Apr 25, 2013
Executives
Seth H. Bagshaw - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer Leo Berlinghieri - Chief Executive Officer and Director
Analysts
Krish Sankar - BofA Merrill Lynch, Research Division Josh Baribeau - Canaccord Genuity, Research Division Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division Thomas Diffely - D.A.
Davidson & Co., Research Division Mark Delaney - Goldman Sachs Group Inc., Research Division
Operator
Good day, ladies and gentlemen, and welcome to the MKS Instruments Reports Q1 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the call over to Seth Bagshaw. You may begin.
Seth H. Bagshaw
Thank you. Good morning, everyone.
I'm Seth Bagshaw, Vice President and Chief Financial Officer. And I'm joined this morning by Leo Berlinghieri, our Chief Executive Officer.
Thank you for joining our earnings conference call. Yesterday, after market close, we released our financial results for the first quarter of 2013.
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 comprise 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 yesterday's press release and the company's most recent annual report on Form 10-K and most recent quarterly report on 10-Q, which were on file with the SEC. In addition, these forward-looking statements will 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, Seth. Good morning, everyone, and thank you for joining us on the call today.
I'll give a recap for the first quarter, as well as our outlook for the second quarter. Following me, Seth will go through the details of our quarterly results and guidance, and then we'll open the call for your questions.
Semiconductor forecasts are improving. However, as I said in the last call, global uncertainty continues to keep the economic recovery in check.
Our first quarter revenues of $142 million came in toward the upper end of our guidance range and increased 6% from Q4, with sales from the semiconductor market up 21% to $90 million. Sales to all other advanced markets were $52 million, down about 13% from Q4, when we had the benefit of several unexpected orders for the solar and industrial markets and also reflecting continued weakness in some markets.
In the second half of 2012, we witnessed a significant drop in the semiconductor capital spending, but conditions stabilized in the fourth quarter. So far this year, we have seen signs of recovery from those levels.
Throughout Q1, the semi book-to-bill ratio has been above parity, a level not seen since May of last year. In the semiconductor market, the trends of miniaturization, constant communication, embedded intelligence and faster speed continue to drive increased semiconductor use, and these trends propel technological advances, as well.
Larger wafers, thinner layers, finer geometries, new materials and 3D structures are required to cost-effectively meet the needs of new semiconductor applications. As I've mentioned in previous calls, our strategy for success in the semiconductor market is to gain new design wins by working closely with semiconductor OEMs as they develop new tools and processes to meet the more stringent technological requirements and to improve productivity.
This past quarter, we had OEM design wins on new tools for a number of our products, including remote plasma, flow, power, pressure measurement and control and more. For example, last quarter, I spoke about evaluations of our recently introduced Paragon remote plasma source.
I'm pleased to report that the Paragon source has been selected by another Asian OEM for use in CVD chamber cleaning. This was a competitive win and we were successful because the Paragon source provides improved ignition, superior gas distribution and longer life construction, all of which improve productivity and yield.
Similarly, we achieved another new design win with a leading U.S. semiconductor OEM for our revolution plasma source for strip applications.
In this case, the customer had encountered some technical challenges with their initial approach, and they requested MKS to provide an improved solution. By using the revolution plasma source, this OEM was able to solve their technical issues and increase their throughput and productivity over their original design, improving the competitiveness of their new tool.
We also achieved design wins with an emerging Chinese semiconductor OEM for RF power, pressure measurement and integrated vacuum products. These wins were for a semiconductor tool to edge through-silicon via, a type of 3D semiconductor device structure which shortens connections and increases density, enabling improved signal speed in smaller devices.
We continue to work closely with numerous semiconductor OEMs around the globe as new tools and processes evolve. And, as these examples show, each quarter we succeed in gaining new design wins, which validate the competitiveness of our technologies and generate future revenues as the market adopts these new tools and processes.
