Good day, ladies and gentlemen, and welcome to the MKS Instruments Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Seth Bagshaw, Vice President and Chief Financial Officer. Please go ahead.

Thank you. 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 second 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 other recent press releases, and 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 second quarter, as well as our outlook for the third 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. Sales for the second quarter of 2012 were $177 million at the lower end of our guidance and down 7% from last quarter. Sales to the semiconductor market were down 7% sequentially to $116 million and were 65% of our revenue. As expected, sales to the solar market were down 33% to $8 million. Sales to all other markets were essentially flat quarter-over-quarter at approximately $53 million. Second quarter non-GAAP net earnings were better than expected at these volumes and were $18.7 million or $0.35 per share, GAAP net income was $18.6 million, also $0.35 per share. Our net balance of cash in short and long-term investments, net of debt, increased $38 million in the quarter to $623 million. Since last quarter, global economic conditions have continued to be unsettled, particularly in the U.S., Europe and China. And demand has softened across a number of our markets. In the semiconductor market, fab utilization remains depressed, as the industry absorbs record level tool shipments. And as an example, recent reports indicate some foundry customers are pushing out their midyear capital additions to late this year or early in 2013. Our OEM customers have reduced their build schedules and our Q2 sales to semiconductor OEMs were down 11% to $88 million. Weakened customer confidence has reduced demand expectation for PCs and portable electronics. However, the Semiconductor Industry Association has reported that, although lower than a year ago, chip sales have been increasingly modestly over the past few…

Thank you, Leo. First, I'll discuss the second quarter results before providing further details on our Q3 guidance. Revenue for the quarter was $177 million, a decrease of 7% compared to Q1 2012 revenue of $191 million, and a 21% decrease from $224 million from a year ago. Gross margin was 43.1% in the second quarter, as compared to 43.9% in the first quarter. The sequential decrease in gross margin was primarily driven by lower volumes, but partially offset by favorable product mix which contribute to gross margin exceeding our guidance. Operating expenses were $49 million compared to $50 million in the first quarter of 2012. The decrease in Q2 expenses was expected, as Q1 has additionally higher employee-related fringe costs, principally payroll-related taxes, that tend to be higher in the first quarter of the calendar year. Also included in Q1 was allowance for uncollectible accounts receivable from a declared bankruptcy of a Japanese customer. As these levels begin to moderate in the quarter we took additional steps to manage discretionary spending levels and freeze non-essential personnel additions, as well as lower variable compensation. As a net result, operating expenses in the second quarter were below the low end of our guidance. As a result of favorable product mix and lower operating expenses, our net operating profit margin was 15.7% of sales, non-GAAP earnings were $18.7 million or $0.35 per share, compared to $22.9 million in the first quarter and $38.8 million in the second quarter of 2011. GAAP net income was $18.6 million or also $0.35 per share. The tax rate for the quarter was 34% and we expect that our full year effective tax rate will also be 34% based upon the expected geographical mix of taxable income. Now turning to the balance sheet. Net cash investments increased…

[Operator Instructions] Our first question comes from CJ Muse from Barclays.

I guess first off, curious, as you think about the downtick in revenues, is that going to be fairly similar, in terms of the declines for semi and other or how should we think about the trajectory there?

CJ, I think with our guidance, we wouldn't expect to get a repeat order in the solar of that approximately half of the revenue for Q2 were in that light, solar customer that was the finishing of the last of the 2 large orders that we kept commenting on for the several quarters. So that would be down and the semiconductor. We essentially expect the other business to remain constant.

Okay. And just a follow-up on the other side. It looks like if we annualize the embedded guide there for the first 3 quarters, it looks like you're tracking down about 20, 22% for the year. Is that the kind of downtick we should assume or how would you want to characterize that?

Yes. I think, you're asking about Q4 estimate, CJ?

Well, I'm just trying to understand the other business. And I guess, the dynamic around the weakening macro and how that is impacting your other business.

