Newport Corporation Q1 2009 Earnings Call Transcript

Newport Corporation (NEWP)

Q1 2009 Earnings Call Transcript

May 7, 2009 5:00 pm ET

Executives

Robert Phillippy – President and CEO

Chuck Cargile – CFO, SVP and Treasurer

Analysts

Ajit Pai – Thomas Weisel Partners

Ed Einboden – Wm Smith & Co.

Mark Douglass – Longbow Research

Jiwon Lee – Sidoti & Company

Presentation

Operator

Good day everyone and welcome to today’s Newport Corporation first quarter 2009 financial result conference. Just as a remainder, today’s call is being recorded. At this time, I would like to turn the call over to your host for today, the Chief Executive Officer, Mr. Robert Phillippy. Please go ahead sir.

Robert Phillippy

Thank you. Good afternoon and welcome to Newport’s first quarter 2009 conference call. With me today is our Chief Financial Officer, Chuck 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 uncertainties 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.

The primary message of today's call is that Newport is taking quick and assertive actions to reduce our cost structure and increase the flexibility of our competitiveness of our operations, while taking great care not to compromise our investments for future growth, or our ability to respond to improved market conditions.

While we are still facing a very challenging global business environment, we're positioning the company for meaningful profit growth when conditions improve. Our actions will ensure that our operations are streamlined, nimble and responsive, and we remain steadfast in our commitment to provide our customers with highly differentiated and innovative photonic solutions.

Here are few highlights from the first quarter of 2009. First, we have expanded and accelerated our cost reduction action. In addition to completing several of our projects to outsource selected manufacturing operations to low-cost regions, we have launched a plan to outsource the manufacturing of the laser products we built in Ottawa, Canada, which will result in the closure of that facility later this year.

We already have a team in place to implement a rapid and seamless transfer, and we're building inventory to ensure that our ability to supply these products to our customers is not affected. Chuck will provide a more detailed status report on our major actions later in the call, but in summary, we expect our cost reduction initiatives to reduce our pro forma operating costs by more than $14 million in the first half of 2009 compared with the first half of 2008.

Second, during the first quarter, we launched an initiative to enhance our already strong position in the scientific community. This includes ensuring that we have robust customer support mechanisms, inventories, and manufacturing capacity in place to respond to the increase in activity we expect to see as a result of government stimulus related funding.

In the month of March, the number of quotations we issued for scientific products almost doubled from historical run rates with many of the requests specifically identified for inclusion in stimulus related grant proposals at various institutions.

While we don't expect our scientific market business to grow in proportion to this increase in quotation activity, we do expect to see increased sales to research customers as a result of the stimulus funding in the second half of 2009 and into 2010.

Third, during the quarter we completed installation and customer acceptance of a suite of SolaryX fully automated thin-film solar panels scribing systems. This enabled the on-time start-up of the new solar panel production line at one of our key customer sites. We also began shipping the SolaryX Edge, a fully automated laser edge isolation and deletion thin-film solar panel tool. This tool provides superior performance and reliability compared with sandblasting techniques currently in use.

In the first quarter of 2009, we generated $5.8 million in revenue for PV applications. Fourth, I'm pleased to report that the 23 new products we announced in January are being very well accepted by our customers. We have already received multiple evaluation orders, and are on track to generate revenue in 2009 for all of them. These include our new 27 watt HIPPO, and 2 watt Green Explorer lasers as well as our new IsoStation workstation, and optical power meters.

All of these products provide significant performance advantages and are more cost-effective than other commercially available offerings. I would now like to comment on trends in our target markets and characterize our recent orders and sales performance in that context.

As anticipated, orders and sales declined in all of our primary end-markets, directly reflecting the global recession. Overall sales declined 16.6% sequentially, and 22.3% versus the first quarter of 2008. Orders were down 19.3% sequentially and 35.7% from the first quarter of 2008. However, our performance and outlook differ somewhat in each of our markets.

Orders and sales in our research market declined the least with orders down 8% and sales down only 1.4% versus the first quarter of 2008. As we have communicated previously, this market tends to be somewhat resilient to macroeconomic factors. It is also important to note that we have not yet received any significant orders related to funding from the American Recovery and Reinvestment Act in the US or similar stimulus funding in other countries.

As mentioned earlier, we do expect to receive incremental sales related to government stimulus funding in late 2009 and into 2010. However, this will be partially offset by reductions in research markets purchases from philanthropic and corporate funding sources.

