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Newport (NASDAQ:NEWP)

Q3 2013 Earnings Call

October 30, 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

James Ricchiuti - Needham & Company, LLC, Research Division

Mark Douglass - Longbow Research LLC

Lawrence Solow - CJS Securities, Inc.

Robert Crystal - Goldman Sachs Asset Management, L.P.

Operator

Good afternoon. My name is Eve [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the Newport Corporation 2013 Third Quarter Earnings Conference Call. [Operator Instructions] Mr. Robert Phillippy, Chief Executive Officer, you may begin your conference.

Robert J. Phillippy

Thank you. Good afternoon, and welcome to Newport's Third 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 addition, during this call, we will be discussing certain of our financial results on a non-GAAP basis, excluding items we believe to be outside of our core operating results. We believe that the supplemental presentation of non-GAAP financial information helps to provide insight into the company's core business results as well as a more meaningful comparison of our financial results between periods. Please refer to the press release we issued today for a reconciliation of our results on a GAAP and a non-GAAP basis.

In the third quarter, Newport continued our rebound from the trough conditions of the first quarter with higher sales and significantly increased profit leverage. Sales of $139 million were in line with our guidance, and our gross margin of 44.2%, operating margin of 13.2% and earnings per diluted share of $0.31 on a non-GAAP basis all exceeded our expectations. We also posted orders of $144.4 million, resulting in book-to-bill ratio of 1.04, with bookings exceeding sales in all of our target markets except defense/security. In addition, we made excellent progress on several of our growth initiatives. These achievements reinforced the strength of our value proposition as the only company in the -- with the technology brand to provide a full suite of lasers, optics and photonics solutions, and our ability to identify and aggressively pursue attractive opportunities and target markets that leverage these core capabilities.

I'd now like to provide an update on order trends, activities and conditions in each of our target markets. Orders from microelectronics customers of $36.9 million increased by 4% sequentially and 13% versus the third quarter of 2012. This performance included 3 design wins for collaborative development programs for opto-mechanical sub-assemblies for next generation semiconductor equipment. One of these programs was for EUV development, while the other 2 work for deep UV. All 3 of these programs included orders for design and prototype unit delivery and will be completed during 2014.

We continue to be closely engaged with our customers to support and collaborate in the development of these next-generation tools. In addition, we also saw modest improvement in demand for some existing programs from a subset of our customers. Although, we have not yet received indications that a broad-based industry upturn is imminent. All of our major semiconductor equipment OEM customers have communicated that they expect increased orders and sales in 2014. Although the timing of this anticipated market strengthening continues to be a bit of a moving target.

In the meantime, we are working with our customers to integrate our new products into their next-generation systems. In particular, interest in activity related to our new Quasar laser continues to be robust. As a reminder, Quasar is a 45-watt UV laser with very high pulse energy at high repetition rates, and a very unique capability to configure the pole strength. This potentially disruptive combination enables customers to produce higher precision and greater throughput in a number of applications that support mobile device manufacturing, including glass cutting, PCB cutting and drilling, silicon wafer dicing, ceramics scribing. Given the progress, some of our customers are making and leveraging the capabilities of Quasar. We remain confident that this product has excellent sales potential. Orders from life and health sciences customers were $30.7 million, a decline of 3% sequentially and 7% versus the prior year. Overall, demand in this market remained steady. The decline in Q3 order levels is based primarily on the timing of OEM orders. We continue to make inroads in bioimaging applications with our innovative InSight DeepSee laser, which has a much broader tuning range than other ultrafast lasers, enabling deep 3D imaging of live tissue. This is particularly important in the study of brain structure and function, which is currently a hot topic in the scientific community.

Q3 represented another record revenue quarter for this product. As a complement to our laser offerings in this area, we are also seeing increased demand for vibration control solutions for microscopes. We recently expanded our VIBe family of vibration isolators and platforms to accommodate a broader range of microscopes and other bioimaging instruments. These products are based on our patented passive mechanical isolation technology, which enables us to provide compact maintenance-free isolation that enhances microscope image quality by eliminating most ambient vibrations.

With the expansion of the vibe family, we have a vibration mitigation solution for virtually every commercially available microscope and imaging system. Orders from industrial market customers were $31.9 million, a 21% increase over the third quarter of 2012, but a sequential decline of 10% compared with the near record second quarter of 2013. We had anticipated this sequential decline as our prior quarter orders included a $5.2 million OEM order for light engines for a 3D printing application that covered 12 to 18 months of demand, and therefore was not expected to repeat.

Activity levels and customer engagement remain high in the industrial market. In particular, we saw record orders for laser diode test systems used in fiber optic device manufacturing applications from our ILX Lightwave business, which we acquired in January of 2012. ILX's orders for 2013 to date have grown to $7.8 million, a 78% increase over the same period last year. This is a good demonstration of the leverage that we can achieve by driving a technically advanced and differentiated product through our global distribution channels.

Also in the third quarter, we introduced the world's first commercially available 100-kilowatt laser power meter. With the expanding use of fiber laser technology for heavy industry applications comes an increasing technical challenge of measuring and characterizing extremely high-power laser beams. Amazingly, this new sensor can withstand the intense optical energy of these lasers and render an accurate measurement over a range of 1 to 100 kilowatts. The first unit has already been shipped and tested with 100-kilowatt fiber laser at the NADEX R&D center in Nagoya City, Japan.

As the world leader in laser measurement, we will continue to develop innovative solutions to ensure that laser technology can be effectively and precisely deployed in an increasing number of applications. Third quarter orders from research market customers, of $29.7 million, declined by 2% sequentially and 8% versus the third quarter of 2012. Our research and defense security markets continue to be constrained by government spending reductions, particularly in the U.S. and Europe. While it currently appears that the U.S. government shutdown will have a relatively small effect on our fourth quarter shipments, the continued implementation of sequestration and the uncertainty related to future funding levels are directly impacting our business in these markets in the U.S. Given the ongoing political conflict related to deficit and budget issues, the timing and extent of recovery in these markets remain unclear.

Research market activity outside the U.S. is mixed. On a year-to-date basis, our orders from research customers in China increased by 27%, while Europe declined by 11% and Japan declined by 6%. Overall, given the magnitude of the budget cuts in the U.S. and several other countries, the fact that our research market orders have declined only 2.3% year-to-date shows the resilience of our research market business on a worldwide basis.

Our position as the market leader for research applications enables us to maintain greater mind and wallet share of scientists during tough market conditions. On a year-to-date basis, defense/security market orders of $44.4 million were down 22%, versus the same period in 2012. With more than half of our defense/security business coming from the U.S., this market continues to be impacted significantly by sequestration.

Before I turn the call over to Chuck, I'd like to comment on some of the actions we are taking on both the strategic and tactical level to ensure the performance of our company and increase shareholder value. First as we've discussed in the past, our growth strategy includes the balance of organic growth initiatives and acquisitions. As part of the acquisition component of the strategy, we have institutionalized a well-tested process for integration in which we work to capture channel, manufacturing, supply chain, G&A, synergies. A recent visible example was the acquisition of Ophir Optronics in the fourth quarter of 2011. Through the disciplined implementation of our integration process, we have captured significant synergies. Ophir's businesses are now a part of our Photonics and Optics groups, so we no longer track Ophir, as a separate reporting segment. However, if we were to reconstruct the Ophir income statement, their third quarter operating margin would have been in the high teens, which is a record level for them and higher than the 15% target we had set at the time of the acquisition. While the pronounced weakness in the defense market has caused Ophir's revenue levels to be lower than we originally expected, we have been very successful at leveraging the infrastructure of the combined company to increase their profitability.

Second, we recently launched an initiative to further streamline our manufacturing infrastructure by moving the manufacturing operations of our Stratford, Connecticut facility to our sites in Wuxi, China and Bozeman, Montana. This action will be implemented over the course of the next 3 quarters and is expected to result in savings of approximately $1 million per year. Our sales and engineering teams for this business will remain in Stratford to ensure that we maintain customer continuity and our technical expertise in this area.

In addition to these actions to improve Newport's efficiency and profitability, we also continually review our portfolio of businesses to ensure they are aligned with our strategic agenda. On October 24, we announced the pending divestiture of our MRSI business in Billerica, Massachusetts to a group of private investors led by the local management team. MRSI develops and manufactures turnkey dye bonding and defense systems for the microelectronics, defense, medical and industrial markets. This business no longer fits with Newport's strategy, which focuses on providing solutions that leverage our core lasers, optics and photonics technologies rather than on turnkey system integration.

In addition, the MRSI team has identified some growth opportunities in their business. They will require significant focus and investment that would not be priorities for Newport. For these reasons, we decided that it was in our best interest to divest the business. MRSI sales in the last 12 months were approximately $12 million, but the business did not contribute materially to our operating income or cash flows.

The transaction is expected to close by the end of 2013. These actions are examples of our ongoing efforts to enhance the efficiency and effectiveness of our operations, ensure that our product portfolio is aligned with our strategic agenda and maximize shareholder value over the long term.

I'll now turn the call over to Chuck to review our financial end performance and discuss our outlook for the fourth quarter 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. There you can see presentations that we've made at 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 are schedules showing supplemental non-GAAP financial information and a reconciliation to the corresponding GAAP measures with details of the items we exclude from our non-GAAP results. I also encourage you to download our Investor Relations app, which is available for free on the iTunes App Store and in the Google Play Market.

I'll now discuss the results for each of our 3 business groups and key components of our consolidated income statement, balance sheet and cash flow. First, I'll discuss our Photonics group, which delivered excellent segment income this quarter. Photonics net sales rebounded from the low watermark of $55.4 million in the second quarter of this year to $57.5 million in Q3. Impressively, the group leveraged this 4% sequential sales increase into a 23% increase in segment income. Third quarter segment income for this group was $13.2 million or 23% of net sales. This match is the highest percentage this group has produced in almost 3 years. We indicated last quarter that any sequential increase in revenue would push our segment income as a percentage of sales, back over 20% and in fact, the result exceeded our expectations. I'd also like to highlight that excellent contribution from Ophir photonics, which is now included in our Photonics group. Ophir photonics achieved the highest level of operating income in its history.

Our Optics group, while not as profitable as the Photonics group, rebounded nicely in the third quarter of 2013 after experiencing 2 quarters of segment income in the low single digits as a percentage of sales. The results improved to better than 10% in the third quarter. This group has the most exposure to microelectronics and defense related customers. On a sequential basis, sales to their customers in both of these markets increased in the quarter. And the group's total sales increased by 8% to $42.6 million. The group was able to leverage this $3.2 million sequential sales increase into $2.5 million sequential increase in segment income. As Bob mentioned, we're also very pleased with the progress the Optics team is making in terms of new design wins, particularly with semiconductor OEM customers. Because this group has the highest fixed cost components, it's very well-positioned to leverage increasing sales to higher profits, primarily through better absorption of its manufacturing costs.

Our Lasers group was the only segment that did not experience sequential profit improvement. Sales in Q3 were $38.9 million and segment income was $3.4 million or 8.8% of sales. Both slightly lower than the prior quarter. With a number of very differentiated new products now gaining traction in the market, and a book-to-bill ratio of 1.12 for the last 2 quarters, this business is poised for near-term sales growth and with it, strong profit leverage.

Now I'd like to make a few comments about our consolidated financial results for Q3 and our outlook for Q4. Except where otherwise noted, these comments will focus on our non-GAAP results. Our consolidated gross margin for the third quarter was 44.2%. That's an increase of 70 basis points over the 43.5% we recorded in the second quarter of this year. We increased our gross profit dollars by $3 million on a sales increase of $4.8 million marking a 63% incremental margin. We're pleased with our gross margin at this sales level and have increasing confidence that with only a moderate increase in sales, we'll again exceed our targeted gross margin of 45%.

Our SG&A expenses of $30.3 million were $2 million below the Q2 of 2013 level. We continue to closely monitor our cost structure, while market conditions remain tepid and unpredictable. In addition, SG&A expenses were a little lower in Q3 due to some information technology costs relating to the implementation of our new CRM software being capitalized as opposed to being expensed. In addition, we reconciled our deferred compensation balances in the quarter and we're able to reduce the amount of expense that had been charged to this area. These 2 items together contributed about $1.2 million of the SG&A reduction. I would like to point out that we did have 2 large non-cash charges included in our Q3 GAAP results. Both charges result from actions that we've announced previously. First on July 18, we announced our new credit facility. As part of this refinancing, we wrote off $3.4 million of costs that have been capitalized as part of the prior facility. Also on October 24, we announced that we decided to divest MRSI and then recorded a $4.5 million non-cash charge for the estimated loss on the sale. Both of these items are included in our GAAP results, but are excluded from our non-GAAP results. Excluding those 2 large non-cash charges, as well as the ongoing restructuring and severance costs, amortization of intangible assets and stock-based compensation, operating income was $18.3 million or 13.2% of sales. This represents a $5.5 million increase over the second quarter of 2013.

Our interest and other expense, net of interest and other income for the third quarter was $1.3 million, reflecting our lower debt balance and the reduced financing costs under our new credit facility. This reflects a $700,000 reduction versus Q2 of this year. And we expect it to decline slightly again in the fourth quarter as our lower leverage ratio reduces our financing costs further. Our non-GAAP earnings per diluted share of $0.31 increased $0.11 versus the $0.20 per diluted share we reported in the second quarter of 2013. As we announced in July, we completed a new $275 million revolving credit facility. This provides us with greater flexibility from a borrowing capacity standpoint, cash flow and covenant perspective, with lower ongoing financing costs. As part of this refinancing, we paid all of the outstanding obligations remaining on the prior credit facility and the fees relating to the new facility by using $34.2 million in cash and borrowing $120 million on our new revolving credit line.

Then during the quarter we reduced our borrowings under the facility by an additional $19 million, down to $101 million. At the end of the third quarter, we had $56.1 million of cash, cash equivalents, restricted cash and marketable securities. We generated $10.8 million of operating cash flow in the quarter. In the first 9 months of 2013, we've generated $40.1 million of cash of operating cash flow and we reduced our net debt position by $31.8 million to $52.4 million.

Turning to our outlook. We expect fourth quarter 2013 sales to be in the range of $139 million to $145 million. We had a positive book-to-bill ratio over the last 3 quarters, and expect our Q4 orders to also exceed sales. This leads us to expect sequential revenue growth, despite the sluggish market conditions. At this point, there is still a degree of uncertainty as to what extent the government shut down and aftermath will impact our Q4 shipments. Although, we currently expect the impact to be rather small. We expect our SG&A cost to be a little higher in Q4, primarily due to the fact that the $1.2 million of positive items I mentioned earlier won't reoccur and probably due to some back end loaded costs in sales and marketing.

R&D spending will also increase as we launch the collaborative development programs associated with some of our recent design wins. As a result, we expect Q4 non-GAAP operating income and earnings per diluted share to be slightly lower than the Q3 level.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jim Ricchiuti with Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

I wonder if you could talk a little bit about the strength you are anticipating in bookings in current quarter. Can you elaborate on which of the end markets do you see the strength coming from? I mean, you've had 2 good quarters in microelectronics. Yes, I think, some of us were anticipating that might get this quarter. How do you see the outlook for that business in Q4?

Robert J. Phillippy

Hi, Jim. This is Bob. We would expect continued strength in activity levels in the microelectronics market. In the prepared remarks, you heard us comment that we did see improving demand on some of our existing programs, but not enough to call it a inflection point in the market in total. But we have seen some firming-up of demand, with selected customers on selected programs. We also are continuing our efforts to increase our penetration of the microelectronics market, and we've got a lot of activity in that area associated with working to capture design wins for next-generation tools, and we would expect that to continue. So microelectronics, we would generally say should be better in Q4 than Q3. And the research market is typically seasonally stronger in the Q4 timeframe. Although in this particular environment, we're not anticipating a lot of incremental strength from Q3 to Q4, although historically, it has been. So that would potentially be good news for us. The other markets that we participate in, as I mentioned, activity levels remain solid and market demand remains steady. So I would say, no significant comments for the upside or the downside in those markets.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. And just a follow-up, if I may. Chuck, just looking at the margin profile of the segments in the quarter, Lasers, it bounces around a little bit. Was mix a factor the -- in margins coming down in Q3?

Charles F. Cargile

Hi, Jim. As you know, having followed us for a long time, mix is always a big driver, because we do have a strong or a high fixed cost component, and also within our laser product offering, there is a different type of margin profile. So that was a little bit of the impact. You may recall, we were very pleased with the Q2 results. In fact, it was a little bit higher than we had expected. So it came back down a little bit here. But at $38 million to $40 million of revenue, bouncing around that 10% operating income is probably what you should expect. And I think it is a tribute to the progress we've made in that division. But now, when revenues are low, we bounce around 8% to 10%, where you'll recall it wasn't that long ago, where at those levels we have been trying to break even. So the profit hurdle has certainly got a lot higher. And with the book-to-bill over the last 2 quarters of 1.12, we're getting positioned for nice rebound in revenue, and I think you'll see a lot of that drop to the profit line when you get the revenue.

Operator

Your next question comes from the line of Mark Douglass with Longbow.

Mark Douglass - Longbow Research LLC

So Chuck, you said you expect 4Q non-GAAP EPS to be slightly lower than 3Q?

Charles F. Cargile

That's correct.

Mark Douglass - Longbow Research LLC

Is that slightly lower the same amount that you were supposed to be slightly up from 2Q? You were slightly up from 2Q.

Charles F. Cargile

Let's hope this is slightly up, it was quite a bit larger than the slightly down will be.

Mark Douglass - Longbow Research LLC

Okay. So just looking at it, the SG&A is going to be a little higher, the full $1.2 million SGA is not recurring, whatsoever?

Charles F. Cargile

That's right, Jim (sic) [Mark].

Mark Douglass - Longbow Research LLC

Plus a little bit more of expense in R&D and SG&A?

Charles F. Cargile

That's also correct.

Mark Douglass - Longbow Research LLC

And then, Bob, looking at it on the orders, I think defense and security -- no, it's up a little bit, but fairly stable. Any reason to suspect that that wouldn't stay here for a while?

Robert J. Phillippy

So the defense and security business is more than half in the U.S., and all directly related to the government funding dynamic. The thing that causes it to bounce around a little bit is that it's all program-driven. So a particular order or a particular revenue quarter is primarily related to how much demand there is for an existing program or whether or not we win new programs. As we have discussed previously, we got some great things going on in the defense market, primarily associated with targeting Tier 1 defense contractors and improving our business relationship and the breadth of coverage that we have for those customers. But we don't have anything meaningful in the near term to show for that yet. So the results of defense and security will pretty much depend on the government funding dynamics related to the problems that we have. So I would expect it to bounce around. I'm not going to try to second guess how the budget negotiations are going to play out in the coming months. But if there isn't a dramatic change in the funding environment, I would say that we are at a position in the defense market where we're operating on the low end of where we would expect.

Mark Douglass - Longbow Research LLC

Okay. There's no major changes kind of mid-teens of millions levels as it seems pretty realistic, and then it would be upside from there, should things starts to actually break loose.

Robert J. Phillippy

I would say, break loose, or even stabilize to any great degree. If there is stability and people understand which programs are going to be funded going forward and we stop kicking the can down the road in terms of budget outcomes, I think that we're probably at a position where we can grow from where we are.

Mark Douglass - Longbow Research LLC

Okay. So the uncertainty right now is leading into this 14 million, 15 million kind of range and just gettings some sort of [indiscernible] improve that?

Robert J. Phillippy

Yes, Mark. If you look back, when we first acquired Ophir, and recall that Ophir is the driver of the defense business for us, we didn't have much before the acquisition, that level was in the 19 to 20% -- or $19 million to $20 million per quarter, and then now, the last 3 quarters, been right there at that $14 million, $15 million. So we would expect, if there was stability, get back to the $19 million to $20 million. And then as we start to capture some of the programs that we were precluded from before, then we should be able to exceed that $20 million number as well.

Mark Douglass - Longbow Research LLC

Okay. And then on the SEMI, there still seems to be a lot of hope that '14 is going to come in pretty strong. Are you saying that right now a lot of your orders are coming from share or new design wins in capture and that there's potentially more upside once SEMI actually starts to invest more, or are you starting to see the SEMI cap turn?

Robert J. Phillippy

Yes, to both. Yes, we've been pretty pleased with the success we've had both in the last quarter and this quarter in terms of new design wins. And so, that will absolutely drive our peak performance up when the market itself improves. But also, in this quarter, we did see some firming up and some increased demand on some existing programs, but it was from a subset of our customers and a subset of the programs. So we didn't see what you could call an inflection point in the market, as we've sometimes seen, where the entire market ticks up, but we did see some improvement in the existing program activity that we have. So really, this quarter, it was a combination of both.

Mark Douglass - Longbow Research LLC

Okay. So it sounds like it's similar to last quarter that you saw, and it was uneven, right?

Robert J. Phillippy

Correct.

Mark Douglass - Longbow Research LLC

If there was an inflation point, there is a subset of customers ordering more -- just kind of more of the same at this point?

Robert J. Phillippy

Yes, but if I were to compare the quarter sequentially, I'd say that there was a little bit more firming up of demand on existing programs this quarter as a percentage of the, call it, the growth mix.

Charles F. Cargile

And Mark, one of things that we're getting excited about is the fact that we can be at this $36 million, $37 million level the last 2 quarters without that type of infection point and then getting close to the $42 million, which was kind of our targeted peak the last cycle. So we're getting more and more positive that we'll be able to far exceed that $42 million once we get a real cyclical turn in the market.

Mark Douglass - Longbow Research LLC

So we just need to get you guys above $42 million in micro and above $20 million in defense, and it's all good, right?

Robert J. Phillippy

Absolutely.

Operator

Your next question comes from the line of Patrick Newton with Stifel.

Unknown Analyst

This is Robert chiming in for Patrick today. I just wanted to ask a couple of questions just to get update on the projects in fab in [indiscernible] facility in Romania and any update on the progress in that?

Robert J. Phillippy

Sure, Rob. Thanks for the question. Romania continues at the pace in which we would anticipate. It's moving along. We've got a full leadership team in place now. And we expect to receive, install and implement several pieces of capital equipment in the current quarter. Remember that the objective there is to build up an optics thin film and fabrication capability that is capable of providing low-cost region optics manufacturing for high precision parts. And in order to do that, we have to take some pretty good expertise that we have there already and systematize and implement some automation in some of the product areas, particularly in metrology and test, where we need to build up our game there a bit. So I would say, overall, it's going as planned, and the next 2 or 3 quarters become really important because that's when we'll be deploying new pieces of capital equipment for fabrication and metrology.

Charles F. Cargile

And Rob, Romania is still a drain on the P&L now, and it's requiring capital investment. We expect in 2014 that will shift and it'll be a contributor to the P&L.

Unknown Analyst

And I guess I wanted to follow-up to our [indiscernible] divestiture, I don't if [indiscernible] talk a little bit about how that's kind of a strategy to focus on core assets. So we're wondering if -- is that something a similar type of transaction [indiscernible] coming in the future with some other non-core assets, or is there any kind of low-hanging fruit [indiscernible] to be coming along?

Robert J. Phillippy

Well, Rob, as a matter of course, we always conduct periodic reviews of our portfolio of businesses. And so anything that's not aligned with our strategic agenda is always under scrutiny in terms of what we might do going forward. In the case of MRSI, there is just no other way to characterize it. It's a systems business, and we are focused on solutions that are primarily product and subsystem businesses that are focused on our core Laser, Optics and Photonics technologies. And MRSI just doesn't fit that, and they've also got some investments that they need to make in order to build their business that just wouldn't be priorities for us. So that's what led us to the decision to divest.

Operator

Your next question is from the line of Larry Solow with CJS securities.

Lawrence Solow - CJS Securities, Inc.

Missed a little bit of the beginning of the call. Can you just review if you have -- or discuss, just in terms of some of the new orders, would you characterize them as sort of similar area as to where you had than last quarter, follow-on to the same customer or new orders from different customers in the same market, or they are in different areas?

Charles F. Cargile

Hi, Larry. So I would say that, in general, if you compare the new orders and the design wins sequentially, I'd say that it comes from, in some cases similar or same customers, but different programs, and in some cases different things altogether. And there is a couple of data points that I point to. So last quarter, we had some meaningful design win activity, and I characterize it as there was one large DQV program for opto-mechanical subassemblies and microelectronics, and a lot of activity related to Quasar in microelectronics. So I would say that this quarter, we also had a lot of activity without the mechanical subassemblies albeit in different programs, and we also had a lot of activity with Quasar, but with different customers. On the industrial side, it's very, very different. Last quarter, we had a $5.2 million order for 3D printing, which was for 12 to 18 months worth of demand, and was not expected to repeat. This quarter, industrial product orders were bolstered by a stellar performance from ILX. And just a little background on ILX, if I may. We acquired ILX for $9 million back in January of 2012. At the time, it was an $8 million business. Year-to-date, in 2013, we've got $7.8 million worth of orders for ILX already. And that's a 78% increase over this time last year. So ILX has had some very strong opportunities, and I guess, the way we characterize it is we feel very, very good about that as an example of a good bolt-on acquisition. But in the industrial market, back to your original question, very different mix of orders this quarter for sure.

Lawrence Solow - CJS Securities, Inc.

And just in terms of -- just generally comparing where we stand today to where you were last quarter, it sounds like visibility in general in your markets is about the same, and obviously you've done -- new specific orders and design wins for your company itself. But generally, your markets are pretty much stable from they were last quarter? Is that a good way to assess that?

Robert J. Phillippy

I would say that it varies by market. This quarter, as I mentioned a little earlier, we did see more activity and more firming of microelectronics for existing programs, whereas last quarter there was a big component of new design wins. And so our optimism, I'd say about microelectronics, in terms of both our ability to gain share and the market firming is a little bit more positive than it was this time last quarter. I'd say, other markets are fairly similar. Life and health sciences and industrial, both have demand that remained steady. I told you the mix changes from one quarter to the other, but the demand remained steady. And in research and defense, as I mentioned in the prepared remarks, we don't see a near-term catalyst for significant improvement. But hopefully, we're bouncing along the bottom.

Lawrence Solow - CJS Securities, Inc.

Okay. Just in terms of costs and cost savings, obviously you implemented a plan, I guess, last year. It seems like most of the heavy lifting of that is done with the exception of operating leverage, or it sounds like you're well-positioned to get a sales growth. Are there other cost-saving initiative opportunities or will margin improvement really from this point on basically rely on revenue growth?

Charles F. Cargile

The best way to grow the profit is, just as you say, to get the better leverage on revenue increases and we've proven to be able to do that in the past. I'm confident that the financial model today is as strong as it's ever been, and so we'll get that same leverage on the revenue increase. But you probably missed in the call, Larry, Bob talked about one project that we did launch this quarter, and that's to move our manufacturing from Stratford, Connecticut to a combination of our facility in Wuxi, China, and also noteworthy to Bozeman, Montana. Bob talked a little bit about the ILX acquisition that's been very, very good for us, not only in terms of their increase in orders and the growing revenue, but also now they have done such a nice job we're comfortable enough to move production from Stratford into Bozeman, which will give us better leverage, a smaller footprint, and should lead to about $1 million in savings, above and beyond what we might get from just the pure leverage of better profit. So we continue to look at ways to reduce cost. That will also result in a headcount reduction of about 25 or 30 of our total headcount. So we continue to look for areas to do cost-cutting. We just haven't had to have any major initiatives that we announced like we did last year at this time.

Lawrence Solow - CJS Securities, Inc.

Is that an annual number or is that a quarterly, $1 million?

Charles F. Cargile

That would be annual.

Lawrence Solow - CJS Securities, Inc.

Got you. And that should begin in the full year of '14?

Robert J. Phillippy

It'll be not quite full year, because the movement of equipment and production takes a little longer than that. It'll be finalized in 2014, so we'll start to get it, but probably not the full $1 million.

Operator

[Operator Instructions] Your next version comes from the line of Rob Crystal with Goldman Sachs.

Robert Crystal - Goldman Sachs Asset Management, L.P.

I may have missed it earlier. But with the new credit facility, does that give you the ability to buy back stocks?

Charles F. Cargile

It does. There is still some restrictions, but not near the type of restrictions we had on the other one. And so, we are free under that new credit agreement to buy back shares or do dividends or to do acquisitions, without having to go back and ask for permission.

Robert Crystal - Goldman Sachs Asset Management, L.P.

And I can't remember, is there a share buyback that's been authorized?

Charles F. Cargile

There is. We have a $3.9 million share authorization that's in place.

Robert Crystal - Goldman Sachs Asset Management, L.P.

Okay. And can you refresh us, Chuck, on sort of where buybacks fall on the priorities of uses of cash?

Charles F. Cargile

Sure. We said last quarter, once we had the refinancing in place, that we would probably -- not probably, we would certainly want to get through the first quarter, get through our covenant compliance and kind of let things settle down, see how our cash generation was, pay down some of the debt, and we did that. And so now, I think, with the authorization in place, we'll still go back with the board. We've done this the last year or so and talk about how we might want to deploy the cash. We certainly will continue to pay down and we are in a net debt position of over $50 million, but we're generating a lot of cash. I think we'll generate probably about $20 million of operating cash flow in Q4. So it's certainly something that we'll address with our board, and we also will continue to look for accretive acquisitions. But it's certainly on the table and something that we'll be looking into.

Robert Crystal - Goldman Sachs Asset Management, L.P.

Yes, given the amount of cash that you generate, it would seem to me to be a good use of cash to buy back stock, particularly given where the stock is trading these days.

Charles F. Cargile

Yes, I appreciate that, Rob. And we are hearing that more and more from our shareholders. So it's something that we are taking seriously.

Operator

And we have no further questions at this time. I would now like to turn the call back over to Robert Phillippy for any closing remarks.

Robert J. Phillippy

Thank you, and thanks again for your interest in Newport. If you have questions or would like additional information related to any of the topics we've discussed today, please don't hesitate to contact us. And also, for investors interested in learning more about the company, we have several events in coming months. So first we'll be presenting at the Deutsche Bank Small & Mid-Cap One-on-One Conference in Coral Gables, Florida on November 20th of this year; and then at the Needham Conference in New York City, on January 16th of 2014; and at the Stifel Nicolaus Conference in San Francisco on February 10th in 2014. And also, we'll be holding an investor presentation and booth tour at the Photonics West Trade Show in San Francisco on February 5th in 2014, which I would encourage anybody there who is able to attend. And of course, as always, thanks to our fellow Newport team members around the world for continued support, as we aggressively pursue our strategic objectives. Thanks, and goodbye.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

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