Feb 4, 2010
Executives
Ron Weigner - VP of Financial & Treasurer Leo Berlinghieri - President & CEO Seth Bagshaw - VP & CFO
Analysts
James Covello - Goldman Sachs Paul Thomas - Banc of America Securities-Merrill Lynch
Operator
Welcome to the MKS Instruments fourth quarter earnings conference call on the 4th of February 2010. Throughout today's recorded presentation, all participants will be in a listen-only mode.
After the presentation there will be an opportunity to ask questions. (Operator Instructions).
I will now hand the call over to Mr. Ron Weigner.
Please go ahead, sir.
Ron Weigner
Good morning, everyone. I am Ron Weigner, Vice President of Financial and Treasurer and I'm joined this morning by Leo Berlinghieri, Chief Executive Officer and President and Seth Bagshaw, Vice President and Chief Financial Officer.
Thank you for joining our earnings conference call. Yesterday after market close we released our financial results for the fourth quarter of 2009.
You can access this release at our website www.mksinstruments.com. As a reminder, various remarks we may make about future expectations, plans and prospects for MKS constitute forward-looking statements.
Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors including those discussed in today's press release and in the company's most recent Annual Report on Form 10-K and most recent quarterly report on Form 10-Q, which are on file with the SEC. In addition to these forward-looking statements represent the company's expectations only as of today.
While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statement should not be relied upon as representing the company's estimates or views as of any date subsequent to today.
Now, I'll turn the call over to Leo.
Leo Berlinghieri
Thanks, Ron. Good morning everyone and thank you for joining us on the call today.
I'll give an overview of the fourth quarter and full year for 2009 as well as our outlook. Following me, Ron will review our financial results and guidance, and then we'll open the call for your questions.
Looking at 2009, we started the year with two dramatically different halves. The first half of the year was extremely challenging due to the downturn in the overall economy and more specifically to our business.
And therefore responded aggressively by making deep cost cuts and restructuring to reduce expenses. Even though revenue decreased 36% or $236 million, these reductions along with strict working capital management resulted in essentially maintaining a flat net cash position for the year and we were successful in minimizing our net loss to less than $3 million on a non-GAPP basis.
Even though we took severe measures, we retained our capability for long term growth and continued our strategy of market diversification. In the second half of the year, we began to see rapid improvement in the business conditions which we expect to continue in 2010.
I'm pleased to report that this recovery accelerated in the fourth quarter exceeding our expectations and bringing our fourth quarter sales to $149 million, up 41% over the third quarter of 2009. This improvement was driven by significantly higher shipments to our semiconductor customers, which were up by 60% and also to a recovery in non-semi markets, which increased 17% sequentially.
Our non-GAAP net earnings benefited from higher margins resulting from higher volumes and a favorable product mix and were $0.31 a share. Our GAAP net income was $0.30 per share.
The recovering semiconductor market is leading the present growth and we are benefiting from the design wins we've discussed previously. Our efforts over the downturn to identify leading edge semiconductor opportunities have resulted in increased business across all MKS products.
Some recent highlights include the selection of our advanced controllers for atomic layer deposition and implant tools and our gas analyzers for real time process monitoring. In addition, our corrosion resistant and high cycle valves have begun shipping our new tools.
Fueled by the improved business conditions, semiconductor tools utilization rates are high as semiconductor device manufacturers push to maximize tool output. MKS provides numerous productivity solutions which enables semiconductor fabs to enhance their output and yield.
In the quarter, our Ozone Products were selected by another advanced DRAM manufacturer to improve their production process and a major Asian foundry ordered multiple gas analysis instruments for real-time automated production monitoring. Design wins and customer wins combined with high utilization rates and the recovery in the semiconductor industry positioned MKS to benefit further in 2010.
Our broad technology portfolio opens opportunities to us in many other advanced and growing markets, such as thin film, LEDs, medical, biopharm, environmental, solar and more. While the global economic crisis constricted the growth of our non-semi business we were pleased to achieve a 17% increase in our non-semi business in the fourth quarter conforming what we are hearing about the improving global economy.