In contrast, Horizon sales from our microelectronic segment reflected the steep and deep downturn in this market. Sales to this segment were 50.8% and orders were down 68.5% versus the first quarter of 2008. This performance is consistent with trends in the semiconductor equipment industry, which represents the majority of our business in this segment.

According to semiconductor equipment and materials trade association, North America-based manufacturers of semiconductor equipment posted three-month average orders in March 2009 of $278.9 million. This number is 76% below the same period of last year, and 84% below the peak in June of 2006.

Even our order activity in the previously fast-growing solar energy industry has paused. In the first quarter, our orders for photovoltaic applications fell to $1 million. We remain very bullish on the long-term prospects in solar energy, but funding constraints have delayed or put on hold the vast majority of our customers’ major projects. While we see no near-term recovery in the microelectronics market, we are encouraged by reports of increased fab utilization, and decreased inventory levels at many of our customers.

While it is too early to forecast a recovery in this market, we continue to work collaboratively with our customers to develop application-specific photonic solutions and capture new design wins to ensure that we are well positioned to benefit when conditions do improve.

We continue to identify and develop new business opportunities in our life and health sciences and industrial markets. Although our current orders in sales activity in these markets generally reflects the global business environment, our business in the life and health sciences market may also benefit from the US economic stimulus package, in particular through incremental funding of the National Institutes of Health.

To reinforce a point we made in the past, our market diversity provides strength in difficult business environments, as it enables us to maintain the level of investment in R&D and customer support needed to enhance our market position. Also the breath of our product and technology portfolio is particularly appealing to customers, who seek a higher value of value from their suppliers to offset their own strained resources.

At this time, I would like to turn the call over to Chuck to discuss some of the other important aspects of our performance, financial condition, and the actions we are taking. Chuck.

Chuck Cargile

Thanks Bob. Please refer to the press release and Form 8-K we issued earlier today. In addition, I encourage you to check our website at newport.com, where we have posted historical income statements, balance sheet, and schedules that detail historical trends for sales and orders by market and the performance of our two reporting segments.

I would like to comment first on the actions we are taking to reduce our cost structure and improve the flexibility and competitiveness of our operations. I will mention five items.

Number one, as Bob highlighted a minute ago we have expanded and accelerated our initiative to outsource selected manufacturing activities to low-cost regions. This includes completing projects to outsource diode packaging operations from our Tucson facility. This project was completed a quarter earlier than previously announced. In addition, we have now launched an initiative to outsource laser production from our Ottawa, Canada facility. This project will result in the closure of that facility, which currently occupies 27,000 sq. ft. and employs 25 people.

Number two, we continue to aggressively transfer manufacturing and sourcing of selected products to our Wuxi China facility. In the first quarter of 2009, we transfer over 750 additional products to Wuxi, and shipped products with an external revenue value of approximately $3.2 million. This brings the total number of projects manufactured in that facility to over 1000.

This level of production in Wuxi, puts us ahead of the pace we announced last quarter. At that time we estimated that we would have transferred 1250 products by the end of 2009. Having transferred over 1000 already, we are well positioned to achieve our goal sooner than previously announced.

We're seeing significant manufacturing cost savings on these products. So in short, we continue to be very pleased with our transition to Wuxi. Number three, our worldwide headcount currently stands at just under 1700 employees. This represents over a 15% reduction from the number of employees we had in July of last year, and also represents a meaningful acceleration of our previously announced plan, which called for a reduction to fewer than 1800 employees exiting in the second quarter of 2009.

Number four, we continue to gain traction on our initiatives to leverage our SAP system to increase efficiency across the organization. You may recall that we completed our three-year initiative to implement this system in the fourth quarter of 2008, and have now moved from the implementation phase to the optimization phase.

Number five, in addition to these actions, which will permanently reduce our cost structure and increase our competitiveness, we implemented a number of temporary actions during the first quarter to further reduce our expense run rate, specifically we have implemented temporary salary directions company-wide ranging from 3% to 10% based on salary levels.

We deferred all salary increases for 2009. We revised our incentive compensation plans for 2009 to eliminate payouts, except in the event of significant overachievement of financial goals. And we announced and are implementing periodic shutdowns at most of our facilities around the world.

