Newport CEO Discusses Q3 2010 Results - Earnings Call Transcript

Oct.27.10 | About: Newport Corporation (NEWP)

Newport Corporation (NASDAQ:NEWP)

Q3 2010 Earnings Call Transcript

October 27, 2010 5:00 pm ET

Executives

Robert Phillippy – President and CEO

Charles Cargile – CFO, SVP and Treasurer

Analysts

Mark Douglass – Longbow Research

Mark Miller – Noble Financial

Ajit Pai – Stifel Nicolaus

Dave Kang – B. Riley & Company

Jim Ricchiuti – Needham & Company

Jiwon Lee – Sidoti & Company

Jim Brilliant – Century Management

Operator

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

Robert Phillippy

Good afternoon and welcome to Newport’s third quarter 2010 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.

The Newport team delivered another strong financial performance in the third quarter of 2010. Perhaps the most notable headline is that we achieved all-time record quarterly sales of $125.2 million, which represents growth of 41.7% over the third quarter of 2009. There were many other highlights in the quarter as well.

For example, our orders of 129.5 million were the highest we’ve ever achieved in the third quarter and the second highest in the company’s history. This level represents 39.9% growth over the third quarter of 2009. Even with record sales, our book-to-bill ratio was greater than one, continuing to grow our backlog.

We also achieved operating income of $15.8 million and earnings of $0.34 per diluted share. Both of these numbers demonstrate the earnings leverage we can generate at higher sales levels. This strong orders, sales and earnings performance coupled with our record backlog of 132 million causes our outlook to be increasingly positive. We now expect our full-year sales to be approximately 475 million, an all-time record for Newport and expect our earnings per diluted share to exceed $1.

I’ll comment further on our outlook a bit later in this call, but first I would like to provide an overview of the conditions and trends in our target markets and characterize our orders in that context.

Third quarter orders of 43.7 million from customers in our microelectronics and market continued at the high level we experienced in the second quarter and grew by 92.4% versus the third quarter of 2009. In particular, we continued to see robust order activity from Tier 1 semiconductor equipment customers. These OEM customers continue to experience strong bookings and revenues for their current generation products and are increasingly engaging us to provide enabling photonics components and subassemblies for their new development programs. As such, we expect this strong demand to continue for the remainder of 2010 and into 2011.

We received $37.7 million in orders from research market customers in the third quarter. This represents a 3.6% sequential increase but a decline of 1.6% versus the strong third quarter of 2009. We are still receiving orders tied to ARRA funding in the U.S. but stimulus related funding in general appears to be winding down.

The global research market picture continues to be mixed with strong growth opportunities in some countries offset by sluggish funding environments related to macroeconomic factors and others.

This market continues to provide a source of stable profitable business and gives us a platform to identify and capitalize on emerging applications for photonics technology.

Orders from life and health sciences customers in the third quarter were 27.5 million, up 4.2% sequentially and 53.9% versus the third quarter of 2009. This significant growth was primarily driven by our business with bioinstrumentation OEM customers.

According to industry reports, the overall bioinstrumentation market has been growing between 7 to 9% over the past year. Our business with these customers has grown at a faster rate due to the collaborative design projects we have been engaged in over the last 24 months. We have now received production orders for these new products and so we expect to experience a degree of volatility in order activity in this market over the new few quarters.

Third quarter orders from industrial manufacturing customers were 20.6 million, up 7% sequentially and 50.7% from the third quarter of 2009. Our performance in this area included large OEM orders from photonics industry manufacturers and orders of our advanced packaging systems for the automated assembly of complex electronic devices.

We continue to benefit from the overall recovery in the industrial market. In our broad and deep portfolio enables us to participate in a wide range of applications that deploy photonics technology.

We historically expect trends in this market to move in the general direction of the overall economy. Although over the past four quarters, our industrial business has grown at a much faster rate than the macroeconomic environment would suggest.

The summary of this brief review is that demand for our products remained strong across all of our target markets and we have capitalized on this opportunity to produce significant revenue and earnings growth.

Now, I would like to turn the call over to Chuck to provide a more detailed update on our financial performance. Chuck?

Charles Cargile

Thank you, Bob. I’d like to first refer you to the press release and 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 operations, balance sheets, and schedules that details 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’ll comment on our cash position and other aspects of our financial performance.

Our cash, cash equivalents and marketable security balance at the end of the third quarter was 165.1 million, an increase of 12.7 million during the quarter. We’ve stayed focused on the balance sheet even as we’ve ramped production to meet growing customer demand. Our days sales outstanding has remained between 55 and 57 days in each quarter of 2010.

