萬機儀器 (MKSI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the MKS Instruments' Fourth Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, this conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, February 3, 2011. I would now like to turn the conference over to Seth Bagshaw, Vice President and Chief Financial Officer. Please go ahead.

Thank you. Good morning everyone. I am Seth Bagshaw, Vice President, Chief Financial Officer and I am joined this morning by Leo Berlinghieri, Chief Executive Officer and President. Thank you for joining our earnings conference call. Yesterday, after market close, we released our financial results for the fourth quarter 2010. You can access this release on 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 those indicated by these forward-looking statements as a result of various important factors, including those discussed in yesterday's press release, and in the Company's most recent year-end report on Form 10K, and most recent quarterly report on Form 10Q 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 will turn the call over to Leo.

Thank you, Seth. Good morning, everyone and thank you for joining us on the call today. I'll give an overview of the fourth quarter and full year 2010, as well as our outlook. Following me, Seth will review our financial results and guidance. And then we'll open the call for your questions. Fourth quarter sales remained strong at $219 million. Sales to the semiconductor market were $140 million or 64% of total sales; and sales to our other markets were $79 million or 36%, consistent with our prior quarter. Fourth quarter operating profit was 22% and non-GAAP earnings were $0.67 per share.

2010 was a tremendous year with sales more than doubling from 2009. The shop pullback and industry capital spending in 2008 and 2009 made for a steep ramp when the economy started to recover. With our exceptional suppliers, lean manufacturing, and the dedication and hard work of our employees, we responded well to the ramp. I am pleased to report that we achieved record sales of $853 million beating our prior peak in 2007 by more than $100 million. Our full year 2010 non-GAAP earnings were $2.62 per share with GAAP net income of $2.80 per share. Our cash and investments, net of debt, increased $168 million to $432 million.

As the semiconductor market rebounded, and demand increased for additional process control and productivity improvements, our semiconductor sales increased to $540 million for the year. Industry analysts' estimates for 2010 CapEx indicate year-over-year growth of just over 100%. Our semiconductor sales were up 167%, significantly outperforming the industry, and evidence of our ability to execute on our strategy, to continually outgrow the overall semiconductor equipment market. We attribute this success to several factors including the increasing importance of process control, competitive wins, and expanding our product portfolio. For example, some of the new business that we gained included developing and selling control systems to a major Japanese OEM to optimize temperature control, a new application for MKS. As semiconductors' layers have become thinner; control of temperature, as well as other parameters, has become critical. Our tool and chamber controllers provide accurate real-time management of the process, improving yield and tool productivity in this, as well as numerous other etch and deposition process tools.

In 2010, we achieved new design wins with multiple OEMs across all of our technologies including wins on newly introduced deposition etch and cleaning tools. We also invested in new capabilities. For example, we introduced custom vacuum chamber designing and manufacturing which has been readily acceptable by semi customers, as well as customers in other markets. Complementing our semi growth strategy, we continued to target other high-growth advanced technology markets. Sales to these markets in 2010 were over $300 million, roughly doubling since 2005, and tripling since 2003. Initially, we focused on thin film, medical, and industrial applications. Today, we have expanded our efforts to leverage our technologies into other markets including solar, flat panel displays, LEDs, pharmaceuticals and more. We have targeted these markets because they share a requirement for precise control, accurate delivery of gases, operation under vacuum or pressure, the need for power to the process, and analytical confirmation of process performance, all core technologies of MKS. Our long-term goal is to achieve at least a 15% compound annual growth rate in these advanced technology markets, and they continue to be a key component of our growth strategy.

In the solar market, where our products are used to manufacture silicon and thin film solar cells, industry analysts project that through 2015, the solar cell compound annual growth rate will exceed 20%. As we reported in Q3, we received our largest order, ever, for power and other advanced control products from a Chinese thin film solar cell manufacturer. Yesterday, we announced that in Q4 we received a second major order and expect additional orders in 2011 from the same customer. This customer chose MKS because of superior performance of our newest RF generator. Equally important, however, was our strong technical and support capability locally situated in China. It has long been a strategic objective of MKS to have a local presence where our customers are and we continue to leverage these investments to support these new markets. Solar sales for the year were $58 million, up 148%, and we are confident that the growing solar market is a significant and continuing opportunity for MKS.