So you're saying that if things remain constant for the fourth quarter, what that total business would be, is that what you're asking? I mean...

No. I guess, as you think about your business in the second half and knowing what customers you're having dialogue with, what contracts you have coming up, how do you see that business trending? Should we track better than what we're seeing GDP-wise, worse? How should we think about that?

I think with the -- if the LED market picks up in fourth quarter as some people have talked, we'd probably would see some business up. Gas analysis has remained pretty strong. I think it's -- I think there are multiple things going on that would have an impact. I think with the uncertainty right now, we are seeing it be relatively flat for a quarter or 2 and we'll know more as we get closer to the fourth quarter.

Okay, great. And then last question for me. On EUV, we've got nice shipments coming through in 2013. Follow-on orders are being placed today with ASML. How should we think about the revenue contribution from that part of the market for you guys in '13 and '14?

We haven't modeled exactly what those numbers are because it's not quite clear. Just recently there's been some clarification on the investments in EUV. But we have vacuum products there. It's not -- it's a modest amount. It might be somewhere between $10 million and $25 million at this point that we could see per chamber in an EUV process. But we need to see a little more things happening. Designs are still going on, but that would be sort of the opportunity at least.

Our next question comes from Jim Covello from Goldman Sachs.

It's Mark Delaney calling in for Jim Covello. I guess to start, I was hoping you could you could talk a little bit about the inventory, you mentioned your equipment OEMs were in the process of reducing inventory. So where do you think your inventory levels of those that customers will be in the third quarter and maybe you can textualize that relative to where inventories were drawn down to in prior downturns?

Yes. Mark, let me -- I'm going to just clarify the inventory comment to make sure it's clear what happens because we usually comment on this most quarters. There are a couple of ways that our customers could reduce inventory. They could have an objective to reduce their overall inventory. Have nothing to do with the business levels, but just reducing inventory. That's what I'm not -- I'm not commenting about that kind of activity. What we're commenting about is that, normally when you either go down in build rate as an OEM or go up, you now have work in process for a different level of business. In this case, it was a higher level of tool shipments per quarter than they have been talking about for the third quarter. So immediately, you have to consume that inventory. You don't need to bring more inventory in. But it's more part of the natural process of changes. When business comes back, we also see a rapid increase as they get that work in process inventory back up to the right level for that amount of tools in the quarter. So we just see it very quickly is what happens. If rates -- if everything that's been adjusted by the equipment companies remain exactly where they are, then that inventory adjustment for their whip and raw goods should happen pretty quickly within a few months or a quarter or so. If it were to change again, then it would change again. So it's very dynamic to the build rates. But it should happen theoretically relatively quickly.

That's helpful. Are there any difference, differences between the orders you're seeing now from semi fabs versus the equipment company that make you think the business and semis overall is going to be pickup in the fourth quarter, like you said some of them have indicated, or it make you think it might be more 2013 like you -- as you said, was another possibility?

Yes. There'll be no way to tell that. I wish we could tell that, relative to that. But our fab business are products that are typically a bit different than we sell to the equipment companies. We would be view them as capital equipment items to the fabs themselves and they tend to buy those relative to particular issues they're having in processing. It may have nothing to do with shipments from OEMs, but it also could be a shipment that was made by an OEM. When that gets up and running simultaneously, they want to add a gas analyzer to it, so it doesn't correlate necessarily to that. The only thing we could possibly see, and we don't really see any of this yet or don't anticipate any, is that service business, if utilization were to go down significantly, service business eventually goes down. But that has not been the case so far.

Got it. And then last question for me. In your cash generation has been very good, meaning you got $11 per share in net cash now. How are you thinking about managing the cash balance going forward? And you have a lot authorized on the buyback, are you thinking about increasing that? Are you looking at M&A? Any detail you can provide, that would be helpful.

