Photronics Inc (PLAB) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Photronics third-quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, August 19, 2009. I would now like to turn the conference over to Scott Gish, Vice President of Marketing and Corporate Communications of Photronics. Please go ahead, sir.

Thank you and good morning, everyone. My name is Scott Gish, Vice President of Marketing and Corporate Communications of Photronics. We would like to thank you for joining our third-quarter 2009 conference call.

Before we begin, I would like to remind all participants about the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. And thus except for historical events, the information we will cover during this call may be considered forward-looking and may be subject to certain risks and uncertainties that could cause actual events to differ materially from those projected, including uncertainties that may affect the Company's operations, market, pricing, competition, procurement, manufacturing efficiencies and other risks detailed from time to time in the Company's SEC reports. This call will remain archived on our website until we report our fourth-quarter 2009 results.

Joining us on the call today is Constantine, Deno, Macricostas, Chairman and Chief Executive Officer; Sean Smith, Chief Financial Officer; Dr. Peter Kirlin, Senior Vice President, United States and Europe; and Dr. Christopher Progler, Vice President and Chief Technology Officer. Deno will first provide a brief review of market conditions and our strategic direction. Sean will then provide a comprehensive review of Photronics' third-quarter performance. Deno?

Thank you, Scott and good morning, everyone. Before turning the call over to Sean, I would like to take a few minutes to review our accomplishments from Q3 as we discuss our served markets (inaudible).

During our second-quarter conference call, we stated that order activity had bottomed in March and gradually improved thereafter. Now third quarter, we saw the pace of orders accelerate as our customers' business came back to life.

The flat panel display industry grew by 42% quarter-over-quarter. As a result, our photomask sales in this area increased by 22% sequentially. The IC mask business grew as well as fab utilization levels improved and new product designs were released.

Our key initiatives entering the quarter were, number one, continue to lower our cost structure and improve our balance sheet. Number two, further penetrate the high-end flat panel display and IC markets while continuing to ramp NanoFab. I am pleased to announce that significant progress has been achieved in both areas.

First, in July, we announced the closure of our Shanghai facility. The IC photomask market in China is competitive, remains relatively small and is mostly comprised of mature applications. These factors leave little opportunity to establish a profitable operation. Closing the facility will enable us to realize savings of $4 to $5 million annually with no revenue impact.

Secondly, our strategy to penetrate and win tapeouts of advanced IC photomasks gained considerable traction during the quarter. Sales of photomask up and below 65 nanometers increased 23% sequentially. Success in this area was driven in large part by gains within memory-based markets, including Taiwan. High-end IC sales expanded in all regions and volume commitment was secured from two major customers.

At NanoFab, our newest and most advanced facility, sales again improved sequentially as we continued to ramp production. Qualification are the first reduction order achieved with an additional Taiwanese data manufacturer. Three previously qualified customers progressed to volume manufacturing and five of our top 20 customers are now sourcing photomasks from NanoFab.

High-end flat panel display photomask sales were also strong, increasing 41% during the quarter. By [geography], technology position with a top manufacturer in this market uniquely aligned Photronics to grow as the market expands.

[As] currently cautious by improving optimism within our customer base. (inaudible) and factory utilization levels are on the rise, indicating an improving demand environment. Capital spending, especially for technology and related equipment, is increasing. In addition, photomask technology has been established as a key component, enabling smaller transistors. Device scaling in both NAND flash and DRAM has been accelerating, driving additional demand for leading-edge photomasks.

On the remaining of calendar 2009, we will stay intensely focused on cost control and balancing [improvements]. Simultaneously, we will aggressively pursue new technology node qualification and marketshare gains with the objective to outgrow the markets during the recovery. Thank you. Sean?

Thanks, Deno and good morning, everyone. I will provide a brief analysis of our financial results for the third quarter of fiscal 2009 and I will also review our balance sheet and cash flows during the period and review our outlook going forward.

