Newport's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 3.11 | About: Newport Corporation (NEWP)

Newport (NASDAQ:NEWP)

Q2 2011 Earnings Call

August 03, 2011 5:00 pm ET

Executives

Charles Cargile - Chief Financial Officer, Senior Vice President and Treasurer

Robert Phillippy - Chief Executive Officer, President and Director

Analysts

James Ricchiuti - Needham & Company, LLC

Dave Kang - B. Riley & Co., LLC

Mark Miller - Noble Financial Group, Inc.

D. Mark Douglass - Longbow Research LLC

Ajit Pai - Stifel, Nicolaus & Co., Inc.

Operator

Good day, everyone and welcome to the Newport Corporation Second Quarter 2011 Financial Results Conference Call. Today's conference is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to Chief Executive Officer, Mr. Robert Phillippy. Please go ahead, sir.

Robert Phillippy

Good afternoon, and welcome to Newport's Second Quarter 2011 Conference Call. With me is our Chief Financial Officer, Chuck Cargile.

Before we get started, I'd like to remind you that during the course of this conference call, we will be making a number of forward-looking statements that are based on our current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings. Although, we believe that the assumptions underlying these statements are reasonable, any of them could prove inaccurate, and there can be no assurance that the results will be realized.

In the second quarter of 2011, the Newport team delivered another strong financial performance. And we recently announced some outstanding progress on our strategic agenda with the signing of definitive agreements to acquire Ophir Optronics and High Q Laser. I will provide some additional information on the acquisition front later in today's call, but first, I want to touch on some of the highlights of the second quarter.

Newport achieved a new quarterly record for orders of $143.7 million. Our sales of $130.1 million were the second highest we have ever achieved in a quarter. Also, we continue to build on our track record of achieving our target financial model, with gross margins of 45.9%, an excellent bottom line earnings. Our cash generation in the quarter was another important highlight, as we increased our cash balance by $17.8 million. These results demonstrate the appeal of our industry-leading brands and differentiated product portfolio and our ability to leverage increasing sales into higher profitability and excellent cash generation.

Now I'd like to take a few minutes to provide an overview of second quarter activity in each of our target end markets. Orders from our scientific research, aerospace and defense/security customers were $41.7 million, representing growth of 14.4% over the second quarter of 2010. While the funding environment for research in the U.S. continues to be a highly visible topic, our slight decline in U.S. research market orders was more than offset by year-over-year growth in orders from customers in the Asia Pacific region. I'm also pleased to report that our research market orders grew by 16% year-over-year in Japan, as that country works to recover from the recent natural disaster.

From a product line perspective, we experienced robust order activity in our lasers, precision motion and opto-mechanical component product lines. Orders from microelectronics market customers were $56.9 million, representing a record for the company and a 30.8% increase over the very strong second quarter of 2010. A major driver of this result was a $14.8 million laser order from one of our large semiconductor OEM customers that will ship over a 3-year period. Even without this order, our orders from customers in this market would have exceeded $40 million for the sixth consecutive quarter. Recent reports have suggested that the semiconductor equipment market may soften in the second half of this year, and updated forecasts from our OEM customers are in line with this sentiment.

For several reasons, we are confident that we are well prepared to weather any softening in this industry. First, over the last 3 years we have transitioned significant fixed costs to variable costs in our operations to ensure they are streamlined and flexible. Second, semiconductor manufacturers typically continue with technology buys during industry down cycles, and we have significant content designed into a number of next-generation tools of Tier 1 semiconductor equipment OEM customers. In fact, we have historically gained share during slower periods in this market. And with several new product entries quickly gaining traction with our customers, we expect to do this again during the next down cycle. In addition, the balance in our end markets insulates us to some degree from the impact of semiconductor cycles. This balance, together with our pending acquisitions, positions us well to be able to continue to grow even during cyclical downturns in the semiconductor equipment market.

Orders from life and health sciences customers were $26.1 million, a decline of 1.2% compared with the second quarter of 2010. It's important to note that the prior year period made for a difficult comparison, as it represented the first of 2 quarters in which we received initial production orders for a few new bioinstrumentation OEM programs that had been under development for the prior 2 years. We remain very bullish on our near- and long-term prospects in this market, given our increasing base of OEM engagements and the recent release of some innovative new products targeted at bioimaging applications.

One important highlight in this area is the introduction in May of our new InSight DeepSee tunable ultrafast laser at the LASER World Of Photonics trade show in Munich. InSight DeepSee enables the start of a new era in bioimaging, by providing from a single unit, an unprecedented continuous tuning range of 620 nanometers, nearly double that of existing ultrafast lasers. This enables scientists to view high-resolution 3D images at dramatically greater depths inside live tissue, with a highly automated user-friendly life source. This represents a major advancement to current state-of-the-art systems, and we are seeing a high level of interest and inquiries regarding this new product. Over the long term, we expect our sales to life and health sciences customers to grow faster than the overall bioinstrumentation market, which has most recently been forecast to grow 5% to 7% in 2011.