As Bob stated earlier, we expect these actions to reduce our pro forma operating costs by $14 million in the first half of 2009 compared with the first half of 2008. We will continue to drive these actions throughout 2009. This significant amount of streamlining will create a much leaner Newport, one which is able to leverage every incremental dollar of revenue into greater profitability.

In the first quarter of 2009, our net loss when calculated in accordance with GAAP was $4.8 million of $0.13 per share compared with net income of $2.5 million or $0.07 per diluted share in the first quarter of 2008.

The net loss for the first quarter of 2009 includes $2.1 million of expenses related to the cost reduction initiatives. On a non-GAAP basis, which excludes a number of expenses that we consider to be outside of our core operating results, we would have reported a net loss in the first quarter of 2009 of $1.6 million or $0.04 per share compared with net income of $3.8 million or $0.11 per diluted share in the first quarter of 2008.

In an effort to clarify the impact of these items and show what our results would be excluding them, we will for a period of time report our income statement in accordance with GAAP and also on a non-GAAP basis. As we are presenting GAAP and non-GAAP information, we have included the reconciliation of the two in our press release, and on our website.

In summary, the best indication of our efforts to manage your business in these difficult conditions is this. In the first quarter of 2009 our sales declined by almost $18 million from the fourth quarter 2008 level. However, on a non-GAAP basis our operating loss was essentially unchanged. In other words, we overcame the meaningful reduction in revenue with no degradation in our bottom-line performance.

Because of the actions we are taking, small increases in future revenue will result in significant gains in profitability. Before I turn the call back to Bob, I would like to make a comment on our cash balance.

At the end of the quarter, we had $141.7 million of cash, cash equivalents and marketable securities. In the first quarter, we used approximately $6.7 million of cash. Historically the first quarter of our calendar year requires the highest usage of cash. We generally have lower revenue, and must pay out year-end incentive payouts, commissions, and other accrued expenses. In addition this year, we're funding additional cost reduction programs, which require severance and other incremental cash payments.

Accordingly, we had anticipated using approximately $5 million in cash this quarter. We fell a little short of this goal, primarily as a result of a couple of shipments being delayed in 2Q.

This created a slight increase in our inventory balance but is merely a timing issue. We expect to have strong cash generation in Q2, despite continuing to fund our cost reduction actions. In fact for the first half of 2009, we expect to have positive cash generation and grow the cash balance back to approximately $150 million.

Now Bob will make a few more comments, before we address any questions that you have.

Robert Phillippy

Thanks Chuck. I would now like to discuss our outlook regarding coming quarters. As I mentioned earlier in this call, Newport's end market diversity gives us some degree of insulation from severe market downturns like we have experienced in the semiconductor equipment market. However, we are clearly not exempt from macroeconomic conditions, and have been significantly impacted by the global recessionary environment.

In the first quarter of this year, our book-to-bill ratio was 0.90. This follows our fourth quarter book-to-bill of 0.93. Further, we have no indication of a near-term recovery in our end markets. These factors lead us to expect our sales to be down slightly in the second quarter. However, we are cautiously optimistic that the combination of stimulus related funding, and modest improvement in the general macroeconomic environment could cause our revenue levels to at least firm up or possibly improve late in 2009.

Given this outlook, we will continue to reduce our cost structure in response to the current low revenue levels, while maintaining a significant investment in next generation product development, and ensuring that we do not compromise our ability to respond to the improved conditions we expect in the future.

We believe the combination of permanent and temporary actions outlined earlier provides us with the right mix to achieve both these objectives. It is important to note that headcount and compensation reductions are particularly difficult actions as they impact our company's greatest asset, our employees. Fortunately, our employees have responded very well as we all clearly recognize that by effectively dealing with our costs, we are preparing Newport for future success.

Newport's position as a leading provider of photonic solutions continues to hold great appeal to our customers, and our technology and product development agenda will continue to strengthen our value proposition. We are very confident in our strategy and tactical plans, and we view the current environment as an excellent opportunity to build a more nimble, efficient, and competitive company that will deliver excellent shareholder returns in the future.

Thank you for your interest in Newport Corporation. We would now like to address any questions you have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We’ll go first to Ajit Pai of Thomas Weisel Partners.

Ajit Pai – Thomas Weisel Partners

Yes, good afternoon.

Robert Phillippy

Hi Ajit.

