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Executives

John Ambroseo - President and CEO

Helene Simonet - EVP and CFO

Analysts

Larry Solow - CJS Securities

Mark Douglas - Longbow Research

Ajit Pai - Thomas Weisel Partners

Jiwon Lee - Sidoti & Co.

Coherent Inc. (COHR) F4 Q09 (Qtr End 10/03/2009) Earnings Call November 5, 2009 4:30 PM ET

Operator

Welcome to the Coherent Q4 2009 Earnings Conference Call hosted by Coherent Incorporated. At this time all participants are in a listen-only mode. At the conclusion of our prepared remarks we will conduct a question-and-answer session. (Operator Instructions) As a reminder this call is being recorded.

I would now like to introduce Ms. Helene Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Helene Simonet

Thank you. Good afternoon and welcome to our Coherent’s fourth quarter conference call. On today’s call I will provide financial information and John Ambroseo, our President and CEO will provide a business overview. As a reminder any guidance and any statements in today’s conference call pertaining to future guidance, plans, events, or performance are forward-looking statements that involve risks and uncertainties and actual results may differ significantly. We encourage you to refer to the risk disclosure described in the company’s on Form 10-K, 10-Q and 8-K as applicable and as filed from time-to-time by the company.

The full text of today’s prepared remarks, which will include references to historical bookings and sales by markets will be posted on the Coherent Investor Relation’s website. A replay of the webcast will be made available for approximately 90 days following the call.

Let me first summarize the key highlights of the quarter. Orders grew 50.5% sequentially to $133.4 million resulting in a book-to-bill ratio of 1.24. Revenues of $107.6 million grew 9.3% sequentially and exceeded our expectations and our guidance.

During the quarter, we generated $20.5 million cash flow from operations resulting in ending cash balance of $243.6 million representing an increase of $21.7 million compared to last quarter.

We continued to execute according to our plans and are on track with respect to our footprint consolidation program. We exited three locations during the quarter. We closed the St. Louis Missouri facility, vacated the lease facility in the San Jose, California and consolidated sales efforts in Japan.

We entered the current fiscal year with annual run-rate savings from these footprint programs of approximately $8 million. Once we exit Finland beginning fiscal 2011, annual savings will step up to approximately $14 million which is the high end of the promised benefits.

Our headcount at the end of the fourth quarter stood at 1,712 which reflect a reduction of approximately 24% from the headcount at the time we initiated the footprint cost improvement program. About 45% of the reductions are the result of the footprint program, the remaining 55% is the result of headcount reductions in response to the change in the economic environment.

On October 14th we completed the acquisition of certain assets of StockerYale Inc and John will discuss this in more detail during his business overview.

Excluding integration cost, the acquired businesses will approach breakeven in the third quarter and should be accretive in the fourth quarter of fiscal 2010 upon completion of the consolidation and integration of the acquired units into the Coherent structure.

With respect to the fourth quarter earnings, we reported a pro forma loss of $0.04 per share, compared to a pro forma loss of $0.09 per share in the previous quarter. The GAAP to pro forma pre-tax reconciliation items includes $1.7 million of restructuring cost, primarily from the footprint consolidation effort, $1.3 million stock-related compensation expenses, a $1.1 million valuation allowance against deferred tax assets and $0.2 million litigation charges.

Net sales for the fourth quarter increased 9.3% sequentially and declined 24.2% from the same quarter ago. The sequential growth was primarily the result of higher service revenues from increased capacity utilization and some signs of improvement in the low-power materials processing, flat panel display and medical markets.

The company sales by significant market application are as follows, scientific and government programs, $29.6 million; microelectronics, $36.1 million; material processing $15.1 million; OEM components and instrumentation, $26.8 million; for a total of $107.6 million.

The fourth quarter gross profit was $37.5 million or 34.9 of sales. On a pro-forma basis excluding $0.8 million restructuring and compensation charges pro-forma gross profit was 35.6%. The sequential decline of 140 basis points from 37% last quarter was primarily due to burning of more expensive inventory, partially offset by the benefits of higher volume and restructuring.

