MKS Inc. (MKSI) Q2 2013 Earnings Report, Transcript and Summary

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 for controllers, ozone generators, power products, integrated excellent management, pressure measurement and flow control with multiple OEMs on multiple process tools, including etch, deposition, cleaning and photoresist strip, and we continue to have multiple products under revaluation, including a number on 450-millimeter development tools. We also introduced a new product for the semiconductor industry this quarter. The MultiTherm 1000, the first in the new line of temperature controllers. Temperature control is a critical parameter in numerous semiconductor manufacturing processes. The ability to quickly react to slight changes in the process environment, in order to maintain uniform temperature across multiple zones is key to maintaining process control. And the new MultiTherm 1000 provides precise, accurate and dynamic control. In addition to semiconductor processing, the MultiTherm 1000 is ideal for other applications, where extreme temperature stability is required, such as in thin film and LED manufacturing. While the majority of our business addresses the semiconductor market, our ongoing strategy is to expand our addressable market by leveraging our technologies into other advanced and growing markets which have similar requirements to the semiconductor manufacturing. These markets are quite diverse and include thin film coatings, light-emitting diodes, drug development and production, medical, industrial, energy, environmental, food and beverage, and other critical applications. In the medical market, I've talked in several calls about our RF power amplifiers which are used in MRI equipment. Today, I'd like to talk about another product and another medical application, the use of our pressure measurement devices in the sterilization of medical instruments. Traditionally, medical instruments have been sterilized through the use of steam and chemicals. This is an effective means of sterilization and is still employed in many hospitals and medical facilities. However, for smaller applications, such as in a dentist or doctor's offices, alternative smaller scale sterilization equipment is wanted. A relatively new method of sterilization is performed in a small vacuum chamber using plasma. Not all products are compatible with plasma cleaning, but when they are, plasma sterilization is low-temperature, faster, less expensive and just as effective as traditional sterilization. Our Baratron Capacitance Manometers precisely pressure in the plasma process and are designed in on the leading plasma sterilization tools. I am pleased to report that this quarter, we received additional repeat orders for this application. In the last few calls, I've talked about our success in supplying gas analyzers for a number of growing markets. We design several types of gas analyzers, which are used in different applications. One of these, our residual gas analyzers or RGAs, are something I usually talk about in a semiconductor or solar application. Recently, we have been strengthening our RGA resources to leverage this technology into new markets and new regions. And our RGAs are now being used in other applications, including freeze-drying, a process which removes moisture during the manufacturing of food and drugs. By monitoring the process gases during freeze-drying, the RGA can detect impurities, monitor for leaks, and identify the end point of the process, ensuring quality, process integrity and consistency of the end product. I am pleased to report that this quarter, we received follow-on orders from a large pharmaceutical manufacturer for RGAs to monitor the freeze-drying process for aseptic pharmaceutical production. Another type of gas analyzer manufactured by MKS, FTIR analyzers continue to be successfully employed for an increasing number of critical gas and air monitoring applications. We continue to receive new and repeat orders from U.S., European and Asian customers for environmental applications, such as continuous emissions monitoring and power plants. Orders for automobile, diesel, locomotive, marine and other engine manufacturers for exhaust emissions monitoring have similarly remained strong. We also won additional customers for the monitoring of cement manufacturing facilities, an emerging application I talked about in an earlier call, which we expect to continue as new regulations for air quality continue to be implemented. This quarter, we received our first orders for a new FTIR application, monitoring landfill gas during biogas production. In biogas production, methane, the combustible gas, is extracted from landfills, digesters or farm waste. However, in order to be used as a biogas, the methane must be pure. If not, impurities build up, which can coat and damage the power-generating equipment. Our FTIR analyzers detect trace levels of impurities and ensure quality of the fuel before it gets burned to produce energy, or is injected into the pipeline, avoiding costly damage to power plant equipment. Whether driven by process requirements, environmental regulation or safety and security, we are optimistic that the market for gas analyzers presents additional growth opportunity for MKS. MKS is a recognized leader in the technologies we supply and with our global applications and support infrastructure, customers know that we are there locally to assist them as they work with our products on new tools and new applications. This combined strength is a critical advantage when we work with new and emerging OEMs, such as the important win we achieved this quarter for our dissolved ozone products with a new OLED display manufacturer in Asia. OLED displays are brighter and clearer than traditional LCD displays and are a key component of high-end smartphones and tablets. As this leading supplier of dissolved ozone cleaning -- the leading supplier of dissolved ozone cleaning sub system for OLED, this customer selected MKS as the proven solution for their new OLED tool. A broad market which we served for many years is the industrial market, which includes a wide range of backbone production applications where many MKS products are used. This is another market where we are investing resources to leverage and develop our technologies to grow our business. This quarter, we introduced a new series of mass flow controllers for industrial applications, the I-Series. These mass flow controllers complement our existing industrial flow products, and are designed for use in harsh environments where the instrument must resist exposure to liquids, particles or dust. Typical markets for the I-Series include food and beverage, biotech and pharmaceutical production, where wet cleaning may be required, as well as industrial glass production, where moisture and or dust is present in the environment. The I-Series follows on the successful introduction of our G-Series, general purpose mass flow controllers, which were introduced a year ago. I'm pleased to report that in the first 6 months of 2013, we've added more than 60 new customers for the G-Series, and we anticipate similar success as the new I-Series ramps. These are just a few examples of how products -- our products enable our customers in numerous advanced manufacturing markets, but they show the breadth of both our technologies and markets. Looking to next quarter, semiconductor industry analysts are projecting that although wafer fab equipment spending could be down this year from 2012 levels, we could continue to see modest growth as the year progresses. For our other markets, the global economic picture remains mixed, with pockets of strength in some markets and with continued weakness in the more lumpy and cyclical segments, like solar, LED and thin film. Due to our short lead times, we have limited visibility into the future. However, looking at the current business levels, we anticipate that sales in the third quarter may range from $155 million to $170 million and that these volumes our non-GAAP net earnings could range from $0.14 per share to $0.26 per share. At this point, I'll turn the call over to Seth to discuss our results and expand on our guidance.

