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Coherent, Inc. (NASDAQ:COHR)

F4Q2010 (Qtr End 10/02/2010) Earnings Call

November 4, 2010 4:30 pm ET

Executives

Helene Simonet - EVP and CFO

John Ambroseo - President and CEO

Analysts

Mark Douglass - Longbow Research

Larry Solow - CJS Securities

Mark Miller - Noble Capital Markets

Ajit Pai - Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to the Coherent fiscal quarter four 2010 earnings conference call hosted by Coherent Incorporated. (Operator Instructions) I would now like to introduce Ms. Helene Simonet, Executive Vice President and Chief Financial Officer.

Helene Simonet

Good afternoon and welcome to Coherent's fourth quarter and fiscal year end conference call. On today's call, I will provide financial information and John Ambroseo, our President and CEO, will provide a business overview.

As a reminder, any guidance and any statements in today's conference call pertaining to future guidance, plans, events or performance, are forward-looking statements that involve risks and uncertainties, and actual results may differ significantly. We encourage you to refer to the risk disclosures and critical accounting policies described in the Company's reports on Forms 10-K, 10-Q and 8-K, as applicable and as filed from time-to-time by the Company.

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

Bookings for the quarter were $192.5 million, representing an all-time record for Coherent. We ended the fiscal year with a book-to-bill ratio of 1.16 and a record backlog of $262 million. Net sales for the fourth quarter were $166.4 million, leading to revenues for the full fiscal year of $605.1 million. This is slightly higher than our 2008 revenues and represents a growth of 39% when comparing to last fiscal year.

Fiscal 2010 acquisitions accounted for approximately 4% of the annual growth. The fourth quarter pro forma income of $0.59 per diluted share compares to a pro forma loss of $0.04 per share a year ago. The full fiscal 2010 pro forma income of $1.92 per diluted share compares to $0.24 per share last year. We are very pleased with the positive impact from our footprint and restructuring activities, our focus on controlling expenses, the speed of recovery and the level of design wins we achieved during the year.

Our fourth quarter pro forma earnings of $0.59 per diluted share were impacted by a few exceptional items. The recent currency volatility resulted in higher currency exchange losses, reducing our earnings by approximately $0.02 per share. In addition, recent vendor component issues resulted in increased costs, which reduced earnings by about $0.03 per share. We ended the year with a cash balance of $263 million, an increase of $19 million for the year.

During the quarter, the company repurchased approximately 719,000 shares for $26.6 million, bringing the total repurchased shares this fiscal year to almost 1.2 million. The average price per share was $36.21 with total cash spent of $43.3 million. We have $6.7 million outstanding against the $50 million previously approved by the board.

Net sales for the fourth quarter of $166.4 million grew almost 55% compared to the same quarter a year ago and were very similar to the previous quarter. As you may recall, last quarter our sales included solar tool revenues of $13 million compared to none this quarter. The sales mix by market is also very similar when compared to last quarter. The lower solar revenues were offset mainly by increases in the advanced packaging market.

Geographically, Asia represented slightly over 36% of fiscal 2010 revenues, and we anticipate the Asia region to remain strong during the next fiscal year. The company's sales by market application for the fourth quarter are as follows, scientific $33.3 million, microelectronics $69.4 million, material processing $23.8 million, OEM components and instrumentation $39.8 million for a total of $166.4 million.

The fourth quarter gross profit was $69.8 million or 42% of sales and included $3.7 million restructuring and stock compensation charges. As a reminder, the restructuring costs included in cost of goods sold are higher than the prior quarterly run rates due to the inclusion of the loss on the sale of the Finland building. On a pro forma basis, gross profit was 44.2% compared to 35.6% a year ago, and 45.1% last quarter.

The fourth quarter gross profit was negatively impacted by unexpected costs associated with the replacement of non-compliant vendor components. The component issues have been successfully addressed and we anticipate returning to a pro forma 45% gross profit level next quarter. The significant improvement versus last year is the result of the sizeable increase in revenues, the positive impact of the manufacturing restructuring activities, and a more favorable mix towards commercial markets.

Pro forma period expenses of $51.1 million, excluding $3 million for restructuring and stock compensation charges, increased $1.9 million from the previous quarter. As indicated previously, we stepped up R&D project spending, principally to address some large flat panel display opportunities. In addition we are adding headcount, although very selectively, to position us to respond effectively to the positive booking momentum we are experiencing.

