Coherent Inc. F1Q09 (Qtr End 12/27/08) Earnings Call Transcript

| About: Coherent, Inc. (COHR)

Coherent Inc. (NASDAQ:COHR)

F1Q09 Earnings Call

February 04, 2009; 04:30 pm ET


John Ambroseo - President and Chief Executive Officer

Leen Simonet - Executive Vice President, Chief Financial Officer


Mark Douglass - Longbow Research

John Harmon - Needham & Company

Jiwon Lee - Sidoti & Company

Ali Motamed - Boston Partners



Good day and welcome to the Coherent First Quarter 2009 Earnings Conference Call hosted by Coherent Incorporated. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. (Operator Instructions) As a reminder, this call is being recorded. I will now like to introduce Leen Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Leen Simonet

Thanks Eric. Good afternoon and welcome to our fiscal 2009 first quarter conference call. On today’s call I will provide financial information and John Ambroseo, our President and CEO will provide a business overview. As a reminder, any guidance and any statements in today’s conference call pertaining to future guidance, plans, events or performance.

Our forward-looking statements involve risks and uncertainties and actual results may differ significantly. We encourage you to refer to the risk disclosure described in the Company’s reports on Form 10-K, 10-Q and 8-K as applicable and is filed from time-to-time by the company. The full text of the prepared remarks which will include references to historical bookings and sales by market will be made available through the Coherent Investor Relation’s website. A replay of the webcast will be made available for approximately 90 days following the call.

We reported first quarter revenues of $124.4 million and a GAAP net loss of $14.7 million $0.61 per share. On a pro forma basis first quarter net income was $8.6 million or $0.36 per diluted share and this compares to quarter’s pro forma income of $0.34 per diluted share and the prior year first quarter pro forma income of $0.30 per diluted share.

Recurring GAAP to pro forma pretax reconciliation item includes a non-cash goodwill impairment charge of $19.3 million, $4.1million in restructuring costs resulting from our manufacturing consolidation program and headcount reduction efforts. $1.7 million stock related compensation expenses and $0.4 million litigation charges resulting from the internal historical option investigation.

Our adjusted EBIDTA percentage for the first quarter was 13.1% compared to 11.6% in the fourth quarter of fiscal 2008. Before moving on with the current quarter’s results, I would like to recap our previously announced restructuring program and also provide specifics on the additional improvement programs we just launched. Last fiscal year, we announced a closure of two manufacturing corporations, Auburn in California and Munich in Germany.

The Auburn closure is scheduled to be completed this quarter and the Munich transfer is scheduled to be finished by the end of June of 2009. Both consolidation efforts are estimated to improve our pre-tax income by $8 to $10 million on an annualized basis. In addition, during last quarter’s conference call, we announced headcount reductions of approximately 5.5% yielding pre-tax annualized savings of roughly $9 million.

We are aggressively moving forward with our footprint reduction program and last week we launched plans to close our St. Louis plant and decided to move our Missouri development and manufacturing operations to Santa Clara facility. Also in the U.S, we plan on vacating a leased building in San Jose and move the current occupants into our Santa Clara building.

Those moves are scheduled to be completed by the end of fiscal 2009. In addition, we initiated the planning stage of a multi-year project to exit our Simmons facility and instead establish capability in the Bay Area.

Combined annualized savings of the three additional footprint projects are estimated to be in the range of $3.5 to $4.5 million bringing the total annualized savings of the announced footprint reduction program to a range of $11.5 to $14.5 million. Since our last conference call, the global economic situation has not shown signs of improvement leaving us to take additional cost reduction measures and headcount actions.

We have introduced mandatory time offers [inaudible] work-week. We continue to curtail discretionary spending inside the company. We have frozen salaries, launched other cost reduction programs and further reduced headcount by 115 people. The sustaining benefit from the headcount reduction and certain other programs are estimated to be in the range of $13.5 million annualized.

If we combine the expected benefits from all of the manufacturing consolidation programs, the reported headcount reduction plus certain other sustaining cost reduction efforts, the aggregate benefits range from $34 to $37 million annualized. This does not include the savings from temporary measures such as mandatory time-off, salary freezes and other discretionary measures.

There are a few other key metrics I would like to share with you. By the end of June 2009, we expect our headcount to be below 1850 representing a reduction of 21% compared to our fiscal 2006 year-end headcount. Once we complete all of the announced footprint programs, our square feet is estimated to be approximately 770,000, which represents a reduction of roughly 40% when compared to the end of fiscal 2006 available space.