We spent only 6.5 million on capital expenditures in the first three quarters of the year and we have effectively managed our inventory. We expect to generate more than 15 million of cash during the fourth quarter of this year, which will allow us to increase the balance to over $180 million as we exit 2010.

That said, we are always looking for ways to deploy our cash to enhance our strategic objectives. We recognized that the greater our cash balance, the greater our flexibility and wherewithal to pursue opportunities to enhance our company. Our third quarter gross margin of 42.9% was 300 basis points higher than the comparable quarter of 2009.

The increase in gross margin in the current quarter was due primarily to improve leverage of manufacturing costs resulting from the higher sales level and to our overall streamlined operations.

We indicated last quarter that we expect our gross margin to remain in the range of 43% to 45% depending on the mix of sales, product pricing variations and manufacturing absorption levels among other things. In the third quarter of this year, the positive impact of the improvements we’ve made in our cost structure was offset in part by two items that we do not expect to recur.

First we negotiated cancellations and order we received back in 2008 from one of our former photovoltaic manufacturing systems customers. As a result of this cash settlement, we recorded 1.3 million of revenue with the corresponding 1.3 million of cost resulting at zero percent gross margin.

Secondly, we recorded a reserve of approximately $7,000 for some related photovoltaic systems inventory. These two items reduced our gross margin by approximately 100 basis points in the third quarter of 2010. As I said, we do not expect these items to recur in the fourth quarter and so we expect our gross margin to return to the range of 43 to 45%.

Selling, general and administrative expenses in the third quarter were 28.4 million or 22.7% of sales. In the first three quarters of 2010, while increasing our revenue by approximately 31% over the same period in 2009, we increased our SG&A expense by less than 1%.

We intend to continue manage our expense base tightly, by investing in appropriate growth initiatives. Our operating income for the third quarter of 2010 was 15.8 million or 12.6% of sales. On a sequential basis, our operating income increased by approximately 41% over the second quarter level, on a 9% increase in sales. Both of our operating divisions performed well, increasing their segment incomes sequentially, both in total dollars and as a percent of sales.

Our photonics and precision technologies division recorded segment income of 17.5 million that’s 22.5% of sales. Our spectra physics lasers division has shown considerable operational and financial improvement over the last year. In the third quarter of this year, spectra physics recorded segment income of 4.1 million or 8.6% of sales.

We’re pleased with the progress we’ve made in our lasers division and we expect continued improvement in the fourth quarter of this year.

Company-wide, we expect our operating margin to increase yet again in the fourth quarter of this year, which will bring our operating margin for the full year to more than 10%. Our tax rate for the third quarter was 1.9%. We continue to benefit from the tax shield we have for federal income tax purposes resulting from a valuation allowance.

In addition, we were able to utilize certain foreign tax credits in the quarter to further reduce our tax expense. Our only taxes resulted from taxes on foreign earnings, state minimum taxes and some U.S. alternative minimum tax. Our diluted shares outstanding for the second quarter were 37.6 million.

As a result of all of these factors, our earnings per diluted share were $0.34 for the quarter and now $0.69 for the first three quarters of 2010. Now Bob will make a few more comments before we address any questions you have.

Robert Phillippy

Thanks, Chuck. I would now like to provide an update on some other important activities at Newport and then comment on our outlook for coming quarters.

Over the past two years, Newport like many companies have spent a significant amount of time and energy on operational streamlining and efficiency which has driven a number of excellent improvements in our operations.

I’m proud to say that in parallel with those efforts, we have also taken a number of actions to build the strength of our channels and other front-end business functions. I’d like to highlight some accomplishments in this area.

Earlier this year, we launched a significant upgrade to our industry-leading website newport.com. The new site includes leading edge functionality such as dynamically created navigation and search results. The search experience provides customized presentation and navigation designed to spotlight and guide visitors to the most relevant information.

Search functionality leads visitors to relevant products or resource content by enabling them to refine the results on the fly by selecting keywords specifications or other attributes. Our product pages provide a comprehensive set of information including technical information, specifications, interactive products photos, CAD drawings, lists of related products and accessories and much more.

All of our merchandise products are available for immediate purchase using our robust ecommerce engine. Our site also includes a host of other interactive tools and information such as selection guides, tutorials, videos, application notes, and of course investor information. Traffic and customer interaction have continued to grow robustly on newport.com to the extent that over the past year, our site has supported more than 12 million page views from more than 2 million unique visits.

