Executives
Rani Cohen – Chief Executive Officer
Amichai Steinberg – Executive Vice President and Chief Financial Officer
Adrian Auman – Vice President of Finance and Investor Relations
Analysts
Chuck Murphy – Sidoti & Company
Jim Ricchiuti – Needham & Company
CJ Muse – Barclays Capital
Sergey Vastchenok – Oppenheimer & Company
Andrew Abrams – Avian Securities
Irit Jakoby – Susquehanna
Ziv Tal – Oscar Gruss
Orbotech Ltd. (ORBK) Q3 2008 Earnings Call November 17, 2008 9:00 AM ET
Operator
Welcome to the Orbotech Limited Q3 2008 conference call. (Operator Instructions) Now I will turn the meeting over to Mr. Adrian Auman.
Adrian Auman
Good morning this is Adrian Auman Vice President of Finance and Industrial Relations for Orbotech. Joining me on the call today are Rani Cohen Chief Executive Officer and Amichai Steinberg Executive Vice President and CFO.
I’d like to take this opportunity to inform everyone that management will be presenting at the upcoming SFG Israeli Conference in New York this week on November 19th on Wednesday, at the Barclay’s Capital Global Technology Conference in San Francisco on December 10th, and the 11th Annual Needham Growth Stock Conference in New York on January 7th. You should have all received a copy of the press release which was issued earlier today. If you have not received this release please refer to the Orbotech’s web site at www.Orbotech.com.
Now before starting the call I would like to mention that certain statements that are not historical or forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. The words estimate, project, intend, expect, believe and similar expressions are intending to identify forward-looking statements and these forward-looking statements involve known and unknown risk and some uncertainties.
Any factors could cause the actual results performance or achievements of the company to be materially different from those that may be expressed or implied by such forward-looking information. Additional information regarding risk and uncertainties associated with the company’s business are included in, but not limited to the company’s reports filed from time to time with the SEC.
With that said I would like to turn the call over to Rani Cohen.
Rani Cohen
A month ago we updated our guidance for the third quarter in light of the rapidly deteriorating economic setting. In the third quarter our PCB business was particularly affected by the high levels of uncertainty currently prevailing throughout the world. Several of our customers deferred deliveries for the company’s PCB systems as they wait to see how the situation develops and also due to the increased difficulties in securing credit facilities for previously confirmed orders.
Since this crisis is largely consumer driven, it is end user products such as computers and cell phones for example, that are being particularly hard hit. Less affected are industrial products including military and medical. I want to point out that the economic crisis that is affecting different customers to varying degrees, the pressure is not universal. Some of our customers are doing better than others. That said there is still very little visibility this obviously makes planning and guidance very challenging.
One bright spot in PCB is the fact that we have recorded initial revenues for our new PerFix the first ever automated optical repair system for bare printed circuit board manufacturing. By automatically fixing short circuit defects, which frequently cannot be repaired manually, the system enables manufacturers to achieve major operational cost savings. Within our PCB bare board division we sold 16 direct imaging systems bringing to 48 the total sold so far this year. At this point we expect to sell approximately 60 systems for the year.
Turning now to PCB assembly, we have decided to scale back operations and will stop marketing our assembly products by the end of the year. As we have been describing for some time this industry is very fragmented. We have sought partners and arrangements in an effort to overcome this problem but without success.
Potential partners have been reluctant to invest money or to sell out. In addition this is an industry in which it is difficult to achieve a sustainable technological advantage. The bottom line is that this is an industry that does not promise attractive enough returns. Therefore we will stop marketing products but we will continue to service and maintain our installed base of systems.
As a result of this decision, we have written down $5.5 million of goodwill on the balance sheet, this is part of our plan to refocus and realign our business.
As we reported in our updated guidance last month, the company has not experienced any major changes in current deliveries, orders or backlog for its FPD products this year and we reported a sequential increase in FPD revenues from Q2 to Q3. We believe that FPD is on track for the fourth quarter of 2008.
However, we believe that our customer’s capacity utilization rates are currently at only 70% to 80%. Their customers are obviously buying less as they look ahead into 2009 panel makers are seeing deterioration in their bookings and falling prices. In response they are cutting production and focusing carefully on cash flow. As a result some future deliveries have been deferred by anywhere from two to nine months. Obviously we are monitoring the situation very closely.
Turning now to our acquisition of Photon Dynamics the transaction closed on October 2nd. Let me remind you that PDI broadens our offerings in yield management and leverages our distribution channels. We believe that PDI will add about $45 million to $50 million in revenues in FPD in the fourth quarter but we can’t estimate what the revenue contribution will be in subsequent quarters. The integration of the two companies is proceeding on schedule and we expect to enjoy about $15 million to $20 million in synergies in 2009.
Medical imaging is another victim of the current economic crisis. We operate primarily in the US where medical clinics and hospitals are cutting back on capital investment. Our current discounted cash flow model required by accounting standards required us to write down associated goodwill and IP by $33 million in the third quarter. We continue to believe that the medical imaging industry offers unique opportunities to Orbotech and that we have leading edge innovative technologies with substantial long-term potential.
In order to complete the acquisition of PDI we took a short-term loan of $160 million with the option of renewing for up to five years. Since the acquisition closed in October, our Q3 balance sheet does not reflect the transaction. After the close of the transaction our cash and cash equivalents were about $115 million. The company has always placed a high priority on the management of its cash flows. Our proven ability to manage cash especially in times of difficulty will be a critical factor in enabling us to emerge even stronger from the current economic crisis.
In light of current worldwide economic conditions and everything I have just described, the company has adopted measures to realign its infrastructure. We will continue to tailor our investments to support planned growth and provide superior equipment and service and support solutions for our customers.
Specifically we have refocused our strategic plan in order to realign the company by for example, scaling down activities in the PCB assembly business. We are implementing a 15% reduction in our worldwide workforce this year. We are reducing corporate management salaries by 15% and other salaries by lesser amount, and we are carefully scrutinizing all expenditures in order to cut wherever else possible. These steps should allow us to realize annualized cost savings of approximately $55 million to $60 million.
Finally, I want to stress that in spite of current economic conditions we continue to invest in new product development. In addition to the PerFix, which I described before, we plan to introduce important new products. We continue to invest so that when conditions improve we will be well positioned to benefit and to even better serve our customers. Given how dynamic the situation is and the extreme lack of visibility it is very perilous to offer any kind of specific guidance. At this point our best estimate for revenues in the fourth quarter is roughly $130 million but I cannot stress enough that this is only a very rough estimate.
I will now turn it over to Adrian for discussion of our financials.
Adrian Auman
Revenues for the third quarter of ’08 were $94.8 million compared to $105.1 million recorded in the second quarter of ’08 and $82.3 million in the third quarter a year ago. Net loss for the third quarter of ’08 was $43.1 million or $1.29 per share compared to net income of $5.3 million or $0.16 per share in the second quarter of ’08 and net income of $400,000 or $0.01 per share in the third quarter of ’07.
Let me just point out that the net loss for the third quarter reflected the following. First, an impairment charge of $38.5 million or $32.8 million net of taxes relating to write down of the goodwill and intellectual property of Orbotech Medical Denmark following a determination that the carrying value of that goodwill and IP exceeded its fair value. This followed and updated forecast to discounted cash flow model which was based on the decline in the company’s business outlook in this segment.
The results for the third quarter also reflected an impairment charge of $5.4 million relating to a write-off of the goodwill of the company’s assembled PCB business, and third it also included an initial restructuring charge of $3.7 million or $3.3 million net of taxes in connection with the company’s ’08 cost reduction program. An additional restructuring charge will be recorded in the fourth quarter of ’08 for the second phase of this program.
