萬機儀器 (MKSI) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the MKS Instruments reports Q4 2013 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Seth Bagshaw. Sir, you may begin.

Thank you. Good morning, everyone. I'm Seth Bagshaw, Vice President, Chief Financial Officer. I'm joined this morning by Jerry Colella, our 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 and full year 2014. 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 comprise 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 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 dates subsequent to today.

Now, I'll turn the call over to Jerry.

Thanks, Seth. Good morning everyone, and thank you for joining us on the call today. In a few minutes, I'll provide fourth quarter and full 2013, as well as our outlook for the first quarter. Seth will follow me with further details and our financial results. Then we will open the call for your questions.

First, I'd like to take a minute to formally introduce myself to the investment community. In my 31 years at MKS, I have progressed through increasingly more senior positions in all facets of the Company. Over the last 10 years, I have worked worldwide responsibility for global sales, operations, application support, and product development.

As a result, have gained an understanding of increasingly complex needs of our customers and our industry. I have been leading the operational strategy at MKS for some time now, and I have never been more confident in our Company's ability to deliver results, whether they are technological, operational, financial, or strategic. I am excited to be working with the strong team that we have built here at MKS.

We have had a long history of success. I want to assure you that we will continue our disciplined financial and operational execution, as well as our commitment to investing in growth in both new and existing markets. We will build on our past success, but with a refined vision for the future. MKS is a respected leader in vacuum processing, and my goal is to further strengthen our front runner position by focusing our efforts in several areas.

First, we want to extend and amplify our initiatives in the area of customer satisfaction. Long-term customer relationships are the foundation of our business, and this has been a priority for MKS.

Our primary focus has been, and will continue to be, on our OEM semiconductor customers, as well as device makers, where we will continue to strengthen our working relationships. We will support them by continuing to provide local application support to better understand and help solve the complex process and deal with the challenges they face.

Second, we will invest in talent and infrastructure to develop and provide innovative technologies solutions in our core markets, as well is new ones. Next, we will direct advance the business for sustainable and profitable growth by expanding our product solutions to our core business and continuing to invest in and expand into other high potential advance markets.

Lastly, I am firmly committed to deploying our capital in the best long-term interest of our shareholders. Over the years, we have demonstrated our ability to generate significant cash flows, and since 2007 we have generated nearly $700 million in free cash flow and have returned $330 million of that to shareholders through stock repurchase and dividends. We have purchased $16 million of stock under our current program, which is authorized for up to $200 million.

In terms of acquisitions, we will be opportunistic and disciplined, focusing on companies and technologies that are a strategic fit with MKS which have both top-line and profit growth potential, and also meet our targeted return on invested capital. We have a robust M&A pipeline, and are confident that we will continually see, successfully identify and acquire integrated technology-based companies, which we believe is a core competency of our management team.

So, as I start this new role, I am energized by the potential MKS has, and I look forward to updating you on progress towards our strategies on future calls. ¶ Turning to 2013, our business improved sequentially each quarter, and we ended on a high note with a very strong Q4, with full-year revenue of $669 million, up 4% from 2012. Fourth-quarter revenue was $204 million, a 23% increase over Q3. This growth was primarily driven by semiconductor sales, which were up 30% quarter over quarter, with sales to all other markets up 7%.

The fourth quarter of 2013 was positively impacted by significant shipments for the first phase of a new memory fab in Asia, the next of which is expected to occur sometime in 2014. Seth will provide additional financial details later in the call.

Now I'd like to share some insight into our markets and applications, and provide some examples of recent successes, starting with the semiconductor market. The demand for smaller, faster portable devices with increased battery life, as well as capability for communication, video, and gaming continues to grow.

As the industry begins the implementation of 20-nanometer and smaller devices, our customers have encountered significant technological challenges. Up until this point, manufacturing chips with smaller features as relied primarily on advances on lithography.