End demand for semiconductors and electronics continues to be found. Analysts are reporting that inventory levels have stabilized and that some chip prices are rising, both indications of improving health in the semiconductor industry, and we remain committed and optimistic about the long-term growth opportunities in the semiconductor industry for MKS.
In addition to growing our semiconductor business through new design wins, our strategy is to leverage our technologies into other advanced and growing markets, which, like semiconductor manufacturing, require our technologies in vacuum, power, pressure, flow, control and analysis in their manufacturing processes. These other markets include thin-film coatings, light emitting diodes, drug development and production, medical, industrial, energy, environmental, food and beverage and other critical applications.
One of our targeted markets is in environmental applications. And in the last call, I spoke about our success with our FTIR air guiding analyzers, which monitor the air for life-threatening and hazardous chemicals in strategic government buildings, public transportation hubs and public gathering places.
The air guard has industry-leading capability to rapidly detect minute amounts of multiple toxic substances and has also been proven to have far fewer false alarms than competing analyzers, not only providing better detection, but also reducing unnecessary disruptive and costly building evacuations. I'm pleased to report that this quarter, we received additional orders for air guard monitors for deployment in a large strategic government agency for security monitoring.
Many industrial processes utilize hazardous gases or emit them as byproducts. Both safety and regulatory compliance necessitate that they be monitored, and the same FTIR technology is used.
Our gas analyzers are employed in numerous industrial processes, including monitoring the purine of gases as they are produced, sampling and in situ monitoring of power plant emissions, toxic emissions and cement manufacturings and formaldehyde emissions, as well as automobile, diesel, locomotive, marine and other engine exhaust emissions. Reducing pollution continues to be a key global concern, and regulations continue to be enacted and enforced to ensure air quality.
This is an area of growing opportunity for MKS, and this quarter, we received multiple follow-on orders for auto and diesel, smokestack, continuous power plant emissions monitoring and other applications from U.S., European and Asian customers. Another growing market for many of our technologies is vacuum coating.
This is a broad area and encompasses diverse applications, including coatings to maintain food freshness, improved tool hardness and to improve the insulating properties of glass. This quarter, we had several design wins for our new G-Series Mass Flow controllers with coating customers in China, Europe and the U.S.
These customers selected the new G-Series because of its performance and value. The G-Series is a cost-effective design for exceptional stability and precise accuracy and enables improved process control, making it a competitive general-purpose Mass Flow Controller for precision coating applications.
The examples I just discussed are indicative of the expanding applications for MKS products in a number of growing markets. These markets are diverse and are having varying degrees of cyclicality, volatility and lumpiness.
For example, our sales for the solar market historically have been significant enough to break out. But today, that is no longer the case.
Solar is currently one of our smallest served markets and we characterized the LED and thin film markets as also being cyclical. And today, sales to these markets are also at historically low levels.
However, the remaining markets, such as medical and biopharm, environmental, general and industrial, are driven less by cycles and more by technological innovations and/or overall economic conditions. In addition to leveraging existing products and technologies into markets outside of the semiconductors, we are also continuing to execute our strategy of diversification by adding technologies and expertise to augment our capabilities to address these other advanced markets.
This quarter, we announced the acquisition of Alter, a European company with excellent technology for advanced microwave applications. This company designs microwave power solutions for industrial applications such as heating, drying and curing and can also be used for semiconductor applications.
This acquisition, although small, strengthens our existing microwave plasma expertise and product portfolio and extends our opportunity into high growth, non-plasma microwave applications for industrial processes, food and beverage, manufacturing and other markets. Looking to the next quarter, analysts are forecasting that the semiconductor market will continue to modestly strengthen.
Business in our other advanced markets can be lumpy, but the most cyclical segments of these served markets are already at fairly low levels. Given this, and looking at the current business levels, we anticipate that sales in the second quarter may range from $145 million to $165 million, and at these volumes, our non-GAAP net earnings could range from $0.04 per share to $0.18 per share.
