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MKS Instruments, Inc. (NASDAQ:MKSI)

Q4 2012 Earnings Call

January 31, 2013 08:30 AM ET

Executives

Seth Bagshaw - VP and CFO

Leo Berlinghieri - President and CEO

Analysts

Chris Sankar - Bank of America

Patrick Ho - Stifel Nicolaus

Mark Delaney- Goldman Sachs

Dick Ryan - Dougherty

Tom Difflely - D.A. Davidson

Operator

To the MKS fourth quarter 2012 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions).

I would now like to introduce your host for this conference call, Mr. Seth Bagshaw. You may begin, sir.

Seth Bagshaw

Good morning, everyone. I'm Seth Bagshaw, Vice President and Chief Financial Officer, and I'm joined this morning by Leo Berlinghieri, Chief Executive Officer and President.

Thank you for joining our earnings conference call. Yesterday, after market close, we released our financial results for the full year and fourth quarter 2012. You can access this release at our website, www.mksinstruments.com.

As a reminder, various remarks that we 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 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 to Leo.

Leo Berlinghieri

Thanks Seth. Good morning everyone and thank you for joining us on the call today. I'll give a recap of the full year and fourth quarter 2012 as well as our outlook for the first quarter. Following me Seth will go through our full year and quarterly results and guidance and then we’ll open the call for your questions.

The global economy has continued to be depressed and the business slowdown which we began to see in the second half of 2011 persisted and deepened through much of the second half of 2012. As a result, sales for the full year were down 22% to $644 million. Our semiconductor sales saw progressive declines through the year and were down 20% from 2011 to $401 million.

Sales to our other advanced markets were down 24% for the year, driven primarily by a sharp decline in capital spending in the solar and LED industries. We did see some bright spots, including process control software and gas analysis products, where sales continued to grow in 2012.

Now turning to the fourth quarter. As noted in the last call, order levels did being to stabilize late in the third quarter and have remained relatively steady since then. Revenue for the quarter came in at the higher end of our guidance at $134 million as we were successful in booking and shipping an order from a large solar customer, as well as an unanticipated additional order for our microwave products and an industrial application bringing sales up 7% in our other advanced markets. As expected our semiconductor sales were down in the fourth quarter but declined a little less than we thought, down 14% from Q3.

Despite last year’s slowdown in the semiconductor market, industry fundaments are sound in current industry forecasts are projecting the market to recover in 2013. So far this year two of the top three spenders on semiconductor fab equipment have announced year-over-year increases in their capital spending budgets for 2013. While encouraging, we have not seen any meaningful upturn in semiconductor orders yet.

The lead time for our products is shorter than those for process equipment and when our OEM customers see an increase in orders for their equipment and begin adjusting their bill schedules accordingly, we would expect to see orders pick up for us shortly after that.

As I’ve mentioned in previous calls, product development activity continues and often accelerates during these slow periods. We along with our customers continue to address the challenges of fire geometries, larger wafers, new materials, 3D structures and advances in lithography, all needed to meet the semiconductor roadmap.

We continue to invest during this slowdown as we work with our customers on new products to gain design winds, which we expect to generate incremental sales as the industry recovers.

For example, this quarter we had another design win on a 450 millimeter tool with a major U.S. OEM, which incorporated our integrated heating solutions to improve productivity and up time in their latest etch tools.

The industry is always driving for lower cost and higher productivity. As wafers get larger, the value of each wafer grows and productivity in yield become even more critical. OEMs are looking for ways to improve yield in minimize loss production time required for cleaning the larger 450 millimeter chambers.

In order to enable this, we recently introduced Paragon, a high performance addition to our ASTRON family of remote plasma sources for chamber cleaning. The Paragon source provides improved ignition, superior gas distribution and longer life construction, all of which improved productivity in yield.

In the fourth quarter we received additional orders from multiple OEMs to evaluate this new plasma cleaning system as they continue to develop and optimize new tools and new processes. We are optimistic that these evaluations will lead to future design wins and volume orders as the industry recovers.

Productivity and process optimization also drove continued sales to multiple OEMs and device manufacturers for our gas analysis products, which monitor quality and improve yield in deposition processes.

And another semiconductor application, we recently had a success with our RF power products, where we achieved design wins on etch producing MEMs or microelectromechanical systems.