Pro-forma operating expenses are $42.2 million excluding $2.3 million for restructuring and stock compensation charges decreased $0.8 million from the previous quarter. This sequential decline is net of incremental spending from higher sales and net of increased R&D spending to qualify the new Sunnyvale facility.

Our cash and cash equivalents balance for the quarter was approximately $244 million representing a year-over-year increase of $25.5 million despite the cash demand from the footprint consolidation programs.

Restructuring and litigation cash outflows this fiscal year, amounted to approximately $18 million and in addition we invested about $9.5 million in building and equipment improvement in support of the consolidation efforts. We are in particular very pleased with our inventory reduction efforts during this tough economic environment. Inventory balances declined $23 million compared to the end of fiscal 2008.

Accounts receivable days sales outstanding stands at 62 days. An improvement of 7 days compared to last quarter and almost similar to our fiscal 2008 year end performance.

Capital spending for the quarter was $3.9 million or 3.6% of sales. For the fiscal year it was $21.6 million or 5% sales. As indicated before a significant portion of this fiscal year's capital spending relates to the footprint consolidation project. Excluding this, capital spending would have been approximately 3% of sales.

Let me give you the guidance for the first quarter of fiscal 2010. As many of you know, the first quarter is our seasonally weak quarter due to the Thanksgiving and Christmas holidays. However, we are entering the quarter with a relatively strong backlog and coupled with about $3.5 million revenue from our recent acquisition, we expect revenues in the first quarter to be in the range of $110 million to $116 million.

It is important to know that the fourth quarter bookings included several annual or larger bookings that will convert into revenue over the course of the fiscal year. As we see a lower manufacturing cost structure starting to take effect, the pro forma gross profit is estimated to increase about 400 basis points when compared to the fourth quarter actual results. We are projecting a range of 39% to 40% of sales.

Pro forma operating expenses for the first quarter excluding intangible amortization stock compensation and restructuring cost are projected to be in the range of 36.5% to 37% of sales. Intangible amortization is projected to be $2 million inclusive of an estimated $300,000 related to the acquisition.

Stock compensation charges for the first quarter are projected to be $1.5 million and restructuring cost related to the integration of the recent acquisition and the closure of Finland will amounted to approximately $1 million.

Other income and expense is projected to be minimal as interest income is estimated to be immaterial for the results. We are assuming an annual tax rate of 33%.

I will now turnover the call to John Ambroseo, our President and CEO.

John Ambroseo

Thanks, Helene. Good afternoon everyone and welcome to our fourth fiscal quarter conference call. As Helene has already recorded, there were a number of positive takeaways from Q4, but perhaps none more so, than the key leading indicator of bookings, with every market posting double-digit sequential growth.

There were a number of contributing factors to this result including increased fab utilization and select capacity expansion within microelectronics, share gains in the scientific research market and the return to annual buying patterns in the instrumentation business. We hope to build on these results in subsequent quarters through design wins and new product introductions.

Orders in the fourth fiscal quarter totaled $133.4 million representing a 50.5% sequential increase and a decrease of 5.7% versus the prior year period. The book-to-bill for the fourth quarter was 1.24.

Orders of $43.9 million in the scientific market set a new quarterly record and represented an increase of 55.3% from the prior quarter and 19.4% versus the prior year period. The surge was due to three factors, continued strong customer acceptance of our Ultrafast portfolio, stimulus money in the United States and a strong performance in Japan and Australia.

We established new booking records for Chameleon series lasers used predominantly for biological imaging and our full range of amplifiers that support basic research in chemistry, physics and material science.

Our internal estimate for stimulus based orders in the US for the fourth quarter was approximately $4 million to $5 million with nearly all of the money coming via the National Science Foundation or NSF. We could attribute very little to the National Institutes of Health or NIH, except for the Challenge Grant Program. Funding decisions from the NIH, notwithstanding, it is our current understanding that stimulus funds will continue to flow in the current quarter.

Bookings in the Asia-Pacific region benefited from stimulus money for basic research in Japan and pent up demand in Australia. In contrast China had a very pedestrian quarter as government incentives favored manufacturing infrastructure over research and development.