If you happen to visit a newport.com in a while, I encourage you to do so to judge for yourself the convenience and functionality of this important Newport channel.

We have also continued to expand and enhance our global deployment of sales and customer support resources particularly in China and other Asian countries. With our worldwide network of Newport offices and distributors, we now do business in 66 countries around the world. Our support capabilities include regional customer service centers with local language support and a globally deployed field service team.

These dedicated people made technical support, transaction information and a host of other services available with a single phone call. These customer focused channels are backed by a robust systems infrastructure. As you may recall, we use SAP’s ERP platform across our global organization. Today we leverage this very robust and effective system as the backbone of our efforts to drive the efficiency of both our front-end and back-end processes.

Our customer service representatives have visibility to our inventories worldwide. Our operations teams have real-time forecast transaction and manufacturing execution data. And leaders in our organization have access to the information they need to make well-informed business decisions.

We have made and will continue to make significant investments in our channels to ensure that our industry leadership in this area remains unchallenged.

I would now like to discuss our outlook for the remainder of 2010 and provide some initial observations about expectations for 2011.

As I said earlier in this call, we now expect revenue of approximately 475 million for the year. This will clearly represent the highest annual revenue in Newport’s history. Additionally, as we have demonstrated for the last several quarters, we are able to achieve significant earnings leverage on revenue growth.

We expect to continue this effective execution in the fourth quarter and therefore anticipate that our full year earnings per diluted share will exceed $1.

As we look at 2011, we remain optimistic regarding market conditions and confident in our ability to execute effectively. Many of our OEM customers report firm orders and reasonable growth prospects for their businesses in 2011. Also we continue to identify new opportunities to deploy our broad and deep portfolio photonics technologies.

For these reasons, we are confident that we are well positioned to continue to grow revenues and earnings in 2011.

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question today from Mark Douglass with Longbow Research.

Mark Douglass – Longbow Research

Hi, good afternoon gentlemen.

Robert Phillippy

Hello, Mark.

Mark Douglass – Longbow Research

I mean the book-to-bill is still above 1, but it’s been taking some downticks here. At any cost for concern or this is kind of a typical seasonality here comes winding down that it starts creeping close to 1?

Charles Cargile

I think the most noteworthy part of the book-to-bill getting close to the 1 is that the revenues getting a lot higher.

Mark Douglass – Longbow Research

Good.

Charles Cargile

And so that’s what we would hope for as we would expect. Obviously we make money on the – on revenue not on orders. So we like to see the revenue moving higher. And also the fact that total orders have increased each quarter is what’s more meaningful as well. So we like to see the book-to-bill staying higher than 1, the most important thing is that both of those numbers continue to increase. Though naturally coming at inflection point at some time when the revenue will pass the orders, certainly that the momentum we’ve had in 2010 has allowed the book-to-bill to stay greater than 1. So I wouldn’t say it’s a concern at all, I think it’s good that both numbers are tending – trending higher.

Mark Douglass – Longbow Research

Okay. Can you discuss PV equipment sales in order – equipment sales in the quarter, if there were any I mean do you see upside in ’11, I was just reading an analyst – industry analyst recently? He thought that there could be significant swing on laser equipment which were thin film manufacturers in 2011. So are you still pursuing that market or what’s happening there?

Robert Phillippy

Sure Mark, this is Bob. The answer is, yes we are still pursuing that market. The solar energy industry is recovering and has recovered significantly from the trough levels we saw last year and our business along with it. Just as a matter of background recall that we participate in the solar industry and several different product and technology areas. The first is lasers, also in solar simulators and test applications related to solar cells. As well as motion control and we even have a certified test and calibration lab that we use to collaborate with solar cell manufacturers to get peak efficiency out of their cells.

And we also, on a very selected and focused basis, have turnkey systems capability for our targeted customers. So we have continued to develop and gain momentum in this area. Third quarter orders for photovoltaic were 4.8 million and sales were 6.2 million. And just to put that in perspective, our orders for the first three quarters of 2010 were 11.5 million and that exceeds the 10.2 million in PV segment orders that we received for all of 2009. So momentum is improving and we’re seeing it.

Operator

We’ll take our next question today from Mark Miller with Noble Financial.

Mark Miller – Noble Financial

Congratulations, you’re doing a very good job. I just was wondering if you could talk a little more geography in terms, are you still seeing a lot of strength in China or in Asia. And what’s propelling you geographically?

