Jul 21, 2010
MKS Instruments Inc. (MKSI)
Executives
Ron Weigner – VP of Finance and Treasurer Leo Berlinghieri – CEO and President Seth Bagshaw – VP and CFO
Analysts
Krish Sankar – Banc of America/Merrill Lynch Kate Kotlarsky – Goldman Sachs Edwin Mok – Needham & Company Shrini Sunder Ahuja [ph] – Barclays Capital Michael Bertz – Kennedy Capital Tim Carroll [ph] – Value Holdings
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the MKS Instruments' second quarter earnings conference call.
During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions.
(Operator instructions) This conference is being recorded today, Wednesday, July 21, 2010. And at this time, I'd like to turn the conference over to Ron Weigner, VP of Finance and Treasurer.
Please go ahead, sir.
Ron Weigner
Good afternoon, everyone. I'm Ron Weigner, Vice President of Finance and Treasurer and I am joined this afternoon by Leo Berlinghieri, Chief Executive Officer and President and Seth Bagshaw, Vice President and Chief Financial Officer.
Thank you for joining our earnings call. Today, after market close, we released our financial results for the second quarter of 2010.
You can access this release at our website, www.mksinstruments.com. As a reminder, various remarks that 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, 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'll turn the call over to Leo.
Leo Berlinghieri
Thanks, Ron. Good afternoon, everyone and thank you for joining us on the call today.
I'll give an overview of the second quarter of 2010 as well as our outlook. Following me, Seth will review our financial results and guidance and then we'll open the call for your questions.
I'm pleased to report that we achieved record revenue in earnings for the second quarter. Revenue increased an additional 15% sequentially to $220.6 million, up nearly 200% from a year ago.
As a result of our continued efforts to improve our financial performance during this upturn, our operating profit was approximately 23% and sequential non-GAAP net earnings increased by 15% to $0.66 per share. During the quarter, our cash and short-term investments, net of debt, increased $35.9 million to $310.4 million.
As discussed in prior calls, we are committed to growing the topline and improving the financial performance of the company. After a thorough evaluation, we decided this quarter to divest two smaller product lines whose growth potential did not meet our strategic objectives.
These product lines did not have a significant impact on our sales but their discontinuation will help improve our expense structure going forward. Their financial results have been reported as discontinued operations in our financial statements.
Seth will provide further details later on in the call. We continue to gain share and achieve critical design wins in SEMI and continue to execute our strategy of diversification into other advanced and growing markets.
These efforts coupled with the increased demand in our served markets resulted in substantial revenue increases in the first half of this year in both SEMI and in our other markets. The SEMI market has continued to ramp and sales to this market increased 82% for the first half of 2010 compared to an improved second half of 2009.
And in addition to the excellent growth in SEMI, we also experienced strong growth in our other markets. We continue to demonstrate our ability to leverage our technologies and expand our opportunities into many additional advanced and growing markets, including LED, medical, biopharm, thin film, environmental, solar and more.
I am pleased to report that in the first half of 2010, we reached $148 million in sales to these additional markets, a 49% increase for the first half of 2010 compared to an also-improved second half of 2009. Our continued strong growth here is a result of our sustained focus and sales efforts to apply our technology portfolio into these various markets.
There are a lot of opportunities in these markets and I'd like to talk about a few of them here. This quarter, I'll start with the solar market, where in the first six months of the year, our revenue exceeded $31 million.
This significantly surpassed our expectations. And while the solar business can be lumpy, if this pace continues, we would exceed our record 2008 solar sales.
We attribute our continued success and penetration of the solar market to the combination of our market-leading technology and our global infrastructure. And we continue to win new customers in both crystal and silicon and thin film solar segments of the market.
We are gaining new customers and increasing our share, especially in the rapidly-expanding China solar market. We now have nearly 250 worldwide solar customers, which is about four times the number of customers we had in 2008.
With our differentiating technology, we recently had significant success with two fast-growing solar companies using CIGS thin film technology. A typical semiconductor CVD tool has four chambers.
In contrast, these CIGS tools have anywhere from 10 to 15 or more chambers per tool, which need power supplies, pressure control, flow controllers, gauges, valves and gas analysis. This equates to opportunities for MKS ranging between $600,000 to over $1 million per CIGS tools.
