萬機儀器 (MKSI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the MKS Instruments second-quarter 2014 earnings conference call. (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 am Seth Bagshaw, Vice President and Chief Financial Officer and I am 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 second quarter of 2014. You can access this release at our website, www.mksinstruments.com.

As a reminder, various remarks that we 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 statement 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 Jerry.

Thank you, Seth. Good morning, everyone and thanks for joining us on the call today. As in the last call, I will start with the progress update on our strategic initiatives. Then I'll give a recap of the second quarter 2014 with some highlights on our business and finally provide our outlook for the third quarter. Following me, Seth will give further details on our financial results and then we will open the call for your questions.

Starting with the vision and goals we have for MKS, specifically, we are on a path to continue to broaden our leadership in vacuum processing, measurably improve our profitability throughout the cycle, efficiently deploy capital to increase shareholder value and aggressively pursue opportunities created by current technology inflections.

In the second quarter, we continue to make progress against all of these goals. In the area of vacuum leadership, last quarter, we announced our acquisition of Granville-Phillips, or GP, a worldwide leader in the indirect gauging market. I am very pleased to report that we successfully closed this strategic acquisition at the end of May. The combination of GP indirect gauging products with our leadership in direct measurement capacitance manometers gives MKS one of the strongest, broadest and most complementary technology portfolios in the vacuum gauging market.

The contribution of GP is immediately accretive to non-GAAP EPS and performs favorably on other key financial metrics. We have already identified and have begun capturing synergies within product development, as well as other operational improvements. For example, we have consolidated all MKS vacuum gauges under one general manager. We are merging our existing indirect gauge productlines under GP and GP now fully participates in our technology roadmapping process.

We have also begun aligning our sales channels to minimize redundancy and provide a closer connection to both our OEM and end-user customers. With the acquisition of GP, we have added approximately $30 million of revenue and further improved our operating profitability, which we expect will increase annual non-GAAP earnings by $0.10 to $0.12 per share. Incremental to the positive financial contribution of GP, we have been taking additional measures to improve our profitability resulting in substantial improvements to our operating model. We outlined the improvements we initiated in Q1, which we expect will generate improvements to our gross margin, operating margin and net income throughout the cycle.

Additionally, we have a robust M&A pipeline and will continue to explore attractive M&A opportunities and I am confident that we will continue to successfully identify, acquire and integrate other technology-based companies.

Along with our vision of deploying capital in the best long-term interest of our shareholders through strong M&A execution, we are also committed to returning capital to our shareholders. In the second quarter, our Board of Directors voted to further increase our dividends. Our goal is to increase cash dividend over time and as a result, this is our second dividend increase bringing the dividend level some 10% higher than when it was initiated in 2011.

Also, during the quarter, we repurchased $20 million of stock. Since 2007, the combined return of capital from dividends and share buybacks has totaled $370 million. In 2014, year to date, we have deployed over $125 million in capital through the acquisition of GP, shareholder dividends and share repurchase.

Moving to our second-quarter results, sales were above guidance at $185 million due to better-than-anticipated sales in the semiconductor market, as well as continued growth into other advanced markets. In the semiconductor market, we continue to work closely with all OEMs and device makers as they design and optimize tools and increase the utilization and productivity in the fab.

In semiconductor manufacturing, we are in the midst of a significant technology inflection point. The leading edge migration to 20 nanometer and smaller devices continues to propel technological changes. Scaling limits and the need to reduce power are driving 3D designs and as advanced lithography techniques continue to be delayed, device makers are increasingly relying on multi-patterning to achieve sub 20 nanometer geometries.

These technology inflection points are significantly increasing capital intensity due to the increased number of critical steps required and our major customers are estimating that spending to support these inflection points could double in the next three to four years. This is especially true in etch, deposition and critical cleaning, which are necessary technologies to achieve 20, 16 and 14 nanometer devices. We have very strong exposure to all etch, deposition and critical cleaning OEMs who rely on MKS technologies to enable their process tools. And this creates additional opportunity for the advanced power, reactive gas, control, flow, pressure and other technologies MKS develops. For example, we continue to gain acceptance for advanced pulse RF power products, which enable precision etch control for the fine lines and high aspect ratio holes in leading edge 2D and 3D devices. Recent demonstrations of this pulsing capability resulted in orders from major OEMs for both dielectric and polyetch.

