萬機儀器 (MKSI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MKS Instruments reports Q3 2013 conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

I would now like to introduce your host for today's conference call, Mr. Seth Bagshaw. You may begin, sir

Thank you. Good morning, everyone. I'm Seth Bagshaw; Vice President and Chief Financial Officer. and I'm joined this morning by Leo Berlinghieri, our Chief Executive Officer; and Gerry Colella, our present Chief Operating Officer. Thank you for joining our earnings conference call.

Yesterday after market close, we released our financial results of third quarter of 2013. You can access this release at our website mksinstruments.com

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

Now I'll turn the call over to Leo.

Thanks, Seth. Good morning, everyone, and thank you for joining us on the call today.

In a moment, I'll review third quarter and provide our outlook for the fourth quarter. Following me, Seth will provide details of our quarterly results and guidance and then we'll open the call for your questions.

First, however, I'd like to say a few words about my upcoming retirement and the announcement that Gerald Colella will succeed me as CEO at year-end. It's been a terrific 33 years at MKS. I greatly enjoyed my time spent with our employees, our customers, suppliers and our shareholders.

I'm immensely proud of our our organization has grown and performed during my tenure as CEO. Aside from meeting our growth and financial performance objectives, one of my personal goals has been to build the strongest possible executive team to lead the company after I retire.

Jerry and I have worked together at MKS for nearly 31 years, and in total more than 33 years. He has been a key contributor in our combined efforts to cultivate a company culture centered around success and delivering results. His new role will bring additional leadership responsibilities in a greater role in guiding the strategic direction of the company.

While he's new to many of you in the investment community, he's been the face of the Company with our customers and suppliers for some time now. I know that each of you listening on the call today will enjoy hearing Gerry update you on our business during future conference calls. I shall look forward to that as well.

Now to our third-quarter results.

Third-quarter revenues were above the midpoint of our guidance at $166 million up 6% from Q2. Over the course of the third quarter, we saw improvement in our semiconductor sales, which were up 10% to $115 million, driven by strong sales to both OEMs and device manufacturers. Sales to all other markets remained stable quarter over quarter.

As I do in most calls, I'd like to share a few highlights from the quarter, which give a greater insight into our business. Starting with our semiconductor market, we continue to work with OEMs as they develop new tools and new applications.

This quarter, multiple MKS products were designed in on PECVD epi etch strip cleaning and other tools. The PECVD win is a good example of technical synergies we can provide through a broad range of technologies and global scope. The win was a result of cooperative development between our RF power products engineers in the U.S. and our new Plasmart matching network team in Korea.

RF matching networks or RF matches maximize the amount of RF power delivered to the process; improving process performance and control. By combining our global RF expertise, the team incorporated sensing functionality into the matching network resulting in better process performance. This combination of technology enabled a device maker to use the matching network to monitor the process in real-time, which was a critical OEM requirement and resulted in the design win for us, as well as the OEM.

Another trend we are seeing in the semiconductor market is the increasing use of our latest generation Ethernet-based automation controllers. These products have been designed to meet the process-controlled challenges of manufacturing next-generation semiconductor devices by providing better process uniformity and faster communication speed for higher throughput.

Over the past few years, we have steadily increased our customer engagements for control products. And with the advances in our new Ethernet-based I/O capability, our controllers are gaining increased acceptance due to the speed and support of the communication needs of the new OEM tool designs.

Several new technologies -- excuse me -- several new technology innovations are beginning to enter production at leading edge chip makers including 3D NAND, FinFETs, and multiple patterning. These technology changes enable smaller faster and more powerful chips to support mobile devices and the rapidly expanding use of video. These technologies add additional process steps, especially in etch and deposition, which are significant applications for MKS technologies. These technologies changes our propelling increased demand.

In this quarter, we received initial orders for pressure control, flow, power reactive gas and other products for multiple production tools from a number of OEMs for a new 3D memory fab in Asia. Mobile devices are driving other opportunities as well. In addition to providing smaller products with richer features, electronic companies are striving to improve the quality and durability of mobile devices.

