萬機儀器 (MKSI) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MKS Instruments Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Seth Bagshaw, Chief Financial Officer. Please begin.

Thank you, good morning, everyone. I'm Seth Bagshaw, Senior Vice President and Chief Financial Officer, and 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 second quarter of 2017 as well as a update on 2017 target operating model. You can access this information at our website, www.mksinst.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 statements as a result of various important factors, including those discussed in yesterday's press release and in our annual report on Form 10-K for the year ended December 31, 2016, which is on file with the SEC. These statements represent the company's expectations only as of today and should not be relied upon as representing the company's estimates or reviews as of any date subsequent to today, and the company disclaims any obligation to update these statements. Today's call also include non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in yesterday's earnings release. In addition, we refer to certain pro forma measures as if the acquisition of Newport Corporation, which closed on April 29, 2016, had occurred at the beginning of the first quarter of 2016. Now I'll turn the call over to Jerry.

Thanks, Seth. Good morning, everyone, and thank you for joining us on the call today. I'll begin with our results for the second quarter of 2017. Following that I'll provide a few highlights in our business and an update on the integration of our Newport Corporation acquisition. Finally, I'll provide our outlook for the third quarter 2017. Seth will follow me with further details on our financial results, and then we'll open up the call for your questions.

We're pleased to announce we achieved record quarterly revenue of $481 million, an increase of 34% on a pro forma basis from a year ago and up 10% sequentially. We also set a new quarterly record for non-GAAP net earnings totaling $77.7 million or $1.41 per share. We continue to leverage our strong semiconductor portfolio specifically our power, plasma and pressure solutions reaching new quarterly record for total semiconductor revenue. Semiconductor revenue was $295 million, an increase of 62% from a year ago on a pro forma basis and 13% sequentially. Overall, our first half of 2017 semiconductor revenue was up 58% year-over-year also on a pro forma basis. Our Light and Motion Division continues to perform well. In the first quarter of this year, we achieved the highest revenue in 5 years and I'm pleased to report that our second quarter revenue was $171 million, an all-time record for this division. Our Light and Motion Division's first half 2017 revenue on a pro forma basis has grown 11% year-over-year. We've been focused on operation improvements including applying the MKS business process to product development, R&D spend, cross-selling and improved internal commmunications. We have taken a multiyear approach to the integration and we have already seen positive results on the programs we have implemented. This excellent progress could not have been achieved without the valued assistance of the Light and Motion management team and their dedicated employees around the world. As we've discussed during previous calls, our strategy is to develop technology solutions that solve our customers' complex problems. We continue to work closely with our customers on designing in the best solution which lead to sustainable revenue growth. In the second quarter, our power solutions business was awarded design tool of record at a major Chinese OEM. We also had a number of design wins in the second quarter for our new lines of EtherCAT pressure control products. The next-generation semiconductor tools are using this new communication protocol as it is the fastest industrial ethernet technology available. EtherCAT significantly improves application efficiency, accuracy, provides greater process control for our customers. For a number of years, we've talked about the key strategic initiative we call technical localization. Providing technical expertise and capability close to our customers. This proximity is an effective method to rapidly identify and solve customers' most complex problems, and we have been very successful in South Korea with this strategy. For example we have seen our direct revenue in South Korea rise to record levels in 2016, and we expect to set a new annual revenue record again this year.

Looking ahead, we see China as another significant opportunity for us. We’re applying similar localization strategy there. We have made significant investments in the manufacturing facilities as well as sales, service, repair and applications teams. Our China presence now represents 10% of our total global workforce. These investments in our local infrastructure position us well for future in the China. For example, we see the LED, OLED and, more broadly, display market continuing to grow in China. Our LIQUOZON product portfolio is key to this flaming [manufacturing] processes that we're working with all the major display fabs.

And from a broader semi market perspective, we are engaged with the major Chinese OEMs in both traditional semiconductor development and LED applications, which continue to see strong growth. We also see additional success in China in our other targeted market segments. In the second quarter, our Light and Motion Division, won a major order for our laser diode burn-in solution supporting a customer's data center application.

Micromachining is another growth area for us, transparent or brittle materials such as glass or ceramic are historically difficult to process with good quality and high throughput. We address this problem with the portfolio of lasers, laser measurement and motion products with a combination of performance, reliability and cost. Additionally, we provide technical expertise in the manufacturing processes, engineering services and the integration.