We also continue to directly support device manufacturers as they optimize tool performance. Recently, our Liquozon PrimO dissolved ozone system was specked in by a prominent logic device maker for leading-edge cleaning applications. This PrimO has been specifically designed to recirculate ozonated water without disposing between process steps. With the recirculation of ozonated water, this customer will save an estimated 75% in water usage thereby improving profitability and eliminating water waste.

This quarter, we also had several significant sales to major Asian semiconductor manufacturers for power, remote plasma, flow and pressure products, as well as service support. At this same customer, we also displaced an incumbent of gas analyzers for several monitoring applications due to our superior performance and local technical support.

We are excited to see continuing results from increased investments in Korea where we received significant follow-on orders for both remote plasma and microwave products for new advanced strip processes from a major Korean strip OEM. Our localization strategy continues to pay dividends as we see deeper penetration there into OEMs and device makers as well.

Looking beyond our semiconductor industry sales, the global economy continues to recover. In this past quarter, our sales to all other markets increased for the third consecutive quarter coming in at $58 million. These markets include medical, thin films, bio and pharmaceutical manufacturing, LEDs, flat-panel displays and other diverse applications.

Building on the success in the semiconductor market, our Liquozon products have also become the standard for cleaning during flat-panel display manufacturing. This quarter, a large Chinese display manufacturer, which is starting production for an active matrix OLED display, placed a multisystem order for our Liquozon cleaning subsystems. We won this business because Liquozon is recognized as a leading technology for critical cleaning in active matrix OLED production.

In the medical market, this quarter, we saw strong follow-on orders for our Baratron capacitance manometers for benchtop medical sterilization equipment used to disinfect dental and surgical tools. In medical imaging, where we provide our power amplifiers to MRI OEMs, the market is expanding internationally, especially as healthcare improves in developing countries. One of our newer Chinese MRI OEM customers is seeing rapid acceptance of their MRI tool in China and based on their success, they have applied for regulatory approval to expand their market to sell into other growing Asian markets.

As a corporate initiative, MKS has identified several key megatrends, which we anticipate will drive growth and over the last few quarters, we have deliberately redeployed people and capital to fund activities in these growing areas. One of these megatrends is the environmental market where air quality and the impact of carbon emissions on global warming are growing concerns around the world. We believe our technologies are well-suited to address environmental marketing challenges and have launched an initiative to further explore and extend our work in gas analysis to identify additional opportunities to address this megatrend. This will build on our existing efforts where we continue to see further acceptance and increased sales of our FTIR gas analyzers for emissions and safety monitoring.

With our recent TUV certification, which is required in the EU, additional opportunities are available to us in a continuous emissions monitoring of incinerator exhaust where FTIR measurement is required to monitor pollutants. This quarter, we were awarded a new contract displacing an incumbent because of our superior monitoring capability and performance. There are just a few examples of the many diverse and growing customers and applications we serve, which provide growth opportunities for MKS.

Looking ahead, reports following the recent semiconductor industry tradeshow continue to project that third-quarter OEM shipments may be down from the second quarter followed by a possible improvement in Q4 and into 2015. In our other markets, the global economy continues to improve and we continue to search out and leverage growth opportunities in a strategic manner. Based on these factors and looking at current business levels, we anticipate that sales in the third quarter may range from $170 million to $190 million. At these volumes, our non-GAAP net earnings could range from $0.28 to $0.42 per share. These ranges include a full quarter of GP results.

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

Thank you, Jerry. I will first discuss the Q2 2014 financial results before providing further details on our Q3 2014 guidance. Revenue for the quarter was $185 million, which was $5 million above the high end of our guidance range due to better-than-anticipated sales to the semiconductor market, continued growth in our other advanced markets and approximately $2 million in revenue from the GP acquisition. Revenue decreased 10% compared to Q1 revenue of $206 million and increased 18% from $157 million a year ago.

