Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Newport Corporation (NASDAQ:NEWP)

Q3 2009 Earnings Call Transcript

October 28, 2009 5:00 pm ET

Executives

Robert Phillippy – President and CEO

Chuck Cargile – CFO, SVP and Treasurer

Analysts

Mark Douglass – Longbow Research

Jim Ricchiuti – Needham & Company

Sven Eenmaa – Thomas Weisel Partners

Jiwon Lee – Sidoti & Company

Ed Einboden – Wm Smith & Co.

Operator

Good day, everyone, and welcome to the Newport Corporation third quarter 2009 financial results conference call. Today’s call is being recorded as of October 28th, 2009.

At this time, for opening remarks and introductions, I would like to turn the call over to the Chief Executive Officer, Mr. Robert Phillippy. Please go ahead, sir.

Robert Phillippy

Thank you. Good afternoon and welcome to Newport’s third 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 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 addition, we will discuss our financial results on a non-GAAP basis, excluding certain expense items that we consider to be outside of our core operating results. We believe that this provides a more complete description of our operating performance and allows for a more meaningful comparison with past and future periods.

Our financial performance in the third quarter provides encouraging signs of an improved business climate and reflects the positive impact of our actions to position Newport for meaningful earnings growth in the future. Over the past year, we have taken aggressive actions to streamline our cost structure and ensure that we are profitable at lower levels of revenue, while simultaneously sharpening our focus on our strategic growth initiatives. Our third quarter performance offers strong evidence that this plan is working quite well.

I would like to touch on a few highlights from the quarter. First, our orders in the third quarter grew 15.2% sequentially to $92.6 million. We are very encouraged by this result, as it validates our belief that we are beginning to emerge from the depressed market conditions of the prior three quarters. Second, on a non-GAAP basis, we generated net income of $2.1 million on $88.3 million revenue. Our breakeven revenue level excluding those types of non-core expense items is now approximately $85 million per quarter and we achieved this target a full quarter ahead of our plan.

Third, our gross margin was approximately 40%, reflecting the positive impact of our efforts to streamline our operations and the beneficial impact of our acquisition of New Focus and the divestiture of our Tucson diode laser operations. As you may recall, that asset exchange was completed at the end of the second quarter, so our third quarter results reflect the first full quarter impact of these transactions.

Fourth, our Spectra-Physics Laser Division returned to profitability generating $740,000 of operating profit on $34.6 million in revenue. We believe we have now turned the corner in this business and expect its operating profits to improve significantly with increased revenues.

And finally, our major initiatives to streamline our operations and improve our competitive position are on track and in some cases proceeding ahead of our plan. These include the integration of New Focus, the relocation of our Lasers Division headquarters to Santa Clara, the expansion and relocation of our operations in Wuxi, China, and the outsourcing of the products manufactured in our Ottawa, Canada facility and the subsequent closure of that site. It is now very clear that we are capturing our target of $25 million in annual sustainable cost savings.

This improving financial performance and accelerated achievement of our key initiatives illustrate our success in transforming Newport into a leaner, nimbler and more capable photonic solutions provider.

Now, I would like to comment on the current environment, our target markets and characterize our orders and sales events in that context. Sales in the third quarter were $88.3 million, 15.9% lower than the third quarter of 2008, but a slight sequential increase over the second quarter. The sequential growth in orders in sales and particularly our book-to-bill ratio of 1.05 are very encouraging, as they represent meaningful signs of increasing revenue momentum.

Our acquisition of New Focus added approximately $5 million in sales in the third quarter, which were spread across all of our end markets. This increase by partially offset by the loss of sales from the divested diode laser business, which were primarily to life and health sciences customers.

Scientific market orders increased 16.5% sequentially and 1.4% versus the third quarter of 2008. We have now begun to receive orders directly associated with the American Recovery and Reinvestment Act in the US. While I would characterize this order rate as trickle rather than a large inflow, quotation activity remains robust, and we do expect order levels related to stimulus funding to increase in the fourth quarter. As we have mentioned in the past, this increase in activity will be offset to some degree by lower funding due to decreases in university endowments and corporate operating budgets.