Orders from industrial and other market customers were $19 million, a slight decline of 0.9% versus a very strong second quarter in 2010. Recall that our business in this market is spread over a broad array of products, customers and applications. During the course of the quarter, we experienced continued strong demand and received ongoing orders from several laser system OEM customers for our opto-mechanical and optics component products. Order activity was also brisk for our OEM laser products for a variety of material processing applications.

In summary, we continue to be very pleased with our orders and sales performance and our expanding position in our key end markets. We are also pleased that we exceeded 45% gross margin for the second consecutive quarter and continued our strong earnings and cash generation.

I will now turn the call over to Chuck to provide more detail on our financial performance, as well as providing some comments regarding our review of financing alternatives. Chuck?

Charles Cargile

Thank you, Bob. First, let me address a few housekeeping items. Much of the information we're discussing during this call is also included in the press release and Form 8-K we issued earlier today. I also encourage you to visit our website at newport.com and, specifically, the Investor Information section where we've posted supplemental financial information, which includes historical financial statements, schedules that detail historical trends for our sales and orders by market and the performance of our 2 reporting segments. In addition, we've posted our most recent Investor PowerPoint presentation. Lastly, I'd like to point out that on September 14, I will present at the Deutsche Bank Technology Conference in Las Vegas; and on September 15, Bob will present at the Longbow Conference in New York City.

Now I'll comment on certain aspects of our financial performance. Our second quarter revenue of $130.1 million is the highest we've ever achieved in a second quarter of a fiscal year and the second highest quarterly total in all our history. For the first half of 2011, our revenue of $258.5 million was 16.6% higher than the comparable period of 2010. Of particular note, our sales to microelectronics customers in the quarter were $44.1 million, that's the highest level we've ever record. Our sales to this market benefited greatly from the strong orders in the quarter and from our high backlog levels, resulting from the strength in this market over the last 1.5 years.

Our orders of $143.7 million are, by far, a new quarterly high. Even without the large order from our semiconductor OEM customer, our orders would have been at or around the same high level that we've achieved over the last 3 quarters. Said another way, our orders over the last 3 quarters prior to Q2 have been around $130 million in total, plus or minus about $1 million. We expect our third quarter orders to return to the $130 million range. Bob will provide more detailed guidance in a few minutes.

Our book-to-bill ratio of 1.1 in the quarter boosted our backlog further. We now have $156.5 million of total backlog, of which $128.8 million is scheduled to ship in the next 4 quarters. This is a very healthy backlog, and we expect it to contribute to another strong revenue performance in the third quarter.

As Bob said, our second quarter 2011 gross margin was 45.9%, marking the second quarter in a row in which we've exceeded the target of 45%. This level represents an improvement of 250 basis points over the comparable quarter of 2010, and our gross margin for the first half of 2011 was 45.5%. That's a 370 basis points improvement over the first half of 2010. We think this margin level is a very clear indicator of the strength of our financial model and it reflects the good leverage of manufacturing costs and efficient execution. A strong gross margin is an abler to many aspects of our business model, impacting pricing decisions, investments in sales channels and product development.

Our selling, general and administrative expenses for the second quarter of 2011 were $32.7 million. Well, that's an increase of $2.3 million versus the first quarter of this year. Of that $2.3 million increase, $2.1 million was due to acquisition-related expenses in the quarter. So it's a pretty good result when you consider that the second quarter of this year included pay increases for most of our employees around the world and those pay raises went into effect in April.

Our operating income in the second quarter of 2011 was $16.7 million or 12.9% of sales. That's an increase of 310 basis points over the comparable quarter of 2010. Keep in mind that this year's second quarter includes $2.1 million of acquisition-related expenses, and the second quarter of 2010 included $0.8 million of costs related to the sale of our Hilger Crystals business.

Our photonics and precision technologies division recorded a record quarterly segment income of $20.7 million or 24.3% of sales. Our Spectra-Physics laser division recorded $4 million of operating income or 9% of sales. We also benefited in the quarter from a gain of $0.6 million after-tax or $0.02 per diluted share, that was associated with the recovery of amounts related to a previously divested business. This amount reflects the final settlement related to this business. And as such, we don't expect any more expense or gain related to it in the future.

Our tax rate for the second quarter of 2011 was 7.9%. We continue to benefit from the tax shield we have for federal income tax purposes, resulting from our valuation allowance. Our only taxes resulted from those on foreign earnings, state minimum taxes and some U.S. alternative minium tax. We expect to record tax expense at a similar rate in Q3 of 2011.

Our diluted shares outstanding for the first quarter of 2011 were 38.8 million. As a result of these factors, our earnings per diluted share were $0.36 on a GAAP basis and $0.39 per share on a non-GAAP basis, excluding the acquisition-related expenses and the gain associated with the discontinued operations. Our non-GAAP net income in the second quarter was 70% greater than our non-GAAP net income for the second quarter of 2010. A reconciliation between our GAAP and non-GAAP net income and EPS is included in our press release.

Our total cash, cash equivalents and marketable securities balance at the end of the second quarter of 2011 was $214.2 million. We've increased that balance by $61.8 million since the second quarter of 2010.

In summary, our financial performance in the second quarter and first half of 2011 was very solid. We believe our financial performance reflects the strength of our business and the strength of our team in executing tactically and strategically. We're excited about the prospects of delivering even stronger business and financial performance as we go forward and especially once we've had the full benefit of the results of High Q and Ophir.

Before I turn the call back to Bob, I'd like to provide an update on our financing. Based on our current cash position after paying for High Q and the cash that we expect to generate in the third quarter of this year, together with the commitment for a $50 million revolver that we have in place, we have more than enough cash to fund the acquisition of Ophir. But with $126.8 million of convertible bonds coming due in February of 2012, we intend to raise long-term finance in the next few months to repay these and provide additional cash to pursue our strategic initiatives. We're investigating several options, including a term loan. We're being very thorough on our evaluation of alternatives and are confident that we'll settle on one that makes the most sense for continued execution of our long-term strategy and is in the best interest of our shareholders. Once we have selected our approach, we'll provide an update.

I'll be glad to answer any questions you have after Bob makes a few more comments.

Robert Phillippy

Thanks, Chuck. The acquisitions of Ophir Optronics and High Q Laser represent important steps in our strategic agenda. As we have consistently communicated over the past few years, Newport's strategy includes a combination of organic growth and growth through acquisitions. With strong global sales channels, a worldwide operations infrastructure and a family of industry-leading photonics brands, we believe we are well positioned to grow our revenue and generate greater profit and cash by executing on this strategy.

One of our 3 strategic growth initiatives is focused on acquisition-related activity, and we have very specific and stringent set of criteria for potential targets. Both Ophir and High Q fit these criteria very well, and we believe they will significantly enhance Newport's market presence and position us well to capture some pretty exciting growth opportunities.

I'd like to take a few moments to provide some highlights on both of these companies. Ophir Optronics is a publicly held photonics technology company headquartered in Jerusalem, Israel. It was founded in 1976 and has a long track record of success in both technology development and financial performance. In fact, over the last 5 years, Ophir has had an annual revenue growth of more than 20% and the company has been profitable every year in its history. Ophir is an industry leader in infrared optical systems and photonics instrumentation and has an emerging business in 3D noncontact measurement. Their reputation for innovation and quality and their responsive and customer-centric organization have positioned them well for growth in each of their business lines.

Ophir's largest business is engaged in the area of infrared optical systems. Ophir products are designed into a significant number of OEM applications for thermal imaging in both the aerospace and defense and commercial markets. These include sensing, sighting and imaging applications for drone aircraft and weapon systems, as well as night vision capabilities for military deployment, automobiles, commercial aircraft and security systems. In particular, we believe that increasing adoption of thermal imaging technology in commercial applications will create a new wave of growth for this technology. In addition, Ophir offers a full line of optical components for carbon dioxide lasers, which provides an additional sustainable profitable revenue stream. Ophir's optics group has a strong product line, some very differentiated and proprietary process technology and a list of Tier 1 customers.

Ophir's second business line is its photonics group, where they are a clear industry leader in instrumentation for laser measurement. Ophir power meters, detectors and beam profiling systems are paired with laser systems throughout the world for measuring, characterizing and monitoring laser beams to ensure they achieve exacting performance parameters for critical applications such as medical procedures, precision materials processing and scientific investigations. Newport's strong presence in the scientific market and the complementary product lines create a combined set of capabilities that we believe will give us a highly sustainable and consistent growth opportunity.

Ophir's Optimet business uses patented conoscopic holography techniques to quickly create highly precise 3-dimensional scans of complex objects. They have deployed thousands of systems for a range of industrial and medical applications. Over the last few years, Optimet has built a strong presence in the emerging field of digital dentistry and has partnered with a leading dental equipment and supplies provider to provide systems that enable dental labs to significantly reduce the time it takes to produce crowns and implants. We believe that this technology and business area is poised for robust growth and that Ophir is well positioned as a key player.

Once the acquisition closes, Ophir will join Newport as a new operating division. Ophir and Newport teams are already working to develop plans to realize the substantial sales technology, process and supply chain synergies that we expect the combination to provide.

Now I would like to discuss High Q Laser. High Q was founded in 1999 and is headquartered in Rankweil, Austria. The company expects to have more than $20 million in sales in 2011 and has approximately 70 employees worldwide. High Q has significant expertise in ultrafast laser technology and a very differentiated product line for a number of emerging market opportunities for ultrafast laser systems. In particular, High Q is designed into several biomedical applications with leading OEM customers in this area. We believe the adoption of ultrafast lasers for a number of medical procedures creates an excellent growth opportunity for this business. In addition, picosecond and femtosecond lasers are increasingly being used for materials processing applications, where they can frequently be used for new materials and higher-precision processes. Newport's Spectra-Physics laser division's worldwide sales, service and support team will significantly expand and enhance High Q's reach and capabilities and can be quickly deployed to ensure that our OEM customers receive effective and responsive support.

With Spectra-Physics' support and assistance, we believe that High Q is well positioned to capture a leading share in the growing market for ultrafast laser applications in the medical and industrial markets. As you may have seen, we announced yesterday that the High Q transaction closed on Friday of last week. We are very pleased to have High Q officially part of the Newport family. Financial results for High Q will be consolidated with Newport's results for 2 months of Q3 and for all periods beyond.

The addition of Ophir and High Q creates new growth opportunities and significant synergies for Newport. In combination, they expand our served available market by approximately $850 million, increasing the total to close to $5 billion. We look forward to crisp and effective integration of both companies and to capitalizing on the many opportunities associated with Newport's expanded scope.

I would now like to discuss our outlook for 2011 and beyond. As noted earlier in this call, as a result of recent information regarding the forecast and guidance of our semiconductor equipment customers, we may experience softer conditions in this market in the second half of 2011. However, we are confident that the combination of continued strength and our expanding presence in other markets, combined with the added revenue from our 2 acquisitions, will more than offset this weakness and enable continued revenue growth in the second half. Specifically, we expect revenues in the range of $131 million to $135 million in the third quarter, followed by sequential growth in the fourth quarter. While we are not yet able to precisely forecast our fourth quarter sales, given the uncertainty as to the timing of closing the Ophir acquisition, we expect revenues for the full year of 2011 to exceed $530 million, excluding that acquisition.

Consistent with our track record and the accretive nature of the acquisitions, we expect to achieve strong profitability and cash generation on these increasing sales. From a longer-term perspective, recall that we have communicated that our strategic plan targets 20% top line growth over a 3- to 5-year period. More specifically, this plan calls for us to target revenues of $750 million in 2013. With the acquisitions of Ophir and High Q, together with the organic growth of our existing businesses, we believe we are well positioned to meet or perhaps exceed this target, while delivering consistent profit leverage and strong cash generation.

That concludes our prepared remarks. And now, we'd like to address your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first with Jim Ricchiuti of Needham.

James Ricchiuti - Needham & Company, LLC

A couple of questions, maybe we could start off with High Q. In terms of the revenues, is it -- are the bulk of the revenues, the $20 million in revenue for 2011 that they anticipate, is that mostly in the medical area, life and health science area? Is that where the bucket you're going to put it in, Chuck?

Charles Cargile

That's correct, yes.

James Ricchiuti - Needham & Company, LLC

Okay. And then just with respect to their capacity, what kind of -- what is their manufacturing capacity at right now? Are they constrained, and do you anticipate being able to expand that, if so?

Robert Phillippy

We do expect to be able to expand that, and that's one of the key advantages that we see with the acquisition. They have a very good relationship with their key OEM customers. And as we concluded our due diligence with High Q, one of the messages that we received was they'd be glad, they'd take more product. And we think with the team that we've assembled in Santa Clara with the Spectra-Physics lasers on the manufacturing side, they're the right folks to go in there and really help the High Q team that's been operating more like a small company than a start-up, our team will be able to go in there and help them really ramp production to satisfy the increasing customer demand.

James Ricchiuti - Needham & Company, LLC

So in terms of that ramp, is that something that we could see some time in the early part of 2012? Or you expect a longer time line?

Robert Phillippy

I think that we'll see growth over the $20 million in 2012, almost for sure, as a result of the manufacturing throughput improvements that we'll be able to help with and the increasing request from the customers.

James Ricchiuti - Needham & Company, LLC

Okay. And then just a follow-up, looking at the margin profile of the business, you had, as you pointed out, terrific margins in PPT. Is that -- are these levels sustainable? Just you're now at, I guess, record levels, and is this something you can maintain? And then conversely, the laser margins, they came down a little bit sequentially. I wonder if you could talk to that.

Charles Cargile

And I'll remind you, Jim, 2 quarters ago, you asked me if the PPT margins were sustainable, and they've gotten better each quarter since. So PPT has performed very, very well, and 24% margin exceeds where we thought they'd be at this point in the year, when we entered the year. In other words, there have -- what we had in our annual operating plan that was approved in December or January, so it's been excellent results. And we believe that the improvements that we've made across the board in our business that are being fully reflected now when we operate at high levels of volume, we think for sure they're sustainable. And then it's just a matter of protection, if sales happen to go down for external market condition reasons and to stay at these good levels as long as the revenue levels are high. So PPT is performing well and every reason to believe that they'll continue to perform well. The laser business, you're right to mention that the lasers revenue -- our profit went down a little bit. And I'll remind you for the last 2 quarters, we operated over 10% operating income in lasers. This quarter, it was down to 9%. But we think it's a temporary drop and we expect it to get back over 10% in the second half of this year. You noticed also, I'm sure, that laser sales were down about $1.7 million sequentially compared with Q1 and about half of that fell to the bottom line, which wouldn't be unexpected. We expect that kind of leverage on the way up and unfortunately, you suffer on the way down as well. I think part of the reason for that downturn in addition to volume was that the sales mix was a little bit higher. It's actually a little bit lower in Europe and Japan, where we had a direct sales force, so the costs were more fixed. And the shortfall, encouragingly, was made up in South Korea and some other regions of the world where we're seeing higher growth. But today, we have independent reps and distributors there, so that carries a little bit higher variable cost. So even though it was down a little bit sequentially, I think that it is important to see the improvement that we've had in lasers over the last year. And the profit a year ago on similar levels, the sales is only about 7%. And now even in a quarter that we're somewhat disappointed with, it was at 9%. So we expect that they'll be better going forward and they'll certainly be better as we integrate and have the results from High Q.

Operator

We'll go next to Mark Douglass of Longbow Research.

D. Mark Douglass - Longbow Research LLC

The $14.8 million order, so that's all in your bookings right now?

Charles Cargile

It was all in the booking -- it was all in the $143 million bookings for the quarter, and it's in the total backlog and the part that's not scheduled to ship in 1 year doesn't show up in the 1-year backlog. In other words, if you look at our press release, it show backlog scheduled to ship in the next 12 months of $128.8 million. Part of it would not be in there because part of it would be in the second and third year, as we mentioned.

D. Mark Douglass - Longbow Research LLC

Okay, so your orders go out forever?

Charles Cargile

Yes. When we get an order, we book the order...

D. Mark Douglass - Longbow Research LLC

That was going 12 months.

Charles Cargile

Correct.

D. Mark Douglass - Longbow Research LLC

Okay. What's the application? Or is it just lasers or has it been entire laser systems with motion on them, or...

Robert Phillippy

It's a laser order and it's semiconductor equipment OEM customer and a semiconductor equipment application. That's about as far as we can go.

D. Mark Douglass - Longbow Research LLC

Okay. The impact of High Q in 3Q, are you expecting any more incremental costs there as you integrate it? And then what are their margins relative to the current laser business?

Charles Cargile

First, keep in mind High Q will be in our results for 2/3 of this quarter. So not July, but it will be for August and September. And we mentioned that we expect for 2011 that they'd do about $20 million of revenue, and there's no big ramp to that in the second half of the year. So I think you should just consider it for modeling purposes about 5/12 of that $20 million. And excluding any integration expenses, we would expect it to be accretive to lasers, but not materially. I think the operating income percentage is very similar to what we do in Spectra-Physics, maybe a little dilutive to the gross margin and had a little bit lower operating costs, but at the operating income it'll be similar. And there will be some integration expenses, probably not a lot in Q3 because we'll be finalizing integration plans and the integration actions will start to be more robust in Q4. It's possibly the early part of 2012. But again, this isn't a high cost integration effort. We're not closing factories. There's no redundant headcount that has to be eliminated and carry severance charges. The benefit here is the growth that we'll see with the interesting applications, the life and health sciences play and the support for our revenue base in Europe. There'll be some cost. We'll probably want to put SAP in there, so it'll be like all the rest of our business. That'll take some costs, but I don't see it as being anything material. And we will highlight it when we report both for High Q and Ophir, we'll be sure to identify what those incremental costs are.

D. Mark Douglass - Longbow Research LLC

Okay. And then finally, Bob, what's your view of the semi cap equipment cycle right now? Is it a pause that some of the major guys have indicated? If so, when does industry press play again? And in what areas might you expect to see some benefit once -- if it does go up again?