Non-GAAP gross margin was 43.4%, including a benefit of approximately 50 basis points from a prior year duty refund and the impact of favorable foreign exchange. Non-GAAP operating expenses were $47.7 million, which was favorable to our guidance primarily due to lower discretionary spending, foreign exchange gains, the timing of R&D project spending, most of which we expect to occur in the third quarter. Non-GAAP operating expenses in the quarter also included $400,000 of GP expenses.

GAAP operating expenses were $49 million, including $1 million of amortization of intangible assets and $300,000 of transaction costs associated with the acquisition of GP. Our non-GAAP operating margin was 17.6% of sales, which was ahead of our target model at these volumes. Non-GAAP net earnings were $22.6 million, or $0.42 per share, compared to $27.2 million in the first quarter and $7.3 million in the second quarter of 2013. Our tax rate was 31% as expected. GAAP net income was $21.2 million or $0.40 per share.

Now turning to the balance sheet, cash and investments decreased by $101 million in the quarter to $546 million, or approximately $10.29 per share. The decrease in cash and investments was due to payments made during the quarter for the purchase of GP of $87 million, a dividend payment of $9 million, share repurchases of $20 million and the vested retirement payment of $14 million to our former retired CEO, which was offset by strong cash flows from operations. As of June 30, approximately 48% of our cash and investments were in the US and the balance was located throughout our international operations. Total book value net of goodwill intangibles was $799 million, or $15.07 per share.

In terms of working capital, days sales outstanding improved to 50 days at the end of the second quarter compared to 53 days at the end of the first quarter. Inventory turns were 2.7 compared to 3.2 in the first quarter. Inventory turns decreased as a result of lower revenue and including inventory from the GP acquisition. Capital additions for the quarter were $4.2 million. Depreciation and amortization expenses were $4.8 million and noncash stock compensation was $2.8 million.

During the quarter, as Jerry noted, our Board increased our dividend to $0.165 per share and we paid a cash dividend of $8.8 million in the quarter. Also, during the quarter, we repurchased approximately 700,000 shares for $20 million at an average price per share of $28.53. As we stated in prior calls, the timing and quantity of any shares repurchased will depend upon a variety of factors, including business conditions, 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.

The total deployment of capital for share repurchases, dividends and the acquisition of GP has totaled $125 million year to date, or one-third of our cash balance in the US when we started the year. Our remaining cash balance in the US is just over $260 million, which is about $75 million to $100 million above what we have estimated we need to operate the business at these levels. We have therefore deployed more than half our excess cash in the US during 2014 and continue to seek ways to deploy capital in the optimal long-term interest of our shareholders.

We are also committed to making continuous improvements in our financial performance over the operating cycle. In the first quarter, we discussed a reduction in workforce that was initiated in that quarter. The annualized net savings of these reductions is approximately $6 million in manufacturing overhead, research and development and SG&A expenses, which also includes reinvesting approximately $2 million into various growth initiatives throughout the remainder of the year. These reductions are now substantially complete. As we mentioned in our last earnings call, we expect this will increase our net earnings per share of $0.06 to $0.07 per share on an annualized basis by the end of the year.

We expect the GP acquisition at current business levels to add approximately $30 million of annual revenue and further increase our non-GAAP earnings per share by $0.10 to $0.12 per share. We have immediately begun to implement cost synergies and coupled with a more focused sales channel strategy, we anticipate growing this business and its profitability as an integral part of our pressure measurement and product portfolio.

These actions, in connection with other opportunities, have improved our target operating model throughout the semiconductor cycle. We have posted an updated version of this model in the investor presentation section of our website. We are also evaluating other opportunities that we believe will continue to further improve our financial performance.

Now I will go through more detail regarding the composition of revenues for the second quarter. Sales to the semiconductor market were $127 million, down from a record $150 million in Q1 and represented 69% of second-quarter revenue. Within the semiconductor market, sales to semiconductor OEMs decreased 18% from the first quarter and comprised 55% of total sales. Sales to semiconductor fabs decreased 2% in the quarter and comprised 14% of total sales.

