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Newport (NASDAQ:NEWP)

Q3 2011 Earnings Call

October 26, 2011 5:00 pm ET

Executives

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

Robert J. Phillippy - Chief Executive Officer, President and Director

Analysts

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

Dave Kang - B. Riley & Co., LLC, Research Division

James Ricchiuti - Needham & Company, LLC, Research Division

D. Mark Douglass - Longbow Research LLC

Jiwon Lee - Sidoti & Company, LLC

Operator

Good day, everyone, and welcome to the Newport Corp. Third Quarter 2011 Financial Results Conference Call. Today's call 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 J. Phillippy

Thank you. Good afternoon, and welcome to Newport's Third 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.

The Newport team accomplished a lot in the third quarter. We delivered another solid financial performance highlighted by $125.6 million in sales, $0.27 per share in earnings and $30 million in cash provided by operating activities. We also advanced our strategic agenda by closing our acquisition of High Q Laser, and by handling the pre-closing actions related to our acquisition of Ophir Optronics and a very attractive credit facility, both of which closed on October 4. We are pleased with our execution on both tactical and strategic levels.

Now I'd like to take a few minutes to provide an overview of third quarter activity in each of our target end markets. I'm pleased to report that we achieved all-time record quarterly orders from our scientific research, aerospace and defense security customers in Q3. These orders of $44.3 million represent growth of 14.9% over the third quarter of 2010. In particular, we have seen a very strong response to a number of our new products, including our Spitfire Ace ultrafast amplifier from our Spectra-Physics laser division. Our New Focus Velocity series external cavity diode lasers, our Newport Smart Table optical tables and several instruments in our Oriel product line.

On a regional basis, we achieved excellent year-over-year research market orders growth in China, and we had particularly strong research market orders in Europe due to some significant customer wins. We also experienced 24% year-over-year growth in research orders in Japan, a surprisingly strong result given the otherwise slow recovery in that country.

Total research market sales were $42 million, representing growth of 9.7% over the third quarter of 2010, consistent with the strong order levels.

As anticipated, demand in our microelectronics market softened considerably due to the current downturn in the semiconductor equipment industry. Our third quarter orders for microelectronic customers were $29.3 million, a decline of 32.9% from the third quarter of 2010. Sales to microelectronic customers were $33.7 million, a 23.8% decline from third quarter of 2010.

Speculation regarding the depth and duration of this down cycle varies considerably, and we have prepared ourselves for a broad range of outcomes. Over the past few months, we have taken actions to reduce our cost structure in response to these weakened conditions, and we will continue to monitor the situation carefully.

It's also important to note that we have streamlined our cost structure significantly over the past 3 years and as such are well prepared to weather a downturn.

We are closely aligned with Tier 1 OEMs in the semiconductor equipment industry, and we expect to continue to receive orders from them to support technology buys by their customers. In addition, we continue to have a high degree of engagement with these customers on their next-generation platforms and have maintained our R&D investment to support ongoing collaborative development programs in this area. We have historically gained share during weaker periods in this market and expect to do so again in the current down cycle.

Third quarter sales to life and health sciences customers were an all-time record of $30.7 million, representing 27.5% growth over the third quarter of 2010. This result was driven by continued demand from our bioinstrumentation OEM customers and the addition of High Q sales of lasers for surgical procedures. Orders from customers at our life and health sciences market were $26.6 million, a decline of 3.4% from the third quarter of 2010, which represented our second highest orders level in this market. The main driver of this result was the timing of orders for key OEM programs.

It is important to note that while High Q contributed to our life and health sciences sales, their orders during the quarter were negligible as they have received several large orders from their OEM customers prior to the closing of the acquisition. As a result, High Q added $21.6 million of backlog scheduled to ship in the next 12 months to our total.

Going forward, the timing of High Q orders will continue to vary widely on a quarter-to-quarter basis due to the patterns of order activity from their major customers. We expect additional reorders from these OEM customers in Q4, giving us very healthy revenue momentum in this business as we enter 2012. We expect this to help fuel incremental revenue growth in our life and health sciences market in coming quarters.

In addition, we have begun taking orders for our new InSight DeepSee tunable ultrafast laser, and we have experienced strong floatation activity for this innovative new product. This, combined with ongoing demand from our bioinstrumentation and bioimaging customers, leads us to expect robust orders and sales growth in our life and health sciences market in the fourth quarter and next year.

Third quarter sales to industrial and other market customers were $19.2 million, a 3.1% increase over the Q3 of 2010. This result was driven by demand for component products from OEM customers for materials processing, telecommunications and automotive applications. Third quarter orders from industrial and other market customers were $18.4 million, a decline of 6.7% versus the third quarter of 2010. This decline was due in part to particularly weak orders from industrial customers in Japan. In addition, since we serve a broad array of applications in this segment, including micromachining, fiber optic communications, rapid prototyping and laser manufacturing, this orders trend generally reflects the current economic uncertainty in many parts of the world.

Overall, our third quarter orders of $118.6 million declined by 8.4% versus the third quarter of 2010, but it's important to note that due in large part to the additional backlog that came with the acquisition of High Q, our backlog scheduled for shipment in the next 12 months increased to a record of $152.4, positioning us well for continued revenue growth in the coming quarters.

Our third quarter sales of $125.6 million were slightly higher than the prior year period and represented growth in all of our target segments, except microelectronics. This helps to illustrate the value of our end market and customer diversity and the insulation it provides us from the cyclicality of the microelectronics market. This diversity in insulation increases, with the acquisitions of High Q and Ophir, both of which provides access to new customers and neither of which participate to any meaningful degree with semiconductor equipment OEMs.

Now I'd like to turn the call over to Chuck to comment on other aspects of our financial performance. Chuck?

Charles F. Cargile

Thank you, Bob. First, let me address a few housekeeping items. Much of the information we are discussing during this call is also included in the press release and the Form 8-K we issued earlier today. I encourage you to visit our website at newport.com and specifically, the company investor information section, where we posted supplemental financial information which include historical financial statements, schedules and detailed historical trends for our sales and orders by market, and the performance of our 2 reporting segments. We've also posted our most recent investor presentation.