The solar market continues to expand and a recent industry report predicted that from 2010 to 2013, the compounded annual growth rate for solar will be a healthy 24%. In the long-term, we believe the solar market will continue to provide MKS opportunities.
In the growing pharmaceutical and biopharmaceutical markets, our technologies are applied in a number of advanced applications. Drug development is becoming more and more complex, especially in biopharm, where drugs are grown in reactors under tightly controlled conditions.
In these highly complex drug development and manufacturing processes, stringent process control, repeatable manufacturing and traceability as well as regulatory compliance are essential. Here, MKS offers a broad range of products to measure and control pressures, manage flows, analyze gases and optimize processes.
In addition to these instruments, our multiple variate analysis software is used to monitor, analyze and optimize the many interrelated processes – processed variables to ensure process control during production. I'm pleased to report that in the quarter, we finalized a four-year license agreement with one of the world's leading developers of innovative medicines, drugs, serums and vaccines for our multivariate analysis software to improve and control their manufacturing processes.
Now, I'll talk about the light emitting diode or LED, market and we continue to be excited about its prospects for growth. LEDs have high reliability, a long life, environmentally friendly benefits such as lower power consumption.
As a result, they have experienced rapid acceptance in lighting of flat screen displays for TVs and other applications. And they are emerging as a force in the residential and commercial lighting.
A recent report projects by the year 2020, 46% of the U.S. market for commercial, industrial and outdoor lighting applications, which are the largest consumers of energy for lighting will be LED-based.
Because LEDs are made using vacuum deposition and etch processes similar to semiconductor manufacturing, many of our vacuum products, including pressure and flow, valves and gauging as well as our power in matching networks, have been designed in on LED manufacturing equipment. Each quarter, we add customers and expand our presence in this growing and important market.
We continue to benefit from the strength of the rebound in the semiconductor market. Our efforts to identify new opportunities and provide technology solutions to leading-edge semiconductor tools have resulted in increased opportunities across all of our product lines.
Q2 sales to semiconductor OEMs increased 20% and sales to semiconductor manufacturers continue to increase and were 11% higher than in Q1. The semiconductor industry is becoming more complex and more globally interrelated as companies license in cross-license technology and outsource production across the globe, we leverage our strong global footprint in worldwide communication and technical capabilities to rapidly support our customers' global alliance requirements.
A good example of this involves our newest ozone system. Because it enabled better film quality, our ozone system was selected for a deposition process in memory chip manufacturing but our superior technology was not the only factor in this success.
Our ability to work in multiple geographic regions with multiple customers simultaneously gave us the speed to solve issues and demonstrate our greater product performance over competitors. Once our ozone systems were successfully qualified at this U.S.
memory R&D facility, the systems were quickly deployed to their U.S. production facility.
Then as a result of cross-licensing of technology between memory manufacturers, MKS ozone systems were rapidly specked in at multiple fabs in Singapore and Taiwan. Our technology and our worldwide support infrastructure were key to our selection and are vital to the continued success in the demanding and global semiconductor market.
Over the last four quarters, the semiconductor industry has experienced phenomenal growth and our sales to other advanced markets continued to exceed our expectations. Current industry and customer projections indicate that business levels are expected to remain strong.
Based on this and expected higher vacation levels in the third quarter, we estimate that our third quarter sales may range from $210 million to $230 million and at these volumes, our non-GAAP net earnings could range from $0.58 to $0.71 per share. At this point, I'll turn the call over to Seth to discuss our financial results and expand on our guidance.
Seth Bagshaw
Thank you, Leo, and good afternoon everyone. As a result of the continued rebound of sales to many of our advanced technology markets, in the second quarter, we achieved record quarterly revenues, operating profit and non-GAAP net earnings.
Second quarter revenue increased 15% sequentially to $220.6 million, which is almost triple the volume from a year ago. Gross margin was 44.1%, which was as expected at this volume and product mix.
Even with these higher volumes, we continued to maintain tight control over our expenses and further improved our operating leverage in the quarter, achieving operating profit of approximately 23% of sales. This was a 100 basis point improvement from the first quarter of 2010.