In the second quarter, we won a substantial order for a mobile phone application with a South Korea customer. We also won a significant order in Japan for a large electrical component manufacturer for our high power UV pulse lasers. Market demand is also increasing for additive manufacturing solutions including lasers and beam delivery. Cross-selling across our Vacuum Analysis and Light Motion Division continues to be a focus, with our sales teams driving sales across our entire portfolio. In the second quarter, we won a significant initial production order for various Light and Motion products for a major life and health science customer. We're providing lasers, optics, filters, motion, optic mechanics and vibration control products as a comprehensive solution, demonstrating the value of the unmatched breadth of our offerings to our customer. In addition to cross-selling opportunities, there are product development synergies as well. We have been leveraging the expertise of almost 700 engineers across the 2 divisions to further provide cost effective solutions to our end customers. For example our Light and Motion engineering team is working with our Vacuum and Analysis team to develop a critical optics assembly, for new applications with significantly improved performance. Our digital and process specialist in our Vacuum and Analysis Division has helped solve a lens subassembly yield issue for a key Light and Motion customer.

At this point, I'd like to turn to our outlook for the third quarter of 2017. We are seeing continued strength in the semiconductor market and are well-positioned to leverage our broad portfolio and customer relationships. Our integration activities with Newport are tracking ahead of plan. We are also well-positioned to drive growth in the general industrial, life sciences and research markets. Based on these factors and looking at current business levels we anticipate revenue in the third quarter of 2017, may range from $450 million to $490 million and at these volumes our GAAP net earnings could range from $1.12 to $1.37 per diluted share and non-GAAP net earnings could range from $1.32 to $1.56 per share -- per diluted share. With that, I'll turn the call over to Seth to discuss the financial results and explain upon our guidance.

Thank you, Jerry. I'll cover our second quarter financial results, provide an update on our 2017 target financial operating model. And finally, I'll cover -- I'll discuss our Q3 2017 guidance.

Revenue for the quarter was $481 million, increase of 10% compared to Q1 2017 revenue of $437 million, an increase of 34% compared to pro forma revenue of $359 million in Q2 2016. Revenue for the quarter at the high end of the guidance range due to continued strong growth from our semiconductor customers as well as growth in the other advanced markets we serve. Sales to semiconductor market increased 13% sequentially to $295 million, which represents a new quarterly record for MKS. This is on top of a very strong first quarter, as sales to semiconductor customers increased 58% in the first half of 2017 compared to the first half of 2016 on a pro forma basis. Sales to other advanced markets increased 5% sequentially and were $186 million. And shipments into certain areas of these markets are project based and can vary from quarter-to-quarter. Non-GAAP gross margin was 46%, which is towards the lower end of our expectations at this volume, primarily due to certain warranty inventory charges in the quarter. Non-GAAP operating expenses were $105 million which were within our expectations at this revenue level. Non-GAAP operating margin was 24% reflecting a strong operating leverage also included in the quarter was $3.3 million of foreign exchange loss primarily due to movements in certain currencies in Asia. GAAP expenses include $11.5 million in amortization of intangible assets, $800,000 in integration cost related to the acquisition of Newport Corporation, and $400,000 in cost related to the sale of our Data Analytics Solutions Business unit, which closed early in the second quarter. Lastly, in the second quarter, we recorded $9.9 million charge for intangible asset impairment, restructuring cost, the inventory reserves relating to the winding down of a small product line and related consolidation of 2 international facilities. GAAP interest expense was $7 million, which includes $500,000 of amortization of deferred financing cost, and non-GAAP interest expense was $6.3 million. Early in the second quarter, we completed the sale of our Data Analytics Solutions Business unit for a net cash purchase price of $72.5 million and recognized an after-tax net gain of $72 million in the second quarter. Revenue in 2016 for this business unit was $13 million and the impact of this business on our financial results were not significant. We also recorded $12 million in projected U.S. federal income taxes related to the repatriation of the international cash proceeds from this sale. However, the timing of repatriation of these proceeds depend upon a number of factors including potential favorable U.S. tax reform legislation. The non-GAAP tax rate was 27% just slightly higher than our expectations for the quarter primarily due to geographical mix of taxable income. The GAAP tax rate was 23.8% including the favorable impact of a tax benefit from stock-based compensation expense for certain restricted stock units that vested during the quarter and the income tax effects of the sale of the data analytics business unit. GAAP net income was $120.4 million with $2.19 per share, and non-GAAP net earnings were $77.7 million or $1.41 per share, both of which also represent new quarterly records. We continue to execute on our financial strategy to delever our balance sheet, and reduce our interest cost and I am pleased to report that at the end of the second quarter, the company is now net cash positive. On June 30, we had cash and short-term investments of $577 million of which approximately 42% was in the U.S. and the remainder in international operations, and the balance of our term loan was $573 million. Also in early July, we completed the third successful repricing of our term loan and completed another voluntary principal prepayment of $50 million which has now reduced our term loan balance to $523 million. Since the loan origination on April 29 of last year, we have completed a total of $250 million of voluntary principal prepayments as well successfully completed 3 reductions in interest-rate spread reflecting the strength of our financial results. Combined these actions reduced our annualized non-GAAP interest expense by approximately $20 million or 50% in just over 1 year. Adjusted EBITDA for the quarter was $128 million, and our trailing 12-month pro forma basis our gross debt to our adjusted EBITDA ratio was approximately 1.3x. We continue to provide a balanced approach to capital deployment, and during the quarter we paid a cash dividend of $9.5 million or $0.175 per share. Capital additions for the quarter were $5.5 million. Depreciation amortization expenses were $20.6 million, and stock compensation was $6.2 million. Free cash flow for the quarter was $104 million. In terms of working capital, day sales outstanding improved to 51 days compared to 56 days in this first quarter of 2017. And the inventory turns also improved to 3.5x compared to 3.3x in the first quarter of 2017.