One focus is improving the scratch resistance and robustness of portable device screens. Stronger glass, advanced coatings and new materials are being evaluated.

One of the materials of interest is sapphire, which is more than double the strength of glass and is nearly scratch proof. Sapphire has a long history of use in military point of sale scanners, optics, LEDs and other applications.

Over the last several years, sapphire production has increased and costs have begun to come down. As the cost have come down, more applications for sapphire are opening up.

For example, in some smart phones, sapphire is use to do cover [camera] lenses and sapphire was recently introduced as a cover for fingerprint readers. Some experts believe that in the future, sapphire may replace glass on the displays of some mobile phones. This would represent additional opportunity for MKS, as we are designed in on multiple sapphire production tools. And I'm pleased to report that in the quarter, we received significant orders from multiple MKS products, including pressure control, flow controllers and advanced gauges for a major sapphire tool OEM.

I've talked in the past about our gas analysis products and how they are used by automobile manufacturers as they develop cleaner burning engines. Clean air legislation is driving these requirements across the entire stationery and mobile engine market including in shipping, where the EPA is finalizing a change to the diesel fuel program that will allow for the production and sale of low sulfur fuel for use in ocean going and large marine vessels. Our multi-gas analyzes are a preferred solution to design for lower emissions and to ensure compliance.

In this quarter, we received our first order from a major global marine diesel engine manufacturer to use our multi-gas analyzer to ensure compliance with these more stringent EPA regulations. This customer selected our analyzer because of its high speed data collection capability, which allowed them to measure transient signals and its ability to measure sulfur compounds and acids in a wet gas stream. We have also seen stronger interest in diesel engine testing from the large truck engine manufacturers, who have a similar need for transient measurements, as well as engine optimization for future alternative fuels.

In the last call, I talked about a new opportunity for our residual gas analyzers or RGAs in freeze drying, which removes moisture during the manufacturing of food and drugs. As I mentioned in that call, RGAs are used to monitor the process gases to detect impurities, monitor for leaks and identify the end point of the process; ensuring quality, process integrity, and the consistency of the end product.

I'm pleased to report that this quarter, we received additional follow-on orders from existing pharmaceutical customer and anticipate further orders in 2014. As drug manufacturing stands globally, new OEMs and new drug manufacturers are emerging in Asia. We are using our global capabilities to target these emerging opportunities. And I'm pleased to report that we have also been designed in at a major Asian freeze dryer OEM for a similar growing application in pharmaceutical manufacturing. These examples provide just a snapshot of where we are leveraging our technologies and global capabilities to support a semiconductor customers, as well as other new and growing applications, and they also demonstrate how we win in the markets we serve.

Now, looking ahead, we have seen a recent acceleration in order rates, particularly from our customers in the semiconductor industry and anticipate continued sales growth in the fourth quarter. Semiconductor industry analysts are projecting that 2014 should be a good year for the industry, driven by ongoing transitions to smaller geometries and implementation of new device technologies in support of demand for full featured mobile devices. Looking at current business levels, we anticipate that sales in the fourth quarter may range from $155 million to $200 million, and at these volumes are non-GAAP net earnings could range from $0.31 a share to $0.41 a share.

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

Thank you, Leo. First I'll discuss the third-quarter result before providing further details on our Q4 guidance.

Revenue for the quarter was $166 million or 6% increase, compared to Q2 revenue of $157 million, an 18% increase from $141 million a year ago. Q3 growth margin was 37.4% and included a $6.4 million obsolete inventory charge for certain products that are our key sole customer in China, whose technology funded by the Chinese government has recently been reduced.

Non GAAP gross margin (inaudible) the inventory charge was 41.2% within our expectations at this volume level. This compares to 39.5% in the second quarter.

Non GAAP operating expenses decreased in the third quarter and were $48.4 million, compared to $51.7 million in the second quarter of 2013. Third quarter non-GAAP operating expenses reflect typically higher vacation schedules, in addition to with a one-week shutdown in certain locations, a decrease due to timing of certain R&D projects and favorable foreign exchange. During the quarter, we also record approximately $1.1 in restructuring charges in connection with the plan consolidation of certain facilities to allow for more effective service and support to our customers.

