萬機儀器 (MKSI) 2009 Q2 法說會逐字稿

Welcome to the MKS Instruments second quarter earnings conference call on the 22 of July, 2009. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

I will now hand the conference over to Ron Weigner. Please go ahead, sir.

Good morning, everyone, I'm Ron Weigner, Chief Financial Officer, and I'm joined this morning by Leo Berlinghieri, Chief Executive Officer and President. Thank you for joining our earnings conference call. Earlier this morning we released our financial results for the second quarter of 2009. You can access this release at our website, www.MKSinstruments.com.

As a reminder, various remarks that we may make about future expectations, plans and prospects for MKS, constitute forward-looking statements. Actual results may differ materially from these indicated by these forward-looking statements, and as a result of various important factors, including those discussed in today's press release, and in the Company's most recent annual report on Form 10-K, and most recent quarterly report on Form 10-Q, which are 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.

Now I'll turn the call over to Leo.

Thanks, Ron. Good morning, everyone, and thank you for joining us on the call this morning. I will give an overview of the second quarter and our outlook, and following me, Ron will review our financial results and guidance, and then we'll open the call up for your questions.

Second quarter sales of $79.2 million were above our guidance, and 3% above first quarter sales. Our GAAP loss of $4.20 per share, including the special charge of $208.5 million, which was for non-cash impairment charge due to a revaluation of the Company's goodwill and certain long-term and tangible assets. Our cash position was better than expected and remains strong, as we continued to manage and control spending.

Our non-GAAP loss of $0.19 per share was at the optimistic end of our guidance. Ron will cover these in more detail later in the call.

After two relatively stable quarters, we are beginning to see signs of recovery in the SEMI and flat-panel markets. In the semiconductor market, sales to OEMs were flat quarter-over-quarter, however we saw improving sales to device manufacturers worldwide.

During this extended downturn, device makers have idle tools. Spare parts, repairs and upgrades are often required when tools come back into production, and inventory starts to be replenished. Utilization rates have been improving, and we have seen an uptick in spares and repair business, as well as air ionization orders for facilities expansion and upgrades at leading device fabricators.

Manufacturing the finer geometries and thinner layers in today's advanced semiconductor circuits requires precision control of the power, materials and process conditions of the tool. The advanced technologies we develop, coupled with the broad range of products we have, position us to work closely with our customers to solve process challenges.

New tool development continues even during a downturn, and is especially important to gain design win now since they are the basis for future volume production orders. We continue to secure design wins for next generation semiconductor OEM tools with our advanced technology power, plasma, flow, pressure control and other products.

For example, our next generation compact high performance control and communications products, high accuracy flow of control products, digital pressure controllers and precision flow ratio controllers, which provide precise delivery of processed gases with accurate and repeatable process control, were designed in on a new sub 45 nanometer etch tool in development by a major semiconductor OEM.

While the SEMI market stabilized, the solar market continued to be negatively impacted by global economic conditions, and planned capital spending for many new production facilities was delayed, resulting in continuing order push-outs from some of our solar customers. However, as with SEMI, design wins in down periods lead to future business, and we continue to gain critical design wins with our advanced process solutions at solar customers.

For example, a second major European OEM selected our remote plasma generators for faster insitu cleaning of deposition chambers, including retro fit of existing installed tools. In contrast to conditions elsewhere, the China solar market has continued to grow, and remains a strong new opportunity for MKS.

We have been qualified and have begun shipping products to new customers in China. This is highlighted by a significant design win for our RF and DC power supplies at a leading China thin film solar fab. We remain positive on the long-term growth potential for the solar market.

The wide ranging technologies behind our instruments, subsystem, and control solutions, enable advanced manufacturing in many applications outside of SEMI fabrication, including medical, pharmaceutical, energy, thin film coatings, environmental and others. We continue to execute our strategy of expansion into these other advanced applications in growing markets.

I would like to describe some of the ways we have been able to do this in three very different markets. My first example is ozone, an environmentally friendly faster and lower cost alternative to conventional steam and chemical disinfection and sanitization. Ozone is highly reactive, and cleans and disinfects at room temperature, with no additional chemicals required. And once the process is complete, ozone reverts back to oxygen.

In the quarter, a global leader of pharmaceuticals and consumer healthcare products ordered ozone systems to disinfect pharmaceutical process water in their R&D labs, with the potential of propagating ozone disinfection into manufacturing.

The next example is in a manufacturing processes with very tight tolerances, safety considerations, or high-quality and repeatability requirements, such as medical devices or drug manufacture. In these markets, products which provide better control and ensure process quality are extremely important.