Please note that we are discussing certain non-GAAP information during this call, which we believe helps provide a more meaningful comparison of our financial results between periods. A reconciliation of these non-GAAP measures to the corresponding GAAP measures is included in our press release.

Lastly, I'd like to point out that on November 16, I will be presenting at the Citi 8th Annual Small to Mid Cap Conference in Las Vegas.

Now I'll comment on certain aspects of our financial performance. Our revenue in the third quarter remained at a healthy level despite semiconductor slowdown and the uncertainty in macro economic conditions. Our Q3 revenue was slightly higher than the prior year level and only 4% below the second quarter of this year, which was the highest level we've ever recorded in the second quarter.

For the first 9 months of 2011, our revenue of $384.1 million was 10.7% higher than the comparable period of 2010. Our third quarter gross margin was 44.4%, and for the first 3 quarters of 2011, it was 45.1%, which is in line with our longstanding target of 45%.

Our selling, general and administrative expenses for the third quarter of 2011 was $30.4 million. That's a decrease of $2.3 million from the second quarter of this year. $1.3 million of this decrease was due to lower acquisition-related cost in Q3 compared with the second quarter. The remainder of the decrease resulted primarily from a reduction in selling, general and administrative expenses as we'd already started to reduce our spending in anticipation of slower market conditions. We'll be very cautious of our SG&A spending as we navigate through the challenging market condition in a few of our end markets. We also commanded increase in demand in others and we're integrating the Ophir and High Q businesses.

Our operating income in the third quarter of 2011 was $14.2 million or 11.3% of sales, a decrease of $1.6 million from the comparable quarter of 2010. On the slightly increased sales, we generated $2 million more gross profit, which was offset by additional SG&A of $2.4 million. $0.9 million of that increase in SG&A came from acquisition and severance cost incurred in Q3 2011, and $0.4 million of the difference came from a nonrecurring gain we recorded in the prior year quarter when we divested the business. $300,000 of the increase came from High Q SG&A for the 2 months that we owned them, and $800,000 of the increase in SG&A came primarily from our spending on global expansion initiatives.

Although the SG&A spending increased year-over-year, we have implemented some targeted cost reductions, and we saw the positive impact of that in the $2.3 million sequential decrease in SG&A. In addition, we have made targeted investments in research and development that increased that expense by $1.3 million in Q3 '11 versus Q3 '10.

Our tax rate for the third quarter of 2011 was 11.5% as we continued to benefit from the tax shield we have for federal income tax purposes, which results from our valuation allowance. Our only taxes resulted from those on foreign earnings, state minimum taxes and some U.S. alternative minimum tax.

As we have been anticipating for some time now, we expect to reverse this valuation allowance in the fourth quarter of 2011, and that will result in a large tax benefit of approximately $30 million. After reversing the valuation reserve, we expect to record tax expense in 2012 of approximately 32% to 35%, reflecting full expense for U.S. federal income taxes. However, for at least 2012, we'll expect to offset most of our federal income taxes with net operating loss carryforwards generated in prior years and tax credits. So most of the incremental expense will be non-cash.

Our diluted shares outstanding for the third quarter of 2011 was $38.6 million. As a result of these factors, our earnings per diluted share were $0.27 on a GAAP basis. On a non-GAAP basis, excluding expenses related to the acquisition, the commitment fee for an interim revolving line of credit and the severance payments, our earnings per diluted share would've been $0.30.

Our total cash, cash equivalent and marketable securities balance at the end of the third quarter of 2011 was $217.1 million. That was an increase of $2.9 million over the second quarter despite the fact that we paid approximately $17.2 million in cash during the quarter for the acquisition of High Q. In fact, we generated $30 million of cash from operating activities, which is a very significant achievement for us.

Although we ended the quarter with $217.1 million of cash, as you know, our cash position changed significantly less than 1 week into the fourth quarter as we used that cash to pay part of the purchase price for Ophir. At the same time, we entered into senior secured credit facility on very favorable terms under which we borrowed $185 million to fund the remainder of the purchase price for Ophir and to pre-fund $100 million towards the repayment of our convertible bonds, which are due in February of 2012. In addition, we have a $65 million revolving credit facility that's undrawn and available to provide liquidity to pursue our strategic agenda.

In summary, we delivered strong financial performance in the third quarter, and we expect to deliver record sales and earnings performance for the full year.

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

Robert J. 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 the coming quarter.

With the closing of the Ophir and High Q acquisitions, we are focusing a great deal of activity on the integration of both businesses. Since acquisitions have been an important part of our strategy for a number of years, we have a very robust and disciplined process to ensure that we identify and leverage synergy opportunities, and we have an experienced team to ensure we implement effectively.

We completed the High Q acquisition in late July and have already made excellent progress on the near-term integration activities. Demand for High Q's products is strong and as such, our first priority is to expand their production capacity and improve their manufacturing efficiencies. Our Spectra-Physics laser engineering and operations organization have a great deal of complementary expertise and process discipline in these areas, and we have launched collaborative initiatives with the High Q team to help address this priority. In parallel, we're in the process of training our global field service team to support High Q products around the world. Our second priority with High Q is to introduce selected products to Newport's global sales channels, which will dramatically increase their exposure to potential new customers. We expect to complete these integration tasks in the first half of 2012.

As a result of these actions, we are confident that High Q will be a very productive contributor to our Spectra-Physics laser division. Going forward, we see additional opportunities for technology collaboration and product roadmap coordination that will further enhance Spectra-Physics' product portfolio.

Integration planning for Ophir has been underway for the past 4 months although there have been legal limits as to what we could do prior to the closing of the transaction. We have 12 project teams comprised of Newport and Ophir business leaders focused on opportunities in areas such as sales, marketing, product development, supply chain management, IT and finance. Although there is still much work to be done, we've already identified significant opportunities in cross-selling, channel integration, supply chain leverage and technology collaboration.

