Apr 22, 2009
Executives
Leo Berlinghieri - Chief Executive Officer and President Ron Weigner - Chief Financial Officer
Analysts
Jim Covello - Goldman Sachs Brett Hodess - Bank of America Tim Summers - Wunderlich Securities
Operator
Welcome to the MKS Instruments first quarter earnings conference call. During today’s presentation, all parties will be in a listen-only mode.
Following the presentation, the conference will be open for questions. (Operator Instructions) I would now like to turn the conference over to Ron Weigner, Chief Financial Officer.
Please go ahead, sir.
Ron Weigner
Good morning, everyone. I am Ron Weigner, Chief Financial Officer and I am joined this morning with Leo Berlinghieri, Chief Executive Officer and President.
Thank you for joining our earnings conference call. Earlier this morning we released our financial results for the first quarter of 2009.
You can access this release at our website, mksinstruments.com. We need to remind you that various remarks we may make about future expectations, plans and prospects for MKS constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Act of 1995, Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in today’s press release and in the company’s annual report on Form 10-K for the fiscal year ended December 31, 2008 which is on file with SEC. In addition these forward-looking statements represent the company’s expectations only as of today.
While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statements should not be relied upon as representing the company’s estimates or views as of any date subsequent to today.
Now, I will turn the call over to Leo.
Leo Berlinghieri
Thanks, Ron. Good morning, everyone, and thank you for joining us on the call this morning.
I will give an overview of the first quarter and our outlook. Following me, Ron will review our financial results and guidance, and then we’ll open the call for your questions.
First quarter sales of $76.7 million were within the range of our guidance. Our GAAP loss of $0.34 per share and our non-GAAP loss of $0.23 per share were better than our revised guidance issued on April 2.
The GAAP loss included special charges of 10.9 million, which were for severance related to reductions in workforce; and excess and obsolete inventory including contractually obligated inventory purchases. These charges were partly offset by a first quarter 2009 discrete tax benefit.
Ron will cover these in more detail later in the call. In this challenging environment, we are continuing to focus on driving down our cost and breakeven.
In the quarter, we implemented a restructuring and reductions in workforce approximately 630 people, representing about 24% of the worldwide headcount. These cuts were made across all functions and levels within the company and included some business realignment.
These reductions were done after careful review of R&D investment, an existing and planned development projects, giving consideration to both our ability to grow in diverse markets and to our ability to respond to demand and innovation, when the economy begins to recover. As a result of these actions, we expect annual compensation-related savings of approximately $40 million.
We also temporarily reduced our cost with continued mandatory time-off as well as continued reductions in compensation of directors, officers and certain employees. We are making further cuts in discretionary spending as well as planning increased mandatory time-off in the second quarter.
The savings from reductions and discretionary spending are approximately $12 million annually. Everyone is hearing that the weaker world economy is impacting just about every business and we are no exception.
For the first quarter 2009, our total sales declined 39% sequentially, which included a more substantial decrease of 49% in sales to the semiconductor market. In the first quarter, chipmakers saw equipment utilization levels dropped as low as 40%.
This amount of unused equipment capacity resulted in lower spending for new wafer fab equipments. As a consequence, we saw a 46% decline quarter-over-quarter to sales to our semiconductor OEMs.
The excess tool capacity meant that fab budgets for non-warranty repairs, spare parts, productivity enhancements and other upgrades were delayed or cancelled. Fabs attempted to minimize their cost and our sales directly to semiconductor fabs were down 55% and our service business also declined.
For the quarter, our service business decreased 29%. This is reflective of lower demand which started in the fourth quarter of 2008 and continued through February.
Beginning in March, our service business has shown some preliminary signs of improvement. The semiconductor market has experienced severe cycles before.
During these downturns, our R&D focus is always on continuing product development and identifying opportunities to secure design wins on future production tools. In the past quarter, a number of products have been selected for next generation tools.
For example, our flow controllers, which precisely deliver gas to multiple zones in multiple chambers, improved X-ray uniformity and lowered cost, and were chosen for new edge tools. Because of their high speed and fast settling time, our valves were designed in for new application on physical wafer deposition tools.
Our ozone generators have been selected for a major atomic layer deposition, next generation, high K process development where ozone is used for oxidation at the 45- and 32-nanometer technology nodes. Worsening economic conditions have impacted the solar market as well, and our sales in the quarter fell 54% sequentially.
As we have said in the past, sales and shipments to solar customers can vary from quarter-to-quarter, as we are selling our products to both the solar OEMs and to fabs, whose order patterns tend to be less consistent. However, we begin to see deterioration in solar sales.
Tightening credit has curtailed financing for some planned solar fabs and several customers have delayed their plans. A major solar fab customer where our RF generators have been designed in has notified us of a delay in their planned business requirements, but which may still have a positive impact on sales in the second half of the year.