Our integrated controllers with multi-variant software, combine data collection and analysis with the capability to feed back information to control and correct the process. At an international manufacturer of medical devices, pharmaceuticals and biotechnology, we were selected for real time quality monitoring and fault detection for critical injection-molded medical devices.

My third example relates to the growing global concern about air quality. Clean air legislation is driving the development of cleaner burning, low emission engines, as well as requiring lower emission levels from factories, power plants, even trains, ships and planes.

The development of new low emission products, coupled with the need to assure that the emission standards are maintained, opens opportunities for our gas analysis products. Our FTIR gas analyzers, which simultaneously analyze and display trace levels of more than 30 gases, were selected by a major European truck manufacturer for engine emissions monitoring.

These examples show that we continue to execute our strategy of applying our broad portfolio of advanced technology products into diverse markets, identifying new and growing applications, which will provide growth opportunity and serve to help offset the cyclicality of the semiconductor market. Our strategy is to leverage our technology breadth and innovation to provide process critical solutions to higher growth markets. Our long-term goal is to achieve 15% compounded annual growth rate in other markets outside of SEMI.

We have seen some growth in our SEMI, OEM and fab business, including service. Combined, the SEMI business was 42% of our revenue in the quarter.

Timing of a meaningful recovery in the global economic market remains uncertain, however considering our limited visibility, the diversity of our markets and current levels of activity, we estimate that the third quarter sales may range from $77 million to $92 million.

At these volumes, the GAAP and non-GAAP net loss could range from $0.18 to $0.07 per share on 49.5 million shares outstanding. If the fab utilization rates continue to improve, and fabs invest in new equipment, we could see a continued improvement in the SEMI market in the second half of 2009.

At this point, I'll turn the call over to Ron, who will discuss our financial results and expand on our guidance.

Thank you, Leo. In the second quarter, we achieved better performance in sales, operating results and cash flow than forecasted. Second quarter sales of $79.2 million exceeded the high end of our guidance, and were 3% higher than first quarter sales, showing stability in the semiconductor and other markets, but with some decrease to solar customers.

The Company's GAAP net loss for the second quarter of 2009 includes a $205 million non-cash charge for impairment of goodwill and intangibles, and a $3.5 million non-cash charge for certain tangible assets. These charges do not impact the Company's normal business operations, nor will it reduce current or future cash expenses. The goodwill and intangible charges result from an interim impairment assessment based on a combination of factors, including current macroeconomic conditions, and the Company's market capitalization compared to its book value.

The $3.5 million non-cash charge for tangible assets is related to a facility located in Asia that we vacated as planned, and the successful consolidation of certain operations. The Company intends to sell this facility, and therefore a charge was recorded to reduce the asset to its estimated fair market value.

Our non-GAAP results were at the more optimistic end of our guidance, and as a result of higher sales and lower operating expenses, and was a loss of $9.2 million or $0.19 per share.

Our cash position remains strong as we continue to focus on improving accounts receivable days outstanding, lowering inventory, reducing capital spending and controlling cost. Cash and short-term investments net of debt increased $3.5 million to $249.1 million, primarily as a result of a $7 million tax refund. Cash provided by operations was $3.6 million for the quarter, days sales outstanding were 67, and inventory turns were 1.8 times. Capital expenditures for the quarter were $850,000, and depreciation was $3.6 million.

In the second quarter we did see signs of stabilization in the semiconductor market, as well as other markets. However, our solar business slowed primarily as a result of the macroeconomic situation, and totaled $11.3 million for the six months compared to $18.9 million for the first six months of 2008. If financing the solar industry improves, and tax incentives are effective, we believe solar will be a growing opportunity for us in the years ahead.

In the second quarter, sales to semiconductor OEMs remain steady, sales to fabs increased 32%, and sales to other markets, which include solar, remain steady. Our service business increased 14%, which is an indicator that SEMI fabs are increasing utilization, and if this continues, we expect it will favorably affect our service revenues.

In the second quarter, our sales to other markets remained strong and represented 58% of total sales, sales to semiconductor OEMs represented 29% of sales, and sales to semiconductor fabs represented 13% of sales.

Geographically, sales in the US increased by 10%, sales in Europe decreased 8%, and sales in Asia decreased 1%. Sales in the US were 54% of total sales. Sales in Asia were 28%, and sales in Europe were 18%. Sales to our top 10 customers represented 37% of total sales, sales to our largest customer, Applied Materials, represented 13% of second quarter sales.

Based on our recent order trends and signs that the semiconductor market may improve in the latter half of this year, we expect to see our sales increase in the third quarter, and this could range from $77 million to $92 million. Gross margin in the second quarter exceeded the high end of our guidance, primarily as a result of higher volume, and was 32.3%. Based on our expected sales range of $77 million to $92 million for Q3, we expect our gross margin could range from 31% to 36%.