At this point, I'll turn the call over to Seth to discuss our results and expand on our guidance.
Seth H. Bagshaw
Thank you, Leo. First, I'll discuss the Q1 results before providing further details on our Q2 guidance.
As Leo described, even though the global economy continues to be unsettled, we did see improvement in our semiconductor markets, and as a result, revenue for the quarter was $142 million, an increase of nearly 6% compared to Q4 revenue of $134 million and a 26% decrease from $191 million a year ago. Revenue for the quarter was still at the high end of our guidance range, primarily as a result of improvement in the semiconductor business in the latter half of the quarter.
Q1 gross margin was 38.6%, which was within our expectations at this volume level. This compares to 39.3% in the fourth quarter.
As expected, non-GAAP operating expenses increased in the first quarter and were $49.4 million compared to $45.1 million in the fourth quarter of 2012, which was an especially low level due to shutdowns and other temporary cost reduction actions. Q1 operating expenses also reflect typically higher fringe costs in the first quarter and more normalized work schedules in the U.S.
Q1 research and development expenses were lower than our expectations in the quarter due to timing of certain project material, consulting expenses, which were deferred to the second quarter. As we mentioned in the past, certain of these costs can vary from quarter-to-quarter based upon project timelines and other factors.
Our non-GAAP operating profit margin was 3.7% of sales. Non-GAAP earnings were $3.8 million or $0.07 per share compared to $5.1 million in the fourth quarter and $22.9 million in the first quarter of 2012.
GAAP net income was $5.8 million or $0.11 per share. The GAAP tax rate for the quarter was a benefit of 16% due to a benefit of $2.4 million recognized in Q1 related to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013.
This act reinstated certain tax incentives with retroactive application to January 1, 2012, the tax effect of which was recorded in the first quarter of 2013. Our non-GAAP tax rate, which excludes this item, was 31%.
Cash and short- and long-term investments net of debt decreased by $19.7 million to $608 million as of March 31, 2013. The net cash decrease included net changes in working capital and the use of cash for payment of a quarterly cash dividend of $8.4 million or $0.16 per share and the repurchase of 61,000 shares of common stock for $1.7 million at an average price per share of $27.35.
As we stated in prior calls, the timing point of any shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions and business development activities, including, but not limited to, merger and acquisition opportunities. These repurchases may be suspended or discontinued at any time without prior notice.
In the quarter, we also included the acquisition of Alter SRL, a European-based technology company, for a purchase price of $2.5 million, subject to final post-closing balance sheet adjustments, if any, plus approximately $800,000 of debt assumed. Total book value net of goodwill intangibles was $839 million or $15.89 per share.
In terms of working capital, day sales outstanding were 58 days at the end of the first quarter compared to 56 days at the end of Q4. Inventory turns improved to 2.7 compared to 2.4 in the fourth quarter.
Capital additions for the quarter, primarily related to investments in manufacturing, IT systems and facility infrastructure, were $3.4 million. Depreciation and amortization expenses were $4.1 million and noncash stock compensation was $3.8 million.
Now we'll go through more detail regarding the composition of revenues for the first quarter. Sales to the semiconductor market was $90 million or a 21% increase compared to the fourth quarter and represented 63% of first quarter revenue.
Within the semiconductor market, sales to semiconductor OEMs increased 23% from the fourth quarter and comprised 46% of total sales. Sales to semiconductor fabs increased 17% in the quarter and comprised 17% of total sales.
Sales to other advanced markets decreased by 13% from the fourth quarter of 2012, and were $52 million, representing 37% of total revenue. This decrease was primarily driven by expected declines in the solar and general industrial markets, in which we had approximately $5 million of one-time large orders in the fourth quarter.