Today, however, new lithography techniques are extremely challenging, and their use has been delayed. In the meantime, semiconductor OEMs are largely relying on new materials and new processing techniques, especially 3D device structures and multi- patenting to continue the path towards better performance of 20-nanometer and smaller devices.

Manufacturing devices in 3D relies heavily on the use of additional deposition and [etch] steps. Multi- patenting also requires numerous additional etch steps.

This is a tactical inflection point for semiconductor manufacturing, and now OEMs have estimated the number of etch and deposition steps needed for these processes could more than double as we go from 28-nanometer to 20-nanometer and below. MKS is a major provider of technologies for both etch and deposition, and the implementation of these additional process steps increases our opportunity significantly.

In 3D NAND, chips are made by etching extremely small d-poles and channels into the devices. This requires exceptionally precise control of the energy, gas, and pressure during etch, and MKS has some very unique products to address these needs

MKS was recently granted a patent for enhancements in our AFT generator, which enabled rapid tuning of the RF plasma to deliver precise power to the process. This improves our advanced RF pulsing capability as a critical improvement for etch tools fabricating 3D NAND, finFET, and other complex leading edge devices.

Our RF pulse products have been selected for advanced tools-- etch tools by the leading etch OEMs, and this quarter we received additional follow-on orders from multiple etch OEMs for our products, which we believe positions us for share gains as these advanced processes ramp. We have also strengthened our AR portfolio with a recent acquisition of Plasmart, a Korean developer of AR matching equipment.

In addition to their technical fit with our AR power products, Plasmart has an excellent reputation and a very strong local presence. MKS has been in Korea for 20 years, and we have invested in people and infrastructure to support our customers there.

This continuing investment, along with the acquisition of Plasmart, has positioned us well with the semiconductor end users in Korea, who are critically important since this is an area of significant growth and increasing importance to the semiconductor industry. We have seen the benefits of these investments in 2013, and we had record sales in Korea.

Turning to the deposition opportunity, smaller features and three-dimensional structures place a depend on EP deposition as well, requiring extremely precise deposition of thinner, more uniform, and more [conforming] layers. This again increases the market for most of our products.

We continue to work with established and emerging OEMs and end users around the globe as they develop new tools and processes for ALD, CDB, epi, and pre-cleaning. This quarter, we were awarded additional design wins in various deposition tools for our remote plasma sources, pressure control, flow, ozone, RGAs, and more.

In the [thin filled] markets, there are been several announcements in the press recently about new advances in portable devices, such as smartphones and tablets, notably about programs to improve the durability of screens by replacing glass sapphire, which is harder and more scratch resistant. In the last call, we reported that we received significant orders for this application, and I am pleased to report that in the fourth quarter we received additional follow-on orders for multiple MKS products, including pressure control, flow controllers, and advanced gauges for sapphire production.

We also continue to grow our business in markets and applications outside of semiconductors and electronics. For example, we increased sales of our air and gas analyzers, which are used in environmental monitoring, flow omissions engine development, hazardous gas monitoring, and other applications.

Recently, our continued submission monitoring system was certified by both TUV and MCERTS to meet the primary industry standards for industrial and power plants, a milestone especially serving the European market. We also continue to expand our sales to engine manufactures, the low emissions development. In the fourth quarter, we received a follow-on order from a major German truck and diesel engine manufacturer, as well as new and follow-on orders from other major engine manufacturers.

In the medical market, where we are the leading supplier of AR power supplies, amplifiers, the medical [imaging] systems, we have been working with emerging MRI OEMs in the expanding China region as they implement our next generation AR amplifiers, which have twice the power to enable improved diagnostic testing of soft tissue, such as heart and circulatory systems. I am pleased to report that these OEMs have received Chinese regulatory approvals, and will move into full production this year.

Another growing medical application is the use of small plasma-based sterilizers to disinfect medical instruments in doctors' and dentists' office. We continue to receive repeat orders from these customers for our pressure control products, and this quarter we achieved a new design win for vacuum valves and hardware for a new sterilization tool.