We have continued to see strong performance in our other advanced markets, which increased by 3% from the first quarter of 2014 and 10% from the second quarter of 2013. Sales to these markets represented 31% of total revenue. Sales in other markets can vary from quarter to quarter based on specific projects, but in general have been growing with GDP improvements until such segments as LED, solar and display start to see significant capacity additions.

Geographically, sales in the US were 59% of total sales. Sales in Asia were 31% and sales in Europe were 10%. Sales to our top 10 customers represented 50% of total sales. Sales to Applied Materials and Lam Research comprised 19% and 14% of second-quarter sales respectively.

Our headcount at the end of Q2 was 2,421, up from 2,326 at the end of Q1 primarily due to the addition of GP employees.

Now I'll turn to Q3 2014 guidance. Based upon current business levels, we estimate that our sales in the third quarter could range from $170 million to $190 million, which includes an estimated $7 million to $8 million of revenue from GP. Based upon this expected sales range, our Q3 non-GAAP gross margin could range from 41.5% to 43% reflecting these volumes and expected product mix. Q3 non-GAAP operating expenses could range from $49 million to $50 million. In the third quarter, R&D expenses could range from $15.9 million to $16.3 million and SG&A expenses could range from $33.1 million to $33.7 million.

The range of operating expenses in the third quarter reflects a full quarter of GP, which we expect to be approximately $1.5 million in operating expenses, as well as certain R&D product expenses that have moved from Q2 into Q3. As I mentioned in previous calls, the timing of these projects are dependent upon a variety of factors and could vary from quarter to quarter.

In the third quarter, amortization of intangible assets are expected to be approximately $1.8 million. Amortization of acquired inventory stepup could be $1.8 million and net interest income is estimated to be approximately $200,000. We expect our third-quarter tax rate to be approximately 31% reflecting anticipated geographical mix of taxable income. Given these assumptions, third-quarter non-GAAP net earnings could range from $14.7 million to $22.4 million, or $0.28 to $0.42 per share and GAAP net income could range from $12.2 million to $19.9 million, or $0.23 to $0.37 per share on approximately 53.4 million shares outstanding. This concludes our prepared remarks. We will now open the call for questions.

(Operator Instructions). Patrick Ho, Stifel Nicolaus.

Nice quarter, guys. Jerry, first, maybe aside from your top two OEM customers, can you, one, give us an idea of your exposure and presence with Tokyo Electron, particularly given the impending Applied Materials merger? And secondly, on a big picture basis, how do you see your opportunity potentially improving going forward with that combined entity?

Thank you, Patrick. Well, I think as far as with TEL, we never want to be presumptuous about our position with a customer. We are always working hard to prove ourselves to them. But TEL has been in the top five of our customers over the last several years, so I think just in that respect we are in very good position. We've had a very significant presence for over four years in Japan in sales and service and technical support and I think a larger entity -- so I think in one stead that they would say we are in good position with TEL. I also have to believe that a larger entity is looking for a large and substantial supplier with a worldwide footprint with low-cost country capability with vast technical resources, which MKS has, versus smaller regional suppliers. I think our opportunity could be even greater as the companies come together, but again we have to work hard to continue to prove ourselves.

As far as where the opportunities apply, I think with this strong growth projected for the next number of years in etch and dep and given our technology, I think I'm really excited about our power in particular with the capability that is needed for deep drilling accuracy. So I think that that is a really big opportunity for us and we continue to get acceptance of our products in the market, but then there is also pressure and pressure control, flow control and I think given the fact that we've seen through VLSI our marketshare has increased over the last year, I think we continue -- good evidence that we continue to see good opportunities ahead. So I am excited about the opportunity to support a larger company in Applied and Tel.