During the quarter, as Deno alluded to, we announced the closure of our manufacturing facility in Shanghai. In connection therewith, including residual costs associated with our previously announced Manchester site closure, we recorded an aggregate charge of $10.7 million in the third quarter. The total Shanghai site closure is projected to be in the range of $11 million to $13 million with approximately 85% of it being non-cash.

On May 15, 2009, we also issued 2.1 million warrants in connection with our amended credit agreement. For the quarter, we recorded a mark-to-market non-cash charge of $6.8 million related to the appreciation and value IN our stock price since the issuance.

For purposes of our discussions on operations for the third quarter, I will be primarily referring to our operating results, excluding the impact of these items. Net sales in the third quarter amounted to $95.4 million. Revenues for IC and FPD photomasks were $71.7 million and $23.7 million respectively. Sequentially, total sales increased by 14.6%, or $12.2 million, with IC and FPD sales increasing by 12.4% and 22% respectively. The increase in sales was by and large attributable to increased high-end demand for IC and FPD photomasks. However, both IC and FPD photomasks for mainstream products improved sequentially as well.

The quarterly revenue of $95.4 million was also enhanced by the early arrival of a few high-end photomask sets during the last few weeks of the quarter. These sets were previously expected to be taped out during the fourth quarter.

Sales of advanced IC and FPD photomasks were 8% and 15% respectively of total sales for the quarter. Included in these percentages are mask sets for semiconductor designs at and below 65 nanometers and FPD sets used to fabricate flat-panel products using G-7 and higher technology. Although not considered high end, we also experienced increased demand for 90 nanometer sets during the quarter. As a percent of total sales for the third quarter, sales were approximately 63% in Asia, 26% in North America and 11% in Europe.

The gross margin for the third quarter was 18.9% as compared to 13.1% for the third quarter of last year. Sequentially, gross margins improved by 520 basis points, due in part to the increased unit volume, high-end demand and continuous efforts on cost-reduction programs.

Selling, general and administrative expenses for the third quarter were $10 million as compared to $13.7 million in the third quarter of 2008. Sequentially, SG&A decreased by $600,000. R&D expenses, which consists principally of continued development for advanced process technologies, were $3.9 million for the third quarter.

Excluding the consolidation charges related to our Manchester and Shanghai site closures, we generated operating income of $4.2 million on $95.4 million of sales during the third quarter as compared to an operating loss of $3.2 million on $105.7 million in sales for the third quarter of 2008.

We are beginning to reap the benefits of our restructured operating model as evidenced by the ability to improve operating income Q3 '09 versus Q3 '08 by $7.4 million despite reduced revenue of $10.3 million. Sequentially, our operating margin improved by $7.6 million on increased sales of $12.2 million. This represented a 62% fall-through of our incremental sales due in part to increased utilization, improved marketshare, coupled with our cost-reduction programs. Our restructured operating model has significant leverage on incremental sales growth.

Other expense net for the third quarter was $14.2 million and includes a $6.8 million non-cash mark-to-market expense associated with the warrants. Excluding the impact of the charge, net other expense was $7.4 million as compared to $5 million for Q2 '09. The sequential increase is attributable to increased interest costs associated with our amended debt agreement and unfavorable foreign exchange.

During the third quarter, we recorded a tax provision of $1.8 million. And excluding the charges related to the facility closure and warrants, the net loss was $5.3 million for the third quarter of '09 with an EPS loss of $0.13 per share.

At the end of the quarter, we had approximately 1280 employees, down from 1450 at the end of our fiscal year 2008.

Now taking a look at our nine-month year-to-date operating results. Net sales for the first nine months of '09 were $267 million, a decrease of approximately $53 million in the first nine months of last year. The decrease is a result of reduced IC sales of $38 million and reduced FPD sales of $14 million.