As a result of our cost reduction initiatives taken during the first and second quarter, operating expenses in the second quarter decreased approximately 13% to $38.2 million. R&D expenses decreased 21% to $12.3 million, and SG&A expenses decreased 8% to $25.9 million.

In the third quarter, we will continue to review and take actions to curtail all areas of spending, and will continue to schedule mandatory time off. Therefore, we expect that operating expenses in the third quarter could remain flat compared to the second quarter, and could range from $37.8 million to $38.8 million. R&D expenses could range from $12.2 million to $12.6 million, and SG&A expenses could range from $25.6 million to $26.2 million. Our headcount at the end of the quarter was 1,967.

As a result of temporary cost-saving measures we have implemented, we expect our third quarter non-GAAP net operating break-even to be approximately $104 million, and operating cash break even to be approximately $92 million. For the third quarter, we expect our normalized non-GAAP net operating income break-even level, which excludes temporary cost reductions, will be approximately $114 million, and our non-GAAP net operating cash break even will be approximately $102 million.

Amortization of acquired intangible assets for the third quarter is estimated to decrease to $900,000, as a result of the impairment charges. Net interest income for the third quarter is estimated to be approximately $300,000.

Our normalized tax rate for the quarter, which excludes the non-deductible impairment charge was 26%. Our actual tax rate for the quarter was 7%, primarily as a result of the non-deductible impairment charge. Based on a revised forecast for 2009, we now expect our normalized tax rate for 2009 and the third quarter could be approximately 39%.

Given these assumptions, third quarter GAAP and non-GAAP net loss could range from $8.9 million to $3.5 million, or $0.18 to $0.07 per share on approximately 49.5 million shares outstanding.

So this concludes our discussion, and now we will take your questions. Operator?

Thank you. (Operator Instructions). First question comes from CJ Muse from Barclays Capital. Please go ahead.

Good morning. Thank you for taking my question. First question, in terms of your SEMI OEM business, roughly flat in June, can you talk about the kind of visibility you have today in terms of pickup there, as well as what your thoughts are in terms of WIP at your key customers, and when you think that will get drawn down?

Good morning, CJ. As far as visibility, I think that's always the difficult one. As you know, the lead times to the major OEMs in SEMI are usually in hours and days on many of the products, so we don't get a lot of visibility at this point in time.

However, all of the news we have heard is very encouraging in terms of announcements that were made last week, or discussion meetings where a number of those OEMs were talking about better third quarters than second quarters, and potentially better second half of the year than where we are today.

So, that to us is encouraging, and the other factor I think we have always talked about is, in a downturn the OEMs are consuming inventory, and not buying as much, maybe even as their rates are adjusted, and that we would expect to see some of that replenishment as their schedules increase.

The timing of that is very difficult to determine because it depends on what the order mix is for what is going to be increased if it does happen. I would say the longer time goes on, the chances are that more of that gets worked off. I think that's probably the best estimate I can make now, that at some point in time as schedules increase, that inventory gets worked off, the longer it takes before you see that benefit, the closer you are to seeing it. So-- .

Okay. That's helpful. And then I guess on the non-SEMI business side, I guess first off, can you tell us what percentage of the overall revenue mix you think that will be in September, and does that mean that March was a trough with LCD being able to offset the weakness in solar, or was solar a larger percent of the mix? Does that negate the strength in LCD, meaning that we just kind of bounced along the bottom here?

I think we see some -- obviously SEMI appears to be positive, and our display market appears to be positive. I think we're expecting that there is a lot of other markets that makes up the rest of that non-SEMI business, and I think based on the global economic conditions, and not expecting any significant change, we would expect that would be relatively flat. Relatively flat could be up a few million or down a few million, but I think we're expecting that most of the change would be focused around the news we have heard around SEMI both fabs and OEMs, and some of the display market.

Okay, and then last question on the tax rate, Ron, when you look out beyond 2009, what should we think about for a tax rate?

Yes, normally we're in a profitable situation, a better rate to use would be around 28%, 29% of operating income.

Thank you.

Thank you. The next question comes from Jim Covello from Goldman Sachs. Please go ahead.

Hi this is Kate Kotlarsky for Jim Covello. Quick question on your inventories at your customers. I was curious if you could comment on what you think inventory levels look like, and to the extent that the inventories are fairly lean, I was curious what you think your ability is to respond to, a snap back in order to the extent that we do start to see that in September from some of your semiconductor customers, and then kind of continued strength maybe in the flat panel business. Thank you.