We remain very confident that the combined strengths of Ophir and High Q and Newport will enable us to generate incremental sales, achieve meaningful material cost reductions and develop more innovative products. The addition of Ophir and High Q creates significant new growth opportunities for Newport. As mentioned previously, together, they expand our served available market by approximately $850 million to a total that approaches $5 billion. This expanded scope provides us access to more customers, applications and growth opportunities than ever before.

While a significant amount of time and energy is indeed focused on the integration of our recent acquisitions, our existing business teams continue to work to enhance our market position and drive organic growth. For example, in August, we released a new version of the Newport Resource, our industry-standard catalog. This latest version presents detailed descriptions, drawings and technical specifications for more than 10,000 products, along with applications notes and other reference materials. The catalog is 1,632 pages and is available in English, French, German, Mandarin Chinese and Japanese, but the distribution of almost 50,000 copies of the print version of the catalog represents only a portion of the exposure of this information. The catalog is also available as an iPad, iPhone and iTouch app, and a digital flipper version is available for Android-based smartphones and tablets. Of course, all the information in the catalog and much more is also available on our industry-leading website, newport.com.

Our broad array of photonics technologies and products, together with our global sales channels, our distribution system and our experienced customer service team, continue to enable us to quickly and effectively respond to the needs of scientific and commercial customers in every major market in the world.

I would now like to discuss our outlook for the fourth quarter of 2011 and our expectations for 2012. As we communicate our outlook for Newport, including Ophir and High Q, it is important to consider that we have made transformational changes in our business in the last few years that have streamlined our cost structure significantly. These changes have positioned us to leverage revenue growth into increasing profitability and to be more resilient and better able to preserve profitability during soft market conditions.

In 2009, we developed a strategic roadmap that outlined our plan to leverage our streamlined financial model together with 3 growth initiatives: global expansion, value-added solution development and targeted acquisition activity; to achieve 20% compound annual growth over the next 3 to 5 years. We indicated that this growth would come from an approximately equal mix of organic growth and acquisitions.

We are proud of our track record in the last 2 years and our outlook for 2012 that indicate we are on track to achieving this goal. In 2009, our revenue was $367 million. In 2010, we increased our revenue by 31% to $480 million. In the first 9 months of 2011, our revenue of $384 million reflects 10.7% growth over the same period in 2010, almost all of which was organic growth. Now with the acquisitions of High Q and Ophir, we expect to record revenues in the range of $160 million to $165 million in Q4, which represents 20% to 24% growth over the fourth quarter of 2010 despite a slowing semiconductor industry. This leads to a revenue expectation of $544 million to $549 million for the full year of 2011. So in 2 years, we have grown from $369 million to $480 million to approximately $545 million, a compound annual growth rate of 21.5% driven by a combination of organic growth and acquisitions as planned.

If Newport, Ophir and High Q have been combined since the beginning of 2011, we would have expected to generate between $650 million and $655 million in revenue for the year. Although it's too early to predict the precise range of revenue for 2012, we are confident that the total revenue in 2012 for the combined businesses will exceed this $650 million to $655 million range even if weaker conditions in the semiconductor industry continue. This would put us comfortably above our 20% compound annual growth rate goal for that 3-year period.

Given the inherent profitability in cash generation potential in our current business, together with the expected accretion from both the Ophir and High Q acquisitions, we expect a higher sales level in 2012 to enable us to achieve record operating income in cash provided by operating activities. With Newport's greater scale, extended global reach and more balanced end market exposure, we are better positioned strategically than ever before to achieve these strong financial returns and to continue our quest to be the world's premier source for photonics technology and products.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take your first question from Mark Douglass with Longbow Research.

D. Mark Douglass - Longbow Research LLC

Looking at 4Q, the guidance, how much of High Q and Ophir is embedded, respectively?

Charles F. Cargile

They'll both be in for almost the entire quarter. Ophir transaction closed on October 4. So for all practical purposes, it's the entire quarter. We're assuming that Ophir's business will be similar to the run rate that it's been in, in the first 3 quarters of this year, which has been about -- an average of about $30 million a quarter. It might be a little bit higher than that, probably not much below, so maybe $30 million to $32 million. We said that High Q did about $4.8 of revenue in the 2 quarters that we owned them in Q3 -- over the 2 months that we owned them in Q3. So they'll have one more month of activity. So we'll get a couple more million out of that probably, and then the remainder would be in the legacy or core of Newport.

D. Mark Douglass - Longbow Research LLC

Right, okay. And then how are we -- how are you thinking about the margin profile? I mean, kind of -- are there going to be more non-GAAP, are there going to be some more of acquisition costs plus all will be fully loaded in 4Q, right?

Charles F. Cargile

Mark, there'll be more acquisition costs but there hasn't been any -- there's not many noise in the gross margins. That gross margin hasn't had any acquisition costs. The only thing it has, that I would mention, is we were 44.4% gross margin in Q3. High Q has a profit percentage that's similar to our laser operating income percentage, actually a little bit higher, but the gross margin's a little bit lower. So if you look at the traditional or legacy Newport before acquisition on the $120 million of revenue, we would have had 44.9% gross margin. So we are really continuing to get strong margin leverage because, as you know, having followed us for a long time, 45% was our target and we have gotten over that this year, and even at $120 million of revenue, which is down a bit and reflecting the lower semiconductor to be just 10 basis points below the 45%, it's a really good sign in the strength of our core gross margin. I think you're going to see that come down a little bit in Q4 and the first part of 2012 because both Ophir and High Q had a little bit lower gross margin than Newport has. The good news is they have a little bit lower SG&A percentage and so the operative income is still pretty good, both of them over 10%, but it will put some downward pressure on the operating income. So there will be some acquisition charges that -- or expenses or nonrecurring expenses that we'll highlight in Q4 as well.

D. Mark Douglass - Longbow Research LLC

So absent the charges, we're still looking at kind of low-teens kind of op margins?