Another advanced market we have targeted is light emitting diodes or LEDs. Similar to the semiconductor chip manufacturing, LEDs are made using vacuum processes and require many MKS technologies. LEDs are bright, have high reliability, long life and are environmentally friendly. Because of this they have gained rapid acceptance in flat screen displays. Our customer base has grown from a few LED tool OEMs to more than 50 customers, and includes LED materials suppliers, captive LED manufacturers, as well as new LED tool OEMs in the US, Asia, and in Europe. While 2010 was an unusually strong year for LED displays, at year end we saw flattening of demand, which is expected to continue into 2011.

The next major application for LEDs is general lighting. This is an emerging market and industry analysts differ on how quickly it will ramp. They all agree, however, that when it does it should drive significant growth for LED manufacturing equipment which depends on our broad portfolio of technologies and we're excited to share in this expected future growth. The rapid commercial success of smart phones is creating demand for ever-brighter and larger displays. These displays often a type of LED called OLED, or organic light emitting diodes, have created new opportunities for our ozone products. Ozone is used to clean the displays between manufacturing steps. And our new ozone system has higher capacity which is required for fast, economical cleaning of these larger OLED substrates. Due to our superior ozone products' cleaning capability, Asian display manufacturers have specified MKS ozone for their display manufacturing process.

In biopharm and drug, as well as food and beverage manufacturing, both our inline and offline analytical software has been chosen to control manufacturing processes. Inline is used to maintain process control in real time, while offline is used to analyze a batch and for product development. Because of its capability to analyze large data sets, in multiple variables, simultaneously, many of the major drug vaccine and instrumentation companies are using our multivariate software as a key part of their process development and control. In 2010, we grew our customer base for our analytical software by 16%

In the environmental monitoring market, we've continued our success in emissions monitoring, both in engine development and in continuous emissions monitoring of power generating facilities. In addition, our AIRGARD analyzer which monitors for chemical warfare agents and hazardous industrial chemicals, is gaining acceptance in new applications. Initially, AIRGARD was deployed for monitoring air quality in military applications in naval ships. In 2010, we captured new customers for new applications including air monitoring in mass transit and public buildings.

Now looking at 2011, we expect the world economy will continue to improve, and with it, our sales to these advanced technology markets. In the semiconductor market, demand for chips continued to increase as new products and new applications are identified. Demand for semiconductor rich products like smart phones, tablet computers, and other new products are expected to increase. Recently, several major IC manufacturers have increased their capital spending plans for 2011. Should customer spending materialize against these recent announcements, we would expect to see an increase in demand for our products to the semiconductor market. And with further large orders, like the solar one we announced yesterday, 2011 should be a growth year for the other advanced markets we serve as well.

Given these conditions, we estimate that our first quarter sales may range from $220 million to $240 million, and at this volume our non-GAAP net earnings could range from $0.62 to $0.77 per share. Today we also announced that MKS has initiated a quarterly dividend payment of $0.15 per share. Our current cash position and long term ability to generate positive cash flow provide us the flexibility to support our growth strategy, as well as return cash to investors. This regular dividend demonstrates confidence in our business, our strategy, and operational discipline, as well as the free cash flows we expect to generate. At this point I'll turn the call over to Seth to discuss our financial results and to expand on our guidance.

Thank you Leo. Good morning again, everyone. We are pleased to report that MKS achieved record performance in 2010. Sales were $853.1 million, up 117% from $392.7 million in 2009. Sales to the semiconductor market increased 167% to $544.5 million, and sales to other advanced markets increased 64% to $308.6 million, both were new records. Sales to the semiconductor markets represented 64% of sales in 2010, compared to 52% in 2009. Gross margin for the year was 44.4% compared to 33.2% in 2009. Non-GAAP operating profit was 23% and non-GAAP earnings were $2.62 per share. GAAP net income was $2.80 per share and included income from discontinued operations of $0.19 per share.

Turning to cash flow during the year, cash and investments, net of debt, increased by $168.2 million to $431.9 million. The increase in cash and investments were positively affected by the proceeds of the sale of two discontinued businesses, as well as income tax refund received in the fourth quarter. The cash received from these items totalled approximately $40 million in 2010. Continuing the strength we have seen in 2010, fourth quarter sales to both our advanced technology and semiconductor markets remained strong at $219 million of revenue. Our net operating profit was approximately 22% of sales and non-GAAP earnings per share was $0.67 per share. Gross margin during the quarter was 44.4%, compared to 44.5% in the third quarter. Operating expenses increased to $48.7 million, up from $43.3 million in the third quarter. The increase in operating expenses was primarily related to planned additional engineering headcount, the timing of 30 engineering projects, in higher variable compensation, and fringe-related costs.