Ajit Pai – Thomas Weisel Partners

A couple of quick questions. I think the most important was just looking at your cash, you know, your net cash has gone up significantly, and I think you have also been buying some of your debts back in the markets, open markets. So could you tell us of the cash flows and you know, you expect to stay cash flow positive as well. How do you sort of prioritize the uses of your cash in a go forward basis?

Chuck Cargile

Hi Ajit, it’s Chuck. I think we continue to monitor the price of the convertible debt that we have in the market and that has been fluctuating a little bit in the quarter. It is not quite as low as it was in Q4 of last year, when we were able to retire $25 million of the bond at under 60%. Lately, it has been fluctuating around 70%, and so we continue to identify that as an opportunity. We choose not to retire any of those bonds in Q1, because we did acknowledge that we would be a user of cash in Q1, but now that we expect to have strong cash flow in Q2, that's an item that we will revisit and could probably we will certainly consider whether or not opportunistically we can retire some of those at a good rate.

So that continues to be a high priority for us and as you know we have 3.9 million shares authorized for buyback, if we would choose to buy back shares, which would also be an option for us as we continue to generate cash, and then we continue to spend on R&D and capital and things that we think improve the day-to-day parts of our business as well. So we are very focused on cash now, and are pleased that even though we are balancing around a breakeven point from a pro forma perspective that we can continue to generate cash and use that strategically during times that we are in now.

Ajit Pai – Thomas Weisel Partners

Got it, and how would you define your, you know, current pro forma breakeven point in terms of revenue?

Chuck Cargile

They don't close as you can see having lost just a little over $1 million in the quarter on a pro forma basis, $89 million and having had some of our cost reduction steps being implemented mid-quarter, I think we are, once we are finished with all the cost reduction steps that breakeven would be below where we are today. It’s – we're very, very close to breaking even here, even though we are complete with all the cost reduction steps.

Ajit Pai – Thomas Weisel Partners

Got it. Yes, that’s actually quite an incredible improvement, and on a go forward basis is there any area that you have actually gotten out of that when you get a rebound in your end markets, you know, won’t show up in your revenues, or have you managed to keep the vast portfolio as well as all geographies intact. You've just been getting up things that are below the line rather than anything on the sales and marketing or, you know, geographic footprint or product portfolio usage?

Robert Phillippy

Ajit, this is Bob. We've been very careful to maintain our customers or infrastructure, and we continue to participate in all the markets and with all the customer collaborations that we have been. We've just been really focused on making sure that on the operation side of our business we are as streamlined as we can be. So the answer is no. There's no material area where there is a segment that we participate in or a geography that we participate in that we have pulled out of.

Ajit Pai – Thomas Weisel Partners

Got it, and was there any pattern that you observed in terms of your, sort of you know, catalogue sales relative to sort of the more sales force driven sales, in terms of how down that business was, was it you know, down far less than some of your OEM sales?

Robert Phillippy

Well, the scientific market makes up quite a good bit of our catalog sales, although it's not a direct one for one overlap, because we do sell lasers into the scientific market, which are generally capital purchases. So I would say in general that it followed along the market lines that we talked about during the course of the prepared remarks more than it did along merchandize versus capital equipment. That said, as we think about the stimulus related funding, a lot of the quotation activity was very much focused on the capital side, in other words the largest purchase orders or the larger items because of people putting together proposals for grants. So when I reference the real up-tick that we saw during the month of March on quotation activity, a good portion of that was on the higher valued items.

Ajit Pai – Thomas Weisel Partners

Got it. I'll get back in queue. I have a few other questions.

Robert Phillippy

Thanks Ajit.

Operator

We'll go next to Ed Einboden with Wm Smith & Co.

Ed Einboden – Wm Smith & Co.

Good afternoon guys.

Robert Phillippy

Hi Ed.

Ed Einboden – Wm Smith & Co.

Great job on taking out all those costs, and I just was kind of want to get a sense for the amount of products that you guys are sending to Wuxi. You guys are ahead of plan, I mean are you guys seeing additional opportunities to send more products there and definitely seeing the benefits from that.

Robert Phillippy

Yes, Ed I would say that what we really are more than anything is accelerating our initial plan rather than expanding it. You know, we've certainly seen less activity than we would like on the orders and sales side of our business due in general to the economic conditions. So that gives us an opportunity to really focus on optimizing the back end of our business, and that's really more about Wuxi. So it's not an expansion as much as it is an acceleration. And we're running well ahead of plan. That was one of the things that we are pretty encouraged by our results in the first quarter.