Non-GAAP net earnings were $33.4 million or $0.66 per share, representing a sequential increase of 15%. GAAP net income for the second quarter was $38.8 million or $0.76 per share and included $5.6 million or $0.11 per share of income from discontinued operations, net of taxes.
As Leo mentioned, after thorough review, we decided to divest two smaller product lines whose growth potential did not meet our strategic objectives. Therefore, all financial results exclude the results of operations of these product lines for all reported periods as they are now included in discontinued operations.
These product lines were not significant to our financial results, representing approximately 3% of sales and only 1% of income from operations. Cash and short-term investments net of debt increased $34.9 million to $310.4 million.
This was due to continued focus on managing working capital and controlling costs as well as proceeds of approximately $15 million from the completed sale of one of the two product lines. Days sales outstanding were 61 and inventory turns were 3.6 turns.
Capital additions for the quarter, primarily from manufacturing and test equipment were $3.3 million and depreciation expense was $3.0 million. In the second quarter, we recognized higher than expected shipments to the semiconductor market as well as to customers across a variety of additional advanced and growing markets.
Second quarter sales to semiconductor market increased 19% sequentially. Sales increased to OEMs 21% and to fabs, 11%.
Sales to semiconductor market in the second quarter reached $144 million compared to our peak in the first quarter of 2007 of $149 million. In the second quarter, sales to our additional advanced and growing market increased 8% sequentially and over 70% as compared to the second quarter of 2009.
As a result of our strategic focus on additional markets, new design wins and continued improvement in these markets, we are very pleased to report that second quarter sales to these markets were also a new record at $77 million. In the second quarter, sales to semiconductor OEMs were 55% of sales and sales to semiconductor fabs were 10%.
Sales to additional technology markets were 35% of sales. Geographically, U.S.
sales increased 13%, primarily as a result of increased sales to semiconductor and thin film customers. Sales in Asia increased 19%, primarily as a result of strong solar and semiconductor sales and sales in Europe increased 10%, primarily as a result of semiconductor and thin film sales.
Sales in the U.S. were 58% of total sales in Asia were 32% and sales in Europe were 10%.
Sales to our top 10 customers represented 48% of total sales. Sales to our largest customer, Applied Materials, represented 17% of second quarter sales.
Our headcount used in continuing operations as of June 30 increased to 2,574 compared to 2,378 as of March 31, primarily reflecting increased manufacturing labor requirements. Based upon industry projections, current business levels and expected higher vacation levels in the third quarter, we estimate that our sales in the third quarter could range from $210 million to $230 million.
Based upon this expected sales range, we expect our Q3 gross margin could range from 43% to 44%. Q3 operating expenses are expected to range from $45.7 million to $46.7 million.
In the third quarter, R&D expenses could range from $15.6 million to $16.0 million and SG&A expenses could range from $30.1 million to $30.7 million. The amortization of intangible assets for the third quarter is estimated to be approximately $300,000.
And net interest income for the third quarter is also estimated to be approximately $300,000. For 2010, we expect our normalized non-GAAP tax rate to be approximately 33%, which does not include the benefit of the expired federal research and development tax credit.
Given these assumptions, third quarter non-GAAP net earnings could range from $29.9 million to $36.4 million or $0.58 to $0.71 per share on approximately 51 million shares outstanding. GAAP net income in the third quarter could range from $29.7 million to $36.2 million or $0.58 to $0.71 per share.
This concludes our discussion. We'll now take your questions
Operator
Thank you, sir. (Operator instructions) And our first question comes from the line of Krish Sankar with Banc of America/Merrill Lynch.
Please go ahead.
Krish Sankar – Banc of America/Merrill Lynch
Thanks for taking my question. Leo, the first question I had was, in your Q3 guidance of flat, essentially midpoint is flat, can you tell the directionality of the SEMI revenues and non-SEMI revenues?
Leo Berlinghieri
I think where the assumption there is they're all relatively in the same area. We've got so many different markets in non-SEMI and so many different customers in SEMI and when you're talking about the change from quarter-to-quarter, as you said, being – quarters being similar, it's really hard to tell exactly.
I would assume that they're going to be similar.
Krish Sankar – Banc of America/Merrill Lynch
So should we just assume like SEMI revenues are going to be flat in Q3 from Q2 levels?
Leo Berlinghieri
I think that's the best we could estimate at this point.