In the fourth quarter, we incurred a loss on foreign exchange of approximately $400,000, compared to the approximately $1 million of favorable foreign exchange gains in the third quarter. GAAP net income for the fourth quarter was $35.9 million or $0.70 per share. The tax rate on continuing operations for the quarter was 30% and the tax rate for the full year was 32%. The lower rate in the fourth quarter was primarily due to the favorable geographical mix of taxable income. In the quarter, cash investments net of debt increased $84.6 million to $431.9 million, include a tax refund of $24.7 million. Day sales outstanding were 57 days, the inventory turns were 3.1. Capital additions for the quarter, primarily related to test and calibration equipment, were $4.4 million and depreciation expense was $2.9 million.

In the fourth quarter, sales to the semiconductor market were $140 million or 64% of total sales. And sales to our other markets was $79 million for 36%, both essentially unchanged from the prior quarter. Within the semiconductor market, sales to the semiconductor OEMs were 53% of total sales and sales to semiconductor fabs were 11% of total sales, both essentially unchanged from the third quarter. Geographically, US sales decreased 7%. Sales in Asia increased 5% and sales in Europe increased 11% primarily as a result of sales to the semiconductor, thin film, and solar customers. Sales in the US were 54% of total sales. Sales in Asia were 33% and sales in Europe were 13%. Sales to our top 10 customers represented 41% of total sales. Sales to our largest customer, Applied Materials, represented 14% of fourth quarter sales.

Our headcount, as of December 31st, increased slightly to 2,673 compared to 2,602, as of September 30th, primarily reflecting increased manufacturing labor requirements. Based upon current business levels, we estimate that our sales in the first quarter could range from $220 million to $240 million. Based upon this expected sales range our Q1 gross margin could range from 43.5% to 44.5% reflecting expected mix. Q1 operating expenses are expected to decrease slightly and could range from $47.5 million to $48.5 million. In the first quarter, R&D expenses could range from $15.5 million to $15.9 million and SG&A expenses could range from $32.0 to $32.6 million. Amortization of tangible assets for the first quarter is estimated to be approximately $300,000. And net interest income for the quarter is also estimated to be approximately $300,000. For 2011, we expect our normalized GAAP and non-GAAP tax rates to be approximately 32%. Given these assumptions, first quarter non-GAAP net earnings could range from $32.2 million to $40.0 million, or $0.62 to $0.77 per share on approximately 52 million shares outstanding. GAAP net income in the first quarter could range from $32.0 to $39.8 million, or $0.62 to $0.77 per share.

As Leo mentioned, we announced that the Board of Directors authorized a quarterly cash dividend. This quarterly cash dividend of $0.15 per share is payable on March 18, 2011, to shareholders of record on March 1, 2011. Due to dividend declarations, as well as the record and payment dates for such dividends are subject to the final determination of the Board of Directors. This concludes our discussion and will now take your questions.

(Operator Instructions) Our first question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Please go ahead.

Good morning, this is Paul Thomas for Krish Sankar. Thanks for taking my questions. First up, some of your OEM customers are expecting a decline in 1Q shipments. Do you expect the semi side of your business will track that roughly, may be down a mid-single digit in revenue for Q1?

Yes, obviously we have a number of semi equipment companies and you're right, a few of them have announced some downside to Q1. I think we are not seeing anything unusual compared to the last couple of quarters, so flat to slightly down I think would be reasonable from our view.

Okay. On the dividend you guys announced, how should we be thinking about your cash level with respect to what you might need to hold onto through a downturn? And how much you might still have set aside for M&A? How should we be thinking about the cash levels?

I will let Seth cover that, but just one comment on a downturn. We went through one of the worst downturns and almost virtually cash breakeven. So, I think probably the Board recognized that, but I will let Seth further comment on what we believe we need, or where we will be on that.

Yes, so Paul, I would say that we have got $430 million of cash at the end of 2010, and take the Q1 run rates, we'll generate about probably about $150 million in cash flow before working capital adjustments and any dividends. So, there is obviously sufficient cash to run the business, grow the business, and M&A activities. I think we will look for opportunistic acquisition opportunities, and the Board will view the cash needed to the Company on a quarterly basis, but I think in the foreseeable future, we are expecting cash to really grow the business and do anything we need to do on the acquisition side.

