Executives
Kenneth F. Potashes - Chairman of the Board
Robert J. Phillippy - President, Chief Executive Officer Director
Charles F. Cargile - Chief Financial Officer
Jeffrey B. Coyne - Senior Vice President, Secretary General Counsel
Analysts
Analyst for Ajit Pai - Thomas Weisel Partners
John Harmon - Needham & Company
Jiwon Lee - Sidoti & Company
Mark Douglass - Longbow Research
Ed Einboden - Wm Smith & Company
Newport Corporation (NEWP) Q4 2008 Earnings Call February 3, 2009 5:00 PM ET
Operator
Good everyone and welcome to the Newport Corporation fourth quarter 2008 financial result conference call. Today’s call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to the Chief Executive Officer, Mr. Robert Phillippy. Please go ahead sir.
Robert J. Phillippy
Good afternoon and welcome to Newport’s fourth quarter 2008 conference call. With me today is our Chief Financial Officer, Charles F. Cargile. During the course of this conference call, we will be making a number of forward looking statements that are based on our current expectations and involve various risk and uncertainty that are discussed in our periodic SEC filings. Although we believe that the assumptions underlying these statements are reasonable, any of them could prove inaccurate so there can be no assurance that the results will be realized.
Our main objective in today’s call is to explain what we believe differentiates Newport in these challenging times and the actions we are taking to ensure that we continue to be a market leader and a company that will provide excellent returns to our shareholders. I would like to begin by touching on a few highlights from the fourth quarter of 2008.
First, we continue to integrate our core competences in lasers, optical systems and motion control technology to provide solutions that enhance the manufacturing process of solar cells and panels. During the fourth quarter of 2008, we commenced shipments our new Solarex 1600-P fully-automated laser scribing system for thin film solar panels. We also introduced a number of new products designed specifically for solar cell manufacturing and test applications which I will describe in a bit more detail a bit later. Clearly, our value proposition continues to hold great appeal for our customers in this market as exemplified by the $33.6 million in orders we received during 2008. This represents growth of more than 150% versus the $13.3 million in orders for all of 2007.
Second, we achieved all time record orders in our scientific research in defense market during the fourth quarter of 2008. Our research market orders were very strong internationally especially in Asia and reflected wins for new laboratory build outs that included products from both of our operating divisions.
Third, the cost reduction plan we announced in September of 2008 is proceeding in an accelerated phase and we have further expanded its scope such that we now expect to reduce our operating expenses by more than $15,000,000 in 2009 and fourth we have continued our steadfast commitment to developing differentiated products within our technology focus areas. At the photonics west trade show last week we introduce 23 new products all of which will begin generating revenue during 2009.
I will provide more detail on some of our new products after Charles discusses our recent financial statements. I would now like to comment more generally on trends on our target markets in characterized on our target markets and characterized our recent orders and sales in that context. Our sales in the Fourth Quarter of 2008 total a 107.4 million a decrease of 9% compared with a 118 million recorded in the Fourth Quarter of 2007.
New orders received in the Fourth Quarter of 2008 of 99.6 million decrease 23.5% compared with 130 million received in the Fourth Quarter of 2007. In our release we noted the four most significant factors influencing our sales and orders report of that quarter. Orders from our customers in scientific research and light and health sciences markets were relatively strong in the Fourth Quarter of 2008. In fact, as I mentioned the 43 million are orders from the research market it represented the highest quarterly level we have ever recorded.
The relative strength and orders from our life and health sconces customers came despite the fact that demand from OEM customers that manufacture cosmetic and therapeutic lacer systems had detoriated significantly due to the macro environment. What we are please with these results we are cautious in our outlook as the primary funding sources for these customers are government, corporate and philanthropic all of which are acing some degree of uncertainty in the current environment. That said we do expect this markets to continue to provide some stability in coming quarters. As our position remain strong and we have continued to invest in innovative products to serve our research in light and health sciences customers.
Second although our order rate for systems and components for solar sale manufacturing applications did declined in the Fourth Quarter as a result harder funding availability for some customers we were still able to record 33.6 million in new orders from this market for the year and excess of our original target of 30 million our sales to these customers where 21 million for the year giving us a meaningful backlog for shipments in 2009. Prevailing views from solar industry analyst point to the general economics slow down contributing to an over supply of solar sales and panels. Although information from our customers in these segments indicates that investment delays are link more closely the funding concerns related to the turbulent financial market conditions than to a pull back of underlying demand for solar energy.
