Newport Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.31.13 | About: Newport Corporation (NEWP)

Newport (NASDAQ:NEWP)

Q2 2013 Earnings Call

July 31, 2013 5:00 pm ET

Executives

Robert J. Phillippy - Chief Executive Officer, President and Director

Charles F. Cargile - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Lawrence Solow - CJS Securities, Inc.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Mark Douglass - Longbow Research LLC

James Ricchiuti - Needham & Company, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Newport Corporation 2013 Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Robert Phillippy, Chief Executive Officer of Newport Corporation. Please go ahead, sir.

Robert J. Phillippy

Thank you. Well, good afternoon, and welcome to Newport's Second Quarter 2013 Conference Call. With me is our Chief Financial Officer, Chuck Cargile.

Before we get started, I'd like to remind you that 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 risks 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, and there can be no assurance that the results will be realized.

In the second quarter, the Newport team took meaningful steps to drive our recovery in our financial performance while also continuing to position the company for future growth. Sales of $134.2 million and $0.20 in non-GAAP earnings per share were in line with our expectations. And we were very pleased with our strong cash generation of $21.8 million in cash from operations.

But the major highlight of the quarter was our orders performance. We recorded $147.6 million in new orders, a 10.5% sequential improvement, and a book-to-bill of greater than 1 in all of the markets we serve. More importantly, many of these new orders resulted from design wins and share gain rather than improvement in market conditions. This bodes well for future revenue growth and also shows that our strategic growth initiatives are already starting to positively impact our results. I'll touch on some of this new business a bit more -- in a bit more detail as I comment about second quarter orders and the conditions and trends in each of our end markets.

Orders from microelectronic customers were $35.6 million, a 26% sequential increase but a 15% decline from the strong second quarter of 2012. During the quarter, we received a $3.6 million order for a new collaborative development program with a leading semiconductor equipment OEM. The program includes design and development of prototype and pilot units of a unique opto-mechanical subassembly for an EUV lithography application. Production shipments for this new program are expected to start in mid-2014.

We also received orders from several OEM customers for our new Quasar laser. As you may recall, we introduced the Quasar 45-watt UV laser earlier this year to expand our presence in mobile device manufacturing and advanced manufacturing processes. Quasar's combination of high UV pulse energy and high repetition rates, plus our patent-pending TimeShift Technology, which provides extensive flexibility in configuring the pulse stream, enables customers to overcome many of the limitations of traditional laser technology to produce higher precision and greater throughput in applications such as glass cutting, PCB drilling, silicon wafer dicing, ceramic scribing and other micromachining applications. We are very encouraged by the level of interest in Quasar, particularly from customers who are developing systems for mobile device manufacturing. Based on the customer response we've seen so far, Quasar has the potential to be a very successful product and a growth driver in 2014.

Mobile device manufacturing continues to present a very promising growth opportunity for Newport. Current industry estimates indicate that more than 2 billion mobile devices will be shipped in 2014, with continued growth through at least 2017. Our technology can play an important role in improving the robustness and reducing the cost of these products. As for the current microelectronics market trend, while recent forecasts of pending improvement has reason to be optimistic, we have not yet seen this improvement reflected in order activity on existing programs. As the incumbent supplier for multiple programs with Tier 1 semiconductor equipment OEMs, we expect to see increased order and shipment activity as the market upturn gains momentum, which most forecasts now indicate will happen later this year or early in 2014.

This market dynamic highlights the significance of our 26% sequential increase in second quarter orders, which occurred without a major upturn in the market. We've often said that we historically gain share during down markets, as this is the time when many of our OEM customers make supplier selections for future programs, and our balanced end market exposure gives us the ability to invest more consistently throughout market cycles. Our orders performance in the second quarter provides meaningful quantifiable evidence in support of this premise.

Orders of $31.7 million from life and health sciences customers increased 63.1% versus the second quarter of 2012 and 6.1% sequentially. These increases were driven by strong order activity from both bioinstrumentation and bioimaging customers. In addition, we had some encouraging reorders for lasers, optics and instrumentation for clinical applications. This bodes well for continued strength in this area, although order patterns will vary significantly from quarter to quarter.