Orders of $34.9 million for instrumentation in OEM components were up 36.2% from the prior quarter and down 7.7% versus the prior year period. There was a significant pattern shift within the medical OEM space. Several key customers for Excimer lasers, used in refractive surgery, placed annual orders, which suggested they have worked through their inventory and have confidence that their end market is in recovery. This is very welcome news but it is important to point out that we expected this order value within fiscal 2010.

The instrumentation market also saw an increase in demand especially in Flow Cytometry, and confocal microscopy. There was growing expectation within this market that stimulus funds from NIH will drive a round of adoption, which could be behind some of the Q4 order growth.

The defense market remains active and we have been working to better align ourselves with certain contractors. This is starting to pay-off as we are becoming qualified on a number of programs mostly for designators and countermeasures requiring semiconductor lasers. Our recent acquisition of businesses from StockerYale will also contribute to these efforts.

In the category of markets that refuse to die, we have enjoyed considerable success over the past couple of years in the light show market with our Taipan OPSL lasers. These lasers enable a compact electrically efficient platform that is easy to transport and setup. To date we have delivered about 500 lasers to integrators they are being used for full color, high end displays in a variety of venues including conferences and concerts.

Booking for microelectronics of $40.5 million increased 84.3% sequentially and declined 20% versus the prior year period. The surge in orders resulted from the increased service demand to support higher fab utilization rates, selected capacity expansion, high consumer demand and continue design wins for next generation devices.

Given our broad coverage in this space, it is our observation that tier one tool vendors are recovering more rapidly than tier two or three players. While not a surprising development, it does beg the question of what the customer landscape will look like in 12 to 18 months.

With factory utilization rates continuing to rise at semiconductor fabs, service orders have picked up as predicted and are trending towards historical norms. Looking to support new tool builds have also improved and we remain optimistic about the mid to long-term future.

The advanced packaging market behave much the same way as semi cap with service orders rebounding following several down quarters. There are signs that the [microviewer] market is working towards inventory overhang. This will be aided by the introduction of new tools that reduce feature size, improve quality and increase throughput. We expect these tools to start shipping in the first half of calendar 2010.

The longer term catalyst for this sub market is 4G deployment, which requires approximately twice as many [microviewer] per board compared to 3G.

Orders from the flat panel display market were up dramatically due to significant [OLE] capacity expansion at a leading manufacturer, continued wins in mobile touch screen manufacturing and service. The multi system order for Excimer annealing systems was valued at approximately $10 million.

We had expected this business as part of our fiscal 2010 plan and we are delighted to receive the orders upfront.

Trends for crystalline silicon devices in the solar market are similar to last quarter. There is an ongoing cost-base share shift from European vendors to ones in Asia and continued interest and enhancing cell conversion efficiency. To address both, we have expanded our offering of solar tools to include production units as well as development and pilot production tools. The new Equinox systems were introduced in September at the European Solar Show in Hamburg. We are currently working on a number of deployment opportunities.

Materials processing orders of $14.2 million increased 10.6% sequentially and decreased 13.3% versus the prior year period. The modest demand improvement within materials processing comes from lower power applications, from marking, engraving and textile manufacturing.

Customers are citing inventory replenishment, service needs and new systems builds as driving order volumes. It would appear that the low power end of the market defined as less than 100 watts of laser output power has stabilized and possibly reached a turning point. By contrast, high power applications remained sluggish due to excess capacity and challenging cash flows.

New order activity in China continues to improve for carbon dioxide and semiconductor laser systems. Based upon customer profiles many of these orders are targeted at the Chinese domestic market, which is consistent with stimulus programs to promote manufacturing infrastructure. Orders for lower power carbon dioxide lasers in Europe and North America also showed improvement [painting] a geographically consistent picture of stabilization and early recovery.

As announced last month, we acquired a laser diode module and specialty optical fiber businesses from StockerYale Incorporated for $15 million in cash and the assumption of certain operating liabilities. These businesses generated $15.4 million in revenue in our fiscal 2009 and we expect them to contribute $16 million to $17 million in revenue in fiscal 2010.

