MKS Inc. (MKSI) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MKS Instruments Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Seth Bagshaw, Chief Financial Officer, please begin.

Thank you. Good morning, everyone. I'm Seth Bagshaw, Senior Vice President and Chief Financial Officer, and I'm joined this morning by Jerry Colella, our Chief Executive Officer and President. Thank you for joining our earnings conference call. Yesterday after market closed, we released our financial results for the second quarter of 2017 as well as updated our 2017 target operating model. You can access this information at our website www.mksinst.com. As a reminder, various remarks that we make about future expectations, plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in yesterday's press release, in our annual report on Form 10-K for the year ended December 31, 2016, which is on file with SEC. These statements represent the Company's expectations only as of today, and should not be relied upon as representing the Company's estimates or views as of any date subsequent to today, and the Company disclaims any obligation to update these statements. Today's call also includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are contained in yesterday's earnings release. In addition, we'll refer to certain pro forma measures as if the acquisition of Newport Corporation, which closed on April 29, 2016, had occurred beginning of the first quarter of 2016. Now, I'll turn the call over to Jerry.

Thanks Seth, good morning everyone and thank you for joining us on the call today. I’ll begin with our results for the second quarter of 2017. Following that I will provide a few highlights in our business and an update on the integration of our Newport Corporation acquisition. Finally, I'll provide our outlook for the third quarter of 2017. Seth with follow me with further details on our financial results and then we'll open up the call for your questions. We're pleased to announce we achieved record quarterly revenue of $481 million, an increase of 34% on a pro forma basis from a year ago and up 10% sequentially. We also set a new quarterly record for non-GAAP net earnings totaling $77.7 million or $1.41 per share. We continue to leverage our strong semiconductor portfolio, specifically our power, plasma and pressure solutions reaching a new quarterly record for total semiconductor revenue. Semiconductor revenue was $295 million, an increase of 62% from a year ago on a pro forma basis and 13% sequentially. Overall, our first half of 2017 semiconductor revenue was up 58% year-over-year also on a pro forma basis. Our light and motion division continues to perform well. In the first quarter of this year, we achieved the highest revenue in five years and I'm pleased to report that our second quarter revenue was $171 million, an all-time record for this division. Our light and motion division’s first half 2017 revenue on a pro forma basis has grown 11% year over year. We've been focused on operational improvements including applying the MKS business process to product development, R&D spend, cross-selling and communications. We have taken a multi-year approach to the integration and we've already seen positive results from the programs we've implemented. This excellent progress could not have been achieved without the valued assistance of the light and motion management team and their dedicated employees around the world. As we discussed during previous calls, our strategy is to develop technology solutions that solve our customer's complex problems. We continue to work closely with our customers on designing in the best solution which lead to sustainable revenue growth. In the second quarter, our power solutions business was awarded design tool of record at a major Chinese OEM. We also had a number of design wins in the second quarter for our new line of EtherCAT pressure control products. The next generation semiconductor tools are using this new communication protocol as it is the fastest industrial Ethernet technology available. EtherCAT significantly improves application efficiency, accuracy, revised greater process control for our customers. For a number of years we’ve talked about a key strategic initiative we call technical localization providing techno expertise and capability close to our customers. This proximity is an effective method to rapidly identify and solve customers’ most complex problems and we have been very successful in South Korea with this strategy. For example, we have seen our direct revenue in South Korea rise to record levels in 2016 and we expect to set a new annual revenue record again this year. Looking ahead, we see China as another significant opportunity for us. We are applying a similar localization strategy there. We've made significant investments in the manufacturing facilities as well as sales, service, repair and applications teams. Our China presence now represents 10% of our total global workforce. These investments in our local infrastructure position us well for future in China. For example, we see the LED, OLED and more broadly display market continuing to grow in China. Our liquid ozone product portfolio is key to display manufacturing processes and we are working with all the major display fabs. And from a broader semi market perspective, we’re engaged with a major Chinese OEMs for both traditional semiconductor development and LED applications which continue to see strong growth. We also see additional success in China and other targeted market segments. In the second quarter, our light and motion division won a major order for our laser diode burn-in solution supporting our customer’s data center application. Micro machining is another growth area for us. Transparent or brittle materials such as glass and ceramic are historically difficult to process with good quality and high throughput. We address this problem with a portfolio of lasers, laser measurement and motion products with a combination of performance, reliability and cost. Additionally, we provide technical expertise in the manufacturing processes, engineering services and integration. In the second quarter, we won a substantial order for a mobile phone application with a South Korea customer. We also won a significant order in Japan for a large electrical component manufacturer for our high power UV pulse lasers. Market demand is also increasing for additive manufacturing solutions including lasers and beam delivery. Cross-selling across our Vacuum and Analysis and Light and Motion division continues to be a focus with our sales teams driving sales across our entire portfolio. In the second quarter, we won a significant initial production order for various light and motion products for major life and health science customer. We are providing lasers, optics, filters, motion, optomechanics and vibration control products as a comprehensive solution demonstrating the value of the unmatched breadth of our offerings to a customer. In addition to cross-selling opportunities there are product development synergies as well. We have been leveraging the expertise of almost 700 engineers across the two divisions to further provide cost effective solutions to our end customers. For example, our light and motion engineering team is working with our vacuum and analysis team to develop a critical optics assembly for new applications with significantly improved performance. Thin film process specialists from the vacuum and analysis division have helped solved a lens subassembly yield issue for a key light and motion customer. At this point, I'd like to turn to our outlook for the third quarter of 2017. We are seeing continued strength in the semiconductor market and are well positioned to leverage our broad portfolio and customer relationships. Our integration activities with Newport are tracking ahead of plan. We're also well positioned to drive growth in the general industrial, life sciences, and research markets. Based on these factors and looking at current business levels, we anticipate revenue in the third quarter of 2017 may range from $450 million to $490 million and at these volumes, our GAAP net earnings would range from a $1.12 to $1.37 per diluted share and non-GAAP net earnings could range from a $1.32 to $1.56 per share per diluted share. With that I'll turn the call over to Seth to discuss our financial results and expand upon our guidance.

