Good day, ladies and gentlemen, and welcome to the MKS First Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Seth Bagshaw. Vice President and CFO of MKS Instruments.

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 first quarter of 2012. You can access this release at our website at www.mksinstruments.com. As a reminder, the 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, in the company's most recent annual report on Form 10-K, the 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.

Thanks, Seth. Good morning, everyone, and thank you for joining us on the call today. I'll give a recap of the first quarter 2012, as well as our outlook for the second quarter. Following me, Seth will go through our quarterly results and guidance and then we'll open the call for your questions. Sales for the first quarter of 2012 were at the high end of the guidance range at $191 million, and up 11% from last quarter. Sales to the semiconductor market were up nearly 19% sequentially and totaled $125 million, or 66% of revenue. Sales to all other markets remained relatively steady quarter-over-quarter at approximately $66 million. First quarter non-GAAP net earnings were $22.9 million, or $0.43 per share, GAAP net income was $22.8 million or $0.43 per share. Our cash in short and long-term investments, net of debt, increased $14 million in the quarter to $586 million. Global economic conditions remain unsettled, but we have seen stabilization and some quarter-over-quarter improvement in a number of our served markets, especially in the semiconductor market where we work closely with the OEMs as they continue tool development, refining current platforms and designing new tools to address finer geometries in larger wafers. Our Q1 sales to semiconductor OEMs were up 22% to $99 million. In the first quarter, we achieved design wins for many MKS technologies, including multiple RF power applications, effluent management subsystems, pressure, vacuum, flow control, reactive gas and others. As many of you may know, the buzz around 450-millimeter wafers is increasing. And every week, there are new articles in the trade journals. While the timing and the requirements have not yet been fully defined, I am pleased to report that we have numerous active programs across MKS with every major tool OEM as they work to…

Thank you, Leo. First, I'll discuss the first quarter results before providing further details on our Q2 guidance. Revenue for the quarter was $191 million, an increase of 11% compared to Q4 2011 revenue of $172 million, an 18% decrease from the record revenue of $232 million a year ago. Gross margin was 43.9% in the first quarter, as compared to 44.2% in the fourth quarter. As we discussed on our last earnings call, in the fourth quarter, we had a favorable refund of U.S. import duties on certain products that were paid in prior years. Excluding this refund, the adjusted gross margin in the fourth quarter would have been 42.8%. The increase in gross margin in Q1 compared to this adjusted gross margin of 42.8% is due primarily to higher sales volume and favorable product mix, offset by the absence of shutdown days in Q1 and higher foreign exchange. Q1 Gross margin was also more favorable than our expectations after sales volume due primarily to product mix. Operating expenses were $50 million as compared to $46 million in the fourth quarter of 2011. The increase in Q1 expenses was due to an increase in employee-related fringe costs, principally payroll-related taxes that tend to be higher in the first quarter of the calendar year, a more normalized discretionary spending level in work schedules and higher R&D project spending and variable compensation. We also incurred an allowance for uncollectable accounts receivable in the quarter due to the declared bankruptcy of a Japanese customer. [indiscernible] higher variable compensation, as well as the timing of certain R&D project expenses in the quarter. As we mentioned in the past, the timing of certain R&D project spending can vary from quarter-to-quarter and expect it to moderate in Q2. Our net operating profit margin was 17.5%…

[Operator Instructions] And our first question today comes from the line of Jim Covello from Goldman Sachs.

This is Mark Delaney calling in for Jim. I guess I was hoping you could start first and talk a little bit more about what you're seeing in some of the other non-semi markets besides solar, maybe if things are still getting a little bit weaker in some areas in the second quarter and if so, where? And then also maybe some of the cyclical indicators that you're seeing that maybe will give you some -- a look for the second half in those markets?

Okay, Mark, maybe I'll take it. I would say that, as you know, we're short lead time, relatively turns business. So our ability to kind of react on things changing up-and-down or what part of the strength of the business is not in forecasting what's going to happen in the second half of the year. But certainly, the LED market and the LCD market has been depressed, and we expect that at least to continue to be depressed in the Q2. The solar business was up a bit in Q1 over Q4, but we're expecting it will be a little softer in this quarter. Medical and biopharm were up last quarter, and we see those -- from quarter-to-quarter it's difficult to predict exactly what's going to happen. We have hundreds of customers and thousands of line items. So when we start looking at it that way, it's not that easy to predict exactly what's going to happen. But what we see is a little strength in those areas. And hence, we believe the quarter will look similar to Q1.