Orders from customers in our microelectronic segment increased 51% sequentially to $22.7 million. Orders from semiconductor equipment OEM customers accounted for the majority of this increase. Orders from these customers have now shown significant improvement from the trough levels of Q1 of ’09, but are still down more than 50% from the peak level we experienced in 2006. While our market position remains strong and our OEM customers are becoming increasingly optimistic, the magnitude and sustainability of the recovery remains difficult to forecast.

Orders from solar industry customers more than doubled to $3.8 million from the severely depressed levels of the second quarter. However, sales to these customers dropped substantially on a sequential basis to $2.7 million as we now have worked through the majority of the backlog build as a result of our 2008 orders total of $33.6 million. While we believe that we have now passed the bottom of the demand curve for capital equipment in this segment, visibility remains limited on the timing and extent of a recovery, and we continue to expect the capital spending in this industry to remain soft in the fourth quarter.

Orders from and sales to our life and health sciences customers declined on both the sequential and year-over-year basis. However, it is important to note that the vast majority of the declines were due to the divestiture of our Tucson laser diode operation as the majority of sales from this operation were to life and health sciences customers. Our core business with bio-instrumentation customers continues to develop. And we believe we are well positioned for long-term growth in this segment.

Orders from and sales to our industrial market customers increased 11.8% and 27.6% respectively on a sequential basis, but declined approximately 25% versus the third quarter of 2008. In this market, we participate in a variety of high precision materials processing, imaging, and sensing applications, so our third quarter performance generally reflects modest improvement in the macroeconomic environment from the lows experienced earlier this year.

I would now like to turn the call over to Chuck to provide an update on the major projects and our overall financial performance. 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 the Investors page of our website at newport.com where we've posted historical income statements, balance sheets and scheduled the detailed historical trends for sales and orders by market, and also the performance of our two reporting segments and a reconciliation of GAAP and non-GAAP financial results. This reconciliation is also attached to the press release we issued today.

First thing I want to discuss is our earnings. After adjusting to the non-GAAP items, we would have earned $2.1 million or $0.06 per share on $88.3 million in revenue. The earnings are a little better that we had anticipated due to the combination of better-than-expected gross margin and lower-than-expected operating expenses. Much of the margin increase results from the improved margin in our Lasers Division, subsequent to the divestiture of our Tucson operations. The lower operating expenses reflect the success of our cost reduction actions.

We are pleased to report these results which reflect our improved financial position even before significant change in the macroeconomic conditions. It makes us optimistic about what we believe will be able to achieve in 2010 and beyond.

Now I will comment on our integration of New Focus and how it overlaps to some degree with the cost reduction efforts we already have underway. We have identified the following primary steps in integrating New Focus into Newport.

First, we’ve made significant progress in relocating products and personnel from existing New Focus facilities in San Jose, California and Shenzhen, China to Newport facilities, primarily in Santa Clara, California and Wuxi, China. We’ve now moved into our larger facility in Wuxi and transferred its inventory, equipment and selected personnel from Shenzhen to Wuxi. This new facility will enable us to more than double our manufacturing volume at this site and provides cost efficiencies from being located in Wuxi’s export processing zone.

The second area of integration is leveraging the distribution of New Focus products through Newport’s worldwide sales channels. There are two areas of opportunity for us as it relates to these channels. One is that Newport has more robust direct sales channels than New Focus. This enables us to magnify the sales efforts for New Focus products with very little incremental selling and marketing expense.

The other is that, in many areas of the world, New Focus had previously utilized third-party representatives and distributors, which we will now replace with the Newport’s more efficient and effective direct sales channels. A third of synergies is in the utilization of SAP at the underlying ERP platform for New Focus business processes. We have now implemented SAP for all New Focus transaction processes.

We’ve already begun to appreciate the benefits of a common system across New Port’s global operations and now we expect to expand those benefits with New Focus. The use of a common system enhances the speed and effectiveness of our integration and it also will allow us to scale our business more efficiently as revenue levels expand.

In short, we are on target to complete our integration of New Focus before the end of 2009, and expect to achieve our target of $5 million to $8 million of annualized incremental profit in 2010 as a result of the asset exchange with Clara.