Okay. Thanks, Kate. As I mentioned earlier, I think CJ had similar type of question, sense of when might we see the inventory levels normalized at customers, so we're actually seeing the demand against what they are shipping out the door. Again, because of mix it is very difficult to predict that, but each quarter that we don't see that effect, we're getting closer to seeing it, and I think some of the OEM customers actually had some discussions around that last week, or announcements.

Some of them had some reasonable reduction in inventory in the June quarter, expected to see some more in the third quarter, but as far as how it affects us specifically, you have to go part number by part number in their tool. So I don't have an answer for you, but as time goes on, we eventually expect some bounce back from that inventory.

As far as the ability to react to a sudden surge of orders should that happen, I think the supply chain is in good shape. And from the OEMs all the way down, I think everyone has been in a mandatory shutdown period of anywhere from one week to a month, and we're no exception to that, and our suppliers are probably in that same situation. And almost everyone, as you can imagine, if they are shutting down, they are working virtually no overtime as well.

So it wouldn't be unusual to pick up 15% capacity just in no shutdowns, so that would be the first step. And then it is not unreasonable in this business to work 50% overtime, but even a conservative 10% to 15% overtime would get you into 25% capacity jump, and that would be for us across the entire business, SEMI is maybe a third of the business right now in terms of the capital equipment piece of it. So I don't anticipate a significant issue around -- if a surge comes the ability for the industry.

Now, there may be other companies, I don't know what their cash positions are, as you go up sometimes it gets a little tough, but from a pure facility capacity is there, equipment capacity is there, I'm sure, it really comes down to labor, and I think most everyone has been in a reduced work schedule, and almost no overtime if any, so I think there's a lot of flexibility relative responding.

Great. That was it for me. Thank you. Thanks, Kate.

(Operator Instructions). We have time for one final question. Our last question comes from Krish Sankar from Banc of America Merrill Lynch, please go ahead.

Hey, Leo and Ron, just a couple of questions. One is on your guidance, what drives the top end and the bottom end of the guidance? Is it going to be that spread is pretty much driven by the SEMI business?

Well, I think if -- because of -- I think I mentioned this many, many times. You are talking about a lot of customers. You are not talking quite about five or six customers. You are talk about hundreds and thousands of customers.

The timing of when they place an order, and they don't necessarily place their orders relative to our quarter, and certainly not relative to our guidance, so the difference in placing an order on the last day of the quarter and the first day of the quarter could be simply a buyer in town or not in town or on vacation or in a shutdown.

So, I think the range is really the unpredictability of the timing of whatever it is, three months or 60-some odd work days, and when orders get placed. We see, obviously we're more confident than we were a quarter ago. We see an upside from where we are today. That's really the range -- the unpredictability of orders.

We're not tied to a handful of customers where the backlog is there today and we know what we're shipping, and it's our manufacturing capability. It's really based on what orders come in and the timing of those orders and when customers want those orders shipped. So it's the unpredictability in that -- our estimates.

Okay. One other question was with your SEMI OEMs, most of the shipment uptick coming from technology purchases, are you guys -- once inventory gets drawn down, do you expect certain of your product lines getting more demand, versus other product lines, i.e. like some of the older technologies might still have inventory left, while the newer ones might get absorbed quicker?

That's a good question. The point is, if the mix changes in increased business or simply just from the reduction in inventory, could that impact the demand by products, could we have products that will move faster than others? I think that happens all the time. The mix changes. I don't see anything unusual going on right now, that would be different from the normal when there is a recovery.

So I wouldn't expect -- we had some critical point in the last six to 12 months that really was a change in technology. A lot of our product supply to multiple technologies, they are fundamentally critical measuring devices, and so I wouldn't see a radical shift in that, or expect to see a radical shift in that.

My final question for Ron is, you said in 3Q, your non-operating break even without the temporary cost reduction would be $114 million, what was it in 2Q?

I don't recall. I think we gave it about the same guidance, about the same.

114, 115.

Yes, it was about the same range.

Okay. All right. Thank you very much.

Thank you. Well, if that's it for questions, I would like to thank you all for joining us on the call this morning. Certainly the recent public announcements by both SEMI fabs and OEMs are encouraging, and business in the semiconductor market appears to be improving.

Our leadership position in the semiconductor market, our broad portfolio advanced technology products, and our ability to innovate and apply these technologies to solve critical process problems enable us to diversify into new applications in other high-growth markets.

The global economic situation still remains unsettled, but our manufacturing responsiveness, varied markets and technical depth, coupled with our lower cost structure, will ensure that MKS is well positioned to benefit from any future recovery. Thank you.

Thank you. This concludes the conference call. Thank you for participating. You may now all disconnect.