Turning to our new factors at Newport Corporation. Integration activities are continuing to progress very well. And I'm pleased to announce that exiting the second quarter, we've already realized $36 million of annualized cost synergies, up from $32 million exiting the first quarter, continue to track well ahead of original schedule. We continue to project that our total cost synergies could be $40 million annually, up from an original $35 million projection when we announced the transaction, and we expect to achieve additional cost synergies potentially in early 2018. Furthermore, we're very pleased with the strong financial results that Light and Motion Division generated this quarter. As Jerry mentioned, the Light and Motion Division achieved a new quarterly record for revenue in the second quarter and non-GAAP operating income more than doubled from a year ago reflecting a strong revenue growth and significant improvements in the Light and Motion financial performance.

Yesterday, after market close, we also published an updated fully synergized 2017 target operating model reflecting the impact of a third term loan repricing, the $50 million principal prepayment completed in July and an update to the non-GAAP effective tax rate to reflect the current projections of geographical mix of taxable income. At an illustrated annual revenue level of $2 billion, including $40 million annualized cost synergies, our illustrated model shows potential non-GAAP EPS at the midpoint of this potential range of $6.35 per share, or an increase of 34% compared to a model entering 2017, in more than double our financial model a year ago, shortly after we completed the acquisition of Newport Corporation. We'll always seek to continue -- we'll always continue to seek additional opportunities to improve our financial performance while providing additional resources to support our customers' requirements.

Finally, turning to Q3 2017 guidance. Based upon current business levels, we estimate that our sales in third quarter could range from $450 million to $490 million. Our Q3 GAAP and non-GAAP gross margin could range from 46% to 47%, reflecting these volumes and expected product mix. And our Q2 non-GAAP operating expenses could range from $102.5 million to $107.5 million. Non-GAAP interest expense is estimated to be approximately $5.1 million, and the non-GAAP tax rate could be approximately 27%. Given these assumptions, third quarter non-GAAP net earnings could range from $73 million to $86.4 million or $1.32 to $1.56 per share. In the third quarter, amortization of intangible assets is expected to be approximately $10.8 million, integration related costs are expected to be approximately $1.7 million. GAAP interest expense estimated to be approximately $7.4 million and interest income is estimated to be approximately $600,000. Our GAAP net income is expected to range from $62.2 million to $75.6 million or $1.12 to $1.37 per share on approximately 55.3 million shares outstanding. This concludes our prepared remarks, we'll now open the call for questions.

(Operator Instructions) The first question is from Amanda Scarnati of Citi.

A quick question on your product growth areas. And where you're seeing the most growth in the quarter? And where you're expecting things to see continued growth on the semi side in 2017? Is there specific areas? Is everything kind of growing together? Are you seeing it more in specific region? Just what kind of color you can give there on the specific products?

Yes. I think in general, the strength is across the board. As it was already mentioned, with plasma, power and pressure in the script that we've written. The regions are all very strong as well. Business is very steady. So I think we're very fortunate that on the semi side that things just continue to be strong. Obviously, we're very pleased with the growth, 62%, 58% growth is tremendous, and it's real tribute to the technology and the relationship we've built with the customers around the world. Obviously, Korea is very, very strong and can't wait till the year-end so I can tell everybody how we're doing but things continue to do well there. So I think it's just across the board. Certainly DRAM is nice, I had said -- when DRAM spending picked up last year, I said that with our position in Korea, we'd benefit from it. So it's just pretty strong across the board. Obviously 3D NAND is great for us so [actual depth] is strong. It's just everywhere it seems we're doing very well.