Okay, I got it. Turning this into the semi side, obviously there's been some big CapEx announcements from some of the foundries in Korea and in Taiwan. When you're talking to your semi equipment customers, kind of going through your build plans, do you think kind of the current order level that you're -- the shipment levels that you're seeing in the first half, I mean, do you think you kind of already shipping to levels where you kind of then go out and address these large CapEx announcements? Or do you think you could go higher or lower in the second half?

Well, if I was that good or we were that good at forecasting, we'd be doing something else today. I would say this, this typically holds true, I mean it's hold true for years and years with MKS. If orders to the OEMs are increasing for front-end process equipment, likelihood -- and the orders stay, then likelihood is we'll see that same change over time. I can remember a couple of years ago, somebody asking me in a similar question, and they said we heard some good orders and I said, okay, that's good. Then at some point in time, I would expect to see some results from those orders if they keep maintaining. So for us, I think we've talked about -- for us we're kind of looking historically, typically at a run rate, and we listen to what the market is doing in general. So we're optimistic that semi is still strong and the run rates suggest that it'll remain strong. That's why we have the guidance where we did. I cannot tell you that the calls and comments are going to come out to orders on some particular month or week. But over time should the OEMs receive larger bookings and expected shipments, they'll need product from us too, to be able to ship those.

That makes sense. And if I just squeeze one more and along those lines. Obviously, they're coming -- yes, these orders have been coming in chunks and a pretty high customer concentration some of your larger equipment customers has said this is causing margin weakness. I'm just wondering if there's been any ASP pressure that's being passed on to you guys?

I will probably say what -- unfortunately what we've seen always is there's always ASP pressures, not necessarily are they short-term based on some particular customer at some point in time for an OEM getting pressured and then back to us. I think the industry in general just expects as they lower the cost of electronics to lower that cost throughout the supply chain, and then we look to lower our costs with suppliers and manufacturing as well to support that. So nothing unusual going on right now.

Our next question comes from the line of Krish Sankar from Bank of America.

This is Thomas Yeh, calling in on from Krish Sankar. On the last call, you had mentioned that the inventory levels at the OEM customers had been approaching a bottom. Can you provide us an update on what you see the inventory levels at currently?

Okay, well I'm not sure where you heard that. I think what I said last time is normally the way systems work, theoretically the way systems work is that when you're reducing your schedules, when the OEMs are reducing their build schedules quarter-over-quarter, the first thing they look at is what's on hand and what's on order versus what they need. And they use up the existing inventory, and that should happen sooner than later and the same thing happens usually when business goes up quarter-to-quarter for them. They'll start having to refill with inventory and it usually happens sooner than later. So what I think I had said was, if that theory holds true, and I think it reflects what normally happens, then since they haven't really reduced their build schedules the last few quarters, then we should be past most of the inventory reduction, if not all of it. I can't tell you what the status of every OEM is and who looks at it closely. But I can certainly tell you the way the system should work is that as rates go down, they look at the on hand and the on order, and they don't buy more if they have enough to cover what they need, and that's why you hear push outs or cancellations or inventory issues. Since we're not in that mode where they're dropping rates, I would expect that we're past sort of the inventory -- any significant inventory adjustment.

That's very helpful. And then on solar, is there a specific reason for the delay in recognizing that big solar order from China? And just in general, how do you see the market going through the next few quarters?

I would say that the order that you talked about from China is the one that will go this quarter. There's no trouble with that. I think we've talked about that customer was initially was planning it several quarters ago and as their factory constructions were delayed in implementing their whole toolset. Some of this got delayed for a few quarters, but nothing unusual about acceptance.

And then just finally, one quick one on OpEx. Because of the onetime charges, do you suppose that the first quarter is probably the peak in your OpEx for the coming year?