Great, that's really helpful. And my second follow-up question in regards the non-semis business, can you give I guess a little bit of color of what markets you are seeing progress in 3Q versus I guess some of the ones that you saw in 2Q? Are you seeing some of the, I guess, market mix change or are the same markets that you saw strength in Q2 carrying on into 3Q?

Yes, it's pretty much for the -- Patrick, I think we see pretty much the same level of projection for what we saw in Q2 to Q3. We had a nice increase again, 3% quarter over quarter in the non-semi markets. We still start to see a little continued like with LED, which we are grateful to. It is certainly not at the levels it used to be, but it certainly is past life support (technical difficulty) called it in the past, but I think slow and steady wins the race in the non-semi stuff going forward.

Great, thank you very much.

You are welcome. Thank you.

Josh Baribeau, Canaccord.

Hi, thanks. Are you guys starting to see the IDMs making some of their own equipment and diversifying away from the traditional equipment OEMs and if so, how do you think you are positioned with them?

Well, I think that they are at least -- we know one customer, and I don't want to get into specifics, that has been engaged in designing and building their own equipment. We have a very close relationship with the end-users. Before the OEMs existed, MKS was supplying directly to the chipmakers themselves and a number of years ago, we started an end-user champion council to go back to our end users to make sure that we were providing the level of service and technical capability they needed.

So I think we are uniquely positioned with those device makers that are beginning to design and build their own equipment. Obviously, we make sure there is a strong veil of IP that's shared between OEMs and end users. We make sure that we are careful about that, but we have seen more activity in that area and we've been very grateful to be part of it.

Okay. And then maybe as a follow-up, changing gears a little bit, obviously, we talk mostly about front-end processing in the semiconductor space, but as the lines are starting to get a little bit blurred between front end and back end as more advanced packaging techniques are being used, are you participating in anything let's call it either traditional back end or somewhere in the middle with some of those new structures?

Well, we do have some -- there is some vacuum content in TSV, through silicon via, is an area where we participate. One of the things we think is interesting though is they are probably going to have to make more subsystems of chips, so chip stacking could be an interesting concept on the back end. And if there would be more need for metrology and measurement, there is a potential opportunity.

One of the things -- we did talk about megatrends that we are pursuing. One is the environmental monitoring; the other one is biopharm, biomed. The third one is new materials down the path of graphene, but we do have a task team that is looking at the back end and where MKS could participate either organically or some other fashion going forward because we think that is a nice growth area. So we are having a team specifically look in that area as well.

Great. Thanks. I'll pass it on.

Okay, thank you.

Krish Sankar, Bank of America.

Yes, hi, thanks for taking my question. A quick one for Seth. Can you guys give color on how the different segments will trend in Q3, particularly between semi and non-semi?

Yes, I will try to give you some detail on that, Krish. Now, as you know, we don't necessarily give guidance by markets because we ship to a lot of customers and we look at a lot of inputs to determine the guidance for Q3, but the way I look at it is we know that we did $185 million in Q2, GP is $2 million of that, so call it $183 million without GP. Then you take the midpoint of the guidance, I will call it $180 million for Q3, which we think is $7 million to $8 million of that is again GP-related, so call it $173 million without GP compared to $183 million without GP. So that is down about 5%. Our other markets, as we said before, have been pretty steady growth rate. So if you assume that is going to be up a little bit in Q3, you sort of solve for what semi could be and that would be down about at midpoint about 8%. We think 8% to 9%.

Got it. And then within GP, is the split equal semi, non-semi and do you plan to break it out going forward or no?

Yes, it has tracked about 50/50. We would probably roll it into our semi numbers and non-semi going forward. Maybe for a couple of quarters, we can show that separately. We haven't really given that a lot of thought, but we are integrating that business, as we said before, pretty quickly into the core MKS to leverage some of the sales channel opportunities and cost synergies. So it is going to be melded in pretty quickly and I think after a while, we are not going to be able to get that visibility. We do track it sort of offline internally to make sure we hit our targets, but for reporting outside the Company, we hadn't really thought about doing that.

Got it. Just a final question. Tax rate looks like 31% this year. Would it start trending up in the out years or is 31% a good proxy for you?