In February, we introduced our first laser that is optimized for medical device manufacturing. Our new Spirit 8-watt femtosecond presents a compact high-performance product for microfabrication processes in the manufacture of stents, catheters and other devices. This is a new application space for us, with a number of emerging opportunities to leverage our expertise in ultrafast laser technology.

We are also seeing increased demand for our measurement instrumentation for medical lasers. As the utilization of laser technology in medical applications expands, our complete portfolio of power measurement and beam characterization products ensure that the lasers are tuned and calibrated to the exacting parameters required for these applications. Ongoing calibration and monitoring is a necessity for equipment related to ophthalmic procedures, dermatology treatments, dentistry and more. As the industry leader in this technology category, we expect to grow our revenues from both product sales and instrument calibration services as medical laser adoption and utilization expands.

Orders from industrial and other market customers were at a near record level of $35.5 million, representing a 22.8% sequential increase, but a 4.7% decline versus the all-time record level in the second quarter of 2012. The highlight was a $5.2 million order for light engines designed for a 3D printing application. 3D printing, or additive manufacturing, has been a hot topic in industrial manufacturing over the past few years, as it enables the fabrication of complex and highly customized component parts in small quantities more quickly and cost effectively than traditional machining methods. Our expertise in the design and manufacture of application-specific opto-electronic light engines is well suited to enhance the performance of laser-based 3D printers. And we expect to continue to effectively serve this rapidly growing area. Orders from customers in both our research and defense and security markets were down sequentially and versus the prior year period. Contraction and uncertainty in government funding levels continue to weigh heavily on both these markets, and the timing and extent of recovery remain unclear.

Orders from scientific research customers were down 3.9% sequentially and 5.8% from the second quarter of 2012. Declines in both the U.S. and Europe were partially offset by growth in Asia. Our research market orders had been under pressure since early 2012, and we believe that the potential for significant further declines is limited. We remain well positioned as the industry leader in serving the scientific community. And we remain the only supplier with a full line of lasers, optics and photonics products for research applications. Over the long term, we expect to benefit significantly from government and institutional investments in science and technology.

U.S. represents a major part of our current business in the defense and security market and, thus, has been the most impacted by sequestration. In this market, our customers continue to express uncertainty related to the funding of ongoing programs and indicate that near-term visibility is limited. The good news is, is that we are now engaged with Tier 1 defense contractor OEM customers on several potential programs that could each represent $30 million or more in incremental revenue over a 5- to 10-year period. These programs will develop over the next 24 months, and we are optimistic about our opportunity for success.

Overall, it's noteworthy that orders and sales grew sequentially in all of our target markets, except research and defense and security, and that a significant amount of the orders growth came from share gains rather than market improvement. We are particularly encouraged by this orders performance and its implications for future revenue growth. It also reinforces the progress we're making on our strategic growth initiatives. We remain confident that these initiatives will represent an increasingly important catalyst for growth in 2014 and beyond.

I will now turn the call over to Chuck to review our financial performance and discuss our outlook for the second half of 2013. Chuck?

Charles F. Cargile

Thank you, Bob, and thanks to all of you for joining us. First, I'd like to mention that much of the information we're discussing during this call is also included in the press release and Form 8-K we issued earlier today. I encourage you to visit newport.com and specifically the section titled Company Investor Information, where you can see the presentations that we've made in recent investor conferences. We've also posted historical financial statements and schedules, the details and historical trends for our sales and orders by market and the financial performance of our 3 business segments. Included also our schedule showing supplemental non-GAAP financial information and a reconciliation to the corresponding GAAP measures. I also encourage you to download our new Investor Relations app, which is available free on the iTunes App Store and in the Google Play Market.

Bob already highlighted our orders and sales and the dynamics in the markets we serve. I'll now discuss the results of each of our 3 business groups and key components of our income statement, balance sheet and cash flows.

First, I'll discuss our photonics group. As a reminder, this group includes Newport's legacy photonics businesses, vibration control, opto-mechanics, instrumentation and precision motion products, now matched with Ophir's power meters, beam profilers and detectors and the instrumentation products of ILX Lightwave.