Our long-term goal is to achieve at least 15% compounded annual growth rate in other advanced applications. Let me share with you some of our exciting growth opportunities.
Light emitting diodes, LEDs are bright, have high reliability, long life and are environmentally friendly. Because of this LEDs are gaining rapid acceptance in solid-state lighting and flat screen TV displays.
LEDs are made using vacuum processes similar to the semiconductor chip manufacturing. At the recent 2010 Consumer Electronics Show every major TV manufacturer launched new LED-based TVs and Sharp announced that 50% of their TVs in 2010 would be LED based.
We are actively engaged in the dynamic growth of the LED market. We have achieved a number of design wins on LED tools, which we are benefiting from today.
As a result we realized sequential quarterly growth to the LED market throughout 2009 and due to this explosive growth; we expect an even stronger 2010. I thought a lot about Ozone in recent calls.
Ozone and sterilization applications is a promising opportunity for MKS for biopharm, food, beverage and other markets. Ozone's aggressive cleaning capability and environmentally friendly disposal make Ozone water treatment and sanitization both low cost and green.
We continue to make progress and gain recognition in the pharmaceutical manufacturing market with our Ozone sanitation systems and we have been invited to present a paper on our leading ozone disinfection technology at the upcoming Ultrapure Water Pharma Conference. As we penetrate this growing market, you should expect to hear more about our activities in Ozone.
Recent concerns about terrorism that put homeland security and public safety in the forefront of the news again. I spoke in the last call about our gas analyzers, which can detect minute amounts of pollutants and engine emissions.
We have adapted to this same analysis technology to detect and analyze chemical warfare agents in various environments and our gas analyzers are being deployed in public spaces to detect bio hazards in the year. We recently received a significant follow-on order for our gas analyzers, which will be installed in buildings to help ensure public safety.
Our technology has broad application in bio hazard monitoring and we will leverage our success to date to expand our reach deeper into this high-growth market. Solar cell manufacturing uses the same types of vacuum equipment, reactive gas generators, power supplies and other products which we sell for the semiconductor and flat panel display markets.
We continue to gain customers and increase share by working with new and existing customers to solve their problems. In the quarter, our reactive gas generators for chamber clean RF power supplies matching networks and pressure and controller products were selected by a major PECVD solar tool manufacturer.
Our business continued to be impacted by lowered consumer subsidies and the over capacity of solar cells on the market. Although the solar market is still lagging the rest of the recovery, industry equipment analysts predict a compounded annual growth rate of nearly 20% between now and 2014.
These are just a few examples of the new applications we're pursuing, but they highlight the range of opportunities and demonstrate success in applying our technologies to these exciting high growth markets. We expect to see continued growth in the semiconductor market in 2010, after enjoying a very positive up-tick in sales in the past two quarters.
We also expect that the improvement in the global economy, combined with our market diversification, will result in increased sales to our non semiconductor markets, fueling additional growth in 2010. Based on these factors and current customer activity, we anticipate that business in the first quarter of 2010 will continue to improve.
We estimate that first quarter sales may range from $170 million to $190 million and at these volumes; our non-GAAP net earnings could range from $0.36 to $0.49 per share. While we are seeing improving conditions across many markets, we are committed to deliver better financial results throughout the cycle and beyond, consequently we are adding only those people and costs which are essential to support and grow the business.
We are in the upside of the cycle, but we will continue to remain cost control while leveraging increasing sales. 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. In the fourth quarter, similar to the third quarter we achieved better performance than our original guidance for sales, operating results, and cash flow.
Primarily as a result of strong demand from semiconductor OEMs as well as increased sales to other markets, fourth quarter revenue increased 41% sequentially to $149.3 million, we achieved non-GAAP earnings of $0.31 per share, which compared to our original guidance includes the benefit of higher gross margin due to increased volume of favorable product mix and a more normalized tax rate. GAAP net income for the fourth quarter was $0.30 a share.