Sales of equipment to the printed circuit board industry relating to bare PCBs were $27.7 million in the third quarter compared to $34.5 million in the second quarter of this year and $37.2 million in the third quarter of ’07.
Sales of FPD inspection equipment were $31.7 million compared to $29.8 million in the second quarter and $8.8 million in the third quarter of last year. Sales of equipment to the PCB industry relating to assembled PCBs were $39.8 million compared to $7.5 million in the second quarter and $5.7 million in the third quarter of last year.
Sales of automated check reading products were $2 million in the third quarter compared to $2.7 million in the second quarter of ’08 and $2.9 million in the third quarter of last year. Sales of medical imaging equipment were $3.4 million in the third quarter of ’08 compared to $4.4 million in the second quarter of ’08 and $3.4 million in the third quarter of ’07, and to remind just in ’07 the company acquired this business on August 6, 2007.
In addition, service revenues for the third quarter of ’08 was $26 million, a slight decrease compared to the $26.2 million in the second quarter and compared to third quarter of ’07 of $24.3 million.
Let me give you the usual breakdowns of sales by products in geography by descent for the third quarter; PCB bare board equipment sales 40%, PCB assembly 6%, FPD 46%, OrboCAR 3% and medical imaging 5%. Geographically for the quarter, Pacific Rim 69%, Japan 10%, North America 14%, Europe and others 6%. Of the Pacific Rim sales revenues, 32% came from Taiwan, 32% from China and 33% from Korea.
Our gross margins for the third quarter were $38.1% which was below the range we got at the Street. This decrease was attributable to a decrease in capacity utilization resulting from lower unit volume and a higher proportion of service revenues as a percentage of total revenues. We expect gross margins to recover slightly in the fourth quarter.
Our operating expenses decreased from Q2 levels primarily due to the cost reduction program we commenced in the third quarter. As we noted in our press release, we are reducing the company’s worldwide workforce by approximately 15%, reducing management salaries by 15%, reducing other employee salaries by lesser amounts and taking other cost-cutting measures as well.
Turning now to the balance sheet, the company completed the quarter with cash, cash equivalents and marketable securities net of indebtedness of approximately $181.6 million compared to approximately $196 million at the end of the second quarter. The company’s marketable securities at the end of the third quarter included approximately $27.6 million of auction rate securities tied to student loans of which $8.5 million have since been redeemed at par value during October 2008.
The company believes that there is no credit risk attached to its remaining ARS portfolio. In connection with the closing of Orbotech’s acquisition of PDI on October 2, the company borrowed $160 million. This loan is for an initial term of one year, extendable at the company’s option for up to five years and bears interest at the three-month LIBOR rate plus 1.45%. After the closing of the transactions, the company’s net cash and cash equivalents totaled approximately $115 million.
The company continues to place a very high priority on the management of its cash flows and believes that its proven ability to manage cash, including in times of difficulty, will be a critical factor in enabling the company to emerge strongly from this downturn. Our DSOs decreased to 131 days and we expect DSOs to decrease to 125 to 130 by yearend.
As Rani mentioned as to the PDI transaction, we are on target with the integration process and we expect to realize operational synergies of $10 to $15 million during 2009. The total annual cost savings from the measures mentioned above will total approximately $55 to $60 million. This concludes our prepared remarks.
At this point we’d be glad to answer your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Jim Ricchiuti – Needham & Company
Jim Ricchiuti – Needham & Company
Just a clarification on the $55 to $60 million of cost savings, that’s including PDI, correct?
Rani Cohen
Yes, Jim, that’s correct.
Jim Ricchiuti – Needham & Co.
I winder if you could give us a better sense as to how we might see those cost savings on the operating expense lines. Can you give us any feel for how that plays out and also perhaps the timing of some of those cost savings, when you expect to see them fully realized.