We believed that both this factors will contribute to a near term pose in capital spending in the segment that will impact our business. On the other hand, the long term outlook for renewable energy sources and solar energy in particular is quite promising. We therefore will continue to invest to develop innovated solutions for solar cell manufacturing application. Due expect to proceed at a more measured phase than in 2008.
Third, the over writing negative factor of our Q4 results was to depress state of market conditions for our semi conductor equipment OEM customers. Fourth quarter sales to and orders from our semi conductor equipment customers which are included in our micro electronics market were both down significantly. Sales to these customers were down 13% compared sequentially with Third Quarter of 2008 and 27% compared with the prior year and orders were down 22% sequentially and 65% on the year over year basis. Orders for the quarter were lower than any level that we have seen since before our acquisition of inspector physics in 2004.
Timing of the recovery in this market is difficult to anticipate but industry forecast and reason announcements from some of our key customers indicate that the current down turn that continue for sometime.
Fourth, in this most recent quarter we suffered the ill effects of the slow down in the industrial manufacturing in other markets we serve. Orders in these markets were down 39% compared with the prior year period. We believed that market conditions in this segment are directly correlated with macro economic trend.
Newport end market diversity has always been one of our strengths and as mentioned above its particular important during difficult economic times as it provide the degree of stability that enables us to maintain high levels of customer support and continuing investing to expand our ever increasing portfolio photonic solutions.
At this time I would like to turn the call over to Charles to discuss some of the other important aspects of our financial condition and performance. Charles?
Jeffrey B. Coyne
Thanks. Please refer to press release and form-AK we issued earlier today. In addition I encourage you to check our website at newport.com we have post the historical income statements, balance sheets and schedule that detail historical trends for sales and orders by market in the performance of our 2 reporting segment.
I had like to acknowledge that this press release includes the number of unusual items in our financial statements include some complex in calendar sheet. When market go to a dramatic dislocation as we seen recently that often leads to a significant balance sheet and income statements and adjustment that we believed our outside of our core operating results. That is much of what international symposium being represented in our current financial state.
In the average to clarify the impact of these items and show what results are would be excluding this items we will for a period of time before our income statement in accordance with GAAP and also on a non-GAAP basis. Since we are preceding GAAP and non-GAAP information we have included a reconciliation of the two in our press release and in our website. To explain the chart as I believed it is usually considered in a two different categories.
The first category is cost that we are encoring to reduce the cost structure of the company to position as the expected lower revenue levels during 2009. You may recall that we acknowledge in July of 2008 that market winds would be against us for a period of time then on September 2nd of 2008 we announced the cost reduction program designed to reduce our total annual cost by between $11 and $14 million.
Since then condition and certain of our end markets have detoriated further and as result we have expanded and intensified our cost reduction initiative. I had now liked to provide a brief update on the major components of these efforts. At the end of the Fourth Quarter we had 1849 employees that is down from more than 2,000 in July of 2008. Additional reductions have been communicated internally and will take place during the next two quarters. We expect to have fewer than 1800 employees as we exit the second quarter of 2009.
We will now transfer more than 250 products to out new manufacturing facility in Wuxi China. We currently employed 55 people at this facility and in the Fourth Quarter of 2008 the external revenue of value of products manufactured in Wuxi was 2.6 $million. During 2009, we expect to continue to increase our manufacture activity in Wuxi through the transfer of additional thousand products.
In addition and adjusted importantly we are excited about capturing new business due to our expended present in the Asian market. Our initiative outsource selected manufacturing activities to loc cost region continues on tract and as expect to be completed by the second quarter of 2009. We begun to leverage our commonly YSAP platform to enhance our efficiency and important example in the Fourth Quarter was the use of this systems tool to facilitate our 23:41 reduction effort which resulted in an inventory reduction of $6.4 million during the quarter.