Net sales for the first quarter declined 12.4% sequentially and 13.8% from the same quarter a year ago. From a market perspective, the scientific business was unchanged from the comparable period, while the other three markets experienced sequential declines in the range of 10% to 27% reflecting overall weakness in the market. The Company sales by significant market application for the first quarter of fiscal 2009 are as follows. Scientific, 30.2; Microelectronics, 40.0; Material processing, 17.4; OEM components and instrumentation, 36.7; for a total of $124.4 million.

The first quarter gross profit was $50.4 million or 40.5% of sales. On a pro forma basis, excluding $3 million restructuring costs and $0.3 stock compensation charges, gross profit was 43.2%. Despite the lower revenues, gross profit compares favorably to the pro forma gross profit of 40.8% last quarter and 42.2% during the comparable quarter a year ago.

The impact of negative market mix and higher inventory charges was more than offset by our headcount and cost reduction efforts and the benefits of the weakened euro versus the dollar. [inaudible] expenses are $59.6 million includes goodwill impairment in our CLC segment, stock compensation restructuring and litigation charges for a combined total of $22.2 million resulting in pro forma expenses of $37.4 million, which compares to pro forma spending of $47.3 million last quarter.

We have seen benefits from headcount reduction and other discretionary spending controls. However, the sequential reduction of approximately $10 million reflects in incremental favorable impact of almost $5 million resulting from investment losses from the employee deferred compensation plan, offsetting cost is captured in other income and expense, so the net impact of the company’s results is immaterial.

Let’s move onto the balance sheet. Our cash and cash equivalent balance for the quarter was approximately $200 million representing a sequential decline of $18 million. Let me highlight the major reasons for this. Cash flow from operations for the quarter was negative, primarily due to slower selection as more of our OEM customers particularly in the United States closed offices at the end of December resulting in postponed payments until the beginning of January.

This negatively impacted our day sales outstanding at the end of December by approximately four days. Inventory did not drop in proportion to the revenue decline. As raw material [received], we are already in the pipeline and as you may recall from previous conference calls, we are building safety stocks to mitigate risks associated with the outsourcing in consolidation of certain of our manufacturing locations.

As we are approaching the end of the Auburn facility closure, the cash out flow from restructuring costs increased approximately $2.5 million during the quarter. Also, the income tax payments during the quarter were high at $10.4 million. However, the second quarter cash flow from operations will reflect a tax refund of $5.6 million.

During the quarter, we closed the Lamda acquisition chapter and settled the remaining shareholder payments eliminating the restricted cash balance of $2.5 million. Capital spending for the quarter was approximately $9 million, which is higher than anticipated as we purchased semiconductor production assets for approximately $3 million and John will discuss this further as part of his prepared remarks.

Please note that although we see experienced negative cash flow in the first quarter of the fiscal year, we are projecting positive cash flow from operations for the full fiscal year and we estimate capital spending to return to historical spending rates during the remainder of this fiscal year.

Let me give you the guidance for the second quarter of fiscal 2009. We project our second quarter sales to be in the range of $108 million to $116 million. We expect pro forma gross profit to be in the range of 42% to 43%. Pro forma R&D spending is estimated to be approximately $14.5 million to $15 million and pro forma SG&A expenses is projected to be approximately $27 million to $28 million.

Intangible amortization costs are planned to be unchanged from the first quarter at $1.9 million. Other income is projected to be approximately $600,000. The annual pro forma tax rate is estimated at approximately 32% and the stock compensation charges for the second quarter are estimated to be in the range of $2.5 million of which $300,000 relates to cost of sales, $300,000 to R&D and $1.9 million to SG&A.

The second quarter restructuring costs are projected to be in the range of $5.5 million of which, $4 million relates to the footprint project and approximately $1.5 million related to the recent headcount reduction we discussed earlier. We continue to stay focused on executing against our footprint and other cost reductions as these programs result in lasting cost reductions that will give us the benefits we are looking for when the market recovers. I will turn over the call to John Ambroseo, our President and CEO.

John Ambroseo

Good afternoon everyone and welcome to our first quarter conference call. Macroeconomics remains the dominant force in our business environment, especially in microelectronics, medical OEM and parts of materials processing.

As Leen highlighted in her comments, Coherent took early action to respond to this downturn, which in turn supported our Q1 results. With end-user demand under greater pressure, Coherent is maintaining its conservative posture. We have further reduced headcount and program spending as well as announced the elimination of three additional sites.