Our non-GAAP operating margin was 12.2% of sales, up from 6.6% in Q2. Non GAAP net earnings were $13.3 million or $0.25 per share compared to $7.3 million in the second quarter and $8.4 million in the third quarter of 2012. GAAP net income was $2.5 million or $0.5 per share. The GAAP tax rate for the quarter was 80.4%.

In the quarter, we're able to take advantage of the favorable short-term tax election at a foreign location. This favorable election will permit the Company to substantially reduce future income tax expenses when moving cash among foreign entities and result in a one-time income tax charge of $6.5 million. In addition, further favorable tax planning opportunities were completed in the quarter which generated an increased U.S. income tax credits of $1.2 million.

We record this discrete benefit in the quarter. Excluding these items, our non-GAAP tax rate was 35%. This rate increased slightly from over prior quarters due to changes in geographical mix of taxable income.

Cash in short and long-term investments increased by $28 million to $626 million, as of September 30. During the quarter, we paid a quarterly cash dividend of $8.5 million or $0.16 per share; did not repurchase any shares during the quarter.

As we said in prior calls, the timing point of any shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions and business development activities, including not limited to merger and acquisition opportunities. These repurchases may be suspended or discontinued at any time without prior notice.

Total book value net of good will intangibles was $841 million, a $15.82 per share. In terms of working capital, day sales outstanding improved to 54 days at the end of the third quarter , compared to 56 days at the end of Q2.

Inventory turns were 3.1, excluding the special obsolete inventory charge of $6.4 million; inventory turns were 2.8 or in time line with Q2. Capital additions for the quarter, primarily relate to do investments in manufacturing and test equipment and IT systems, were $2.8 million, depreciation and amortization expenses were $4.2 million, and non cash stock compensation was $2.7 million.

Now I'll provide further detail regarding the composition of revenues for the third quarter. Sales to the semiconductor market were $115 million, up 10%, compared to the second quarter, and represented 69% of third quarter revenue. Within the semiconductor market, sales to semiconductor OEMs increased 8% from the second quarter and comprised 54% of total sales.

Sales to semiconductor fabs increased 16% in the quarter and comprised 15% of total sales. Sales to our semiconductor fab customers can vary from quarter to quarter, depending on the timing of customer projects. Sales to other advanced markets remained stable quarter over quarter and were $52 million, representing 31% of total revenue.

Geographically, sales in the U.S. were 55% of total sales, sales to [Asia] were 33%, and sales in Europe were 12%. Sales to our top 10 customers comprised 44% of total sales, sales to applied materials and LAN research comprised 16% and 14% of third quarter sales, respectively. Our head count decreased slightly from Q2, and as of September 30 was 2,298.

Now I'll turn to Q4 2013 guidance. Based upon current business levels, we estimate that our sales in the fourth quarter could range from $185 million to $200 million. But based upon its expected sales range and product mix, Q4 gross margin could range from 41.5% to 42.5%, we expect Q4 non-GAAP operating expenses will increase from Q3 due primarily to the timing of incentive compensation as well as R&D projects and could range from $51 million to $52 million.

In the fourth quarter, R&D expenses could range from $16.1 million to $16.5 million. In SG&A expenses could range from $34.9 million to $35.5 million.

I mentioned on previous calls, either expenses could vary from quarter over quarter, depending on the timing of various R&D and IT projects. In the fourth quarter, we expect to incur the following additional GAAP operating expenses -- $2.3 million in executive retirement costs; $400,000 of amortization of intangible assets; and $100,000 of restructuring expenses.

Net interest income is estimated to be approximately $200,000. We expect our fourth quarter income tax rate can be approximately 35% reflecting projected geographical mix of taxable income. Given these assumptions, fourth quarter non-GAAP net earnings could range from $16.6 million to $21.9 million, but $0.31 to $0.41 per share and GAAP net income could range from $14.8 million to $20.1 million or $0.28 to $0.38 per share or approximately 53.6 million shares outstanding.

This concludes our prepared remarks. We now open the call for questions.

