Good day, ladies and gentlemen, and welcome to the MKS Instruments Report Q2 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Seth Bagshaw, Vice President and Chief Financial Officer. Sir, you may begin.

Thank you. Good morning, everyone. I'm Seth Bagshaw, Vice President and Chief Financial Officer, and I'm joined this morning by Leo Berlinghieri, our Chief Executive Officer. Thanks for joining our earnings conference call. Yesterday, after market close, we released our financial results for the second quarter of 2013. You can access this release at our website, www.mksinstruments.com. As a reminder, the various remarks that we may make about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in yesterday's press release and the company's most recent annual report on Form 10-K and most recent quarterly report on Form 10-Q, which were 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. Second quarter revenues were up 11% from Q1 to $157 million, slightly above the midpoint of our guidance, driven primarily by increased sales to the semiconductor market, which were $104 million, up 16% quarter-over-quarter. Sales to all other markets were $53 million, up 1%, however, excluding solar, sales to all other markets combined were up 4%. As I do with most calls, I'd like to talk a little bit about products in various markets we participate in to give you a better sense of why and how we succeed. Starting with the semiconductor industry, reports from the recent SEMICON West trade show project that 2013 CapEx will be flat to down 10% for the year, with quarterly sales improving modestly as the year progresses. Analyst projections for 2014 are quite positive, driven by the continuing demand from the mobile consumer for smaller, faster, portable products with longer battery life, which require the implementation of smaller chip geometries, as well as continued development of 3D devices. Some analysts predict that we could see double-digit growth of equipment spending next year, driven by technology transitions, such as 20-nanometer, 3D NAND and broader adoption of FinFETs, which could drive continued spending strength through 2016. All of these technology drivers require more processing steps and more equipment, creating increased opportunity for MKS. We continued to work closely with the semiconductor OEMs as they develop new tools and processes, and I'm pleased to report that this quarter, we won business…

Thank you, Leo. First, I'll discuss the second quarter results before providing further details on our Q3 guidance. Revenue for the quarter was $157 million or an 11% increase compared to Q1 revenue of $142 million, a 12% decrease from $177 million a year ago. Q2 gross margin was 39.5%, which was within our expectations at this volume level. This compares to 38.6% in the first quarter. As expected, non-GAAP operating expenses increased the second quarter and were $51.7 million, compared to $49.4 million in the first quarter of 2013, levels which reflected a shutdown and other temporary cost reduction actions. Q2 operating expenses reflect more normalized work schedules in the U.S., annual salary adjustments and higher IT and research and development expenses due to the timing of certain product material and consulting expenses, which have been deferred to the second quarter. During the quarter, we received a $1.1 million insurance reimbursement in connection with the litigation settlement in 2012 with a former shareholder of a company we had acquired. In addition, we recorded approximately $200,000 of restructuring expenses in the quarter in connection with the consolidation of 2 sites in Europe. We expect to incur additional restructuring costs in the third quarter as we complete this consolidation. Our non-GAAP operating profit margin was 6.6% of sales, non-GAAP earnings were $7.3 million or $0.14 per share, compared to $3.9 million in the first quarter, and $18.9 million in the second quarter of 2012. GAAP net income was $7.3 million or $0.14 per share. The tax rate for the quarter was 31%. Cash in short and long term investments, net of debt, decreased by $9.5 million to $598 million dollars as of June 30, 2013. This net cash decrease included an increase in working capital as a result of improving business…

[Operator Instructions] Our first question comes from Krish Sankar from Bank of America Merrill Lynch.

A couple of them. Leo, or Seth, can you just tell us, for your guidance for Q3, how the different segments of semi, solar and non-semi would trend versus Q2?

Yes, Krish. We've got so many segments and subsegments in the non-semi business that I would say that we're expecting that semi and then the non-semi would probably make up that. So I think last quarter, we talked about, believing that almost all of it was semi. I think we feel that would be somewhat of a mix.

Do you still expect semi to be up in Q3 versus Q2 or...

We have a slight increase in our total guidance, so I think it'd be -- we would expect that to be slightly up, yes.

Got it, all right. Another quick question was, that when you look at your OEM customers, some of them have this massive cost reduction plan, and one of the targets their looking at is actually trying to, like, get more juice from their suppliers. I'm just kind of curious, are you beginning to see a lot more interaction with OEM customers on the pricing? The reason I ask, is I can look at the fact that your gross margin definitely has compared with this price cycle, is that part of that, or is there something else going on?