Well, I would say, I told people before. I think for the full year probably the $50 million per quarter on average is about what I would expect for the full year by quarter. It does bounce around just because of foreign exchange, timing of R&D materials and so forth. I think, I said year-over-year, I would expect OpEx to move up 5% from 2011. And there's some variable compensation that moves around as well. So it gets a little lumpy by quarter, but probably around the $50 million range is about what I would expect.

Our next question comes from the line of Patrick Ho from Stifel, Nicolaus.

Leo, maybe if you could give a little bit of color in terms of the second quarter revenue breakdown, given some of the bullish comments out from the OEMs and the continued strength in the foundry build, can you just give a little bit of color of why revenues are flattish relative to, I guess, some of the positive commentary we're getting out of semis. Is there a decline in the other businesses as a whole that offsets continued semi strength?

Okay, Patrick, I'll try to answer that. I thought I may have answered a little bit out of an earlier question, but I'll try it again. May not have been clear. So because of the turns business and the number of customers we ship to, a lot of the ways that we develop a comfort level in the guidance is by looking at historically the run rates and then what we see in the market. Customers, I mean, certainly if we knew for sure and a customer promised and guaranteed they'd give us 20% more business then we would include it in the guidance. But when we look at the historical averages, and we look at near-term obviously because this is a changing market. It suggests that things will remain relatively similar. And so hence, where our guidance is, I think we think solar will be a little lower and probably the rest of the markets relatively the same. So I think we haven't seen anything that would suggest differently. We hear things, but if I always reacted and we reacted to what we heard, we'd be doing some different every other week. So what we look at is how we see the business coming in. And I will say the other thing, when you look historically at things, when things change, you don't always catch them soon enough. That's the problem with historical averages is they don't account for trends. And so if in fact, those orders develop and the OEMs have greater shipments as I said earlier, then we'll probably see higher demand. But for right now, we're not seeing it in the way orders have come in. They've been relatively stable for a number of months now.

No, fair enough. And maybe then my, that gets to my second part and that's why I was trying to get a little more granularity in terms of the overall revenue trend. In terms of margins, sounds like the impact in 2Q is primarily product mix. Is there anything that we should take away from, I guess, the gross margin guidance relative to Q2?

The Q2 is a little bit higher just due to the mix of product. I think, in the guidance in Q2 and Q1 is fairly similar at these volumes. So I would say, for us Q4 had a duty refund I mentioned that was add about 1.5 to margins in Q4. Q1 a little better mix. I think Q2, we expect based on the current bookings level a more normalized margin of 42% to 43%. So nothing unusual in Q2.

Yes, I would say again relative to mix, thousands of line items so we sort of look at a normal mix unless there was something really unusual in a large quantity that we knew was going to be different. Then we mentioned that on previous calls. So in general, we're going to look at a normal mix as we look forward unless we saw something really unusual. And that would have to be something fairly significant would be a 1 or 2 customer, 1 or 2 part number thing that we saw. Otherwise, you can't see it. There are too many line items, too many customers.

Our next question comes from the line of Olga Levinzon from Barclays Capital.

This is actually C.J. Muse. Thank you for taking my question. I guess, Leo, first question, curious if you could provide updated thoughts on kind of how you see the cycle playing out here on the semi side?

I don't know what my thoughts would be worth on that. But I think we're optimistic. Here we were a couple of -- half a year ago wondering what we're going to do with resources. We had enforced mandatory time off in the fourth quarter and again things change, so we're looking at what the shippings and bookings look like. Certainly, last quarter and this quarter we feel a lot more comfortable. I think there's still varying opinions on the second half of the year. But they seem to be more getting positive on the second half of the year than less. I could tell you that makes us feel better than where things were a couple of quarters ago. But I can't tell you what the market is going to do. Again, we spend more time around how do you execute in a varying number of markets, including semiconductor, obviously, which would have usually the biggest impact. But when we see the order rates stabilize, and they have done that now for 4 or 5 months, and we hear our customers reporting results that seem positive. And then we hear yourselves and other industry analyst tending to get more clarity on the second half of the year. That has us feeling better. But I have no idea what is going to happen in the second half.