Charles F. Cargile

Yes, I think the -- I think you should -- you can expect outside of one-off nonrecurring charges for the acquisition integration, as you mentioned, that the operating income percent would be similar to what we had this quarter just on a much higher base of revenue.

Operator

And we'll take our next question from Jim Ricchiuti from Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

Following on that line of questioning, Chuck, as we look at that operating margin, how should that change over the course of 2012 just given -- I know you're not going to be doing much in the way of extracting cost savings. That's not the aim of the acquisitions, but just in general, how might we think about the operating margin profile in 2012?

Charles F. Cargile

Jim, as we said ever since we announced both acquisitions, one of the things that we're most excited about is that we bought 2 profitable strong businesses. They're not ones that we need to change their profit profile very much for them to be accretive immediately. In fact, we don't have to change them at all. So that gives us a lot of confidence as we enter 2012. Today, both of them operate with an operating income percentage that's slightly below ours, but with the scale that they'll benefit from in being part of Newport, we see no reason at all to change the targets that we have and the ones that we've been meeting or close to meeting over the last year, which is 45% gross margin and 15% operating income when we're in the strength of the cycle. When you get to a point where the cycle softens a little bit, like it did in Q3, it might come down to 12%, maybe a little higher when we're getting benefit of additional scale. So still bouncing in that same range depending on where you are in market cycles, but, as I say, keeping a very similar operating income percentage of a much higher base of revenue.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay, that's helpful. And just with respect to the laser operating margins in the quarter, they were down sequentially, I guess, around 6.8% or so. Is that a function of the decline in the semiconductor market primarily? Or are there some other factors contributing to that?

Charles F. Cargile

There's really 2 primary factors. You hit the first one. Lasers does have a bit of their business that's dependent upon semiconductors. So that puts downward pressure on lasers. But also, our business in Japan, Newport's business in Japan is greatly skewed to lasers. So without High Q -- remember, High Q goes into the laser business. So without High Q, we had a decline in laser revenue of about $3 million and a little more than half of that fell out of profit. So when Bob mentioned in his prepared remarks that we've got some cost reduction, that has been more in the laser business than anywhere else, and I think that because we've done that early on, I think even if the conditions remained soft, we're going to see improved profitability in the laser business. Now as I mentioned, the good news is High Q is now part of lasers and will be for the full 3 months because they don't have any participation in semi nor do they have any operations in Japan. It gives them a nice buffer to what the Spectra-Physics laser business has been struggling with. So they'll get the full benefit of that in Q3. It should be even a little better than what they got in Q2, and the laser business, with the actions they take, will show a little bit better profitability as well.

James Ricchiuti - Needham & Company, LLC, Research Division

And Chuck, I joined the call a little bit late, but did you or Bob comment on what might be happening within the business in Japan, Malaysia businesses? Is it just macro related or part from just semi exposure?

Robert J. Phillippy

Jim, this is Bob. Yes, we did comment on it a bit, and 2 data points related. It's, number one, we were pretty excited about the fact that on a year-over-year basis, our research market orders in Japan grew by 24% actually year-over-year, which was very, very good news. The Japanese government has released, I think it's called, their third supplemental budget for funding R&D efforts. So we were very encouraged by that, but other areas of the business continued to be down. So we're expecting a long, slow recovery. In particular, Japan, impacted negatively our industrial and other segment quarters and sales significantly.

Operator

And we'll take our next question from Ajit Pai with Stifel, Nicolaus.

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

Just give maybe the semi gap for your sort of microelectronics orders in the month of October. Are the orders still declining from the levels that you were seeing in September? Or have they sort of broadly stabilized?

Robert J. Phillippy

Ajit, we have resisted the temptation to discuss orders on -- what this would be -- a weekly basis. We're only 3 weeks into the quarter. So if we were -- we do look at it every day, trust me, but it would be probably -- we'd run the risk of sending the wrong message if we try and give out weekly orders and have you extrapolate a trend on that. So I think it would be inappropriate for us talk...

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

Yes, but would it be fair to say to, can we expect to see sequential decline in the microelectronics business in terms of orders for the December quarter? Just a cyclical slowing because you are anticipating this to be somewhat of a cyclical slowdown, right?

Charles F. Cargile

I think as we look into Q4 -- I'm not speaking just for the Newport business outside of Ophir and High Q. I think if we were just talking about the Newport business, we would say that the semiconductor business would probably show another decline in Q4, but that would be offset by the strength that we're seeing in research and the Q4 strength that we have historically experienced from seasonality. So I think that the point is that there may be continued weakness in semi. We ought to be able to offset that not only with the businesses we acquire, but also with some of other parts of Newport.

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

Got it. And you -- we're also watching your orders in the industrial, manufacturing and other side that have been declining over the past several quarters. Is there something specific that's happening over there? Or is it just end markets being sluggish?

Charles F. Cargile

There's -- as we've mentioned many, many, many times, that's a business that's spread over a broad array of products and customers and applications, and they all have their own little individual dynamics. The part of that group that goes to the industrial manufacturing and graphics and rapid prototyping and metrology is generally very steady and resilient. It doesn't show a lot of fluctuation, but there's a part of that, industrial and other, that goes to telecom and to other laser equipment companies, and those segments have shown weakness. Telecom, as you know, has been slow. Telecom is nowhere near as high a business force as it once was, but we'll still do anywhere from $1 million to $3 million or $4 million a quarter in that business, and that's been pretty low the last couple of quarters. And then as laser manufacturers slow down, we experienced that to similar scale as we do in the telecom side.

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

Got it. And then you just -- in your discussion, I think on the Q&A, on margins, you talked about expecting the acquisitions you have made to gradually come up to your target margins. There's no reason to change those targets, but I was thinking of timelines to actually get there. Should we be looking at sort of a 18-month timeline or a 36-month timeline? Or could you give us some indication of when you'd expect that -- the overall corporate margins to get to that 15% plus again?