At Newport, we stay focused on generating cash. At the end of the third quarter, our cash balance was $150 million. We are particularly encouraged by the fact that we increased the balance despite the cash demands in our integration and cost reduction efforts.

In fact, let me add some perspective to our cash balance. In the last two quarters, we have increased our cash balance by $8.3 million. During that same period, we used approximately $5 million to acquire and integrate New Focus and divest Tucson, spent an additional approximately $2.5 million on our cost reduction steps and spent approximately $4 million on capital expenditures directly related to the integration and cost reduction steps. This equates to approximately $11.5 million in total over the last two quarters. The $8.3 million plus the $11.5 million on integration and cost reduction efforts equals almost $20 million in cash in the last two quarters.

I would also like to highlight that our cash balance today of a $150 million is the highest level we have had since we did our convertible net offering in early 2007. And we expect to increase our cash balance again in the fourth quarter of 2009.

Now, Bob will make a few more comments before we address your questions.

Robert Phillippy

Thanks, Chuck. I would now like to provide an update on some other important developments in Newport and then comment on our outlook for the coming quarter.

Over the past year, we have discussed our initiative to streamline our cost structure, while at the same time better positioning Newport for future growth opportunities. An important example of this parallel effort is product development. While we have reduced our R&D budgets compared with 2008 levels, we have maintained and in some areas increased the pace of new product introductions.

For example, in our Lasers Division, we have introduced 18 major new products in the first nine months of 2009. These include five new higher power versions of our Pulseo, HIPPO and Explorer industrial lasers. Each of these products provides industry-leading performance and compelling cost of ownership, while being designed and tested to meet stringent reliability requirements in demanding 24/7 applications. These new products significantly expand our addressable market in microelectronics, solar cell manufacturing and micro materials processing applications.

In our photonics and precision technologies division, we have introduced 41 new product families in 2009, ranging from new optical and opto-mechanical components to major new entries in our Solaris [ph] line of solar cell manufacturing equipment. We have significant new entries developed for scientific, OEM and industrial user applications in each of our target end markets.

In short, we are very pleased with the level of output achieved by our product development teams. We have remained focused on the highest priority developments and rigorous in following our product development processes.

It’s also important to note that the acquisition of New Focus brings more than 2,000 new products that are perfect complements to our existing portfolio. As Chuck mentioned, our integration activities are on track including leveraging Newport sales channels to increase the exposure and market penetration of New Focus’ high differentiated product line.

We believe that this combination of highly productive product development and our new line of products from New Focus will enable us to further improve our market position in the current environment. In addition, as conditions improve, we are confident in our ability to generate incremental profit from increased sales levels.

I would now like to discuss our outlook for the fourth quarter of 2009. As mentioned earlier, we have seen recent improvements in activity levels in both our scientific and microelectronics markets. Although the degree and sustainability of a broad based recovery remain uncertain, we do expect this increased activity level to continue in the current quarter.

Additionally, our fourth quarter is typically, seasonally stronger, especially in our scientific market. These factors coupled with our book-to-bill ratio of 1.05 in the third quarter lead us to expect modest sequential increases in both orders and sales in the fourth quarter of 2009.

Our performance in the third quarter of 2009 demonstrates our progress in transforming Newport. Our company is leaner and more efficient. And we continue to enhance our technology portfolio and gaining channel strength.

We will enter 2010 with continued focus on providing our customers with innovative photonic solutions, coupled with highly responsive support and service, at the same time, we have a business model that is more resilient to lack luster market conditions, and we will gain significant profit leverage as conditions improve.

That concludes our prepared remarks. We would now like to address your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Mark Douglass of Longbow Research. Please go ahead.

Mark Douglass – Longbow Research

Good afternoon.

Robert Phillippy

Hi, Mark.

Chuck Cargile

Hi, Mark.

Mark Douglass – Longbow Research

Congratulations on getting lasers profitable.

Robert Phillippy

Thank you.

Chuck Cargile

Thanks.

Mark Douglass – Longbow Research

A very good sign. Can we go into the orders a little bit? You said that the sequential increase in micro was primarily due to semi cap OEMs.

Chuck Cargile

That’s correct.

Mark Douglass – Longbow Research

Okay. Can you say how much of say New Focus is in there or even in scientific?