Yes, I think 31% -- the big mix -- the big factor is really the mix that the income comes from, but I think 31% is what we would project going forward at these volumes and sort of where the current mix is. So it's probably a pretty good proxy going forward. We do have a number of activities that we are working on to sort of I will call improve that rate and we will update as we kind of get those things completed. But 31% is a pretty good rate at this point.

Got it. Thank you very much.

Jairam Nathan, Sidoti.

Thanks for taking my question. I just had a quick question on the adjacent market. Just can you give us a better idea of what the breakdown looks like now given your strength in medical and environmental -- I just want to see if you could give us that breakdown as well as industries?

Okay, your question, Jairam, is try to break out the non-semi --

Yes.

(multiple speakers). So we have done that in the past at a high level and those markets like the medical, biopharm have always been around sort of the 4% to 6% range, so pretty steady eddie, so we haven't given much more granularity underneath that quite honestly. They do tend to ebb and flow by quarter, so some go up or down. As Jerry mentioned, we are seeing really again very strong growth, I would say sequential quarter over quarter. Again, 3% this past quarter, 10% since a year ago and then LED and solar are still I will call more capacity-driven are actually showing a little bit of life the last several quarters.

But our belief is, generally speaking, GDP plus growth rates are probably a good benchmark. The markets all sort of ebb and flow, so it's hard to pick one and really model it accordingly. Plus, we have 3,000 to 4,000 -- literally 3,000 to 4,000 customers around the world, so it's a very broad number of industries and again, the biggest ones probably run about 4%, 6% maybe 7% of our revenue. So to try to give one that is sort of a good model or a benchmark -- the good news, we have so many different chips on the table, that's a core strength for us, but not any one is sort of a critical driver.

Okay. And just to follow up on the medical on the MRI side, Jerry, you mentioned something about getting approvals and registrations. So do you today sell mostly in China and the US and you are not into the other markets here or how should we think about that?

No, well, actually, we sell the MRI power supplies to all the large MRI equipment providers in the world, the Siemens, Phillips, GE. So wherever their markets are is where we are. So Europe and the US and in Asia, but specifically in China, there are a number of new MRI equipment manufacturing companies that have begun and we are selling directly in there. It's a new market for us. It is technology that we have developed for the existing markets, but it is a new and growing market. But we have been pretty well-dispersed around the world through the large OEMs that we sell to.

Okay, thank you. That is all I have.

You are welcome. Thank you.

(Operator Instructions). Tom Diffely, D.A. Davidson.

Yes, good morning. Maybe, first, touch on the upside you saw in the quarter versus your previous expectations. Is there any more color you can provide as far as where it came from? Was it the OEMs, the fabs or any particular productlines?

Yes, I would say -- Tom, this is Seth -- we look at our order rate and sort of revenue between OEMs and the end device manufacturers. The OEMs are a more volatile revenue stream as you can imagine. We saw it sort of trend down. When we gave guidance last quarter, it was trending down and actually stabilized and so that was kind of why we did a little better than we expected in the quarter. Again, not dramatically off where the high end of the range was, but it has been relatively healthy at these levels for most of this quarter, which is probably what we didn't expect coming into the quarter.

And we have very short leadtimes in the products that we sell direct through purchase orders, but we also have a large amount of our orders that come through pull systems where we stock the material line side to the OEM and if they decide towards the end of a quarter to resell con bonds and increase their inventory level, we will see a preponderance of pulls, which are booked in shipments in the last weeks of the quarter because they are looking to maybe replenish inventory. So between that and sometimes the short leadtimes and the lumpiness of the quarter, sometimes it gets very difficult to predict the fineness of the revenue.

Okay, so good news for you, but not necessarily an indicator of that ramp in the fourth quarter quite yet?

Well, I still think we are riding our canoe, as I said before. I'm not sure if we are in the middle of the canoe and paddling, but we have heard a lot of good things about what next year looks like. We are really excited about the mix, even if the wafer fab spending was flat year over year, but there was a mix due to supporting 3D NAND and multi-patterning and [thin] set. That is really good for MKS. So we are still bullish about an upturn eventually. We are just riding along in our canoe.