And then again, also you don't want to forget about our microelectronics business which is [litho] of the inspection metrology with the Light and Motion Division. Dallas business units have performed well as well. The industrial side is doing well, but certainly this semi side, which we call microelectronics, certainly is doing as well. So across the board.

And then in terms of two half growth versus one half growth. Just thinking from the major OEMs at the end of last quarter and throughout the quarter was that one half was going to be a little bit stronger than two half. Based on your result it looks like it could be relatively equal or your guidance that could be relatively equal one half versus two half. Are you seeing that sort of change or is it still a little bit more first half loaded?

I think the sentiment is a little stronger for the second half being better than was originally projected. Some people were saying 55-45 at the beginning of the year. But I think that we are feeling the people think it will be a little better than was originally thought. And the business appears to be steady to us right now. Again, we've very limited exposure, lead times are very short. We can only go based on what we read, and what our customers tell us. But the sentiment appears to be better about the second half position than it was at the beginning of the year, yes.

All right. And then one more question if I can sneak it in for Seth. In terms of the target model, the last 3 quarters it's been updated. Is this just because Newport is performing a lot better than expectations, and it just keep beating expectations, or is it just a little bit more conservatism on your part just to kind of keep expectations a little bit more muted?

Yes. The model's designed to do a couple of things. One it gives, obviously, the buy side and sell side a pretty good roadmap to model the profitability in the business based on certain revenue volumes. We've always had a 50% variable gross margin, 40 to 45 point variable operating margin so that's kind of like point number one. And then point two is, we've always updated this model when we sort of achieve our profitability improvements, restructuring the business, we've done a quite a bit obviously on paying down and the debt as well as repricing the debt up as well. So that's sort of -- we sort of do it as we go along so that we don't get too far ahead of ourselves and projecting a too far-out model. An update this quarter reflected, as I mentioned in the script, a little higher tax rate, better interest savings, if you will. And then the height of our guidance range of $490 million gets to the $2 billion range. So we thought it would be appropriate to kind of update the top line to reflect potential growth going forward as well.

The next question is from Sidney Ho of Deutsche Bank.

My question is on the Light and Motion margins. You guys have done a great job driving that operating margin to I think 18% in Q1 I don't know what that is for Q2. But if my math is correct that implies the operating margin for the organic MKS business in vacuum and analysis is close at 25%. Longer-term, is there any fundamental reason why Light and Motion cannot get to the same type of margin, say mid 20% range. Is it more R&D intensive? It looks like the gross margin for Light and Motion is already better than the Vacuum and Analysis at least in Q1?

Yes. So good question. I think let's talk about Q2 for Light and Motion first of all. So the L&M [read] $171 million for the quarter and the operating income was 19.8%. And again, if you look back when we acquired that asset a year ago. The operating margin was probably in the 10% range, $150 million per quarter revenue. So we really done -- I think the teams have done a great job growing the top line of that business and the profitability. And in Q2 we mentioned we had $36 million of synergies already achieved. We obviously feel the $40 million was quite achievable. So you can pretty much factor in additional cost savings that'll hit that P&L going forward that'll drive up the profitability. Probably another 1% or 2% I would say. And then in the L&M side, it's the -- the similar dynamics for a combined company. The variable gross margins of about 50%, and so what I would say is we'll joint the additional cost synergies we talked about which would be in this P&L, and then we'll obviously continue to grow the top line which will have impact on the margin. And then your new product development in leveraging some of the low-cost jurisdictions will probably be of some help as well in the future. So it would probably -- to get to 25%, little more growth in top line and again, we've good line of sight on the cost savings. But I think that's possible in a couple of years I would say.

I think the thing that be mindful of is that we have a process to constantly look at our profitability. When, in January of 2014, we initiated a profit and cash recovery team for the base MKS business, and that team has met every month since then. And I am the scribe and the leader of that team. And we need to look at what we can do to improve the -- just purely the core operational cost and profit to the company, separate needs are about revenue. And when we acquired Newport, we had an integration team but we also implemented a profit and cash recovery team set for Newport. And again they meet monthly to take the exact approach that we did with the base MKS business. So now you have 2 profit and cash recovery teams that are just focusing on what else can we do to improve the profitability issues with materials, structure of the business, just everything is on the table the way we look at it. And then we've added just one more layer of strategic management oversight to sit above both business units now and just look structurally just at the a company as a whole. And that's a different level of discussion, it gives us a much more deeper and broader thoughts about what the business could look like. So you will never see MKS and/or either division ever stop concentrating on sustainable and profitable growth and improving the profit. We have a process in place which has worked and we intend to continue to improve the profit year-over-year.