Okay. Well maybe I'll touch on M&A and I'll let Seth talk about buybacks and dividends and other cash ideas. But as I stated earlier and previously on the M&A activity, we've been acquisitive. We have an appetite for M&A. I wouldn't judge the interest level or the effort based on the announcements if you look at a lot of things -- and I think we're fairly disciplined in that because of our ability to execute on the regular part of the business. I think we behave the same relative to M&A. So there's always M&A possibilities in the pipeline. And part of the cash we've always stated is to satisfy that interest in doing M&A. And I'll let Seth comment a little bit more on stock buyback.

So, Mark, you're aware there was announcement back in July of 2011 for share purchase and that's -- there's no time frame based on that, but it's still in effect at $200 million. We have bought back some shares since then, looking at the opportunistic on the share repurchase. But that program is still in place and the board views it on a regular basis. And then I mentioned earlier, or Leo did, we do have our cash dividend to shareholders which is a return of capital we put in place early in 2011. And again, the board reviews that level on a regular basis. So between cash for M&A, cash for share purchase, dividend -- ongoing dividend rate, that's kind of our use of cash looking forward.

Our next question comes from Krish Sankar from Bank of America Merrill Lynch.

Leo, if you look at the inventory drawdown or the bit drawdown from your OEM customers and let's assume a scenario where orders do bounce back in Q4, would you start seeing your shipments pickup in tandem in Q4? Or do you see a lag effect?

Krish, if it's order -- I thought what I heard you say if order is picked up in Q4. Normally, there's a lag from orders to build plans, to building products at OEMs. It usually happens quickly once they change their schedules if they're in the near term. So my guess is that order rates would increase their build schedules at some point whatever their lead time is on those orders they're committing. And then as you know, we're a turns business. We would see that shortly before they need it. But if their rates go up and the whip has to go up, we'll see that, plus some. So I know it's not an exact answer. But there's normally a delay from orders to build rates and their shipments, obviously you know. And then our lead times are relatively short, so they don't have to do something immediately if they're not building something for 3 or 4 months.

All right. And then couple of other short questions. In Q3, I noticed your SG&A is not going down a whole lot. Is there something happening and-- or do you guys have any kind of shutdown in Q3?

Did you say not or are?

It's not going down that much?

Well, it's trending down in Q3. And we have made some steps to curtail discretionary spending, but there hasn't been a wholesale reduction in workforce.

I think what I would comment on, is normally as the business goes up, our SG&A doesn't go up very much. And as the business goes down on a temporary basis, it doesn't go down very much either. It's fairly stable. I think that one of the things you probably know about us is as we see even short-term business trends, we take some temporary actions. And so that's probably where you're seeing some of the reduction in SG&A, are those temporary actions. But in general, the operating expenses don't change significantly on the upside or downside from a quarter or 2's activity.

Got it. And do you guys have any shutdowns in Q3?

We've announced that we would have a reduced work schedule.

Our next question comes from Patrick Ho from Stifel, Nicolaus.

Just going back to SEMICON West and some of the announcements that came out, particularly the one with ASML and Intel regarding the investment, do you see any changes to your 450-millimeter investments? Do you have to accelerate some of those programs or do you believe that you're generally on track with where you're at?

Okay. Some of the good things about the technology that we provide is, normally, as you go from size generation to size generation, everything does not get affected by in terms of developing needs or requirements of the products. So many of the same products that we sold into 200-millimeter, we sell into 300-millimeter and we'll be able to sell those same products into 450-millimeter. There are some tweaks on some things. They're usually -- they may need a higher value version of something. They may need a -- more of them. They may need multiples of the same thing. And the other aspect is that -- I'll give an example, let's say for instance, chamber cleaning, in situ chamber cleaning using our ASTRON product, certainly going from a 300-millimeter chamber to a 450-millimeter chamber, there is a -- if you want to clean it at the same speed, you need more atomic flooring in the chamber to do that. So then you need an ASTRON that generates more atomic flooring per minute. We already provide those for chambers like solar chambers and LCD chambers which are already quite pretty live. So there's no need to run off and design a new ASTRON for 450 because we already have it for other applications that we already shipped into. So there may be some features and some additional development. But it's not a completely new development effort for us in terms of providing control instrumentation for 450. It gives us more opportunity, but doesn't have too much of the R&D changes.