Although this group is the most stable and most profitable of the 3 groups, it's also the most dependent upon the weak research market that Bob described earlier. As such, the photonics group's net sales in Q2 of this year of $55.4 million was the lowest level we've experienced since the acquisition of Ophir. Their Q2 operating profit of $10.8 million or 19.4% remains healthy but requires stronger sales levels in order to stay above the 20% operating margin we've become accustomed to.

Optics group is a combination of Newport's optical components and subsystems businesses and the Ophir infrared and industrial optics businesses. This group has the most exposure to microelectronics and defense-related customers. New orders in our optics segment rebounded significantly in the second quarter, and their sales of $39.4 million increased by a little more than 11% versus the low watermark we experienced in Q1. The group's operating profit also rebounded from the low Q1 level. The optics group's $1.9 million of operating income or 4.8% of sales in Q2 was much better than the Q1 results but still far below the low- to mid-teen percentages we reported in 2012, as this is the most capital intensive of our business groups, and we continue to experience under-absorption of our manufacturing infrastructure at this level. Also, we're still in the early stages of building out our low-cost region optics fabrication and coding facility in Romania. We're confident that this business will return to higher profit levels as Romania comes online and market conditions improve, particularly in the semiconductor capital equipment and defense industries.

Our laser group sales in Q2 were $39.4 million, slightly higher than the Q1 2013 level. The group's profit of $4.2 million or 10.7% of sales was 35% higher than the prior quarter. We indicated last quarter that we expected the group's operating margin to return to over 10% this quarter, and we're pleased to see it did so, even though revenue was relatively flat. Bob referenced some of the exciting opportunities we have within the lasers group, and we believe these opportunities will lead to nice revenue growth in the near and mid-term, which will translate to continuous improvement in profitability.

Now I'd like to make a few comments about our consolidated financial results for Q2 and our outlook. Please refer to the press release we issued today for a reconciliation of our results in accordance with Generally Accepted Accounting Principles and excluding certain items we believe to be outside of our core operating results. The following comments will focus on our non-GAAP results.

Our consolidated gross margin for the second quarter was 43.5%. We're pleased to see this rebound from the unusually low level of 42.7% we reported in Q1. It's also noteworthy that the gross margin in the second quarter of 2013 is almost the same as we reported in the prior year second quarter, despite the decline in revenue of $19.4 million. This exemplifies the increase in strength of our financial model as we integrate acquired businesses, strengthen product lines and weed out underperforming products. With the increase in backlog resulting from our $148 million in new orders, we're expecting revenue to increase in the second half of the year. We expect the increase in revenues to also have a positive impact on the gross margins. It has in the past, and it should in the future.

We continue to focus on managing our cost structure as we navigate through these tepid market conditions. Our SG&A expense of $32.3 million was slightly below the Q1 2013 level and $1.3 million lower than the year-ago quarter. We also continue to streamline our headcount to improve efficiency and profitability. In the last several weeks, we've implemented plans to reduce our headcount by an additional 75 people or 3%. These actions have been announced internally, and the transitions will occur over the remainder of 2013. As such, we expect our SG&A to decline in the third quarter, despite the anticipated increase in revenue.

While we're focused on streamlining our SG&A, we continue to invest in R&D. Much of the success Bob referenced in some of our new product wins is due to the effective targeted investments we continue to make in new product development. In the quarter, we spent 9.9% of revenue on R&D, reflecting the highest percentage in years. Our plan is to increase gross margins, squeeze SG&A as a percentage of sales and continue to fund our R&D to drive long-term sustainable revenue growth.

Finally, I'd like to discuss our enhanced debt and refinancing situation. As we announced a few weeks ago, we refinanced our credit facility in mid-July. We repaid $152.6 million of obligations on the prior facility while only drawing $120 million on the new facility, with the remainder coming from cash on hand. As a result, we reduced our total indebtedness by over $30 million, we lowered our borrowing costs and enhanced the flexibility of covenants. While we will record a noncash charge of $3.4 million in the third quarter of 2013 to write off the remaining unamortized balance of the previously capitalized fees related to the credit facility, we're pleased that we're able to take advantage of favorable market conditions to enhance our financial position. Since this refinancing occurred after the end of quarter, you won't see it reflected on our Q2 financial statements. As of the end of the quarter, and as reflected in our financial statements, we had $161.4 million in debt and $102 million in cash. During the quarter, we generated $21.8 million in cash from operations and reduced our net debt position by $16 million.