Chuck Cargile

Well, yes, the New Focus in total that was about $5 million, which is in keeping with what we said when we acquired them last quarter, they do about $20 million for the year, probably a little more than half research.

And we also saw – also as part of the increase in orders, there was a little bit of an uptick in photovoltaic orders as well, so that’s why it’s primarily microelectronics or primarily semiconductor within microelectronics.

Mark Douglass – Longbow Research

Okay, okay that’s helpful. And then if we look at the orders again, particularly in scientific and micro, and I think scientific and research probably have more of a turns business, but how long would you expect orders to turn into sales?

Chuck Cargile

Generally in research as you say, it’s pretty quick turn. And then for semiconductor it varies by product line of course.

Robert Phillippy

And it varies by program, it can be all over the map. In a number of cases, we will get blanket orders that will be 12 months in duration and even that is a subject to pull-ins and push-outs based on market dynamics. So that the orders pattern in semiconductor equipment in particular and microelectronics in general doesn’t necessarily directly correlate with the sales pattern, whereas the research correlation is quite a bit closer.

Chuck Cargile

Mark, let me – I think I – let me try this way. I think I know where you’re going. We did increase orders a little bit more than we thought we would. And so let’s say if we were going to do about we had thought we might be maybe in the $85 million, $86 million, we did $92 million. But we also – but – so there is $6 million more of orders.

We also had revenue that might have been about half of that. So maybe half of – you can think of half of the increase in orders flow through in the current quarter. So maybe that gives us a little bit of wind in our sales as we enter Q4, and that’s why when Bob gave the guidance, he said we think that we can have revenue a little bit higher in Q4 than it was in Q3.

Mark Douglass – Longbow Research

Okay. Then, I know you’re not really going to want to give us the explicit guidance on 2010, but do you think the seasonal decline that we usually see and scientific and research will come back, you think that’s very likely?

Chuck Cargile

You mean for Q1?

Mark Douglass – Longbow Research

Yes.

Robert Phillippy

The season – this is Bob, Mark. The seasonal decline will occur. It’s just how much of it could be offset by increase in the flow of funds from the ARRA and other stimulus type funding, because as I mentioned in the prepared remarks, the Q3 presence of ARRA was a bit of a trickle. We have now experiences with research customers who have received funds and they have placed orders as a result, but it’s certainly a very low level of activity.

Chuck Cargile

And because of the unpredictability of the flow through, the ARRA funding for our own internal purposes, we are treating that as something that we are not expecting. Well, when that comes, it will certainly be welcomed, but it’s very difficult to predict. So we will enter 2010 with the expectation that will be – it will be seasonally low just like Bob said.

Mark Douglass – Longbow Research

Okay, that’s helpful. And then finally, what was your cash flow from operations in the quarter, and then your CapEx?

Chuck Cargile

Yes, CapEx for Q3 was $5.4 million, and that’s a little higher than we have been running, primarily because off that $5.4 million $2.7 million of it, about half of it was related to the facility moves that we have as a result of moving to Santa Clara and then also Wuxi, moving from Shenzhen into Wuxi. So it won’t be as high as that in Q4. And as we said, the – our cash balance was up about a $0.5 million for the quarter.

Mark Douglass – Longbow Research

Okay, thank you.

Chuck Cargile

You’re welcome.

Operator

Thank you. And our next question comes from Jim Ricchiuti from Needham & Company. Please go ahead.

Jim Ricchiuti – Needham & Company

Hi, thanks. Good afternoon.

Chuck Cargile

Hi, Jim.

Jim Ricchiuti – Needham & Company

I think you gave the revenue that you generated from New Focus in the quarter. You might have given this number, but I may have missed it, the revenue that you lost from the transfer of the diode laser business Tucson.

Robert Phillippy

Yes, that’s difficult to say, because we don’t know what their shifts, right?

Jim Ricchiuti – Needham & Company

Right. But, in rough terms, I am trying to – well I am trying to get a sense, maybe you can give us just what it was in the June quarter?

Robert Phillippy

Yes, I think there’s about a – you can assume about a $2 million positive from that.