Our quarterly operating break-even for the fourth quarter increased to $110 million from $101 million in the third quarter. This quick increase in break-even was a result of our actions to eliminate mandatory time off, as well as most temporary cost reduction measures.
Our cash position remained strong as we continue to focus on improving accounts receivable, day sales outstanding, improving inventory turns, minimizing capital spending, and controlling cost. Cash and short-term investments net of debt increased $9 million to $263.7 million.
Day sales outstanding improved to 59 days and inventory turns improved to 2.9 turns. Capital expenditures for the quarter which were primarily for test and calibration equipment were $1.4 million and depreciation was $3.4 million.
In the fourth quarter we recognized higher than expected shipments to semiconductor OEMs and increased business from customers in other markets such as light emitting diodes, gas analysis and medical. In the fourth quarter sales of semiconductor OEMs increase 73%, sales to fabs increased 23% and our sales to all other markets, which include solar increased 17%.
Our solar business in the fourth quarter was $5.3 million and totaled $23.6 million for the year compared $49 million for 2008. Our 2010 backlog for solar customers is strong and we believe our solar sales will increase in 2010 and will remain a growing global opportunity for us in the years ahead.
Our service business remained steady reflecting more normalized requirements from our service customers. In the fourth quarter sales of semiconductor OEMs represented 50% of sales.
Sales to semiconductor fabs 12% and sales to other markets represented 38% of sales. Geographically U.S.
sales increased 47% primarily a result of increased sales to semiconductor OEMs. Sales in Asia increased 40% primarily as a result of strong semiconductor OEM and fab sales.
Sales to Europe increased 18% primarily as result of energy related sales. Sales in U.S.
were 57 % of total sales, sales in Asia were 31% and sales in Europe were 12%. Sales to our top ten customers represented 43% of total sales; sales to our largest customer Applied Materials represented 13% of fourth quarter sales.
Based on our recent order trends resulting from a stronger than expected semiconductor market and expectations that our other markets will continue to recover, we expect to see our sales increase in the first quarter and that could range from $170 million to $190 million. Our headcount as of December 31st was 2,178 compared to 1,970 as of September 30th.
In order to provide capacity for increased production in the fourth quarter and going forward in addition to working overtime, we are hiring temporary direct and indirect manufacturing personnel. Based on our expected sales range of $170 million to $190 million for the first quarter, we expect our gross margin could range from 42% to 43%.
The projected marginal increase in gross margin from the fourth quarter is somewhat less than we would normally expect. This is due to higher than expected increase in sales of new products to semiconductor OEMs, which we have not yet transpositioned to our China manufacturing facility, last time by the lower margin product, a more favorable mix in Q4 and increased fringe benefits.
Future quarters should reflect improved variable margin. We expect our operating expenses will increase in the first quarter; this represents increased cost resulting for more normalized engineering project spending compared to the lower spending in the fourth quarter and increased cost of fringe benefits.
We expect net operating expenses in the first quarter could range from $43.7 million to $44.7 million. R&D expenses could range from $14.9 million to $15.3 million and SG&A expenses could range from $28.8 million to $29.4 million.
Amortization of acquired intangible assets for the first quarter is estimated to be at approximately $700,000. Net interest income for the first quarter is estimated to be approximately $200,000.
For 2010, we expect our normalized non-GAAP tax rate could be approximately 32%, which does not include the benefit of the expired R&D tax credit. Given these assumptions, first quarter non-GAAP net earnings could range from $18.3 million to $25.1 million or $0.36 to $0.49 per share and approximately 51 million shares outstanding.
GAAP net income could range from $17.8 million to $24.6 million or $0.35 to $0.48 per share. This concludes our discussion and we will now take your questions.
Operator
(Operator Instructions). Our first question comes from Jim Covello from Goldman Sachs.