Charles F. Cargile

Yes. Let me press it by saying in about a month, Bob and I will be in Ophir, going through our first really thorough review with their team on their 2012 annual operating plan. So they're rolling out, just as they always would, with their teams internally, and they're going to present it to us, just like all of our business units do, here. So I think we'll have a better idea then about the timing of it. I think -- as I sit here today, I'd like to believe that we could exit 2012 being at or near those targets, assuming that market conditions support it.

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

Exit 2012 at the 15% plus.

Charles F. Cargile

Well, yes. 15% with 45% gross margin and SG&A and all operating costs at about 25%

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

Got it. And that's assuming that the semiconductor capital in the microelectronics business returns to recent revenue levels? Or even if that hasn't come back, you could potentially get there.

Charles F. Cargile

The semiconductor piece won't matter as much as it used to for us. That's going to be 20%, 22%, so it will still have an impact but in only a quarter of the business. There could be other dynamics within life health sciences, within research, within industrial, that could certainly allow us to get there even if we're not at peak cycle in semi, whereas Newport 3 years ago would've had to have peak semi to be able to get there.

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

Got it. And then last question is just looking at some of the floods in Southeast Asia, Thailand, et cetera, are there any disruptions in your supply chain that could impact things from a production -- from a supply standpoint?

Robert J. Phillippy

Yes. Ajit, this is Bob. We do have an important supplier in Thailand. It's primarily supplying to our lasers division at this point, and we are in daily contact with them to ensure that we do whatever is possible to mitigate the effects of flooding in that country. We currently believe that we have adequate safety stock and alternative sources to cover shipments that we have scheduled for the current quarter. We will reassess any potential impact on potential first quarter shipments on an ongoing basis, but right now, we don't see any major impact.

Operator

We'll take our next question from Dave Kang with B. Riley.

Dave Kang - B. Riley & Co., LLC, Research Division

Can I get some numbers first, Chuck? Can I get -- what is this -- stock compensation, depreciation and amortization and CapEx, what they were?

Charles F. Cargile

Sure. The stock comp for the quarter was about $1.5 million, $1.2...

Dave Kang - B. Riley & Co., LLC, Research Division

Is that going to go up? I'm assuming it's going to go up materially going forward?

Charles F. Cargile

It won't go up materially in Q4. It will go up in 2012 because we are adding over 700 employees, not all of which will get stock, but some of course will, similar to the way the Newport team does. So it will go up in 2012, but we've not made those allocations yet. So it depends on how many shares we'll issue and what the share price is at the time of issue. So yes, it will go up, but I can't yet estimate what that will be. All right? And then in terms of depreciation and amortization for the quarter, Newport, including High Q, since we had them for 2 or 3 quarters, was about $5 million. Ophir, even though we didn't have them, but you'll want them for Q4, is about $2 million a quarter. CapEx, Newport and High Q together, for Q3 was about $2.5 million, and on recurring normal CapEx, Ophir runs anywhere between of $0.5 million and $1 million.

Dave Kang - B. Riley & Co., LLC, Research Division

Okay, so about $3 million, $3.5 million. Got it, all right. And then just some of my questions have been answered, but going back to Ophir, one of the laser component companies, they reported yesterday. They talked about their industrial customers acting very cautious in recent weeks, so -- and then you said you expect Ophir to still be comparable with a run rate of $30 million or higher. So can you just comment on that, what you see from Ophir's customers versus what the other guy was talking about yesterday?

Robert J. Phillippy

Yes. I guess that the best way for me to characterize it is that we don't really have much change in the trajectory of the business at Ophir at this point. Recall that when we did the due diligence on the acquisition, we did a bottoms-up role of all the program activity and also a careful view of the markets and the programs that they're participating in, and what it turns out is we've got a pretty conservative forecast in place relative to what they can achieve. Now that said, there are some areas where they're seeing softening in certain end markets that they've participated in. So I think it's kind of a mixed view and it's kind of a balanced outcome that leads us to a run rate where Chuck already mentioned that we would expect it to be consistent with what they've done so far in the year.

Dave Kang - B. Riley & Co., LLC, Research Division

Okay. And the last question is just a clarification. You said for this year, the guidance is about $544 million to $549 million, but had you had Ophir and High Q for the whole year, your sales would have been in the range of $650 million to $655 million, and then for 2012, you expect year-over-year sales growth. Now is that based on $544 million or $650 million?

Robert J. Phillippy

Well, the $544 million would be a fairly low hurdle, so there's great confidence to get over that, but what the prepared remarks were intended to say is we're confident that we'll be able to grow over the $650 million to $655 million range.

Operator

And we'll take our next question from Jiwon Lee with Sidoti & Company.

Jiwon Lee - Sidoti & Company, LLC

Just kind of going back to the revenue numbers for next year, Bob. Knowing that having the product lineup that you have and the visibility that you have, which market do you expect the most amount of growth? Or where do you expect to grow? And how much of that growth will depend on the semicon fab coming back at a reasonable pace next year?

Robert J. Phillippy

So, Jiwon, a couple of things. First of all, as we mentioned in the prepared remarks, by bringing on Ophir and High Q, neither of which have any meaningful participation in the semiconductor equipment market, semi becomes a lower percentage of our mix. In other words, the combination gives us a better balance of end market participation. We certainly expect to continue to collaborate closely and work well with our semiconductor equipment customers. It's just going to be a smaller part of Newport's overall revenue stream. So that's just to kind of put it in perspective. As for the market dynamics, we would expect the most robust growth on a percentage basis in life and health sciences for 2 reasons: first of all, we've got a number of new products in that area that we are pretty confident with and they're gaining traction quickly; and secondly, because the majority of High Q's revenue is going to be life and health sciences-based and their business has been pretty strong. By the way, I guess, I should mention a third thing is that Ophir has a relatively small business at this point that is focused on the emerging field of digital dentistry, and there could be some great breakthrough growth trajectories in that area. So we're most bullish on life and health sciences. We continue to have a strong position in the research market. Research, of course, funding levels are a bit of a mixed bag. It varies by where you go in the world, but we've continued to produce results that we believe outperform the market in total, and a lot of that growth is coming from the Asia region, where economies are just growing faster even in the context of some have reported the softening of areas. We still continue to grow strongly there. In the semiconductor equipment space, we currently don't anticipate a prolonged deep, steep downturn, but as we mentioned, we are very prepared to respond to whatever the eventuality is there and we're not going to be the ones who pick the inflection points of the cycle. We're just going to collaborate with our customers and gain share in the down cycle and then emerge even stronger when the up cycle returns. And then in industrial, I think I'll just reiterate Chuck's comments that we've got some segment -- because it's such a broad array of end customer types, we've got some segments with a bit of stability and some where we've seen a little bit of a softening. And so that, I think, is dampened but it has been a little bit softer recently.