Jim Ricchiuti – Needham & Company

Okay. And if we look at the swing in profitability, the nice swing in profitability in the laser business, how much of that would you attribute to the divestiture of Tucson?

Robert Phillippy

Well, I haven’t really thought of it that way, Jim. I think it’s more a matter of just you can sell based on historical financials how much we were losing in Tucson before. But there is more than just the Tucson exit. That business we have been saying for a longtime was making positive steps, it was just been overshadowed by the loss of Tucson. So I think the fact that we would make money even at $34.6 million in revenue which is the lowest level we have seen in many, many, many years I think is an overall really good sign for the business and what we are going to be able to do there going forward.

Jim Ricchiuti – Needham & Company

Just looking at gross margins which came in a little better, at least I was expecting. Can you give us some sense as to how you see gross margins over the next couple of quarters, assuming we see some modest sequential improvement in revenues this quarter?

Chuck Cargile

Yes, we were pleased with the gross margin, they came a little higher than we had expected to as well, which is encouraging because it wasn’t due to just an increase in revenue. Revenue was pretty flat. So that gives us confidence that we are pretty well positioned to grow going forward.

And I think the best way to model it, since we have any given any guidance on what we think our revenue is going to be, I think if you just take a – an assumed increased level in revenue and say that any incremental dollar is going to be better than that 40% and depending on the mix of products we have, it could be a flow through of anywhere from 50% to 60%, then you could see us at each, say $10 million incremental revenue level, you will get another 100 or even a 150 basis points improvement in margin. So if we were to get back to say a level of around a $120 million, say back to where we might have been in 2007, it becomes very reasonable that we can be getting to our goal of 45% gross margin.

Jim Ricchiuti – Needham & Company

Okay, that’s helpful, Chuck. And looking at OpEx, anything in the SG&A that we need to be aware of in Q3 as it relates to how we should think about your SG&A expense going forward in Q4?

Chuck Cargile

Not so much Q4. I would say that as you look out into 2010, some of the savings that we have captured in 2009 will not be sustainable, because we have done salary reductions for all employees, all 1659 employees that we have around the world took a pay cut and those pay cuts will be reinstated at some point in the future.

We haven’t been paying much by way of incentive compensation, hopefully that will come back in at some point, and we also at most of our worldwide factories that were shutdown during 2009, which hopefully we wouldn’t have to do in 2010 either.

And so I think as you look out into 2010, in the SG&A line, you might need to assume somewhere around $1.5 million a quarter more and expense that will come back in for those. And even when you do that, you will still see that we have significant savings over where we were a year ago and we have hit our targets. But it’s just right now it’s a little bit high because of those temporary measures that we have taken.

Jim Ricchiuti – Needham & Company

Okay. And I just had a – just a question on the order activity and then I will jump in the queue. You think you see some good chance, I guess the orders are going to be up again in the December quarter and clearly you had a nice pickup in orders in your microelectronics business. Do you see that sustained in the December quarter as well based on what you’re hearing from the OEMs?

Robert Phillippy

Jim, this is Bob.

Jim Ricchiuti – Needham & Company

Hi, Bob.

Robert Phillippy

The semiconductor equipment OEM sector is always a challenging one to forecast because it not only is influenced by a cyclical industry, but it’s influenced by the relative inventory levels and production ramps of our customers. So it’s certainly subject to pretty big swings.

We don’t see any very, very near-term signs that we will have a slowdown in the order levels that we’ve received. However going out more than a quarter or so is becomes even more difficult to predict, because we are not prepared to comment on the sustainability of a recovery in that sector.

Jim Ricchiuti – Needham & Company

Okay, that’s certainly understandable. Thank you.

Robert Phillippy

Thanks Jim.

Operator

Thank you. And our next question comes from Ajit Pai from Thomas Weisel Partners. Please go ahead.

Sven Eenmaa – Thomas Weisel Partners

Hi, this is Sven Eenmaa calling in for Ajit. I have a couple of questions. First, wanted to ask about your solar business, I kind of understanding the volatility in that side, what is your current backlog in the business and when is that expected to shift?

Robert Phillippy

Sven, this is Bob. So I will characterize in general the PV market activity and just by way of refresh, we build capital equipment that is used by solar cell manufacturers to produce solar panels and our major revenue has come from stem cell solar panel applications.