Ed Einboden – Wm Smith & Co.

Great, and I guess, if you are seeing an up-tick in the stimulus package and some of the research is going on out there. Is that unsolicited business or you guys going out and you know, sort of winning attention from the scientific community?

Robert Phillippy

We are soliciting everything we can. If there is a rock, we want to look and see what's under it. No, the up-tick that I talked about, and I want to be real careful here. The up-tick that I talked about was in quotation activity. So what we saw really in the month of March was a flurry of activity associated with anticipated stimulus funding that will be available to scientific researchers for various grant related projects. We have not seen the actual money being, I should say issued or the money being available and those quotations turning into purchase orders, and the timing of that remains unclear to some degree, although we are told by the scientific community and many of our customers there that you know, we should expect that later in 2009. But for now what we’ve seen is an up-tick of activity related to people being in the activity of preparing proposals.

Ed Einboden – Wm Smith & Co.

And if you guys, I am not sure if you are willing to comment on that, but if you guys seen that kind of continue into Q2.

Robert Phillippy

To some degree. It was particularly high in March, and it continues to some degree. I can’t say that it's more or less in particular, but it hasn't precipitously dropped.

Ed Einboden – Wm Smith & Co.

Okay, great, and great job on the cost guys.

Robert Phillippy

Thank you.

Operator

We’ll move next to Mark Douglass of Longbow Research. Please go ahead sir.

Mark Douglass – Longbow Research

Good afternoon gentlemen.

Robert Phillippy

Hi Mark.

Chuck Cargile

Hi Mark.

Mark Douglass – Longbow Research

Yes, I concur you really did a number on taking the cost out. With that how is progress on the laser segment tracking?

Robert Phillippy

Mark, this is Bob. The laser division, if you look at our division performance and I was – Chuck is looking for the exact numbers while I'm talking but they had a very credible performance. There are still not above water. They did take a loss during the course of the quarter, but they reduced the amount of their loss in spite of what I think was an $8 million drop in orders from Q4, I’m sorry in sales from Q4. So they were certainly very effective in participating in our overall performance to reduce cost. So you have Chuck pulled up the numbers, and they lowered their loss from $2.2 million in the fourth quarter to $1.4 million this quarter, on $8 million lower in sales.

Mark Douglass – Longbow Research

Okay.

Robert Phillippy

And Mark we’ve talked about this in previous calls, but as you know a couple of years ago, we did struggle will some operational execution issues with the lasers business. That is not the case. We have addressed absolutely the list than we had at that time and feel pretty good about their ability to improve their performance going forward. Now we're just kind of stuck in the midst of lower revenues than their infrastructure will support.

Mark Douglass – Longbow Research

Okay, so you've made a significant amount of adjustments to the (inaudible) variable cost structure, but right now that's – you've got to the point where you need that sales –

Robert Phillippy

Right.

Mark Douglass – Longbow Research

To get above just to the basic cost structure. So you feel – the most part there you just need a lift in laser sales at this point.

Robert Phillippy

Well, let me say it a different way. A couple of years ago, I would have said that some of our struggles with profitability in the laser division were operational execution related. Now I would say that we are still below the profitability line solely for just cost of infrastructure reasons, and we do continue to address those as we announced earlier in the call, we have made the decision to close our Ottawa site, which is a laser site, and then in addition, you know, we have just completed, I mean literally at the end of the quarter, our outsource of our back-end packaging operations of our Tucson facility to a contract manufacturing partner. So we are continuing to take cost out the Tucson, I am sorry the Ottawa project that is just launched. So we continue to address those issues, but we are not addressing what I termed as operational execution issues a couple of years ago.

Mark Douglass – Longbow Research

Okay, so you are in the midst of closing Ottawa site?

Robert Phillippy

We are. It'll be closed by the end of the year.

Mark Douglass – Longbow Research

And Tucson just completed.

Robert Phillippy

Correct.

Mark Douglass – Longbow Research

So, even in this next quarter you’ll see some benefit, although it might be offset fully by costs to close the Ottawa site?

Robert Phillippy

Exactly, yes. Probably you're looking at the second half of the year before you see clean P&Ls for lasers, but we’ll certainly be able to highlight, which part are incremental, and which parts represent the underlying value of the business.