Robert Phillippy

So Mark, as you know, we participate as an OEM supplier to the semiconductor equipment companies and they certainly have a lot of comments regarding demand and the types of demand across the end markets that they serve. We're relatively evenly exposed across all the semiconductor end markets, by virtue of the fact that we're aligned with Tier 1 equipment players. Whether or not it's a pause or a typical downturn, which you'd argue would be in the 6-quarter range, is something that we try hard not to go too far to speculate on. Certainly, all of our customers have released cautious outlooks at this point and some have specifically guided down. As I mentioned in the prepared remarks, we're certainly well prepared to participate in the cyclical industry. And one of the points of your question is what about the types of business that you would expect to get? Well, the big semiconductor manufacturers continue to make technology buys during down cycles and we are well positioned in a mix of things that I would call capacity type of business, as well as technology type business. In other words, we've got designed-in status into a number of next-generation tools of our customers. And so we'll continue to fare reasonably well in the down cycle relative to the industry. And then, of course, when it returns we'll enjoy the upside because we've historically gained share when the market is down, and we would expect that to be the case in this circumstance as well. The other thing that, I guess, I would add to it, just in terms of Newport's business as it's exposed to the semiconductor cycle is that we have a very balanced set of end markets that we participate in. And so our exposure there is insulated somewhat by the fact that we've got that overall balance. And with the acquisitions of High Q and Ophir, which have negligible exposure to the semiconductor equipment cycle, we'll be even more balanced.

Operator

We'll go next to Mark Miller with Noble.

Mark Miller - Noble Financial Group, Inc.

Did you indicate that the -- while it was slight that you saw a decrease both U.S. government-related orders and sales, or was it just orders?

Robert Phillippy

I commented on just orders, and it was indeed slight. So it was research market activity in the U.S., and it was slight.

Mark Miller - Noble Financial Group, Inc.

Just wondering if you can comment on 2 things. Did you see any slowing in Europe? I know typically it slows down this quarter, but any slowing that occurred earlier? And also, there's been concern about tightening in China affecting equipment purchases there.

Robert Phillippy

So regarding Europe, it's a bit of a mixed bag. Germany has continued its commitment to R&D spending, and so we continue to see a lot of market activity there, whereas some other countries have more cautious outlooks and more cautious -- or I should say, more -- less robust funding for research applications. In China, the business has continued to be very, very robust for us. And certainly, we've heard the same things you have about in some capital markets, some of the equipment spending being reduced. But remember that they have continued to state that their percentage of research investment, as a percentage of GDP, their own GDP is going to continue to expand. They've made that commitment over a multi-year period, and they have followed through with it so far. So we have seen robust growth and expect that to continue in the scientific market.

Mark Miller - Noble Financial Group, Inc.

And just one final thing, what was the cash flow from operations?

Charles Cargile

Cash flow from operations was about $21 million. We spent about $3 million in CapEx. And as we said, the overall cash balance increased to $214 million.

Mark Miller - Noble Financial Group, Inc.

If I could just interject one more. And again, I realize you're still working on this. Could you give us just a ballpark feeling what would be comfortable once you get done with all your financing-related deals, what would be a comfortable net cash level or a cash level? Do you have any guidance on that point?

Charles Cargile

I think that it's -- let me say it this way, Mark. Today, we have about $31 million of our $214 million is outside the U.S. and to bring that $30 million back to the U.S. could cause some penalties or some royalty payments that you have to pay to get it back. And so our preference would be not to bring that back, unless there was a very efficient way to do it. And then we would probably want to have an amount similar to that or maybe slightly less, so say -- or I'll say it this way, in the decade plus I've been at Newport, we've never managed with much less than $50 million of cash. So I think we'd probably want to stay in that range. Could we dip below it a little bit for a short period of time? Certainly, because we do have very, very strong cash generation capability quarter-to-quarter. But for the most part, we probably want to operate above that level.

Operator

We'll go next to Dave Kang of B. Riley.

Dave Kang - B. Riley & Co., LLC

Chuck, few numbers first. What were depreciation and amortization and stock compensation?

Charles Cargile

First, the stock comp in the quarter was $1.1 million. And as always, about 80% of that or maybe a little more $900,000 was in SG&A, and the other $200,000 split out evenly between cost of sales and R&D. And you said depreciation and amortization?

Dave Kang - B. Riley & Co., LLC

Yes.

Charles Cargile

That was about $5.4 million. And as I said to Mark, CapEx was about $3.2 million.

Dave Kang - B. Riley & Co., LLC

Right. Okay, $3.2 million. Now so stock comp, it's been kind of going down, I guess. Is that the case? Or how do you expect that to trend going forward?

Charles Cargile

I hope our employees don't think that stock comp has been going down. I don't think it's been going down. There hasn't been any change in the grants that we've given. I'd have to look at the numbers in detail. But I think it's probably pretty consistent.

Dave Kang - B. Riley & Co., LLC

Okay, yes. And then did you disclose what you paid for High Q?

Charles Cargile

We said that it was less than 1x revenue, and the revenue this year would be about $20 million.

Dave Kang - B. Riley & Co., LLC

Okay, all right. And then, Bob, you talked about semi cap space. But can you just be a little bit more specific in terms of what your expectation is for second half from semi or specifically the microelectronics? They did, what, $85.7 million in first half? I mean, should we be expecting like maybe $80 million? $85.7 million in the first half, so should we be expecting maybe $80 million in second half? Any color there as far as what your assumption is for giving guidance.

Robert Phillippy

Yes, Dave, I can give you more qualitative color, but the quantitative guidance is what we've provided and it's in a macro overall sense. But the gist of the remarks is that we do expect to see a softening in the semiconductor equipment industry during the second half, and that's based on the forecast of our customers and the external information that's available. And basically what we're saying is that we'll continue to grow revenues in part through continued strength in our position in other markets, but also with the addition of High Q revenues as an offset to that. So if you go back and do the math that Chuck was talking about a little bit earlier in the call that says that High Q is a $20 million business. And you can kind of anticipate 5/12 associated with that being in our numbers in the second half of the year. You can kind of suggest that, that's an offset to the demand that we would see in the semiconductor market, and then we'll just get a bit of growth over that, if you take a look at our guidance.

Dave Kang - B. Riley & Co., LLC

Got it, got it. And one of your peers in the CO2 market, they said that there's been some pricing pressures. Just any more color on that, what you're seeing from your end as far as pricing is concerned?

Robert Phillippy

I think I want to not get into any specific commentary about the pricing of a company we have not yet acquired. And the CO2 optics businesses, you're referring to is Ophir. And so that transaction isn't closed yet and I don't think I can go there.

Dave Kang - B. Riley & Co., LLC

Okay. And Chuck, lastly, just CapEx for remainder of the year, is that going to ramp up with all these acquisitions or -- and capacity expansion plans?

Charles Cargile

Did you say the CapEx?

Dave Kang - B. Riley & Co., LLC

Yes, CapEx for second half or for 2011.

Charles Cargile

I think if I think about the 2 pieces, one being Newport standalone and the second piece seeing what we might do with the acquisitions, I would expect CapEx in the second half for Newport to be similar to the first half, which -- it's been about $5.1 million or $5.2 million in the first half. I don't see anything on the horizon that would cause that to change materially. For Ophir, I don't think that we have any plans in integration that would require an intense amount of capital. Again, usually when you do an integration, you have a lot of capital if you're moving factories or building something out to accommodate new production. And fortunately in the case of both of these deals, we don't have that issue. I mentioned that we'll implement SAP in Austria eventually. I'm not sure if that'll be Q4 or not. So I don't see a huge capital drain coming in the foreseeable future as a result of the integration.

Dave Kang - B. Riley & Co., LLC

Okay. And just lastly, you guys already talked about by regions, but how do they break out between North America versus EMEA versus APAC?

Charles Cargile

How's the acquisitions?

Dave Kang - B. Riley & Co., LLC

No, no, no, just your revenue by -- so revenue mix between all those continents.

Charles Cargile

Yes, okay. So sales in the quarter were 45% in the U.S., 20% in Europe, about 25% or 26% in Asia. And the remainder, about 9% or so in the rest of the world.

Dave Kang - B. Riley & Co., LLC

Okay, and 25% -- sorry.

Charles Cargile

The 9% is a little higher than it normally would be, because we had a large shipment that went into Saudi Arabia I think, which we calculated or we included in the rest of the world.

Dave Kang - B. Riley & Co., LLC

And then Asia 25%, is that mostly China and Japan?

Charles Cargile

About 8% of that is Japan, and then -- so the remaining 17%, the majority of that -- or the largest amount, I don't if it's majority, but the largest amount would be China.

Operator

Our next question comes from Ajit Pai of Stifel, Nicolaus.

Ajit Pai - Stifel, Nicolaus & Co., Inc.

A question on the life and health sciences, that's the business that for you folks had tremendous momentum middle of last year with 30% and 54% growth in orders. And in this particular quarter, it was down on a year-over-year basis and flattish sequentially. So could you give us some idea as to whether it's just design-ins that you have that are growing? Or whether there's any kind of macro headwind that you're seeing that's impacting that business?

Robert Phillippy

Ajit, this is Bob. I think the big dynamic associated with it is that the tremendous growth you had spoken about that we saw in some prior quarters was Q2 of 2010, which was a tough comparable because it was the quarter in which we received production orders for some collaborative development programs that had been in design for quite a bit of time prior to Q2 of 2010. Those new development projects are in the normal production run rate now. And so we continue at the same high level, but we didn't have anything -- any new business that, that was of that same sort of size and scope to layer on top of it. The other thing I would say is that we continue to experience the same dynamic that we, I guess, always have in this market is that it's primarily an OEM relationship basis. And so orders and sales patterns can be a bit lumpy, orders patterns in particular because most of the order activity is for multiple periods. The only macro driver is just associated with the overall bioinstrumentation market. And I think it's driven to macro economic factors and that the most recent forecast we have for the market in total, talking bioinstrumentation now was off about a percentage point. In our last call, we talked about the forecast being 6% to 8% growth in the course of 2011. And the most recent update we have calls for 5% to 7% growth, so it's been revised downwards by 1 point in both of those bottom and top ends of the range. But we continue to be in a position to grow faster than that. And of course, that will be accelerated further with the fact that, as Chuck mentioned earlier, High Q has a good portion of its revenue, majority of its revenue in the life and health sciences sector, and Ophir has meaningful life and health sciences business as well.