Charles Cargile

We are seeing strength in China and we’re – we are excited about the strides that we’re making there. For 2010, we’re pretty confident that we’re going to exceed the goal that we had for our manufacturing facility in Wuxi, which was to produce products represented about $30 million in external revenue. And that’s for a facility that we’ve been shipping out it really for just about two years. So they’ve made a – made tremendous strides in Wuxi. We’re expanding the production now to support programs for some of our semiconductor OEM customers which we didn’t do until this year. So that off doing mainly PCSB type products and now we’re doing some of the semiconductor OEMs.

In 2011 and beyond we think that Wuxi has been the key driver for us to penetrate the China market and grow our share in greater Asia. In addition to the entity that we already have in Wuxi in the export processing zone, we now have a distribution center adjacent to it. So the export processing zone enhances our export revenue but now with the distribution center, they’ll make it easier for us to do business with the Chinese customers whether they’re buying from Wuxi or whether they’re buying from other Newport facilities around the world that we didn’t ship into China. So we’ve got a lot to be excited about in China and I think maybe Bob do you want to talk about some of the other areas in Asia.

Robert Phillippy

Yeah as I had mentioned in our prepared remarks, we have expanded our channel infrastructure really throughout Asia in multiple countries and we have a greater degree of participation today than we’ve had historically. And we’re seeing growth that is commensurate with that. It’s most robust in China but we’re starting to see in other places as well.

Japan of course is a bit more mature, so it seen growth there that’s more in line with other areas of the world, but in other Asian countries the growth has exceeded the growth of other parts of the world.

Mark Miller – Noble Financial

And I was just wondering, you are building a significant cash position and what would you consider or do you have any ideas in terms of that cash grows which you use it to share buybacks or expand into new areas and if you could give us some color where you’re going to be expanding in any new areas like fiber lasers or LED or some new laser application areas?

Charles Cargile

Yeah, we are very focused on increasing the cash balance. I think I mentioned in the prepared remarks that we expect the exit the year with 180 million, but Mark our first priority will be to make sure that we secure that cash because in February of 2012 the convertible debt will come due and that’s about $127 million. So we want to make sure that we’ll generate cash that can pay that off and still have enough power drive to run the business and make the investments that we want to make. We consider share buybacks. We have an active program, an open program. So we discuss with our Board very quarter, if we would want to engage in a share buyback. We also look for acquisitions. We’ve been very pleased with the acquisition that we did of new focus a year ago that we were able to fold into our photonics – precision photonics technology division, so that one has been very, very good for us. We would look for acquisitions like that in the future as well. So I think we like having the cash and there is a lot of good uses for it and we’ll keep pursuing them.

Robert Phillippy

Hey Mark, I wanted to just add a little bit. You mentioned LED as a potential investment area, so I just wanted to comment on that briefly. Today applications for LED manufacturing represent a fairly small, but growing part of our revenue. And we have some technology that we believe will serve some LED manufacturing applications very well, although I won’t elaborate at this point. And we are developing products to pursue those applications. So we believe that this market offers pretty significant growth potential for us going forward.

Operator

Our next question will go 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.

Ajit Pai – Stifel Nicolaus

Couple of quick questions. I think the first one is just the life science business, you talked a little bit about going forward that we should expect some volatility there. But volatility based on the ramp of products where you have design wins, would that mean volatility in the upward direction or volatility in the sense that you might watched a pause before that ramped?

Robert Phillippy

It means – Ajit this is Bob. It means volatility in the lumpy direction I guess is the best way to put it. We’ve been talking for several quarters now about the fact that we expect a strong second half of 2010 order activity because we’ve had a number of programs that had been in collaborative development for almost a couple of years at this point. So now those programs have entered production status and we have received production orders in Q3 for those programs. And so what that means is that we’ll continue to grow our life and health sciences business but our order patterns will be lumpy.

Ajit Pai – Stifel Nicolaus

Right. But, do we take 3Q as the base, because it only went up. Orders and the life science side went up only by about 1.1 million, which is about 4% sequentially. So do we take 2Q, 3Q as the base before the ramp or do we take the fact that was already material in 3Q?