The laser diode module or LDM business, which is currently based in Montreal, Canada is complementary to our existing LBM portfolio. These new products position us in the machine vision market and enable new applications and bio instrumentation especially in the area of structured life. We have already informed customers and the Montreal based employees that we will consolidate the LBM operation into our existing network within nine months.

The specialty optical fiber or SOF business in Salem, New Hampshire develops and manufactures active and passive optical fibers used in materials processing, medical, defense, communications, and other applications. Having these capabilities will support our internal fiber-laser programs improving time-to-market, reliability and reproducibility.

They also create an attractive consumables opportunity since many of the passive fibers are intended for one-time use such as in laser based surgical procedures. We intend to maintain the Salem facility as an ongoing operation.

The final phase of our previously announced footprint consolidation is proceeding and we expect to exit our epitaxial growth facility in Finland on time by the end of fiscal 2010. An important milestone towards this goal was satisfied during Q4, as the first semiconductor laser devices came off our new Sunnyvale line.

The bookings performance was a welcome change and helped replenish our backlog that has been drawn down over the course of fiscal 2009. Coupled with the acquisition and recent design wins we have the foundation to generate between $475 million and $500 million in revenue during fiscal 2010.

As revenues ramp to these levels we will return to profitability with the usually caveat of mix and currency risks. It should also be noted that as we progress forward, we will be enlightening some of the temporary cost controls imposed during fiscal 2009, such as reduced work schedules and other compensation measures.

Helene and I will be presenting at the Needham Growth and CJS Securities conferences. Both will be held in New York during the week of January 11. 2010.

I'll now turn the call back over to Evert for the Q&A session.

Question-and-answer session

Operator

(Operator Instructions). Your first question comes from the line of Larry Solow.

Larry Solow - CJS Securities

Good afternoon. John it sounds like sort of mix bag on why a big increase in bookings. It sounds like some of its just some annualized orders, which I imagine will exacerbate the increase on the upside and was there also some inventory rebuilding and some pent-up demand and how do you look at the whole packages. Is it just different buy segment or?

John Ambroseo

It's going to vary a bit by end market application Larry. If you take as an example the business and instrumentation for medical OEM customers, that was really a return to historical buying patterns where most of those customers operated on annual purchase orders and they had moved to shorter-term orders over the past year not only to manage inventory but also to manage what their demand profile looked like. So the fact that they returned annual buying we see as a very positive sign that confidence in their end market has returned.

With respect to other areas, its select capacity expansion as we mentioned or as I mentioned around microelectronics, a very big win within the [OLE] manufacturing space. The scientific market was quite frankly a stunning performance for our team where we grew significantly in terms of bookings and it appears based on other public reports that we've done a pretty good job of capturing share during the quarter.

Larry Solow - CJS Securities

Okay. Then in terms of gross margin, I know you, sounds like you’re pretty much have finished on unwinding the higher priced inventory or there is still sort of a tail to that?

Helene Simonet

Hello, it’s Helene. We actually, it went a little faster than we initially estimated because our inventory turned towards the better.

Larry Solow - CJS Securities

Okay.

Helene Simonet

So there is always a little tail, but it’s smaller and that’s why we also gave the guidance for the gross profit to go up 400 basis points.

Larry Solow - CJS Securities

Right. Then as orders are, it sounds like it’s your $110 million implies that of your guidance, that you could see a little increase sequentially through the year in volume, but we expect gross margin to come up a little bit higher, obviously mix comes into play there, but based on what you see in your backlog today, and obviously well I guess the scientific orders still being a pretty significant piece and being lower margin. Is the 39, 40, a good ballpark figure to use for the year or do you think there is more upside to that?

Helene Simonet

I think you highlighted the fact that we do have still a mix shift towards scientific. The booking were very strong in the fourth quarter, so we’ll continue to see a higher share of scientific, but hopefully we will see as we move further out we will see some improvement in the higher margin businesses, such as microelectronics and OEM and components and instrumentation.

Then, if the volume is excess and indeed we should see some, but never forget that we also, as we go through the year, we need to slow in some of these temporary measures that we took last year. So you have to take that into account as well.