Mark Douglass – Longbow Research

Okay, then on the other end markets, orders are, other than scientific, your orders are down pretty significantly. Just I’m sure everybody is asking these days, have you seen what would appear to be stabilization in the orders up to this point to the second quarter. Do you feel –

Robert Phillippy

The way we characterize it is too early to call. We have seen external signs that would typically be leading indicators of a firming up or even a recovery, and the two that I would point to primarily is general information that is in the public domain about lower inventories in the channel. And the second one would be increased fab utilization. Now remember the fab utilization part of that is a couple of steps away from us in the supply chain, because we supply to semiconductor equipment manufacturers who in turn supply to fabs.

Mark Douglass – Longbow Research

All right.

Robert Phillippy

So it might take a little time for that to trickle out. However, we have had no conversations that are direct with customers in our microelectronics sector that would indicate that a near-term recovery is imminent.

Mark Douglass – Longbow Research

Okay, if there is a recovery in that space, would you say that there is – or might there’s about a quarter or two lag between when you might book sales, but you know if fabs are – there is overcapacity out there, they might not be buying equipment for some time. I mean how should we think about a lag, if there is a pickup in the manufacturing in fabs versus where you stand. Maybe they might adopt lasers more now than they would have a year ago just for various reasons.

Robert Phillippy

So a couple of quarters of lag time between the call it the front-end pickup of that microelectronics industry, and our own activity is the norm. What usually starts happening and I believe will happen in this occasion is the technology buys will come first, and since we believe that photonics technology has a continued opportunity to increase its penetration into the industry in general through an increase in the number of applications that we serve. You know, I think that we’ll start to see those first, but again I think we probably are closer to being at the bottom than we are coming out of it.

Mark Douglass – Longbow Research

Okay. And then lastly looking at the orders on the life sciences, you know the sales declined only 5%, but orders obviously slid 24%. Is that typical to see kind of a lag there, anything happening in life and health sciences in particular?

Chuck Cargile

Yes, let me make a comment on that and then Bob might want to add to it. I think it is a healthy thing to do Mark is to look at the trend sheet that we post on the website. We probably also will e-mail it to you that shows historical sales and orders. What you're describing for this quarter is not unusual. Our orders are generally very lumpy. We'll have a big quarter than maybe one that is down, and then they ship out a little bit more linearly. So I think that if you look back you’ll see that the going to $19 million in life and health science orders, although a little low isn't that surprising, coming of a $25 million order this quarter, and then the revenue will be spread a little bit more thinly. I think that we are still feeling very optimistic about our presence in life and health science, and have a couple of really exciting initiatives underway. So I’ve cautioned people for years to not overreact to a quarter of orders within life and health science because it doesn’t move quite a bit and is a bit lumpy. So I wouldn't read too much into that.

Mark Douglass – Longbow Research

Yes, that’s I’m looking at it now. It is –

Chuck Cargile

Okay.

Mark Douglass – Longbow Research

Yes.

Robert Phillippy

So two more comments related to that Mark. One is, if I remember correctly and I'm turning into it right now. That Q1 of ‘08 number for life and health sciences, I believe was an all-time record. So it's kind of a peak level performance.

Chuck Cargile

Yes, the orders level was –

Robert Phillippy

Yes, so you’re comparing the current condition to an all time record. So I think it skewed a little bit. We didn’t even do as well in Q2 as we did in Q1 that year.

Chuck Cargile

That’s thing one, and then thing two, he’s recalled that our order, our activity in life and health sciences has two different looks to it. One is bioinstrumentation OEM, which includes some microscopy applications, and then the other is medical laser applications. So the medical laser applications ultimately make it to the consumer market, which ultimately means that it's going to track according to that and keep in mind that those are all elective procedures. So you would expect that to be down precipitously or it has been down precipitously, let's put it that way. The bioinstrumentation sector has also been soft, but it may stand to benefit from increased stimulus related funding. I think I mentioned it in the prepared remarks, especially related to the National Institute of Health. We expect it will receive increased funding. So we could see some upside in our life and health sciences just based on better conditions related to stimulus funding later in the year.

Mark Douglass – Longbow Research

Okay, thank you.

Robert Phillippy

Thanks Mark. You are welcome.

Operator

Next from Sidoti & Company, we'll go to Jiwon Lee.

Jiwon Lee – Sidoti & Company

Thanks. Good afternoon.

Robert Phillippy

Hi Jiwon.