As Leo mentioned, sales to the solar, LED and thin-film markets are historically low levels, comprising less than 10% of total revenue in Q1 and were at a quarterly level more than 60% lower than we saw during the 2010 and 2011 peak. Geographically, sales in the U.S.
were 53% of total sales. Sales in Asia were 34% and sales in Europe were 13%.
Sales to our top 10 customers comprise 41% of total sales. Sales to our largest customer, Applied Materials, comprised 15% of first quarter sales.
Our headcount decreased slightly from Q4, and as of March 31 was 2,275. Now I'll turn to Q2 2013 guidance.
Based upon current business levels, we estimate that our sales in the second quarter could range from $145 million to $165 million. Based upon expected sales range and product mix, our Q2 gross margin can range from 37.5% to 39.5%.
Q2 non-GAAP operating expenses are expected to range from $51 million to $52 million. In the second quarter, R&D expenses could range from $16.5 million to $16.9 million.
And SG&A expenses could range from $34.5 million to $35.1 million. As I mentioned in previous calls, these expenses can vary from quarter-to-quarter, depending on the timing of various R&D and IT projects.
In the second quarter, amortization of intangible assets are expected to be $700,000 and net interest income is estimated to be approximately $200,000. We expect our second quarter income tax rate to be approximately 31%, reflecting the projected geographical mix of taxable income.
And given these assumptions, second quarter non-GAAP net earnings could range from $2.1 million to $9.6 million or $0.04 to $0.18 per share and GAAP net income could range from $1.7 million to $9.1 million or $0.03 to $0.17 per share on approximately 53.7 million shares outstanding. This concludes our prepared remarks.
We'll now open the call for questions.
Operator
[Operator Instructions] The first question is from Krish Sankar of Bank of America.
Krish Sankar - BofA Merrill Lynch, Research Division
A couple of quick questions. Leo, in terms of Q2 guidance, can you give the directionality of the different segments?
How much do you expect semi to grow to, like 10% to 15% in Q2 from Q1 levels, and what about the non-semis?
Leo Berlinghieri
So Krish, we would expect that probably the majority of the growth will be in semi. You might see some of the non-semi business come back a little up as it was down a little in the first quarter.
So there are a lot of segments than that, but you can see a little bit of that. But primarily, I would consider semi.
Krish Sankar - BofA Merrill Lynch, Research Division
Got it. And then in Q1, on the semi recovery, did you see a uniform recovery as the quarter progressed?
Or was it more front half, back half loaded, any such color?
Leo Berlinghieri
I think we saw a little more in the second half than we did in the first half, but it wasn't some significant acceleration so that -- it looks like a steady gradual increase in second half.
Krish Sankar - BofA Merrill Lynch, Research Division
And is that second half momentum continuing into Q2? Or what do you see so far when you one more in Q2...
Leo Berlinghieri
We base our guidance on what we see, so I think you'll get some indication that we think that, that rates will continue at least to be up to get the increase in Q2.
Operator
The next question is from Josh Baribeau of Canaccord.
Josh Baribeau - Canaccord Genuity, Research Division
Could you provide us with maybe a little bit of where you think that a lot of your exposure is, the breakdown, let's say, between IDM, foundry and memory or do you not have that line of sight?
Leo Berlinghieri
Yes, we don't -- a number of the tools are used in many different, the same applications -- the same tool is used in a number of different device types. And so we wouldn't necessarily see that.
Josh Baribeau - Canaccord Genuity, Research Division
Okay. And is that -- for a similar question, do you have any line of sight into whether it's a 28-nanometer process or a 20-nanometer process and logically [ph]?
Leo Berlinghieri
And not necessarily. Although what we tend to see is, the smaller the geometry, there tends to be more precision requirements, and we'll see more process control overall, but not as people are ordering.
They're ordering a large number of line items, and some of them are consistent across different technology nodes as well.
Josh Baribeau - Canaccord Genuity, Research Division
Is there a way to quantify the relative capital intensity between different nodes? Is it up 5%?