And we have also initiated additional cost reduction action included personnel cost and periodic shutdown of selective factors. In the reconciliation of non-GAPP financial measures on page 8 of the press release you can see that to implement this initiative we encored $2.6 million of expenses in the Fourth Quarter and $4.7 million in the full year of 2008. We estimate that the cost of these initiatives in total will be approximately 8 million to 12 million which is unchanged from what we estimated in September of 2008. We expect these cost results in annual saving in excess of $15 million. This lower cost structural position us extremely well for the second half of this year and allow for superior profit leverage when revenue levels increase.
The second category of charges is more complex and now operates in the nature. This charges relate to balance sheet adjustment that become required from a GAPP perspective when company market capitalization fall of 25:05 as ours data in the Fourth Quarter of this year.
The largest item is an impairment charge relating the good will and intense full assets we established in 2004 in connection with our acquisition of inspector physics laser and photonics. We establish a good will amount that time of $178 million at that time when Newport’s market CAP was $531 million. At the end of the Fourth Quarter 2008 our market CAP was $238 million. The severe drop in market CAP of Newport and most other lacer a company makes it impossible to support maintain in their original evaluation of our lacer division as independent of its business outlook and future cash generation ability. As such we updated our evaluation and determine to be appropriate to record a charge of $119.9 million to write up the entire goodwill balance related to our lacers division and certain other intangible assets relating to that business.
In addition we recorded a charge of $2.9 million to w rite down our minority investment in a business devoted to backend semi conduct packaging. Due to the decline market evaluation in that industry both of this items reflect non cash expenses that have no impact on the expected operating profit generation of our business international symposium going forward. They merely reduce the balance sheet carrying value of the items.
Another accounted adjustment requires relate to the tax impact that occurs once we encore such large non cash expenses. This charges which total over $120 million push us into a cue needle book lost position for the last 3 years. In a simplest terms this requires us to record an additional amount of $19.8 million to fully reserve the differ tax assets we have in our books and also requires us to establish a tax liability for certain benefits we had previously estimated with derive from our long live lacer assets which is total of $4.6 million.
That is important to note that both of these adjustments are noncash and do not result in the lost of any assets. Instead the assets become fully reserved and as we regain our profitability we expect that this assets will be fully realize. In other words we still have approximately $75 million of net operating loses that we can utilize for many years to offset the U.S. tax liability on future earning.
So all those these are large Q4 expenses they do not impact our profitability in the future nor do they in any way indicate that our future prospects impaired. The financial statement also reflect and update on our actions to collect the note receivable relate in sale of our previously discontinue to operation. There are 2 line items of $.7 million and $.3 million and for Q4 2008. We continue to litigate this matter and expect to conclude the legal action and achieve some recovery in the first half of 2009. When that happens we expect to record a gain but we remain unable to estimate that amount at this time.
The last two areas I want to explain about positive, first in the fourth quarter we retired %28 million of our convertible bonds for approximately $70 million in cash result into $10.7million gain. Also we sold the only building we own in our Mountain View California campus for approximately $7 million in cash result in the gain of $2.5 million.
These last 2 items reflects our focus on effective cash generation a utilization of cash. In the Fourth Quarter we generated over $14 million in cash from operation and then earn another $7 million from the building sale. We use this cash to retire the bond and their by reduce our in date base. At a time when market conditions are hand free in our top line performance we will continue to be focus on cash and balance sheet effectiveness.
In addition as a result for the 29:30 discussed previously our balance sheet has become much cleaner and leaner. I recognized that this is a lot of discussion about non-operating items so let me take a minute to emphasize that the actions we taken serve 2 purposes.
Number one base on our cost reduction efforts. Our PNL has been streamline. Once the steps are completed, we expect our quarterly SGNA will be below $27 million per quarter. Now our RND will be below $10 million of core. In addition as we complete our cost reduction initiatives including our manufacturing transfer action and as our sales volume recovers we expect our gross margin to return that allow them in at 40% level.
Secondly base on our balance sheet adjustment we now have a balance sheet that includes mush lower risk of future write up but retains the potential for significant tax benefits once we return to profitability. Yet times are tough but the Newport management team will continue to take actions to protect and improve our profits and to effectively manage our balance sheet. Now I had like to turn the call back to Bob.