Jiwon Lee – Sidoti & Company

Yes, hi. With the residual restructuring left over, how much of restructuring charge should we be expecting for the second quarter and anything beyond?

Chuck Cargile

Yes, I think we still have a number of initiatives underway as you allude to. So I think for the second quarter you should probably expect an amount not unlike what we had in the first quarter. We'll probably have a couple of million dollars more and, but I think it won't be too different from that.

Jiwon Lee – Sidoti & Company

Okay, great, and as your sort of guiding your next quarter sales a little bit down, with the mix that you have and how do you feel about, you know, gross margin going back up to near 40% and above.

Chuck Cargile

We certainly talk about gross margin internally all the time, and a gross margin that's not above 40% is not acceptable. That said, realistically between now and end of Q2, we’re half way end of the quarter now to see revenue – to see pressure on the revenue line and a rebound to gross margin over 40%, while we're completing the restructuring initiatives is a little bit too short of a horizon to evaluate it. I think it's fair for us to be looking at gross margins above 40% after we are through with some of the structural changes we are making and when business market – when the markets improve, but I wouldn't – I don't think it would be reasonable to assume 40% in Q2.

Jiwon Lee – Sidoti & Company

Okay, that's pretty helpful. So the restructuring that you are undertaking by the end of the second quarter. Should we be expecting whatever is going on right now should be done by then?

Robert Phillippy

We will be – as we exit this quarter, we'll be getting the benefits for the outsourcing of the backend packaging in Tucson, as we said we have completed that. There's not as much volume as we’d like and most savings come when you have the volume, but we are certainly done with that action. We are – we just now launched the outsourcing of the lasers made in Ottawa, Canada. So that benefit you won't see until the end of the year at best. We'll have that one shut down by the end of this year. So I think that what you're going to see throughout 2009 is the evolution of the business model. You won't ever be able to say in 2009, yes this is it.

Jiwon Lee – Sidoti & Company

Okay, that's very helpful. Thank you.

Robert Phillippy

You are welcome.

Operator

We'll go back to Ajit Pai of Thomas Weisel Partners.

Ajit Pai – Thomas Weisel Partners

Yes, just looking at your gross margins and also looking at your set of laser business, you know, it's pretty tremendous sort of improvement on the laser business side in terms of your profitability there. Could you give us some indication as to, you know, in the laser business whether the vast majority of the realignment is behind us or whether there is still some of that left so that you know, at the $37 million level that you had in this quarter, you could actually be breakeven, and also like what the relative gross margins of that business are right now?

Chuck Cargile

First I would reference you to the segment information that we post on the website, and then we’d probably e-mail to you. That will show you the historical operating income margins for various businesses.

Ajit Pai – Thomas Weisel Partners

Yes, I'm looking at that right now.

Chuck Cargile

We are not in the habit of providing the gross margins by each of the divisions, but what we have said in the past is that the PPT gross margins are higher than the corporate average, lasers it's slightly lower than the corporate average, and so I think that's still true today.

Ajit Pai – Thomas Weisel Partners

Okay, that's true –

Chuck Cargile

As far as the performance, I think Bob kind of touched on this earlier, but there's two ways to bifurcate the laser performance, one is the improvement that we are getting for structural changes or changes in the way we run the business, and there's also changes that come from execution and business improvements, and we're seeing a lot of the execution improvements in this quarter reflected in the reduced loss despite lower revenue, You're not yet seeing the full benefit of the outsourcing of diode packaging from Tucson. You're seeing none of the benefit that we get from outsourcing Ottawa. Those are going to play out over the second half of the year.

Ajit Pai – Thomas Weisel Partners

And while those will help your overall cost structure, is there a loss in gross margin or you'll actually still also get a much better gross margin. I know you're going to get rid of fixed cost. So at depressed levels, you know, it might help you but even when things begin to rebound, are you going to be getting (inaudible) more competitive than doing it internally.

Chuck Cargile

Yes. I think – let me answer it differently. I think this one is your question. We fully expect the gross margin as we exit 2009 to be significantly improved over where it was this quarter.

Ajit Pai – Thomas Weisel Partners

Right, but if your revenue levels were 50% higher, would the outsourcing be gross margin neutral or would it be gross margin, you know, would it still – would your gross margin still be materially higher?

Chuck Cargile

It will still be higher.