Is it up 20%? Or is it too soon to tell, let's say, between 2020?
Leo Berlinghieri
I think it's too soon to tell.
Josh Baribeau - Canaccord Genuity, Research Division
Okay. Anything to report or any exposure in OLED this quarter?
Leo Berlinghieri
Nothing significant to report at this time, although I think there has been some activity in Asia that certainly looks promising for this year.
Operator
The next question is from Patrick Ho from Stifel.
Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division
Leo, in terms of the non-semis business, I know a lot of it can be lumpy, and as you mentioned, cyclical in some of the segments. Which of those different areas do you believe could see the first signs of a recovery?
Or where do you see strength in -- at least as we head into the June quarter? Are there pockets where you expect a little bit better than what you saw in Q1?
Leo Berlinghieri
Patrick, I think it's kind of difficult, and let me explain why. With the solar and LED and sort of the LCD DNS at historically low levels.
I guess, we're not anticipating solar or LED having any significant change in Q2. Some form of FPD [ph] could be impacted in Q2, but we're not -- again, we're not expecting any significant increase.
Then in those other markets, there are so many customers on a worldwide basis, and you're not talking about $10 million customers. You're talking about $100,000 customers, and lots of orders are made up in those other segments, whether it's industrial or whether it's in chemical, or whether it's environmental.
So I think that we don't predict that. We look at it as a run rate from where it's been.
So I think that a comment we made that most of the increase comes from semi, and the only reason we say that some of that might come from some of the other markets is that it was slightly down -- even when you pull out the unusual orders we got in the fourth quarter, it was still slightly down a bit, and those tend to reflect the economy and just the activities that are going on in different markets. So they may come back a little, but I don't think we have an exact expectation.
Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division
Okay, great. Now, that's very helpful.
Going to semi side for a second, in terms of -- I know we've discussed this and I mentioned in the past about inventory levels at your OEMs, obviously, by your guidance, it sounds like things have worked themselves through on that front. Do you believe this pickup that you're seeing now from an inventory basis, is the inventory build by the equipment vendors?
Or is it purely now that they're taking it off demand?
Leo Berlinghieri
What was interesting, Patrick, was with a great 21% increase in semi, was a great sign of things recovering. If you look at what was released so far, it looks like the major equipment companies actually reduced inventory.
So theoretically, it would say that they consumed more than they bought, if they have less inventory. But we can't tell if it's our parts or somebody else's or what inventory they're talking about, but that's a good sign that most of the major OEMs decreased their inventory, while we saw this increase in the first quarter.
Operator
The next question is from Tom Diffely of D.A. Davidson.
Thomas Diffely - D.A. Davidson & Co., Research Division
I'd like to focus on the model of the cost structure at this point. It seems like margins with the guidance are at kind of multi-year lows here while the operating expenses have crept up over the last couple of years.
I'm just kind of curious that this kind of longer-term trends are here give us a weak earnings guidance on the revenues?
Leo Berlinghieri
I think, Tom, in the first quarter, it's mix-driven, and also you'd expect that when semi ramps up, some of the larger cost gets better pricing. That's a factor as well.
And then, foreign exchange is a piece of it as well. I did mention in the past calls, and again, I'll mention it now, is we have some capacity in the factories right now.
And so if the business picks up, we don't expect to add a lot of indirect labor and all great costs to meet the additional ramp in the business if that does occur. So the margin right now had some impact on a negative basis.
Leo Berlinghieri
I think typically, we've seen incremental margins of around 50%. I think, over some period of time, we'd expect that to happen again.
Seth H. Bagshaw
Exactly, exactly.
Thomas Diffely - D.A. Davidson & Co., Research Division
Okay. And has your long-term model changed as far as what you think profitability is, at the $200 million, $250 million level?
Seth H. Bagshaw
No.
Thomas Diffely - D.A. Davidson & Co., Research Division
Still kind of mid-40s margins?