Great. That's a great insight. My second question is first I appreciate the update on your progress in China. On the semiconductor side specifically, my understanding is that you have great relationships with a lot of local equipment OEMs. I'm curious if you can comment on China fab construction activities based on the collective intelligence from both domestic and foreign equipment of light. I know you talked about 20 new fabs in China in the past maybe you can give us an update where things are today versus say 3 months ago?

Yes. It is little bit more difficult for me to comment on that. We've focused so much really on the OEMs we have less insight particularly on the fabs. And if I quote something it's usually because I read it from [indiscernible] somewhere else. I'm not a great guru on that. But I think the thing that we are doing is we're really concentrating our position with the key OEMs there . So as an example we talked about design tool of record award and it was for a [PECED] tool with a very significant Chinese OEM. I think the thing that we see is that we see in China what we saw to a certain extent happening with Korea, more of a ecosystem developing around semiconductor equipment and semiconductor processing. And we're seeing that in China as well. And so what we are seeing is getting design wins, getting orders, orders starting to trickle in here and there. More important positioning for future growth in '18 and beyond. But I don't really have any insight about the current state of fabs and I wish I could provide that to you. As soon as I do I'll tell you. I'll tell you what articles I read, I'll tell you that.

The next question is from Dick Ryan of Dougherty & Company.

So Seth, what impact did the warranty charges have on gross margin in Q2 and was there any mix issues as well for impact?

Yes, exactly. So there was warranty charges and some inventory charges. And that was about 60 basis points on the consolidated margin. And so if we're like 46%, 45.9% to 46% it should be more like 46.5% right down the middle of the guidance range. So that was kind of a big delta relative to what I thought would occur in the quarter. And just so you know, on the inventory charges, what that was is we bought Granville-Phillips in 2014, the indirect gauging, leader in the industry made us #1 in direct gauging. What we were doing is basically consolidating indirect gauging manufacturing to [recall] a center of excellence in Longmont, Colorado. And this last charge was moving some production from a European indirect gauging, Legacy MKS facility into Longmont. So that was why that charge occurred in Q2. But all in, the warranty and that inventory charge is about 60 basis points.

Any lingering impact into Q3 from those 2?

I don't know. Not planning that, no. So that's why you see our guidance in Q3 be back to the 46% to 47% range. It came at 480...

Yes, those were oneoffs so that it shouldn't be expected..

Yes. Yes, lumpy stuff too.

They weren't a pattern.

And it kind of happened all in this quarter, so I think that's behind us.

Okay. Light Motion had a good sequential growth. Did that come from both sides, the semi and their core business and maybe as an extension Jerry, are you seeing any progress of now owning Light and Motion and moving further into litho or advanced packaging?

Yes, no. Actually there's a lot of good win in industrial. We talked about different orders that we have saw for telecom and datacom for transceivers in data center. On the industrial side, PCB cutting and drilling, mobile phone, button cutting, industrial electric component manufacturing. We are seeing some good benefit from mobile device manufacturing on the industrial side which has given us great strength. Also there on the 3D printing for additive manufacturing on the industrial side. And then obviously, we called the microelectronics, but it's really the semi side for Newport with our customers in lithography, metrology inspection. Obviously, we have key accounts at ASML and KLA. We continue to see strength there. So it's really both the industrial side, and again a lot really at the mobile phone manufacturing. And then, microelectronics or the semi side being litho, metrology inspection. And we continue to concentrate on those key accounts. And I think there's further penetration over the next few years we can have on the semi side. We used to be surrounded the chamber in the front end chamber side with AMAT and Lam and TEL. And now we've really expanded our reach into packaging and litho and inspection in the front-end metrology. So we think there is really good growth rate there. But we're really high on the industrial side, on the laser business as well. And then bundling, one of the things that we've done by consolidating the sales folks at Newport is having them take a bundled approach when selling. So there happen to also be a win we had in life and health science that we mentioned that had a whole -- a sundry of products that was bundled with it. So I think the industries are doing well and just our management of the team to be more focused across selling is helping a lot.

The next question is from Krish Sankar of Bank of America.

Jerry and Seth, couple of quick questions. If I look at the midpoints of the May -- September guidance, it's roughly flat to down 2%. Can you just tell us how it breaks down between semis and Newport?

Well I think in general, it -- sometimes the business can be little bit lumpy. So a 2% change -- Krish, this is really -- sometimes it's related to people's ordering pattern. Some people pull in stuff some earlier than expected. So as far as just the -- that changed, it's just a matter of timing, the business is still very strong. We expect [to continue] to see continued growth in the Newport side. We think that they're doing very well, as we said in the industrial and microelectronics. You'll see continued growth there. And again, the semi stuff is strong as well.