We also sell on an OEM basis to companies who use our product for various types of solar cell manufacturing equipment. So our revenue trends are going to be more based on the expansion or call it tool upgrade of solar cell manufacturing as opposed to that the increased deployment of solar cells themselves.

So as you know, that business was running at a very robust rate in 2008, and during the course of 2008, we collected $33.6 million in orders from solar cell manufacturers. We have gone through and shipped the very vast majority of that backlog if not all of the major systems orders. And now we have – I mean that market with the financial crisis and the lack of availability of capital and things deteriorated significantly over the past few quarters.

And as I mentioned, we’ve just now gotten back to $3.8 million worth of orders in the quarter, and that represents a doubling of the run rate from the quarter before, so it went from a pretty robust run rates almost nothing. In the meantime, we flushed through the backlog.

Chuck Cargile

And we don’t – Sven, we don’t report backlog by product line or even by business units. But we did mention that we had almost $4 million of new orders in PV and a little less than $3 million in sales. So just in the quarter alone, we have built a little over a $1 million of backlog as Bob said for the assistance we had flushed out most of the backlog before that. So it’s not a huge number at this point.

Sven Eenmaa – Thomas Weisel Partners

Great, thank you. The next question I have is in terms of the order activity in October, and that's just broadly across all the segments, how does that compare to what you guys sell in October?

Robert Phillippy

We are only what three-and-a-half weeks into the month of October, October 3rd was the close. And we really don’t want to get in the habit of reporting on three weeks of data. So I think I am just going to have to punt on that one.

Sven Eenmaa – Thomas Weisel Partners

And I have actually two more questions, one of them is, now looking at the improvements in the segments’ operating margins, how much – is there any further cost reduction activities which are going to improve both of those segments or should – is that currently the base line from which we should model and I guess I assumed the incremental margins you mentioned before.

Robert Phillippy

We’ve said that we are going to be complete with the integration and the cost reduction steps in Q4. So I think it’s fair to assume that most of the impact in SG&A line and the operating expense is probably baked in already.

So I would say the main thing as you look out in 2010 is to just acknowledge like I answered Jim’s question a minute ago that there will be some expenses that come back in once we reinstate salaries and don’t have the benefit of factory shutdowns. So I think there is probably going to be a little bit of increase in expenses in 2010 from the low levels that we reached to date.

Sven Eenmaa – Thomas Weisel Partners

Okay, got it. And the final, I just wanted to ask about the stock-based compensation in the current quarter, whether there was any and how much was it?

Chuck Cargile

Yes, about $600,000 – about $600,000 a quarter is what we have run this year through the end of Q3, so about $1.8 million in total and we will have another $600,000 or $700,000 in Q4.

Sven Eenmaa – Thomas Weisel Partners

Great, thank you.

Chuck Cargile

You’re welcome.

Operator

Thank you. Our next question comes from Jiwon Lee from Sidoti & Company. Please go ahead.

Jiwon Lee – Sidoti & Company

Thank you. The first question is the benefit that you are seeing from the stimulus funding, are they mainly related to lasers?

Robert Phillippy

Hi, Jiwon; this is Bob.

Jiwon Lee – Sidoti & Company

Hi, Bob.

Robert Phillippy

No, I would say it’s just generally across the board. Although I will comment that typically when a researcher gets a new grant and that’s really the manifestation of the availability of the funding, right? The funding agencies like NIH and NSF provide grants to research organizations. And when a researcher gets a grant, the laser is usually one of the first things that the researcher goes and buys, because it has a higher ASP and sometimes a longer lead time in some of the merchandise type items.

So while the grants and the availability of ARRA funding and similar stimulus packages in other countries will ultimately be correlated with products across the board both in lasers and photonics. It is reasonable to assume that some of the early purchases will be of lasers, maybe a little bit earlier than some of the other things.

But that said; recall that in the prepared remarks, I said that the ARRA related order so far have been more of a trickle, so we have seen some which is more than we can say last quarter. But we certainly have not seen a robust level of order activity based on that funding, although we have seen a robust level of quotation activity. Our quotes are running at historical highs for sure.