Larry Solow - CJS Securities

Right. So, I imagine there's a bit, that could take away some of your leverages, you bring back some of these revenue unwind from a temporary cuts that were implemented?

Helene Simonet

That’s correct it will take away some of the leverage.

Larry Solow - CJS Securities

Then just lastly and just in terms of bunch of new products I know they are very much focused on the high power end of the materials processing market and that sounds like there is still lot of excess capacity there. So is it fair to say that most of your increasing sales, there is minimal coming from your new products.

John Ambroseo

Larry, we introduce new products all the time we don’t highlight all of them. As we see this as normal operations of the business, we did highlight the high power portfolio because it was a departure for what we have historically done within the materials processing space, but it is by no means the only thing that we are doing within the materials processing market or other markets for that matter.

Operator

Your next question comes from the line of Mark Douglas.

Mark Douglas - Longbow Research

Good afternoon John and Helene. Helene can you review again the savings you have already in hand prior to the Finland closure and then obviously we're not [fortunate] once Finland closes just before the 2011?

Helene Simonet

Yes. As of the end of September we have a run rate of $8 million already included and beginning fiscal ’11 that will step up to $14 million. Then there is not a lot of increased benefit during fiscal ’10. Because we are maintaining two facilities and we are stepping up costs here to bring up the facility in Sunnyvale, while we are maintaining the facility in Finland. So during fiscal ’10 the increased benefit are not very large. It will come in during fiscal '11 in Q1 effective Q1.

Mark Douglas - Longbow Research

I said okay. So it's not so much that Finland itself is providing $6 million. In fact you have a few facilities going at once in the same similar operations. Okay. So would you say the R&D going forward, is there still some more cost in there for Sunnyvale and then once that rolls off qualifying Sunnyvale, do you think you could keep R&D relatively flat, run-rate or just before for 2010.

John Ambroseo

So the savings that we've talked about are across all lines. They are not just in the inverse margin line there and expenses as well. So there will be some modest amount of R&D expense that comes out as we wind down Finland.

Mark Douglas - Longbow Research

Okay. Of that $8 million, how much is kind of structural permanent and how much is return the volumes and opportunity with the work.

Helene Simonet

Mark, the footprint savings, the $8 million, they are all structural.

Mark Douglas - Longbow Research

So $8 million is all structural. Okay. So right now any savings you have from this reduced, work weeks that's absent from the $8 million?

Helene Simonet

Correct, the $8 million does not include savings from the temporary measures.

Mark Douglas - Longbow Research

Okay. That's helpful and then finally and you grew the cash in the balance sheet There is still a lot of cash there. What you’re thinking on now on your uses for that cash?

John Ambroseo

Well, we spent a little bit of it in October in acquiring these two businesses. We continue to look for acquisition opportunities that are complimentary to what we’re doing and that can be, and that could be accretive in the short-term.

Certainly as the marketplace recovers, some of those opportunities will start to look better and better because they have some lift onto them, rather than buying, just simply the stressed businesses. We’re also continuing to look and consider other uses of cash. As we’ve said in the past, we’re not opposed to things like buybacks and even potentially, dividends if the circumstances warrant.

Operator

Your next question comes from the line of Ajit Pai.

Ajit Pai - Thomas Weisel Partners

A couple of quick questions. I think the first one is just addressing the gross margin relative to scientific markets that you talked about being quite strong. Aren’t the bearable margins for that business still significantly higher than 40% on the gross margin line and higher than 30% on the operating income line?

John Ambroseo

You’re talking about incremental margin?

Ajit Pai - Thomas Weisel Partners

Incremental margins. I mean why would it have a negative impact on your margins? I mean all of that should be incremental?

Helene Simonet

It is incremental, Ajit. So, the margins today are significantly lower than the microelectronics and OEM margins. So there is still a gap between the two.

Ajit Pai - Thomas Weisel Partners

Right. So on a variable margin basis it's still higher than 39%, 40%, right to the gross margin line for the scientific and the scientific vertical?

Helene Simonet

It's probably a little better, you are right, but it's still below the margins that we have for microelectronics OEM components.