Given this and other recent customer input, as well as the rapid decline of the global economic conditions, it is hard to predict what 2009 solar sales will be. Looking longer term industry growth projections for the solar market remain positive and our solar customers continue to focus on process development, efficiency improvements, yield and cost of ownership.
We continue to work closely with leading solar OEM’s and fabs to identify and secure design-win opportunities. For example in the first quarter we were selected to provide chamber clean generators for a major European OEM solar tool.
These generators efficiently and rapidly clean the chamber in situ, eliminating periodic manual cleaning. Several Asian and European OEM’s selected our pressure control solutions, which provide higher precision and improved process control.
As we have demonstrated our strategy is to diversify into other markets for long-term growth and to offset the cyclicality of the semi market. This strategy and our execution have broadened our served market and expanded our customer base.
The deteriorating global economy however, has impacted to varying degrees of sales to these other markets, which declined 28% sequentially. Excluding the semi conductor, solar and thin film sectors, the remaining other markets, which represented 41% of total sales declined 13%, lessening the impact of the combined 49% decline in the semi conductor, solar and thin film markets.
We continue to have success in penetrating other growing markets such as alternative energy and clean technologies. We are attracting new customers from multiple MKS products for applications such as fuel cells, alternative energy, clean engine development and emissions testing.
For example we are expanding our success in engine development testing with another design win for diesel engine testing. Our MultiGas FTIR base gas analyzer was selected by a major European truck manufacturer for diesel engine development.
Another example of broadening penetration into other growing markets is into the food and beverage segment. While today it remains a smaller part of our business, in the past quarter one of the ranking companies in the world selected our Multivariate Analysis Software to ensure quality and consistency of snack food production.
Another growth area in the food and beverage market is the insuring of quality, safety and distribution of food across the globe. In this area our products are used and are now being evaluated for various applications to protect and purify foods.
We continue to identify new and growing applications for our products, which will provide growth opportunities for us and to offset the cyclicality of the semi-conductor market. Our strategy is to leverage our technology breadth and innovation to provide process critical solutions to higher growth markets.
Our long-term goal is to achieve 15% compounded annual growth in other markets. These are uncertain times.
We have seen some stabilization in our business over recent weeks and some semi-conductor customers have suggested that the industry cycle may be bottoming. While this is encouraging, the magnitude and duration of the global economic crisis in the semi-conductor downturn are still very uncertain, and our short lead times further limit our visibility.
Given these conditions we cannot predict when our semi-conductor business and sales to other markets will improve. However, considering current levels of activity we estimate that second quarter sales may range from $55 million to $75 million.
At these volumes the net loss could range from $0.36 to $0.21 per share based on 49.2 million shares outstanding. The non-GAAP net loss could range from $0.34 to $0.19 per share.
We are focused on continuing to drive our cost down while supporting our customers in this difficult environment. At this point, I’ll turn the call over to Ron, who will discuss our financial results and expand on our guidance.
Ron Weigner
Thank you, Leo. First quarter sales decreased sequentially as a result of decreased sales to all markets.
We incurred a first quarter GAAP net loss of $16.5 million or $0.34 per basic share. Included in the GAAP net loss were special charges totaling $10.9 million for severance costs related to our reductions in workforce and other special charges incurred in the quarter.
Our non-GAAP net loss was $11 million or $0.23 per share. Our GAAP and non-GAAP losses were better than our revised guidance, primarily as a result of significantly reduced spending late in the quarter and a larger than anticipated income tax benefit.
Turning to the detailed financial results, first quarter sales of $76.7 million decreased 39% compared to fourth quarter sales of $125.2 million. Sales to semiconductor OEMs decreased 46%.
Sales to fabs decreased 55% and sales to other markets decreased 28%. As we have discussed, our solar sales decreased 54%, flat panel and data storage 45% and sales to remaining markets, which represented 41% of our total sales, decreased 13%.
Service revenues decreased 29%, but began to show improvement in March. In the first quarter, sales to semiconductor OEMs represented 31% of sales.
Sales to semiconductor FABS 10% and sales to all other markets 59%. Geographically, sales decreased globally.
In both the US and Asia, sales decreased 44%. Sales in Europe decreased 33% and we are somewhat buoyed by sales to non-semi markets.
Sales in the US were 50% of total sales. Sales in Asia were 29%, and sales in Europe were 21%.
Sales to our top ten customers were 30% of total sales. Sales to our largest customer, Applied Materials decreased 70% sequentially and represented 8% of first quarter sales.
Sales to contract manufactures of Applied and other semiconductor OEMs also decreased 70%. Sales to Applied Materials were 84%, less than Q1 2008.
During the first quarter and early in the second quarter, we took actions, to restructure and reduce or worldwide headcount by 24%, to approximately 2000 employees, which resulted in an annual cost savings of approximately $40 million. Our headcount as of March 31 was 2092 employees.