Orders in the first fiscal quarter totaled $103.3 million, which were down 27% and 33.3% sequentially and 33.3% versus the prior year period. The book-to-bill for the quarter was 0.83. Included in net bookings was a $3 million cancellation thus reducing bookings by this amount in the current quarter.

Orders of $30.9 million in the scientific market were down 15.9% from a strong fourth quarter and were virtually flat versus the prior year period. However, this was a typical first quarter in the scientific market. Europe and Asia posted solid bookings and the U.S. was weaker after a very robust Q4. In general, market dynamics were stable, although there is evidence of aggressive pricing from smaller competitors trying to sustain their order stream.

We are watching this carefully and still believe that product differentiation and company’s sustainability represent the winning formula. As part of our market strategy, Coherent introduced a new high performance ultra fast amplifier called the Libra HE at last week’s Photonics West Tradeshow.

The HE is a black box system that delivers flexible performance and applications for further chemistry and material science. We are confident that this combination represents a compelling option for researchers.

The outlook for this market remained stable as the primary funding sources, which are public funds seem secure. The decline in value of the university endowments has a small influence on revenue opportunities in the scientific market mostly for start up grants for new Professors. It remains to be seen whether the Federal Government Stimulus Package including $10 billion set aside for researching technology will have a meaningful impact on the photonics market.

Orders of $27.5 million for instrumentation and OEM components were down 27.2% from the prior quarter and 42.1% versus the prior year period. As a reminder, the prior year period included approximately $3 million in optics bookings and we have exited this business.

The trends that emerge in the fourth quarter have continued in Q1. Orders for lasers used in aesthetic and refractive applications continue to be pressured by reductions in consumers spending. Non-refractive ophthalmology shows signs of strength based on the adoption of Genesis 577 laser for retinal therapies.

In general, bioinstrumentation customers remain in good health and are managing inventory and risk by shifting to smaller more frequent orders. We expect this pattern to continue for the near-term future. The OPS portfolio expanded with the introduction of the Genesis 532-2000, a continuous wave green laser suitable for a variety of uses including instrumentation and scientific research. The system boasts the same benefits as other OPS offerings including compactness, power scalability, high wall plug efficiency and long operating lifetimes.

Bookings from microelectronics of $31.9 million decreased 36.9% sequentially and 40.8% versus the prior year period. The drop in consumer confidence and spending continues to depress the microelectronics market. Non-service orders during the first quarter can be characterized as technology buys or design wins and while service orders have nominally held up, we are very mindful of how changes in fabulization rates will affect this part of the business.

Orders from semiconductor applications remain weak due to further reductions in projected CapEx spending for 2009. Despite this trend, previous design wins led to key technology buys that in turn should lead to share gain over the next 12 months.

Bookings for event packaging users softened further, as integrators are running their inventories out end-users struggle with extra capacity. We believe this market will remain depressed until broader economic stimuli, weakening consumer demand for electronics.

Orders for flat panel display manufacturing were driven by service needs from an application standpoint; the only transition across FPD formats is creating new opportunities and has expanded demand for sensitive mobile touch screen that contributed to new order activity in the segment.

Bookings for solar cell manufacturing reached an all-time high in the first quarter. Demand was strongest from crystal and silicon applications where our UV lasers are used in critical process steps that enhance yield and optical electrical conversion efficiency.

We are working closely with customers to push these processes to full-scale manufacturing. The offset to this good news is that tight credit, low energy prices and sagging consumer confidence are slowing the rate of investments in the broader solar and renewable energy markets. The short-term health of this market will remain dependent on government incentives and there is hope that the proposed U.S stimulus package will spur higher investment. All things considered, we are guardedly optimistic about this opportunity.

Materials processing orders of $13 million decreased 20.4% sequentially and 42.2% versus the prior year period. The aforementioned $3 million is included in the materials processing numbers. In other words, groves new bookings were approximately $16 million.

In the prior quarter, we had seen a slow down from domestic number customers. In Q1, it was Asian and European customers that saw their businesses weaken. We believe that two primary underlying causes are credit tightening and erosion of the Euro. While the slowdown has been broad based, we are seeing pockets of strong activity. For example, orders for non-metal drilling mostly for filter production are near record levels. While the current market conditions are unfavorable, materials processing remains a key long-term opportunity for the photonics market.