Robert J. Phillippy
Thanks Jeff. Now I would like to take a moment to highlight a few of the new products we introduced at the Photonics West Trade Show last week. First, we introduce two new Q switched lasers specifically designed for thin film potable takes scribe applications. A new 27 31:12 version of our industry leading HIPPO lacer and a two 31:15 dream version of our compact explorer lacer. The superior beam quality of both products enables solar cell manufacturers to produce clean scribes on glass funnels with a large tolerance bond for glass flatness.
Most competing lacers required the use of complicated and extensive focusing optics to accomplish the same thing. These new lacers also deliver up to double the average power for over 50% higher lots per dollar compared with previous version. This new HIPPO and explorer lacers are base on the companies ragged industrial OEM product platforms with time tested and proven performance for 24/7 operation.
All film for solar cell applications we introduced 32:06 sole 3-A solar simulators. This are large area continues wave sources that meet all class-A performance parameters without compromising the output power. Each version are fully certified and calibrated to all applicable industry standards making them ideal for the test and measurement of most tasks of solar cells.
A third new entry into our portfolio products for solar cell applications is our new PV isostation series of work stations. This are ergonomic work stations that feature integrated storage and shelving for instruments solar simulators and other devices and a specifically treated work surface that reduces light reflectivity by a factor of 6 compared to typical optical table surfaces.
HIIPPO and explorer lacers, 33:00 solar simulators and PV isostation work stations are three new examples of how Newport’s broad technology portfolio can be effectively leverage to create solutions for solar cell development and manufacturing. For the scientific community we introduced 2 higher power versions of both our spitfire ultrafast amplifier and our solstice ultrafast lacer system. The new spitfire pro XP provide pulses of less than 35 per seconds at the industry leading for watts of average power. The new solstice 1 box system provides ultrafast pulses with 3.5 watts of average power and up to 10 kilohertz repetition range. With exceptional beam quality and superior pulse intensity this innovations in ultrafast lacers will enable researchers to further their important work in chemistry, physics and Biology.
We also introduced the ESP Trio 1 a new three access motion controller and driver with some great new features including fast USB communication and a clean, intuitive front panel menu. In addition, the ESP trio 1 provides the excellent reliability and robustness of our popular ESP product platform and Newport proprietary ESP stage auto detection and auto configuration enabling factor setups and faster data collection. The list goes on and as I mentioned earlier we introduced 23 new products at the show. All examples of our continued commitment to being the industry foremost photonics solutions providers and now I like to make a few comments regarding our outlook for coming quarters.
Earlier in this call I described the conditions in each of our target markets. While qualitatively the diversity of our end markets provide us with a degree of insulation from steep downturns in some sectors.
The general turbulence and lack of visibility in the macroeconomic environment makes specific quantitative guidance impractical. From an operation perspective we have responded to this uncertain but cautious outlook by building flexibility into our co-structure as exemplified by the list of cost reduction actions Chuck outlined a few moments ago.
Implementing these actions will enable us to be profitable and continued positive cash generation in a year that we expect to be down from the sales perspective. While preserving our ability to respond to growth opportunities as conditions improved.
Some of the actions we are taking impact our employees and therefore particularly difficult as we believe that our employee team is truly our Company’s best asset. We are fortunate that the passion and commitment of our team members includes a willingness to accept these cost reduction steps in the spirit of enabling Newport’s future success through short term belt technique.
To summarize, while current economic environment is impacting Newport’s business, we believe that our profit improvement action plan and focus on cash will position as well to endure and successfully compete in a challenging market environment.
Our market diversity combined with our continued ability to leverage the industries most complete technology portfolio to provide value added plutonic solutions from our customers has and will continue to improve our market position.
In fact the current market conditions create a meaningful opportunity for Newport. As our broad range of products and services provides a one stop shop value proposition that will be particularly appealing to customers who are operating within their own tight resource constraints.
Thank you and now we would like to answer any questions you have.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Ajit Pai - Thomas Weisel Partners.
Analyst for Ajit Pai - Thomas Weisel Partners
This is [37.54] calling in for Ajit. A couple of questions, first I wanted to ask about the December quarter in terms of the margin dynamics in the quarter. If I exclude I guess $2.6 million in restructuring related charges looks like gross margins were still sequentially down close to 250 or so basis points and operating expenses increased sequentially or could you give a little more detail on that.
Charles Cargile
Yes. This is Chuck. The gross margin was down in the quarter even if you look at on a non-GAAP basis and it was down for different reasons in the two distinct business units that we operate in. Within lasers the gross margin was impacted by a couple of inventory adjustments that we reported in the quarter, the total about a $1 million. We reported that in Q4. We would not expect that to recur in 2009. Within the PPT business the dynamic is a little bit different although we did have a smaller amount at the inventory adjustment in both cases part of the reason for inventory adjustment is merely due to this anticipated slowdown in revenue that we are going to see in 2009.
So, we did have a small write off in PPT. But also within PPT the mix of revenue was less favorable than what we have seen in the past. Recall that within PPT we really have three different types of businesses. We have the components business that has the long time Newport traditional business if you will. We have the optical components group that we had purchased from Thermal Electron and we have the integrated solutions business that we have built such point of the acquisition.
The integrated solutions business is where we are shipping the photo volume take tools, the solar tools that Bob referred to earlier. At those start to ship the first generation tools that we have carry a lower margin. We expect that as we continue to ship more and more that margin will improve. But in the quarter we had a higher mix of integrated solutions tools and a lower amount of optical components so that leads a mix negative that we saw in the quarter as well.
So, probably was what we will consider the low watermark from a margin standpoint in Q4 and we would expect to see that get better in 2009.
Analyst for Ajit Pai - Thomas Weisel Partners
In terms of operating expenses the sequential increase?
Charles Cargile
Yes, the operating expense increases, I think are difficult to decipher particularly from your perspective because there are so much going on in terms of transitioning the business and I think as we work through the headcount reductions and we work through the transfer of manufacturing both internally to Wuxi and externally to the outsource partners that we have selected, and then as you transition through was a very difficult quarter as you can imagine I think there are some overlap of costs that we incurred in the quarter that will not recur. That is why in the script I made a point of identifying what you should expect the cost to be once we can work through all these transition-type items that we have. The target would be for operating costs to be back below the $27 million a quarter level impact for SG&A and $10 million for R&D.
Analyst for Ajit Pai - Thomas Weisel Partners
Okay. And these 27 and 10 targets are this sort of second quarter or which quarter should we expect that?
Charles Cargile
I think you should expect that if you were modeling it for the second half of the year. If possible we can get there by Q2 but there is still some of the actions that we have identified will overlap a little bit in Q2, so we may not capture the full amount. I think we will exit Q2 with that as a run rate. We may not be able to capture it all in Q2.
Analyst for Ajit Pai - Thomas Weisel Partners
Okay and in terms of $2.5 million one time charge, how much of that was in cost of sales and how much of it was in SG&A?
Charles Cargile
The $2.5 for the profit improvement action is $1.2 for cost of sales and $1.3 for SG&A.
Analyst for Ajit Pai - Thomas Weisel Partners
Okay, great. And the second question I had is in terms of microelectronic, you provided a detail on semiconductor side of business it sounds like the orders from portable side were somewhere around $3 million. How are the trends in the distexturing side?
Charles Cargile
Distexturing is basically zero for the quarter. You recall but those are orders that we only get periodically and then they ship our over a number of quarters and we did not have any those in Q4 and frankly do not see any of those on the horizon in the near future.
Analyst for Ajit Pai - Thomas Weisel Partners
Okay, great. And then lastly, the final question in terms of the stock-based compensation. What was it in the quarter and what should we expect for the next year and also how should we think about the taxes next year?
Charles Cargile
Stock-based compensation was very minimal in Q4. In a minute, I may look at the exact number but it was immaterial because we are not hitting any of the targets that had been pre-established in order to pay out incentive compensation, so that is basically no. And for 2009 I think you can also consider that it is a very low amount. It is where we are going to set our internal targets to pay out incentive compensation at a level that requires to us hit a pretty impressive financial performance in order for them to pay out. So, in other words, there will be self funding if they do pay out. So, I think if you look at it, if you are running your model and you are comparing Q4 of this year to Q1 of next year you would not see an incremental cost for incentive compensation unless you are modeling an increase in profits. Does that make sense?
There would not be an explanation for expenses to go up or profit to go down because of additional incentive compensation. The profits would have to be enough to cover the incentive compensation.