Year-to-date gross margin decreased to 15% from 17.2% as a result of the reduced revenues and SG&A expenses decreased by $12.6 million to $31 million. Research and development costs were $11.7 million for the first nine months of 2009 as compared to $13.1 million last year. Other expense, including warrants, was $16 million in 2009 compared with $6.3 million in 2008 as a result of increased interest expense associated with the increased interest rates, decreased investment income and increased foreign currency losses. For the first nine months, we recorded a tax provision of $2.9 million.

Now turning to the balance sheet. Cash and short-term investments at the end of the third quarter amounted to $85.7 million with working capital of $77 million. This represents a $37 million sequential improvement. Our accounts receivable increased by $7.8 million during the quarter as a result of the increased revenues in Q3 '09 and accounts payable and accrued liabilities at August 2, 2009 amounted to $72 million, which was essentially flat with the end of the second quarter.

Total debt at August 2, 2009 was $187 million. The principal components of outstanding debt include a $123 million outstanding revolving credit balance, approximately $27 million in terms loans and approximately $37 million in capital lease and other obligations, including the US NanoFab.

As a reminder, on May 15, we amended our credit agreement. Key terms and conditions of the amended agreement include the following. The total availability under the revolver was increased from $120 million to $130 million at the end of our fiscal year 2009 from $100 million to $110 million at the end of our first quarter 2010 through maturity. The overall availability was reduced by $5 million to $130 million on May 15 and as I mentioned, the Company issued warrants that could be exercised up to 5% of the Company's stock. The maturity of the agreement was extended to January 31, 2011 and of course, certain financial covenants were modified.

On June 8, we completed or we entered into a new $27 million credit facility with our primary lenders and repaid a foreign term loan of an equal amount and aligned the maturity of the new loan with our existing credit agreements. Additionally, $9.1 million of this new credit facility is due January 31, 2010.

While we have some financial flexibility as a result of our amended agreements, we are also faced with higher interest costs. Our focus over the near term is to reduce our interest costs and debt levels through operating cash flow, monetization of certain assets and reviewing opportunities as they present themselves. Minority interest at the end of the third quarter amounted to $49.7 million, which primarily relates to the minority interest in the equity of our 57% majority-owned subsidiary, TSMC.

Taking a look at our cash flows. Cash provided by operations for the third quarter was approximately $15 million and amounted to approximately $42 million year-to-date. Cash flow used in investing activities year-to-date amounted to $23.9 million, which includes $29.9 million for cash payments for capital expenditures. Free cash flow year-to-date amounted to $11.5 million and is expected to improve for the remainder of the year. We continue to feel confident that our significant capital expenditure spending is behind us and we expect to generate cash from operations for the year certainly in an amount sufficient to cover our planned capital expenditures.

Taking a look ahead, our short-term visibility, as always, continues to be limited, typically one to two weeks. Turning to our outlook for the fourth quarter, we remain cautiously optimistic as the business conditions experience modest improvement from our Q2 '09 trough. Based upon our best analysis, our revenue guidance for the fourth quarter is in the range of $92 million to $97 million. The revenue guidance for the fourth quarter has been impacted by the previously mentioned high-end orders, which were pulled in during the last few weeks of the third quarter.

Capital expenditures for 2009 on a cash basis are expected to be less than $50 million and when we take a look at our initial pass at CapEx in fiscal 2010, they should be in the range of $40 million to $50 million. However, we would like to emphasize to you this morning that we maintain a significant degree of flexibility in how we invest capital into our organization so that if trends accelerate or decelerate, we can move quickly to optimize our competitive position.

For the remainder of 2009, our tax rate will continue to be impacted by the flow of income from jurisdictions for which we may have tax holidays or credits and upon our limited ability to recognize tax benefits in areas which we are taxable. Accordingly, for the fourth quarter of fiscal '09, this will equate to a range of $1 million to $1.8 million in whole dollar terms.