In the pharmaceutical market, our multivariate analysis and design of experiment software, enabled pharmaceutical companies to bring drugs to market sooner, and once in production, allows operators to quickly detect, analyze, and respond to deviations in the manufacturing process. After close cooperation and support over a number of years, I am pleased to report that this quarter a leading pharmaceutical manufacturer signed a multi-year agreement for global implementation of our multivariate analysis and design of experiment software.

We spoke last quarter about another pharmaceutical manufacturing process, freeze drying to remove moisture where RGAs are used to monitor the gas to detect impurities, check for leaks, and identify the end point of the process, ensuring quality, process integrity, and consistency of the end product. We continue to increase our penetration of this market, and received additional orders again in the fourth quarter.

In March of last year, we acquired Alter Systems, a manufacture of microwave products for industrial applications. Microwave is a fast and efficient method of heating materials that are different to warm by other methods. Unlike other types of heating, microwaves penetrate all parts of material concurrently, so they heat uniformly.

Industrial applications of microwave are diverse and include cooking, heating, drying, polymer processing, curing, [serve] modification, and more. Our industrial microwaves are solid-state designs, which resulted in smaller size and higher reliability attributes, which make them a good fit for industrial tools such as food production, packaging, and coding.

In the fourth quarter we had a new microwave design win of a major filling and packaging OEM. These are just a few examples, but they reflect the diversity and range of applications and successes we are seeing in both our core semiconductor market, as well as the other markets we serve.

Looking ahead, industry analysts are predicting that 2014 will be a strong year for [a wave of IT], spending, and in particular, for etch and deposition systems required to support 3D designs. This trend opens opportunities for MKS is quite positive for our semiconductor business.

For our business in other advanced markets, the most cyclical segment such as solar, LED, and thin film are currently at historical lows, and we would expect would provide an upside as the industry continues to improve. We also anticipate steady growth in our other markets as the global economy maintains a modest recovery.

For the first quarter of 2014, business continues to be strong for us, particularly in the semiconductor segment. Looking at current business levels, we anticipate that sales in the first quarter may range from $190 million to $205 million, and at these volumes our non-GAAP net earnings could range from $0.35 to $0.48 per share.

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

Thank you, Jerry. I'll discuss the fourth quarter and full year financial results before providing further details on our Q1 2014 guidance.

Revenue for the quarter was $204 million, an increase of 23% compared to Q3 revenue of $166 million, and a 53% increase from $134 million a year ago. Revenue for the quarter was above the high end of our guidance range due to shipments for the first phase of a new memory fab in Asia, the continued strength in our OEM business, and growth in our other advanced markets.

Gross margin was 42.9%, which was within our expectations at this sales volume. Non-GAAP operating expenses were $53.5 million, above our guidance due primarily to higher variable compensation and unfavorable foreign exchange. As a reminder, non-GAAP operating expenses in the third quarter of 2013 were below normalized levels, due to seasonally higher vacations, including shutdowns, foreign exchange gains, and the timing of certain other project spending.

In the first quarter of 2014, we expect our operating expenses to be at more normalized levels, which is in the range of $51 million to $52 million. Our non-GAAP operating margin was 16.7% of sales. Non-GAAP net earnings were $22.3 million, or $0.42 per share, compared to $13.3 million in the third quarter and $5.1 million in the fourth quarter of 2012. GAAP net income was $20.2 million, or $0.38 per share, and the tax rate for the quarter was 35%.

Now, turning to the balance sheet, cash investments increased by $24 million in the quarter to $650 million, or approximately $12 per share. Approximately 60% of our cash investments are in the US, and the balance is in our international operations. Total book value, net of goodwill and intangibles, increased to $857 million, or approximately $16 per share.

In terms of working capital, day sales outstanding continued to improve, and were 52 days at the end of the fourth quarter, compared to 54 days at the end of the third quarter. Inventory turns also improved to 3.3 compared to 3.1 in the third quarter.