Yes -- no, I don't -- I think there are some dynamics that happened, relative to pricing. So pricing with major customers in the semiconductor market, ASPs have always had changes downward over years. I think the things that you try to do in your part of the business is to make sure the next product you develop replaces the old one, has lower cost structure, better gross margin, and I don't see anything unusual right now compared to normal price pressures in the industry. I would -- we've talked before about -- maybe and Seth can comment as well, but I think we've talked about the fact that some of the pressure on margin right now is that we probably have capacity for quite a bit more output. And that probably has more to do with any kind of depression on margin from previous period than I would say, recent cost-reduction pressure, but I'll let Seth comment as well.

Yes, and also, Krish, when you tend to ramp pretty steeply, you'll get a little more productivity out of the factory. Right now, we're seeing a gentle increase in the volume of revenue. And so in the prior peak, it had a more -- again, a steeper ramp in the business. That tends to create a little bit of margins as well.

Our next question comes from Patrick Ho of Stifel, Nicolaus. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Maybe, Leo, first, we've talked about in the past inventories, especially at your customers' site, but from your perspective, now that you're seeing a little bit of a ramp of revenues and you've given some of this positive commentary for the back end of this year, are you guys starting to build a little bit of inventory, or given that you do have shorter lead times, you can still wait until the customers really demanded to get products to them?

Well, we're pretty much single-source on most of our tools. So we've got to be a little more strategic in building -- when we think -- what we think is going to happen in the near future. Although our lead times are relatively short, our cycle times are short as well, and we have a good, sort of, synchronization with our supply chain and giving them a heads-up on what's happening. So I don't -- I think if you look at us and you look at our customers, probably the absolute inventory is up, as you start going through these. As we've said before, you got more tools on the floor, which means more inventory on the floor that you had at a different rate. But at the same time, you probably have better turns because on a going forward basis, because you're expecting higher shipment levels. So -- then I think that you saw that in ours as well where we have a slightly better inventory turn, although inventory was up in dollars. So -- and if you look at some of our customers, what they've reported so far, we've kind of seen the same thing. So I don't think there's anything unusual going on with inventory, and we have so many varieties of products. We can't build -- we wouldn't be able to predict the right mix. We're trying to -- when we give the earnings call, we're trying to predict the right total volume, but we have raw materials come in relatively quickly and build a little there, and then our ability in the factory to do final assembly and test quickly, that's kind of our method. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: All right. Maybe a two-part question on the non-semi side of things as we look forward to 3Q. One, can you give a little more granularity or color of which areas within that you're seeing "maybe a pickup" or some increased activity as you head into 3Q? And secondly, can you remind me whether there's any seasonality factors with the non-semi side of things, whether it's in, say, medical imaging or some of these industrial markets, do you see any seasonality on those type of markets?

Yes. I don't -- I'll answer that last one first. I don't see -- notice anything that would show seasonality that would be representative of anything that would have an impact to the number. So I guess from that standpoint, there's probably something in there I'm not aware of it in some small segment that has some impact, but I don't think that -- in that segment, but overall I wouldn't expect there's anything that we'd ever talk about, related to seasonality. I would say that the display market, the OLED, we talked a little bit about this quarter, is looking more positive. The gas analysis business, some of our software business, I think second half of the year could be continued strength, as the global economy continues to do well. So I think those kinds of things have done pretty well in the display -- in the OLED display, we put ozone systems in. So if that continues, the economy does well and there's continued investment, which seems positive right now, then we'd expect some increases in those areas. I don't see anything in solar and LED that we're counting on changing from where we are today, really. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Right. That's really helpful. And now final housekeeping question for Seth. What was your cash flow from operations this quarter?

Hold on a second. About $6 million, Patrick.

Our next question comes from James Covello of Goldman Sachs.

It's Mark Delaney on behalf of Jim Covello. I wanted to talk a little bit about more on the semi business. As you guys know, a lot of the equipment OEMs reported 2Q results at the high-end of guidance and they also noted memory orders were picking up more than expected, and often your revenue growth is magnified at the start of an upturn as the tool OEMs increase the number of systems in WIP. And so with that in mind, I would have thought your revenue may have been closer to the high-end of your guidance for 2Q rather than toward the midpoint. And it seems like the discrepancy maybe was lower shipments directly to the semi fabs themselves and so can you just help me reconcile what's going on in the semi business broadly and if there's anything that's causing the business with the fabs to be a little bit more moderate?

Yes. So you're right. The OEMs were up 26%. So that was strong and represented most of that growth. The fabs were down a bit and I think part of that is -- our fab activity is usually project material, and also typically, comes after the tools go in. So one of the larger pieces of our fab business is RGAs. So once the tools are in, RGAs would get installed onto the tools. So sometimes, there's a delay in that, and it's definitely lumpy. It's not a steady flow of business, it's tools, certain tool sets as certain customers come in, and then they would potentially do RGAs. The other part of it is we do a lot of work on the fab hookup, and I believe a couple of quarters before that, we had some stronger fab business holding up. So this lumpiness to the fab business there's some service related and smaller parts -- spare parts and replacements, they don't make up the majority of the fab business. Typically, ozone type systems or RGAs would typically make up the larger lumpy demand, and that was down a little bit for the quarter.