Ajit Pai – Thomas Weisel Partners

It will still be – okay, got it and then from a competitive position on the laser market, is there any you know, I think you've talked about the fact that you saw the fundamentals in solar. You know you don't believe your – at least you alluded to the fact that you know you're still pretty stronger than would you sort of indicate that you don’t think that you’re losing any share there, but in other verticals, is there any change in competitive behavior, and even on the solar opportunity are you seeing any pricing pressures that are greater than you expected?

Chuck Cargile

I wouldn't say greater than we expected, but we certainly participate in a very competitive market place, and certainly for all the information in public domain, and you see all the financials of our competitors and other companies in this space, just about everybody is experiencing the challenges on the top line. So when that circumstance occurs, you know, everybody has ample capacity and would certainly like to get an order, and so that doesn't help the competitor dynamic at all, and I guess I should say it makes the competitive dynamic quite significant. So we're dealing with competitive market pressures certainly in our laser segment, but in our other segments as well, but it is not outside the scope of what we would reasonably anticipate.

Ajit Pai – Thomas Weisel Partners

Got it, and then the last question would be just looking at the fact that you're almost you know, you're very close to sort of a net cash position on your balance sheet, and you know, you never mentioned on the use of cash, you know any potential acquisitions. Are you looking at sort of you know, non-organic means of scaling some of your businesses like you’ve done on the laser side, on the non-laser side?

Robert Phillippy

We never stop looking at potential acquisitions, and that's the same today. I think we continue to be very focused on our market space, and are interested to know if there are opportunistic ads that we can make and if there are more, there's a better opportunity because of valuations the way they are today. So other than that, as you can imagine, we can’t comment on it.

Ajit Pai – Thomas Weisel Partners

You said in the current environment a weakness in demand and – you know evaluations coming in, are the opportunities – are you looking at them, you know, is the activity greater and you're looking at them or is it the same as it has been in the past several years?

Chuck Cargile

I’d say it’s certainly different than it has been in the last several years because of what’s happened in the markets. You have more distressed properties, companies or VCs [ph] that may need to get out of certain properties that shocked them. So I think, I would say maybe the phones have been ringing more in the last three or four months from people that are trying to get out of businesses, and of course a lot of times, they are trying to get out of the business for a reason and (inaudible). So, I think that has changed a bit, but I would also say for strategic business development if a company is holding what they believe the valuable asset, it’s difficult to rationalize selling that now with the markets being down as they are. So I think – I'm probably, as I say, (inaudible) and thinking about it a little bit more, but it also is a more challenging time to be trying to do something like that.

Ajit Pai – Thomas Weisel Partners

Yes, but there’s nothing you’ve seen that helps you sort of scale a business to be, you know, more accretive or anything of that sort that is you know, a material percentage of your revenues right now. Most of what you're looking at would be smaller, more distressed assets that need not necessarily be accretive from day one. Is that fair?

Chuck Cargile

I think it’s broader than that. I think we look at across the sector, and I think that's about as far as I can go about.

Robert Phillippy

Yes. Ajit, don’t get the impression that we are looking primarily at distressed assets. You know, we have an agenda associated with targets that we would be interested in reviewing, but that doesn't necessarily correlate at all with whether a property is distressed or not.

Ajit Pai – Thomas Weisel Partners

Got it, but you do think that scale in the businesses where you are operating right now is a beneficial thing, greater scale?

Robert Phillippy

I think that it is. I think that we have very leverageable channels and a very leverageable infrastructure in terms of customer service support, and even R&D because we have you know a pretty significant portfolio of different technologies that we understand, and I think that there would be synergy with a lot of different companies in our industry.

Ajit Pai – Thomas Weisel Partners

Got it. Well thank you so much and also again congratulations on some very impressive cost-cutting.

Robert Phillippy

Thank you.

Chuck Cargile

Thanks Ajit.

Operator

(Operator instructions) And it appears we have no further questions at this time. Mr. Phillippy, I will turn the conference back over to you sir.

Robert Phillippy

Thank you, and thanks again for joining us on the call today and for your interest in Newport. As we noted in the call, we are taking a set of actions that will effectively respond to the current environment, while positioning the company for greater success in the future. We believe that our performance in the first quarter provides an example of our ability to reduce our costs without compromising our customer support or technology development agenda. We look forward to reporting on our continued progress in all these areas in our second quarter conference call. Thank you.

Operator

And that concludes today's conference. We thank you all.

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