Capital additions for the quarter were $3.3 million. Depreciation and amortization expenses were $4.4 million. Non-cash stock compensation was $2.5 million. During the quarter we paid a cash dividend of $8.5 million, or $0.16 per share. We did not repurchase any shares under our repurchase program in this quarter.

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

Now, I'll go through more detail regarding the composition of revenues for the fourth quarter. Sales to the semiconductor market were $149 million, or an increase of 30% compared to the third quarter, and represented 73% of fourth quarter revenue.

Within the semiconductor market, sales to semiconductor OEMs increased 34% from the third quarter and comprised 59% of total sales. Sales to semiconductor fabs increased 15% in the quarter end comprised 14% of total sales.

Sales to our other advanced markets also increased, up 7% from the third quarter of 2013, and were $56 million, representing 27% of total revenue. As I described before, sales in these advanced markets can vary from quarter to quarter.

Geographically, sales in the US were 54% of total sales, sales in Asia were 36%, and sales in Europe were 10%. Sales to our top 10 customers represented 50% of total sales.

Sales to Applied Materials and LAN Research comprised 18% and 14% of fourth-quarter sales, respectively. Our headcount at the end of Q4 was 2394, up slightly from 2298 at the end of Q3, due to increases in manufacturing-related labor work.

To recap our results for 2013, sales for the full year was $669 million, an increase of 4% from $644 million in 2012. Sales to the semiconductor market were $457 million, increasing 14%, reflecting the strong rebound in semiconductor OEMs' spending in the second half of 2013.

Sales to other advanced markets decreased 13%, and were $212 million. The decrease in these other advanced markets was primarily driven by the expected decreases in solar revenues, which were down more than 70% compared to 2012.

Sales to our top 10 customers totaled 46% of revenue in 2013 compared to 42% in 2012. Sales to Applied Materials and LAN Research comprised 17% and 12% of 2013 revenue, respectively.

Now, I'll turn to Q1 2014 guidance. Based upon current business levels, we estimate that our sales in the first quarter could range from $190 million to $205 million. Based upon this expected sales range, our Q1 gross margin could range from 42% to 44%, reflecting these volumes and expected product mix.

Q1 operating expenses could range from $51.3 million to $52.3 million. In the first quarter, R&D expenses could range from $16.6 million to $17 million. SG&A expenses could range from $34.7 million to $35.3 million.

The range of operating expenses in the first quarter reflects lower variable compensation expenses compared to Q4 of 2013 and the absence of foreign exchange losses incurred in the fourth quarter, partially offset by seasonally higher fringe costs in first quarter, more normalized work schedules in the US, and continued investment in certain key research and development projects. As I mentioned in previous calls, the timing of these projects is dependent upon a variety of factors, and could vary from quarter to quarter.

In the first quarter, amortization of intangible assets is expected to be approximately $500,000. Net interest income is estimated to be approximately $200,000.

We expect our first quarter tax rate to be approximately 33%, reflecting an anticipated geographical mix of taxable income, and includes the effect of the expiration of the US research and development tax credit at the end of 2013. Given these assumptions, first quarter non-GAAP net earnings could range from $18.9 million to $25.9 million, or $0.35 to $0.48 per share, and GAAP net income of $18.6 million to $25.5 million, also $0.35 to $0.48 per share on approximately 54 million shares outstanding.

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

(Operator Instructions)

First question is from Patrick Ho of Stifel Nicolaus.

Thank you very much. First I'll congratulations on the nice quarter and end to the year. And Gerry for you, best of luck going forward in your new role as CEO.

Thank you.

First question, and you gave a lot of good details in the prepared remarks regarding the opportunities on the etch and deposition side of things, especially with the capital intensity increasing for both of them. You mentioned both, I guess, the opportunities and the increasing capital intensity as well as share gain.

One, can you comment about maybe again some of the increasing content you will see in both etch and deposition? Secondly, you also mention share win. What are some of the areas where you believe you can gain share in those growing processes?