Analyst for Ajit Pai - Thomas Weisel Partners
Great, yes, and in terms of taxes what should be modeled?
Charles Cargile
Taxes. As I mentioned to you before, the taxes become difficult to explain when you are bouncing around breakeven because usually when we are about breakeven point which we are going to bouncing around that in the first half of the year we are still making profit in our foreign locations but we are losing a little bit money in the US and so we will still have tax at the consolidated level, even though we will not have tax for the US. So, I think for the first part of the first half of the year I would recommend that you model like we have this quarter on a pro forma basis about a $1 million in tax expense and then as your model reflects a more meaningful profitability because we will still have the reserve on the deferred tax asset, you should assume about 15% to 20% as the tax rate.
Operator
Your next question comes from the line of John Harmon - Needham & Company.
John Harmon - Needham & Company
I was wondering, you have talked about an improvement in the second half, but will we see an improvement in gross margins at the same time as a reduction in operating expenses and talking about gross margins, the down tick in the fourth quarter, you talked about inventory charges but is that something that you can recover a little bit or are we going to stay around this level for awhile?
Charles Cargile
I think you are going to see improvements in gross margin for a couple of reasons. One is the one off nature of a couple of the items that I mentioned previously in answering Sidan’s question. So, I think you would naturally see an increase in the margin here in the first half of the year. Again, that is dependent to some degree on the revenue levels, but certainly for the second half of the year, as I mentioned in the prepared comments a minute ago, two of our bigger initiatives are not specific to headcount and operating cost but are very, very focused on cost to sales and that is the continue to move products internally to Wuxi. As we mentioned, we have already moved about 250 product lines and we think that we will do a 1,000 this year. That is a huge increase and we get a meaningful gross profit improvement when we do that and that we will see an increasing value throughout 2009. And then secondly by the end of the second quarter our outsourcing program to our partner in Southeast Asia will be complete and that will also show a meaningful improvement in the margin.
So, I think just with those two items alone, you will see an improvement in the second half of the year irrespective of an uptick in volume and also I think, as you will note, we have reduced inventory throughout 2008. So, we have already reduced our cost base even when the shipments did not come down. So, in other words, if our revenue would be flat in 2009 versus 2008 the margin would already go up because we have reduced the cost that takes to produce that inventory.
So, we are keenly aware of how the margin has deteriorated and actions that we are take to buoy that did not just start because we start something weak in Q4. It is something that we have already started and you will see the benefit throughout 2009.
John Harmon - Needham & Company
Okay. Thank you. And secondly you led into that you started working on the profitability of your laser business before the general company and if you take up a $1 million industry, which is an inventory charge and profitability improved in the fourth quarter but could the profitability of your laser business improve more, we see probably PPT pick up.
Robert Phillippy
John, it is Bob. Did you say could the profitability of lasers improved before PPT?
John Harmon - Needham & Company
Yes, since you have been working on it longer.
Robert Phillippy
I think our update on progress in the lasers’ division is pretty much a carbon copy of what we have communicated previously and that is we can continue to see progress. We continue to see the operational metrics are headed in the right direction. We began during the third quarter to having, I should say dealt with a lot of the process related issues. We began in the third quarter to reduce and streamline the co-structure and we continue that with the deteriorated market conditions we are really doing that across the Company, but I would say that it is more pronounced in the lasers division because they had a bigger opportunity to improve their gross margins.
So, we are still headed on the same tract. Everything is looking the same as it did a quarter ago. It is just that we have seen a greater decline in revenue and/or at least I should say a greater decline in our outlook than we had a quarter ago.
John Harmon - Needham & Company
Okay, thank you. And then just finally, how do you determine how many of your bonds to buy back in a quarter? Is it just limited by availability or are you buying back roughly in line with your cash generation from various sources?
Robert Phillippy
That is a good question John. First, it should be noted that that is a decision that our Finance Committee of our Board is very involved in and so we do not have ironclad rules. But I believe it is fair to say it is primarily dependent upon our cash generation and our consideration of other uses and as you can see last quarter we generated about $14 million in operating cash and had another $7 million that we got from the sale of the building. So, we had $20 million that we had available and we used 17 to buy back the bonds.