Turning to our outlook. We expect to increase our sales in the second half of 2013 compared with the first half of the year. In addition, we believe that our growing backlog, coupled with new business wins related to our strategic growth initiatives, will position us well for increasing sales and profitability in 2014. In the third quarter of 2013, we expect sales to be in the range of $136 million to $143 million, resulting in sequential increases in our non-GAAP operating income and our non-GAAP earnings per diluted share.

That concludes our prepared remarks, and we'll now address any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Patrick Newton of Stifel.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Congratulations also on seeing a nice uptick in orders. And I guess along those lines, especially in the microelectronic orders, can you help us understand, of the sequential uptick, how much is share gains versus market dynamics? You definitely alluded to more upside from share gains. But just based on that mix, I'm trying to understand the expectation on sustainability of this uptick.

Robert J. Phillippy

Patrick, this is Bob. I quantified the uptick for one large order. That was a $3.6 million order for opto-mechanical subassemblies for a EUV lithography application. And then I also spoke about several orders from several customers for Quasar, and that's what I'd say is a substantial portion of the sequential uptick, but I don't think we want to qualify it -- or quantify it any closer than that. I guess the point is, is that there were several significant orders that influenced the result that were above and beyond just an uptick in existing programs. And I think that's the important message here.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

And I guess on the underlying -- so if we strip out the share gains in new orders, the underlying market, would it have been -- would book-to-bill still have been above 1? In essence, I'm assuming that, obviously, the share gains will benefit you on a go-forward basis, but has that inflection, for the market as a whole, happen on the microelectronics side if you strip out the share gains?

Charles F. Cargile

Yes, we did almost $36 million in new orders in microelectronics. The revenue was about $29 million. And so I don't think we could attribute all $6 million of that -- if you're looking for a book-to-bill better than 1, we couldn't attribute all that to share gains. So the market might have been a little bit stronger. But the key message is that we had nice growth in orders and the markets still haven't come back yet. When the markets come back, we'll get even greater orders, and it won't be -- it won't necessarily be because of share gain. So it's nice to see it's a little earlier than we saw the market rebound.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Okay, understood. And then I guess I wanted to dive a little bit on to the operating margin by segment, specifically in the optics segment, you did note in your prepared remarks that the operating margin rebounded sequentially. And I think you even said -- you pointed out that it is the highest capital intensity. But what I'm trying to understand is you put up a 12% operating margin and less revenue in 4Q '12. And so I'm still a little bit confused to the weakness, and was there anything inside your reorganization that impacted results? Or can you at least help us understand what needs to happen within that segment in order to get back to that double-digit operating margin that historically has achieved?

Robert J. Phillippy

Yes, Patrick, I think we also included in the prepared remarks that we are building out our low-cost infrastructure in Romania as we speak, and there's an ongoing expense run rate as we get that team in place and start to position that operation so that it can be a contributor. We've had some good success with low-cost region manufacturing in the past with our Wuxi operation, which we established several years ago. And it's now producing an output in the range of $50 million of revenue out of that low-cost region center at good cost savings. So we expect to accomplish the same thing in Romania, but it's an expense run rate that's incremental to what we've had in the past. And that continues to be something that's going to be with us for several quarters as we work through that. So that explains part of the decline. The second piece is that, as I mentioned, the $3.6 million order in the microelectronics sector, that was an opto-mechanical subassembly, and it represents pretty good growth opportunity for us, as do other pieces of business that we are winning or anticipating winning very shortly. And we're going to invest in R&D in order to make sure that we can support that growth. So we've got a little bit of period expense run rate increases associated with deploying resources to win those programs.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

And just I appreciate the details. I guess this is not necessarily a fair question, but just help us understand, if you strip out the low-cost infrastructure build in Romania and you were to strip out the associated R&D on these optics wins, does the -- all else equal, does your segment income look more like it has in the past? Or would it be pushing towards double digits?