Charles F. Cargile

Let me add one more thing, Jiwon, on semiconductor, specifically, and we've been saying it for a long time now that our combined business is more than just semiconductor and we've certainly been saying now with the acquired companies, there is a big buffer there. But if you get a chance, I'd encourage you to the take a look at the information that we've put on the website. It shows the sales and the orders by market, because this year, year-to-date, the semiconductor growth as a part of our business is actually lower than Newport in total. So Newport's total revenue growth is 10.7%. Semi has grown 9.3%, and then also, in orders, just the same dynamic. Our orders year-to-date are actually down in semiconductor, but Newport in total is up. So I think we're already showing that in Newport standalone, and now we're going to add $150 million of revenue that doesn't have any semiconductor presence to speak of.

Jiwon Lee - Sidoti & Company, LLC

Okay, that was very well put. And then the second question, with Ophir, I wonder whether your Wuxi transition plant or the manufacturing plant there change at all, either up or down?

Robert J. Phillippy

I'm going to have to ask you to repeat that question. I didn't understand it.

Jiwon Lee - Sidoti & Company, LLC

Oh, I'm sorry. I wonder with Ophir now as part of your revenue stream and the manufacturing plants that they have whether you'll have any changes with your Wuxi plant.

Robert J. Phillippy

Yes. So first of all, there are no facility consolidation plans associated with either the Ophir or High Q acquisition. So we're not going to be pulling revenue out of one factory and putting it in another. That said, as we've mentioned, we believe that there are some meaningful supply chain synergies, and in addition, possibly the opportunity to build more sub assemblies or more supply components via our Wuxi facility to support the Ophir and High Q businesses for that matter. So supply chain leverage is something that is absolutely high on our list of priorities and synergies because as just a larger company and the fact that we've been in China and sourcing from low-cost regions for a number of years, we offer an additional dimension of supply chain management that neither High Q nor Ophir have capped in the past, and so we think we can add some value there.

Jiwon Lee - Sidoti & Company, LLC

I guess I was asking because I know that the research market, as well as the life and health sciences are important in Asia, and with Ophir's product line, I was just wondering whether or not what the change is.

Operator

[Operator Instructions] And we'll return to Jim Ricchiuti with Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

Your research business has shown good order intake for the last several quarters, and I know you've commented that you're seeing some nice growth coming from overseas, but I'm just curious, as you think about that business domestically and as we go through this a bit of a soap opera with the super committee, what is your take on how the research business in the U.S. might play out over the next couple of quarters? And I'm wondering if you're going to see any volatility in orders in the next 1 to 2 quarters as some of that can gets sorted out. I'm going to have a follow-up question.

Robert J. Phillippy

Okay. Well, Jim, of course, there aren't any facts about the future and I'm certainly not going to be the one who tries to second guess what the super committee or our congressional leaders may or may not do, but I can rely on history, which states that as a result of the -- what I guess you could call the natural checks and balances of the parties in our system, the research market funding and the research market activity has been remarkably resilient to the dramatic swings that some have forecasted and anticipated. We've had a couple of times in the last few years, remember, where people have speculated that we could get double-digit drops and we just never saw it. And so from our standpoint, while certainly there's a lot of saber-rattling and a lot of visibility associated with funding levels, we continue to do what we do and we're pretty excited about our new product portfolio, which I said in the prepared remarks, and we think we're just going to continue to be successful in the research market.

James Ricchiuti - Needham & Company, LLC, Research Division

Is that research piece larger internationally now, Bob? Is it or is it still the bigger piece domestic?

Robert J. Phillippy

Jim, I don't have those numbers.

James Ricchiuti - Needham & Company, LLC, Research Division

It's fine. I can take that offline. The other question I have is more relating to just some other items on the model, just in terms of the tax rate going forward. It looks like there are going to be some puts and takes just given where Ophir is located. Can you guys talk a little bit about that and maybe just address the interest expense going forward?

Charles F. Cargile

Yes, Jim. There'll be a lot of noise in the tax line in Q4 and that's because we have net cumulative profit targets that's required from a GAAP perspective to now reverse the valuation reserve that's on our books for the last almost 3 years that has shielded us from recording a tax provision from U.S. federal taxes. So we'll have what could be a $30 million, or even a little bit more, credit to the tax line. Non-cash, just the book entry, will show a big credit in the tax line. So the earnings will go way, way up because of that. It will stand out like a sore thumb. Once that valuation reserve is reversed, then in 2012, we will show on our P&L a normalized tax rate that if we were just a U.S. company, we'd probably be 35% or a little bit higher, but the tax rates in some of the foreign countries where we operate are a little bit better. So we're anticipating the tax provision to the be in the 32% to 35% range. Now keep in mind, for 2012, much of that tax, booked tax, we'll be able to be offset when it comes time to pay cash taxes because we have some net loss carryforwards and some tax credits that we'll be able to offset at least through to 2012. So you'll see a big credit in Q4 and then a normalized tax credit, whereas we've been reporting taxes in the 8% to 10% or 12% that's going to move to 32% to 35%.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay, and, Chuck, just given the financing, talk a little bit about interest expense going forward.

Charles F. Cargile

Yes. I'm glad you asked that, Jim, because we're very happy with the terms that we have with the senior secured facility that we agreed to on October 4, when we closed the deal. And as you know, we borrowed enough in that transaction to, in essence, pre-fund the payment of the convertible bonds that are due in February. So what that means between now and February, unfortunately, is that we will be carrying -- we'll have a balance sheet that's grossed up. So we'll have extra cash, but on that cash, we'll also have the double debt. So we'll still have to convert, and we'll have the debt on the loan. So between now and February, our interest expense is going to be basically double what it will be from February and beyond in 2012. So specifically, the convert, we pay about $800,000 a quarter in interest. It's 2.5%. We also have to amortize the discount on that of about $1.3 million which is non-taxed. So that's $2.1 million of interest expense you'll see on the convert, and then the $185 million credit line has about $1.6 million of interest and about $400,000 of fees that get amortized. So together, it's about $4 million that you'll see for the next 1.5 quarters, and then it'll go down to $2 million after February of next year.

Operator

And we'll take our next question from Dave Kang with B. Riley.

Dave Kang - B. Riley & Co., LLC, Research Division

So regarding the revenue situation in Thailand, I'm only asking because you used to have a lot of these products back in the telecom bubble days. Do you still have -- or do you have any products left that you could sell to the eagle [ph] as I'm sure a lot of their testing and measurement equipment must be damaged.

Robert J. Phillippy

Oh, that we sell to them?

Dave Kang - B. Riley & Co., LLC, Research Division

Yes, or opportunity to sell some of the photonics-related products?

Robert J. Phillippy

Yes. It's a good question, Dave, but not one I've researched at all because our primary focus has been ensuring that we can get products from them in order to ship our products. So really, we've focused on that and as I've mentioned earlier, we're in daily conversations and we're trying to help out as much as we can to ensure that they can continue to keep the continuity of supply to us, and if that includes helping them out by virtue of providing or selling products to them, we'll certainly be happy to do that.

Dave Kang - B. Riley & Co., LLC, Research Division

But the question is, do you still have those photonics-related products?

Robert J. Phillippy

Some. A lot of manual positioning equipment and component level products that are on an optical breadboard used for packaging fiber optic devices are still in our portfolio, but we no longer manufacture or sell the highly automated photonics packaging systems.

Dave Kang - B. Riley & Co., LLC, Research Division

Got it. And the last question is, for me, on the M&A side, you certainly made a couple of nice acquisitions. Are there still -- I'm assuming you have to go through some integration period, but are there still compelling targets out there for you? I'm assuming with this current slowdown, their asking price will come down quite a bit, I assume.

Robert J. Phillippy

Well, Dave, it's a good question. We continue to pursue our strategic agenda as we always have, and we've always talked about it being a balanced approach of organic and inorganic growth, and as we've mentioned before, we keep a prioritized target list that we proactively pursue. So at any given time, we'll be in ongoing dialogue with a number of potential targets. And that just -- that doesn't change. Also, because we are looking at a variety of potential acquisitions, most of which are privately held, what happens in an environment like this is private ownership doesn't reach a target price point, and so their availability changes based on the fact that they're not going to be able to meet their objectives. So in some sense, it doesn't work where the prices suddenly become a whole lot more attractive. Our valuation, of course, is related to some degree to peer transactions, and so what we're willing to pay may fluctuate to some degree but their target expectation may not. So it doesn't necessarily say that a deal is included or excluded as a result of that. It just says that it's circumstances that don't necessarily create a more attractive M&A environment for us.

Dave Kang - B. Riley & Co., LLC, Research Division

Right. A follow-up would be, now that you are more balanced going forward, is there any kind of a preferential area that you would like to see be stronger than the others or...

Robert J. Phillippy

If you're talking about acquisition targets by market segment focus, the answer is there's no particular preference because that hasn't been our primary focus. What we look for are companies that are complementary from a technology standpoint, of which we can help to leverage our strength in our channels and in our logistics and supply chain capability. And also, we certainly look for brands that have some equity in the marketplace that are good complements with the business that we do. So that's our set of criteria, and although market focus is certainly a consideration, it's not necessarily the primary factor by which we prioritize.

Operator

We'll take our next question from Ajit Pai with Stifel, Nicolaus.

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

Just looking into your life and health sciences, I think in the Q&A, you responded to someone saying that you're extremely positive on how robust that business can grow. Could you give us some color as to how much of that is coming from sort of the High Q side of things? And how much from a core organic basis do you expect that -- how do you expect that business to do? And also, within the September quarter, it's a record quarter for you in life and health sciences, what is the exact High Q contribution?

Robert J. Phillippy

Ajit, I'll take it one at a time. So on the first page, in terms of what is the organic contribution versus High Q and Ophir, and I think I mentioned that the High Q and Ophir pieces we're excited about in both arenas because we think that in the High Q instance, ultrafast laser deployment for surgical opportunities can be meaningful and we think it can be an area of robust growth going forward. So we're very bullish about the opportunities for High Q growth. Secondly, with Ophir, just to reiterate a point I made in response to a previous question, Ophir is positioned in the emerging field of digital dentistry. They have conoscopic holography scanning technology, which is a patented technique for a very rapid, very precise scan, which they're using in the dental industry to be able to supplement current molding processes for implants and crowns, and we think that could be an emerging field that will offer significant growth. So those are for the acquisitions. As for the base business, we continue on the trajectory that we've had really since before announcing Ophir and High Q, which is we think with the engagement of our bioinstrumentation OEMs and the programs that we've won, together with some of the new products that we've recently introduced, including the InSight DeepSee for multiphoton microscopy applications, that we can outgrow the benchmark that we typically use as the bioinstrumentation and bioimaging kind of index base, which is 5% to 7% growth. So we would expect our base business to grow faster than that base or that benchmark. And then High Q and Ophir on top of that leads us to being really, really bullish about life and health sciences going forward.

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

And in the September quarter itself, of the $30.7 million, how much of that -- I mean, it was a record quarter, would there have been a record quarter without the acquisitions? Or without the High Q -- or any High Q contribution?