Okay and maybe a bit more on the potential for Korea. It sounds like you made some nice penetrations there. What is your penetration right now versus kind of your average worldwide and are there other regions like Taiwan and Japan where you can do a similar effort?

Well, Korea has surpassed all the other Asian markets now as our largest market surpassing Japan. We believe that the Korean semiconductor equipment and chip market is fast-paced and growing and so we are really bullish about that. We made a strategic acquisition over a year ago, a company called Plasmart, which had strong technical connections to all the OEMs and the end users there and we see our relationship and the technical roadmap being a strength that has developed there. So I think it continues to be an emerging market for strength for the equipment industry in general and it's a strong point for MKS. We've been in Korea for over 25 years or so and had a large concentration of people on the ground in sales, service and applications and we've only strengthened our position with the acquisition of Plasmart. So we are really very excited about it.

Yes, Tom, just to add to that, so we have a pretty broad footprint in Korea, as Jerry mentioned, through Plasmart and we've been investing in our local operations, our subsidiary in Korea. And so it is the largest direct shipment sub in the world for MKS that surpassed Japan last year, which indicates our content in Korea. Then that also doesn't show all the exposure we have to the Korean market because we will ship -- as you know, the OEMs in the United States, they ship into Korea. So we are very leveraged to all the big device manufacturers and this is kind of one example that is coming through right now.

The other thing that we've seen more progress in the last couple of years is with the OEMs in Korea themselves as well. So the suppliers, OEMs in Korea who supply the end users, we've seen some tremendous penetration there and really happy about the progress we've made there. Very excited about it.

Okay, and does that include some of these other markets too like the flat-panel and LED?

The largest gain has been on the semi side, I'd say. Some progress in the areas, but primarily the biggest penetration has been on semi.

I think OLED is pretty good.

Yes, OLED, right, particularly.

Okay. And you've talked a bit about how the other markets are kind of bouncing off the bottom here and some of the near-term drivers, but which of those segments in the other category do you think has the biggest long-term potential for you?

Well, we still think that LED is a good market and we think it is just a matter of when the saturation of the equipment abates because obviously the consumer is going to be in a position to be buying LED lighting over time. That has got to be a growth area and like I said, this environmental monitoring, it's smallish comparatively, but we think that has got some tremendous potential. If you look at the local EPA concern about gas -- coal-fired plants and the emissions there alone, they are concerned about pollutants around the world and global warming. We think we are well-positioned as well as in the area of terrorism because we have the best chemical weapon detection product on the market. It is deployed in places that we can't talk about around the world and gaining more acceptance. There will probably be more to talk about when we can over time. So we think that is a really nice opportunity for MKS over time.

Okay. And then, Seth, does the tax rate, the 31%, include an R&D tax credit this year?

No, it does not. And we think that is probably about another point at these volumes, Tom. So with the R&D, probably 30%, but 31% does not include the R&D credit.

Okay. And then last, with your share repurchasing, do you expect any kind of meaningful shift in the share count on a go-forward basis?

Again, we sort of report our share buybacks after they occur for a lot of different reasons. And we look at that on an ongoing basis. A lot of different factors drive that. So I would say that can't comment looking forward, but we are committed to returning capital to shareholders and again, we've got a fair amount of dry powder left on the authorized plan with no expiration date. So that is very much alive front and center in our thought process.

Great, thanks for your time this morning.

You are welcome.

And I am not showing any further questions at this time.

Well, I am extremely pleased with our financial performance in Q2. Our focus is to aggressively work to improve our operating model and efficiently deploy capital. We have great exposure to semiconductor OEMs and end users as they address today's technology inflection points, especially in etch and deposition and we believe we will gain an increasing share of the incremental capital required to support these technology changes. Additionally, our initiatives to address megatrends are moving forward, which alter and open up additional opportunities for MKS outside of semi. I look forward to updating you on our continued progress in October. Thank you for joining us on the call today.

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