Robert J. Phillippy

I think it would explain the majority of the delta. I mean, in any given quarter, there's always mix dynamics. And so could we have some sort of dynamic where it wouldn't be exactly the same? Sure. But it's -- a lot of it is based on the investments that we're putting in to grow the business.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Great. Great. And then last one for me, and I'm sorry if I missed this, Bob, but any update on your opportunities with the 450-millimeter system design as far as wins in the quarter or expected material contributions to your P&L?

Robert J. Phillippy

Yes, thanks. I didn't include that in the script this time, but yes, we continue to have a high activity level. There is -- there were no new design wins in the quarter, but the interaction with our customers remain high. Remember that a few quarters ago, we reported design wins with 3 different customers for projects that will proceed throughout 2013, '14 and into 2015. During those time periods, we would expect to achieve single-digit millions in revenues as we go through the collaborative development process and do prototype and beta units. But production is still a ways out. It's anticipated to start in the 2016 timeframe. So that's a long way of saying no new news, but certainly, it's an important area of ongoing activity and investment for us.

Operator

Your next question comes from Larry Solow of CJS Securities.

Lawrence Solow - CJS Securities, Inc.

Can you just discuss some -- the nature of some of these new contract wins? Are they sort of longer-term-type multiyear deals? And then like the second part of the question is, are there opportunities to go to other OEM customers with these technologies?

Robert J. Phillippy

Larry, this is Bob. So the contract win that I just discussed when --- in response to Patrick's question, the $3.6 million opto-mechanical subassembly, those opto-mechanical subassemblies are application-specific. So while the technology and the inherent capabilities are absolutely deployable with other customers, it isn't a standard product that can be sold to other people, if you know what I mean. On the other hand, one of the other things I talked about was Quasar, which is very early in its life cycle. We just introduced the product earlier this year. And while I would stop short of saying it's standard, it is a product that is highly configurable, and we expect to sell a basic Quasar unit with potentially different features and different configurations to multiple customers. And that was the one that I described is that we had orders from several customers during the quarter. Also, remember that Quasar is a new -- I'll call it application entry for us with some of the processes that I spoke about, PCB drilling, ceramic scribing, glass cutting, things like that. We haven't [ph] had a product in the past that could participate effectively in those applications. So this is a new opportunity for growth for us, and we're pretty excited about it.

Lawrence Solow - CJS Securities, Inc.

Okay. And just as a second question, just to follow up on Patrick's question on the margin, so if you look back, actually, in the back half of '12, and you guys did 1 -- low 140s and your adjusted margin was in the mid-teens, 15%, so I mean, is -- and I do realize that SG&A is usually front end loaded, so you get a little -- so you're being a little bit penalized in the front half this year versus the back half last year. And you talked about the buildup in Romania and your R&D for the microelectronics. But I mean, are those really the only couple of factors, and otherwise, because it seems like it's a pretty big fall down. So in other words, if you get back to that guidance, you hit the 140 next quarter and are sort of in the middle of your guidance, you'll be pretty flat year-over-year in sales, but it doesn't sound like your margin will be anywhere near that 15% adjusted basis.

Charles F. Cargile

Yes, they're -- you're right to zero in on the volume first. The volume will drive an improvement in the margins for sure. And you'll see a lag effect. You'll see a lag effect when the revenue goes up, and you'll see it when it goes down. And we got the benefit of that in the second half of last year because when the volume was higher, we were capitalizing positive variances that then roll out over time. So the second half of last year, we had the benefit of the high volume from the first half of the year. Now as we entered this year, even as volume starts to come back, we're going to be fighting our way out of the hole of 2, 3 quarters of much lower volume. If we were to be at a standard level -- or not standard, if we were to be in a flat level of revenue, above that 140 range, you should expect similar margins.

Lawrence Solow - CJS Securities, Inc.

Okay. And I guess that would mostly be then on the gross margin side, that you'd get that lag?

Charles F. Cargile

That's correct.

Operator

Your next question comes from Mark Miller of Noble Financial.

Mark S. Miller - Noble Financial Group, Inc., Research Division

I was just wondering, as we -- the projections are out there, as you mentioned, for very significant double-digit gains and semi-CapEx spending next year that's certainly a positive potential for you. As you would shift your backlog and your shipments more towards some equipment, how does that drag margins?