Our cash and cash equivalents balance for the quarter was $263 million, representing a sequential increase of $9 million. The cash balance was positively impacted by a stronger Euro versus the dollar, positive cash flow from operations and higher proceeds from stock exercises, partially offset by $27 million stock repurchases and $5 million capital spending.

The full fiscal year cash flow from operations was approximately $79 million. Working capital management remains a key area of focus for our businesses. Notwithstanding, inventory balances increased at year-end, but it is important to note that the vast majority of the increases are directly linked to higher revenue projections and customer service requirements.

Let me now give you the guidance for the first quarter of fiscal 2011. We are entering the new fiscal year with a very strong backlog. Unlike previous fiscal years, where the first quarter revenues usually declined when compared to the fourth quarter, we project our fiscal 2011 first quarter revenues to range from $171 million to $179 million, the equivalent of approximately 3% to 8% increase from the fourth quarter.

As previously indicated, pro forma gross profit levels are projected to be approximately 45%. Pro forma period expenses are projected to be in the range of 30.5% to 31% of sales, which is similar to the last quarter. And this is inclusive of $2.1 million intangible amortization expense. Stock compensation charges are estimated to be approximately $3 million.

As we completed the integration of the recent acquisitions and are nearing the end of the footprint restructuring program, we anticipate the remaining restructuring costs to be much lower and these costs are now absorbed in the above gross profit and expense guidance. We're assuming an annual pro forma tax rate of 34%. And we anticipate our capital spending for the year to be about 4% of sales.

Please note that since we have not yet closed the acquisition we discussed in the press release, the first quarter financial guidance does not take into account revenues, benefits and costs from our pending acquisition. John will discuss the acquisition in more detail as part of his remarks.

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

John Ambroseo

Thanks, Leen. Good afternoon, everyone and welcome to our fourth fiscal quarter conference call. Before I discuss our record setting orders or our outlook for fiscal 2011, I'd like to spend a few moments augmenting Leen's comments regarding the component issues we dealt with in the fourth quarter.

We had two unrelated batch failures of electronic components used in specific high-performance lasers. The corrupt material negatively impacted laser performance, reliability and lifetime. We immediately stopped shipping new systems, while we put a fix in place. This was the correct action to take from a customer perspective and to limit additional exposure. With strong incoming orders, we were able to redirect some of the capacity to build other lower margin products, which protected the top line, but were less favorable to the bottom line. At this point, the issues are resolved.

The only word that I can use to describe fiscal 2010 is extraordinary. We posted record revenue, record orders, record operating income, record pro forma EBITDA and record backlog. We racked up a significant number of design wins in key markets and expanded our portfolio through targeted acquisitions. We also continued our practice of returning cash to shareholders by repurchasing approximately $43 million of common stock, bringing our total since March 2008 to slightly more than $270 million. We have sustained solid cash flows and our balance sheet remains pristine. And momentum is continuing into fiscal 2011.

We set a record for quarterly bookings with fourth quarter orders of $192.5 million, representing an increase of 6.6% sequentially and 44.3% versus the prior year period. The book-to-bill for the fourth quarter was 1.16. Bookings of $696 million for the full fiscal year were up 66% compared with fiscal 2009. The book-to-bill for the year was 1.15.

Orders of $43.6 million in the scientific market were up 33.8% versus the prior quarter and down 0.7% from the all-time record established in the prior year period. For the full fiscal year, record-setting orders of $148.6 million were up 10.4% compared to fiscal 2009. The book-to-bill for the year was 1.05.

The high order rate in Q4 reflected pent-up demand from Q3 as well as lingering ARRA funds in the United States. On the product front, we recognized record orders for Chameleon lasers for biological imaging applications, and ultrafast amplifiers for use in chemistry, physics and materials science research. We are also pleased with the acceptance of our OPS platform as a pump source for a growing number of applications.

For the full year, we benefited from both stimulus funding in the U.S. and abroad and share gains, particularly in Asia. We estimate that ARRA contributed between $7 million to $10 million in bookings during fiscal 2010.

Record orders of $47.6 million for instrumentation and OEM components were up 3% from the prior quarter and 36.5% versus the prior year period. Full fiscal year bookings of $165.3 million were up 51.3% over fiscal 2009. The full year book-to-bill ratio was 1.09. We received a number of large and/or annual orders in the fourth quarter, which we interpret as confidence in the midterm business outlook.

While all geographies contributed, our OEM customers have highlighted the rising importance of Asian customers to their business. This is completely consistent with developing economies and growing discretionary income that can be applied to aesthetic or vision correction procedures. Similar trends are being witnessed in the diagnostic market.

Within the product families, our OPS platform is doing exceptionally well, especially in bioinstrumentation where form, function and reliability are critical. Demand for Existar excimer lasers used in refractive surgery is reflecting global trends including Asia. And we've seen a higher growth rate, albeit on a smaller base in the machine vision business, whose products we acquired early in fiscal 2010 from the former Stocker Yale.

Record-setting orders of $79.4 million for microelectronics were up 8.1% sequentially and 96.4% versus the prior year period. For the full fiscal year, orders of $291.3 million were 139.5% higher compared to fiscal 2009. The book-to-bill for the year was 1.26.

Of the markets that we participate in, none gets more attention than semi cap equipment, even though it represents a modest portion of our overall business. That fact notwithstanding, our business in fiscal 2011 should be resilient due to prior design wins with a number of key customers that have signaled stable CapEx spending for advanced node logic and memory applications. We are working to extend our leadership position by investing in new technologies that will support higher resolution, better throughput and enhanced yields.

There are several trends that will define the advanced packaging market for fiscal 2011, including the continued proliferation of mobile and tablet devices, accelerated migration towards laser-based direct imaging and via drilling systems; and despite near-term turbulence, continued penetration of LED devices for high-end displays. The growth outlook for mobile handsets to more than 1.4 billion units and a projected 10X increase in the number of tablets to 50 million units in 2011 bode well for our business.

One area that should benefit are lasers used in circuit board manufacturing, either for patterning through laser direct imaging or via drilling for high density interconnects. In 2010, we saw significant growth in lasers used for LED manufacturing. And while fab buildouts are continuing, the current glut in older generation LCD panel inventories has caused the market to pause. The general consensus is that price incentives going into calendar year end will clear the inventory and growth will return in the first half of calendar 2011.

Over the past few quarters, I have been highlighting the opportunity for Coherent in the flat panel display manufacturing area. We capitalized on some of these opportunities in Q4 with a multi-unit order for LCD annealing systems for mobile and tablet displays. And significant orders for lasers used in light guide plate manufacturing for LED-based displays. The combination led to the second highest bookings quarter ever and we're about to crush those numbers in Q1.

We have recently received a multi-unit order for OLED manufacturing totaling approximately $37 million. The order was largely for Vyper lasers, our most advanced excimer light source, and line beam optics; 90% of the order will book in Q1. The remaining 10% will book no later than Q2 pending finalization of certain performance specifications. All systems covered by this order are scheduled to ship within fiscal 2011. We've also captured a competitive account for panel welding that will add to the bookings gold rush in the first quarter.

Growing pains persist in the solar market as most crystalline silicon manufacturers run at high capacity, but face dropping module prices. Interest remains high in techniques that improve efficiency and decrease cost. We are working with multiple customers on doping applications with many of them describing their work at the recent solar show in Valencia. All indications are that good opportunity exists, but timing remains fluid.

Materials processing orders of $21.8 million decreased 22.8% sequentially and rose 53.7% versus the prior year period. For the fiscal year, orders totaling $90.8 million were up 68.6% compared to fiscal 2010. The book-to-bill ratio was 1.1.

The difference between third and fourth fiscal quarter bookings is due to the timing of several larger orders rather than a change in market sentiment. And seasonal softness in China that was offset by gains in Europe. The mix of low power applications and technologies remains relatively consistent with prior quarters.

We are seeing a pick-up in orders for high power products such as the E-1000 CO2 laser and direct diode modules for use in cutting, welding and cladding. We remain on track with our high power fiber laser. We have completed several important program milestones including cutting metals with market-competitive speed and quality. And we remain on schedule to ship first articles in 2011.

The laser tools business is tracking expectations and, at the same time, is providing an interesting contrast to the laser OEM business. The most notable differences are the amount of content we deliver and our involvement in process development. The end-user and laser OEM customer response has been positive. So we see limited risk to stand-alone laser sales. The response at tradeshows has been strong and we've been pleasantly surprised with the number of orders we've received on show floors.

Despite our best efforts to exit of our epitaxial growth facility in Finland, rising orders for diode and diode-pumped products, keep getting in the way. And we have been unable to hit our buffer stock targets. We will run the facility through the end of March 2011 at which point we expect to begin decommissioning the remaining reactors.

As part of our strategy to enhance our market share and customer support in Asia and strengthen our efforts to manage costs, we have entered into a definitive agreement to acquire the business assets of privately-held Hypertronics in an all cash transaction. Hypertronics has an engineering and integration center in Singapore and a low cost manufacturing hub in Penang, Malaysia. Their strength is the design and manufacture of laser and vision-based tools for flat panel, storage, semiconductor and biomedical applications.

Their FPD business is particularly attractive given the relationship with leading Taiwanese accounts and will enable us to leverage the combined portfolio. The Singaporean and Malaysian operations will serve as a nucleus for laser manufacturing and repair in Asia. This will allow us to offer faster service response time, while reducing inventory, providing benefits to customers and Coherent alike.

We will also expand our global sourcing initiative through the establishment of an international procurement office. As this function is developed, we will be able to reduce material costs on a global basis. We expect the transaction to close within 30 to 90 days.

With a record backlog and continued momentum, we anticipate organic annual revenue growth of 15% to 20%. We'll update this total to include Hypertronics after the transaction closes. We'll be presenting at the Nasdaq conference in London, on Tuesday December 7th, and at the Needham Growth Conference in New York this coming January. And look forward to seeing some of you there.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mark Douglass from Longbow Research.

Mark Douglass - Longbow Research

Is the big OLED order part of the reason that you have a little more confidence in talking about the entire fiscal year '11, because I assume the bookings in 1Q and 2Q will mean they will most likely ship kind in the back half of the year? Is that how we should think about that?

John Ambroseo

As I mentioned the $37 million order is all scheduled to ship during fiscal '11. And it will be staggered over several quarters and they are all going to go in a single quarter. And the reason for our confidence in 2011 is we're entering the year with 260 somewhat million dollar backlog, and we've added another $37 million to that. So yes, we have confidence in the outlook.

Mark Douglass - Longbow Research

That's a big backlog. Helene, you broke up a little bit in your commentary. Can you say again what your expected tax rate is and CapEx, please?

Helene Simonet

The expected tax rate is 34% and the capital spending is projected to be about 4% of sales.

Mark Douglass - Longbow Research

And then are you giving any more commentary on the acquisition, John, as far as size, EBITDA, anything like that?

John Ambroseo

We'd like to get the acquisition closed before we fill in all the blanks. But, Mark, this is a strategic acquisition to position us for to take advantage of growth in Asia. It's relatively small on a revenue base. You can think of it in $10 million to $12 million of annual revenue. This is not the driving factor behind the acquisition it's the strategic direction that puts us on.

Mark Douglass - Longbow Research

And then finally Helene, in the quarter, the currency effect on sales. Do you have that number?

Helene Simonet

I do. I am just looking for it. It's less than $1 million.

Operator

And your next question comes from the line of Larry Solow from CJS Securities.

Larry Solow - CJS Securities

Just a quick housekeeping to follow up. On the currency, was there a transaction (inaudible) impact sales or was it actually the $0.02 that you referred to was that on adjustment and inter-company account balances?

Helene Simonet

It is a transaction gain and loss, and it's classified as other income and expense. So below the operating income line.

Larry Solow - CJS Securities

And John, you talked a little bit about the high powered materials processing market and in terms of how you guys are doing. Just in terms of macro conditions, has that market started to turn at all or anything you can comment on?

John Ambroseo

As we've talked to both customers and competitors at recent conferences and shows, the sentiment is certainly improving. And I think some of the numbers that are coming out in the industry both last week and some of the things that came out this week, would support the notion that there is the beginnings of a turn around there.

Larry Solow - CJS Securities

And the Finland closure, actually, I guess to delay sort of a high-class problem. Is it fair to assume that if you start closing in March '11, maybe we could see the benefits by the beginning of fiscal '12? Is that sort of a good ballpark to use now?

Helene Simonet

Yes. Larry, we have roughly about $3 million to $3.5 million annualized benefits to come. And so that will start, that run rate benefit will start sometime during the third quarter of fiscal '11.

Larry Solow - CJS Securities

And then just last question. Obviously, I know you guys don't want to give exact guidance and you give one quarter's sort of margin guidance or what not, but I don't know exactly what the adjusted EBITDA margin was this quarter, because I just got the press release right before the call. But clearly you did a 20%, EBITDA margin last quarter and looking out with these pretty good sales growth numbers would you expect to exceed that number in fiscal '11? On the EBITDA margin basis?

John Ambroseo

We're digging for a piece of paper.

Helene Simonet

The current quarter EBITDA is just slightly below 18%.

Larry Solow - CJS Securities

Right and there were some one-timers in there. So that could have been similar or slightly below the Q3 run rate of, that was 19.7%, right?

Helene Simonet

Yes, it was 19.7%, and the full year for fiscal '010 it's 17%. And we anticipated this to be above that EBITDA percentage.

Operator

Your next question comes from the line of Mark Miller from Noble Capital Markets.

Mark Miller - Noble Capital Markets

Could you give us just a flavor in terms of your current backlog? Is it a richer mix in terms of margins or equal to what you have been seeing recently or is it improving or going down?

John Ambroseo

Well, I think if you look at where the orders for the year are, clearly we've done very well in our two highest margin markets. And that would be microelectronics and instrumentation. And the current backlog is in all probability skewed towards those markets. There's always the issue of mix within the market. And that's the level of detail that I think is better served on a quarter-to-quarter basis, when we know exactly what we're going to ship, rather than trying to prognosticate at this point.

Mark Miller - Noble Capital Markets

You mentioned this large order for OLED Viper type lasers, and I'm just wondering, is it possible to break out either your backlog and/or your sales last quarter in terms of to LED and OLED types of customers?

John Ambroseo

We generally don't break down that level of detail, partly because customers don't want us divulging the data. Some of these markets are pretty focused like the OLED market, which means that everybody knows exactly what they are getting. And that's somewhat taboo. So unlikely that we'll do that.

Mark Miller - Noble Capital Markets

I'm just wondering, you seem to be penetrating and growing that market better than your competition, is that accurate? And could you give us a little color why?

John Ambroseo

I think it is wholly appropriate comment. It is a market that we've been in for a number of years, in fact over a decade. And I think I've alluded to the fact that we have over 100 installations globally even before this recent upswing. So we are the leader in the space and I think there are two reasons for that. Number one, we've invested to keep pace with the customer and being able to bring the right product at the right time, with the right performance in the right overall cost of ownership is pretty critical.

Competitors are trying to bring a new approach to the annealing process to the market, and when you have a fast moving market, that's not the easiest thing to do, to convince a manufacturer to change a process, especially when the incumbent process has more than 99% uptime and yields in the very, very high 90s. And then you add to that, that the way that we've structured the platform and the way that the process runs is actually lower cost for vast majority of the applications. I think it's a pretty important combination. And that's the reason that we're winning all these orders.

Mark Miller - Noble Capital Markets

And just one last question, you mentioned you're expecting to get more traction with your fiber products and a cutting. There have been reports by others that the fiber lasers are seeing increasing adoption for cutting applications is that what you are seeing?

John Ambroseo

The answer is, yes. And that's not new. That's been going on for a number of years.

Mark Miller - Noble Capital Markets

And it seems like from what I've heard, it's starting with new applications, but is that untrue?

John Ambroseo

I think the comment that fiber lasers are winning in a lot of cutting applications is correct.

Operator

(Operator Instructions) Your next question comes from the line of Ajit Pai.

Ajit Pai - Stifel Nicolaus

Just a couple of questions. You mentioned something about taking a GAAP charge on a sale in Finland. Is that the same plant that you had your fab running that you are planning to wind down? And also, once you wind down that fab and also (inaudible) would the D&A impact of shutting it down as well as overhead, which quarter will take the full impact of that?

John Ambroseo

So the charge that Leen referred to is related to the Finland closure. And as she mentioned, I think even during her script or in another response to another question, we're going to be shutting the facility down at the end of March. And there'll be some cleanup work that gets done. There's $3 million to $3.5 million of incremental benefit that is not yet in the P&L, because we've already scaled back that facility overtime, so some of the full benefits are baked into the current model. And at staring Q3 of fiscal '11 that $3 million to $3.5 million annual number will start to appear in the P&L.

Ajit Pai - Stifel Nicolaus

And then the other question is just the fact that you have these component shortages during this quarter, from a competitive perspective, who managed to get extra revenue from that? I mean, did you lose some revenue or orders because of that?

John Ambroseo

Just as a matter of correction, it wasn't a shortage, it turned out to be bad material, and you could see that's one and the same thing. But we did not lose any revenue, no one picked up any revenue. We shifted revenue from what would have gone in Q4 into the current quarter or into next quarter, because these products generally are designed in with customers and replacing just a handful of them on short-term basis, doesn't generally happen.