As a result, based upon our current operating model, we are estimating our loss per share, excluding the impact of the charges related to the consolidation charges and exclusive of the potential mark-to-market impact of the recently issued warrants, the EPS loss for the fourth quarter is expected to be in the range of $0.15 to $0.09 per share.

In summary, I would like to reiterate that we have made significant progress over the last few quarters in reducing our operating costs, stabilizing our financial situation, while expanding and growing our high-end business. While we are pleased with our progress, we are not done improving our business model. Over the near term, we plan to capitalize on our strategic position in an improving business environment while reducing our debt in order to ultimately return to bottom-line profitability. That concludes my remarks. Now I would like to turn the call back over to the operator for questions.

(Operator Instructions). Matt Petkun, D.A. Davidson & Co.

Hi, good morning. Solid quarter in Q3. Nice improvements both on the operations and the balance sheet. One quick question, Sean or Deno, just you talked about this notion of pull-ins and that might impact the opportunity for revenue growth in the October quarter. Your business isn't one where I historically have thought much about orders being pulled in or pushed out given the short leadtime nature. Can you talk more directionally what you are seeing both in the FPD market and the IC market and what you would be expecting? Obviously, January is usually a seasonally down quarter, but what are we seeing in terms of maybe longer-term growth opportunities here?

Thank you. Maybe Sean could --.

Matt, I think you are correct with the short leadtimes, but what we had anticipated when we guided for Q3, based upon our qualification processes at the NanoFab and some new customer engagements that Deno alluded to in his opening remarks, we had planned for some of those orders to come in in Q4. The process for regular transfers of high-end orders were pulled in so we were able to capitalize on that. But we generally believe that we will continue to see modest improvement as we move forward.

Okay. And then the next question I had again was kind of on the NanoFab. You are now only counting 65 nanometers or below versus a year ago. Those numbers included 90 nanometers. So clearly, you are seeing improvement. But it sounds like you have had a lot of incremental customer traction. When can we see the numbers for the NanoFab start to improve on a year-over-year basis? The October quarter last year was over $10 million. Should we start to see double-digit types of numbers from the leading edge?

Well, I am not sure -- to answer your question, we have seen year-over-year implement in the NanoFab, no question about it. And we have seen sequential improvement each of the last five quarters there. I am not sure that the quota, the $10 million for Q4, that I believe was all our high end last year, it wasn't just the NanoFab. We probably won't be in a position to discuss the specific components of the P&L or the top line at the NanoFab, but that technology that is there, the process, the qualification process that has happened over the last year has enabled and benefited our other sites as we were able to transfer work around the network. Now as Deno alluded to, in the NanoFab, we have five of our top 20 customers doing business there now as opposed to Q1 where we only had one. So that is where we are seeing the incremental lift.

Okay, great. And then just my last question is how we should be thinking about the relative margins. You guys now really dominate, it seems, the mainstream business and that has meant historically a great cash cow for you. Are the margins still -- I mean there is obviously a lot of opportunity to capture margin in the NanoFab, but how should we be thinking about relative margins between your high-end and low-end business both in mainstream and in FPD?

Well, I think, Matt, we are at a point now in our operating model when we talk about sequential improvement in revenue and the drop-through and that is primarily on the gross margin line, but we were quoted at the operating margin line. So that is going to happen across all facilities and as we work to continue to drive costs down. So we are at the point now where we still have some capacity within the network, but to the extent we receive incremental revenue over what we did this quarter, we should see approximately the same level of drop-through that we saw this quarter.

Okay, great. And Sean, did you share depreciation and amortization for the quarter?

Depreciation and amortization in the quarter was -- I have to put my glasses on -- $19 million for depreciation and then $2.4 million of amortization.

Okay, thank you.

Krish Sankar, Bank of America-Merrill Lynch.

Hi, thanks for taking my question. Sean, how do we think of the interest expense in Q4?