Jiwon Lee – Sidoti & Company

Okay, well, that’s helpful. And then your upticks from microelectronics and many other markets, right now, at this point, will you expect to ship most of those new orders?

Robert Phillippy

As I mentioned a little bit earlier, the correlation in microelectronics between orders and sales certainly isn’t one for one, because the orders generally come in blankets and the sales come when the customer needs the product, with a lot our customers were on con-bon type inventory pull systems and so they pull it when they need did.

However, there certainly is an increased amount of activity in the microelectronics and particularly the semiconductor OEM segment. We have seen the public disclosures of some of our customers and they would indicate that revenue is going to be ticking up a little bit as well.

Chuck Cargile

And if you think about it at a high level, the book-to-bill of 1.05 implies there is $4 million more of orders than revenue which means you have $4 million more of backlog that’s going to ship at some point. So some of that will come out in Q4, but I think that the fact that it is $4 million – only $4 million of (inaudible) there, if this is the – if the recovery – if this is a false recovery, hence not sustainable as Bob referred to earlier, then there is not going to be any bump in the revenue, and we have to be very cautious in how we consider that because of what we have been through over the last year. So in other words, we need to see several quarters of meaningful book-to-bill greater than 1 to be able to plan for a significant increase in revenue.

Jiwon Lee – Sidoti & Company

Okay, well, that’s helpful. And update us again how much of a sales do you expect out of Wuxi next year in terms of the percentage or in any way they do (inaudible)?

Robert Phillippy

Yes, well I think the way to think about is this year we had said that we were – that we would do I think a little more than $10 million of external revenue out of Wuxi. And that by virtue of the Shenzhen transfer from New Focus into Wuxi that we could double that, so that’s probably a reasonable estimation at this point.

Jiwon Lee – Sidoti & Company

Okay. And lastly from me, will there be anymore leftover on the structuring related charges in the fourth quarter?

Robert Phillippy

Sure. We have said that we will complete the integration of New Focus and the cost reduction programs in Q4, and that there would no longer be any lingering expenses in 2010. But we certainly will have them in the fourth quarter, although we expect them to be lower. I think the – this quarter, the total expense – the difference between the GAAP and the non-GAAP was about – for the integration and restructure was about $4.5 million, that will be down a little bit in Q4, not a lot. So maybe assume about $4 million, and then we spend about $3.5 million in capital, and that will be down to maybe a $1.5 million. So both numbers will come down a little, but they will still exist in Q4, and then hopefully they will all be flushed out and there won’t be any in the first quarter of 2010.

Jiwon Lee – Sidoti & Company

Great, thank you very much.

Robert Phillippy

Hi, Jiwon, just to reinforce that – Chuck’s point, the integration activity that we have been talking about were things that we put together as a part of our cost reduction and integration plan that we have been communicating for a couple of quarters, and everything is absolutely on track. So that’s not trailing costs from projects that we had intended to complete earlier.

It’s projects that we said from the very beginning, we were going to get done in the calendar year of 2009, and every one of those is on track and even a couple of them or even a few months early. So nothing’s changed from what we had anticipated. It’s just that that’s the trailing end of our implementation.

Jiwon Lee – Sidoti & Company

Understood. Thanks again.

Robert Phillippy

You’re welcome.

Operator

Thank you. And our next question comes from Ed Einboden with Wm Smith & Co. Please go ahead.

Ed Einboden – Wm Smith & Co.

Good afternoon guys.

Robert Phillippy

Hi, Ed.

Ed Einboden – Wm Smith & Co.

I just had a couple of questions. First of all, good quarter and it is good to see this profitability to begin to uptick. I just was wondering if you can maybe refresh us on the laser side before maybe all diode complications or the masking of how profitable that business was. Can you tell us what the historical highs were and sort of where you see that near term?

Chuck Cargile

The laser business had not been profitable. You have to go back to 2007 to when the laser business was profitable. Now at its peak during the 2006 time period when market conditions were probably as robust as they have been in the last five, six, seven years, 2006 was the key for us, the laser business earned about $4 million in a quarter on – I think it was about $4 million on maybe $50 million in revenue. So I think it’s reasonable for us to start targeting and driving or expecting the business to get 10% operating income would be reasonable as we look at long term, and it’s nice to see that we will be moving it from a position of profit now.