Thank you, Jerry. I'll cover our second quarter financial results, provide an update on our 2017 target financial operating model and finally I'll discuss our Q3 2017 guidance. Revenue for the quarter was for $481 million, increase of 10% compared to Q1 2017 revenue of $437 million, an increase of 34% compared to pro forma revenue of $359 million in Q2 2016. Revenue for the quarter was at the high-end of the guidance range due to continued strong growth from semiconductor customers as well as growth in the other advanced markets we serve. Sales to the semiconductor market increased 13% sequentially to $295 million, which represents a new quarterly record for MKS. This is on top of a very strong first quarter as sales to semiconductor customers increased 58% in the first half of 2017 compared to the first half of 2016 on a pro forma basis. Sales to other advanced markets increase 5% sequentially and were $186 million. And shipments into certain areas of these markets are project based and can vary from quarter to quarter. Non-GAAP gross margin was 46%, which was toward the lower end of our expectations at this volume, primarily due to certain warranty inventory charges in the quarter. Non-GAAP operating expenses were $105 million which were within our expectations at this revenue level. Non-GAAP operating margin was 24% reflecting a strong operating leverage. Also including the quarter was $3.3 million of foreign exchange loss, primarily due to movements in certain currencies in Asia. GAAP expenses included $11.5 million in amortization of intangible assets, $800,000 in integration cost related to the acquisition of Newport Corporation and $400,000 in cost related to a sale of a data analytic solutions business unit, which closed early in the second quarter. Lastly, in the second quarter, we recorded $9.9 million charge for intangible assets impairment, restructuring cost and inventory reserves relating to the winding down of a small product line and related consolidation of two international facilities. GAAP interest expense was $7 million, which included $500,000 of amortization of deferred financing costs and non-GAAP interest expense was $6.3 million. Early in the second quarter, we complete a sale of our data analytics solutions business unit for a net cash purchase price of $72.5 million and recognized an after-tax net gain of $72 million in the second quarter. Revenue in 2016 for this business unit was $13 million and the impact of this business on our [indiscernible] results were not significant. We also recorded $12 million in projected US federal income taxes related to the repatriation of international cash proceeds from the sale. However, the timing of the repatriation of these proceeds depend upon a number of factors, including potential favorable US tax reform legislation. The non-GAAP tax rate was 37%, just slightly higher than our expectations for the quarter, primarily due to geographic mix of taxable income. The GAAP tax rate was 23.8%, included a favorable impact of a tax benefit from stock-based compensation expense for certain restricted stock units invested during the quarter and the income tax effects of the sale of the data analytics business unit. GAAP net income was $120.4 million or $2.19 per share and non-GAAP net earnings were $77.7 million or $1.41 per share, both of which also represent new quarterly records. We continue to execute on our financial strategy to deliver our balance sheet and reduce our interest costs and I'm pleased to report that at the end of the second quarter, the company is now net cash positive. On June 30, we had cash and short-term investments of $577 million, which approximately 42% was in the US and the remainder at international operations and the balance of our term loan was $573 million. Also in early July, we completed the third successful repricing of our term loan and completed another voluntary principal prepayment of $50 million, which has now reduced our term loan balance to $523 million. Since the loan origination on April 29 of last year, we have completed a total of $250 million of voluntary principal prepayments as well successfully completed three reductions in interest rate spread reflecting the strength of our financial results. Combined, these actions reduced our annualized non-GAAP interest expense by approximately $20 million or 50% in just over one year. Adjusted EBITDA for the quarter was $128 million. And our trailing 12-month pro forma basis, our gross debt to adjusted EBITDA ratio was approximately 1.3 times. We continue to provide a balanced approach to capital deployment and during the quarter we paid a cash dividend of $9.5 million or $0.175 per share. Capital additions for the quarter were $5.5 million. Depreciation amortization expenses were $20.6 million. And stock compensation was $6.2 million. Free cash flow for the quarter was $104 million. In terms of working capital, day sales outstanding improved to 51 days compared to 56 days in this first quarter of 2017. And then inventory turns also improved to 3.5 compared to 3.3 times in the first quarter of 2017. Turning to new factor in Newport Corporation, integration activities are continuing to progress very well. And I'm pleased to announce that exiting the second quarter, we've already realized $36 million of annualized cost synergies, up from $32 million exiting the first quarter, continuing to track well ahead of original schedule. We continue to project that our total cost synergies could be $40 million annually, up on original $35 million projection, we announced the transaction and we expect to achieve additional cost synergies potentially in early 2018. Furthermore, we are very pleased with the strong financial results that Light & Motion division generated this quarter. As Jerry mentioned, the light and motion division achieved a new quarterly record for revenue in the second quarter and non-GAAP operating income more than doubled from a year ago, in fact strong revenue growth and significant improvements in the light and motion financial performance. Yesterday, aftermarket close we also published and updated fully synergized 2017 target operating model reflecting the impact of a third term loan repricing, a $50 million principal prepayment completed in July, and an update to the non-GAAP effective tax rate to reflect the current projections of geographical mix of taxable income. At an illustrated annual revenue level of $2 billion including $40 million annualized cost synergies, our illustrated model shows potential non-GAAP EPS at the midpoint of this potential range of $6.35 per share or an increase of 34% compared to a model entering 2017 and more than double our financial model a year ago, after we completed the acquisition of Newport Corporation. We’ll always seek to continue to seek additional opportunities to improve our financial performance, while providing additional resources to support our customers’ requirements. Finally, turning to Q3 2017 guidance. Based upon current business levels, we estimate that our sales in third quarter could range from $450 million to $490 million. Our Q3 GAAP and non-GAAP gross margin could range from 46% to 47% reflecting these volumes and expected product mix. And our Q2 non-GAAP operating expenses could range from $102.5 million to $107.5 million. Non-GAAP interest expense is estimated to be approximately $5.1 million and non-GAAP tax rate could be approximately 27%. Given these assumptions, third quarter non-GAAP net earnings could range from $73 million to $86.4 million or $1.32 to $1.56 per share. In the third quarter, amortization of intangible assets is expect to be approximately $10.8 million, integration related costs are expected to be approximately $1.7 million, GAAP interest expense estimated to be approximately $7.4 million and interest income is estimated to be approximately $600,000. Our GAAP net income is expected to range from $62.2 million to $75.6 million or $1.12 to $1.37 per share on approximately 55.3 million shares outstanding. This concludes our prepare remarks and we will now the call for questions.