Well, certainly the interest expense is one of the areas we need to take a hard look at. We have an effective yield, if you look at Q3, of about 11.4% all in including cash and non-cash. So it would probably be about the same amount, 11.5% all in of our outstanding debt. So that is why we are incented to try to use some of our cash on the balance sheet and our operating cash flow and the sale of certain assets taken out of service to pay down our debt to improve the bottom line.

Okay. And in terms of the high-end IC, do you think you have any terms of segmentation by customer or region for the IC photomask in the July quarter?

No, we didn't, but I think it would be fair to say that we saw strength in all geographic areas where our customers are located. The manufacturing may have been done in the US or in Asia, but certainly we've benefited from all geographic areas.

Along the same lines of the FPD, the high-end group quite a lot -- almost over 40%. Was this coming from Taiwan or was it Korea or both regions?

Primarily Korea.

Primarily Korea? And then did you guys like have any new customer qualify in the NanoFab for July?

(inaudible), do you want to answer?

Yes. We said that we qualified three additional customers in the NanoFab and we also moved three customers who were already qualified to volume production.

Got it. Thank you very much.

(Operator Instructions). Patrick Ho, Stifel Nicolaus.

Thanks a lot, guys. I understand it is prudent to be cautiously optimistic at this time, but what is your take or what is your color in terms of the sustainability of business trends on a going-forward basis? Do you feel much better that the worst is over and at the very least, we are at an inflection point of a recovery?

This is Deno. Patrick, I do believe the worst is over. The Company is stable. I think the semiconductor sector is improving, top line is improving and (inaudible) about over 60% of that dropped to the bottom line. So we feel very good about. The only negative is the debt tied to improve the balance sheet and the interest expenses. But definitely, we have tried to continue to reduce operational expenses.

Great. I think you guys have done a really good job at least on the cost-cutting front over the last few quarters and taken some major moves along the way. And maybe this is more for you, Sean, would it be fair to say that a lot of the major moves are out of the way and from here on out, they are kind of tweaking moves? Or are you guys still evaluating like the overall structural basis of the Company and there could still be additional sizable moves ahead?

Maybe I'll speak to that and if Deno wants to add some color to it. I think in the short term, we are going to -- there is probably not a planned significant move. We believe the manufacturing network is well-aligned and positioned. To the extent something does change quickly, we obviously would make a move. So we always analyze things. But to use the word tweaking, we will constantly try to drive costs out of our system. We are in a stable position, but we do not forget where we came from a few months ago. So we are not going to relax. We are going to continue to try to squeeze every nickel out of the system we can. We are very excited about the high-end penetration traction we are getting and the customer engagements that we are having. So assuming the economy stays -- modestly picks up or even stays where it is, we feel we have an opportunity to grow in the future.

Great. And a final question from me, along with these cost-cutting moves and aligning your manufacturing cost structure to I guess the next recovery scenario, how have your suppliers or how do you feel your supply base is for you guys on a potential recovery scenario? Do you feel confident that they will be ready to ramp up whenever things really start picking up steam?

I think our supply chain is exercised, duly exercised as they are an active participant in our cost reduction. And as Sean mentioned, we will be relentless day in, day out and continuing to drive down our operating costs. However, they are largely intact, so they are well-positioned to ramp with us.

Thank you, Peter.

It would be fair to say we haven't seen suppliers unable to meet demand. That has not been an issue.

Definitely not.

Right. Thanks a lot, guys.

Chip Bonnett, FM Global.

Good morning. Nice quarter, guys. Two questions for you. First, can you just give us an update on the total numbers for the NanoFab between the total numbers of customers qualified and then total numbers of volume customers?

Sure. Chip, Sean here. At the end of Q3, we had 15 qualified, seven are volume and we mentioned that five are in our top 20. If we go back to Q1 of '09 just as a comparative reference point, we had 11 qualified, two in volume and one in our top 20.