Great. Maybe just going to a finance side for a second. On the gross margins, given the revenue decline projected for 3Q, your gross margins are actually holding up pretty well. I guess what are some of the key variables there that are allowing it to stay at these current levels?

Yes. I think primarily, it would be the product mix we're forecasting and we had pretty good mix in Q2 which should continue in Q3, we believe. And then as mentioned before, we have made some short-term actions to curtail some spending levels based on lower volumes. And then curtail work schedules will help to some extent.

I would say, normally, larger customers which tend to be more in the semiconductor space for us, probably get better pricing than smaller companies and other markets. As you have asked that question on calls in the past, this is a case where the larger customers semi OEM is slower in the quarter than the previous quarter, and the same thing happened in Q2. So they were a little better than we expected as well, but that had some contribution to that, I believe.

Our next question comes from Dick Ryan from Dougherty.

Seth, you mentioned the buyback and I wasn't sure if the buyback was initially stated at $200 million or where does it currently stand?

Yes. Dick, it was $200 million initially stated, no time frame involved. And that was back in July of 2011, and we've used about only $7 million of that so far. So $193 million still on the shelf here to use.

Okay. Leo, I was looking back at past guidance, as you're going into last year's Q4, you were kind of looking at a similar sort of revenue $145 million to $165 million, that was your initial guidance for last year is Q4. Can you kind of compare or contrast kind of what you were thinking or looking at the market back then versus now? I mean, does it have the same feel? Are there some differences? Can you kind of give us a little color on that?

Yes. I'm not sure you'd want my real answer on that in terms of that, because I don't know what that actually mean in terms of any real good information. What I've always said is, as things turn down or up, to me they always feel different and simultaneously the same. And so I think we -- I think the difference maybe today is that we had gone from -- if you remember that was Q4, we had gone from a record Q2 to a projected down Q4. We had seen, sometime in the May or June of last year, things slow down and so we had lower numbers expected and things were continuing to deteriorate. As we did the call in Q4, we had seen things continue to deteriorate. So -- and no one at the time was talking about a pause or what was happening. We just saw the business had deteriorated and the market had deteriorated. So it failed a little bit different from the standpoint of, this is the first quarter that we've seen anything substantial really and people are talking about a pause in their particular types of devices in the foundries where investment is being slowdown. I guess that's the different part of it. But from our view when we look at the revenue, we sort of take those same actions that we would normally do when things have been fairly good and then start to change downward. We take those first steps. We talked about discretionary spending, nonessential resources frozen, it's more difficult to replace somebody and we take other cost-cutting actions that we talked about.

[Operator Instructions] Our next question comes from Tom Diffely from D.A. Davidson.

Leo, another question on the inventory. Is there a natural or a normal data level that you have versus your OEM customers where if they price is down 10% during the slowdown, you're down 12%?

I would say that if there is, I certainly haven't been able to calculate it, nor has anyone else in the company. Reductions are really -- they normally, theoretically, happen quickly and they vary by customer in where they put their attention, and where they put their time, just like our business units vary and how quickly they respond to things. So I couldn't put a correlation that they go down x and we go down x plus something else. But what I do know is they should consume material and make shipments, some percentage without having to buy material from us for those shipments because the whip is larger or the raw material is larger. Exactly what the percents are, I don't know.

Okay. And what about the dynamics at the MG, at the fabs themselves, what do you see when things slow down and pick up?