Got it. So nothing in terms of market share that was an issue?

No, not at all.

Yes, Mark, you go back like 5 or 6 quarters, you'll see the fab revenue does bounce around quite a bit.

Okay. For my follow-up, I wanted to talk a bit more on the -- on the margins. And I understand some of the -- there's some moving pieces with some restructuring actions. I know there's -- the margins were a little bit lower this quarter. When you guys think out, say, 2014, 2015, do you expect the margin structure of the company to be similar to what it was in past cycles?

Well, I think if you go back to the model we have in the investor presentation, Mark, we'd be tracking to that.

Assuming that the growth is sort of just a steady growth, I think Seth's comments earlier about, when you have rapid ramp, you tend to do better because costs -- you're stretching your capacity as much as you can stretch it, and you're getting some benefit out of that of the supporting margin. But in general, if you have a more typical, if you have a slower growth, which has been a little less typical in this business, I think that's what the model we show when we talk about, is that under sort of a normal growth period, slower growth period, it would fit more of the model. But if we had sort of a ramp again, I think we'd probably exceed the model.

Got it. So some of the pressures, such as the equipment OEMs consolidating, you think you can offset that with some of the restructuring actions that you talked about and lower cost product designs and so net-net, depending on where we are in the cycle, that the margin performance should be still in line with your guidance?

Yes. We've demonstrated that before, ASPs have never really gone up on the existing products that are designed in over years. And so we've had pricing pressure for years. I've been here more than 30 years, and I don't remember not having an industry that had pricing pressure, but by driving to better manufacturing practices and driving engineering to make sure the next design that's going to replace that product or bring in additional market has better margins starting is how you sort of beat that issue.

Our next question comes from Tom Diffely of D.A. Davidson. Thomas Diffely - D.A. Davidson & Co., Research Division: Yes. And maybe another question on the margin side. So Seth, how do you look at the incremental fall through for the gross margin line, as we ramp revenues?

Typically, what I use, Tom, is about 50% variable margins. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then what about the ramp of the operating expenses with revenue?

They're fairly fixed in the short-term, Tom. The only thing that's going to change is some variable costs that's really based on inner results. But that shouldn't change dramatically. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. So there's no big commission component to that?

Not substantial, no.

Yes, if you look at the third quarter guidance, we're probably at a higher than 50%. I think it just reflects -- as we start putting more through the factory and get better utilization and mix, it's a slightly better margin than that. But in general, I think, normally, we expect that 50%.

Yes. I think you look at Q3, I think the midpoint of the guidance, it's probably close to a 70% variable margin. So a better -- more normalized mix in Q3 than Q2. Thomas Diffely - D.A. Davidson & Co., Research Division: Sure, okay. And then Leo, when you look at the possibility of getting back to, say, an $800 million run rate you had in '10 and '11, is it simply just getting the kind of wafer fab equipment back to $35 billion, or do you really need these adjacent markets to grow from the bottom here?

Well, I think if we're going to be back to that kind of number, I think at peak, probably, our semi was somewhere in the $550-ish million range, so -- and our non-semi was over $300 million. So we need semi to get up higher than that if solar and LED aren't going to come back in the near future. It depends on how quickly that comes back. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then I was a little unclear on your comment on the solar, there was a piece of business that was pushed out from the second quarter?

No. It was related to the large customer that we talked about in solar shipments over the last, towards the end of the year. We were able to recognize revenue in the first quarter, so we didn't see that again in the second quarter. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then what kind of linearity did you see during the quarter? Was it pretty usual, where it kind of ramps up near the end of the quarter? Or is there anything unusual?

Yes, just we're not an OEM. So, as a result, we tend to -- because we supply OEMs, you don't -- we don't tend to have a ramp up at the end of the quarter. And so we get more of a continuous flow. I don't think it was an unusual quarter for us. I would say that orders have been relatively stable in their growth, so more consistency both in the orders and also, a fairly normal sort of quarter in terms of revenue out the door and not a large amount on the last 2 weeks or last month of the quarter, that's not typically what happens anyways for us. Thomas Diffely - D.A. Davidson & Co., Research Division: Yes, okay. And then I finally -- when you look at your business over time in the semiconductor world, you've been able to outpace 2 to 3 points per cycle because of the growing process control, do you see those trends continuing going forward?