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 levels, the payment of a quarterly cash dividend of $8.5 million or $0.16 per share, and the repurchase of 46,000 shares of common stock for $1.2 million, an average price per share of $26.24. As we stated in prior calls, the timing and quantity of any shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions and business [ph] development activities, including, but not limited to, merger and acquisition opportunities. These repurchases maybe suspended or discontinued at any time without prior notice. Total book value net of goodwill and intangibles was $842 million or $15.83 per share. In terms of working capital, days sales outstanding were 56 days at the end of the second quarter, compared to 58 days at the end of Q1. Inventory turns improved to 2.8 compared to 2.7 in the first quarter. Capital additions for the quarter, primarily related to investments in manufacturing, IT systems and facility infrastructure were $3 million, depreciation and amortization expenses were $4.4 million and noncash stock compensation was $5 million. Now I'll provide further detail regarding the composition of revenues for the second quarter. Sales to the semiconductor market were $104 million or a 16% increase compared to the first quarter, and represented 67% of second quarter revenue. Within the semiconductor market, sales to semiconductor OEMs increased 26% from the first quarter, and comprised 53% of total sales. Sales to semiconductor fabs decreased 10% in the quarter and comprised 14% of total sales. Sales to our semiconductor fab customers can vary from quarter-to-quarter, depending upon the timing of customer projects. Sales to other advanced markets increased by 1% from the first quarter of 2013 and were $53 million, representing 33% of total revenue. Included in sales to other advanced markets are revenues to solar customers, which decreased in Q2, due to the timing of a large order in which we recorded revenue in Q1. In Q2, excluding solar revenue, revenue to all other advanced markets increased 4% sequentially. As we mentioned last quarter, combined sales to the solar, LED and thin film markets remain at historically low levels, comprising less than 10% of total revenue in both Q1 and Q2 and are at a quarterly level of more than 60% lower than what we saw during the 2010 and 2011 peak. Geographically, sales in the U.S. were 55% of total sales, sales in Asia were 33%, and sales in Europe, were 12%. Sales to Applied Materials and Lam Research comprised 19% and 12% in the second quarter of sales, respectively. Our headcount increased slightly from Q1, as of June 30, was 2,334. Now I'll turn to Q3 2013 guidance. Based upon current business levels, we estimate that our sales in third quarter could range from $155 million to $170 million. Based upon this expected sales range and product mix, Q3 gross margin could range from 39.5% to 41.5%. Q3 non-GAAP operating expenses could range from $50 million to $51 million. In the third quarter, R&D expenses could range from $16.2 million to $16.6 million, and SG&A expenses could range from $33.8 million to $34.4 million. As I mentioned in previous calls, these expenses can vary from quarter-to-quarter, depending upon the timing of various R&D and IT projects. In the third quarter, amortization of intangible assets is expected to be $600,000, restructuring expenses could be $600,000 and net interest income estimated to be approximately $300,000. We expect our third quarter income tax rate to be approximately 31%, reflecting the projected deductible [ph] mix of taxable income. And given these assumptions, third quarter non-GAAP net earnings could range from $7.6 million to $14 million, or $0.14 to $0.26 per share. And GAAP net income could range from $6.8 million to $13.2 million, or $0.13 to $0.25 per share on approximately 53.5 million shares outstanding. This concludes our prepared remarks. We'll now open the call for questions.

[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.