Okay, and then maybe just one last one. You mentioned the CapEx announcements we've heard are early January from the semiconductor manufacturers. When might you expect to see some change in your order pattern based on past history? Is that something that does not happen for a couple of quarters, or what are you expecting in terms of that?

Well, I guess when the fabs start spending the money with the OEMs, then we expect to see the business that way. So, I don't know if they -- they didn't provide exact timing and certainly one thing I will say is that the whole cycle time in the semiconductor supply chain has gotten tighter over the years. So if the fab spending materializes and they place orders, then I would expect OEMs -- or they start speaking with OEMs to increase their rates to prepare for those orders, we would expect to see it. So it could happen in a short period of time. It could happen a little longer, depending on when those fabs place those orders.

Okay.

We are certainly excited about the announcements, and hope they materialize.

Great. Okay, thanks a lot.

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

Great, good morning, guys, and thanks so much for taking my question. The question is on lead times within the semi equipment, both for your business and then your OEMs' lead times as well, as we get a read on how things are going to progress over the course of the year? Thanks.

Okay Jim, thanks. One of the comments I just made was how things have tightened up relative to cycle time. We have our supply chain and I'm going to imagine that many of the suppliers that supply to the equipment companies are on more of a just-in-time supply with their suppliers, but we are in pretty good shape with our suppliers where we expect that they have relatively short lead times to us. As you know, we are a turns business so we have short lead times to our customers. I have heard, I am sure it varies by equipment company and by tool, but I have heard cycle times of sometimes a month for an equipment company from the time they get the material in to shipping out the door. If we are all on a just-in-time delivery system, it doesn't take too much longer than that to get the equipment in the door. So, I think it can happen relatively quickly, I guess, if it needs to.

That is helpful, thanks, and then if I could just ask a follow-up. Relative to your years is a cyclical experience, as this one comes together, any big differences or similarities that you see as we get into the stronger part of this cycle relative to what we have seen in previous cycles?

Jim, with all that experience I wish I could predict them as well from the number of years, but they all seem different when you're in them, and then when you look back, you can say it was a lot like this one or that one. I think they are very unpredictable. I think typically, it starts, as you know, with investment by the fabs. It's good to hear that fabs plan to spend more money in 2011, and we are excited about that. I think the news in the last two to three weeks was more positive than three months ago, so that is a good trend as far as I see. But I wish 30 years in this business gave me a little more insight.

Thanks so much, I appreciate it.

Thank you. Our next question comes from the line of C.J. Muse with Barclays Capital. Please go ahead.

Yes, good morning. I guess the first question, curious, we have heard from a number of your customers in terms of slight delays of shipments of products in Q4 to Q1, and I'm wondering if that impacted your semi revenues in the December quarter?

C.J., at least to my level, I had not heard of anything relative to push outs that would affect us. We obviously wouldn't see that pretty much directly because of the turns business, but I think that what you are saying, by a customer being pushed out, does that change the demand? We typically are not going to see that, in terms of -- we wouldn't tie it that closely to this order by that OEM being pushed out, so we wouldn't know that. If they have had those things happening, they usually have some impact down the supply chain if it impacts what they planned on shipping. We haven't seen anything like that, no.

Okay, great. On the SG&A front for the December quarter, it looked like that came in a couple million more than what it was guided to originally. So, curious, what led to that and how should we think about the trajectory of SG&A throughout 2011?

I will take that question. In Q4 we had some non-recurring fringe costs hit in Q4, and in Q1, we got it down midpoint, down about $700,000. I don't expect any major swings in SG&A going forward, or total OpEx guided down. We are adding some headcount in 2011 to post some of the customer requirements in Asia, and we are kicking off another phase of a rollout for our IT systems, which will occur in 2011. Generally, the run rate you see now in Q1 should be relatively the same for the rest of the year. There'll be some swings by quarter, probably be some timing projects, but should be fairly consistent.

That's helpful. Then, final question, based on your comments that semis in Q1 are flat to maybe slightly down, it looks like, clearly, the uptick your revenues is coming from the non-semi side at $90 million plus run rate. My question, is that a sustainable run rate as you look at the visibility you have from some of these solar contracts? Is that the right kind of number we should be thinking about throughout the year?