[Operator Instructions] The first question is from Amanda Scarnati of Citi. Your line is open.

Good morning guys, great results. A quick question on your product growth areas and where you're seeing the most growth in the quarter and where you're expecting to see continued growth on the semi side in 2017. Is it specific areas, is everything kind of growing together, are you seeing it more in specific regions? Just what kind of color you can give there on the specific products?

I mean, I think in general the strength is across the board, Amanda, as we mentioned with plasma, power and pressure in the script that we are written. The regions are all very strong as well. Business is very steady. So I think we're very fortunate that on the semi side that things just continue to be strong. Obviously, we're very pleased with the growth 62%, 58% growth are just tremendous and it's real tribute to the technology and the relationship we've built with the customers around the world. Obviously, Korea is very, very strong. I can't wait till the year ends, so I could tell everybody how we're doing, but things continue do well there. So I just think it's just across the board. Certainly DRAM is nice. I said when DRAM spending picked up last year, I said that with our position in Korea, we’d benefit from it. So it's just pretty strong across the board. Obviously 3D NAND is great for us. So etch and [def] [ph] is strong, it’s just everywhere it seems to be doing really well. And then again also we don't want to forget about our microelectronics business, which is lithography inspection, metrology with the Light & Motion division. Dallas business units have performed as well. The industrial side is doing well, but certainly the semi side which we call microelectronics certainly is doing as well, so across the board.