Krish Sankar – Banc of America/Merrill Lynch
Got it. Got it.
Okay. All right.
That's helpful. And the second one, I had was, in terms of the solar sales, can you tell what percentage of solar sales comes from China?
Leo Berlinghieri
We don't report it by geographical region by each market but I can say that both in 2009 and 2010, we are seeing considerably more of the solar sales coming from China than we had previously. So, while the 2008 was our record solar year, we did not see a lot come from China in 2008 and so a larger percentage of the solar sales are coming from China, if that helps you a bit.
Krish Sankar – Banc of America/Merrill Lynch
Got it. Okay.
That's helpful. And then you spoke about your dollar opportunity for the CIGS tool.
Can you tell us what it s for the MOCVD tool in LED?
Leo Berlinghieri
I would say that there's a lot of variation today on tool design. So I don't want to give out too much information on our customers.
But I would say that there's probably some variation in the $80 million to maybe $125 million, might be a reasonable range, in terms of opportunity on the vacuum side of things, probably a little bit higher as they adopt atomic fluorine generators and other products are potentially in there. So, I think today, the way a lot of the equipment is designed, built and focused on, chamber cleaning and other things are usually happened after they get to production volumes and fabs when they're trying to maximize throughput.
So I would say, today, somewhere in the $80,000 to $125,000 would probably be sort of the vacuum content to a tool.
Krish Sankar – Banc of America/Merrill Lynch
Got it, got it. And then a final question from me, when you talk to your SEMI customers and your biggest customer, have you seen any change in their tone today versus a month ago?
Leo Berlinghieri
I would say that the tone continues to be positive each quarter. So it's probably more positive today than it was last quarter and more positive last quarter than it was the quarter before.
So I would say that since we just ended a quarter, I would say more positive in general.
Krish Sankar – Banc of America/Merrill Lynch
Okay. Thanks, Leo.
Leo Berlinghieri
You’re welcome. Thank you.
Operator
Thank you. Our next question comes from the line of Jim Covello with Goldman Sachs.
Please go ahead.
Kate Kotlarsky – Goldman Sachs
Hi. This is Kate Kotlarsky for Jim Covello.
I wanted to ask a follow-up question on your guidance. It sounds like on the margin, things are getting better and your customers are sounding more optimistic and I would have thought, based on what we're hearing from some of the SEMI equipment – through your SEMI equipment customers, the guidance might have been a little bit better.
So I'm just trying to understand if you're being a little bit conservative and maybe if you could provide a little bit more color of how you're thinking about the guidance by segment and maybe where you're baking in some of the conservativism.
Leo Berlinghieri
Yeah. Well, we didn't say we're conservative but you hinted we might be.
But let me just remind you of a couple of things, Kate. One is, the visibility is pretty limited; when we go into a quarter, we don't have much backlog, since a lot of our business is turn-spaced.
I think we've done a good job in the last couple of quarters catching up on delinquency. As you know, this whole supply chain has been tight there.
So we're sitting with less visibility than we were a quarter ago or two. And so we have that, then we've got some of these lumpy types of businesses like solar that we've talked about and so we've just experienced two really good quarters in solar.
They could continue for the next two, three or more but we know it's been lumpy business so we have to consider that. Projects can change overnight.
And so I think it's just the way we can assess the business at this point in time, with being a turns business. And I think the other side of it is, it's certainly the growth of the last three quarters are moderating a bit.
I think everybody understands that. When that happens, it has – it may mean that one quarter is less up than another or flatter than another.
So I don't think there's anything unusual going on. The sentiment is strong.
I don't think we're going into this being conservative. I just think with the information we have, it's more limited than we were a quarter ago.
Kate Kotlarsky – Goldman Sachs
Okay. That's helpful and then maybe a follow-up first question, you commented on the supply constraints and the supply chain.
Are any of those constraints potentially preventing you from maybe growing your revenues at a greater pace than maybe you think would be possible, kind of given what your customers are telling you?
Leo Berlinghieri
Yeah. I think the supply chain is in better shape today than it has been.
We worry less about the supply chain today than we did a few months ago. Our customers – the same concerns we had in the supply chain, when we had dialogue with our customers on issues around delivery.