We are making targeted investments to increase our participation in the materials processing market. At Photonics West, we introduced the HighLight 1000F, which is a fiber delivered direct diode system that produces 1 kilowatt at the end of the fiber. It can be equipped with up to 50-meters and that is approximately 154 feet of delivery fiber to bring light directly to the work [place] making it suitable for a wide range of applications including welding, flatting, grazing and [inaudible].

Among the many benefits of the 1000F are outstanding electrical-to-optical efficiency, ease of integration and operation. The evaluation of beta units has gone very well and we have received the first orders. Revenue shipments will be in Q2.

In her commentary, Leen outlined our plans for exit facilities in Tampere, Finland; St. Louis, Missouri and San Jose, California. When complete, these projects will further contribute to improvements in our operating efficiency.

Leen also described acquisition of certain assets for semiconductors laser manufacturing. Semiconductor lasers are core technology Coherent. They directly serve applications and are used as an excitation source in all diode pump lasers, which when combined represents about 40% of total company revenues.

Since 1996, we have relied on Molecular Beam Epitaxy, or MBE, as our growth process for semiconductor lasers. Our MBE-based devices continue to provide competitive performance and industry-leading reliability. However, as with any technology, MBE has its limitations.

Some of the new semiconductor architectures that we envision would benefit from metal organic chemical vapor deposition, or MOCVD based growth and we sought to add this capability. We were very fortunate to acquire two state of the art MOCVD reactors, other process equipment and a properly configured leased facility within two miles of our Santa Clara semiconductor facility. The total cost was about 10% of what new equipment and a facility upgrade would have cost. We expect to ship first articles within the next 12 to 15 months.

The lack of visibility makes it more challenging to manage any business. Our end market diversity may seem like a burden at times like these, but we have clearly benefited from sustainability in certain end markets. We cannot predict where or when the bottom occurs. We can and will take the necessary steps to ensure that our business execution and financial performance are commensurate with our position as a market leader.

For those of you who will be in the bay area, Leen and I will be presenting at the Thomas Weisel Technology Conference on Tuesday, February 10 and we hope to see you there.

I’ll now turn the call back over to Erick for the question-and-answer session.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Mark Douglass - Longbow Research.

Mark Douglass - Longbow Research

A couple of things. What was the orders for scientific again? I missed that.

John Ambroseo

$30.9 million.

Mark Douglass - Longbow Research

When did the investigations roll off for the legal expenses?

John Ambroseo

The remaining costs are tied to the derivative litigation and there is ongoing dialogue with the Plaintiffs in that matter. We can’t tell you an exact timeframe for it.

Mark Douglass - Longbow Research

Okay, But you would expect them to continue to trend down, I assume?

John Ambroseo

I can’t make any predictions at this time, Mark.

Mark Douglass - Longbow Research

Okay, fair enough. Can you give a little more color I guess into the microelectronics market? Your solar I guess, you said its doing okay at this time? Are those orders starting to roll off--?

John Ambroseo

The solar market has performed reasonably well over the last few years. I think if you look at the numbers for ‘08, ‘07, ‘06, you saw roughly a doubling of the business every year. Certainly the first quarter this year, we have record bookings for any given quarter, and that is good news, but as I said there are a lot of moving pieces in the solar market and funding is the big question mark right now, not only from the company end, but also from the consumer end.

That is the reason that I use the term, that we are guardedly optimistic rather than wildly optimistic about the opportunity. As far as the sales of the microelectronics market, I think the pressures in that segment are well documented by companies who have much greater exposure to it than we do. There is weakness in chip demand, there’s weakness in end user demand. So its pretty broad spread at this point.

Mark Douglass - Longbow Research

Your gross margin performance was nice. You were able to get those tops out of there fairly quickly, quicker than I anticipated, that was good to see. Are you expecting I assume the movements you made and the re-foot printing of everything, you’re confident that your 42%, 43% say pro-forma gross margin is more or less sustainable for the rest of the year and going forward?

John Ambroseo

I would love to be able to confirm that, but there is a lot that goes into it, including revenue levels and mix and I think there is enough uncertainty in the marketplace right now that we’ll stick to the 90 day guidance.


(Operator Instructions) Your next question comes from John Harmon - Needham & Company.

John Harmon - Needham & Company

A couple of questions; first of all, given the remarks you made about the MOCVD versus MBE, I just want to confirm that it is your intention to move the functions performed in Finland into this new facility and equipment that you acquired or is this a new capability for you?

John Ambroseo

This is new capability and we’ll be making future comments about the over arching technologies once we’ve completed all the statutory discussions in Finland.