And then in terms of two half growth versus one half growth, the thinking from the major OEMs at the end of last quarter and throughout the quarter was that one half was going to be a little bit stronger than two half. Based on your results, it looks like it could be relatively equal or you guidance could be relatively equal one half versus two half. Are you seeing that sort of change or is it still a little more first half loaded.

I think the sentiment is a little stronger for the second half being better than was originally projected. I mean some people were saying 55, 45 at the beginning of the year, but I think that we are feeling that people think it will be a little better than it was originally thought. And the business appears to be steady to us right now. Again, we have very limited exposure, our lead times are very short, we can only go based on what we read and what our customers tell us. But the sentiment appears to be better about a second half position than it was at the beginning of the year, yes.

And then one more question if I can sneak in it for Seth. In terms of the target model, the last three quarters it’s been updated. Is it just because Newport is performing a lot better than expectations and it just keeps exceeded expectations or is it just a little bit more conservatism on your part to kind of keep expectation a little bit more?

I think the model is designed to do a couple things, one it gives obviously the buy side and sell side a pretty good roadmap to model the profitability in the business based on certain revenue volumes. We've always had a 50% variable gross margin, 40 to 45 point variable operating margin. So that's kind of like point number one. And then point two is, we've always updated this model when we sort of achieve our profitability improvements, restructuring the business, we've done quite a bit on paying down the debt as well as repricing the debt as well. So that's sort of - we sort of do it as we go along so that we don't get too far ahead of ourselves on projecting a too far out model. And the update this quarter reflects the things I mentioned in the script, a little higher tax rate, better interest savings if you will. And then the high end of our guidance range, the 490 million gets to the 2 billion range. So we thought it would be appropriate to kind of update the topline to reflect potential growth going forward as well.

Thank you. The next question is from Sidney Ho of Deutsche Bank. Your line is open.

Congrats on a solid quarter and guide. My question is on the light and motion margins. You guys done a great job driving that operating margins to, I think, 18% in Q1, I don't know what that is for Q2. But if my math is correct that implies the operating margin for the organic MKS business in vacuum analysis close to 25%. Longer term is there any fundamental reason why light and motion cannot get to the same type of margin say mid-20% range, is it more R&D intensive, it looks like the gross margin for light and motion is already better than the vacuum and analysis at least in Q1.

Yeah, so good question. Let me talk about Q2 for light and motion first of all. So the L&M read 171 million for the quarter and the operating income was 19.8%. And again if you look back and we acquired that asset a year ago, the operating margin was probably in the 10% range, 150 million per quarter of revenue. So we really done a – I think the team has done a great job growing the topline of that business and the profitability. And in Q2 we mentioned we had $36 million of synergies already achieved. We obviously feel 40 million is quite achievable. So you can pretty much factor in additional cost savings that will hit that P&L going forward, that will drive up the profitability probably another percent or two I would say. And then in L&M side, it's consumer similar dynamic for a combined company, the variable gross margin is about 50%. And so what I would say is, we [Indiscernible] additional cost synergies we talked about to be in this P&L and then we’ll obviously continue to grow the topline which will have impact I think on the margin. And then new product development in leveraging some of the low cost jurisdiction I think will probably be some help as well in the future. So it would probably to get to 25%, a little more growth on topline and again a good line of sight on the cost savings, but I think that's possible in a couple years I would say.

I think the thing that to be mindful of is that we have a process to constantly look at our profitability. In January 2014, we initiated a profit and cash recovery team for the base MKS business and that team has met every month since then. And I am the scribe and the leader of that team and we meet to look at what we can do to improve the just purely the operational cost and profits of the company, separate [meets] [ph] about revenue. And when we acquired Newport, we had an integration team but we also implemented a profit and cash recovery team set for Newport. And again, they meet monthly to take the exact approach that we did with the base MKS business. So now you have two profit and cash recovery teams that are just focusing on what else can we do to improve the profitability issues with materials, structure of business, just everything that is on the table the way we look at it. And then we’ve added this one more layer of strategic management oversight to sit above both business units now and just look structurally just at the company as a whole and that's a different level of discussion. It gives us a much more deeper and broader thoughts about what the business could look like, so you will never see MKS and/or either division ever stop concentrating on sustainable and profitable growth and improving the profit. We have a process in place, which has worked and we intend to continue to improve the profit year-over-year.