They recognized some of those same concerns. Those seem to be less for everybody.
So, I don't anticipate that we would be restricted in any way, but other than the normal supply chain can restrict you; not anything unusual that the ramp. I think the supply chain is – as we have gotten closer to meeting our delivery commitments, the supply chain is doing that as well.
So we're not concerned about that and I wouldn't anticipate any restriction in terms of making shipments and customer needs.
Kate Kotlarsky – Goldman Sachs
Okay. And then maybe one final question for me is, your largest customer today announced some changes happening in their solar business.
I was just curious whether that impacts you in any way and if the impact is meaningful or not?
Leo Berlinghieri
It's not impacting anything in the next visible quarters that we see – next one, two, or three quarters. I mean, maybe we were hoping that if they were continuing to be successful, that maybe sometime way out in the future, we get the benefit of that.
But we weren't anticipating anything significant over the next several quarters.
Kate Kotlarsky – Goldman Sachs
Okay. Thank you so much.
Leo Berlinghieri
Welcome. Thanks for your questions.
Operator
Thank you. Our next question comes from the line of Edwin Mok with Needham & Company.
Please go ahead.
Edwin Mok – Needham & Company
Hey, Leo, a question on your longer-term, you guys have laid out a target model previously. And it looks like you're offering that is on the offering model side, you have the feeling or even maybe achieving that target model?
How should we think about your business longer-term? Should we expect even more leverage as you – assuming that you grow going forward or should we expect some more of these markets maybe limiting that margin leverage on the model?
Leo Berlinghieri
Well, I think that we can certainly continue to leverage the operating expenses. I mean, you have to add some as you continue growing the business but I think the whole team has done a good job of minimizing and leveraging that operating expense.
We're going to work hard to continue to leverage the operating expenses. I think the margins will work.
It will probably be newer products that will contribute to improving gross margins over time. I don't see anything radical in terms of changing it; a little more volume is not going to do that much change to the gross margins.
But we're going to keep driving the engineering teams to develop some great products and see how they can improve the margins and we keep driving our materials teams to get lower cost materials. So that won't change in terms of our efforts, but I don't see anything in the short-term that would have a significant impact to margins.
I don't know if Seth feels any different.
Seth Bagshaw
No. I would agree with that.
Also, just to give you a little background too, Edwin, back in Q2 of 2007, that was our previous peak, revenue volume, $204 million for that quarter. And our OpEx that period was about $50 million and in Q3, at a volume about 10% higher, we'll do about $46 million OpEx.
So we are growing the topline with a lot less resources required and that's our focus going forward, as well, obviously.
Edwin Mok – Needham & Company
Great. That was very helpful and then just a couple questions.
I guess, you guys look at, if you look at your guidance for the coming quarter for roughly on the flat in the topline. Is it possible we hope we should rank [ph] in terms of the few markets that you have mentioned on the core, including SEMI; obviously, also solar, the medical market as well as the LED market.
Which market do you expect to have, let's say above-average growth and which market do you think might be average or below-average growth? Is there any way you can quantify it that way?
Leo Berlinghieri
Yeah. It's from a quarter-to-quarter basis, it's very difficult today.
I mean, a lot of – the LED market based on sort of the annual compounded – annual growth shows quarter-to-quarter growth. Medical markets that we're in show quarter-to-quarter growth.
But I think when you come down to the segments we're in, the parts they buy; it's really difficult to tell you that. But let us take some consideration on maybe in the future what, if we can give any more color to any of these markets, we'll think about it.
And as long as we can give you meaningful information, then we'll consider it. But I think today, you've got to realize that we have so many different products sold into so many different markets to do a forecast by market by all those products.
It wouldn't be prudent, I think. We should be spending our time getting designed in, in these markets but let us give some consideration for – if there's some way to add more color on some of these markets going forward, we'll try to do that.
Edwin Mok – Needham & Company
Great. We'll look forward for that and then finally, please, on your answer to, I guess, Kate's question – it sounds like you may be a little more cautious about solar more because you had a pretty sizable ramp over the last few quarters.
Is that a fair way of characterizing your view on that market?
Leo Berlinghieri
Well, I think we're very pleased with what we saw in the first half of the year and we hear good things about the second half of the year. But we also have been subjected to the market that's lumpy, that what you're told one month, you're going to get for an order.