Ajit Pai - Thomas Weisel Partners

The second is that I think you highlighted when you explained the gross margin this quarter kind of some of it was expensive inventory that was getting worked on you talked about a little bit tail left there, but you also mentioned for qualifying Sunnyvale there was some expenses.

Should I take it that, that completely goes away going into the next quarter from the gross margin line and can you quantify how much that was, or was it like in the range of a couple of million or much less than that?

Helene Simonet

I believe I made the comment with respect to period expenses and it's new in the R&D pool I was...

Ajit Pai - Thomas Weisel Partners

So its mainly in R&D it's not in COGS so much?

Helene Simonet

Correct. Right now the doubling length of expenses to get the facility up and running and qualifying the product is captured in development. I would say in the fourth quarter alone that was probably about 500,000.

Ajit Pai - Thomas Weisel Partners

Got it. Then when you look at your verticals I think you talked about especially in the tool side I think you talked about when demand is coming back the tier ones are benefiting more than customers that have less secure market positions. Is that a negative or a positive for Coherent, I mean is your pricing with the tier ones are better or is it better with, set of smaller players. Then if the market concentrates at your customer level is that, longer term a negative trend for you because your pricing ability would probably deteriorate?

John Ambroseo

So the comment about the universe really has to do with the fact that we sell to a variety of customers up and down a line. It is not our practice to determine who is successful in the market place and who isn’t. Our pricing isn’t tied to whether somebody is a big customer or small customer, its meeting their own business but rather the business that they do with us. Because a lot of it in the commercial space is not only value bases but also volume based.

So the comment that the tier one guys are recovering quicker. Quite frankly not surprising, customers want to go with known quantities. They want people who or they want partners who are going to survive and thrive. So that's playing out pretty much the way one would expect. It doesn't have a big impact on us or not. We are probably somewhat skewed to the larger players in the market rather than the smaller players. So net-net it is probably a positive for us.

Ajit Pai - Thomas Weisel Partners

Got it. Then the last question will just be in the broad sort of pricing trends you are seeing across your market, is it fairly benign or has it gotten quite aggressive during the past couple of quarter and just given you a rebound in orders right now, did you have to be aggressive in pricing to be able to capture it or there is no change in trend?

John Ambroseo

So the commercial business is as I just stated is really a value/volume discussion that we have with customers. In the scientific market in fact we looked at this and talked about it internally, while we did see some aggressive pricing in isolation, our pricing has held up remarkably well within that space.

Operator

Your next question comes from the line of Jiwon Lee.

Jiwon Lee - Sidoti & Co.

John, you may have said there is in different ways but just going back to your fiscal 2010 sales guidance of about $475 million to $500 million, should give us a little sense a little more sense on the kind of a mix assumptions that you have in there?

Then the second part of the question is I didn't hear you guys discussing the modified EBITDA margin for the quarter and given that you have a pretty good sense for the structural savings going forward and perhaps some of the loosening of previously saved, would there be some EBITDA margin goal for next year?

John Ambroseo

So, the first question you asked about, what the mix looks like, certainly we would anticipate some of the trends that have established themselves in the fourth quarter to continue to play themselves out, meaning that the commercial markets continue to recover, microelectronics and instrumentation and hopefully we’ll start to see a similar pickup in materials processing, although we think the challenges within materials processing are somewhat different than the other two markets.

With respect to what the EBITDA margin looks like, there are number of different ways to look at this Jiwon. As we mentioned or as I mentioned during my comments, mix is obviously critically dependent. Timing is also going to be dependent as it pertains to unwinding some of these temporary expenses.

Right now, while we have a view to what total revenue could look like, the margin model could fluctuate quite significantly from our quarter-to-quarter and therefore influence what the year looks like depending on how the different markets recover and what that does to the gross margin line and also to the expense line.

So, we’re in a refrain right now from talking about long-term operating income or EBITDA and will continue to do that on a quarterly basis. When we get to the point where we do have a good sense of what the full year looks like, we’ll be happy to provide that update. It’s a little early to go all the way down to the bottom line however.

Jiwon Lee - Sidoti & Company

Okay. That’s fair enough. What was the sales breakdown geographically was like during the quarter and then was there any foreign exchange impact?