My second question is, first, I appreciate the update on your progress in China. On the semiconductor side specifically, my understanding is that you have great relationships with a lot of local equipment OEMs. I'm curious if you can comment on China fab construction activities based on the collective intelligence from both domestic and foreign equipment suppliers. I know you talked about 20 new fabs in China in the past, maybe you can give us an update where things are today versus say three months ago.

Yeah. It's a little more difficult for me to comment on that. We focus so much really on the OEMs, we have less insight particularly on the fabs. And if I caught something, it's usually because I've read it from somewhere else. I’m not a great guru in that. But I think the thing that we're doing is we really are concentrating our position with the key OEMs there. So as an example, we talked about design tool of record award and it was first a PECVD tool with a very significant Chinese OEM. I think the thing that we see is that we see in China what we saw to a certain extent happening with Korea, more of ecosystem developing around semiconductor equipment and semiconductor processing and we’re seeing that in China as well. And so what we're seeing is getting design wins, getting orders starting to trickle in here and there, more to the point of positioning for future growth in ’18 and beyond. But I don't really have any insight about the current state of fabs and I wish I could provide that to you. As soon as I do, I'll tell you. I’ll tell you what article to read. I’ll tell you that.

Thank you. The next question is from Dick Ryan of Dougherty & Company. Your line is open.

So Seth, what impact did the warranty charges have on gross margin in Q2 and was there any mix issues as well for impact?

Yeah. Exactly. So there was warranty charges and some inventory charges. And that was above 60 basis points on the consolidated margin. And so if we were like 46, 45.9 to 46, it should be more like 46.5, right down in the middle of that guidance range. So that was kind of the big delta relative to what I thought would occur in the quarter. And just seeing on the inventory charges, what that was is we bought Granville-Phillips in 2014, the indirect gauging leader in the industry, number one indirect gauging. What we were doing is basically consolidating indirect gauging manufacturing to what we call center of excellence in Longmont, Colorado and this last E&O charge was moving some production from a European indirect gauging legacy MKS facility into long line. So that was why that charge occurred that in Q2. But all-in, if you warranty net inventory charge, it’s about 60 basis points.

Any lingering impact into Q3 from those two?

I don't know, not playing that, no. So that's why you see our guidance in Q3 be back to the 46% to 47% range. [Technical Difficulty] Yeah. Lumpy stuff too, but it kind of happened on this quarter. So we think that’s behind us.

Okay. Light & Motion had good sequential growth. Did that come from both sides of semi and their core business and maybe as an extension, Jerry, are you seeing any progress of now owning Light & Motion and moving further into less so or advanced packaging?

Yeah. Actually, there was a lot of good win in industrial. We talked about different orders that we saw for telecom and datacom for transceivers in data center. On the industrial side, PCB cutting and drilling, mobile phone, button cutting, industrial electric process manufacturing, I mean, we’re seeing some good benefit from mobile device manufacturers on the industrial side, which has given us great strength. Also, on the 3-D printing for additive manufacturing on the industrial side and then obviously we call it the microelectronics, but it's really the semi side for Newport with our customers in lithography, metrology and inspection. Obviously, we have key accounts at ASML, in KLA. We continue to see strength there. So it's really both the industrial side, again a lot of it is related to mobile phone manufacturing and then microelectronics or the semi side being litho metrology and inspection. And we continue to concentrate on those key accounts and I think there's further penetration over the next few years that we can have on the semi side. Dick, we used to be to surround the chamber, the front end chamber side with AMat and Lam and Tel. And now we've really expanded our reach into packaging and litho and inspection in the front end metrology. So we think there is a really good growth rate there, but we're really high in the industrial side on the laser business as well and then bundling. One of the things that we've done by consolidating the sales folks at Newport is having them take a bundled approach when selling. So there happen to also be a win we had in life and health science that we mentioned that had a whole, a sundry of products that was bundled with it. So I think the industries are doing well and just our management of the team to be more focused at cross-selling is helping a lot.

Thank you. The next question is from Krish Sankar of Bank of America. Your line is open.

Couple of quick questions. If I look at the midpoint of the September guidance, it’s roughly flat to down 2%. Can you just tell us how it breaks down within semis and Newport?

Well, I think it general, sometimes, the business can be a little bit lumpy. So a 2% change. Krish, sometimes, it's related to people's ordering pattern. Some people pull in stuff earlier than expected. So as far as just that change, just a matter of timing, the business is still very strong. We expect we can see continued growth in the Newport side. We think that they’re doing very well as we said in the industrial and microelectronics. We'll see continued growth there and again the semi stuff is strong as well.