These tools used for semi-conductor manufacturing processes to produce miniature electromechanical devices which are used in a broad array of applications; especially, as sensors for motion, acceleration and fluids and demand for MEMs devices is expected to be strong over the next five years. In addition to power we also sale pressure, flow, vacuum and other MKS products for MEMs tools.

So to sum up our thoughts on the semi-conductor market, the outlook for recovery this year is encouraging and we believe our customer collaboration and design wins during the slow period are positive drivers for incremental revenue growth as the capital spending environment improves.

Turing to our other markets, our strategy is to fuel additional revenue growth by leveraging our product portfolio into other advanced and growing markets which require our technologies in vacuum, power, pressure, flow, control and analysis in their manufacturing processes.

One example of this is the coating market. Coating encompasses a wide variety of applications ranging from ophthalmic coatings on eye glasses to architectural coatings to improve the insulating properties of windows to coatings on food packaging to block light and moisture to ensure freshness.

Coating tools utilize a number of MKS technologies and in this quarter we have received orders for RF and DC power supplies, pressure and flow gauging valves and gas analysis products for several coating tool OEMs for multiple coding applications.

Moving to the LED industry, analysts project that long-term, the demand for LED is strong, especially as LEDs are adopted for lighting. Near term though, the market for MOCVD equipment used to manufacture LEDs remains depressed.

Demand for OLED or OLED equipment; however which is driven by the need for brighter, higher resolution phone and tablet displays continues to grow. In OLED manufacturing ozone is used for both cleaning and oxide growth and as screen size increases with new generations of smartphones and tablet computers, more ozone is required. Our Liquizone products are the industry leader with higher flows and more dissolved ozone to support faster cleans in larger substrates.

In a competitive win this past quarter the leading global manufacturer of OLED displays compete multiple ozone products for their OLED cleaning process, and once again, selected our Liquizone as the best product available, resulting in additional orders which will ship in 2013.

As the popularity of smartphones and tablets continues, we are also seeing increasing demand for Liquizone from emerging OLED tool manufactures in China as well in other countries in Asia.

In the last few calls, I talked about the investments we have making to strengthen our technical depth closer to our customers around the globe. This investment in infrastructure and technical support, which is for all products, has already provided significant competitive wins and additional opportunities for growth. We are seeing results from previous investments made in process control software, with new orders and new customers in biopharmaceutical manufacturing.

In Europe and Japan, our FTIR-based gas analyzers have displaced local suppliers for automotive ignitions motoring and despite the challenging economy our FTIR gas analysis business, both for continuous and engine emissions monitoring grew by more than 10% in 2012. We are continuing to invest additional technical resources in a number of regions where we see additional growth opportunities over the next several years.

Another of our FTIR gas analyzers AIRGARD, which is used for monitoring ambient air for life threatening and hazardous chemicals, has completed numerous critical evaluations for monitoring air in strategic government buildings, public transportation hubs and public gathering places with great success.

I am pleased to report that in the fourth quarter, following a comprehensive evaluation AIRGARD gas analyzers were selected for deployment in a large strategic government agency for security monitoring. With this deployment and other successful installations and evaluations, our reputation as the best solution for security monitoring continues to expand.

In total, we are executing our strategy for targeting other advanced and growing markets and our investing resources to grow this part of our business. The examples I’ve talked about here demonstrate how we are succeeding in capturing additional opportunities in other advancing growing markets and provide some understanding of how when economic conditions improve, sales to these markets could return the historical growth levels or higher.

Now, looking to the next quarter global economic conditions are expected to remain unsettled. So far this year, expectation for wafer fab equipment spending in 2013 have improved marginally from flat to down 15% to flat to down 10% compared to 2012 levels. Some have projected the industry may be at or near order trough levels as we exited the year.

Given current business levels, we anticipate that sales for the first quarter may range from a $125 million to a $145 million and at these volumes our non-GAAP net earnings could range from a net loss of $0.06 per share to net earnings of $0.08 per share.

At this point, I'll turn the call over to Seth to discuss our results and expend on our guidance.

Seth Bagshaw

Thank you Leo. First I will discuss the full year results and then our fourth results before providing further details on our Q1 2013 guidance. Sales for the full year were $644 million a decline of 22% from $823 million in 2011. Sales for the semi-conductor market were $401 million, declining 20% compared to $502 million in 2011 reflecting a slowdown in the industry spending in the second half of 2012.

Sales for semi-conductor market represented 62% of sales in 2012, compared to 61% in 2011. Within the semi-conductor market sales for semi-conductor OEMs were down 24% and comprised 47% of total sales.

Sales for semi-conductor device manufacturers were down 7% and comprised 15% of total sales. Sales for other advanced markets decreased 24% and were $243 million. The decrease in other advanced markets was primarily driven by the expected decrease in solar and LED revenues, which together were down more than 60%, compared to record levels in 2011.

Sales to our top ten customers' totaled 42% of revenue in 2012, compared to 41% in 2011. Sales to our largest customer Applied Materials comprised 14% of revenue in both 2012 and 2011. Gross margin for the year was 41.9%, compared to a 45.6% in 2011.

As we’ve mentioned in previous calls our 2011 results included the benefit of a favorable import custom settlement resulting in a $3.4 million refund, or a 40 basis point positive impact on our gross margin.

Excluding the impact of this refund, the year over year decrease in gross margin was due to lower sales and production volumes, offset by improved product mix.

We continue to take a variety of steps to lower our production costs, including reduction in workforce and shutdowns in the U.S. in the latter part of Q3 and in Q4.

Operating expenses decreased by $1.7 million, primarily as a result of cost reduction actions taken in the second half of the year and lower foreign exchange losses, partially offset by annual compensation increases, increased legal expenses and the operating cost of Plasmart Inc., which we acquired in the third quarter.

Non GAAP operating margin was 12.8% and non-GAAP earnings were $1 per share. GAAP net income was $0.90 per share. Cash in short and long term investments net of debt increased by $56 million to $627 million as of December 31, 2012.

This net cash increase included the use of cash for the payment of quarterly cash dividends totaling $33 million, the repurchase of 435,000 shares of common stock to $12 million and average price per share of $26.46 and the acquisition of Plasmart for $23 million for a total use of cash of $68 million for these items.

Free cash flow for the year was approximately $120 million and furthermore we increased our quarterly dividend by 7% from $0.15 per share to $0.16 per share in the third quarter.

Now I'll turn to fourth quarter results. Revenue for the quarter was $134 million, a decrease of 5% compared to Q3 revenue of $141 million, a 22% decrease from $172 million a year ago.

Revenue for the quarter was toward the high end of our guidance range primarily as result of an order from a large Chinese solar customer and an order for our microwave products in industrial application both of which occurred late in the quarter. The combined revenue for these two customers was approximately $5 million.

Gross margin was 100 basis points favorable to our guidance due to positive product mix, and continued cost reduction actions. Gross margin was, 39% compared to 40% in the third quarter, primarily due to lower sales volume.

As we discussed in the last earnings call, as business volume are moderated during the latter part of the year, we have made a number cost reduction activities.

We completed a mass reduction in work force, reduced overtime in contract labor as well implemented shutdowns in U.S. and in certain international locations. We also limit discretionary and non-essential spending during the quarter.

As expected operating expenses increased in the fourth quarter and were $45.1 million, compared to $43.8 million in the third quarter of 2012, which was at an especially low level due primarily to adjustments in annual variable compensation.

Operating cost in the second half were below our normalized rates and our Q4 operating expenses were below our guidance range of $46 million, due to lower variable on center compensation cost of year and the timing of certain consulting expenses related to IT and other projects, the timing which can vary from quarter-to-quarter.

We do expect that these unusually low operating expense rates will not continue in the first quarter. Our net operating profit margin was 5.8% of sales. Non-GAAP earnings were $5.1 million or $0.10 per share, compared to $8.4 million in the third quarter and $20.4 million in the fourth quarter of 2011. GAAP net income was $4.1 million or $0.08 per share.

The GAAP tax rate for the quarter was 40%, which was higher than a non-GAAP tax rate of 36% due to the cumulative effect in the quarter of adjusting to full year tax rate.

Now turning to the balance sheet, cash and investments net of debt increased by $8.2 million in the quarter, is now $11.90 per share. Total book value net of goodwill and intangibles was $850 million or $16.12 per share.

In terms of working capital, day sales outstanding were 56 days at the end of both the third and fourth quarter and inventory turns improved slightly to 2.4, compared to 2.3 in the third quarter.

Capital additions for the quarter, primarily led to investments in manufacturing, IT systems in facility infrastructure with $6.7 million. Depreciation in amortization expenses were $4.2 million and non-cash stock compensation was $3.1 million.

During the quarter, we paid a cash dividend of $8.4 million or $0.16 per share, and repurchased 190,000 shares for $4.5 million at an average price per share of $23.55.

As we have said in prior calls, the timing and quantity any of share’s repurchased will depend upon a variety of factors including business conditions, stock market conditions and biz development activities including but not limited to merger and acquisition opportunities. These repurchases may be suspended or discontinued at any time without prior notice.

Now, go thorough more detail regarding the composition of revenues for the fourth quarter. Sales for the semiconductor market was $74 million with a decrease of 14% compared to third quarter and represented 55% of fourth quarter revenue. Within the semiconductor market, sales to semiconductor OEMs decreased 11% from third quarter and comprised 40% of total sales. Sales to semi-conductors fabs decreased 21% in the quarter and comprised 15% of total sales.

Sales to other advanced markets increased by 7% from third quarter of 2012 from $59.8 million representing 45% of total revenue. Sales to the solar market increased by $3.2 million compared to third quarter, driven by a shipment to a large solar customer in China and were $5.5 million. Sales to all other advanced markets increased 2% and were $54.3 million.

Geographically, sales in the U.S. were 50% of total sales, sales in Asia were 35% and sales in Europe were 15%. Sales to our top 10 customers represented 40% of total sales and sales to our largest customer, Applied Materials, comprised 13% of fourth quarter sales.

Our headcount decreased by 4% from Q3. As of December 31, it was 2,305 compared to 2,412 as of September 30th, primarily reflecting the mass reduction in workforce in the quarter.

Now I'll turn to the Q3 2013 guidance. Based upon current business levels, we estimate that our sales in the first quarter could range from $125 million to $145 million.

Based upon this expected sales range, our Q1 gross margin could range from 36% to 39%, reflecting these volumes and expected product mix. Q1 operating expenses could range from $49.7 million to $50.7million. In the first quarter, R&D expenses could range from $15.9 million to $16.3 million and SG&A expenses could range from $33.8 million to $34.4 million.

The range of operating expenses reflects a typically higher fringe cost in the first quarter, more normalized work schedules in U.S. and continued investments in certain key IT and research and development projects. As I mentioned in previous calls the timing of these projects depend upon a variety of factors and could vary from quarter to quarter.

In the first quarter, amortization of tangible assets is expected to be $500,000 and net interest income is estimated to be approximately $200,000. We expect our first quarter non-GAAP income tax rate could be approximately 33%, reflecting the anticipated geographical mix of taxable income and the reinstatement of the U.S. federal research and development tax credit.

We expect our first quarter GAAP tax rate to be approximately 28%, which also reflects the retroactive credit of the 2012 research and development tax credit reinstated in Q1 of 2013.

Given these assumptions first quarter non-GAAP net earnings could range from a loss of $3.3 million to net earnings of $4.3 million or net loss per share $0.06 to net earnings of $0.08 per share and a GAAP net loss of $4 million to net income of $4.3 million or net loss per share of $0.08 to net income of $0.08 per share or approximately 53 million shares outstanding.

This concludes our prepared remarks. We now open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Chris Sankar with Bank of America.

Chris Sankar - Bank of America

Leo, I have a couple of ones. Number one, you said that you are not quite seeing any order activity from your customers. Is it said to say your OEMs build plans are still pretty stable in the sense you are not seeing any improving build plans so far?

Leo Berlinghieri

As you know we don’t really comment on our customers build plans. They give us information to help us plan, and we are not supposed to reveal those. So you’d probably have to talk to them about that but I think in general the order rate hasn’t significantly changed.

Chris Sankar - Bank of America

And given your prior experience, if you look at the last few years, does that order rate, let’s assume in the beginning of the recovery, does that order rate really start improving after the Chinese New Year or is it just a matter of just pure timing rather than trying to like actually time the system?

Leo Berlinghieri

Yeah I honestly have no idea if Chinese New Year has anything to do with the order rate at all. We plan more of our capacity around it in China than focus on that and I don't anticipate anything unusual happens on the order rate because of that.

Chris Sankar - Bank of America

And then Seth in terms of your buyback, how much do you have in buyback left?

Seth Bagshaw

We have a $186 million available; it has no expiration date on that.

Chris Sankar - Bank of America

Got it and then so how many weeks shutdown did you guys have in 4Q and is there any shutdown schedule for Q1?

Seth Bagshaw

Well there is certainly, it's probably about in total if you look at holidays and shutdown days, it is probably closer to the half as many in Q1.

Operator

Our next question comes from CJ Muse with Barclays.

Unidentified Analyst

Hi this is (inaudible) calling in for CJ. I guess looking at your overall semi-market trends; it looks like over the last year or two you've underperformed from a kind of the year over year basis relative to the double EFE space, likely due to and some level of inventory depletion and then market share moves amongst your customers. And then the environment that you highlighted for this year of flat to down 10, could MKSI semi revenues outperform that level as a result of inventory replenishment or how should we think about that on the overall market?

Leo Berlinghieri

I think you made a good point. Normally as the business turns down our OEM customers are consuming their inventory to use for shipments. So we're never seeing this shipment rate. So I would expect that we would perform differently. I guess historically, we tend to come back stronger, if you look at probably the last couple of cycles because their probably replenishing that. So if history repeats itself I guess we would see that happen again.

Unidentified Analyst

Got it and then within the sort of the non-semi markets, if I exclude solar from the mix, you've seen pretty steady growth there over the last few years and you highlighted some opportunities and design wins that you’ve had so far. Could we see this kind of approximately 10% growth rate coming into this year, anything that you're identifying right now that would drive the growth rate higher or lower?

Leo Berlinghieri

Yes, I don't think we are ready to comment on the year. With the lead times we have and the way things change, we don't have that kind of visibility but I would say that it's possible that as certainly the global economy doesn't seem to have settled all its issues and so that has no in addition to the MOCVD and the solar declines in the past year, there is nothing that seems to driving significant change globally over the past year. So if that changes, I would hope that we would get back to more historical growth rates.

Unidentified analyst

Got it, and then just final clarification question. Given that your OpEx from March is impacted by some of these IT and consulting spending, would you expect an OpEx decline into the second quarter as that sort of fades away or is this the level we should be thinking about.

Leo Berlinghieri

Actually in Q1 we also have reinstatement of payroll taxes impacts the first quarter but to answer your question in Q2 we have wage increases and also some other project spending in R&D and in IT. So we're still looking at roughly these levels for next several quarters, $50 million -$51 million type range. That could obviously change based on foreign exchange and timing of the projects but that's what we're looking at right now.

Operator

Our next question comes from Patrick Ho with Stifel Nicolaus.

Patrick Ho - Stifel Nicolaus

Leo, maybe just a little color in terms of the outlook. You obviously did a little bit better on revenues the past quarter due to some of your adjacent markets. Is the range that you've given for Q1 driven more by the potential semis or is it still the adjacent markets that causes some of that variability.

Leo Berlinghieri

Yes, Patrick I would say that certainly as Seth mentioned, we got about $5 million of revenue that we hadn't anticipated orders in revenue in that quarter and where the midpoint of the guidance at least is kind of in the same range of the Q4 revenue. I would think that most of that would be related to semi, but we have so many skews and so many different markets, we don't plan it down to that level of detail but I would guess that some of that would be a semi improvement.

Patrick Ho - Stifel Nicolaus

Great, and just to get a little color on some of your different collaborations in the design wins, obviously you guys have been a long time semi supplier so I assume that some of the design times or the times needed for design wins are a lot shorter. Can you just characterize the differences between some of the work you do on the semi side, versus the time needed to get I guess qualification of wins in some of your adjacent markets?

Leo Berlinghieri

Well, I think in some cases it’s similar to semi. So there are some situations, all of these products are critical to processes. They go through an extensive evaluation and so they're proven for the particular application do exactly what they want or get more results out of it.

So in some cases these other applications look a lot of semi, in other cases they're more project oriented. So sometimes what you'll see is semi has usually a more steady flow. At whatever rate it is there tends to be regular less lumpy kind activity.

We have so many other markets, some of that gets lumpy so some of the design wins could be a little shorter but I think in general for these kinds of products there is an extensive evaluation goes on in testing and proof and then designed in. So I don’t see it significantly different honestly.

Patrick Ho - Stifel Nicolaus

Okay, great. And a final question from me. In terms of the solar, you guys obviously got a nice piece of business in the Q4. Are these type of I guess one offs or aberrations, are they very customer specific, project specific. How do you manage some of those one offs, given how depressed that industry is right now?

Leo Berlinghieri

Well, the good news we’re quick turns business. So we usually have the ability to acquire materials of we have it and turn around and ship it quickly. As you can imagine with the solar market being depressed, it’s more related to a particular customer who either gets funding or decides they want to do some expansion. They’ve been delaying, delaying, delaying and then all of sudden they do something and they want to do it quickly.

So, really our strength is the capability of turning that around, getting in order and being able to ship it out and that’s why we have that success in the fourth quarter. So I would just say it’s more customer related and as funding is available and they want to move on an expansion plan, they do it quickly.

Operator

Our next question comes from Jim Covello with Goldman Sachs.

Mark Delaney- Goldman Sachs

Hi, it’s Mark Delaney calling in on behalf of Jim Covello. I was hoping to understand a little bit more your comments about mix impacting your gross margins for next quarter. I understand from some of the prior questions, it sounds like you think semi is maybe a little bit more your mix next quarter and then on flat revenues at the midpoint, gross margins are down a couple of hundred basis points. Can you walk me to a little bit more of what’s driving that?

Seth Bagshaw

Well Matt, to we’ve a lot of different products, different markets and so it can move in any one quarter. I wouldn’t necessarily attribute any change in the mix overall market.

Leo Berlinghieri

Yeah. I would say also as I mentioned earlier, we probably have half as many days off in the first quarter than we did in the fourth. That will have some nominal impact on the margin as well.

Mark Delaney- Goldman Sachs

Okay, got it. And then you guys mentioned you won some OLED business for 2013 and I was hoping you can maybe just quantify a little bit more on the size of that win and timing of it?

Leo Berlinghieri

Well, we don’t talk typically about particular orders and size and who and the timing but we have been a leader in ozone for OLED and the largest producer of OLED panels has been buying from us regularly and as they always do they are constantly looking at next generation panels and evaluating other equipment.

They evaluated us with others and again we were the best product on the market and they placed orders with us in the fourth quarter and that would ship in 2013. We have had orders from them before; we have been the leader and continue to be that leader.

I think the other thing we noted is that we are starting to see OEMs in China and other parts of Asia making investments for OLED equipment. So we are looking forward to with the evaluations we have going on there, looking forward to expanding that.

Mark Delaney- Goldman Sachs

And then just on the balance sheet and the cash flow, I understand even with the acquisition and increase in the dividend doing the buyback, you guys generated, I think about $50 million in cash onto the balance sheet over the course of the year. As you guys think long term, I understand that you have different priorities between returning cash to shareholders and M&A but can you help us understand maybe at what point you want to start thinking about certain points of your free cash flow as a percentage being returned to shareholders?

Leo Berlinghieri

I don’t think we would comment in a number range. I think you have seen what we have done. We have utilized cash for M&A as you mentioned and dividend and also some of the buyback. I think we have an appetite to continue doing M&A. We have done a number of over the years, I think more than 17. I think we still have an interest in doing that, that we’ll look at both semi and non-semi areas. So depending on how that goes we’ll make our decisions on that and how the market is.

Operator

Our next question comes from Dick Ryan with Dougherty.

Dick Ryan - Dougherty

Seth, how should we be looking at CapEx and depreciation and amortization for the year?

Seth Bagshaw

I would say CapEx to 2013 probably at the $15 million range.

Dick Ryan - Dougherty

And just refresh me what it was in 2012?

Seth Bagshaw

2012 was about $17 million. And then depreciation and amortization probably take the Q4 run rates.

Dick Ryan - Dougherty

And Leo, you mentioned doing half as many shutdown days as Q4. How you are looking at discretionary spending going forward, whether it’s travel or even on a hiring basis. What do you think as you look into maybe the first of 2013?

Leo Berlinghieri

Okay well let me just make one clarification. What I said was between holidays and shutdowns we have about half as many in Q1. There’s a lot of holidays in Q1 as well. Can you repeat the balance of the question? I was thinking about correcting the first part of it.