Robert J. Phillippy

Margins -- the margin dynamic would be potentially a little bit lower gross margins but similar higher operating margins. We've seen that in the past. With the OEM sales and particularly with semiconductor OEM sales, there's some pressure on the gross margins, but we're able to accomplish it with lower SG&A spending and shared R&D and, in many instances, lower R&D. So I think higher revenue in all regards, we'll be able to leverage good operating income and specifically within sales to semiconductor OEMs.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Your UV laser seems like it's seen a high level of interest. I guess that's not surprising, at least to me. There's other people trying to pin on that door, and I'm just wondering, how do you define yourself as a first-mover? Advantages there if this market starts to get more competitive, say, in 6 months to a year?

Robert J. Phillippy

Well, I agree it's certainly an interesting market opportunity. And as a result, we're not going to be able to occupy that space alone. As of this moment, I think we have a pretty differentiated product. We have the only product on the market that is completely configurable. I mentioned in the prepared remarks the TimeShift Technology, and that is unique to the industry. Also, it’s highest peak power UV laser on the market today for this application, so we're positioned well right now. I mentioned a lot of activity associated with it. But we certainly will have company in that market space. The good news is, is that I think there's a lot of upside in the marketplace. I mentioned mobile device manufacturing. A lot of the precision elements of mobile device manufacturing now are to make smaller and smaller features and tighter and tighter tolerances in the manufacturing processes, and that plays very, very well for UV laser processing. So I think the market has growth lags, and I think that we have a pretty good product right now, but certainly, there will be competition that we'll have to deal with going forward.

Mark S. Miller - Noble Financial Group, Inc., Research Division

As you mentioned, you have some unique features. Are you protected, from a proprietary standpoint, with patents or pending patents?

Robert J. Phillippy

Yes, we do have patent-pending feature sets associated with Quasar, particularly the TimeShift Technology piece.

Operator

[Operator Instructions] Your next question comes from Mark Douglass of Longbow Research.

Mark Douglass - Longbow Research LLC

Let's go back to microelectronics. It seems to be the theme for the call. Looking at orders, do you think with the share gain, the new design wins, I'm not saying when, do you it's possible to move beyond the prior peak's $42 million in orders?

Robert J. Phillippy

Yes, I believe so. Absolutely. I mentioned the one design win, which happened to fall into this quarter, the $3.6 million one. That is for collaborative development and beta units -- or I should say pilot units. And it has an ongoing production tail that follows. So that's just one example. I don't mean to highlight that as the only thing. But if the market were to come back to its prior peaks, meaning if the market activity were to become back to its prior peaks, we would be higher for sure.

Mark Douglass - Longbow Research LLC

Okay. And in this UV, this is not expected to go into production until maybe 2015?

Robert J. Phillippy

Two different things.

Mark Douglass - Longbow Research LLC

Or maybe this is -- this has been the next step before you get to EUV?

Robert J. Phillippy

Yes, the program that I mentioned is EUV, so it's more immediate. We certainly would expect to engage and participate in EUV programs, and that does present what I believe is a meaningful opportunity for us as well, but that's further out.

Mark Douglass - Longbow Research LLC

Okay. And the restructuring in the quarter, and I guess there's more going on, is any one segment bearing the brunt of that? Or is it across all the segments? And I guess, is that already included in your segment income?

Robert J. Phillippy

The restructuring efforts and expenses, as you would expect, are mainly in the optics area. The optics division is the one where there's been the most integration. And it's also the one that's been hurt the most by the defense tailwinds, so that one has the bulk of it. The photonics business would be second. They have the second most challenging integration effort. Not as much as the optics, so there's been a little bit more there. And lasers has been very much unaffected by it, and you don't see much there. For the most part, Mark, those charges that we show as pro forma or non-GAAP will not be charged back to the division. So those are in the unallocated bucket that you see. Yes, so what you -- what we try and provide in the division P&Ls are something that would be comparable to prior periods.

Mark Douglass - Longbow Research LLC

Okay. And so this is mostly optics and then some photonics. Is it quite fair to say that a lot of it is pretty much Ophir?

Robert J. Phillippy

A lot of it is due to the Ophir integration, but there are times where part of integrating Ophir means there's actually -- it's taken at former Newport locations or with Newport personnel or Newport products, et cetera. So I think it's fair to say it's Ophir-related, it's not always Ophir locations or the Ophir businesses that existed when we purchased it.