Ajit Pai - Stifel Nicolaus

And from a broader set of linearity perspective, especially where we are right now in the quarter, you are feeling fairly good about not having similar issues in this quarter?

John Ambroseo

To answer your question, we dealt with component supply challenges, since the recovery happened and I think most companies have is well. A lot of the component manufacturers haven't stepped up, because they've been asked the same question that lots of other people have been asking, is it sustainable or is it a double. And we've worked hard to keep component material or materials flowing. This is not a new situation for us. This is the first time that we actually got stunned by corrupt material.

Ajit Pai - Stifel Nicolaus

But going into this quarter, you have given guidance, now if demand is stronger than that guidance, would you have the components still satisfy excess demand?

John Ambroseo

I did not understand the question in the first place. The answer is, it will vary by product-by-product. Some of the factories are running full tilt and even if we have more orders, we can't push more through those factories as they stand today. Other factories, we could expand capacity in labor and we have the footprint to do it, if the orders are there. But that's going really be a case-by case-basis.

Ajit Pai - Stifel Nicolaus

You talked about adding headcount selectively where your capacity constrains, so in many cases it's headcount that's the issue rather than components.

John Ambroseo

I would say that again there's no single answer that applies. You do have flexibility in terms of running overtime in different factories. And that's probably the easiest way to add capacity in the short term, because you already have trained labor. In other areas you may be bringing people in at lower level jobs and moving people up to the food chain, so to speak, so you can create additional capacity there.

As I think I mentioned in the last quarter, we only have one factory worldwide right now that is at its physical limits, where it's running 24 hours a day, and every square inch is being used. And we're currently in the process of expanding that facility and that will be online a few months down the road. Virtually every other factory is running one to two shifts at maximum, which means you do have the footprint to work. So now you have to look at the variable piece or the flexible piece, which is manpower in materials.

Operator

Your have another question from the line of Mark Miller from Noble Capital Markets.

Mark Miller - Noble Capital Markets

Sorry if I missed it. What was your cash from operations?

Helene Simonet

The full year was $79 million and the quarter was roughly $10 million.

Mark Miller - Noble Capital Markets

And just one last one. A lot of fab construction and upgrades in the micro or the semi area, and I'm just wondering, are you directly benefiting from that or is it more capacity adds?

John Ambroseo

We've done I think a tremendous job and I have recommend our teams for this at winning lots of design phases. So as these new notes come into the manufacture, new capabilities come into manufacture, we are designed into a disproportionate number of those.

Mark Miller - Noble Capital Markets

So you're benefiting from technology transitions and new wins?

John Ambroseo

Correct.

Operator

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

Mark Douglass - Longbow Research

Helene, what was the CapEx in the quarter?

Helene Simonet

$5 million.

Mark Douglass - Longbow Research

So it looks like your CapEx is going to step up pretty significantly next year. Is a lot of it due to the capacity expansion you were just talking about, John. And I mean if things are running full tilt that you mentioned the one facility, but you would expect with the 15% to 20% sales growth, some of the other facilities might come under strain as well. You're kind of looking at ramping up capacity expansion as the year progresses. And is that going to dampen your ability to kind of hold the gross margins at 45%, do you think?

John Ambroseo

Let me answer those questions separately. Certainly the growth rate is going to have capital demands associated with it. There's no short there. As far as the gross margin from where we stand today, the answer would be, no. There's not going to be a gross margin impact as we add capital to the mix. I mean that's all is going to be baked into our model.

Mark Douglass - Longbow Research

And you're going to get the benefit of Finland too. And then finally, I think in the last call, you mentioned in the solar tools, that you had some expected shipments that could or may or may not occur in the quarter. It sounds like they did not occur.

John Ambroseo

That is correct.

Mark Douglass - Longbow Research

$6.5 million, is that correct?

John Ambroseo

Approximately.

Mark Douglass - Longbow Research

So are we assuming that they are going to ship in 1Q, most likely?

John Ambroseo

We currently don't have them as part of Q1. We are in regular contact with the customers or with customer on this. And when we have an update, we'll let you know.

Mark Douglass - Longbow Research

So essentially it's in a holding pattern right now?

John Ambroseo

Correct.

Operator

(Operator Instructions) And at this time, we have no further questions in the queue. I will turn the call back over to Mr. John Ambroseo for any additional or closing remarks.

John Ambroseo

I'd like to thank everyone for their participation today. And we'll talk to you in a few months. Thanks.

Operator

Ladies and gentlemen that concludes today's presentation. You may now disconnect. Have a great day.

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