During the quarter, we aggressively took actions to curtail spending in all areas. Actions taken to reduce cost include mandatory time-off, continued wage reduction for directors, officers and certain other employees, a wage freeze, reductions in engineering and IT project spending, as well as reductions in all other expense categories.
Excluding the special charges for excess and obsolete inventory, the pro-forma non-GAAP gross margin for the quarter was 30.6%, compared to 39.6% in the fourth quarter. The reduction in margin in the first quarter, is mainly related to lower volume, unfavorable product mix and excess capacity, which was somewhat offset by a 12% reduction in overhead spending.
As a result of our cost reduction initiatives, operating expenses decreased 12% sequentially, R&D expense decreased to $15.5 million and SG&A expenses decreased to $28.5 million. Our tax rate, excluding the $6.4 million discrete benefit, was 42% or 13% higher than our expected rate for the quarter of 29%.
The increased benefit was due to a change in our worldwide distribution of losses to higher tax countries. Our non-GAAP net loss, which excluded amortization of acquired intangibles and other special items, was 11 million or $0.23 per share on 49 million shares outstanding, compared to net earnings of 100,000 or breakeven on 48.7 million shares in the fourth quarter of 2008.
As previously mentioned, our GAAP results included special charges. In addition to the charge for severance cost, our special charges included a $12.9 million charge related to excess and obsolete inventory, as a result of lower forecasted sales volume.
This was partially offset by a reduction in taxes of $6.4 million, as a result of the completion of a recent tax audit. Cash used for operation was $5.8 million for the quarter.
Cash and investments net of debt decreased $14.6 million, primarily due to our net loss. Day sales outstanding were 68 days in the first quarter compared to 62 in the prior quarter.
The increase in day sales outstanding is primarily result of a higher percentage of normally slower paying customers and slower payments, in general. Inventory decreased $5 million, which excludes a special charge for excess and obsolete inventory and inventory turned near 2.1 times.
As we have taken steps to conserve cash, capital expenditures during the quarter totaled 1.6 million, compared to an average of $3.7 million per quarter for 2008. Depreciation expense for the quarter totaled $3.7 million.
In the second quarter, we expect that our normalized quarterly non-GAAP net operating income breakeven level, which excludes temporary cost reductions, could be approximately $116 million and our non-GAAP net operating cash breakeven would be approximately $103 million. In addition, we have implemented additional temporary reductions such as mandatory time-off, wage reductions, and certain other temporary cost savings measures that will further reduce our second quarter non-GAAP net operating income breakeven level and our non-GAAP net operating cash breakeven level to approximately $106 million and $94 million respectively.
We will continue to review and take actions to reduce all areas of spending, reduce purchase material costs, reduce warranty costs and lower manufacturing costs. Looking longer-term we’re evaluating additional opportunities that will reduce our breakeven, such as further consolidations of function and facilities and reduction of information technology operating systems cost.
As Leo said, we currently anticipate that second quarter sales could range from $55 million to $75 million. We anticipate that the gross margin could range from approximately 20% to 31% at these sales volumes.
We expect that operating expenses could decrease approximately 9% sequentially. R&D expenses could be approximately 12% lower and could range from $13.3 million to $13.9 million and SG&A expenses could be approximately 8% lower and could range from $26 million to $26.6 million.
Amortization of acquired intangible assets is estimated at $1.7 million. Net interest income for the quarters is estimated to be approximately 600,000.
Based on a revised forecast for 2009, we expect that our tax rate for 2009 and the second quarter could be approximately 41%. Given these assumptions, second quarter non-GAAP net losses could range from $16.6 million to $9.4 million or $0.34 to $0.19 per share on approximately 49.2 million shares outstanding.
Second quarter GAAP net loss could range from $17.7 million to $10.5 million or $0.36 to $0.21 per diluted share. This concludes our discussion and we will now take your questions.
Operator
(Operator Instructions). Our first question comes from the line of Jim Covello - Goldman Sachs.
Jim Covello - Goldman Sachs
You had commented about the short lead times kind of impacting the visibility. In a scenario where your semi-equipment customers specifically started to see orders increase in the June quarter, presumably for shipments in the September quarter.
How long do you think it would be before MKS saw that in the semi-equipment segment on the revenue line?
Ron Weigner
I don’t know, I guess, I would expect may be no more than a couple of months offset from their shipments there. Cycle times and lead times have being pretty short and then I guess, you’d have to net out what the inventory position is at those customers.
So they are going to factor that in, If they are out of point that whatever they get for orders they have to buy, they are not reconfiguring or they are not having any material already available, then it would probably affect us, I would think a couple of months before shipment. Yes, it maybe be a good estimate.
Jim Covello - Goldman Sachs
Okay, and then you talked about some of the services activity or spare parts activity and what other signs would you be looking for to get a little more incremental confidence that this order from the semi-equipment OEMs would come through?
