Newport Corp. Q2 2010 Earnings Conference Call Transcript

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 |  About: Newport Corporation (NEWP)
by: SA Transcripts

Newport Corporation Earnings Call, (NASDAQ:NEWP)

Q2 2010 Earnings Call

July 28, 2010 05:00 pm ET

Executives

Robert J. Phillippy - Chief Executive Officer

Charles F. Cargile - Chief Financial Officer

Analysts

Mark Douglass – Longbow Research

Dave Kang – B. Riley

Ajit Pai - Stifel Nicolaus

Operator

Good day ladies and gentlemen and welcome to the Newport Corporation Second Quarter 2010 Financial Results Conference Call. Today’s call is being recorded. At this time for opening remarks; I would like to turn the conference over to Chief Executive Officer, Mr. Robert Phillippy, please go ahead sir.

Robert Phillippy

Good afternoon and welcome to Newport second quarter 2010 conference call. With me 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.

We are very pleased with our financial performance in the second quarter of 2010. Here is a brief list of highlights from the quarter. We achieved $125.5 million in new orders. This represents the highest level of orders we have ever achieved in a second quarter of our fiscal year and is an excellent follow on to our very strong first quarter orders. For the first half of 2010, we have recorded $250 million in orders, an increase of 55.6% over the first half of 2009. Our sales performance in the second quarter was also quite strong; at $114.6 million, an increase of 30.9% over Q2 of 2009. This revenue growth is a direct reflection of the meaningful improvement in conditions in our end markets and provides evidence of the increasing strength of our position in those markets.

While we are quite proud of these orders and sales results, perhaps the most compelling highlights of the quarter are earnings and cash generation. We achieved earnings of $0.22 per diluted share and generated $18.8 million in cash from operating activities during the quarter. Both of these numbers clearly demonstrate the strength of our business and our ability to gain, improving leverage on sales increases and leverage this into significant increases in profitability. This is particularly exciting because we now expect all time record sales for the full year of 2010, an increase of more than 25% over 2009. We expect the sales growth to drive very strong profitability for the year. I will discuss our financial outlook in more detail in a few minutes. But first I’d like to provide an overview of the conditions and trends in our target markets and characterize our orders in that context.

Orders from microelectronic customers were $43.4 million, up 191% from the second quarter of 2009 and only $4 million off the all time record orders level of Q1 of this year. Most forecasts now suggest that the semiconductor equipment industry will remain strong throughout 2010 and much of 2011.

As we have communicated previously we are closely aligned with several key customers that are tier manufactures in this industry. And in communications with these customers, they have reinforced their expectation of robust market conditions for the balance of 2010 and continuing in to 2011. Second quarter orders from customers in our research market were $36.4 million, an 11.4% increase over the second quarter of 2009, and only 2.4 million lower than the strong orders in Q1 of 2010.

We continue to benefit from orders funded by the American recovery and reinvestment act in the U.S. We currently expect these funds to be available for the next few quarters but to begin winding down in late 2010. The global stimulus related funding picture is mixed, with spending already completed in some countries and plan to subside during the second half of this year and others. As communicated previously, these funding sources are being partially offset by reduced funding from local governments, corporate research budgets and philanthropic sources.

Orders from life and health sciences customers were $26.4 million; an increase of 37.1% over the second quarter of 2009 and 11.5% sequentially. We are now receiving production orders from bio-instrumentation customers for a few collaborative development programs that have been ongoing for the past 18 to 24 months. We also continue to enjoy robust order levels for our industry leading products for multi-Fulton imaging applications including multi lasers, vibration control work stations and optical systems. Current forecast for the bio-instrumentation industry are generally bullish for the foreseeable future, while opportunities in bio-imaging applications will be somewhat correlated to research funding.

Orders from industrial manufacturing customers of $19.4 million grew 71.6% over the second quarter of 2009 and 31.7% sequentially. Included in this number were several large OEM orders for optical and precision positioning components. This is a particularly encouraging result as it speaks not only to our success but the overall health of the [photonics] industry. Recall that this market includes a wide range of customers and applications, including sales of enabling components to other [photonics] industry companies.

The conclusion form this brief review of each of our markets is that we are clearly operating within a business environment that has improved significantly in recent quarters led by robust activity levels in the semiconductor equipment industry. With our strong position in multiple end markets, we have capitalized on these improved conditions to produce significant revenue growth. This combined with effective execution in our business operations and our more streamlined operating cost structure has enabled us to generate meaningful earnings leverage.

I would now like to turn the call over to Chuck to provide an update on our financial performance. Chuck?

Charles Cargile

Thanks Bob. Please refer to the press release in form 8-K we issued earlier today. In addition I encourage you to visit our website at newport.com and specifically the investor information section where we've posted historical statements of our operations, balance sheets and schedules that detail historical trends for sales and orders by market. We also show the performance of our two reporting segments.

Since Bob already highlighted our sales and earnings for the quarter, I will comment on other parts of our financial performance including our cash position and I will also discuss our divestiture of Hilger Crystals. Our gross margin of 43.4% was 320 basis points higher than the first quarter of 2010 and the highest level we’ve achieved in 3 years. The increase in gross margin in the current quarter was due primarily to improved leverage of manufacturing costs resulting from a higher sales level, also the continuing positive impact of the July 2009 asset exchange with Oclaro and due to our overall streamlined operations.

We expect gross margins to remain in the range of 43-45% depending on the mix of sales, product pricing variations and manufacturing absorption levels among other things. Selling general and administrative expenses were $28.3 million in the quarter, reflecting an increase of $1.6 million compared with the prior year quarter. More important than the increase in total dollars is the fact that as a percentage of sales, SG&A declined to 24.7% form 30.5% in the prior year quarter.

We believe we will continue to drive SG&A as a percentage of sales to even lower levels in the second half of this year. Research and development expense in the second quarter was $9.4 million or 8.2% of sales. This is a little lower than the level we incurred in the first quarter of this year. We anticipate increase in our funding of R&D efforts in the second half of the year. Our long term target for R&D as a percentage of sales is in the range of 9% to 10%. As a result of these factors, our operating income for the second quarter of 2010 was $11.2 million or 9.8% of sales.

On a sequential basis, operating income increased by approximately 50% on the 7% increase in sales. Our two divisions both performed well. Our photonics and precision technologies division or PPT as we refer to it, recorded $15.3 million of division operating income or 21.5% of revenue. Our spectra physics lasers division has shown considerable operational and financial improvement over the lat year. In the second quarter of last year, this division recorded a loss from operation of $3.3 million. In the second quarter of this year, Spectra Physics recorded operating income of $3.4 million or 7.8% of sales.

The largest positive impact to the lasers division was the divestiture of our diode laser business which we accomplished last year via our asset exchange transaction with Oclaro. We are pleased with the progress we’ve made within our lasers division and we expect continued improvement in the second half of this year.

Companywide, we expect total operating income as a percentage of sales to slightly exceed 10% in Q3 and for the second half of 2010. Our tax rate for the second quarter was 9.8%.

As we continue to benefit from the tax shield we have for federal income tax purposes, resulting from evaluation allowance. The only taxes result from taxes on foreign earnings, state minimum taxes and some alternative minimum tax. Our diluted shares outstanding for the second quarter were $37.6 million. As a result of all these factors our earnings per diluted share were $0.22 for the quarter and $0.36 for the first half of the year. We’re pleased with these earnings results and look forward to even higher earnings in the second half of this year.

Our cash, cash equivalents and marketable securities balance at the end of the second quarter was $152.4 million. This is the highest level we’ve had since the third quarter of 2007. In Q2 we generated $18.8 million of cash from operating activities. We stay focused on balance sheet management even as we’ve ramped production. Our inventory balance increased only $200,000 in the first half of 2010 despite increasing production to meet customer demands. Our day sales outstanding of 55 days, is the lowest it has been in 5 years and we spent only $ 5 million on capital expenditures in the first half of this year. We believe we’ll generate more than $30 million of cash during the second half of this year, allowing us to increase the balance to exceed $180 million as we exit the year.

That said we are always looking for ways to deploy the cash to enhance our strategic objectives. The greater cash balance, the greater our flexibility to pursue more opportunities to enhance our company. Before I turn the call back to Bob, I would like to discuss our divestiture of Hilger Crystals. Newport acquired Hilger in 2004 as part of the transaction with Thermal Electron where we acquired Spectra Physics Lasers, [Corian] Filters, Richards & Gradings and [Oreal] instruments. Program manufactures IR, X-ray and Gamma rays synthetic crystals primarily for security applications.

Total was the smallest of the businesses we acquired in that transaction, it was not a strategic fit with other parts of Newport. Revenue for this business was $2 million in 2009 and $1.5 million for the first two quarters of 2010. On July 19th 2010 we closed the sale and received $4 million of cash. We could receive as much as $750,000 of additional cash in 18 months if the business achieves certain revenue levels over that period.

We’ve identified the assets and liabilities of this business separately on a balance sheet. The business had a small pension plan that will cost us some money to unwind. In the second quarter because we were negotiating sale of the business, we recorded $700,000 non cash charge to curtail the pension. In addition we recorded an expense of approximately $100,000 for transactional related costs. This total of approximately $800,000 is identified separately on our statement of operations.

In the third quarter of 2010 we expect to record a gain on the sale of this business that will be offset in large part if not completely by cost related to the final disposition of the pension plan. We expect a net of the gain in the pension expense to be relatively immaterial.

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

Robert Phillippy

Thanks Chuck. I would now like to provide an update on some other important developments at Newport and then comment on our outlook for the coming quarters. July 4th marked the one year anniversary of our acquisition of New Focus and I can say unequivocally that the transaction has been a huge success. The New Focus team has proven to be talented, focused and resourceful. The product lines are excellent complements to Newport’s portfolio and the customer relationships are strong and expandable.

Today we are benefiting from robust sales growth in New Focus products such as tunable lasers, eco motor base precision positioners and optic mechanical sub assemblies. The New Focus brand which is celebrating its 20th anniversary this year is well known for it innovative products and differentiated technology. The combination of these strengths with Newport’s industry leading channels and global operations capabilities is enabling this business to perform very well in every respect.

As a technology company we depend on new product development to help fuel our growth. As we reported previously we have taken a number of steps to ensure that our product development teams work at peak levels of productivity. We are now beginning to enjoy the benefits of this focused effort.

There are a few recent product introductions I’d like to highlight. At the Senicom West exhibition in early July we introduced Singulus, a new family of modular high precision linear stages for single access in gantry applications. This stages deploy Newport’s proprietary silicon carbide structures and pressure vacuum air burn technology to provide precision motion solutions for loads up to 10kg with 2.5G acceleration and bi-directional repeatability of better than 80 nanometers over 1 meter of travel.

This makes Singulus an ideal motion solution for high duty cycle precision applications such as flat panel display inspection, thin film photable tape panel scribing, semiconductor wafer processing and laser micro machining.

In our Spectra Physics division, we recently expanded our offering of pulse sale, high power industrial Q switch lasers. These compact rugged industrial laser are specifically designed for low maintenance 24/7 operation. They also produce higher peak energy in shorter pulses than similar competitive lasers, enabling greater throughput and higher yields in most material processing applications.

The pulse sale family now includes 10 watt and 20 watt UV lasers as well as a 34 watt version at a 532 nanometer wavelength. These products are quickly gaining traction in a variety of applications including wafer scribing and dicing, solar cell processing, printed circuit board and electronic package micro machine and flat panel display manufacturing. We also began production shipments of our new model 6100 combination laser diode driver and temperature controller. This innovative product combines 2 important devices for research applications into a single user friendly instrument. It provides ultra stable current control, integrated laser diode damage protection and includes a digital signal processor for fast settling times. This instrument provides a versatile new tool for conducting a wide range of scientific experiments in physics, biology and chemistry.

The last area I would like to discuss is our initiative to build our business and manufacturing presence in China. We continue to ramp activities in China and now have 129 employees there. We are progressing toward our target of manufacturing products representing 30 million in external revenue value in our facility in Wuxi and this operation is now a very clear profit contributor to Newport. During the second half of this year we will expand production to support a number of programs for some of our semiconductor OEM customers. In 2011 and beyond we believe that Wuxi will be a key driver of our ability to increase our market share in China and greater Asia.

I would now like to discuss our outlook for the second half of 2010. We expect that the strong market conditions will continue through the remainder of 2010. Also our robust order levels in the first half of the year have provided us with increased back log and revenue momentum. We are pleased to communicate that this factors have contributed to an improved outlook for our 2010 performance. We now expect to achieve full year revenue in the range of 460 to 470 million. As I stated earlier this represents an increase of more than 25% over the $367 million we recorded in 2009. More importantly it will be highest annual revenue level in Newport’s four year history.

This improved revenue outlook combined with our expectation of continues solid execution by our business teams will enable us t achieve strong profit leverage. As such we now expect full year 2010 earning per diluted share to be in the range of $0.80 to $0.90.

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

Question-and-Answer Session

Operator

Thank you (Operator instructions). We’ll go with Mark Douglass, Longbow Research. Please go ahead.

Mark Douglass – Longbow Research

Good afternoon gentlemen. The sequential gross margin improvement, very nice. Can you go into more detail as to what really helped drive that? You know the quarter-over-quarter, I mean that laser segment obviously was a very big part of that is that you are part of the facility consolidation you had going on with the laser group, Spectra Physics or just go into more details as to what is going on there.

Charles Cargile

Sure Mark, this is Chuck. We are very pleased with the improvement that we’ve seen gross margins, as you know we’ve been speaking for sometime about needing to get back to the 45% range and improvement that we showed this quarter gives u a lot of confidence that we are moving in the right direction and it comes as a result of a lot of the things that we’ve been doing and talking about for the last year, year and a half and really it’s across the board. We get a huge benefit from both sides of the asset exchange that we did last year. All you have to do is look at the lasers performance from Q2 of last year which was the last quarter in which we had the diode business versus the second quarter of this year. The biggest driver of that was the exit of the diode business. Also we had very, very strong performance in PPT as well.

So it’s just very reflective of the benefit we get from having taken all the significant cost effort and then leverage that smaller amount of fixed manufacturing cost on higher levels of revenue.

Mark Douglass – Longbow Research

So I guess because if you look at the laser segment from 4Q to 1Q, you had a really big step up in sales but profitability declined and then here sales went down but profitability went up big time. So I guess it’s just a little confusing because a lot of what you talked happened in 2009, correct?

Charles Cargile

Yes but remember we mentioned in our call last quarter that there was some degree of settling in if you will with the laser division into the new facility. Last quarter was the first quarter that we moved into the new facility and we were chasing a big step up in demand at the same time. So I think over time if we continue to grow the lasers revenue you will continue to see an improvement in margin but much of that improvement is from groundwork that has been laid over the last year, not things that are unique to a quarter. It’s just the visibility of it in the financial statements.

Mark Douglass – Longbow Research

So 1Q is more the anomaly and 2Q is kind of what we are looking at going forward, you mentioned the back half is likely to be 43 to 45%.

Charles Cargile

That’s a good way to think about it Mark.

Mark Douglass – Longbow Research

Okay great and then the a little bit of slow down in orders sequentially in micro electronics ,a little bit of seasonality I mean do you still expect at least the order levels to be pretty high for some time?

Charles Cargile

Mark I’ll make one comment and then Bob may want to talk a little bit about the outlook as we go forward. Yes if you look at the raw numbers there was a slight decline in the micro electronic orders in Q2 but if you look at it overall broader time horizon that is the second largest orders we have ever had in micro electronics for the quarter and it’s the largest order we’ve ever had for Q2. So I think it’s more reflective of how strong the snap back was for semi conductor in Q1. More so an indication of some change in the industry dynamics.

Mark Douglass – Longbow Research

I’d find something to pick on.

Robert Phillippy

Mark, just to add to that, this is Bob. If you take a look at the future as I mentioned in the prepared remarks we collect data on our expectations for the semi conductor equipment industry from two sources. One is that we follow the industry closely from what’s in public domain and then the second is we talk a lot with our customers and as you know we are fairly closely aligned with some of the tier one players in the industry and our dialogue with them indicates that we expect the business to remain at robust levels through the remainder of 2010 and into 2011.

Mark Douglass – Longbow Research

Right and then finally the $20 million you kept in your numbers, is that something that we want to do going forward?

Robert Phillippy

No, that was a one time curtailment charge for the pension related to the business that we sold. So that won’t recur, it shouldn’t be in your model going forward. In Q3 we expect that we’ll record a gain on the sale of the business but also another charge to do the final transition of that pension plan. We think those two are going to net to something in material, we’ll highlight them just so you can get closure of it. So there will be another set of accounting for the transaction in Q3 that will highlight but it won’t be a recurrence of the 800,000.

Mark Douglass – Longbow Research

Alright because I was thinking of how we’re going to go talk about it going forward. We referred to this quarter as $0.22 or really was it $0.23 or what the after tax in fact. Was it about a penny?

Robert Phillippy

About $0.02

Mark Douglass – Longbow Research

$0.02. OK thank you that’s it.

Robert Phillippy

You’re welcome.

Operator

We will go next to Dave Kang, B. Riley.

Dave Kang – B. Riley

Thank you, great quarter. I guess the first questions are the numbers. Can I get the depreciation amortization and did you say CapEx was only 3 million and what would be budget for second half and also can I get stock compensation numbers please?

Robert Phillippy

Sure. So for the quarter depreciation and amortization is 5.6 million, that was the same as Q1. It is going to creep up a little bit the second half of the year but not much. So you can model 5.6 or 5.7 a quarter for depreciation amortization. CapEx was a little lower in the quarter, just a matter of how the timing of how some of the spending flowed. It was only 1.5 million in Q2, you may recall in Q1 it was 3.5 million. I think it will be a little higher in the second half of this year than it was in the first half but not dramatically so. As far as the stock compensation goes for the quarter for Q2, it had $1 million of stock comp and…

Dave Kang – B. Riley

And most of that is in OpEx?

Robert Phillippy

Yes, almost all of it. There is 800,000 in SG&A, 100,000 R&D and about 100,000 in cost to sales.

Dave Kang – B. Riley

Got it.

Robert Phillippy

For the first half [inaudible] 6 was about the same ratio.

Dave Kang – B. Riley

Ok got it and then let’s see, regarding your revenue guidance 460 to 470, so the mid point in second – if you look at the second half suggest about 243, 244. So may be 121 or 122 million per quarter. I don’t know if the semis are peaking– I mean and obviously you still need to grow sequentially to get to 243, 244 in second half. Where will the growth come from? I mean what are your assumptions as far as growth is concerned?

Robert Phillippy

Dave I think the biggest influence of that can be detected by the book to bill over the last 4 quarters being 1.10. So for 4 straight quarters we’ve been adding to the back log, that back log will start to flash out in the form of revenue on the second half of this year and into 2010.

Dave Kang – B. Riley

Okay, and then obviously a lot of investors are concerned about what is going on in Europe and the Chinese market, what do you see from your end as far as those two segments are concerned?

Robert Phillippy

Europe is been interesting for us, when we went through difficult – the challenges of the latter part of 2008, 2009, our business in Europe didn’t go down as dramatically as it did in other places. And now as we’ve had really strong performance in the US and Asia the Europe business hasn’t had to come back as much either. So it’s been a little bit more moderate over the last two years, a little more consistent. Much of the talk that you referred to I assume is because of the change of the Euro and the situations in Greece.

Those things are all certainly of interest to us and we follow them from a macro economics standpoint. But they really haven’t had that much of an impact on our business. In terms of China and Asia we continue to do very, very well there specifically with our manufacturing site in Wuxi and then more specifically in our ability to sell more in that region. And as we have mentioned many times over the last several quarters we think that that’s going to be a great area of opportunity for us not only in 2010 but more so in 2011, 2012 as we look out over a longer horizon.

Dave Kang – B. Riley

Right, and then you said you have 129 right now. I mean how many were added during I don’t know last quarter or first half?

Robert Phillippy

I think it was about 12 or 13 people. Dave

Dave Kang – B. Riley

Okay. And then just I guess there’s a mandate in China as far as minimum wage is concern of about 30% increase, is that going to have any impact on your margin structure or is it too small at this point?

Robert Phillippy

I think the direct answer is it’s pretty small. We are certainly not exempt from China labor market dynamics and we have made some adjustments to address wage inflation. But keep in mind that the products that we manufacture there are some of our lower precision assemblies that we transferred from manufacturing sites in California. So even with the increase in salaries we are still achieving significant cost savings by building products in Wuxi. Also remember that in general labor content for our products isn’t a huge percentage anyway.

Dave Kang – B. Riley

Got it and then just lastly on industrial sector. I know it’s not really a big area focus for you. But what was the driver to obviously have a big sequential jump there and can you just separately talk about high power versus low power. I understand low power is more stable than high power. Is high power coming back at all, just what you see from that side?

Robert Phillippy

Yeah Dave, we segmented a little bit differently. It generally would go along the lines of high power versus low power. But the way we look at it is more macro versus micro. So the macro processing applications which are typically high power are things like cutting metal and welding, things like that. Those are not applications that we participate in. We participate because of our product line, our application focus in micro applications. So we don’t pay as close attention to the quote high power or macro markets, but in the markets that we participate in we generally categories it as following general macro economic conditions. However we are breaking that mole because we are doing quite a bit better than that at this point and in particular in the second quarter we had quite a few OEM orders that gave us a lot of momentum.

One thing Dave to put the industrial and other in context is again with lots of our business you have to look at over longer time horizon. And although we’ve seen great growth in that segment over the last couple of quarters this quarter was certainly very, very strong growth. If you look back to the level of activity that we would record in that market prior to the market turmoil and recession of 2008, it was most of the time we were in the 19 to 23 range in terms of millions of dollars of revenue. So I think it’s more reflective of how steep the downturn was because of the overall melees in the industry that it is now it’s getting to some kind of artificial highs that’s finally getting back to levels that it had 3, 4 years ago.

Dave Kang – B. Riley

Got it. Before I jump off can I just ask one more on the solar? Just give us an update, I know you had a separate booth at Senicom West or something like that and you’re starting to come back, is there any update as far as the customer activity and all that?

Robert Phillippy

Yeah, the solar energy industry is recovering quite nicely from the trough levels we experienced in 2009 and most solar industry forecasts are quite bullish. And recall Dave that we participate in basically two categories in solar. One is a component in subsystem level where we sell products like lasers, solar simulators, motion control and we also have a certified testing calibration lab. The other is in systems. So as it relates to the component and subsystem products we continue to expand our activity level and we’ve got a number of new product release and new account penetration and we are making good progress. On the system level that is of cause a longer term play, we continue to develop customer engagement and we continue to be at a high level of engagement and discussion but it’s going to take some time to develop and orders will be kind of digital in fashion.

Dave Kang – B. Riley

Got it, got it. Thank you.

You’re welcome.

Operator

(operator instructions). We’ll go next to Ajit Pai with Stifel Nicolaus.

Ajit Pai - Stifel Nicolaus.

Yeah good afternoon and congratulations on a very solid quarter.

Robert Phillippy

Thank you.

Ajit Pai - Stifel Nicolaus.

A couple of quick questions, I think the first is just sort of the a little bit of color on your scientific research air space and defense business. Through the second consecutive quarter where your orders have been declining there and you did provide us some good color I think that the new focus acquisition has been successful et cetera that you know deep sell into the market. So could you give us some color as to whether things have already picked in that business in the December quarter in terms of orders, what you are seeing in that business and whether that business is one that is expected to set up from this point onwards, not necessarily up to this point but start out performing the rest of your business in growth and profitability.

Robert Phillippy

Yeah Ajit, this is Bob. So a couple of comments just to follow the question in the context of the question that you had. So first of all as we have reported previously the fourth quarter of our fiscal or calendar year is typically our high water mark just from terms of seasonality in the research business. So that would explain kind of a peak level in Q4. And then for Q1 and Q2, forget the sequential for a moment but in Q1 and Q2 taken together is an all time record for Newport for both sales and orders in the research market.

So if you take a look at that over the first half of the year it’s certainly an all time record. So we feel pretty good about our position in the research market. As I mentioned in the prepared remarks, we do continue to receive some orders that are funded from the American Recovery and Reinvestment Act, ARRA related programs. Those are expected to continue although all the funds needed to be obligated by the end of the government fiscal year which is September 30th although it sounds like there may still be some equipment purchases that can be made after that date although the funds need to be obligated doesn’t necessarily mean spent on equipment.

And as I mentioned in the prepared remarks the status of stimulus funding in other countries is mixed with some ongoing and some already concluded in terms of stimulus funding, so that’s the stimulus funding story. Now in terms of the overall picture as I mentioned, we enjoyed all time records sales and orders in the first half and we’d seen some announcements regarding the state of research funding in various countries relative to overall economic environment and the story is generally encouraging. There are several countries that are taking steps to insulate investment in R&D to some degree even in the phase of significant government deficits, but speculating on the macro environment just in total is certainly a hard thing to do at this point.

Ajit Pai - Stifel Nicolaus.

Got it, then second just moving here for the margin targets I think Chuck briefly mentioned gross margin going into the second half. And if I heard that right he said between 43 and 45%. Maybe I got that wrong but would like some color there. But also looking longer term at the – I think he also mentioned double digit operating margins for the second half of this year. Why they shouldn’t be higher than June quarter up margins, why not if you are 11.2% in this quarter pro-forma? Why shouldn’t it be 12 and 13 if you are expecting sequential growth in revenue through the end of the year? And looking a little further out beyond this year whether you have much better idea of your portfolio right now, you’ve already done your restructuring or the vast majority of it. What does 2011 margin structure look like?

Robert Phillippy

Well first sticking with the gross margin, I think we are still very much on track to gaining the target margins that we’ve mentioned. I would like to point out one thing, as you look at the margins one thing that we see that gives us a really good indicator of the improvement in the margin is, if you look at gross profit for this quarter versus last year when we were basically finishing up some of the integration programs, our gross margin this year has increased by $17.6 million on $27 million of incremental revenue June quarter over June quarter.

So that’s about 65% pull through on each incremental dollar of revenue. So we do really benefit from the increased revenue by being able to leverage the fixed manufacturing costs. We do think that the margins are going to be better, we haven’t yet gone over the 10% in the reported quarter. We said that we think we will in the second half of the year. I think we are not in a position today to give guidance for 2011 yet, but you’ll probably recall me talking about our target model which would be to have 45% gross margin SG&A somewhere in the 23, 24% range and R&D in the 9 to 10% range. So if we achieve that model then you would be looking at operating income that would be in the low to mid teens.

Ajit Pai - Stifel Nicolaus.

Got it, and then uses of cash, I think you highlighted how much cash you have generated in this quarter plus you just divested business that should be helping as well and as the growth rate moderate your cash in relation should accelerate. Could you remind us what the uses of cash are? How you are going to priorities uses of that cash and right now what the acquisition pipeline looks like?

Charles Cargile

Yeah we think that – we agree with you that the cash generation will be strong throughout the rest of this year and into 2011. We do continue to look for ways to deploy that cash to enhance the strategic objectives that we have. Being pragmatic the first thing that we have to be concerned with is the $127 million of convertible debt that’s due in February of 2012.

So in about 6 months from now we’ll have to move that to current on our balance sheet and so we do want to be considered that first and we continue to look at acquisitions. We’ve been very pleased with the acquisition of New Focus. Bob talked about that in his prepared comments and we’ll continue to look for acquisition like that that we can build on and enhance the overall performance of the company.

Ajit Pai - Stifel Nicolaus.

Got it, thank you.

Charles Cargile

You are welcome.

Operator

(Operator instructions). It appears we have no further questions. I would like to turn the conference back to Mr. Robert Phillippy for any additional or closing remarks.

Robert Phillippy

Well thanks again for joining us today and for your continued interest in New Port Corporation. We are proud of our recent financial performance and quite confident that we will continue to execute crisply and achieve significant revenue and profit growth in coming quarters. It is our expectations that this effective execution will deliver increasing value to our shareholders. While it’s a pleasure to be a spokesman for these achievements, it is important to mention that the credit for this strong performance goes to the talented team of over 1700 Newport employees across the world.

Their ongoing creativity and focus are truly appreciated and are instrumental as we continue our quest to be the world’s premier source for photonics technology and products. We look forward to providing you with updates on our progress. Thanks.

Operator

Ladies and gentlemen this does conclude today’s discussion. We appreciate your participation. You may disconnect at this time.

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