Charles F. Cargile

No. High Q, of their $4.8 million, the majority of that went into life and health sciences, but, Ajit, I think what I'll remind you and it seems like I remind you this every quarter, but it's something I have to do. The sales in life and health sciences are not going to be linearly up, but what I would encourage you to do is take a look at the sales trend that we have on the website, that we've made available, and if you look at the life and health sciences line, you can even take out $4.5 million of High Q if you'd like to for Q3 '11, and then you just do a rolling 4-quarter average. So you start with Q3 and take it back to Q3 of last year. That would be $105 million of revenue. And then you drop off Q3 and you take the next 4 trailing quarters. That would be $103 million, and the next would be a $101 million, $96 million, $90 million, $87 million. So over the last 6 trailing 4 quarters, we've gone from $87 million to $90 million, to $96 million, to $103 million, to $103 million, to $105 million. So it may be a little bit up and down month -- or quarter-to-quarter, but over that trend line, we've shown a consistent increase in sales.

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

Right. And when you think about the margin implications of that, I know you break it out, your margins and your reporting segments differently, but can we think of, if life and health sciences scales, that the operating margins are higher than company average -- have higher operating leverage than company average?

Robert J. Phillippy

I think you should consider if it scales, it's going to be at or better than corporate average. I think -- and I have to look at it. We don't -- because most of the -- many of those products that go into life and health sciences come from all the different locations and all the different manufacturing sites. It's a little bit hard to target the specific gross margin, but I think what we find consistently across the board, with higher volume comes greater profit, and I think that you would see that with life and health sciences as well.

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

And would it be more than above average leverage or the same as corporate average, do you think?

Charles F. Cargile

I think I would assume at the corporate average until I saw a dynamic that gave me better hope than that. I think I would just assume that would scale at the average.

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

Okay. And the other question is, you've mentioned something about in the optics industry of equipment you provided historically above the table and also the desktop that is discontinued, the more automation stuff, but what about the table itself? It was -- used to be pretty significant market, and if there's flooding, do these, the vibration isolation tables and all the other stuff that goes with it, is that stuff that in -- I mean, you probably have seen some flooding in markets where you've had these tables, does that need to replaced or does that fine through floods?

Robert J. Phillippy

Ajit, so first of all, in specific response, I was talking about in the context of the telecommunications device packaging industry, but just as it relates to our product portfolio in general, the optical table is still a flagship product for us. It was the product that the company was founded on and it's been a part of our portfolio for many, many years. It continues to grow and we continue to innovate in what is a product line that's been around for 40-plus years now. It's a very sturdy, rigid product. If it gets wet, seriously wet, certainly, it damages the integrity of the product's performance. Can it be dried out? I don't know. That's a case-by-case discussion. But just to kind of clarify an overarching sense, we're not looking at the flooding circumstances opportunistically as a growth opportunity. We're just trying to, first of all, make certain that from our own employees, customers and suppliers' standpoint, that we help out as much as we can, and then from a supply chain standpoint, that we make certain that we have continuous sources of supply.

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

Right. So it wasn't -- the specific question was more trying to understand on when a whole broad area gets flooded, including the disc drive industry and many other industries over there in Thailand outside of Fabrinet and they need -- do they need to change all these tables? Are there going to be constraints to get the equipment back or are these items that don't necessarily have to be replaced if they're flooded? So it's well beyond just Fabrinet from a sourcing perspective, which I think you answered already.

Robert J. Phillippy

Yes. So as it relates to the specific natural disaster that's occurring, I think it's too early to tell as to what the impact on our production and revenues might be. As it relates to flooding in general, when our products get wet, it compromises the performance of them for sure. It's case-by-case as to whether they can get dried out. That's depending on how wet and how long they're wet. By the way, Ajit, I wanted to just comment, to follow Chuck's remark on one point regarding the margins, when you guys were talking about margins for life and health sciences business, I presume you were talking about operating margins, right?

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

Yes.

Robert J. Phillippy

Okay. Because in general, the growth margins for OEM-side business, which much of our life and health sciences business is, are lower but the operating margin is about the same.

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

About the same, got it.

Robert J. Phillippy

I wanted to clarify.

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

And just given that fact that some of these big product ramps haven't happened, but you've had lots of investment and you have probably a significant team on the R&D side, I would expect that the leverage to be above what it is and in more mature categories where the team has been static and revenue is static for a while. So the operating margins in life sciences would -- I would have imagined would be somewhat lower than the others. I know you don't look at your businesses by the end market, or at least you don't report it by the end market, but would that be a fair assumption that those are sort of the R&D as a percentage of sales and the sales and marketing as a percentage of sales for that business would be greater until those ramps happen?

Charles F. Cargile

Well, I don't think so just because -- certainly not on the R&D side, because when you're dealing with OEMs, the SG&A and the R&D tend to march together because they're doing more of the R&D effort and you don't have to development as much. So I think I'll stick to the corporate average for the...

Operator

And that does conclude our question-and-answer session. At this time, I'd like to turn the call back to you, Mr. Phillippy, for any additional or closing remarks.

Robert J. Phillippy

Thanks, Jamie, and thanks again to everyone for your participation in today's call and your interest in Newport. I guess, the summary message of our call today is that we continue to execute effectively on our strategic agenda and we expect to continue to deliver our commitment to build an enduring success of Newport, making the company ever more valuable to our shareholders, our customers and our employees, and while I'm pleased to be the spokesperson for this great progress, it's important to note that it is our talented and experienced employee team that enables this performance. This quarter, we welcome the employees of High Q and Ophir to the Newport family, and in doing so, we create a combined organization with more expertise, market insights and industry relationships than ever before. It is the passion, resourcefulness and tenacity of our combined team that will drive Newport to new levels of success, and so my sincere appreciation goes out to our employee team for their outstanding efforts and support. So with that as an important closing comment, we're excited about where Newport is headed, and we look forward to reporting on our continued progress next quarter. Bye now.

Operator

And that does conclude today's conference. We do thank you for your participation.

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