Ron Weigner
I guess their announcement, they say their business increase will be one I think seeing consistency in the service business. I think overall, we’re all looking for any glimmer of opportunity or any good news and so when you see a month or a five or six weeks of something, you don’t know whether it’s repetitive trend or what’s going to happen, I guess.
So seeing that continue I think would be a good sign. If utilization is being down and spare parts and service have been down, if that continues the trend being back to normal levels, I would say that’s a very positive sign.
Usually after that, typically productivity enhancements and things like that are next and then may be capital after that.
Operator
Our next question comes from the line of Krish Shankar - Bank of America.
Brett Hodess - Bank of America
Hi, it’s actually Brett Hodess. On some of the non-semi businesses, which are also down in the quarter but dominant part of the business in the near term.
Can you talk about what the visibility and lead times are in that business versus the semi business, are they as low and short?
Ron Weigner
Good morning, Brett. Thanks.
The visibility is very similar; I think that typically the visibility is based on our lead times, and a lot of those other businesses, a lot of those other markets tend to be, again, more project-related. I think that any large segment tends to have OEMs in it and they’re sort of all over the market segment.
Where we have so many other diversified markets, we tend to pick up business. There are a number of projects, so if it’s a lighting fab, they’re retooling for maybe LED type lighting, we get some business out of it.
We may not get business the next year if they’re not retooling again if somebody else is retooling. So I would think part of issue is, we have products that have relatively short lead times.
And I think those customers are onto to the same severe constraints of, where they are going to spend their money, where they are going invest and who’s is going buy, whatever they are selling? So I don’t think, there is, we’d anymore visibility in those other markets.
Maybe, in case-by-case basis we might have it, but not enough to give you a prediction for the whole growth of 41% of those other business.
Brett Hodess - Bank of America
All right, and then it’s a follow-on for Ron. When you look at the difference between, the ongoing breakeven if you will, and the breakeven values that you have with the temporary steps?
How long do you think after, we start to see a revenue recovery? Would you start to add back the cost between the temporary and the permanent cost structure?
Would it happen quickly, immediately or would it?
Ron Weigner
I think, Brett obviously we will have to look at what we expect the future trend and revenue. And I would expect that we would add some of that back gradually.
And certainly we want to get to at least above breakeven before we start to do that, and so I think we would do it gradually as we are going above breakeven.
Operator
Our next question comes from the line of Tim Summers - Wunderlich Securities.
Tim Summers - Wunderlich Securities
The guidance for revenue in 2Q was $55 million to $75 million. Could you give us a ball park, a feel for what end-markets could be stronger or weaker, relative to the first quarter?
Leo Berlinghieri
Hi Tim, this is Leo. It’s a good question, I think its impossible to give you exactly what that is, because again, with many of the products and sort of that two week lead time range, we don’t even know what orders are in yet, that will cover the quarter, right?
So we’re going to have to book orders over the next at least the next seven or eight weeks that will ship within the quarter. And predictability is just not there so, and that wouldn’t be unusual.
I mean, we can look at a major segment or whether semi was going to be up or solar was going to be up but excluding those two pieces, I don’t expect we can give you an idea of what particular market, because a lot of these are much smaller dispersed markets.
Tim Summers - Wunderlich Securities
On your solar business, could you give us an idea, I mean to the degree you know, how much of your sales are into customers that manufacture thin film equipment versus crystal and silicon?
Leo Berlinghieri
We don’t get orders that way but I mean, I think the comments we made in the past is that thin film opportunity is roughly three or four times the crystal and silicon but obviously there was a lot more crystal and silicon production going on. What I mean by today is excluding the future, what it has been, I mean the significant growth that you saw in the past year has been around the thin film opportunities.
A lot of RF generators, RGAs, the traditional vacuum products to use both from thin film and crystal and silicon, atomic fluorine generators for chamber clean, those three big items alone were a pretty significant part of the growth last year in addition to sort of all the vacuum related products. So I would say that in the past, past year or so, the thin film was a much bigger part of the total, but I don’t have an exact answer for you.
Operator
(Operator Instructions) At this time, there are no further questions in the queue.
Ron Weigner
Well, first of all, thanks for joining us on the call this morning. Optimism is certainly in short supply, while the semiconductor and global economic downturn continues pretty much unabated.
But the turnaround will happen and because of our market diversification and focus on innovation and design-ins while controlling costs and returning to profitability, I think MKS will be in a stronger position to benefit from the rebound as it occurs. Thanks again for joining us on the call.
Operator
Thank you. Ladies and gentlemen, this concludes the MKS Instruments first quarter earnings conference call.
If you’d like to listen to a replay of today’s conference, please dial 303-590-3000 followed by passcode 11129318. You may now disconnect.