Okay, great. And then next, can you talk a little bit about I guess the general sentiment among your customers? Your results here and just the general tone seem much better. So what is kind of the sentiment out there?

This is Scott. I will take that question. First of all, in flat panel display, it is a period of expansion as they try to respond to increasing unit demand. If you look at unit demand for large area panels, it is increased, I believe, every month sequentially for over a year. So unit demand is very good there and so I think the customer sentiment is expand. Customer sentiment in the IC world is -- we are encouraged by the capital equipment expenditures for technology. We believe that's going to lead to eventually getting some capacity add-ons. We see utilization rising. So all of those are positive trends from the customer base.

Okay.

Not only the IC customer base, the lion's share of our customers all have visibility through the third quarter and it is starting to materialize for Q4.

Perhaps Chris could add something on the technology side to say how customers are dealing with things there.

Sure. This is Chris Progler. I think on the memory side, IC memory side, what we are seeing is kind of renewed commitments to roadmaps and shrinks, which we haven't seen say over the last couple of quarters. So if you're following that, you will be able to pick that up. Definitely there is some scaling competition going on among the big players. So generally, that is good for photomasks because photomasks are used to enable a lot of those scaling paths.

On the logic side, we see pretty vigorous activity coming for 65, much broader adoption. And 45 is still fairly muted, but definitely there are more companies jumping into the water at the 45 node too. So overall, your question on sense and confidence, it looks decidedly more optimistic from a roadmap perspective right now.

Okay, that is all pretty solid. Last question is just on margins. Sean, you talked about the drop-through and I think you might have said the drop-through on gross margin is about the same as on the operating line. You can correct me on that. But any chance that that number can actually go a little bit higher than what you did and then how would mix impact that?

Sure, Chip. To the extent we have projected sequential revenue growth, we would see an improvement in gross margin absolutely. We have already covered our fixed costs. So are variable margin would drive the higher gross margin.

Was drop-through still around 60% there? Was that the number you gave?

This quarter, we did 62% I believe I quoted, but depending upon the mix, it could be anywhere from 50% to 60%. We have seen some quarters where it is 70% and some quarters where it is 48%, but around 60% is a good benchmark.

Okay. And that is kind of consistent for both on the gross margin line and the operating margin line?

Yes. To the extent our top line is going up, we don't anticipate adding a great deal of additional costs on the SG&A side. However, on the R&D side to the extent we are involved in extended qualifications or additional qualifications with new business opportunity, we may see a modest pickup there, but nothing substantial at this point in time.

Okay, good. That's it for me for now. Thanks.

(Operator Instructions). Brett Hodess, Merrill Lynch.

Good morning, guys. I had two questions. On the commentary on the demand front from the high end, we have seen -- you just commented that the logic area, 65 nanometers, is pretty strong and you are beginning to see a little bit of 45. We have seen a really big pickup in spending at 45 at TSMC and now filtering into the other foundries with a lot of customer announcements moving in at 45. And a lot of that spending is going into existing fabs where they are just upgrading those fabs. So they expect that production to be online really quickly by year-end. And they are also talking about going from like basically 1% or 2% of their production at 40 to 45 nanometer now to over 10% exiting the year and that is on a higher volume.

So I am wondering, while the visibility is always short, the pull-ins that you saw this quarter, might those not be pull-ins, but just customers accelerating a lot of their designs that have been sort of lagging during the downturn? And is it possible later this quarter and into the year-end that you could see that pipeline from the logic side become much more steady? It seems like, given the spending pattern, that implies that.

This is Chris. Certainly that is conceivable. If the equipment is going in now to establish 45 nanometer processes, particularly in the foundries, they are going to want to get the utilization up quickly. So what we commented on is kind of isolated pull-ins could translate into kind of a sustained higher-end ramp as customers adopt those nodes.