Well every -- we believe that, and everything we heard out at SEMICON West, both from customer presentations and analysts' comments, forecasters, certainly, with 3D devices, FinFETs and 3D NAND and the expectation that you pretty much have to buy new tool sets in order to produce those products, and we expect more -- there's more process steps on those, so we would expect that to continue with higher level of content. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And is most of that driven by just increase of the number of tools you have or parts you have on the tool? Or is it just an increase of complexity of that tool, or of that part on the tool?

I'd say both. And maybe they're all related to increased complexity, but sometimes, you put more of the same thing on the tool. Sometimes, you're -- you need to have, I guess, higher features or options to help in terms of process control, in some cases, for power supplies, let's say, as geometries get smaller and challenging, they're looking for ways that prevent arching in the process, suppressing arching, monitoring things more. So there's a little value. It's not as if it's completely new products. It's just typically a higher value, similar kinds of technology, where you're adding features, flow controllers, they're trying to deliver short doses of very small amounts of new materials, which become challenging. So you need just better, more feature-rich products in most cases. So that's where you get some additional content. You do get some components that are duplicate, you get some of the processing step increase, you get more -- like the RGAs, we've seen stronger growth over the years in RGAs, by a wider set of customers than we saw when we acquired Spectra more than 13 years ago, where -- they were selling primarily to the kind of the Intels and the IBMs, the high-end devices. Now we're seeing foundries and memory people using RGAs. So as those device structures get more complex, they start adding more sensors on to the tool, even after they receive them. So I think that's where you get, it's a mixture of different reasons for why you get that increased content.

I just wanted to clarify one comment for -- that Patrick asked about operating cash flow, it was $6 million year-to-date Q1 and Q2 and $3 million in the second quarter.

[Operator Instructions] Our next question comes from Josh Baribeau from Canaccord.

Could you remind me the percentage of your manufacturing now that's either in Mexico or low-cost regions? And then potential GM headroom, gross margin headroom, that you can achieve by completing that transition?

Well, I think we're probably in the 40%-ish, 30% to 40% range, 35%. We have activities going on now that would increase that, there are some things that would never move for particular reasons that we have outside the factories they're in now. But we're going through a transition right now with additional products moving into Mexico that probably take another 2, 2.5, 3 quarters to finish. And that will help the gross margin out. And we're not ready to give an exact number on it, but it should help keep improving the gross margin, that's another way, as I mentioned, manufacturing strategy and techniques.

Okay. And can you help me out a little bit with the lifetime of your products, if most of your revenues are driven by primary CapEx, or if there's some sort of consumable of component or maintenance component?

There -- so most of the product, let's start with the majority where it goes on an OEM tool, primarily, there, it's spare parts, so over time, the fabs will buy directly spare parts. And the other aspect of it is, most of these products need to be calibrated on some regular cycles. So we have sort of repeat business, there's recommendations of 6 to 12 months to do some level of recertification of the instruments because you're measuring highly-precision type factors, and you want to make sure they're measuring correctly. We have a repair and service business, so there is some level of repair and service when you look at -- the instruments that get on tools, we've seen products come back that have been still used in the field 10 years after they've been put in there, and they're in for calibration or service of some sort. Some of the more capital-oriented products like ozone generators and RGAs, they probably have more of a maintenance type, ability to do maintenance contracts with the customer and also have a service component.

Okay, great. And would you say -- if I understood correctly, it sounds as though you're not seeing an increase in solar activity just yet from a broader perspective, same with LED. Did I understand -- am I understanding that correctly?

Yes, as far as actually seeing any orders, seeing a change or anticipating a change in orders, nothing. Although I would say that Seth and I, we're doing some investor meetings in the Boston area and out in the Midwest, and we heard people talking about some money being freed up, either through low-cost financing, or customers who are discussing with them, looking at some point, investing, investing in additional equipment, but we aren't anticipating that in the near future here.

Okay. And then do you have any exposure to polysilicon manufacturing? Any vacuum or any plasma, anything going on there?

For the solar or...

Well, I guess -- I mean, obviously, solar is the largest consumer of polysilicon now, but just in terms of primary polysilicon capacity, or are you more in the solar [ph] module side?

No. We're also involved in the production of it as well. So polars and things like that use vacuum processes.

Okay. But not in the primary purification of polysilicon?

I'm not aware of that.

And at this time, I'm not showing any further questions. I'd like to turn the call back to management for any closing comments.

Thank you. So I'll reemphasize again the tone at the recent SEMICON West trade show was very positive regarding the long-term demand in the semiconductor market through a number of customers and reports. And forecasts for 2014 predict strong equipment growth, as chip manufacturers implement plans for 20-nanometer features and 3D chip designs, which will require more processing steps and more process equipment. As the global economy continues to stabilize and grow, we're optimistic about the opportunities for MKS in both the semiconductor markets and in the other advanced markets we serve. So thank you for joining us on the call today and we look forward to updating you on our Q3 call in October.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.