Charles Cargile

I think Ajit you should recognize that Q2 was a very healthy jump over Q1 and Q2 and Q3 have both stayed at very high levels whereas we had been running 23 million a quarter for the two quarters before that. We’ve now – it’s now increased. And I’ve said for years that we have to acknowledge that life and health sciences should not be measured quarter-to-quarter, it has to be looked at over a longer period of time. So if you look at – you have to look at it more broadly. So I think if it were to jump to 30 one quarter, go back to 25 another quarter, when you’re dealing with OEMs that might happen. And as long as you evaluate it over a four quarter period of time, instead of a one quarter period of time, I think you’ll be better served.

Operator

We’ll go next to Dave Kang from B. Riley & Company.

Dave Kang – B. Riley & Company

Yes, thank you. Nice quarter, gentlemen. I guess the first question is on, so the tax rate – what kind of the tax rate should we be using for December quarter-end and next year-end? How much NOLs do you have, can you remind us that?

Charles Cargile

Sure. For Federal we have $90 million of NOLs and State we’ve got about 36 million and foreign we have about 16 million.

Dave Kang – B. Riley & Company

Okay.

Charles Cargile

The Q4 tax rate, we expect will probably remain slightly below 10%. Now we are monitoring what affects some of the federal legislation that might come out of the delaying that session as well as the refinements that are being made in the California landscape. So that could change slightly where we sit today, you’d probably expect a little less than 10%.

Dave Kang – B. Riley & Company

Sure. And what was your – what was your depreciation and amortization during the quarter?

Charles Cargile

Depreciation and amortization was 5.5 million.

Dave Kang – B. Riley & Company

And that number is not going to change that much going forward?

Charles Cargile

It might go up a little bit. That it’ll – It’ll be made still to be below six.

Dave Kang – B. Riley & Company

Okay. And then, regarding your guidance, what shall – what should we expect as far as of your scientific research business is concerned? Now that I should mention that every money seems to winding down?

Charles Cargile

Dave, I think it’s a mixed picture. There are some countries around the world that have basically insulated R&D spending from other economic parts of their spending because a lot of the R&D money that we enjoy ultimately comes from a government entity one way or the other. And then there are other countries that are saying kind of everything is on the table and so it creates a sluggish funding environment. So I think it’s kind of a mixed picture going forward.

The thing I would point out is that if you take a look at where we sit today over the first nine months of the year, our research market orders and sales are both all-time records. So we have certainly capitalized on improved market conditions and taken it higher than we’ve ever taken it before, in a market environment that isn’t historically that cyclical as you know. So it’s been a good performance for us in 2010 for sure and our position in the market remains strong, so if there is market there we expect to capitalize on it and its mixed bag but certainly nothing negative to report.

Operator

So our next question we’ll go to Jim Ricchiuti with Needham & Company.

Jim Ricchiuti – Needham & Company

Hi, thank you, good afternoon.

Charles Cargile

Hi, Jim.

Jim Ricchiuti – Needham & Company

The question I have relates to operating margin. Just looking at your two business segments, you’re showing very nice sequential improvement in operating margins in both business areas. I wonder if you could talk a little bit about, number one, on the photonics side of the business, do you see much room for further expansion of operating margins and then perhaps talk a little bit about laser. And then just in broad strokes, just what you might – if you want to share with us what you think your target operating margin could be?

Charles Cargile

Sure, Jim. Yeah, we’re pleased with – very pleased with the segment margins that we had in both of the divisions this quarter. And I’ll address them separately, the same way you asked the question. First PPT at 22.5 million segment income, I had to gone back to see when was the last time we had at that higher segment percent but it’s been a long time, so that really all of those product lines performing very, very well.

Jim I think the focus with PPT would be to grow the top line more so than to try and expand the operating margin. When you’re getting that type of percentage income, I think you need to do all that you can whether it to look for bolt-on acquisitions like we did with new focus to invest in some of the product lines or push them more globally. Our focus within PPT is to grow the top line and really get the benefit of the superior segment margins that we get.

On the laser side, 8.6% is much improved with improvements still to go. One of the things that we’ve said historically is that, as long as our laser business can operate a little over 10% operating income it’s going to be valuable to the company because we do get the pull through of photonics products with those laser sales. So lasers can draw through some of that that 20% plus operating income business, but we do expect lasers to be over 10%. And I think we’re getting very close to where it will be maybe even as early as when we report Q4. So let’s get lasers over 10% and the focus is to expand the margin there that thing to grow the top line more on the photonic side.

We’ve said for a long time that our gross margin target in total would be 45% and we’re getting close to that as well. We’ve said over the last couple of quarters that we can certainly operate between 43 and 45 with SG&A at 23% and R&D under 8%, I think it gives a pretty good indication that we can operate with the margin in the low to mid teens. So I think, I think that’s reasonable. We do need to invest a little more on R&D, the sales have ramped faster than our spending in R&D. So I think you’ll see that in 2011 but we will continue to leverage the SG&A, hopefully get that gross margin to 45% and then get back to where we’re spending 9% in R&D without giving up on that on a 13, 14, 15% operating income.

Jim Ricchiuti – Needham & Company

Yeah, that’s all for Chuck and you I think in the last call, you talked a little bit about plans in R&D and clearly that was up sequentially, I guess by about 5% in the quarter. Just over the next one to two quarters, should we assume that continues to move up and then on the SG&A side conversely, you showed very little growth and sequentially very nice growth on the top line.

Charles Cargile

Yeah, I think you’ll see us continue to invest in R&D try and hold the SG&A as far as we can. And Jim I will add a little bit on the SG&A because we’re very proud of how we’ve been controlling those costs and we’re keeping SG&A flat despite the fact that we reinstated all employee salaries that have been cut for a couple of years that adds $1.5 million per quarter of additional expense compared with other period from last year. And because much of our pay structure, certainly for managers in the company, is incentive based and we are performing better this year than our original targets had been. We’re expensing more for incentive compensation. So those are things that you like to SG&A increase for, but we’ve been able to manage without seeing a large increase in total dollars that putting money back to the employees which were can be well utilized.

Operator

We’ll go next to Jiwon Lee with Sidoti & Company.

Jiwon Lee – Sidoti & Company

Thanks, good afternoon. Bob, I wonder whether you could talk about the kind of a level of development engagement you have with your semicon OEMs and roughly if it’s possible when they are expecting to launch some of these products?

Robert Phillippy

Yeah, sure. So in the semiconductor equipment market, which by the way, makes up a big piece of our macro electronics orders and revenue performance, and you have seen that very strong this year. We participate in a number of programs in which we are the incumbent supplier and a variety of different programs which are – in which we are in the midst of participating in projects for products, OEM products and our customers’ products that have not yet been released to market. But those not all have specific stop and start date that it’s kind of a continuous thing, when a particular OEM customer is evolving to the next generation of a particular tool or thinking about introducing a new tool and we hope to be selected as a collaborative partner in that development and in the manufacturing cycle for those tools. So I’d say it varies, particularly because we’ve been participating in the semiconductor equipment industry for many years now. We have programs in all sorts of faces.

But let me extend that comment to talk a little bit more about the market environment in semiconductor equipment. So as you know, we participate with semiconductor equipment industry customers and we are fairly well aligned with Tier 1 OEMs in that segment. And semiconductor equipment as everybody knows is the cyclical marketplace. And so we watch that market very closely and try to anticipate the cycles as best we can, but visibility is inherently limited. So we get our data from two sources, one is that we read the external environment and everybody can see that and there is certainly different views about what the prospects might be for 2011.

The other is communications with our customers and I think it’s important to reinforce that as we speak today we’ve got customers that believe that there is plenty of opportunity in terms of development of structural capacity and technology buys in the semiconductor equipment industry that they see good growth prospects for 2011 and they’ve communicated specifically with us that they expect market strength to continue through the end of 2010 and end of 2011. And then in addition, we haven’t had any requests for postpone or push outs on our existing backlog. So prospects look pretty good with the acknowledgement that it is a cyclical industry and I think the other important point to make there though is that even if the cycle were to turn down, number one, because of our position in the value chain, I think we get a little bit of our heads-up. As we’ve communicated previously, we usually get a quarter or two in which we can see the turn and try to adjust to it and then secondly, given the cost model that we put in place emerging from 2009, we’re in a better position to whether an industry cycle than we’ve ever been in before by far. So just a longwinded answer but the fact of the matter is that we got a lot going on in semi.

Jiwon Lee – Sidoti & Company

That’s well put. Thanks. And so that could you sort of venture out? What kind of a sales growth that you expect at least the minimum goal that you might have for next year?

Charles Cargile

Jiwon we’ve – we’re not going to venture out that next year any present, we already have. We’re very confident that with what we’re seeing it in the market that we’re going to grow next year but for those of you that have followed us for a long time you may realize that we’re not – we don’t usually give guidance to the next year in our October call. We usually hold that up for after we concluded the year and when we have our Q4 announcement at the end of January or early February. So we wanted to give – we want to give some confidence of our expectation for growth next year but we’ll be very specific in January.

Operator

We’ll take our next question from Jim Brilliant with Century Management.