But for us, I think it is just a little too soon to tell if that full pull-through will happen. But we see the same things that you commented on. Capital equipment is going in. Seems to be a stronger commitment from the customer base to evolve to next nodes and one interpretation of a design pull-in is trying to get a more aggressive product to market sooner. So I think the vectors are there indicating what you suggested, but we do have to just still be a little bit cautious I think.

Okay. The second question I had was really for Sean. You mentioned on the interest expense front trying to be opportunistic to get down the debt levels and the interest expense. Is there -- when you are talking about being opportunistic, are you focusing -- and I know there are a lot of different opportunities -- but you are focusing mainly on taking out new debt as the credit markets continue to loosen up or would you actually consider an equity offering as well, do you think, to improve that issue?

Well, Brett, it's good to hear your voice by the way. I think -- I know -- we need to be opportunistic and look at every and all opportunities. We came from a relative weak point with our relationship and where we were in December and January and February. We have improved financially and stabilized the Company. We have an amended debt agreement. To the extent we continue to improve our operations, we should have additional -- I wouldn't say leverage, but a better bargaining position with our commercial bankers.

That said, we have to be prudent and look into other opportunities as they present themselves. So we will look at everything, including trying to dispose of a couple of the locations that we closed and monetize those and pay down our bank debt. So everything is on the table, but it is all going to be driven by costs and what's in the best interest of our shareholders as well.

I guess a quick follow-on to that then is, as you shut down Manchester and Shanghai and as you mentioned on the call, you still have some fixed cost absorption and utilization rate issues, could you give us some kind of idea where your utilization rates are now or maybe if you would rather deal with it a different way, how much headroom you have to improve revenues in the remaining facility?

Well, I'll take a shot at it and then I will let the others comment too. We certainly have enough installed capacity to do well north of what we did this quarter and that is -- mix, product mix is going to dictate that. I don't believe, based upon -- or even in our capital plans, initial capital plans for next year, which primarily is uncommitted, we intend to install significant capital. So we should be able to grow the Company with what we have installed today.

We have a lot of capacity in the high end and the low end (inaudible). We have a lot of capacity (inaudible) north of first quarter (inaudible).

That was how I was going to answer the question. We can achieve peak revenue levels historically with the installed base as it sits now without any doubt.

Okay. Can you exceed those levels given the higher ASP mix of the leading edge?

Yes, we can exceed them.

Okay, good. Thank you. Congratulations on the progress.

Thank you. Good talking to you.

(Operator Instructions). Matt Petkun, D.A. Davidson & Co.

Hi. Just following on a little bit to some of Brett's more overlying industry commentary. And also what Chris said in terms of the memory customers starting to ramp up. Were there any 10% or greater customers in the quarter? I know historically you have a big customer in Korea.

Matt, we do historically have had a 10%, greater than 10% customer in Korea and even in the low 20%s the last couple of years as we have disclosed in our 10-K. What I can say year-to-date, we have some customers approaching, but not quite at 10%, but approaching to 10%, which is good and some of those customers, we hadn't had a business relationship with as early -- as recently as two or three years ago. So I think when we publish all our data at the end of the year, we are going to see a nice addition -- a couple of customers, new customers in into say our top 20 and then maybe one or two just a little bit around 10% or little bit over 10%.

Okay. And then how should we be thinking about Micron? I know primarily their volumes go through MP Mask, but I guess my understanding is that any overflow could go through the NanoFab. Is that correct?

Chris, do you want to pick up that one?

Yes, Matt. I can take that one. MP Mask, that is our JV with Micron, does the R&D work primarily. That's its primary mission, the R&D work from Micron and I will say Micron group companies. These are companies that Micron has JV partnerships with to make memory and flash. All the R&D for those group companies go through MP Mask and some of the production. But its primary purpose is really R&D and usually the highest end-node production, initial sets for that to do proof of process. But the NanoFab very quickly moves those processes over and its charter is to be the primary production engine for those masks. So it is a very kind of harmonious interaction between the two sites. Technology, R&D and most advanced nodes in MP and then volume production in the NanoFab is how we have aligned it.