And then can you just tell us, I think in the last earnings call, Jerry, you kind of mentioned how much was OLED and LCD as a percent of your sales, is it still like about 2% for OLED?

It’s under 5%. Yeah. It’s about under 5%, Krish.

And then I had a question on the target model, like the $2 billion revenue run rate that you guys issued. How does it split between vacuum and the Light & Motion.

Well, we don't really give them all that level of detail, Krish because we have thousands of customers in obviously many different markets. So that level of granularity is difficult to come up with. If -- you might want to look at our current run rate between VNA and LNM through Q3, give a relative split on that. There's probably a good guestimate. When we grow either side of the business, we’re happy where the growth comes from. So we don’t look at that level of granularity.

And then a final question for Jerry, about three months ago, most of your semi OEM customers are talking about potential stretching of lead times and I wondered if that has actually kind of moderated now or do you still think that is ongoing compared to three months ago?

Krish, we never really felt that or saw that frankly. And I know our customers have added a lot of capacity in the last couple of years. As a matter of fact that we had some executive meetings with them where they talked about continuing to add capacity, but we frankly did not see -- we did not have an effect on that, in other words, our leases have stayed cross and we’ve really not really seen that effect from our customers. We've seen steady as she goes frankly.

Yeah. And just add to that, Krish, MKS is not a constraint to our major customers. We are absolutely ramping along with them and that’s been our core expertise for many, many years. So that's not a -- you might be one off here and there, but it’s not a constraint we're seeing to our customers.

By the way, Krish, I do want to add one more thing about the OLED stuff. We've got certainly good positions for, with our liquid zone products for cleaning. There are other opportunities, but we do think there is longer term applications to lasers and optics, things like mass making and cutting, blading and repair. So we'd like to see that OLED business pick up. So it isn’t a target for us right away.

And then a final question for you Jerry or Seth. Can you guess still how much was AMat and Lam as a percent of your sales. I’m guessing it is still about 10%?

Sure. I’ll get that for you. It’s -- AMat was 13% for the quarter and Lam was 10% in Q2.

Thank you. The next question is from Patrick Ho of Stifel Nicolaus. Your line is open.

Jerry, maybe first off for you. In terms of supply chain management, obviously as you just mentioned, you're not a constraint for your OEM suppliers, yet at the same time, they're feeling a lot of the constraints on the supply chain. How are you managing -- how are you managing that on your end to make sure that you deliver products and maybe as a second follow-up question to that, are you seeing any trends of the OEM suppliers going to larger suppliers like you for more business because of the reliability and their need to always ensure that they get their products out?

Sure. Well, the first question is, this is a thirty plus year operation of being really good at what we do and maybe that's partly why I’m CEO, I'm not sure, I'm not a technical guy. But we've concentrated on supply chain management from the first day I came here and we had $8 million a year to spend and now we have, I don't know, probably 500 million, 600 million that we spend and leverage it. We put in lean manufacturing into our operations around the world, in Mexico, China and here in the US and we’re just very, very close to our suppliers. We meet with them quarterly. We make sure we give them, we also contract differently and not give any secrets away, but we contract in such a way that they're not engaged to us. I consider inventory as storage capacity frankly. I look at labor as storage capacity, the way we plan capacity is different than other people and again, I don't want to give any competitive edge, but it's really something that we've focused as a operational weapon the last thirty plus years. And it's -- and we've won probably as many awards for operational execution, believe it or not, as we have for technology. And then the second part of the question, can you repeat that Patrick because I just went on and on for a minute?

Sure. Are you seeing any trends from your customers gravitating more to you because of their needs for reliability on a much grander scale?

Actually that is true and I've had executive discussions with some of the leading execs that our customers coming to us because of our worldwide footprint, our capability, demonstrated execution, also the stability of management. Now, I may not be appear to be a stable person, but somehow they say our longevity of the team here and my team itself gives them comfort. We’re around, there's no, we're consistent, there's a constant purpose of how we execute and we just have size now. Now, before the size used to be attractive to smaller OEMs, because they say, well, you've got a wide and deep portfolio, you can do everything for us, therefore, we don't have to go to 10 suppliers to get our work done and you can develop integrated subsystems. So that was always a strength of MKS, dealing with the smaller OEMs. But it is true now that the larger OEMs see us as a stable company, worldwide footprint, willing to invest in people and inventory and that actually is, we are definitely seeing the benefit of that.