Seth H. Bagshaw
Yes.
Operator
[Operator Instructions] The next question is from Jim Covello of Goldman Sachs.
Mark Delaney - Goldman Sachs Group Inc., Research Division
This is Mark Delaney on behalf of Jim Covello. I was hoping you could help us understand a little bit of the impact of your business model as it changes.
As I understand it, more of your business is moving into less cyclical areas, such as industrial markets. And how do you think about managing your capital allocation strategy as your cyclicality of revenues changes?
Leo Berlinghieri
Well, I think, as I said earlier, those are relatively small customers. It's not huge swing in the business.
It's just part of the overall. And I think, what we were inferring to is that there's probably not a lot of cyclicality in the next quarter since the most cyclical businesses like semi are either on the upside or at all-time lows.
So I don't -- I still think that we believe that over the long run, LED market will recover and be a good piece of the business. I think solar can be part of that at some point in time, certainly FPD.
So I wouldn't see that this would be a huge mix change that would change the capital structure.
Seth H. Bagshaw
And that's great, correct. Yes, so -- as you know, Tom, we've got dividend, we've got a share repurchase plan that we've executed on, and we do want to retain some capital for M&A activity, and we have bought 2 companies in the last 6, 7 months outside the U.S., using cash outside the U.S.
as well. So we haven't changed.
Our model is still intact.
Operator
The next question is from Larry Dayton [ph] of Second Line Capital [ph].
Unknown Analyst
I came into the call late, so if I missed something, I apologize. But in terms of M&A strategy, any update kind of in the non-semi area to try to expand any frustrating experiences or positive experiences that kind of matter out?
Leo Berlinghieri
Well, one of the things we mentioned in the call, if you got on late, is we did acquire a microwave -- industrial microwave company, relatively small company in Europe, but it gives us -- we are in the microwave plasma business, primarily focused on the semiconductor market. This technology gives us the ability to look at microwave applications in non-semi industrial areas and should augment what we have today for technology.
So -- and Seth just mentioned, we're continuing a part of the cash that we do hold, our expectations, we're optimistic about those kind of opportunities. Nothing particular right now that we could announce.
Unknown Analyst
But to the extent that it's really hard to get a deal done, is it hard to find the assets you want, or is it mainly valuation, or is it something else?
Leo Berlinghieri
I think that M&A is always difficult. It's never simple, and so we've exhibited patience.
I think we've exhibited in the deals we've done to create value in the businesses, we've looked for them to be strategic to our business plan. So I kept confidence that if we look at enough things to find the right things that you can do a good deal in.
So I'm confident that we can find those things. We put the right resources in place, we have the right way to look at those things.
So I think our patience and our success in the past, I think, will continue going forward.
Unknown Analyst
And just one separate question, in terms of solar, I really found out that you can see what looks for 2014 to be a significant better year?
Leo Berlinghieri
Yes, we're not anticipating anything significant, although I think -- although if you look at the general market data, I think they're talking about 11% growth over the next couple of years on, as I said, almost nothing, so I'm not sure we're raising flights right now in solar, but it's nothing in the foreseeable future, the next 12 months or so or 18 months that we'd see there'd be any significant change.
Operator
Thank you. There are no further questions at this time.
I'll turn the call back over for closing remarks.
Leo Berlinghieri
Thank you. We are continuing to strengthen our infrastructure and technical capabilities worldwide to keep us competitive and responsive to the needs of our customers.
We are encouraged about the improvement we're seeing in the semiconductor market. However, in that term, we anticipate the business conditions for other markets will remain challenging.
We're optimistic about long-term recovery, and we are continuing to work closely with customers on design wins and are continuing to make investments to position ourselves for the long-term growth. I'd like to thank you for joining us on the call today, and we look forward to updating you on our Q2 call in July.
Thanks.
Operator
Ladies and gentlemen, this concludes today's program. You may now disconnect.
Good day.