Jim Brilliant – Century Management

Hey guys.

Charles Cargile

Hi, Jim.

Robert Phillippy

Hi, Jim.

Jim Brilliant – Century Management

How are you doing?

Charles Cargile

Good.

Jim Brilliant – Century Management

You know as you’ve stated several times in the past, you’re operating goals being the 45-ish percent gross profit margin and 23% SG&A, kind of this is the first time I – that you’ve got into that level in a long time but it was step function down in terms of the percentage – SG&A as a percent of sales. Obviously a function of your sales growing while you’re keeping your SG&A in line. Is that – are we – how sustainable is this level of SG&A going forward and you’ve seen the full benefits of your pieces of implementation?

Charles Cargile

I’ll take the last one first Jim. I think we are seeing the benefits from the implementation of SAP that happen a couple of years ago. I think two of the illustrations of that that I think make it most clear is number one, when we bought new focus last year and integrated them to the rest of Newport, we didn’t use any external consultants to help us with that, we did it with our internal SAP team and we did it very inexpensively and very quickly. So that should – that gives us great confidence when we do acquisitions that systems issues aren’t going to slow us down in getting the full benefits of the acquisition.

And then secondly, as you know we reduced our headcount significantly in 2008 and 2009. Since we’ve bottomed out, we’ve probably added maybe 100 people or so, but that’s a lot less than we would have to hire in years gone by when we had 13 different systems around the world. So the fact that we’re able to leverage at our ERP system allows us to do more with fewer people as we ramp the revenues. So I think that that’s something that’s new to the model that we didn’t have the last time we were in a ramping for growth environment.

I think that we will see SG&A increase in 2011. I think that we won’t see it increase as quickly as R&D increases. And I think we won’t see it increases as much as, as sales increase. I’d like to see the margin more consistently at 45% and then that would give us a little bit more latitude to spend discretionarily in SG&A and certainly in R&D.

Jim Brilliant – Century Management

So with all the changes that you’ve undertaken the asset swap with the diode business and ERP systems and now that a bit better than expected transition in China. Are you still comfortable at the model that you’ve got, the 45% gross profit margin and 23% SG&A or is there any potential to increase the margins as you continue to see the benefits of the increased contribution margins within each division?

Charles Cargile

Right now, Jim, we’re going to stick to the targets that we have. I think what we’d like to do is, is sustain those targets for a period of time. And then see how – what levers we can pull when we have that degree of financial flexibility to grow the top line, so using the cash and the profits that we generate from a model that would be bringing 13, 14, 15% operating income, expand geographically, do other acquisitions or find ways to spur the top line because it’ll be such a solid cash generating model at those levels.

Operator

(Operator Instructions) We’ll go next to Mark Douglass with Longbow Research.

Mark Douglass – Longbow Research

Hi, just a couple of follow-ups. I think I missed the CapEx, what was that in the quarter?

Charles Cargile

CapEx was 1.5 million in Q3.

Mark Douglass – Longbow Research

Okay. And then, on the backlog, where is most of the backlog? How is split? I assume most of it is in microelectronics and life sciences but just talk about the backlog a little bit?

Charles Cargile

I think it’s fair to say back – I’m just not looking at numbers but it’s generally the backlog will be more OEM driven. It’s – we have fast return on the research side. As you know our backlog is, we manage our backlog more via product lines than we do by markets so that I think it’s fair to say semiconductor or – yes, semiconductor and life and health sciences.

Mark Douglass – Longbow Research

Okay. Thank you.

Operator

We’ll go next to Dave Kang with B. Riley & Company.

Dave Kang – B. Riley & Company

Yes. Can we get the revenue split between North America, Europe and Asia and particularly on China, if you have them?

Charles Cargile

Sure. You want sales or orders?

Dave Kang – B. Riley & Company

Yeah, sales. Sales or – yeah sales would be fine.

Charles Cargile

Sales is, in the quarter was 51% in the U.S., 19% in Europe, 11% in Japan and 15% what we call other Pacific RIM. So it’s not specifically China, China is a piece of that but it would be all non-Japan within the Asia region.

Dave Kang – B. Riley & Company

Okay. Okay. And then, let’s see, on the industrial, what drove industrial sales in Q3, any particular market?