You don't get for three months when you go to collect the orders. So I think just knowing that that happens and knowing that we don't have as much visibility or lead times or getting back into more of a normal range that we can – we have a harder time predicting things in terms of – with backlog.
So I don't know if it's more conservative; I just think it's known that things are lumpy. I don't know if we predicted the first half of the year in solar, the way it came out, so…
Edwin Mok – Needham & Company
I see. Great.
That's all I have. Thank you.
Operator
Thank you. Our next question comes from the line of Shrini Sunder Ahuja [ph] with Barclays Capital.
Please go ahead.
Shrini Sunder Ahuja – Barclays Capital
This is Shrini calling for C.J. Muse.
My first question was to – how to model the exit of the other businesses that you have exited right now. And then will it be reflected in your model?
Is it going to be September or beyond?
Leo Berlinghieri
Well, I think it's a couple of – Seth, they want to comment on it, but when you look at the financials, they – all of that information has been pulled out of the – and then stated in discontinued operations. So both historically, for what we report and the guidance we've given, have those noted as discontinued operations.
And I think what you'll see is lower operating expenses as a result of that in the guidance, which Seth – when you look at the approximately $46 million, you'll see that's lower in Q3 than it was in Q2 before the divestiture, at least Q1, if you look at Q1 numbers. So I think that's where there's some benefit and revenue-wise, as Seth mentioned, it was about 3% of the revenue.
Seth Bagshaw
Yeah. It was about $5 million in the first quarter and probably $400,000 operating profit for those two small product lines.
And in Q2, as Leo mentioned, in Q3 guidance, those two have been recorded as disc operations in the financial statements.
Shrini Sunder Ahuja – Barclays Capital
Okay. I have one or two more follow-up questions.
Regarding the 17% of revenue that you get from Applied Materials, how much of it is from SEMI'S and how much of it is from solar?
Leo Berlinghieri
The way they buy the materials and the one advantage that we really have in leveraging technology is, the same products we sell into solar, in many cases, are the same products we sell into thin film, LED, OLED, flat panel and other areas. So from Applied's standpoint, they don't buy a part with the intent of what market it's going to be used on; they buy a part.
So it's very – it's not easy to be able to tell you exactly where that is.
Shrini Sunder Ahuja – Barclays Capital
Okay.
Leo Berlinghieri
I can tell you that there's been very little going into the solar business to Applied these days. I can tell you that.
Shrini Sunder Ahuja – Barclays Capital
So that would mean that your exposure to the crystalline part of the solar business is somewhat minimal?
Leo Berlinghieri
Correct. Hopefully, I made it clear that we didn't see – the announcement that just came out today.
We didn't see any negative impact in any of the next several quarters. Obviously, if Applied was successful in the long-term, we'd see some benefits, but we weren't expecting anything significant; so, no negative impact.
Shrini Sunder Ahuja – Barclays Capital
Okay. And compared to 2009, regarding the percentage of revenues coming from semiconductor in 2010 and 2011, what kind of changes might you be expecting?
I'm just trying to gather what other sectors might be underperforming or overperforming right now?
Leo Berlinghieri
If I understood the question, I thought what you asked, Shrini, it’s that percentage of the revenue would be semi versus other?
Shrini Sunder Ahuja – Barclays Capital
Yes.
Leo Berlinghieri
For '10? We aren't giving guidance yet for '11.
We're trying to get to Q3 here but for 2010, we've been running around 35% other, 65% SEMI. And I mentioned that in the guidance we gave, there was no significant change that we could comment on relative to either of those.
So I think for today and now, that's probably a reasonable number to look for. We'll be through three quarters and unless there's a surprise, then we should be in that roughly 65/35 mix – which will be better than it was at the last peak.
It was probably more like…
Seth Bagshaw
26.
Leo Berlinghieri
Yeah. It was 27%, actually 30 and in probaby ’07?
Shrini Sunder Ahuja – Barclays Capital
Great. One last question.
Given that you're tantalizingly close to $1 billion, what do you plan to do to get there in revenues?
Leo Berlinghieri
Well, it takes orders. If you want to buy something, we'd be glad to sell it to you.
I think our effort is to continue to do the things we do. I don't think you make business decisions a day at a time.