Got you. Got you, all right. And then can you just tell us, I think, in the last earnings call, Jerry you kind of mention how much was OLED and LCD as a percentage of your sales, is it still like about 2% for OLED ad 3% for LCD?

Yes, it's about under 5% percent, Krish.

Got it. Got it, okay, fair enough. And then I had a question on the target model. Is it like $2 billion revenue run rate that you guys issued? How does it split between vacuum and the Light and Motion?

Well, we don't really give them all that level of detail, Krish, because we have thousands of customers and obviously many different markets. So that level of granularity is difficult to come up with. If you might want to look at our current run rate between V&A and L&M through Q3. It gives you a relative split on that. Just probably a good guestimate -- I am sorry but when we grow either side of the business, we're happy wherever the growth comes from. So we don't really get to that level of granularity. But...

Oh, that's fair. All right. And then the final question for Jerry. About 3 months ago most of your semi OEM customers are talking about potential stretching of lead times and I wondered if that is kind of actually moderated now or do you still think that is ongoing compared to 3 months ago?

You know Krish, we never really felt that or saw that frankly. And I know our customers have added a lot of capacity in the last couple of years. As a matter of fact, we had some executive meetings with them where they talked about continuing to add capacity. But we frankly did not see -- we did not have an effect on that. In other words our lead times have stayed constant. And we really did not really see an effect from our customers. We've seen steady as she goes, frankly.

Yes. And just to add that Krish, MKS is not a constraint to our major customers.

No.

We're not a -- we're absolutely ramping along with them. And that's been our core expertise for many, many years. So that's not a -- there might be a one off here and there, but it's not a constraint we're seeing to our customers.

By the way, Krish, I did want to add one more thing about OLED stuff. We've got certainly good position for our liquids and products for cleaning. There's other opportunities. But we do think there's longer-term application for the lasers and optics, things like NAS making, cutting, ablating and repair. So we'd like to see that OLED business pickup. So it is a target for us by the way.

Fair enough. And then a final question for you Jerry or Seth. Can you guys tell how much was AMAT and Lam as a percentage of sales. I'm guessing it is still about 10%.

Sure. I'd get that for you. It's a...

AMAT was 13% for the quarter, Lam was 10% in Q2.

The next question is from Patrick Ho of Stifel Nicolaus.

Jerry, maybe first off you. In terms of supply chain management, obviously, as you just mentioned you're not a constraint for your OEM supplier. Yet at the same time, they are feeling a lot of the constraints in the supply chain. How are you managing -- how are you managing that on your end to make sure that you deliver products and maybe as a second follow-up question to that: Are you seeing any trends of the OEM supplies going to larger supplies like you for more business because of the reliability and their need to always ensure that they get their products out?

Sure. Well, the first question is, this is a 30-plus year operation of being really good at what we do. And maybe that's partly why I'm CEO. I'm not sure I am not a technical guy. But we've concentrated on supply-chain management from the first day I came here, and we had $8 million a year to spend and now we have -- I don't know probably $500 million $600 million that we spend and leverage it. We put in lean manufacturing into our operations around the world in Mexico, China and here in the U.S. And we're just very, very close to our suppliers. We meet with them quarterly. We make sure we give them -- we also contract differently and I don't want to give any of secrets away, but we contact in such a way that they are not a gate to us. I consider inventory as storage capacity, frankly. I look at labor as storage capacity. The way we're playing capacity is different than other people. And again, I don't want to give any competitive edge, but it's really something that we've focused as a operational weapon the last 30-plus years. And it's -- we've won probably as many awards for operational execution believe it or not as we have for technology. And then the second part of the question can you repeat that Patrick because I just went on and on for a minute.

Yes, sure. Are you seeing any trend from customers gravitating more to you because of their needs for reliability on a much grander scale?

Actually that is true. And I've had executive discussions with some of the leading execs that our customer is coming to us because of our worldwide footprint, our capability, our demonstrated execution. We also have the stability of management. Now I may not appear to be a stable person but somehow they say, the longevity of the team here and my team itself is -- gives them comfort. We're around. There's no -- we're consistent. There's a constancy of purpose of how we execute. And we just have size now. Now before the size used to be attractive to smaller OEMs because they'd say, "Wow, you got a wide and deep portfolio, you can do everything for us. Therefore we don't have to go to 10 supplies and get our work done. And you could develop integrated subsystems." So that was always the strength of MKS dealing with the smaller OEMs. But it is true now that now that the largest OEMs see us as a stable company, worldwide footprint, willing to invest in people and inventory and that actually is that we are definitely seeing the benefit of that.