Mark Douglass - Longbow Research LLC

Okay. And then, Bob, you mentioned industrial had a nice order win in 3D printing. That's certainly a big buzzword these days. But what else is happening in industrial? There was -- that doesn't account for the whole uptick sequentially. What other markets are doing well or maybe not so well?

Robert J. Phillippy

Industrial market activity continues to be good for us. We've seen upticks in a couple of different sectors. One that I think is worth mentioning that we haven't talked about specifically before in this call is automobile night vision. We did see an uptick in order activity associated with that. Again, the long-term prospects of that are going to depend on adoption rate -- or I should say the ultimate level of adoption and the adoption rate. But it did gain traction during the quarter, so we were pleased with that. The other thing that I would mention is, is that part of our industrial laser activity is associated with OEM sales of measurement equipment to other laser applications. So industrial machining and materials processing applications are all applications that we serve with our instrumentation and measurement equipment. And so we also saw a pretty good activity there as well.

Mark Douglass - Longbow Research LLC

On the auto night vision, those are getting shifts, not for development purposes, but real vehicles are using this at this point?

Robert J. Phillippy

Yes, that's a program that's in production. And we are selling the optics on an OEM basis, and they're going into cars. And when I say adoption rate, it's not adoption rate from square one, it's adoption rate -- or I should say penetration rate into other models and other manufacturers of automobiles.

Operator

Your next question comes from Jim Ricchiuti of Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

Chuck, can you say if you anticipate your gross margins will be up this quarter?

Charles F. Cargile

Q3 versus Q2?

James Ricchiuti - Needham & Company, LLC, Research Division

Yes.

Charles F. Cargile

Yes, I would expect our gross margins to be up Q3 versus Q2.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. And then looking at the laser business on the operating margins, off of these revenue levels, the operating margins look pretty strong. Certainly, if you look back a couple of quarters, was it mix- related, or do you see potentially, as you get back into the $45 million range, that the operating margins could be a little bit higher than what you were showing back then?

Charles F. Cargile

Yes, the lasers margins are better. But if you look back, Jim, at our discussion a quarter ago, we were a little surprised and a little disappointed in the Q1 results. So we fully expected to be better this quarter than we were last quarter. It was good to see that, that happened. But the important part of your question is whether or not there's a new financial model there, if you will, and that when they back to similar levels, will the revenue be better? And the answer is yes, we would expect that. The laser business has done a very nice job of focusing on more profitable product lines. And of all of our businesses, they have probably done the most weeding out of unprofitable product lines. It's one of the reasons why the revenue hasn't grown much, but that mix in revenue is more competitive products and more profitable products. So I think that, yes, if and when we get back to those peak levels of revenue, the margins will be better.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay, that's helpful. I did have a question regarding the additive manufacturing award. Was that for a plastics-based application or metal-based application?

Robert J. Phillippy

Jim, it's an OEM customer, and it’s into a laser based 3D printing tool. And I probably don't want to go much further beyond that because I don't want to be too specific. But it's something that we're pretty excited about, and it is a hot area, and it is an ongoing business relationship. So this isn't a one-and-done type of thing, it's an ongoing set of activities.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. So there's potentially additional business. Is this a European OEM?

Robert J. Phillippy

No.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. The -- you mentioned night vision. And I was just wondering, we are starting to hear of some additional rollouts in that market. And it sounds like, I think, Mercedes is going to be rolling out night vision. The optics, the components that you're supplying into that market, those will be manufactured ultimately in Romania?

Robert J. Phillippy

That's correct.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay, because it's about -- I mean, do you -- I don't know, Bob, is there a way for you to give us some sense as to what content might be like as we begin to start seeing that market develop?

Robert J. Phillippy

Well, some directional comments. I don't want to talk specifically about prices, but just some directional comments. So that is going to be, and in fact, to some degree, already is a high-volume application. So gross margins will continuously be under pressure, but operating margin should be okay. And the content per vehicle is not huge. It's just the number of vehicles that goes in. And when I say not huge, I would say less than $100 per vehicle.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. Great. And then just finally, in the Life and Health Science areas, sometimes that business can bounce around a bit, but what's your sense as you look out in, in terms of the pipeline, the order pipeline in that area?