Charles Cargile

Yeah. So we had20.6 million in orders from manufacturing customers during the quarter – from industrial customers during the quarter, which was growth of 50.7% over 2009 and it included as it has in the last few quarters a number of large OEM orders for component products primarily. And primarily sold into other manufacturers and then we also have some orders, some meaningful orders for advanced packaging systems for the automated assembly of electronic devices. So those are two things that grew at. And we had a similar report last time as well so I don’t want to suggest in any way that those are one-time event, those are ongoing businesses but it was certainly a healthy market activity set this quarter.

Dave Kang – B. Riley & Company

And looking at the last four years or so. It seems like this micro sales, is the new peak is it not, Chuck?

Charles Cargile

Yeah. We both in terms of sales and orders, yeah sales 44 million, we’ve never achieved that much in microelectronics in history. Orders, in the last three quarters, 47 million, 44 million, 44 million, those three together we’ve never had that high for three quarters either. And I think that that speaks well to our penetration with the Tier 1 customers and also speaks to the fact we acquired additional new customers since the last peak as well.

Operator

And we’ll go next to Ajit Pai with Stifel Nicolaus.

Ajit Pai – Stifel Nicolaus

Yeah, two questions. One is the charges that you’ve talked had impacted your gross margins. Which business did you take them in, on the laser side or the photonics side, say 1.3 million and the 700,000?

Charles Cargile

Both are on the photonic side.

Ajit Pai – Stifel Nicolaus

Okay. And then, the second question is, just looking at the orders for microelectronics. Did we see those – it declined since the first quarter and the second and third quarter at a lower level, do we expect that level of orders to go up or stay flat or start going down from this point onwards?

Charles Cargile

We’ve – actually I’m not sure what you see. The microelectronics orders were slightly up in Q3 versus Q2.

Ajit Pai – Stifel Nicolaus

Yes. Q3 to Q2 was up from 43.4 to 43.7 but still down from the 47.2 in 1Q.

Charles Cargile

Yeah, down from the all-time record, 47, which was the – really the first snapback when the industry really started to turn. I think the guidance that we’ve given for Q4 and for 2011 I think stands on its own. What I would say is that we’ve not seen any slow down at all in terms of orders in the microelectronics market in the first part of this quarter, we’re one month into it and it has stayed just the strong. And we have seen, as Bob mentioned earlier, we have not had any cancellations or push outs of backlog which is usually one of the first indications we have that things are starting to slow down. So we’re confident that we are going to see the revenue targets that we gave you and the semiconductor is going to be a strong piece of that.

Ajit Pai – Stifel Nicolaus

And the LED opportunity and the photovoltaic opportunity you talked about are all the revenues of that in microelectronics or – the most not all of it, but as the majority of those two opportunities in microelectronics or are there in other segments as well?

Charles Cargile

They are all in microelectronics.

Ajit Pai – Stifel Nicolaus

Got it. Thank you.

Charles Cargile

You’re welcome.

Operator

And we’ll go next to Mark Miller with Noble Financial.

Mark Miller – Noble Financial

I’m just assuming from the previous question and your guidance that the backlog in terms of margins is equal if not slightly better than what you’ve been doing recording recently?

Charles Cargile

Yes. It is, specifically for the two items that I mentioned. We’re going to expect those to recur and that put 100 basis points pressure on the margin that goes away and your back in the middle of the high-end of that range that we gave of our target for gross margin.

Mark Miller – Noble Financial

And I apologize that I missed this. But what was your cash from operations in the quarter?

Charles Cargile

The cash from operations that will actually come out when we do our 10-Q, Mark. We provided the income statement and the balance sheet when we do the conference call. We’ll follow our queue probably in about a week and you’ll have the detailed cash flow statement.

Mark Miller – Noble Financial

Thank you.

Operator

And at this time, ladies and gentlemen, we have no additional questions. I’ll turn the conference back to our speakers for any closing remarks you may have.

Robert Phillippy

Thank you. And thanks again for joining us today. And thanks for your continued interest in Newport Corporation. The summary message of our call is that we are proud of our performance and expect to continue to deliver on our commitment to build on the enduring success of Newport, making the company evermore valuable for our shareholders, customers and employees.

With this in mind, it’s important to note that our team of more than 1,700 employees around the world really serviced the enablers of this performance. If they’re passion, resourcefulness and tenacity that have and will continue to drive Newport on our quest to be the world’s premier source for photonics technology and products. So my sincere appreciation goes out to our employee team for their outstanding efforts and continued support. With that as an important closing comment, we look forward to the next quarter’s update. Thanks take care.

Operator

And ladies and gentlemen, this does conclude our conference. We appreciate your participation.

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