John Ambroseo

I am sorry, what was the second part of the question?

Jiwon Lee - Sidoti & Company

The foreign exchange impact.

John Ambroseo

Okay.

Helene Simonet

Jiwon, the revenue growth was 9.3% and there is about $1.3 million in favorable foreign currency.

Jiwon Lee - Sidoti & Company

Okay.

Helene Simonet

So with constant currency the growth would have been 7.6% sequentially.

Jiwon Lee - Sidoti & Co.

Then the geographic and sales breakdown, roughly the North America Europe and Asia if you could?

Helene Simonet

Are you looking for the full year or for the quarter?

Jiwon Lee - Sidoti & Co.

Either way quarter will be more helpful.

Helene Simonet

For the year, there isn’t a large shift yet compared to the last year the 12 trailing months of this year was 34% Europe, 29% other countries, 5% in the delta would be Asia, which is as you can see I don’t have it in front of me here, its 32%.

Jiwon Lee - Sidoti & Co.

Well, that’s fair enough we can follow up on that. Some of your laser comps commented on a lot of the sequential improvement out of China and obviously these are companies that have a little more material processing mix. However, I wonder with your new product introductions and your sort of focus back on the material processing, what kind of opportunities you might see out of China next year or so?

John Ambroseo

As I mentioned Jiwon, in the materials processing space we did see good activity in China, it was in the research space and the other markets where the Chinese influence is not quite as high. So again no surprise there.

We do look forward to participate in more broadly in the Chinese market, especially as we start to roll out some of these higher power systems that would begin early next year with the formal launch of e1000 and then continue with power platform next year. Can we quantify it today? No we can't, but certainly that is our intent.

Jiwon Lee - Sidoti & Co.

Okay. Then lastly should we read anything into your consolidating Japanese sale office?

John Ambroseo

Read anything into it. No I don't think so. We had two locations and we didn't need two locations. We were able to put everybody in one location.

Operator

(Operator Instructions). Your next question comes from the line of Larry Solow.

Larry Solow - CJS Securities

John. Just a follow-up and you briefly touched on it. In terms of your headcount reduction, you mentioned that little more than half of it was sort of economic related. How do you view bringing these people back, I mean do you have certain sales level, is it based on, in other words would you just bring them back slowly. Do you that conservatively, devoting any head shakes in the economy. How do you look at that?

John Ambroseo

We will very cautious in adding headcount. If I had to gauge this I would say that the first thing, the first order of the business will be to move away from these temporary shutdowns or furlough programs that we've been using and that will allow us to bring capacity back in and once we get to the point where we've completely absorbed that capacity then we would look at that adding headcount as necessary. It's really quite that simple.

Larry Solow - CJS Securities

Right. Then mainly the gross margin that fell down to 40%, is that an adjusted number a guidance for Q1 as soon as its adjusted that takes out the stock comp and any restructuring charges in there?

Helene Simonet

Yes. That's correct, Larry. It is a pro forma gross margin. It does include the acquisition but it excludes stock comp and restructuring costs.

Larry Solow - CJS Securities

Got it and then last question on CapEx for this fiscal '10, should that trend down or some of it was related to the consolidation?

Helene Simonet

That’s correct. This year we had 5%. A more normalized run rate for us is about 3.5%. So, I would use 3.5% for the year.

Operator

You have a follow-up question from the line of Mark Douglas.

Mark Douglas - Longbow Research

Hi. The StockerYale, you said it's about $15 million to $17 million in fiscal ’10, correct?

John Ambroseo

Correct.

Mark Douglas - Longbow Research

How does that split between your end markets, just roughly?

John Ambroseo

The bulk of it, I don’t have an exact breakdown, Mark, but the bulk of it will be in instrumentations.

Mark Douglas - Longbow Research

Okay. Then you said it's accretive in fourth quarter 2010, right?

Helene Simonet

That’s correct, yes.

Operator

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

John Ambroseo

Thank you. We’d like to thank everyone for their participation and look forward to speaking to you again in three months.

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Source: Coherent Inc. F4Q09 (Qtr End 10/03/2009) Earnings Call Transcript
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