That's great. I apologize, you may have touched on this, I hopped on a little late. But I'm curious, specific to semis in terms of your June outlook, I think reading between the lines in the other businesses. It sounds like that's tracking flat and that appears a little bit lighter than kind of shipments we're seeing from the bigger OEMs. So curious what's driving that discrepancy?

I have no idea. It's probably what you need to dig into to figure out. We don't worry about it because I think you understand, you get designed into these tools and you're in these tools for a long period of time, and you're really looking at what the industry is doing in the shipments of those OEMs. Well, they reported recently. They expect shipments to be up. It's hard to tell where they're -- exactly where all their parts are and where they are inventory-wise and exactly the mix of what will ship. And again my guess is, if all that holds true, then all of a sudden, the rates will change, if that holds true. And we'll focus on what we do best which is reacting to those things when they happen. So I wish I could give you an answer because all of us would like that answer here. But we just, we can't use that information only to predict the future and then it's okay. Lumpier number's up because OEMs commented last week. So I think we're optimistic, and we give a range, remember, we don't pick a point in the range. We give a range. And we think we're still in that same range. We may find out at the end of the quarter, semi is up more than we thought and something else is a little lower, but you're talking about lots of markets, lots of products, lots of customers, hard to do that on a future basis, unless you see something real obvious.

Our next question comes from the line of Tom Diffely from D.A. Davidson.

First just a clarification. When you talk about mix had an impact on the margin and the EPS this quarter, is that the actual product, the change in the products that are being shipped or is it really where those products are going and what the end customer is that determines the margin?

No, I don't know. Let's just comment, but really it's the products themselves. More often the mix of products rather than the mix of customer.

Right. That's correct.

Okay. And then if you look at the lead times, where is your standard or average lead time for the semiconductor industry right now? And has that changed at all in the last 6 months?

It's roughly the same for all customers. But normally in some of the more complex products like a power supply, RF generator or a reactive gas product, probably somewhere in the 4-to-6-week range depending on the configuration, how constantly they buy something like that, because we have a pipeline of how to handle that and gear up. In sort of the instrumentations like vacuum gauges and pressure measurement control, flow measurement and control, those lead times range from a few days to maybe 3 or 4 weeks on average. So we don't have to look too far out to manage the business in those kinds of products. So we can spend a lot of money in investing in the future prediction, which nobody really knows from everything we've read and seen or we can spend our resources on how to react to what happens. And if more orders come in, get more out. If less orders come in, reduce costs and get what we can out. So I guess that's how we see it.

Okay, and Leo, you said we're past the negative adjustments to the inventory. But in a normal cycle, do you typically see the other side of that equation as well or when their customers start to ramp, they actually build some inventory and you outpace them for a few quarters?

Yes, and hopefully what I said or you heard was that I think we're be past -- we should be past most of the inventory adjustments downward because we're in a couple of quarters of growth for the equipment companies. But that never holds true for every line item, I just want to say that. It can be the best environment in the world and somebody could be sitting there with excess. And all you have to do is ask the accounting firms and they'll tell you that everybody has some expectations there's some excess. But in general, I think you're correct in that understanding. And it goes the other way if things should change significantly upward. And so if the quarter-over-quarter build rate gets significantly better for the OEMs, then typically they have to put more WIP on the floor than they had when they were sustaining through a downturn. Now we only had a couple of quarters where things were much down. So it usually takes a lot to drain the WIP and then they have to build it up quickly. I don't know if they were drained at the time things started turning around. But normally you would see the same occurrence on the upside as they're trying to replenish their work in process inventory.

Okay. And then finally, when you look out across some of your adjacent markets, the new markets over time, does it look like the products will have roughly the same margin structure going forward or are certain industries just inherently more profitable than others?

Well, I get that question a lot. I looked at a few things to kind of get what you think will happen by what we tell you here. First of all, some of those customers in these other markets are the same customers buying the same parts. So it's hard to charge them a different price in a different market. So those aren't going to be very different at all. Some of them buy the same parts, but are in different markets. But they buy the same semiconductor part because they use it across numerous customers. And in that case there, probably the way pricing is based on volumes they use. And so it isn't a market price. It's a, if you buy as many as this customer over here in semi and you're in solar, you're probably going to get close to the same kind of pricing. So it's more around the volumes they buy. The other thing they do is obviously when somebody's in other market, they may be smaller than some of the big semi customers most of them are. And as a result of that, we try to get more business with them and they try to give us some more, so they could get the volume up to get some favorable pricing. I'd say in general, we expect that the other markets may have a slightly better gross margin. But that's probably offset by slightly higher selling expenses because they're not a 15% customer. And therefore, from an operating profit level, there's probably not a lot of difference.

Okay. It sounds like either way, you'd benefit from the higher volumes in your factories?

We do, yes, and they do too, from a pricing standpoint. A win-win.

[Operator Instructions] Our next question comes from the line of Dick Ryan from Dougherty.

Say, Leo, on the solar opportunity, did you -- I may have missed it, did you mention what the follow-on order in China, the amount was or can you compare that to the first order?

Yes, it's a good question because I think this time around will be slightly different. I think if you remember we thought -- I think we announced -- we have other orders than just the orders that we announced. They also buy a lot of our flow and vacuum products as well. But we specifically talked about a record order of $20 million around the power supply and match work. And then followed quickly by a $10 million order. And that was for a particular plant that would fill the plant to what the capability they were looking for. And then as you probably remember what we thought was going to ship all by either the very end of 2010, in the first half of 2011, part of that kept getting stretched out, and stretched out, and stretched out. And a lot of the reason for that was them being able to complete the construction of the facility and then implement all the tools they needed and get them up and running. So they kept delaying that. And obviously you can imagine, then financing becomes difficult when you buy everything upfront and then try to implement it a long time later. So this time around, they and we will work in several POs for the same products. So we don't expect a $20 million and a $10 million PO. But we would likely see, and we are hoping to see maybe 4 or 5 different orders that could represent that same quantity. So this was about 1/5 of that total that we announced in those 2 big orders last time. And I think what they'll do is they'll match the orders closer to the way they're building the facility, the progress of it, how they want to manage their cash as well. I think that they'll do that and then we will also won't end up prebuilding things to an order that then gets pushed out. So I think it helps us as well. It will be a smoother transition. That order was around $5 million and likelihood is the total should equal around the same over time if we're successful getting all that business which we believe we will be.

You mentioned the stability of orders over the last 4 or 5 months, but I was just wondering as you move through the quarter, was there any growth month-over-month? Or what have you seen so far in April versus?

Stability. Stability. And remember that, that's the benefit of having lots of customers. I think the good news is, we sell to all of these customers in the equipment space, in the semiconductor and all these other customers. Obviously if their business is going to go up and their inventory is where they want it to be, we're going to see that at some point in time. No matter what they do, up or down. And so we see stability over the last several months and nothing different so far.

Okay. One last thing for me. What is left on the stock buyback?

Probably about $197 million or so. $195 million a little north of that.

Our next question comes from the line of David Trossman from Wilmington Trust.

Leo, I remember a couple of quarters ago an interesting discussion of things that were going on in Ozone cleaning and I think you were acquiring a small piece of GE's business and were going to do some more work with them. Can you give me an update -- I don't know if you remember seeing anything that looked like a small acquisition in the cash flow statement, did that happen? How is that progressing? Is that something where you could see new products either this year or next year or further on?

Yes, I think when we talked about it, we probably, we already did that acquisition. This was done back at least 3 quarters ago. Yes, so we've done that acquisition. It was primarily the revenue we would see directly, was more related to the service revenue. Because we took over the service. And then we would become a preferred supplier for Ozone. Obviously for the applications where our Ozone product fit. And so we did take -- we did procure that business. And we do all the service for them, and we are getting contacts with those customers. We've had a number of inquiries on quotations, and we also have had product shipped to customers. So for valuations and things of that nature. I think we had maybe 4 new customers in the last quarter or 2.

And I'm showing no additional questions in queue. I would like to turn the conference back over to management for any closing remarks.

Thank you. While we continue to demonstrate our commitment and ability to provide technologies to address the needs of both new and existing customers, to grow our core semiconductor market while leveraging our technologies and infrastructure investment, to identify and penetrate new customers and new applications in a variety of those diverse and growing markets. We look forward to updating you on our Q2 call in July and thanks again for joining us on the call today. Thank you, operator.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.