You're in it for the long run. We want to be past $1 billion after the $1 billion.
So I think we'll continue to do those things, design products that meet customer demand; try to do them better than our competitors, try to keep a leadership position in the market area as these new market opportunities open up; make sure that we use – leverage our sales efforts well. I don't think we'll do something different to get to $1 billion when we're almost at $900 million.
So I don't think there's a lot of difference there. Certainly, as we get to critical map in some markets or certain markets grow, there's some things you can do with sales channels that might help you grow them even more.
So, that's always something that we consider but that isn't new; that's something we always look at.
Shrini Sunder Ahuja – Barclays Capital
Okay. Thank you very much.
Congratulations on your good results.
Leo Berlinghieri
Thank you.
Operator
Michael Bertz – Kennedy Capital
Good afternoon, gentlemen. Just a couple of questions, so, first, looking at Q3, you mentioned something about more vacation days in there.
I mean, if you were to sort of compare Q3 to Q2 – I'm assuming, too, this applies in particular to your customers. How much more do you think that is?
Is that a 5% hit to you guys, or…
Leo Berlinghieri
Yes, I won't comment on the exact numbers because I haven't recorded and checked everybody's vacation. But I would say that we had everybody working as many hours as they could possibly work in the last couple of quarters.
One, because of the ramp; two, because of being delinquent; three, because of the pressures of customers who didn't particularly care for the delinquency. So I think in all that cases, I would – they were just in – at least for a majority of the U.S.
base. Normally, the July-August timeframe tends to be a heavier vacation period.
So you get the combination of being behind in deliveries, big ramp and people coming out of – remember, two years or a year and a half of mandatory time off where they consumed a lot of their vacation. So a combination of being able to work and build it back up, needing everybody – we just believe that we will see a higher vacation period.
And the requests we would grant it as well, based on how much we've asked people to work. So we think it's a smart thing to do right now.
I'm assuming also that we're not the only people that have this impact. And probably some of the supply chain below and above us will have higher levels of vacation periods.
But I don't think, Michael, it will be – I can't give you a number, I'm sorry.
Michael Bertz – Kennedy Capital
Well, I guess I'm looking for, it's not likely to be well into the double digits in terms of time.
Leo Berlinghieri
I can't imagine it would be.
Michael Bertz – Kennedy Capital
Okay. And then on the discontinued operations, you talked about it sort of not meeting your objectives, I mean, do you want to share anything about what a hurdle rate you would have looked for in that?
I mean, obviously, it looks quite like it's quite a bit lower in terms of operating income in percentage versus the rest of the business; but where would you look for, as you sort of do your portfolio management of things you want to acquire and things you want to get rid up? So where are you setting the bar for that?
Leo Berlinghieri
Well, I don't want to comment exactly and give all of our strategy away here. But I would say there's some factors relative to divesting of these two businesses.
One is, we want to grow faster in the markets we serve, so, one concern is can – if something can't grow faster, that's a concern. The other aspect of it that we're looking at is we're trying to control costs and allocate resources to those that give the best return.
It's easier to do that going forward, where you have to look at where you are today as well. And so, I think, as you can see from the comments of percents that Seth quoted, that for the revenue, the return on the bottomline wasn't as good as some of the other pieces of the business.
So I think why not be able to give some resources to a business that can grow faster and deliver more bottom-line results than continue with a business that we don't believe will grow as fast nor give that same result. So there's a lot more – if you noticed, there's a little more operating leverage now as a result of that.
So I think growth is one area and, certainly, the return to the bottomline as well as where are we today, relative to operating expenses of that business? How much R&D do we spend?
How much sales effort is involved? We'll look at each element.
So I can't – I just can't give you a straight answer that says, this is the way we'll look at it. But I think you can imagine growth is important to us, return on that operating profits are important to us and leveraging operating expenses as well as achieving good gross margins, those four areas are where we focus on.
Michael Bertz – Kennedy Capital
Okay. Fair enough.
And then in terms of as your managing working capital here, if you were to say hold working capital and particularly inventory levels as they are right now, I mean, what level do you think of revenue could you support here? And if you do see that ramp up, is there maybe any change to the components of working capital that would have to move around some to get there?