John Harmon - Needham & Company

Okay, but you did say you do aim to close the Finland fab, clearly this is probably the logical location for that activity to go. I was just wondered if you could kind of talk about the economics of Finland, which is probably an expensive place to have a fab, versus the bay area, which is also an expensive place for a fab?

John Ambroseo

I have to be somewhat delicate in answering this question, John because we are involved as I said in statutory discussions in Finland and before we make any definitive comments we need to complete those good faith discussions. As far as what we’re seeking to do, we do believe that the next generation of technology will be MOCVD based for a number of different applications which is why we made this investment and you can do things with MOCVD that you simply can’t do with MBE.

John Harmon - Needham & Company

Regarding your materials processing business, you reminded us that Photonics West that you are mostly in in-organics, but certainly with your Nuvonics technology you are more in the high powered part of the space.

Would you say that all portions of materials processing have been affected equally or do you think in-organics might have fared any better or worse than metal cutting and other high powered applications?

John Ambroseo

I’m going to reserve judgment on some of the high power applications. Although if you look at the end markets that the high power devices are going into, they all seem to be under pressure. So I wouldn’t be surprised if there is some pressure there, but again our participation at this point is really in low-power and organic processing.

The interesting thing that we have seen in the highlight I has been good and continues to be good and that is very refreshing, but it does represent a break in the cost model as well as the ease of use and integration. I guess I’m hesitating because I’m not sure if it is a new technology that is gaining people’s attention or if it is simply another tool in a market that is holding up well. I don’t think we have enough visibility yet to make that call.

John Harmon - Needham & Company

A question for Leen please, the goodwill that you wrote off, you said it was in the CLC segment, but to which acquisitions exactly does it pertain?

Leen Simonet

The analysis is done on the reporting unit level, which is for us two segments, CLC and SLS. So the fair value calculation is basically done on the entire CLC segment. I can tell you what rolls up into it a little bit, but it is not done on the lower level basis.

Some of the acquisitions or a part of the CLC segment would be our Portland organization, would be the Nuvonics acquisition. It includes some older technologies that we bought a while back as part of semiconductor and it includes the Island technology that we bought about a couple of years ago. So as I said, the analysis is done at the segment level not at the individual acquisition level, because our reporting unit is equal to segment and we also have in there the CO2 acquisition, I think we did in 2000.


(Operator Instructions) Your next question coming from Jiwon Lee - Sidoti & Company.

Jiwon Lee - Sidoti & Company

First of all for Leen, the other income in the expense line, that was predominantly from, I guess the compensation charge, right the losses from the compensation. Could you give us a little more idea about how much that was in that quarter?

Leen Simonet

During the quarter it was probably about $6.8 million. As I said, the way it’s reflected in the income statement, it’s gross up. So in this particular quarter, we saw benefits of about $6.7 million in the period expenses and the reverse expense comes then in OIE. So net, net, net it has no impact to the company’s results or very immaterial, but it is done on a gross up basis from an accounting point of view.

Jiwon Lee - Sidoti & Company

And the second question is to John. How has order trended so far in the March quarter? Obviously, things are bad across your key markets, but is there any bright spot, as you have alluded in the flat panel display. Maybe there is some share gain opportunity, but how has the order tracked so far in the March quarter?

John Ambroseo

Jiwon I’m sorry, but we can’t comment on order patterns for the current quarter.


Your next question comes from Ali Motamed - Boston Partners.

Ali Motamed - Boston Partners

You gave some guidance. I was just hoping to clarify some things. You had mentioned revenue 108, 116. Gross profit, R&D and SG&A and then below that you talked about stock-based comp. When you gave those three cost items, did that include the stock based comp or would that be additive. If in the sense that, do I take 42% to 43% gross margin and then add stock-based comp to sort of further reduce that gross margin?

Leen Simonet

Yes, that is correct. When I gave you the percentages and the dollars for gross profit, R&D and SG&A it did not include stock compensation expenses, nor does it include the restructuring costs.

Ali Motamed - Boston Partners

Could you aggregate stock-based comp, the whole lot of it again for me one time?

Leen Simonet

Stock-based comp is going to be estimated at $2.5 million, of which $300,000 relates to cost of sales, $300,000 to R&D, and $1.9 million to SG&A.


At this time we have no further questions in the queue. I would like to turn the call back over to Mr. John Ambroseo for additional or closing remarks.

John Ambroseo

I’d like to thank everybody for participating in the call and we certainly look forward to talking to you in three month’s time.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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