It is our expectation that over the long run that we get at least 15% growth on that other advanced market, but certainly, in the near term I think the announcements of the solar orders certainly makes this quarter look like additional growth is coming more from the non-semi side. With the expectation of further orders, that would certainly help it further out into the year, but I don't know what is going to happen. The good news is the global economy has reported -- is going to continue to grow so that usually supports our non-semi business. I wish I could give you an exact answer, but if the economy continues to grow, we would think that some of this non-semi business growth would be sustainable.

That is helpful. Thank you.

(Operator Instructions) Our next question comes from the line of Edwin Mok with Needham. Please go ahead.

Hi, thanks for taking my question. Leo, just a follow-up to the last question. If I just breakdown on the first-quarter guidance, is all of that growth come from the solar order that you have announced previously, or what other moving part that is driving that growth based on your guidance?

Let me try to make this a little clearer. When you look at the amount of technology and the amount of products we have and the lead times we have, and the fact that we are a turns business, it is not as if we are sitting here today with a backlog and just trying to figure out who we are going to ship. It could turn out that semi is a little higher or a little lower. It could turn out that LED is lower or higher. I think one of the things we know is that the solar expectation is very strong for the quarter, primarily based on the additional announcements that we made this quarter relative to Q4 and what we announced about Q3 orders. It wouldn't surprise me if semi was flat or a little down, but on the other hand, being a turns business and not knowing when, if in, fabs spend the numbers they're talking about, when we see it, it is not a science to give you that exact number. So, I would say that the expectation is that probably solar is a little stronger based on the orders, and that we are looking at more flatter business in semi. But it could be down a little bit or it could up a little bit. One of the reasons for the range of the guidance, I think, as well.

Great. Thanks for clarifying that. On the solar orders, beyond this large customer that you guys have reported, my understanding is that you have orders (inaudible) you guys are working within Asia or in China. How do you think about those customers in terms of their financial strength? And there is a lot of talk of potentially over capacity in solar. Does that concern you that some of these orders might get canceled or pushed out, or basically not happen?

Let me answer the last part you just mentioned about the sales activity, and push-outs or pull-ins. The solar business and some of these other markets we've always said are more lumpy in the sense that you have many new customers and they are more project-based than the semi industry, which tends to be more of a flow either up or down, or not very often flat. But in these other markets, they tend to be lumpy. And so, from that standpoint, that wouldn't surprise me when something gets pulled in or pushed out because of a particular project. You don't have a run rate with hundreds of equipment companies and fabs. We have 300 by the way, Edwin, of customers in the solar space. So, it is starting to get a little more run-rate oriented with that base, but I'll let Seth talk about the viability of getting paid and comfort level with those customers' ability to pay.

Yes, Edwin. We go through a credit review process for all customers, including the solar accounts in China. And in many cases, if it is a large customer or a large order, we make it cash up front or letter credit. So, I think we mitigate any risk fairly well. As you can see, the DSO improved during the quarter, so we're working pretty hard overall on collections, but we manage it pretty well.

Great. One last question. You also sell to the flat-panel display market, right? Any commentary on what you see in that space right now in terms of business level with that and maybe outlook for the coming quarter?

I would say that as we got past the first half of the year, the flat-panel business really dropped off. And that there is no expectation that will pick up in the first half of the year. We have heard from some customers that it may pickup in the second half of the year, but a little bit beyond the lead time that we would like to get that information from. So, we will see what happens as the year goes on, material-wise, but slower second half of 2010, continued slow first half of 2011, potentially some opportunity for pickup at the end of the second half of the year.

Great, sorry, to squeeze one more in. Just a question on use of cash. You guys announced this dividend obviously welcomed by shareholders, but any thoughts about buyback versus that, or are you guys going to continue to do a buyback program? How are you thinking about that?

We announced the dividend. We haven't announced any type of other cash returned to shareholders, but I think the cash generation capability of the business and the cash we have, we'll look at that relative to the needs of the business. It doesn't preclude us doing that in the future. We just have not made any decisions or announcements relative to that.

Great, that is all I have, thank you.

There are no further questions in the queue. Please proceed.

Thank you very much. 2010 was a tremendous year. We are excited by our continued high growth in many of our technology markets, and the recent CapEx spending announcements as we talked on the call by some of the key fabs are really generating expectation for continued growth in the semiconductor market. And we are optimistic about the good start to the year. Thank you very much for joining us on the call this morning.

Ladies and gentlemen, this concludes the MKS Instruments Fourth Quarter Earnings Conference Call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 with the access code 4402397. Those numbers again are 303-590-3030 with the access code 4402397. ACT would like to thank you for your participation. You may now disconnect.