(Operator Instructions). Our first question comes from the Jim Covello of Goldman Sachs

Great. Thank you for taking the question. This is [Jack Shane] on behalf of Jim Covello.

So, I guess last night major OEM and a client of yours just started to higher margins. How should we think about your longer term margin structure, given the recent [wave] of consolidation with your customers? I know you guys mentioned how [LAM and applied are] currently about 30% of your sales.

Thanks, Jack, for the question. I think if you're referring to the impact on us relative to pricing pressures, the industry's had pricing pressures for the 33 years I've been here. You work on improving your own cost structure, do you work within the industry, I -- we don't expect anything significant. You've got our numbers -- estimates for the quarter, and we also show a model. We don't expect anything would change in both of those.

Great, and thanks for that. And as a follow-up, I was wondering if you guys could talk a bit more about your lead times. Have you guys have seen lead time stretch out, given the pickup in the industry particularly from the memory end market?

If you're talking about our ability to deliver to our customers lead time I think that's what you're talking about

Yes. That's right. Yes. That's right.

You know, in our business we are single source. So our customers count on us.

One of the ways, aside from technology that we maintain that position, is through operational excellence. So we gear up as the industry gears up.

We have a flexible work force; we're able to bring in a temporary work force. We use overtime to expand capacity.

Our suppliers -- we do long-term contracting with them so they make commitments on materials [and] available. So we don't anticipate; we're happy to see the orders and don't anticipate anything changing in lead time significantly.

Great. Thank you.

You're welcome.

Our next question comes from Krish Sankar with Bank of America.

Hi. Thanks for taking my question. A couple of quick questions. Number one -- in your guidance, how would you expect the semiconductor revenues to improve sequentially in December?

Yes. I think in general where the non semi business has been relatively stable, I think you can assume that most of that is in semi. Although, as you know, we're sort of a [churns] business so there could be some lumpiness in the quarter. And so, I would say in general, our thinking is it's primarily semi.

Got it. And then you highlighted that you guys felt trying to make a -- I'm kind of curious was these sales for sapphire for mobile applications? Or was it for regular LED

We prefer not to provide too much information on that. I think there's a -- I don't think initially it's LED. Put it that way.

And are these shipments more than what you normally sell for LED segment? Or is it a brand-new opportunity that usually this can be qualified?

I didn't quite understand the question because you asked if these were shipments based on LED when I said likelihood was they're not going on LEDs But can you replay that again?

Just the quality of shipping that is shipping for this application is it a normal? Or --

No. It's higher than usual.

Got it. Got it. That's very helpful.

And, Leo, congrats. You'll be missed and congrats to Gerald to the new promotion. Thank you, guys.

Thank you.

Thank you.

Our next question comes from Josh Baribeau with Canaccord.

Again, congratulations, and good luck to you and Gerry.

Some of our -- some of your customers and some of their customers have started talking a little bit about equipment reuse, probably expect this trend to continue as each note gets much more expensive. Can you talk a little bit about how that affects you, if there's a services component if some of your subcomponents get swapped out or made more intensive as that happens?

Well, a piece of our both OEM and end user business is upgrading existing tools. And we look forward to those kinds of things.

Because typically what happens is they will upgrade a particular tool prove out better performance and then upgrade a series of those tools that are doing the same thing. So we do that both directly with the fabs themselves and with OEMs, who do some type of upgrade kits or refurbishments.

You know, it's been a trend for a while. I don't know that it -- the other thing we have seen is that with some of these new device structures, it's more difficult to reuse and needing some new tools.

So I don't know that we're sitting here today expecting a major change in refurbishment or upgrades to tools. But we've been doing that for a number of years.

It has grown, as you've said. There are more refurbishing. But we're not expecting at least in the near term anything unusually to change there.

Typically, we get to put new products on exist -- older tools. They get to -- and it helps us get those components adopted on the next generation tools, as well.

Okay. And then are you able to quantify the increase in capital intensity for your business through some of these new processes, new structures, new notes? A lot of your customers talk about what they think, let's say the etch intensity would be or the deposition intensity. Would your component or subcomponent intensity mirror that? Would it -- might it be higher? Have you ever quantified that?