Dick Ryan - Dougherty

Yeah, just I mean, just what are your plans for may be hiring and kind of other cost containment, what discretionary spending, travel, are you still watching that pretty tightly or is it kind of loosening up as you look out over the first half of the year?

Leo Berlinghieri

Yeah. I would say that nothing else significantly has changed. We are make some investment in some geographic regions for some of the products that are typically not related to semi, that need better support in terms of growing in regions that we haven’t even been really present in.

So, as we have seen success in doing that in Europe and Japan we will extent that into other regions. Not a lot of resources to that, just a couple per country. We’ll probably do a couple of countries worth in the first six months of the year. And beyond that travel is still being held tight and other discretionary spending and still being held tight until we see order rates change that would support changing that.

Dick Ryan - Dougherty

Okay. And Seth, cash how much is held domestically and what’s overseas roughly?

Seth Bagshaw

About 55% in the U.S., 45% outside.

Operator

And the next question comes from Tom Difflely with D.A. Davidson.

Tom Difflely - D.A. Davidson

First a question on the timing of your revenue. Based on your quick lead times I guess your customers inventory levels and revenue recognition, what does it correspond most closely to? Is it the orders of yours customer, specialty OEMs, maybe shipments or even revenues?

Leo Berlinghieri

One customer doesn’t represent the entire industry. I guess. And they all of have different cycle times and they are getting better and shorter so that’s a good sign. But I would think first orders come and here is why I think this.

First I would think orders come and that’s what probably changes their build schedules to increase them and then until they see the orders, they are not probably going to increase those schedules. And then when the schedules increase I’m guessing we’re a 30 to 60 days behind their shipment, at least in front of their shipment, so that if they are trying to ship something out, they probably need to look at us with their cycle time and everything else, somewhere between 30 and 60 days. That’s not an exact number, it just my own guess here.

Tom Difflely - D.A. Davidson

Okay. So some of the big OEMs are talking about shipments going up in the first quarter. If that was to be I guess broad based, you’d start to see that pretty soon then.

Leo Berlinghieri

I would think so. Assuming their inventory is perfectly balanced for the rates they are trying to ship that.

Tom Difflely - D.A. Davidson

And you talked about some wins in 450 millimeter. Is it possible to meaningful revenues in something like that, say 450 before it becomes widespread adoption, just feeding the R&D activities.

Leo Berlinghieri

Well, one of the things as you know Tom, we sell to all the equipment companies. So I would say even a little bit from each company as they do proof of concept and start building e-value and things like that. That hasn't happened yet. The focus is on getting designed in when you see that but I guess in these days, meaningful is much smaller. Today, everything is important to us. The design win is probably the most important at this time and meaningful revenue would come after.

Tom Difflely - D.A. Davidson

Okay and then, last thing, do you have any meaningful FX exposure at this point?

Seth Bagshaw

Well, we would in Yen and some Euros. Europe is not big for us; right around 50 was none of our business. Japan is a good size of our business. That’s mostly in Yens and nominated sales and we do typical foreign exchange hedging on that. But FX would over the long term affect us obviously.

Tom Difflely - D.A. Davidson

Okay, do you just hedge one quarter out or do you steer step it?

Seth Bagshaw

We latter it, steer step.

Operator

(Operator instructions). I'm not showing any further questions at this time. I'd like to turn the conference back to our host for closing remarks.

Leo Berlinghieri

Thank you. We are encouraged by the announcement and forecasts made recently that we may be at trough levels and that business levels, should begin to grow within a quarter so and even be stronger in the second half of the year.

Furthermore, in our own businesses as I said, we've seen stabilization of our order rates for several months and we've not seen inventory adjustments, cancelation or push outs for a while now, which is also encouraging.

As Seth noted we are investing and we are investing in our manufacturing and IT infrastructure to better manage the business at all of our sites. We continue to make investments in technical resources as we see opportunities to grow several non-semi products in regions where we see new opportunities. This will strengthen opposition to enable further growth when the global economy recovers and when the semi-conductor industry up turn occurs.

When that recovery occurs, we are prepared and committed to meeting our customer's needs which are often more accelerated and at higher levels than are forecasted.

Thank you again, for joining us on the call today, and we look forward to updating you on our Q1 call in April.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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