would you rate, sort of, the visibility the OEMs are giving you now versus some of the previous beginning of upturns.

Okay, well, it's been pretty much across the board. Asia OEMs are certainly strong, but so are the U.S. from our view. And we -- throughout the cycle we get about a six-month view of production requirements. That doesn't really change much during the cycle, and so I can't comment much more on that, Brett, other than that we do get a six-month view out.

Okay. And then a quick follow-on for Ron.

Ron, I am wondering if you are could give us an update on the restructuring, how close we are to completing that in terms of having charges in the quarters. And then -- I know you gave guidance for the quarter on taxes, I'm wondering what we should use for the tax rate for the rest of the year given the accelerated profitability.

On the first question, Brett, we expect that we will have completed our restructuring charges by the end of this quarter. So this should be the last quarter that we would see any significant charge, as we complete the consolidation of smaller facilities.

Now as far as the taxes going forward, as you know, the taxes only represent taxes on foreign income. So that tax would only change as the mix of domestic and foreign sales change. So relatively, it would be about the same depending on the volume.

Okay, so we should use about the same percentage if we assume the mix stays about the same?

Generally, yes, that would be true.

Very good. Thank you.

Our next question comes from Jay Deanha, with J.P. Morgan. Please go ahead with your question.

Hi ,good afternoon.

John, I was wondering, do you have a sense at this point of what your 200 versus 300 millimeter mix will be this year? And you mentioned earlier that your revenue opportunity is bigger with 300 millimeter tools. In a generic sense, can you quantify how much bigger it is?

Just taking a generalized system, we estimated it is about 1.2 times, about 20% more revenue system to system, comparing 200 to 300, but it is very difficult to compare it because a number of the acquisitions we did had no content at all in 200 millimeter. They're really oriented to 300 millimeter, such as the information technology products and some of the diagnostic products that we added, online and Spectra and so on. And so we've just -- that's a difficult estimate. But we think it is at least 1.2 times.

The mix will follow -- since we sell to everyone in the industry basically, the mix will follow the progression for the industry, which I think from VLSI numbers and from OEM estimates, which I think have been public, we will still see 200 millimeter sales out through 2007 or so, but this year, it looks like perhaps 60/40, 300 millimeter to 200 millimeter. I think that's the latest estimates we have seen from VLSI. We wouldn't see anything much different than the industry mix since we are selling to everyone.

When you say 60/40, are -- are you referring to tool units or tool revenues?

Units.

Okay. And then the follow-on for Ron.

Ron, you indicated that one of the drivers of been improving gross margin scenario this year should be an increase in integrated subsystems as a percentage of sales.

Yes.

If integrated subsystems goes up, let's say hypothetically 5 percentage points in sales, what kind of an incremental gross margin effect could that have?

Well, our goal is to achieve gross margins, higher than normal gross margins on integrated -- on integrated sub systems. Now that doesn't apply to every subsystem, but that's our target. So the goal would be -- is to have margins in excess of 45% on some of those subsystems.

Okay. Great. Thank you very much.

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

Good afternoon. Thanks so much.

Quick question, can you remind us, John, on how much total adjustable market you think you have added with the result of acquisitions and new business opportunities in this cycle over the last cycle?

We think the served market has doubled.

And any idea on kind of a share number that you think -- that you have -- the company has to target to capture that increase of total adjustable market, the incremental?

In 2002, we had about a 21% share of a billion and a half dollar market.

Okay.

So that's our share.

Okay, so the fact that you, know -- with one more good quarter of growth into the June quarter, you will be back up to the previous peak, pre-acquisition and pre-increase in total adjustable market, but we should expect to see revenues go meaningfully above that in your case?

Well, our peak revenue -- if you take all the acquisitions back to 2000, our peak revenues would have been $630 million or about $155 million a quarter.

Okay.

So I -- I can't -- I am not going to forecast what quarter we might hit that or if we will hit that, but our expectation is that we are following -- the VLSI forecasts show, you know, for capital equipment spending this year, a 40% increase and 53% for next year. So that would -- that would put us above peak if that -- if those industry numbers happen and if we maintain or increase our market share.

Terrific. That's very he helpful. Thanks so much.

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

Yes, good afternoon, gentlemen. Congratulation on the strong lever.

I am hoping you can help us a little bit with the China transition and add some color to how far you are to moving manufacturing there and getting the qualification from the customers, in particular. And whether we could see some added leverage from that transition later this year relative to the last cycle.