I think the thing that is the biggest opportunity for us is the slow growth in lithography and the move towards the 3D NAND finFET and multi-patenting. If you look across the products that we offer for the pressure measurement, or RF, or PC power, or remote chamber cleaning, there's so many additional steps that'll be required by all of the OEMs for this production of 3D NAND and finFET that in general that increases our content and our opportunity across the whole gambit, Patrick.

It's really a technology inflection point that for us is exceedingly important because of the process control that's required when you go from 28 to 20 and the type process improvements we're seeing. It is really across all the business units and across basically all of the OEMs that we are doing business with.

No ones, particular one, stands out. It's really about the technology change.

Great. Second question, maybe for Seth. On the margins front, you performed really well this quarter as revenues ramped. What are the key variables over the next few quarters?

Is it absorption and product mix, customer mix? I know they're all probably contributors at some level, but what's the biggest one that we should be looking out for over the next several quarters?

I would say, Patrick, at these volumes, the factories are running pretty of efficiently. In the fourth quarter, we ramped the production pretty substantially which gave us some good wind to our back on the absorption side.

Clearly, volume is probably the most important. That is what we got in Q1 the way we did. Then, as always, product mix, but it tend to level itself out quarter over quarter.

I'd say volumes are probably most important, and then foreign exchange, international operation of impact as well. We like a weak dollar over time. That's probably the other factor that would affect the margins.

Great. Thank you very much.

Thank you, Patrick.

Next question from Jim Covello of Goldman Sachs.

Good morning, guys. Thanks very much for taking the question. LAM on its call last night, obviously important customer for you. There's obviously a tremendous amount of customer consolidation in the semi space.

They talked about it even in more extreme level of customer concentration, going from 60% of their business coming from the top three to 80% in the first quarter. Is that creating any incremental challenges for you as you look into 2014, specifically? [Whether that would be] forecasting with lumpiness of three guys being 80%, or margin pressure, or any of those things?

Thank you, Jim. As far as margin pressure is concerned, everybody sees pricing pressure year over year, and it is nothing that is not to be expected. We don't think to see anything more extraordinary than, in terms of dealing with our customers on contracts and pricing discussions.

Certainly, we have actions that we take on our end on our cost side to work with low-cost country, other things we need to do to maintain good margins. We are fortunate that we have significant technology that is critical to the customers, and there is a lot fewer subsystem providers.

It is consolidated market on our end. It enables us to have more opportunity. I think the more the consolidation, the actually easier it is for us to do business, to figure out the trends, where the volume's going.

We have a very deep and solid relationship with all of our customers. I think the fewer people, in terms of predicting the business, is actually probably a little easier for us in general, although our lead times are short, and we're on a lot of pull systems so our visibility doesn't go beyond much before a few weeks in our quarter.

It is lumpy, but I think between the lean systems we have in place, the pull systems for materials between ourselves and our customers, the solid global supply chain we have, and our ability to ramp and react, I'm not really worried about fuzziness for the forecast or the inability to respond to customer demand. I don't see that as a problem.

That is really helpful. Thank you so much.

You are welcome. Thank you for the question.

Next question is from Josh Baribeau of Canaccord.

Hi, thanks. You had talked, obviously, about the strength in memory. Would you be able to provide us with more of an approximate breakdown between memory and logic in the quarter, and then maybe what you expect going forward?

The good news for MKS is that it doesn't matter whether it's memory or logic, or which OEM or end user has strength in a quarter. Our business is spread across multiple technologies and throughout multiple customers.

So we really can't tell you where the product ends up. We know the customers we ship it to. Where it ends up ultimately at the of the day really isn't something that we have a lot of visibility to.

We are fortunate in the fact that we have a very deep and wide portfolio that applies to all the multiple players in the industry and it plays to all of the technology. I think the more you see an uptick in 3D NAND and finFET multi-patening and more etch and deposition, you probably can surmise that that's very good for MKS in general. In general, it's kind of very difficult to tell because of such a widespread product offering, which is great for us.

Sure. And then maybe to look at things a little bit differently, can you help us out maybe with the mix between etch versus deposition versus implants, something like that?