Rani Cohen
The timing is basically it already started. We realized a savings of about $3 million already in the third quarter. Of the $55 million to $60 million is for the ’09 as a whole compared to our current run rate. The breakdown, if this is what you’re asking for, I would say that on the, and don’t forget, Jim, we're talking about the combined company, I would say that roughly speaking about $10 to $15 million of the R&D, about a similar amount on the SG&A, and above line a similar amount. So it’s one-third above line, one-third R&D and one-third the SG&A.
Operator
Your next question comes from CJ Muse – Barclays Capital.
CJ Muse – Barclays Capital
First off, I’m trying to get an understanding of what the run rate on the expense side looks like with PDI in the fold. So could you provide guidance in terms of SG&A, R&D and amortization of goodwill for the fourth quarter?
Rani Cohen
It’s going to be very confusing because with or without PDI and the comparative will be very, very confusing. On the goodwill amortization, or not the goodwill, the intangible amortization you should assume about $10 million in the fourth quarter and around $20 something million for ’09, and say $11 million for 2010. On the other stuff it’s going to be a little more tricky right now.
CJ Muse – Barclays Capital
Can you help us, if we’re going to be modeling the savings of $55 to $60 million it would be nice to know what we’re starting with?
Rani Cohen
I can give you the numbers for the combined.
CJ Muse – Barclays Capital
Okay
Rani Cohen
And you’re going to do the comparison to what happened before that.
CJ Muse – Barclays Capital
Oh absolutely, combined is a preference here.
Rani Cohen
Right. SG&A should be around between $20, $21 million, R&D about $25, $26 million and I think basically you’ve got what you want, right.
CJ Muse – Barclays Capital
Yes, and so I guess you talked about the planned cost savings, you already started the initiative. How should we think about the linearity of that into and through 2009? I guess maybe the best way to ask this question is, where do you think your breakeven either GAAP or operating cash basis is from a revenue perspective today, and where do you think it gets to exiting 2009?
Rani Cohen
Most of the cost saving will materialize during the fourth quarter so we will have the benefit of them starting the beginning of say '09. I think the breakeven point is once you do that and assume the gross margin guidance that Adrian gave you, you should have the number.
CJ Muse – Barclays Capital
I guess the gross margin guidance was slightly up does that mean around 39% or are we talking above 40 again?
Rani Cohen
Let's use the number 40 as 1% here and 1% there will not make a big difference.
CJ Muse – Barclays Capital
Sure, and in terms of a tax rate for '08 and '09 how should we think about that?
Rani Cohen
I would keep the 15.
Operator
Your next question comes from Andrew Abrams – Avian Securities.
Andrew Abrams – Avian Securities
I wonder if you could give a little perspective on both your LCD and PDI's LCD business as you see it. I guess a lot of the manufacturers still have a little bit of leeway in terms of when they're going to, if they're going to and when they're going to change the perspective on orders in order to be up and running by mid-year. I know you said that there was little change maybe some postponements. Can you give us a little more color in that direction?
Rani Cohen
I'll try and again you have to remember that this is the viewpoint right now and things as you know change very rapidly right now. So, what I'm saying now can be completely different from what I am going to say next week or next month or next quarter. The way it looks right now in very general terms is that the situation in Taiwan seems a bit more difficult than it does in Korea and Japan.
The manufacturers there are under more pressure and therefore of course are trying to contain their costs and control their cash flows more carefully, which means for us and other equipment manufacturers pushing out equipment that was ordered or delaying installation of equipment or bringing up equipment that's already onsite and ramping up for production.
As I said in our opening remarks, we haven't seen any cancellation of any orders but we have seen some push outs and most of those push outs have been on the order of one to two quarters, maybe three quarters. So, basically that's what we can see. Some of the big programs, the big projects that are going on right now are continuing as planned as we have equipment going into them as we speak and some of them they are now postponing a little bit here and there. Some of it by the way from what we understand for purely logistical reasons not necessarily concern to the overall economic situation, and some of them obviously due to the deteriorating economic situation.