I am also hoping, John, that you can give us some color on the demand from the end users, the fabs, given the strength of utilization I would expect some of your spares and businesses doing very well as well.

Okay. Let's take the China transition.

First, our philosophy on this is that it is -- because labor is a relatively small percentage of our manufacturing cost, materials cost is a much higher percentage of our cost, it is important to source from low-cost countries. It is not necessarily that important to do a lot of manufacturing in low-cost countries. So we are -- we're balancing that.

So we are at about, at this point, around 22% to 25% of the materials are sourced from low-cost countries so we have some headroom there and manufacturing is about the same level.

We -- our facility in China has been approved by the major OEMs for manufacture there. The quality of people have been in and have approved those facilities. We're baking modules there. We are also doing some finished products and will be testing finished products soon. But finished products are not so much the important goal there. It is sourcing low-cost materials and doing modules there.

Great.

And we will see that progressing as we go through this year.

We don't break out spares and service income, but historically, spares and service and upgrades have ranged from 15% to 20% of revenues.

Are you seeing part of the demand strength on the first quarter driven by inventory replenishment of spares. Or at this point is it all OEM driver?

Well, there's -- there's a big -- there is a component of the OEM business that's spares also, and we can't tell what's a spare and what is for production. That's why it is difficult for us to estimate what the spares business is. So I can't really shed much light on that. I don't think that we are seeing a big move for increased spares or a move in double ordering or any of that. I think it's -- it's basically for production capacity that we are seeing demand increase.

Great, thank you very much, John.

You are welcome.

Our next question comes from Philip Lee with J.P. Morgan. Please go ahead with your question.

Hi.

I just want to get a clarification on the tax rate. In the quarter that you decide to bring back the deferred tax asset, would there be an effective tax rate of about 31% in that quarter?

No, it would be in the quarter going forward.

Okay.

The quarter subsequent to that.

Okay.

And then, what is your forecast for receivables and inventory change in the first quarter?

Well, as you know, Phillip, we pretty consistently run a DSO of better than 60 days. As you know, it ran 59 days last quarter so I expect that we would maintain the same day sales outstanding.

And as far as the inventory is concerned, our longer-term goal is to achieve about a five-times turn going forward.

Okay.

And then for SG&A trend, would you expect that to trend up modestly?

Yes.

Okay. Thanks.

Our next question comes from Mark FitzGerald with Banc of America Securities. Please go ahead with your question.

Thanks.

Are there any big uses of cash other than working capital when you look out through the current fiscal year?

Well, looking at -- at capital expenditures, we would expect that they would not exceed depreciation of about $16 million because we do have adequate capacity to grow, physical capacity to grow, and we'd only need additional equipment and so forth possibly for new products and so forth.

So is it fair -- if we are trying to do some sort of cash flow projection to have cash basically ramp along with the profits to the company, is that -- ?

I would expect that given the industry forecast, that we would generate cash in the '04.

Okay. Thank you.

Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the 1. As a reminder, if you are using speaker equipment, please lift the handset before pressing the numbers. Once again, that's Star 1.

Our next question comes from Ted Berg with Lehman Brothers. Please go with your question.

Hi, thanks, I had two questions.

In terms of your major product areas, your two big products areas of power, [indiscernible] and [EMFC] products, do you expect them to both generally grow at the same percentage growth rates throughout the next couple of quarters or is one product area outperforming the other?

And then I had a question on the incremental gross margin going forward, I think it was roughly almost 50% in the fourth quarter versus the third quarter. Where do you see incremental margins going throughout the, you know, next several quarters, if this is a sustained upturn here.

Well, as you know, Ted, we don't break out the product groups. It is all one -- one unit. And as I indicated, our -- our growth was across all of the product areas.

And on incremental margins, I believe Ron did give an estimate of incremental margins for Q1, and we are not projecting out past Q1, I do believe he said 39% to 41%, given a 20% -- approximately 20% increase in revenue.

Okay, thanks.

Gentlemen, there are no further questions that the time. Please continue.

Well, that concludes our comments. Thank you very much for joining us today and for your continued interest in MKS. Thank you.

Ladies and gentlemen, this concludes the MKS fourth quarter and year-end 2003 conference call.

If you would like to listen to a replay of today's conference call, please dial 303-590-3000, and enter the passcode of 563854.

This concludes our conference. You may now disconnect. Thank you.