So, I think it is more matter of what we think our comfortable cash position is and then what the rate is that we can buy them back and we got them back at about 60% of par in Q4. So, I think next week will be interested again and look and seeing what the deals are and we have got our projections for cash flow for the next quarter in the first half of the year and I think we will continue to be opportunistic because it is a very, very positive use of our cash in this environment.
Operator
Your next question comes from the line of Jiwon Lee - Sidoti & Company.
Jiwon Lee - Sidoti & Company
First to Chuck, what type of interest rate the question relates to the convertible accounting that everybody has to apply this year. What type of interest rate should we model? Just given today’s convertible on the books and/or what dollar figure should we be using for our modeling purpose this year?
Charles Cargile
Yes, I understand. That is going to be an issue for all the finance analysts in putting their model and to be quite frank, Jiwon; we have not made that public yet for what our final calculation is. Our focus was completing the 2008 results and to project now for what we expect Q1 to be. We have not done that yet. So, you are going to have to wait. You are going to make your estimate or wait for us a little later in the quarter to get the full estimate, possibly by the time we filed our 10-K in the February, first of March, we may be able to give some better guidance to that.
Jiwon Lee - Sidoti & Company
Okay, fair enough. And then, how much on restructuring charge do we incur the second half just to refresh my memory of this, including $2.5 million for the fourth quarter?
Charles Cargile
It was $4.7 from the time we announced September 2nd.
Jiwon Lee - Sidoti & Company
Okay. And then how should we be thinking about the remainder of the charges in the first half?
Charles Cargile
Good question. We had said in September that to complete the actions it would be between $8 million and $12 million in total. It was a bit of a broad range and in hindsight it was wise of us to provide that broad of a range because at that time we did not know if conditions would deteriorate further or not. As we have said in the prepared remarks, conditions did get a little bit worse so we have expanded the scope of some of those actions. So, I believe that we are still in that range of $8 million to $12 million in total but you should assume that is going to be closer to the $12 million and the $8 million just because we have expanded the actions, so that is going to be close to $12 million in total and we have already incurred $4.7 million.
Jiwon Lee - Sidoti & Company
Okay. And lastly to Bob, the reason why you withdrew from this specific guidance is that just because things are really bad and you just do not have any visibility or can you give us a little more color is to why you are not providing specific items anymore?
Robert Phillippy
Yes, it is basically that the turbulence of the market conditions. We understand, I think directionally and qualitatively where we stand in each of our markets and I made remarks to that extent but trying to peg a specific number is just the difficult thing to do when you have got particularly in the turbulence in the semiconductor equipment market. So, what we have chosen to do in light of that degree of uncertainty is to really make sure that we can deal effectively with the bank we can control which is our cost structure so we are purposely driving our cost reduction actions hard and building our flexibility into our business model so that we can be better prepared for that degree of uncertainty that we are experiencing.
Jiwon Lee - Sidoti & Company
Could you comment on any type of order cancellations and if so where that might have come from for the quarter?
Robert Phillippy
Jiwon I do not think we had any material cancellations certainly none that impacted the revenue. I do not think there is nothing really to speak of at the cancellation front.
Operator
Your next question comes from the line of Mark Douglass - Longbow Research.
Mark Douglass - Longbow Research
Do you expect to be profitable in Q1, non-GAAP? Tough one to answer?
Robert Phillippy
Yes it is a tough one because we have not given any guidance. We are not purposely giving guidance because it is so difficult to try and guess what the market is going to give us for the next two months. I think it is fair to say that from a non GAAP perspective that our cost structure will be lower in Q1. It will be lower than it is going to be in Q3 but it will be lower in Q1 which drives our break even point to something quite a bit below where we are for Q4. So I think if market conditions are more favorable than what we anticipate today then certainly I would not be surprised if we were profitable. If market conditions continue to slide and we see that the seasonal down drafts that we usually see in the research, we will probably be a little bit in the red but it is fair to say that we are going to be bouncing around that break even point, one way or the other just depending on the directional arrow of the market.
Mark Douglass - Longbow Research
Ok it is fair enough. Can you repeat what you thought the quarterly run rate will be for the SG&A and R&D?
Robert Phillippy
Yes, below $20 million in SG&A and $10 million in R&D.
Mark Douglass - Longbow Research
And you expect to be there around Q3?