Andrew Abrams – Avian Securities
Is this more a new facility that was coming up with three lines and is now going to come up with two lines or is this we haven't really changed anything we've just pushed everything out by a couple of months. When you say there are no cancellations does that mean nobody has cancelled a line in particular or does it just mean they've all pushed out that kind of stuff?
Rani Cohen
It's all of the above. There are different cases but yes some of them are planning to install less lines at this point, some are pushing out everything, some are bringing up capacity slower than they expected on existing lines and other things.
Operator
Your next question comes from Chuck Murphy – Sidoti & Company.
Chuck Murphy – Sidoti & Company
A few questions for you, first regarding taking on the debt, had you already done that mid third quarter? Just wondering why we had a financial loss line.
Adrian Auman
We took on the debt already in the middle of September anticipation of the transaction. Part of financial loss was also a certain amount of losses because we also liquidated our investment portfolio so we had some losses in that portfolio as well in the third quarter.
Chuck Murphy – Sidoti & Company
I was just trying to get a feel for the run rate we'd have for that line. I guess next as far as the Salvador Imaging business, have you been able to sell that yet?
Rani Cohen
Yes, we announced that. We sold it [inaudible] to the closing of the PDI acquisition.
Chuck Murphy – Sidoti & Company
I'm sorry, forgot about that. As far as how we should think about the assembled PCB the impact from that on the bottom line going forward was it unprofitable the last couple of quarters?
Rani Cohen
In the last couple of quarters it was unprofitable, but breaking even on the level of $7, $8 million a quarter.
Chuck Murphy – Sidoti & Company
My last question was any sense on what the CapEx would be for 2009?
Rani Cohen
About $8 million.
Chuck Murphy – Sidoti & Company
And that's for the combined entity?
Rani Cohen
From now on we are talking about the combined.
Operator
Your next question comes from Sergey Vastchenok – Oppenheimer.
Sergey Vastchenok – Oppenheimer & Company
I got a bit late on the conference call. Can you just give the guidance for the Q4 for PCB and FPD line?
Rani Cohen
The guidance we gave was $130 million for Q4 with a very, very big disclaimer that the level of uncertainty and lack of visibility is worse than ever and therefore that number has to be taken with a big grain of salt.
Sergey Vastchenok – Oppenheimer & Company
What about the FPD? I heard you were speaking about $45 to $50 million range that’s what you're planning to have in FPD standalone in Q4.
Rani Cohen
No, what we said is that the PDI acquisition will add between $45 and $50 million to Q4 in the FPD.
Sergey Vastchenok – Oppenheimer & Company
And on top of that the Orbotech core business which is supposed to be about the same level in Q3, right?
Rani Cohen
First of all the 45, 50 is included in the 130 that I gave, and the Orbotech's core business in the FPD without PDI is planned to be less than 45, 50. We gave our guidance and we are more or less as I said we're on track for Q4 which means that the FPD specifically will be anywhere around 75 to 80.
Sergey Vastchenok – Oppenheimer & Company
Regarding the FPD backlog, can you specify if it grew in this quarter or where do you see the traction and which generations you see the backlog going forward?
Adrian Auman
The backlog, the book-to-bill last year for the FPD in this quarter was less than one. Going forward we don't know.
Sergey Vastchenok – Oppenheimer & Company
And to which generations is it primarily all about?
Adrian Auman
Are you talking about the new booking?
Sergey Vastchenok – Oppenheimer & Company
Yes
Rani Cohen
It's all generations. We have Gen 8 orders that we booked this quarter. We have Gen 5 and 6 and even some Gen 4.
Sergey Vastchenok – Oppenheimer & Company
Going to the PCB business, how do you see it going forward if its still being less cyclical than FPD which shows been the case for the last year since and what is the competitive landscape over there?
Rani Cohen
I don't think cyclicality has to do with anything at this point. The PCB business is just going down in the past few weeks and since more or less beginning of September or middle of September and right now we cannot forecast when it's going to improve.
Sergey Vastchenok – Oppenheimer & Company
You feel your take in the market share in the last quarter?