Charles Cargile

I want to add one thing, Ajit. I know I've mentioned this to you before and probably on this call. Because of the OEM nature and the lumpiness of the business, I always want to remind people that you can make dangerous assumptions when you look at the life and health sciences for 1 quarter. And so what I'd like to call your attention to is in the last 4 quarters, our life and health science revenue is $103.4 million. The 4 quarters prior to that was $87 million, so we're up 18% when you look at it over a longer-term horizon. And we would expect to continue to see that growth, as long as you look at it over a longer period of time and not quarter-to-quarter.

Operator

We'll go next -- we have a follow-up from Jim Ricchiuti of Needham.

James Ricchiuti - Needham & Company, LLC

Just on the point you made earlier, Chuck, about the decline you saw in laser revenue sequential. Was that attributable to any one market? And how do you see that in Q3, of course, excluding High Q?

Charles Cargile

Yes, the biggest one that was down that didn't surprise us was Japan. Remember, we are very, very strong in Spectra-Physics lasers in Japan and the disruption that occurred in March in orders and carried into the first part of Q2 had a significant impact on the revenue, because orders in Q1 were hurt in Japan. But not revenue, because the crisis occurred with only 1 week to go in the quarter, so most of our shipments were already out the door. So we had -- we shipped about $12 million of revenue in Japan in Q1 and that was down about 35% in the quarter. So $4 million reduction in Japan, which is hard to overcome with the other parts of the business.

James Ricchiuti - Needham & Company, LLC

Okay, that's helpful. And on the SG&A expense, I think you called out there was about $2.1 million of acquisition-related expense in the quarter. How do you see SG&A in the September quarter as a percent of revenues? Do we see it remaining at somewhat elevated levels, just because of the various things you have going on? And then, do you see that beginning to come down more in Q4 closer to perhaps the Q1 levels, and recognizing that you now have High Q in the mix?

Charles Cargile

Yes, I think it would be difficult for me now to forecast or predict the nonrecurring part of the SG&A. There's still some uncertainty as to what it's going to take to finalize or to get to close for Ophir. But I would say for the core of Newport that there wouldn't be an increase. So I mentioned the 2 things in the SG&A, one was the $2.1 million of acquisition costs. Those specific costs go away, but there's going to be other ones that come in, just getting us to close. So that part I would want to exclude. There's about $1.5 million increase in Q2 versus Q1 that was due to pay raises and that went into effect in April. Those, of course, will stay in Q3. But other than that, I don't see any initiatives that would cause it to go up or down. What I'm most excited about, Jim, is by adding these 2 acquisitions and getting greater scale and being able to flush greater revenues through our channel without increasing a lot of costs. So I think we can see increases in revenue and greater leverage of SG&A without having to add to the fixed cost base.

Robert Phillippy

Jim, let me add a comment to that just for color, and that is with the High Q. There was a question earlier about synergies. When people talk synergies, they think about cost reductions. In the case of High Q, it's a cost avoidance synergy because we have a pretty robust sales service and support team, and High Q is a much smaller company, doesn't have that. So for a minimal incremental cost, since we've already got those investments in place, we're going to be able to expand High Q's sales, service and support efforts significantly.

Operator

We'll go next to a follow-up question from Mark Miller of Noble.

Mark Miller - Noble Financial Group, Inc.

If you can just refresh my memory, I thought as your OEM business from semiconductors decreases you're actually improving in terms of margins, your product mix. Is that on target or off target?

Charles Cargile

What we usually say, Mark, I think what we've said in the past is that OEM business will usually carry a little bit lower gross margin. But it also carries lower operating expenses, because they're higher priced, selling price items, you can have fewer sales people calling on one big account. You don't have as intensive R&D efforts, because you're using the R&D efforts of your customer. So at the bottom line, at the operating income line, there's not that big of a difference. But you might see a little bit of movement within the geography of the P&L between gross margin and the operating expenses.

Operator

That concludes today's Q&A session. I would like to thank our participants and turn the call back to our moderators for any additional or closing remarks.

Robert Phillippy

Thank you. And thanks again for your participation today in the call and for your interest in Newport. The team of Newport employees around the world once again delivered a solid financial and operational performance, and it is with the greatest respect and appreciation that I say, I'm proud to be a part of this team of talented individuals. Together, we welcome the employees of Ophir Optronics and High Q Laser to join us, and we look forward to working with them to take our company to even higher levels of success. Bye now.

Operator

This does conclude today's conference call. We thank you for your participation, and have a wonderful day.

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