Chris, it was my understanding that during the downturn, just given lower volumes, that MP Mask, the intent is just to keep that shop busy first. Is that correct?

To some extent, we have to keep some work flowing into MP Mask for sure, so there is very, very limited volume. In order to keep the R&D programs moving forward, we do have to ensure there is some amount of volume in MP. So that is true, but we have taken the capacity down in the JV fairly significantly and we don't plan to ramp capacity there. So with the improving demand profile seeing much more activity in the NanoFab flowing from the MP Mask side.

Okay. And then you did comment a little bit about just the technology partners that Micron has now. I assume you have an opportunity to serve some of the guys in Taiwan who will be accessing the Micron technology. Where will you be serving them from? I assume in Asia.

Initially, the intention is to service them from the US, but we will use mixed sets for some of those customers. So to the extent our sites in Asia qualify for some fraction of the layers, perhaps noncriticals and other things, we will ship those from Asia. So we have a fairly flexible manufacturing strategy there depending on the needs of the customer and the type of technology in the set.

Okay, great. Thanks so much.

Chip Bonnett, FM Global.

Thanks. Just to follow on to one of Brett's questions about having the capacity to achieve prior revenue levels. If I look back, it seems like a few times you were hitting on a quarterly basis about $115 million to $120 million in revenue, and EPS on those numbers was $0.25 to $0.30.

So if you have enough capacity to meet or possibly exceed that revenue level, where do you see EPS falling out? Would that also potentially be exceeding that prior level base or not necessarily, given your higher interest expense?

Chip, there are a lot of moving pieces with that.

Sure are.

The infrastructure is completely different than when we were at those levels. It's much reduced. So I think at this point in time, we probably won't comment on what the EPS potential could be at $115 million or $120 million, whatever those numbers are, because there are -- to the extent our business as we believe continues to improve, we will reduce our debt costs.

Okay.

But definitely, we are a leaner company. Definitely our cost reductions and our breakeven point is lower than it used to be for.

No, that's definitely true. I just -- obviously, the interest expense is different than you had several years back. And to the extent you pay that down, you do -- the earnings per share definitely go up. But I was just trying to get a gauge of where EPS was on the same revenue level.

I think maybe said another way, Deno's point well taken, you know, if I remember correctly when we are at $115 million or $118 million, our breakeven from an operating income standpoint was probably about $102 million, $103 million. And now it is probably, where we stand today on an operating margin basis, is probably $86 million, $87 million as we look out.

So we fixed above the operating margin line with the infrastructure and still have the ability to grow the high end and engage with high-end customers. Now what we need to do is reduce our debt and use that cash we are generating from operations to help get those costs down, which will drive EPS.

Okay, and Sean, on the breakeven, the number you just threw out includes the Shanghai closing?

Well, it is on an ongoing basis. It doesn't include the Shanghai closing. The Shanghai -- that is just from ongoing operations, that number.

Okay. And is it going to kind of stay around that level or do you anticipate that going any lower?

We will work to try to get that lower, barring any other significant move. I think we referred to it earlier on the call as tweaking, but we are going to continue to try to extract fixed costs out of our system.

Okay. But it will be relatively minor compared to what you have done over the past year.

Yes. As we sit here today, should market conditions change, as we have talked about continuously, we will continue to evaluate our manufacturing network and align the business model to where our customers are.

Okay, great. Thanks. That's it for me.

(Operator Instructions). We have no further questions in the queue. I would like to turn the call back over to our presenters for any additional or closing remarks.

In closing remarks, I want to say we have the momentum and the leverage to continue growing and improving the bottom line. Also, I am very happy really -- I have an excellent team here to implement and execute. So with this team, definitely we are going to capitalize every opportunity going forward. In close, I would like to thank you for your attention and participation in this morning's call. Thank you.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.