Great, that's helpful. May as a follow-up question. You talked about some of the cross-selling opportunities you already see and how that helped especially your Light and Motion business. Can you talk about some of the product development maybe on a qualitative basis and how you see potential revenue synergies as we go into 2018 and even 2019?

Yes. One of the areas is a lot of our cross developments on the optics side, there's a lot of optics and also lasers that we use in some of our nonsemi businesses. The things like gas and oil, purity. But we're also seeing the opportunity as an example for potentially optics for sensing and semiconductor longer-term. And we are already in discussions internally about how we can apply the capability of our sensors and our optics capability to provide a different technique for sensing on the semiconductor site. But we have the office of CTO which is chaired by John Lee, our Chief Operating Officer who is a PhD which is helpful better than I run it, and so they really are exploring multiple opportunities between the two groups for optics and lasers in particular. So we think there is some potential there. One of the things we talked about is the fact that their -- the design teams are working on solving problems that each has had. And I think that on litho metrology side, inspection side of the business, we're going to see some additional benefits from the capability of Vacuum and Analysis brought for critical problem solving to Light and Motion.

The next question is from Tom Diffely of D.A. Davidson.

Just another boring record quarter, I guess?

We don't consider it boring if you work with us, you'd find it's not that boring. Trust me.

We don't consider it boring.

Just first start off with the target model. What is the reason for the slight increase in the tax rate?

It's really the mix of where the income is coming in, Tom. So it's more of a UX -- more of a mix towards the U.S. income. And cause that's a high-tax jurisdiction as we all know. That's what drives it mathematically. And most of our semi customers are in the U.S. It's what probably the bigger driver of it.

Okay, and then after the repayment what is your current onshore, offshore cash balance?

Hold on one second Tom.

It's 42% U.S. at the quarter end. But right there right now it's 577, right? Times 42. It was 242 minus the 50, 36%.

Okay, great. And then it sounds like obviously Korea has been a great success story for you. For the record business this year, is it your share that's gaining with your customers or is it your customers' share gaining versus the rest of the world -- like in the OEM world or is it just the market being strong for everybody that's really driving that business?

It's actually both. We really penetrated the Korean ecosystem there with PSK and WONIK and TES -- Eugene Tech beyond Hynix and Samsung. And some of those OEMs are seeing benefit outside of Korea themselves, and I don't want to get into because it's their business. But -- so their business is growing and our business is growing it's just a matter of both -- and if you look at the numbers in Korea you can tell it's well beyond what markets -- what's just the growth of the market is. It's literally intense penetration in the growth by those customers. It's a great strategy and we're really -- we're thrilled with it, and we intend to have the same success in China. We really intend to make that a target for ourselves, hopefully to achieve that.

Okay. And are you seeing those customers supplying globally and not just to their own domestic market?

In Korea, there is one customer particular that has expanded beyond Korea. Again I won't tell who it is because it's their own strategy. But there is one that for sure that we know has expanded beyond Korea. They are doing very well.

Okay. And then if you look at the roughly 10% range of your revenue guidance. Which of the segments of your business is most volatile or the most unknown that gives you a kind of a larger range?

Yes. It would be the semi side, Tom. Only because we get short lead times. That could move around a little bit, so that's probably the most volatile ...

But it doesn't appear to be, but it would be in past historically it has been, but we don't foresee that but...

Yes. You've seen in the last several quarters, towards the high-end of the range I think that the semi's been doing very well.

That's was one of the nice parts about the Light and Motion acquisition. We're still dedicated to semi, we are going to grow that. We're going to grow their semi business. But we're a unique animal compared to people in our space now. We have other places to go. Business that's methodical and repeatable and less volatile, and we think can grow. We think there are -- we can -- obviously we've demonstrate we can grow that business hopefully we'll continue to do that. But we are very pleased with that acquisition because it gives us other places to go where other people can't so.

Okay. And then speaking of Light and Motion. How does that business breakdown in terms of whether you're selling components or subsystems or maybe full systems in some cases. Is it still mainly a components business?

It's components and subsystems. And we're not -- when we sell lasers, we're selling lasers into people are building the equipment. We're not doing the, for the most part, large subsystems. So, it’s mainly components of subsystems for the most part. That's the best way to think of it.

And finally when you look at the OLED business especially in China. To my understanding that we're still very, very early in this ramp, and we're just having a little bit of kind of a R&D or pilot-line stuff going on. But the real production is still ahead of us. Is that how you view it as well?

Well we certainly know that the CapEx has had a pretty good jump in '16 to '17. And it's a growth where it continues, you can see it. We continue to see it a growth rate business. Maybe in the longer-term, it's high single digits, but that's a good number. And we're still interested in it. We -- I was saying that earlier question about on the display side. Certainly do a lot of work on the cleaning and LIQUOZON. But we think there's other opportunities for the Light and Motion with laser and optics in the future.