Rani Cohen
I would be careful and say I'm sure we didn’t lose market share in the various areas of AOI and DI. We may have gained some but we don’t have the numbers right now.
Operator
Your next call comes from Jim Ricchiuti – Needham & Company
Jim Ricchiuti – Needham & Company
Yes, I was wondering if you might be able to talk a little bit more about PerFix. How big a market opportunity that is and to what extent, you talked about I think seeing some revenues in Q3 from that, how do you see that product rolling out in this environment?
Rani Cohen
Jim, first of all the overall total available market or potential market for this, I would say in the tens of millions of dollars. I don’t want to give an exact number because the whole market is so volatile that it’ll be very difficult to estimate to how much it’s going to bring.
I think that this is a product that is very, very well positioned and well suited, especially for this kind of environment. This is a product that brings direct savings to our customers by enabling them to fix PCBs that they would previously have thrown out, and since the average selling price of this kind of system is relatively low, it enables them to invest even in difficult times like this and the return on the investment is very easy to show that it is a very short ROI.
As I said, it can bring money directly to the bottom line by enabling them to ship products that previously they would have to throw away. So I think this has a potential to sell okay in this situation, but again, we’ll have to see how the entire market behaves. But we already presented this product, we started launching it in Q2 of this year, we recognized revenues in Q3, and we think there’s potential for quite nice revenues going forward.
Jim Ricchiuti – Needham & Company
Yes, could you just go over the ASP with us and can you say how much in revenue you recognize?
Rani Cohen
The ASP is something like above $200,000 and we recognized three systems this quarter.
Jim Ricchiuti – Needham & Co.
And just a clarification, I think you gave a forecast for DI and I wasn’t sure, did you say 60 machines for the full year?
Rani Cohen
Yes, we sold 48 up until now and we forecast about 60.
Operator
Your next call comes from Irit Jakoby – Susquehanna.
Irit Jakoby – Susquehanna
So just turning again to the guidance, I know it’s a tough number and the variability could be very large, but if you’re contemplating $130 million for Q4 can you go into that a little bit in terms of what you expect to see in the PCB? Do you expect PCB to be down quarter-over-quarter and then going into 2009 is there a trough level of PCB revenue?
Amichai Steinberg
There is a trough line for the PCB we just don’t know where it is. Q4 will be less than Q3 and on the PCB and what will be remaining from the PCB assembly because we continue to sell these systems for the next few weeks. Although the 130 implied that if we get the 45, 50 from the Proton contribution, which means that our standard order on the organic, so called revenues for Orbotech will be less than the third quarter. In any rate about 2009 it’s too soon and it's too risky and given the very limited visibility we have, I don’t think it’s reasonable to come with a number now.
Irit Jakoby – Susquehanna
And so looking at the bare PCB only since assembled is now not going to be continued, is there a revenue level that is breakeven for that business?
Amichai Steinberg
This number is now going down due to the measures we took. There is a number I don’t have it here now.
Irit Jakoby – Susquehanna
And last one for me, on assembled PCB, I think in the past you had talked about a few different alternatives possibly for that business. Is that something that you think is completely off the table or do you think that in a better environment it could still be feasible later on?
Rani Cohen
We’re still trying to sell that business and transfer the business to other people, other companies. We have not given up on that, so we’re still in the process of that, but in the meantime we have to take the measures and up ‘til now we weren’t successful in doing that.
Operator
Your next call comes from CJ Muse – Barclays Capital.
CJ Muse – Barclays Capital
Sorry to harp on this, but I think understanding the cost structure and trying not to lose cash is really critical here. So I guess a couple follow up questions. It looked like the combined PDI Orbotech R&D run rate was around 25, 26 so I suspect you’re not seeing much cost savings there. So should we see $10 to $15 million annual savings off of that 25, 26 run rate that you guided to for December through 2009?