Leo Berlinghieri
So, say that – so, what would – what change in working capital would we have to…?
Michael Bertz – Kennedy Capital
Well, it's kind of two questions, Leo. One being, okay, so let's say just at this level of working capital, what revenue level can you support?
And if you were to hold that, would you see changes to receivables versus it would offset in inventory or something like that or would it be pretty much the same components across the board?
Leo Berlinghieri
Well, I think one thing we've been seeing is that, as the businesses have been going up, we obviously have – we've gotten better turns out of the inventory, but the inventory, the actual inventory has gone up. And receivables – days necessarily haven't gone up but at a higher volume, dollars and receivables have gone up as well.
So there's been increased need for working capital as we've gone up this curve, this growth curve. So I don't know what you mean by exactly what would happen if you kept working capital at this level and grew the business.
Michael Bertz – Kennedy Capital
Well, I guess I'm asking that question backwards. I mean, is it possible to grow revenue meaningfully and yet hold working capital at current levels?
I guess, is what I really want to get at.
Seth Bagshaw
I think – you would see some increase in AR, obviously, because our days sales are 60 days, for example. So that would clearly be an additional work cap requirement.
I think inventory – we're always looking at leveraging that a little further going forward. I think probably 3.6 turn, maybe 4, higher volumes would probably be appropriate for our model for working capital.
But AR would definitely go up based on revenue.
Michael Bertz – Kennedy Capital
Okay. All right.
Thanks, guys.
Seth Bagshaw
Thank you.
Operator
Thank you. Our next question is a followup from the line of Krish Sankar with Banc of America/Merrill Lynch.
Please go ahead.
Krish Sankar – Banc of America/Merrill Lynch
Hey, Leo, I just wanted to find out, what are the two product lines you sold off and who are the competitors in it?
Leo Berlinghieri
Well, maybe we'll comment on one of them because we've completed a transaction and the other is not completed. So I'd prefer not to mention that at this time but the ionization was the product line that we sold off and the purchaser announced the acquiring of it.
And it is basically another – a larger business that had ionization as one of their product lines.
Krish Sankar – Banc of America/Merrill Lynch
Got it. All right.
And then final question, what are your plans for use of cash? Thank you.
Leo Berlinghieri
Well, I mean, we have been acquisitive and certainly, the smaller technology-type companies, cash is typically required to do any kind of acquisitions there. So there's no change in the strategy to continue to look at what makes sense as a company.
We've done buybacks. There are other things we could do.
So I don't think there's anything to announce today but I think you have some history of what we have done with cash in the past. We have done a buyback and we've done a number of acquisitions.
We certainly would be interested if there's the right piece of business that will help continue the growth and deliver the results, we'd be very open to that.
Krish Sankar – Banc of America/Merrill Lynch
Thank you.
Operator
Thank you. Our next question comes from the line of Tim Carroll [ph] with Value Holdings.
Please go ahead.
Tim Carroll – Value Holdings
Good afternoon. In May, the Massachusetts High Tech Business News had an article where Brooks is suing you, patent suits regarding sensors and control systems.
Do you have any thoughts on that? How much revenue would be involved?
Leo Berlinghieri
Well, it's – first of all, it's in the very early stages. In terms of – they did file a motion or a couple of motions in terms of what they believe in patent infringement.
I think by now we've probably done something similar in terms of filing our motions of their infringement. So I think it's far too early to comment.
We feel very positive about our position. So I think that's all I can say at this point.
Tim Carroll – Value Holdings
Okay. Thank you.
Leo Berlinghieri
You’re welcome.
Operator
Thank you. And gentlemen, I'm showing no further questions in the queue at this time.
Please continue.
Leo Berlinghieri
Great. Thank you very much.
The first half of this year, our sales have exceeded our revenue for all of 2009. We've successfully ramped production and continue to succeed in diversifying and applying our technologies into these new markets that we've talked about.
Based on industry analyst predictions and continued global economic recovery, we're very optimistic that business will remain strong in the second half of the year. And I'd like to thank everyone for joining us on the call this afternoon.
Operator
Thank you, sir. Ladies and gentlemen, if you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030, using the access code of 4317832.
This does conclude the MKS Instruments' second quarter earnings conference call. Thank you very much for your participation.
You may now disconnect.