The next question is from Weston Twigg of KeyBanc Capital Market.

I just wanted to make sure I understand the other expense line. It sounded like you had FX losses and there was some in there related to the sale of Data Analytics, but I wanted to make sure that's right because net with interest and other expenses was minus -- it was $9 million impact this quarter up from $4 million last quarter. And that was a pretty big jump, bigger than expected.

Yes. So this $3.3 million loss for FX in Q2. And that's just to the ongoing business. And just so you know we had $2.1 million gain in Q1 for the same, kind of, running the business, so year-to-date it's a small loss. But that's really related to the core MKS business and not related to the sale of Data Analytics.

Got it. Okay. And then you had mentioned earlier in the call something about ethernet protocol solution is fastest industrial solution. I hadn't heard about that, and it sounds like that could be a fast-growing opportunity. Could you expand on that? And the...

Yes. It's a communication protocol for faster communication. The applications are backside wafer cooling for conductor and also ALD tool and FPD tool for etch. Those are 3 applications that we've seen so far.

Is that a meaningful piece of the business yet?

It will be. It's just an adoption. But it will be.

Okay. And then, I just wanted to ask about the longer upside to cost synergies with Newport, you mentioned there could be some more to come in 2018. That's upside to the $40 million. Can you comment on what that potential opportunity could be?

Yes, let's kind of clarify that Wes. So we have the $40 million is the total we're seeing right now. And so we have $36 million completed at the end of Q2. So $36 million going to $40 million is our current view. We'll always try to do more than that and we'll look at the Vacuum and Analysis side as well as Jerry mentioned in the call, it's kind of our core competency continues, kind of, to be more efficient and just drive more opportunities there. But the $40 million is our current synergy target, and we think we'll get there or potentially early in 2018.

It's our DNA to -- across the company continue to look for improving the profitability of the company beyond that, Wes.

(Operator Instructions) The next question is from C.J. Muse of Evercore.

I guess first question for you Jerry. With your large OEM customers having visibility extending now into Q1. I guess a little surprised to hear you talk about some uncertainty on the semi side. And I know we're talking only in kind of $5 million to $10 million range. But curious what would drive that kind of volatility. Would it be inventories, downstream. Would it be just kind of pull ins, push out. What will drive that?

I don't think I've said uncertain. What I simply said is our visibility is short because our leads times are very short. And we only give a quarter at a time. What I've said is the business is steady, and our customers are still communicating to us that the business is steady. So yes, and I think the only thing that the volatility question came when someone said if you had any part of business that's volatile, Seth said, "Well, semi could be because it historically been there." But I don't think anybody's mentioned that it's volatile or tenuous at this point. We think it's pretty steady so far, C.J.

Got you. So embedded in that down 2% sequential guidance is roughly flat-ish semi business?

Yes. Oh yes, and again that could be, like I said it, just people's ordering patterns. Some people be -- get their [bills] schedules ahead of time so they take a little more in a quarter from us. And $10 million to us now is not something of a concern. It's 2%.

It would imply steady.

I like the word steady. [Last], to me, implies something different than steady.

Makes sense, and I guess the follow-up on the EUV front. Clearly seeing a meaningful ramp shipment wise at least as your customers in Q4 and then throughout all of next year and beyond. Curious how we should think about the incremental revenues for you guys both on your core business as well as in the Newport optics side?

Yes, sure. So we have a significant content through L&M on EUV tool as well as vacuum. And even with EUV at 7-nanometer, we continue to see growth in the patterning steps of [DIPNECH], so we think there's more continuing opportunity for us as there'll be a need for more DIPNECH patterning, multi-patterning as EUV goes into 7-nanometer. So we're considering actually it as another opportunity because we have more content now.

At this time there are no further questions in queue. I would like to turn the call back over to Jerry Colella, for closing remarks.

Thank you. We're very pleased with our continued progress in 2017 in achieving our objective of sustainable and profitable growth. This quarter we achieved new records for quarterly revenue and non-GAAP net earnings and our focus on integrating Newport Corporation acquisition into our organization. And it has been -- produced excellent results in new growth opportunities. We achieved our initial cost synergies ahead of plan while also substantially improving the revenue growth profile and profitability of Light and Motion. Thank you for joining us in the call today and for your continued interest in MKS. Meeting you with our continued progress when we report our third quarter results in October. Thank you.

Thank you. Ladies and gentlemen. This concludes today's conference. You may now disconnect. Good day, everyone.