Robert Phillippy
Correct, actually exiting Q2, yes.
Mark Douglass - Longbow Research
Exiting Q2. And then on the medical side of the business, the therapeutic lasers. You said you have been seeing a large downturn there?
Robert Phillippy
That is why we were encourage by Life & Health Science segment orders that in an absolute sense were not all that exciting. We saw the medical laser piece drop dramatically but we hung in there very, very well on products that go into buy instrumentation applications.
Mark Douglass - Longbow Research
[NPE] things of that nature? So that appears to still be…?
Robert Phillippy
We had a very strong quarter in that respect and it was in part offset by the fact that the lasers that get used into applications which would be considered elective with patients, medical therapists, and things like that. Those dropped dramatically.
Mark Douglass - Longbow Research
With these newer lasers product introductions, do you expect them to be higher price points to improve some of your mix and maybe improve revenues or are you just generally adding more features, more power and things of that nature for the same selling price?
Robert Phillippy
Yes in the lasers business, we have basically upgraded a couple of important product lines for us by putting out, I will call it, “higher [wop] per dollar.” So it is a better value product but from a selling price perspective it is practical based on features and configurations that ASPs could increase somewhat but faces a competitive market out there. So we are not expecting an enormous price increase opportunity. What we are expecting is to be able to deliver better value but it certainly will not deteriorate our margins. Most of the new products that we are releasing have better margins than our baseline portfolio today.
Operator
(Operator instructions) Your next question comes from the line of Ed Einboden - Wm Smith & Company.
Ed Einboden - Wm Smith & Company.
I have a question for you regarding some of the color that you get from your industrial end market. How much really did they isolate as being related to financing issues versus what their outlook is for the full year and whether credit opens up or whether their order rates can open up?
Robert Phillippy
Most of what we do in the industrial market segment is not very, I will call it, capital equipment type oriented. It is mostly OEM sales and so based on that it is much less of a financing perspective unless it is our customers’ customer having a problem from a finance perspective. So, really it is more about the dynamics affecting their businesses.
Keep in mind that a lot of those manufacturing sector activities are things like material processing, which has been very hard. Graphic arts and display, color matching for household and business applications and even some applications that ultimately lead their way into the automotive industry. But again, their OEM sales is more about our customers business than it is a capital equipment financing circumstance.
Ed Einboden - Wm Smith & Company
So, it would be fair to say if they saw a pretty quick uptick in what they are getting as far as demand that would flow to you and visibility will be pretty, you do not have a lot of visibility into that but it could happen pretty quick, the turnaround could be pretty quick.
Robert Phillippy
Absolutely. Historically that market has not had as many abrupt turns as the semiconductor equipment market has because we are very accustomed to abrupt changes in direction of the semiconductor equipment market but it is certainly could play out exactly that way.
Ed Einboden - Wm Smith & Company
Okay. And as far as sort of what you are seeing in the $11 million or $14 million in cost savings, in those buckets, can you maybe describe where the slight increase the $15 million that you guys are now looking for, where that is occurring, where that extra power you may have?
Robert Phillippy
Yes. That is primarily going to be an SG&A because the initiatives that we have launched already that will impact cost of sales for the most part, which is the movement to Wuxi and to outsourcing to the manufacturing, those are already, as I mentioned earlier launched and are changing very much, maybe the pace at which we get some of the products to Wuxi increasing a little bit. But that is not what is pushing it from the 11 to 14 over 15. It is more a matter of SG&A cost.
Ed Einboden - Wm Smith & Company
Alright, thanks guys. I appreciate you have given us the color you guys can.
Operator
(Operator Instructions). There are no further questions at this time. I would like to turn the conference back over to Mr. Phillippy for any closing remarks.
Robert Phillippy
Well, thanks again for joining us on the call today and for your interest to Newport Corporation.
As we reported in the call Newport’s business model positions us well to deal with volatile market conditions and our strategy enables us to build on our industry leading position.
Further the team of Newport is aggressively implementing plans to carefully manage expenses and cash. We are confident that this effective balance of activities will positively impact our short and long term financial performance. We look forward to reporting on this in our first quarter 2009 conference call. Thanks.
Operator
Thanks everyone. That concludes today’s conference. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!