I think the only way we have quantified that, because you can imagine that we sell thousands of line items, and various components, and different equipment companies migrate to that. So I don't go from where they are today to a completely different process at volume.

So this happens over time. And so I think the way we've demonstrated that is if you look at our content, our dollar content as a percent of capital spend, that, we've demonstrated has gone up over time. That's probably when you have thousands of line items with various customers with different acceptance and timing of acceptance within a process, that's probably the most concrete way we could measure that.

Great. Thank you.

(Operator Instructions). Our next question comes from Patrick Ho with Stifel Nicolaus.

And Leo, I want to send my best wishes to you. Congratulations on your time at the Company, as well as your CEO tenure, and Gerry, good luck on a going forward basis.

Thank you.

Thanks.

Leo, maybe just as a parting shot, you're departing as the semi cap industry appears to be heading up. There's talk about the sustainability of these CapEx trends heading into the early parts of 2014. Can give a little color and granularity in terms of your readiness and your ability to ramp particularly to lead times and the equipment vendors tend to be shorter and shorter over these past several cycles; how ready are you and how will you be able to react to keep your margin profile going up during this time?

Thanks, Patrick, for the question. I guess, first of all, you know, I'll say that as the technology keeps advancing and we got to smaller nodes and newer structures, we are an enabler to that. So often, if we can't provide technology to those customers that -- the industry slows down.

So, first of all, from that stand point, we're ready in terms of the products that we have available, the way we're adding features to products that can allow our customers to keep advancing technology maps. I think as far as being able to produce, the other area is -- I think each -- as time as gone on, we get better and better able to meet these types of ramps both in output and technology for a number of reasons.

One is as we go through these, we discover where the weakest link is and we fix that weakest link, and then we go to the next ramp and we determine where the weakest link is and we fix it. So I think over time each area with the global operation the global design centers, every time we've gone through changes and ramps we get better at doing what we do across more the entire organization. So I think today, I'm confident we can meet the deliveries, we can meet the technology needs.

I don't see that beings the challenges. I think having -- I think as the lead times get tighter and shorter, I actually like the fact that we don't buffer this industry quite the same way with inventories because it sort of gives false demands up and down. So I think it's a healthier sort of overall industry model, and I think we get healthier as time goes on based on the things we do.

We have used down turns to improve the business, either structurally or in the way we perform. So I'm very confident going forward. And Gerry has been doing that with me for many years with the whole team. And so I think it's -- he'll bring another level of improvement to the organization

Great. That's helpful. And my final question is on the non semi side of things, and I know it's very diverse; you have many markets you participate in outside of semiconductors and it can be lumpy in some of those segments. But as you look forward to 2014, do you have any feelings about some of the other markets that could pick up and where you could see some tail winds from those non semi markets?

Yes. Well, I will say this. It's only as good as the forecast of the people that give them.

But at least from the data we see, while solar and LED is sort of at the very, very bottom of what we've seen in many, many years, both of those markets showed double-digit expected growth from the experts that forecast those. And so, as long as the experts are right, then those look like they would be growth areas for us.

I think we still see GAAP's analysis. I think we mentioned earlier in the year that we had been making investments in other parts of the world in our gas analysis and the combination of EPA regulation tightening going across more type of engine manufacturing and putting some resources in other parts of the world, I think that keeps us optimistic that that would be a growing segment of the business.

So I think a lot of it will depend on the global economy as well. When our business has been relatively stable. But when I read other reports from other companies and I talk to other CEOs, I think everyone's sort of surprised that it's been as stable as it has in some cases they've seen it down. So I think it's been low for a while and so I'd have some expectations that eventually it has to come back and certainly the experts in those industries are forecasting it to be better.

Great. Thanks again, and good luck, Leo.

Thank you.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our host.

Thank you. Thank you for joining us on the call today.

Before concluding, I would like to thank both the Company and all those who have been associated with it for the support I've received during my many years here at MKS. You've all been part of helping make us a successful company. I'm excited to begin to have time to enjoy some of the other aspects of my life while watching MKS continue to grow and be successful in the years to come. Thanks again.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.