Amichai Steinberg
The combined number for PDI R&D and the Orbotech FPD R&D was much more than the number you mentioned.
CJ Muse – Barclays Capital
I guess I have to recheck that. I guess maybe a bigger picture question then, in terms of the numbers you gave for December, we should be thinking 10 to 15 on top of that through ’09 or a portion of that 10 to 15 is already reflected in the numbers for December?
Rani Cohen
I’m not sure I understand the question. You need to help me out here.
CJ Muse – Barclays Capital
Well I guess what I’m trying to get at is you’ve enunciated what the plan is to lower costs and we know now that it looks like operating breakeven is around $120 million top line for December. What is that number exiting December 2009? Is that closer to $9,500 million, given the cost savings you talked about?
Amichai Steinberg
Without being too specific, the answer is yes.
CJ Muse – Barclays Capital
And then follow up on the flat panel side, you and PDI have pretty different I guess alignments, at least regarding what they were doing on the repair side. What are your plans there? Are you thinking about the outsourcing side of things? You planning to manufacture most in Israel? Any thoughts there would be greatly appreciated.
Rani Cohen
We’re looking now at the whole operational side and we’re definitely going to take advantage where it’s applicable of the outsourcing activities that PDI already started. One of the things we have in our plan for the very near future is to see how we consolidate all the different manufacturing facilities and operational activities that both companies have.
I can tell you very clearly that we’re not going to change the manufacturing from San Jose to Israel, but we will look at how we can optimize the different manufacturing floors and facilities for the whole company now, not just for PDI.
CJ Muse – Barclays Capital
And in terms of some of the synergies there and in terms of using their technology and new products, can you talk about the road map there, as to are we early stage development or you think you’ve got a new product out in three to six months?
Rani Cohen
In three to six months the only thing that may come out is all kinds of data mining and data sharing and things like that. Anything more than that always takes more time than that. We’re now working on the road map and what we can bring and what synergies we can see on the product side, but it’s too early to discuss that now.
Operator
(Operator Instructions) Your next question comes from Ziv Tal – Oscar Gruss.
Ziv Tal – Oscar Gruss
Can you please share with us some of the plans or the way you’re looking at the medical imaging part of your business into 2009?
Rani Cohen
The medical activities we have or the activities we have in the medical area are, as I said in the opening remarks, they’re all long-term potential. We're now looking into the various activities we have there to decide how we want to continue them. In light of the economic conditions and the money we can invest in R&D and in the other activities there. As you know, today we have activities here in Israel and in Denmark, both aimed to the nuclear cardiac imaging market. The CZT detectors that we develop and sell which have more or less proven market advantages or technology advantages, and we’re going to check now and see how we want to continue those activities going into 2009, and into the further future.
In any case, the activities we have there, as I said before, are more longer-term potential growth areas and revenue contributors and not for the immediate future.
Operator
Your next call comes from Bob Taylor – Harris Associates.
Bob Taylor – Harris Associates
Gentlemen, a couple questions, first of all, regarding the medical to follow up, is that breakeven right now?
Amichai Steinberg
Our plan is that’s going to be breakeven in ’09. In $2.5 million is the current expenses, it’s not breaking even, but are planning to bring it to a breakeven level in [inaudible].
Bob Taylor – Harris Associates
And has that been written down to zero now?
Amichai Steinberg
Almost, we’d have leave $7.5 million about 5 of them are on tangible assets and 2.5 or so in intangible assets.
Bob Taylor – Harris Associates
And then the next question is regarding the $55 to $60 million cost savings, you mentioned a fourth quarter charge. Can you just elaborate what you expect that to be and how much of it is cash?
Amichai Steinberg
I don’t have the final numbers most of it will be cash because it has to do with employees. I will say around, for the employees I would use the number $5 million is a reasonable number.
Operator
At this time I show no further questions.
Adrian Auman
Okay thank you very much for joining us. Any other information you would like to know about Orbotech, please visit our Web site at www.orbotech.com. Thank you.
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