Well, I think initially, if you looked at the fourth quarter, again, I'll go back to our third quarter, we still saw the fab projects. Remember that our fab business is really 2 or 3 different kind of businesses: One is service and repair and that's probably more related to -- almost like a consumable in a way, it's not a consumable, but similar to consumables. If you run the fab, you need to repair and calibrate and do things like that, service product. Then we have this capital equipment area. Those tend to be more project-based and so a fab is either working on a particular tool, a series of tools, where they want to use on RGA gas analyzer to improve yield. And so it's really based on the timing of that project for them. It could be based on tools coming in, but they're going to then buy some of those RGAs or could be existing tools. And then we do some upgrade work. And again, that upgrade is usually the priority of the fab and our ability to convince them that we have a solution that will save them some money. So they're not necessarily related to what's happening this quarter exactly with the equipment people. So far, we -- the business was up in Q2. That's a good sign and we didn't model anything unusual for Q3 with them.

Okay. And then maybe just a quick one on the 450-millimeter, when we move from a 3 to 450, have you at this point quantified how that impacts your power gas vacuum systems? You mentioned earlier that sometimes it goes up, I'm just wondering if there's any kind of a per tool estimate you get a 1.3X add or when you move up, you have to -- there's fewer systems out there because it's more productive?

Yes. I guess we tend to look at it on a product-by-product basis and dollars to a product, not necessarily what happens to the tool. Because as you know, we're not talking about production volumes next year. We're talking still 5 years out or so, let's say on average. At that point in time, there's a lot of things to still calculate. What competitive positions did we gain? What new pieces need to be added if they start developing these? So I think it's tough to say today, this is the volume that will happen. The other thing that, if you go back to the 200 to 300-millimeter transition, a lot of people made that same comment. When you change over and get to a larger tool that has more output, you end up needing less components, eventually because there's less tools. On the other hand, by the time we got from the beginning of a 300-millimeter development, sort of like where we are in 450, the production volumes, they are already double the processing steps. And so there were not many more tools that were needed even though there was more output. So I think it's hard to look at that today and say this is exactly what's going to happen. I think what we look at it is for each product group, one of the products they sell into a 300-millimeter tool today, what's likely to happen and 450-millimeter, do we have those products available today? What do we need to do from an R&D standpoint? And who -- which customers do we need to work more closely with to ensure we get designed in? That's where we put a lot of our effort.

Okay. That makes sense. And then when you look at the solar market, obviously, it's pretty good-sized and very -- well, extremely lumpy. But how do you view what's the potential opportunity is, the number of other clients that you could potentially penetrate over the next few years?

Well, first of all, we have -- I don't know how many are totally still there, but there's some that are not. But we have more than 350 customers in solar. So I'm not sure there's a customer we forgot to see and work with. However, we never have every bit of their tool designed in. So I think there are opportunities. They're usually timing-based on when they have to make a decision on a new tool. As you know, we get designed in and usually you're in for the life of the tool unless there's some issue that happens also, in some cases for a competitor. So unless there's an issue or a new tool design where we can provide some benefit, I don't think there's somebody out there that's -- like, we just talked about the last several quarters, but we didn't know they where they either until they came about. So I think our goal is to make sure we sell to everyone and then we look at those customers that have, what we believe, the most potential to succeed in the marketplace and we look at where we don't sell them something on their tool and we work hard to get that business. So there's nothing I can comment on today that says, yes, there's another $50 million out there because there are 3 customers we have no contact with. But we believe there's more opportunity with those customers than we do today.

I'm showing no further questions at this time. I will now turn the call back over to Leo Berlinghieri for closing remarks.

Thank you. Although we are seeing a pause in the semiconductor OEM demand at the underlying market for semiconductors, especially high-speed, low power, portable electronics remain sound. We continue to strengthen our competitive position with key semiconductor OEMs. And as I said, we are leveraging our investment in R&D and infrastructure and other advanced markets to execute our long-term growth strategy. We continue to demonstrate the strength of our model and our ability to respond to dynamic business conditions while maintaining our technology leadership. We will continue to address the needs of the new and existing customers, in both our core semiconductor market and in other advanced and growing markets we serve. And we look forward to updating you again in October on the call. Thank you for joining us on the call today. Thank you, operator.

Thank you ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.