It's pretty much the same issue. It's pretty well spread out. We really don't see much of a difference in terms of that dissemination of the business.

Okay. That is good for me. Thanks. I'll pass along.

You are welcome. Thank you.

(Operator Instructions)

The next question is from Tom Diffely of DA Davidson.

Yes, good morning. First, Gerry, I was hoping you could help us maybe compare and contrast business trends that you just had in the fourth quarter to maybe the fourth quarter of 1984?

(Laughter) Well, let's see. I was seven years old back in.

I wasn't born yet. So (inaudible) going back just a couple of years, last time you were above $200 million in revenues. How was business different today than it was, say, just a couple of years ago when margins were perhaps a little bit higher?

I think there's probably a little more content in solar or LED in terms of comparable levels of business over 2010 and 2011. That is really the big difference between now and then.

In general, the other parts of our business are relatively the same and strong. That is the only difference I could really tell you that between when we were at $200 million or above and today.

I think also Tom, the rates, the FX rates back then a more favorable as well. That's probably the other thing I would just point to.

Okay. When you look at some of these [adjacent] markets, solar, LED, thin film, which ones seem to have -- I mean, we've heard some interesting things percolating in all of them. I'm curious, from your point of view, which ones do you think may be the first to recover?

Well, I'd probably say, if I start with the least most likely the solar would be one we think might take the longest to recover with the subsidies that don't exist in longer, the over-saturation in some of the equipment. I think between thin film and LED, it's probably a reasonable expectation both we probably could see some level of improvement.

Certainly don't think it's going to be a rapid improvement, not from the things we're seeing from external resources. Maybe there will be some life to the flat panel and thin film maybe a little earlier on than maybe LED, but not really sure. We're just hearing probably the same things you're hearing, and we're just positioning ourselves at the customers to be ready when they come back here.

Okay. Also you talked about how etch and deposition are nice growing markets. Do you actually have higher exposure to something like 3D NAND that has more layers in etch and deposition versus, say, the finFET design? Or is it too small to really measure?

It is well-positioned across all of them, although the 3D certainly has significant position in. We have a lot of power opportunity for pulsing in RF, but it goes across all of the parts that we offer. We're pretty equally positioned in just about all of them.

Okay. And then on the other side, when you look at the cash, 60% sounds like it's onshore. For 2014, the cash generation, what is the mix of onshore/offshore on a go-forward basis?

Hold on one second, Tom. It would depend obviously where we are in sort of the cycle, and what piece would -- I would say, Tom, maybe 50/50. It is a little hard to say because you have to model what's going to happen 2014, and we don't get beyond the first quarter.

I can give you sort of a rough idea. It is sort of 50/50 is how it sort of rolls out. There's a lot of things that'll move that, working capital's probably the biggest impact on it.

But still pretty plenty of room to support a dividend for many years to come.

Yes, absolutely. And the 50/50 I mentioned is without dividend. We have plenty of cash to support the dividend. Again, I said in the past, it's really a -- the dividend is more of a view on the operating model of the business, not that we have cash on the balance sheet. That's how I've always looked at it.

I know we do internally here as well, for the rest of team. As Gerry mentioned, we have acquired a number of companies in our career, and we think having cash to deploy for long-term M&A is also advantageous as well.

Yes. Finally the tax rate of 33%, at this point it looks like good long-term tax rate as well?

Yes. I think without that, there's no R&D credit in there. Again, at these volumes, that's probably pretty realistic.

Okay. Great. Thank you.

Thank you.

Thank you. There are no further questions at this time. I'll turn the call back over for closing remarks.

Thank you everyone. I started this call by sharing our visions for MKS. The examples we covered today demonstrate a very solid foundation to successfully implement the strategies to accomplish this.

We will continue to exceed our customers' needs, to invest in innovative technology-based solutions, and to manage this business for sustainable and profitable growth. I look forward to updating you on our continued progress in April, and thank you for joining us on the call today.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.