And maybe as a follow-up question. You talked about some of the cross-selling opportunities you’re already seeing and how that's helped, especially your Light & Motion business. Can you talk about some of the product development, maybe on a qualitative basis and how you see potential revenue synergies as we go into 2018 and even 2019?

Yeah. Well, one of the areas is a lot of our process development is on the optic side. There is a lot of optics in and also lasers that we use in some of our non-semi businesses, for things like gas and oil purity. But we're also seeing the opportunity as an example for potentially optics for sensing and semiconductor longer term. And we're already in discussions internally about how we can apply the capability of our senses and our optics capability provide a different technique for sensing on semiconductor side. But we have officer or CTO, it's chaired by John Lee, our Chief Operating Officer who has a. Ph.D, which is helpful, better than I run it and they really are exploring multiple opportunities between the two groups for optics and lasers in particular. So we think there's some potential there. One of the things we talked about is the fact that the design teams are working on solving problems that each has had and I think that on the litho metrology side, inspection side of the business, we're going to see some additional benefits from the capability to [indiscernible] critical problem solving to Light & Motion.

Thank you. The next question is from Tom Diffely of D.A. Davidson. Your line is open.

Just first starting off with the target model, what is the reason for the slight increase in the tax rate?

It's really the mix of where the income is coming in, Tom. So it's more of a US -- more of a mix towards the US income and because that's the high tax jurisdictions we all know. That's would just drives it mathematically. And most of our semi customers are in the US. So that’s probably -- it's what is probably the bigger driver of it.

Okay. And then after the repayment, what is your current onshore offshore cash balance?

Hold on one second Tom. It was 42% US after quarter end, but if I tell you right now, it’s 577 right. Tom, it’s 42. It was 242 minus the 50, 36%.

And then it sounds like obviously Korea has been a great success story for you. For the record business this year, is it your share that’s gaining with your customers, is your customer’s share gaining versus the rest of the world, in the OEM world or is it just the market being strong for everybody that’s really driving the business?

It's actually both. We really penetrated the Korean ecosystem there with PSK and Wanic and Test and Eugene Tech beyond Hynix and Samsung and some of those OEMs are seeing benefit outside of Korea themselves and I don't want to get into it because it's their business, but -- so their business is growing and our business is growing. It’s just a matter of both. And I mean if you look at the numbers in Korea, you can tell us well beyond what markets, but just the growth of the market is, it's literally intense penetration in the growth by those customers. It’s been a great strategy and we're really -- we're thrilled with it and we intend to have the same success in China. We really intend to make that a target for ourselves, hopefully to achieve that.

Okay. And are you seeing those customers supplying globally, and not just in their own domestic market?

In Korea, there was one customer in particular that has expanded beyond Korea. Again, I won’t tell who it is, because it’s their own strategy, but there is one that for sure that we know has expanded beyond Korea. They’re doing very well.

Yeah. Okay. And then if you look at the, roughly 10% range of your revenue guidance, which of the segments of your business is the most volatile or the most unknown that gives you that kind of larger range?

Yeah. It would be probably the semi side Tom, only because we get short lead times and that could move around a little bit. So that's probably the most volatile I would say.

But it doesn't appear to be, but it would be intact. Historically, it’s been, but we don’t foresee that, but –

Yeah. It’s been the last several quarter, which were in the high end of the range. I think the semi has been doing very well.

That was one of the nice parts about the Light & Motion acquisition. We’re still dedicated to semi. We’re going to grow that. We're going to grow their semi business, but we're unique animal compared to people in our space now where we have other places to go, business that's methodical and repeatable and less volatile and we think can grow. We think, we can -- obviously we’ve demonstrated we can grow that business, hopefully we’ll continue to do that, but we're very pleased with that acquisition, because it gives us other places to go where other people can’t.

Okay. And then speaking of Light & Motion, how does that business break down in terms of whether you sign components or subsystems or maybe even full systems in some cases, is it still mainly a components business.

Its components and system and subsystems. When we sell lasers, we’re selling lasers into people that are building the equipment. We're not doing the, for the most part, large subsystems. So it’s mainly components and subsystems for the most part. That's the best way to think of it.

Yeah. Okay. And then finally when you look at the OLED business, especially in China, it's my understanding that we're still very, very early in this ramp and we're just having a little bit of kind of an R&D pilot line stuff going on, but the real production is still ahead of us. Is that how you view it as well?