Robert J. Phillippy

Yes, with the caveat or the qualifier that the order patterns are going to continue to be lumpy because they just follow our OEM customers' order behavior, it's a bit of a mixed bag for us because in the life and health sciences business, we participate in bioinstrumentation and bioimaging applications, which I would say is low to mid single-digit growth. And then we participate in clinical applications, which are going to be more driven by adoption rate of new ophthalmic procedures and increasing utilization of lasers in clinical applications. So I guess to shorten that, I'd say that order patterns will continue to be lumpy, but we're pretty bullish about the medium- and long-term prospects for the market.

Charles F. Cargile

My suggestion, when you look at that, is twofold. One, it's better to look at revenue and not orders if you look at the long-term trend data because the orders, of course, will spike more because you can book a big order in a much longer time, and I would always look at it on a rolling 4 quarter basis, eliminate some of the quarterly blips. And what we've always said, if you're going to look at rolling 4 quarters, that business should be getting better. If you just -- if you react to the quarterly flexes in orders, one quarter, you're going to think we're conquering the world, and the next quarter, you're going to think it's going down the tubes. So look at revenue and look at it in a rolling 4 quarters.

Operator

Your final question is a follow-up from Mark Miller of Noble Financial.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Just was wondering how your microelectronics orders flow through the quarter? Were they linear? Were -- you said you didn't see any big evidence, and that's what we heard at Semicon? Like people were hearing about this very aggressive forecast for next year, but they were yet seeing it. And some were linear, then they drop off as the quarter ended, or are they pretty steady?

Robert J. Phillippy

Mark, they gained a bit of momentum, I'll say, in the last month of the quarter. That's not unusual. That's more probably based on interactions with customers and activities related to that, that it is just the market dynamic. I think the theme, and this is a bit repetitive, but I think the theme of our activity in the microelectronics business is that we certainly are optimistic about the forecasts related to the recovery in microelectronics. We've heard all the things about increased activity in the memory space and things like that. And all of that is good for us. And we would expect that later this year or early in 2014, we'd start to benefit in a meaningful way from that market updraft because we're the incumbent supplier in a number of existing programs. However, we didn't see that substantial uptick during the course of Q2 on our orders line. And Chuck mentioned a little bit earlier that it was somewhat better than Q1, but it wasn't the inflection point and a significant slope of an uptick that we usually see, that we've seen in the past. So I think that sort of highlights the fact that a lot of the increase in orders that we saw was associated with new design wins. So that was kind of the theme of the microelectronics market.

Mark S. Miller - Noble Financial Group, Inc., Research Division

FinFETs have been a major struggle in development. Some people think they're getting pushed further and further back. But I assume that when they ramp, that would be a very, very significant opportunity, especially in metrology. Is that correct for you guys?

Robert J. Phillippy

Yes. And the way we look at it is that if things are lithography, metrology, inspection-centric that, that's good for us because we're an OEM supplier, so we're designed into tools that perform those applications. And everything that we've heard about FinFETs leads us to believe they will be particularly metrology-intensive, so that would be pretty beneficial.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Is that second half of next year, do you feel?

Robert J. Phillippy

I try not to be the one who picks the inflection point. We all read the same thing. We know that the market can turn fairly abruptly. We're pretty optimistic about the news, and we've seen the forecasts that indicate that 2014, overall, could be very strong for the industry. But our job is to make sure that we win as much business as we can in the downcycle, in particular, because that's the time when customers are thinking about changing suppliers. And then we prepare ourselves to effectively support our customers as demand for our products increases.

Operator

This concludes today's question-and-answer session. I would now like turn the floor back over to Mr. Robert Phillippy for any closing remarks.

Robert J. Phillippy

Yes. Thanks, everybody, for your interest in Newport. And of course, if you have any questions or would like additional information related to any of the topics we've discussed today, please don't hesitate to give us a call. And as always, thanks to our fellow Newport team members around the world for continued support and as we aggressively pursue our objectives. So bye now.

Operator

Thank you. This concludes your conference. You may now disconnect.

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