James Covello - Goldman Sachs
Question is really on the semi equipment side and the question is how much of a difference are you seeing in the activity levels at your various OEM customers, because one of the things I think is two big things I think people trying to wrestle with, one is, why some folks shipments are up much more in the first half of the year versus others. And the second is the sustainability of these levels of shipments.
And so I guess really what we could ask you guys is, how much of a difference are you seeing in the activity levels from your various customers? Thank you.
Leo Berlinghieri
Hi, Jim this is Leo, thanks for your question this morning. As of now we see no difference in the semiconductor side of the business from where it has been running for the last several months.
It's hard to predict this industry, but we don't see anything significantly different in recent order patterns in semi.
James Covello - Goldman Sachs
Are you seeing different things from different customers, different OEM customers different activity levels or different growth levels from various OEM customers?
Leo Berlinghieri
I would say that's true, but that also would reflect on their downside probably depleted inventory how much inventory. So it's hard to just [pin it], what's happening to their business some of it is recovering some of the drained inventory is down quite a bit.
Operator
Our next question comes from Krish Sankar from Banc of America Securities-Merrill Lynch.
Paul Thomas - Banc of America Securities-Merrill Lynch
Hi good morning this is Paul Thomas for Krish Sankar. Thanks for taking my questions.
I guess, first off, congratulations on an excellent quarter and guidance. As with kind of along those lines, you were just talking about inventory, are we past the restocking phase yet or do you think that's going to continue in 2Q for semiconductor OEMs?
Leo Berlinghieri
I think, I'm not going to predict when we get to the end point of inventory, but I would say this, certainly if you go back couple of quarters ago there weren't many systems on the OEM factory floors. So, and if you look today I'm sure you'd see that's different.
So there has been a build up of that. However, if you ask the supply chain how they're doing getting device demands, I think you'll find that inventories are getting tighter on electronic components.
So, there's some inventory build up and I think some of this drive in the global economy is having a high demand on some of the electronic components and I think there is more discussion around components that are tied on inventory than in excess. So I'd say there's been some inventory build-up that still seems like customers are streaming to get parts, we could imagine it's a challenge for everybody in this environment when you grow 40 plus percent after the downturn we've entered to be able to ship what everybody wants exactly when they want it.
And I can tell you when it doesn't go out exactly when they want it they're calling you asking for it. So usually if inventory is built up you don't hear too much in that kind of situation.
Paul Thomas - Banc of America Securities-Merrill Lynch
Okay thanks for that. And then of course this is turns business, I know you don't need have a lot of visibility, but you've talked about growth through 2010 now.
So looking into Q2, do you have any confidence directionally where that will go; you think that will continue to be up from where we were or where you're projecting we are going to go in 1Q?
Leo Berlinghieri
Well, I think Paul you said it best, we have very little visibility being the turns business, but I do think that good reports in terms of the global economy expecting to increase we have good share now in non-semi business we keep growing that share, we've seen a down year and solar, which is supposed to get better. So I think the opportunity is there for the things that continue to grow, we'll have to see as we get into this quarter more.
Paul Thomas - Banc of America Securities-Merrill Lynch
Okay, one last quick one on the OpEx side, you gave guidance for 1Q, do you think this 28% of sales or so at the higher run rate now, is that going to be at good level with all the temporary cost measures backing, are we looking at like a $48 million to $50 million type of OpEx later in the year?
Ron Weigner
No, I think we guided to about just a little over $44 million in OpEx and our goal would be to keep that pretty steady throughout the year.
Operator
(Operator Instructions). Thank you.
That appeared to be the last questions, please continue with any closing remarks.
Leo Berlinghieri
Thank you. Well, thanks for joining us on the call this morning.
Our core semiconductor market is recovering and we expect it to continue to grow in the future. With the global economy improving and our strong position in number of growing markets, MKS is well positioned and optimistic for increased growth in 2010.
Thanks again.
Operator
This does conclude the MKS Instruments' fourth quarter earnings conference call. Thank you for participating.
You may now disconnect.