Well, we certainly know that the CapEx has had a pretty good jump in ’16 and ’17 and as the growth rate continues, we can see it's continued to see the growth rate business, maybe the longer term, it's high single digits, but that's a good number. And we're still interested in it. We, like I was saying it earlier, question about on the display side, certainly do a lot of work on the cleaning liquid zones, but we think there's other opportunities for the Light & Motion with laser in optics in the future.

Thank you. The next question is from Weston Twigg of KeyBanc Capital Markets. Your line is open.

I just wanted to make sure I understand the other expense line. Sounded like you had FX losses and there was some in there related to the sale of data analytics, but I want to make sure that that's right, because net with interest and other expense was minus 9, it was 9 million impact this quarter from 4 million last quarter and there was a pretty big jump, bigger than expected.

Yeah. So there's 3.3 million loss for FX in Q2 and that's just to the ongoing business and just we had $2.1 million gain in Q1 for the same kind of same running the business. So year-to-date, a small loss. But that's really related to the core MKS business and not related to the sale of analytics.

And then you had mentioned earlier in the call, something about Ethernet Protocol solution as fast as industrial solution. I hadn’t heard about that. It sounds like that could be a fast growing opportunity. Could you expand on that and?

Yes. It's a communication protocol for fast communication. The applications are backside wafer cooling for conductor and also ALD tool and FPD tool for etch. Those are three applications that we've seen so far.

Is it a meaningful piece of the business yet?

It will be. It’s just an adoption, but it will be.

Okay. And then if I may, just wanted to ask about the longer term upside to cost synergies, with Newport, you mentioned there could be some more to come in 2018. I assume that’s upside to the 40 million. Can you comment on what that potential opportunity could be?

Yeah. I’d just kind of clarify that, Wes. So we have, the 40 million is the total we're seeing right now and so we have 36 at the end of Q2. So 36 million going to 40 is our current view. We’ll always try to do more than that and we’ll look at the analysis side as well. So as Jerry mentioned in the call, it’s kind of, I think our core competency tend to kind of be more efficient and just drive more opportunities there. But the 40 million is our current synergy target and we think we’ll get that potentially earlier in 2018.

It’s our DNA, to across the company, continue to look for improving the profitability of the company beyond that, Wes.

[Operator Instructions] The next question is from C.J. Muse of Evercore. Your line is open.

I guess first question for you Jerry. With your large OEM customers having visibility extending now into Q1, I guess a little surprised to hear you talk about some uncertainty on the semi side and I know we're talking only in kind of $5 million to $10 million range, but curious what would drive that kind of volatility, would it be inventories downstream, would it be just kind of pull and push outs, what would drive that?

Yeah. I don't think I said uncertain. What I simply said is our visibility is short because our lead times are very short and we don't -- we only give a quarter at a time. What I said is the business is steady and our customers are still communicating to us that the business is steady. So, yeah, and I think the only thing I think that the volatility question came, when someone said if you had any party of your business that's volatile, I said ,that, well semi could be, because it's historically been there. I don't think anybody's mentioned that it's volatile or tenuous at this point. We think it's pretty steady so far, C.J.

So embedded in that down 2% sequential guide is roughly flattish semi business?

Yeah. And again, that that could be -- like I said, it's just people's ordering patterns. Some people get their bill schedules ahead of time, so they take a little more than a quarter from us and 10 million to us now is not something of a concern, it's 2%. It would imply steady -- I like the word steady. Lastly, it implies something different to steady.

And I guess a follow up on the EUV front, clearly seeing a meaningful ramp shipment wise at least at your customer Q4 and then throughout all of next year and beyond. Curious how we should think about the incremental revenues for you guys, both on your core business as well as in the Newport optics side?

Yes. Sure. So we have significant content through LNM on EUV tools as well as vacuum. And even with EUV at 7 nanometer, we continue to see growth in the padding steps of depth in etch. So we think there's more continuing opportunity for us as there will be a need for more depth in etch padding, multi-padding as EUV goes into the 7-nanometer. So we’re considering actually it has another opportunity, because we have more content now.

Thank you. At this time, there are no further questions in queue. I like to turn the call back over to Jerry Colella for closing remarks.

Thank you. We're very pleased with our continued progress in 2017 and achieving our objective of sustainable and profitable growth. This quarter, we achieved new records for quarterly revenue and non-GAAP net earnings and our focus on integrating Newport Corporation acquisition into our organization and it has produced excellent results and new growth opportunities. We achieved our initial cost synergies ahead of plan, while also substantially improving the revenue growth profile and profitability of Light & Motion. Thank you for joining us on the call today and for your continued interest in MKS. Updating you on our continued progress when we report our third quarter results in October. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day, everyone.