Ed Einboden – Wm Smith & Co.

Okay, great, thanks. And on the industrial side, can you guys talk about which specific areas or were there any that were – that were pretty good strong or whether large order trends that you guys saw?

Robert Phillippy

Ed this is Bob. That’s always a tough question, because our participation in that industrial segment is a variety of different niche applications. I guess in general, I could say that there was nothing incredibly sensational that happened during the quarter.

The only thing that I would say is probably noteworthy is that as I mentioned during the call, the divestiture of our Tucson diode business meant that we lost sales in the life and health sciences sector, that was the majority of their revenue. But the second biggest sector was industrial. So we actually had a little bit of a drain on the industrial side as a result of that divestiture. So if anything those results were call it diluted a bit because of the diode laser divestiture.

As I mentioned, the new focus acquisition added sales across all of our segments, but the major one was research and second most was microelectronics, whereas the diode business divestiture, the major piece was life and health science and second was industrial.

Chuck Cargile

The other thing to keep in mind Ed, anytime you are wanting to look at the different market segments, keep in mind that within microelectronics and almost to the same degree life and health science, we have a very, very concentrated customer base, so you can – if you look at the top 10 customers, you are going to get most of the revenues. So it’s very easy there to talk about major trends or major activity. It’s the exact opposite when you look at research and industrial and other.

It’s unusual for us to have a customer in a single quarter and these are those markets over a $0.5 million of business. So it’s really a lot of different small orders from a lot of different customers, so it’s a little harder to talk about those two in the context of the way you asked the question.

Ed Einboden – Wm Smith & Co.

Okay. Well to that degree, did you guys see maybe a trend going through the quarter towards the back end of things, you saw some strength that way or was it pretty consistent throughout or any trends with that?

Chuck Cargile

I have got a little stronger over the course of the quarter, but it wasn’t like a big hockey stick where it surprised us at the end. It was just – it was relatively predictable.

Ed Einboden – Wm Smith & Co.

All right, and I guess just lastly, I think you said that you had about 1,600 products move to Wuxi. Can you guys give us an update as to though the amount of products that you guys have shifted there?

Chuck Cargile

Well, from products that were legacy Newport products that didn’t change a lot, because the primary focus on Wuxi in the last quarter was to get Shenzhen moved in there and to get move from the current facility in Wuxi, well the old facility in Wuxi into our new facility in the export free zone.

So it’s a – there probably wasn’t a lot of new products added from Newport, but we are going to double the volume when you put the Shenzhen products through there. So it’s a tremendous amount of activity, but there is going to be – we will have to educate with new metrics to measure that, because the 1,600 would have been just based on what we were doing before we acquired New Focus.

Ed Einboden – Wm Smith & Co.

All right, thanks.

Robert Phillippy

Just as a general guideline, we did a product or SKU stock keeping unit count of New Focus, and it’s more than 2,000 products that we brought on board via the acquisition of New Focus, and many, many of those are manufactured in Shenzhen. So that correlates pretty well with the notion of the doubling.

But, we did change the agenda there as with the acquisition of New Focus, the priority needed to be to integrate that quickly to get the move from Shenzhen to Wuxi, and the expansion of Wuxi completed quickly. So as Chuck mentioned, we certainly would have diminished. We certainly did diminish our normal activity of product transfers.

Ed Einboden – Wm Smith & Co.

All right, thank you.

Chuck Cargile

You’re welcome.

Robert Phillippy

Thanks Ed.

Operator

(Operator instructions) There are no further questions at this time. Please continue.

Robert Phillippy

Thanks again for joining us today, and for your interest in Newport Corporation. As noted in the call, our third quarter performance exceeded our expectation in many respects and serves as testimony to the great work of our team in transforming our company.

I would like to thank everyone at Newport for those efforts. We have accomplished a great deal over the past year, but we will remain focused and diligent to ensure we build upon our position as a leading photonics solutions provider. Thanks for attending.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation, and you may now disconnect your line, and have a great day. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Newport Corporation Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts