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Newport (NASDAQ:NEWP)

Q1 2012 Earnings Call

May 02, 2012 5:00 pm ET

Executives

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

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

Analysts

James Ricchiuti - Needham & Company, LLC, Research Division

Lawrence Solow - CJS Securities, Inc.

Christian Seiferth

D. Mark Douglass - Longbow Research LLC

Mark S. Miller - Noble Financial Group, Inc., Research Division

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

Alfred Victor Tobia - Sidus Investment Management, LLC

Operator

Good day, everyone, and welcome to the Newport Corporation First Quarter 2012 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

Well, good afternoon, and welcome to Newport's first quarter 2012 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 event could prove inaccurate and there can be no assurance that the results will be realized.

The first quarter of 2012 represented another solid financial performance by the Newport team. The incremental sales and orders contributed by our acquisitions of Ophir, High Q and ILX enabled us to achieve significant year-over-year growth in Q1 and has set the stage for strong growth for the year.

We had record orders of $186.1 million, representing growth of 43.5% over the first quarter of 2011. Sales were $157.2 million over 22% higher than the first quarter of 2011. Easily a record for the first quarter of the year and second only to our all-time record sales of $160.9 million in the fourth quarter of 2011.

We also completed our acquisition of ILX Lightwave during the quarter. And we continue to make excellent progress on the integration of all our recent acquisitions. In addition, we retired the remainder of our convertible notes during the quarter and reduced our total debt by $21.6 million.

In short, we executed well and we're off to a good start for the year. I'll discuss our outlook going forward later in the call, but first, I'd like to comment on conditions and activities in our markets.

As expected, our recent acquisitions enabled us to overcome some lackluster business conditions in some areas and achieved year-over-year orders growth in all of our end markets. Another benefit of our recent acquisitions is improved end market and geographic balance. This is exemplified in the first quarter with approximately 34% of our sales coming from the scientific research and aerospace, defense and security markets, 23% from life and health sciences, 23% from microelectronics and 20% from industrial and other markets.

Regionally, the U.S. accounted for approximately 39% of our first quarter sales with Asia accounting for 27%, Europe for 26%, and the remaining 8% coming from other parts of the world. This balance enables us to participate in a range of very exciting growth opportunities, while providing a degree of insulation from the inherent cyclicality of some markets.

Now turning to our individual markets, first quarter orders from customers in our scientific research, aerospace, and defense and security markets were $49.2 million, an 18% increase over the first quarter of 2011 and a decrease of 10% versus the fourth quarter of 2011.

The sequential decrease was expected, given the historically seasonal nature of this business. We did experience particular weakness in orders from universities and government labs for some of our higher-priced products such as ultrafast laser amplifiers and precision motion systems.

We believe this is primarily the result of budget timing, as we have visibility to a number of opportunities that should enable us to regain momentum in these product areas later this year.

In addition, we have seen a modest uptick in OEM orders from aerospace and defense contractors, which have become a more significant part of our business as a result of our recent acquisition of Ophir. This business is program driven and as such, is subject to a wide variation in quarter-to-quarter order activity, so the uptick was welcome news. Our long-term prospects in this market continue to be quite favorable, as defense and security applications continue to rely more heavily on remote surveillance and night vision systems.

First quarter orders from life and health sciences market customers were $63.2 million, by far, an all-time record for the company, and representing growth of 71% sequentially and 142% over the first quarter of 2011. The highlight of this order activity was the $37.7 million order for ultrafast lasers used in surgical procedures, which we started to ship in Q1 and expect to continue to ship through the end of 2013.

This market has strong growth potential, as the unique and precise interaction of ultrafast laser pulses with tissue create better patient outcomes. We also added a new application space during the quarter with the introduction of a solar simulator product lines specifically configured to testing standards in the cosmetics industry.

Our new Sol-UV Solar Simulators are fully compliant with the European Cosmetics Association standards for testing SPF for sunscreen and other skin care products, and deploy a patent pending optical design that results in highly efficient and accurate tests. We've already received an initial order from a major cosmetics manufacturer and believe this application niche will provide some interesting growth prospects.

Our first quarter order from microelectronics customers were $44.8 million, an increase of 45.8% sequentially and 7.7% over the very strong first quarter of 2011. Our book-to-bill ratio in this market was 1.26.

This is an excellent result in a market that had been soft for the prior 2 quarters. Although we have strong and enduring relationships with several industry-leading semiconductor equipment OEMs, our order activity in the first quarter came from a subset of these customers, while others continued to experience reduced demand for their products. However, industry reports published by SEMI, the Semiconductor Equipment Industry Trade Association, have now shown increasing order levels for the past 5 months and an industry book-to-bill ratio of greater than 1 for the last 2 months. This reinforces our cautious optimism that the current down cycle may be less severe and shorter in duration than previous cycles.

Longer term, this market continues to hold great promise, as ongoing trends, driving smaller, more powerful and lower-cost semiconductor devices increase the need for our products in lithography, inspection, metrology and wafer processing applications.

First quarter orders from industrial and other market customers were a record $28.9 million, 42.3% higher than the first quarter of 2011 and 1.4% higher than the previous record result in the fourth quarter of 2011.

The acquisition of ILX Lightwave expands and enhances our solutions for industrial laser manufacturing. ILX is the leading commercial supplier of test and measurement solutions for diode lasers of all types, including emitters for telecommunications networks and pump diodes for DPSS, such as fiber lasers.

ILX helps lasers manufacturers improve yields and reliability and reduce cost by providing highly accurate and robust device burn-in and characterization equipment. Combined with the Ophir Photonics and Newport instrumentation product lines, we now have test and measurement solutions for virtually every laser manufactured in the world.

An important take away from this end market review is that our strategy to leverage common technologies and products across multiple end markets is working. It provides a good return on our R&D investment and enables us to maintain [ph] factory loading in the face of changes in demand. It insulates our financial results to some degree from unfavorable macroeconomic trends.

I'll now turn the call over to Chuck to comment on other aspects of our financial performance. Chuck?

Charles F. Cargile

Thank you. 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 encourage you to visit our website at newport.com and specifically, the company investor information section, where we post a wealth of information for interested investors. We've included the presentations that we've made at the most recent investor conferences we've attended. We've also posted historical financial statements, scheduled the detailed historical trends for our sales and orders by market, and the performance of our 3 reporting segments. Included also is a schedule showing supplemental non-GAAP financial information and a reconciliation to the corresponding GAAP measures and the calculation of our adjusted EBITDA.

I'd like to spend a few minutes talking about our non-GAAP information. For the first time, we are now identifying the cost of our noncash amortization of intangible assets and the noncash expense of equity compensation in addition to the other pro forma items, such as restructuring, acquisition-related and other special expenses and/or benefits. We believe this helps provide insight into our core business results, as well as a more meaningful comparison with financial results in prior periods. We acknowledge that this is a new and expanded presentation of our financial measures and we welcome your feedback as to whether this information is helpful.

While Bob already discussed our first quarter orders from each our key end markets, I'll provide a summary of our first quarter sales and also provide information on other aspects of our financial statements.

First quarter sales were $157.2 million. This reflects a 22.4% increase compared with $128.4 million we recorded in Q1 of 2011. Our acquisitions provided a positive boost to our Q1 results, adding a total of $39.3 million of revenue.

Excluding our acquisitions, our revenue would've declined year-over-year by $10.6 million or 8.2%. So the positive impact of our acquisitions is very beneficial at a time when many of the end market we participate in are a bit sluggish.

Our Photonics and Precision Technologies division or PPT, reported sales of $79.1 million and segment income of $16 million or 20.2% of sales. ILX, which we acquired in January of this year, contributed revenue of approximately $1.8 million to PPT.

Our Spectra-Physics lasers division followed its record financial performance in Q4 of 2011, with another very strong financial performance in the first quarter. Sales of $49.2 million were a little lower than the record $53.9 million recorded in Q4 of '11, but segment income in the first quarter was $6.7 million or 13.5% of sales. That's the highest percentage the lasers division has ever recorded.

We continue to be very pleased with the increase in profitability from Spectra-Physics and with the contribution of High Q Laser, which we acquired last July. High Q contributed $8.7 million of revenue in Q1 and we're optimistic about continued growth from the ultrafast laser offering they bring to Newport.

Ophir contributed sales of $28.9 million in the first quarter, which was 4.8% higher than the $27.6 million we recorded in Q4. Ophir's Q1 segment income of $2.3 million or 7.8% of sales exceeded the $1.5 million and 5.5% we recorded in the fourth quarter.

We remain confident in the synergies we will achieve with Ophir, most of which are expected to materialize later in 2012 and in 2013 and beyond. In the first quarter of 2012, our GAAP results included a number of special charges and gains, including acquisition-related expenses, amortization of intangible assets, stock-based compensation expense, restructuring and severance costs, a gain on the sale of assets and a reversal of a valuation allowance against the portion of our deferred tax assets.

That's a long list and some of these items positively impacted our GAAP results and some were negative. The net impact of these items on our operating income was $9.7 million and our net income, net of the tax impact of the excluded items, it was $5.6 million or $0.14 per diluted share. These items are detailed on Page 7 of our press release.

The following discussion about our income statement will reflect these results on a GAAP basis including the full impact of the items we highlight, as well as on a non-GAAP basis excluding those items.

Our operating income on a GAAP basis was $10.2 million or 6.5% of sales. On a non-GAAP basis, our operating income would have been $19.9 million or 12.7% of sales. We believe our operating income as a percentage of sales will increase throughout the year and we remain focused on achieving our goal of 15% of sales.

Our tax rate on a GAAP basis was 17.9% for the first quarter of 2012. That's quite a bit lower than the 32% to 34% we forecasted last quarter due to a onetime benefit we recorded in the quarter. Let me explain that. We made a minority investment in a business many years ago. And had long ago fully reserved -- and had long ago fully reserved for that investment, both for book purposes and for tax purposes.

Just today, it was announced that, that business was acquired and as a result, we expect to record a gain of approximately $5 million in Q2 of this year. So even though the transaction didn't occur in the first quarter of this year, the proper treatment for tax purposes is to reverse the previously established tax reserve. This generated a $1.4 million reduction in tax expense in the first quarter. This benefit is reflected in our GAAP tax provision and then as you expect, we excluded it from our non-GAAP results, as highlighted on Page 7 of the press release.

So in short, our GAAP tax rate in Q1 was 17.9%. Our non-GAAP tax rate was 31.6%. Going forward, we expect our tax rate to be approximately 35%.

Now perhaps more importantly, we only paid $1.2 million in cash taxes for the quarter, reflecting a cash tax rate of 16.2%. We're able to utilize net operating loss carryforwards and tax credits to reduce the cash outlay for taxes. We expect the cash tax rate to remain in the mid-teens throughout 2012 and into 2013.

Our earnings per diluted share in the first quarter on a GAAP basis were $0.17. On a non-GAAP basis, our earnings per diluted share would have been $0.31. We're confident that our earnings will increase as our sales increase and as we capture more of the synergies from our acquired businesses.

Lastly, we had a very good quarter from a cash management and debt reduction standpoint. In the first quarter of 2012, we used $21.6 million to reduce our total debt. We also used an additional $9.3 million in cash to complete the acquisition of ILX lightwave, and we paid $6.2 million for compensation related to our 2011 incentive plans.

These 3 items accounts for $37.1 million of cash usage. Yet in the quarter, our cash, cash equivalents and marketable securities balance declined by only $21.5 million

As it relates to our debt, we retired all of our remaining convertible bonds in the first quarter. Our debt is now comprised primarily of a term loan of approximately $180 million. There's interest of approximately 3%.

In addition, we have $21.2 million of other debt, which is mostly outside the U.S. So our total debt at quarter end was $201.6 million. We also have a $65 million revolving line of credit that remains undrawn.

We are pleased with our first quarter cash generation and the fact that we reduced our total debt by almost 10% in the quarter.

So in summary, overall market conditions are currently relatively soft, either [ph] acquisitions are enabling us to reach new heights in orders and revenue. Our Q1 financial results, including cash management, were solid. In addition to driving for effective execution in all of our businesses, we will continue to focus on integrating acquired companies to capture synergies and on generating cash to reduce our debt.

Bob will now provide additional comments before we address any questions that you have.

Robert J. Phillippy

Thanks, Chuck. I'd now like to provide an update on the integration of our recent acquisitions and then comment on our outlook for 2012.

Having now completed an acquisition in each of the last 3 quarters, we continue to devote a great deal of attention and energy toward integration. Given the significant differences in the size and product alignment of each of these new businesses with our existing organization, each integration project is proceeding at a different pace and is being driven by different teams.

ILX Lightwave, which is our most recent acquisition, is now part of our Photonics and Precision Technologies division. Its highly complementary products and technologies make it an ideal fit with existing Newport channels.

In January and February, the ILX sales and marketing team conducted a series of training programs to bring to Newport sales force up to speed on their products. This will enable our global sales service and distribution channels to expand the reach for ILX.

Going forward, Newport salespeople will identify sales opportunities and ILX sales and marketing leaders will serve as the experts to educate, support, close and guide the combined team in pursuit of ILX business growth.

High Q Laser, which we acquired in August of 2011, is a part of our Spectra-Physics Laser division. Most of the initial integration tasks for this business has been completed, including financial consolidation, manufacturing process optimization, channel migration and detailed training for selected members of our sales and service organization.

We've also established strong collaboration between the Spectra-Physics and High Q technical teams, which will lead to future products that combine the ideas and innovations of both organizations. Demand for High Q products has been robust and we now have the scale, support and service infrastructure in place to fully leverage the very differentiated High Q product line.

Ophir Optronics, which became part of the Newport team in October of 2011, is the largest and most complex of the 3 acquisitions, and has been a established as a new Newport division. Ophir has multiple product lines and a leadership position in some end markets in which Newport's presence have previously been relatively small.

The integration of Ophir is a significant project. Our integration teams are addressing an array of synergy opportunities in sales, marketing, product development, operations, IT and human resources. We are making very good progress in each of these areas with first quarter accomplishments that include establishing working relationships and conducting cross-training of a significant number of Ophir and Newport salespeople, adding dozens of Ophir products to Newport's e-commerce Internet site, developing a plan for material cost reduction by leveraging Newport's low-cost region supply chain, identifying opportunities to lower manufacturing costs through effective use of Newport's Wuxi, China and Ophir's Bucharest, Romania facilities, launching a plan to link our IT networks together globally and introducing Ophir personnel to Newport business processes and incentive compensation and retention tools.

As Chuck mentioned earlier, we expect integration-related activities, especially for Ophir, to proceed throughout 2012 and the associated financial benefits to materialize later in 2012 and into 2013. While we are very pleased with our progress, several of our integration projects such as optimizing our channels, coordinating product road maps, cash ring supply chain savings, further integrating IT systems and streamlining G&A processes, take time to implement and realize the resulting benefits.

With many years of experience and a track record of successful integration of acquisitions, Newport is well prepared to fully leverage the combined capabilities of our expanded team.

I would now like to discuss our outlook for the second quarter and full year. As noted earlier in this call, we're off to a very good start in 2012. We had all-time record orders in the first quarter and now have all-time record backlog scheduled for shipment within the next 12 months.

Although we had historically experienced seasonal weakness in our orders and sales in the first calendar quarter of the year, due to our more balanced end markets, this year, our revenue declined sequentially only about 2% compared with the fourth quarter of 2011.

However, we continue to operate in a lackluster macro environment and we anticipate market conditions in the second quarter to be similar to those in Q1. As such, we expect our Q2 revenue and our non-GAAP operating income and earnings per share to be similar to first quarter levels.

In the second half of the year, we expect to begin to leverage our strong backlog to a greater degree and to begin to increasingly realize the benefits arising from our acquisitions. As such, we expect our sales in the second half of this year to increase sequentially -- to increase approximately 7% to 12% over the first half level.

Based on this forecast of softer, near-term demand than previously anticipated, primarily from research and aerospace and defense customers, we now expect our revenue for the full year to be in the range of $650 million to $665 million with non-GAAP operating income in the range of 13% to 14.5%.

Although market conditions have dampened our outlook for revenue growth a bit, 2012 will be a very productive year for Newport on both tactical and strategic levels.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today will come from Jim Ricchiuti with Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

I was wondering if you could maybe help us get our arms around some of the factors. You cited in the shortfall, where I guess in the revised outlook for revenues this year, it's about $20 million. Is it spread? Is it concentrated more in the research? Or is it more of that coming in the defense government markets?

Charles F. Cargile

Yes, Jim, it's Chuck. The research was certainly slower in Q1 than we expected 3 months ago and we see that continuing into Q2. So that's the primary reason for the slowdown in the first half of the year. Defense was a little lower than what expected but not quite as negative as the research was.

James Ricchiuti - Needham & Company, LLC, Research Division

Got it. And Chuck, just looking at the margin improvement in the back half of the year. To get to the high end of that range that you're providing for non-GAAP operating margins, talk a little bit about what drives that? Whether -- are you assuming greater margin improvement in Ophir or just some of the other business units?

Charles F. Cargile

Yes. First of all, we have proven that we get very good profit leverage on increasing revenue. And so from where we are today, just the increased volume would give us, not only increase in total dollars, but also increase in the percentages. So that's number one . Number 2, we are expecting to see continued benefit from synergies and integration of all 3 of the companies that we've acquired. So I think those are probably the 2 largest drivers of the improvement.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. And with respect to High Q, you gave us a revenue number, I think about $8.7 million. How are the operating margins in that business? Because that's part of Spectra and Physics and you clearly showed some nice margin improvement in that segment.

Charles F. Cargile

Yes, the Spectra-Physics Lasers division profit percentage even without High Q would be at historically high levels. I didn't look back to see if it would be an all-time record, but it would be probably pretty close, if not, for sure, to be at a record level, and High Q even expands on that a little bit more. And I think that High Q is showing margins that are similar to what we get in the Photonics parts of our business. Now, I wouldn't expect that to continue forever, because remember right now, they're dealing with a very concentrated, customer base. So the revenue comes without a lot of incremental SG&A effort and they're getting much more efficient now that our lasers team from Santa Clara, is spending my time with them, so the manufacturing processes are getting better. So with all upside in the market in the near term. But now, as we're transitioning to go acquire new customers, we may have to change products slightly. That will put some cost into that business that we don't have today. So we certainly have room now to leverage those profits, to grow the revenue at even greater pace.

Operator

We'll take the next question from Larry Solow with CJS Securities.

Lawrence Solow - CJS Securities, Inc.

Just a quick clarification. Since the -- again, I don't want to focus too much on the quarter, because that's not really my MO. But you had a guidance number of 7% to 8% in operating profit. Did that guidance include -- I realize it did include the amortization and whatnot, and some of these other sort of one timers. But did it include the severance and the restructuring? That's really my question.

Charles F. Cargile

Yes. Well, when we gave guidance, Larry...

Lawrence Solow - CJS Securities, Inc.

Right. Did you know that the severance and restructuring was going to be there, too?

Charles F. Cargile

No, when -- the guidance -- what you should look at now for comparative purposes...

Lawrence Solow - CJS Securities, Inc.

Right. I'm just trying to do an apples-to-apples and see what -- when you put out that number, because I don't know -- you know what I mean? you sort of -- you moved the goal post a little bit in the middle of the game, which is fine, but you did sort of do that, so...

Charles F. Cargile

Let me help you with that, okay? All right. So operating income as reported was $10.2 million or 6.5%. To make that comparable, you have to exclude all the restructuring and acquisition charges, which were about $2.3 million, okay? And then, so if you exclude those, we would have had operating income of 12.5% or 8%. So the revenue was down a little bit, but the operating income as a percentage of sales was at the high end of the range that we gave when you compare it apples-to-apples.

Lawrence Solow - CJS Securities, Inc.

Perfect. That helps a lot. Because I'm -- now, obviously, you're going to be giving this number. And the other question is, and I think I'd know the answer, but the -- well, sort of just to compare apples-to-apples, your full year guidance initially was for an operating margin was, I guess, 10% to 12%. Now it's 13.5% or whatever it is now it's -- the higher number, does the higher number -- is the difference there? Obviously, the amortization of it. It's all these things, right? But what we've seen there...

Charles F. Cargile

In going apples-to-apples, my guidance would be about equivalent to 10%percent or so. Because, again, when we gave the guidance before, we were excluding all the acquisition-related charges and restructuring. And more yet [ph] excluding the intangibles and the stock comp, okay. And the intangibles and the stock comp are the ones that we identified in the press release at being about $5.2 million in amortization and $2.2 million in stock-based compensation. So those are the 2 that weren't contemplated in the guidance last quarter.

Lawrence Solow - CJS Securities, Inc.

Right. So in other words, the prior guidance of 10% to 12%, but that did not include a severance in the restructuring, right? So that's -- I guess that would be a little bit of an uptick there from what your prior guidance was, is that fair to say?

Charles F. Cargile

We included those in the raw numbers, we weren't excluding them. When you hear the 13% to 14.5%, now we're excluding those as non-GAAP measures.

Lawrence Solow - CJS Securities, Inc.

No, no, I understand that, but I know like for instance in the first quarter, you had the 6.5% would have been 8%. Okay -- I guess, I got it. We can always talk offline. No problem. A question in terms of bookings, you gave sort of an organic -- your sales number would've been down about 8% organically. Any way to look at that on a bookings basis? So obviously, your bookings were strong up 43%. I assume that did increase on organic basis, too, and would you have that number?

Charles F. Cargile

The biggest driver of the increase in the orders, of course, was the $37 million ultrafast laser...

Lawrence Solow - CJS Securities, Inc.

Of course, right. And that's sort of -- obviously inorganic [ph] -- it's an acquisition-related number, although it's a big number. And it's nice, because you -- probably bigger than you anticipated when you purchased it but...

Charles F. Cargile

And if you look at each of the markets in science and research, that was pretty weak in the quarter as we just [ph] got sort of microelectronics was very, very strong. Life and health science, because of the ultrafast order was very, very strong and industrial was very strong. So all of our end markets compared sequentially with Q4 were strong except for research.

Lawrence Solow - CJS Securities, Inc.

Right. And I guess, sequentially, that's all apples-to-apples except for ILX, which is -- ILX, which is pretty small, so shouldn't really be moving the needle. Okay it sounds like -- just to follow-up to Jim's question, the really -- the pushback is in the research market pretty much. Is that fair to say? That sort of the -- if I had to isolate one area where you're sort of cutting back a little bit in your enthusiasm or cutting numbers a little bit is from the research.

Robert J. Phillippy

Larry, this is Bob. That's correct. Also, the aerospace and defense market is a little softer than we had anticipate -- than we had anticipated.

Lawrence Solow - CJS Securities, Inc.

Right. And you talked about -- but not on the OEM -- isn't that an OEM business? Or at least of the OEM defense piece increasing? So I guess that's not all OEM then that...

Robert J. Phillippy

Well, we saw an uptick sequentially in OEM orders from aerospace and defense contractors, which was certainly welcome news, but it was in the context of a soft market.

Operator

The next question will come from Patrick Newton with Stifel, Nicolaus.

Christian Seiferth

This is Christian Seiferth filling in for Patrick Newton. I was wondering if you could comment on the microelectronics business? Would you expect the first quarter to be a trough for revenue in the segment and how can we think of the growth profile of microelectronics as we move through 2012?

Robert J. Phillippy

Yes, Christian, this is Bob. Our sales in the quarter to microelectronic customers basically reflected the soft market conditions we had experienced in the second half of 2012. You recall that we had a precipitous drop in microelectronics orders in Q3 and Q4 of last year. And so you see that reflected in the sales of Q1. On the other hand, the orders in Q1 from these customers, as you can see, rebounded sharply. And as I mentioned in the prepared remarks, the rebound wasn't across the board with all of our OEM customers, but that's fairly typical for an industry inflection point. But that said, 44.8 million in orders for the quarter is really a healthy level for us. And you combine that with the fact that industry-wide booking trends have been quite favorable for the last 5 months, which is usually a leading indicator for our business. And so you put those together and we're pretty optimistic that the industry will recover in the second half of 2012 and we're preparing accordingly.

Christian Seiferth

And then I was wondering if you could also comment on the scientific research side of the business. And any impact you're seeing from North America, a decrease in budgets there? And is China still expected to be a healthy growth driver in 2012?

Robert J. Phillippy

Yes. So as Chuck mentioned, activity in the research market was particularly slow in the quarter. When we look at the budget announcements that we've seen from various countries and you put it all together, of course, with the U.S. and Western Europe being the more subdued of those. But if you look at it on a global scale, we anticipated low single-digit growth in 2012. Now, we did see a drop in orders and, as I mentioned, it was particularly for higher-priced items, things that would be a higher dollar value, CapEx-type things. And so that was clearly an impact. We did see a decline there for sure. And when we talked to customers, we were led to believe that while there certainly is some uncertainty in the market, the first quarter softness was at least, to some degree, influenced just by timing. So if you combine that with the mindset that the market is historically seasonal, and Q1 is typically the softest quarter, we really haven't changed our sentiment about the market other than the fact that it was a little bit softer than we expected in Q1 and we continue that softness in Q2. And so that caused us to be a little bit more conservative in our guidance for the year.

Charles F. Cargile

And you also asked about China, right?

Christian Seiferth

I did ask about China.

Charles F. Cargile

Okay, sorry. Yes, China. So we had another consecutive quarter of record sales in China. Our revenue run rate, as I think we've reported previously, is now approaching $50 million a year. Orders for the first quarter in China were a little bit softer, and for the first time in a while, we had a book to bill of slightly less than 1. This isn't anything we're particularly concerned about, because we had anticipated that growth in China would slow and we continue to believe that China represents an excellent growth opportunity. So we're still staying in the course and it's very active, I guess, I would say. The other piece on China is that we intend to further leverage over Wuxi manufacturing site, because we have been very pleased with the material cost reductions that we have received there and we intend to expand that capability to our new acquisitions.

Operator

We'll hear next from Mark Douglass with Longbow Research.

D. Mark Douglass - Longbow Research LLC

Okay, tax rate. Chuck, can you go through that again? So in the quarter, if we compare apples-to-apples to what you were guiding before, that 8% up margin comparable, what would the tax rate have been on that? Can you...

Charles F. Cargile

Yes. We would've expect that if it weren't for the benefit from the reversal of that valuation reserve, we would have expected the tax rate to be about 35%. So it would have been about $2.8 million, then we got the $1.4 million direct benefit that reduced it by half. And so going forward, we would expect the GAAP tax rate to be 35%, there's no change in that. We just got the benefit because the business that we had a share of ownership and got sold.

D. Mark Douglass - Longbow Research LLC

The GAAP tax rate just will be 35%?

Charles F. Cargile

Yes, sir.

D. Mark Douglass - Longbow Research LLC

And non-GAAP?

Charles F. Cargile

Non-GAAP might be a little bit lower. But it'd be in the -- not at the cash tax rate, it'll be in the 32% to 35% range also.

D. Mark Douglass - Longbow Research LLC

Okay. And maybe you want to talk offline. It seems a little -- okay. What was cashless [ph] operations, CapEx and D&A? Did I miss that?

Charles F. Cargile

Yes. First of all, you can see the stock comps in the table. But for depreciation and amortization, it's about $10.8 million in the quarter, CapEx was about $3.7 million.

D. Mark Douglass - Longbow Research LLC

What was the cash flow from operations, again? I'm sorry.

Charles F. Cargile

Cash from operations is about 13 -- a little more than $13 million.

D. Mark Douglass - Longbow Research LLC

Okay. And then we look at Ophir. How did the end markets breakout for Ophir in the quarter?

Charles F. Cargile

Ophir is about 50% goes into what we classify as research, aerospace and defense. And again, for them that's going to be more defense than research as opposed to Newport. About 31% goes into industrial and other, maybe 10% or 11% life and health sciences, and then a little bit that remains probably goes into semiconductor.

D. Mark Douglass - Longbow Research LLC

Okay. And then finally -- on the orders, is the life and health science fully reflecting that $38 million High Q order then?

Charles F. Cargile

The orders number fully reflects all of that ultrafast laser. The backlog reflects only that which will ship in the next 12 months [indiscernible] into 2013.

D. Mark Douglass - Longbow Research LLC

Okay, so orders is total no matter how far out the order is?

Charles F. Cargile

That's correct.

D. Mark Douglass - Longbow Research LLC

Backlog is only 12 months?

Charles F. Cargile

That's right.

Operator

We'll hear next from Mark Miller, Noble Financial.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Could you just -- specific guidance for the margin improvement in the second half?

Charles F. Cargile

Did we give specific guidance for the margin improvement?

Mark S. Miller - Noble Financial Group, Inc., Research Division

Just saying it's going to be higher?

Charles F. Cargile

Well, there's a couple of reasons. One, is in this quarter, Mark, I know that you don't break out the onetime charges. But this quarter, there was $800,000 in cost of sales for inventory that was capitalized as part of the opening balance sheet. The opening balance sheet accounting, so that's about 50 basis points of improvement that we would get. I mentioned that with the expectation of 7% to 12% increase in revenue will get leverage on that improvement. And then we also expect that some of the synergies, some of the activities that we're taking with acquisitions will start to kick in. So you may recall last year, before we had done the acquisitions, Newport's gross margin was right around 46%. The acquisitions have brought that down temporarily, but we're confident that those businesses by leveraging off the scale that Newport has, and the growth in revenue can get back to those same levels.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Okay. Since I'm already getting e-mails about this and you'll have to bear with me, this goes back to a previous question. I just want to make sure that investors have a clear sense. Obviously, you're guiding a little down in sales for the rest of the year, but you're seeing improvement 7% to 12% in the second half over first half. I think what you stated before your operating income after your adjusted from restructuring acquisitions was in line with what you expected, is that correct for the first quarter?

Charles F. Cargile

For the first quarter, yes.

Mark S. Miller - Noble Financial Group, Inc., Research Division

And then for the year, after making adjustments from the original guidance, it's also -- is it a little higher now than your original guidance or at the same level when you make...

Charles F. Cargile

No, if you look apples-to-apples, Mark, we would be at the low end of the range of the guidance that we given before for the full year, because of the reduced revenue.

Mark S. Miller - Noble Financial Group, Inc., Research Division

That was 10% to 12%?

Charles F. Cargile

Pardon me?

Mark S. Miller - Noble Financial Group, Inc., Research Division

That was 10% to 12%, your original guidance?

Charles F. Cargile

That's right. It was 10% to 12% before, and that was excluding the amortization of intangibles and the stock comp. And those are running, as you can see in the press release, we'll have about $19 million or $20 million of amortization of intangibles, which is about 300 basis points. And then on the stock comp, it's running at about $8 million, which would be about another 100 basis points or so. So when you look at the 13% to 14.5%, you need to take off of that to make it apples-to-apples about 350 basis points. So we think we'll be at the low end of that range if you don't exclude the noncash amortization of the noncash stock comp. So the range, even though the revenue was lower, at the low end of the range.

Operator

We'll hear next from Dave Kang with B. Riley & Co.

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

First of all, Chuck, so if you strip out the High Q orders of 37, Q1 orders were approximately $150 million. Is that kind of what we should be expecting in Q2 as well, as far as orders are concerned?

Charles F. Cargile

Well, first, Dave, I think it wouldn't be appropriate to take out all of the $37 million, because that would imply that we wouldn't have gotten any other orders at all for that in the quarter, and we've been shipping a lot. So they would have had to make some orders just to continue to maintain their production, the customer, that is. So I wouldn't take out all $37 million, maybe take out $30 million of it to make it comparable going forward.

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

Okay. But my understanding is that High Q only had -- they only had, what? A couple of major customers? So I guess going back to that $37 million, in terms of [ph] orders. How many -- over how many quarters do you expect to fulfill? And typically, what's the lead time for those ultrafast laser? I mean, do they wait until orders are completely fulfilled or do they order ahead?

Robert J. Phillippy

Yes, Dave, this is Bob. The idea behind the $37 million order is that it does cover the time period for 2012 and into 2013. So we started shipping the order in Q1 of this year. So it's already started shipping and our current schedule has the order completed shipping by the end of 2013. And of course, that depends on market demand for our customer's product.

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

And what's the typical lead time for those lasers?

Robert J. Phillippy

Well, if you are at a cold start, lead time would probably be a quarter. But the idea behind this order is that we'll have the ability to drive our supply chain, hopefully reduce material costs which we certainly expect to do and schedule the shipments. So that in terms of the customers' requirement date, when they pull, we'll be able to have the product immediately available.

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

Got it. And then the other major customer for High Q, when was the last time they placed orders, and when do you expect them to come back with a follow on?

Robert J. Phillippy

I think the last big order from another -- from other customers -- I mean, High Q, let me just make sure I clarify, High Q has more than 2 customers. We get orders all the time, but the last significant order from other customers was like in the Q3 timeframe of last year. We do have some circumstances in which customers want to have a larger order that's scheduled over time, so that they can assure that the availability of capacity for a fairly steady run rate.

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

Got it. And then -- so how much is -- you talked about Ophir and aerospace. What's your total exposure to aerospace defense or is it all Ophir?

Robert J. Phillippy

Of our total company's orders in revenue, it's in the 10% to 15% range now.

Charles F. Cargile

Dave, we didn't answer your first question about the orders. [indiscernible] although you may not pull out all of that $37 million order as we mentioned, we are seeing conditions very similar in Q2 to Q1. So the $150 million range, give or take, 5% or so is probably in the right range for the expectation for orders.

Operator

And we'll take a follow-up question from Jim Ricchiuti.

James Ricchiuti - Needham & Company, LLC, Research Division

The Ophir bookings in the prior quarter were, I believe, around $23 million, Chuck? How did they track in the March quarter?

Charles F. Cargile

Much better. We mentioned in February that we had already seen them improving and they improved about like we expected, which was very well. So over $30 million, about a 35% improvement over the $23 million in Q4.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay, so that was, Chuck, some of the snap back that you were anticipating in the aerospace defense market?

Charles F. Cargile

That's right. And what I think, Jim, there's no way to prove this, but I think some of that was just orders that we might -- maybe Q4 was a little bit light, those orders that would probably would have gotten in Q4. Because we don't see the overall defense space being that robust, that would show 40% increase, which is what we saw at Ophir. I think with the other companies that you followed, nobody's talking about that type of activity in defense. So it's a matter -- we had mentioned before that we thought there was a little bit of acquisition fatigue in the Ophir team. And so you probably need to look at those 2 quarters together rather than say, wow, Q4 was terrible and now there's been a see [ph] change in the environment in Q1.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay, and the commercial? Sorry...

Robert J. Phillippy

This is Bob. Just to follow on that point regarding the aerospace and defense business. I had the opportunity to attend the Defense, Security and Sensing Show last week in Baltimore. And during the course of that show, I was, of course, meeting a lot of Ophir's customers and so I had the opportunity to talk with a number of Tier 1 companies in the area, and I had really a couple of different takeaways. Number one is, no surprise, just because of what you see in public domain, that the U.S. Defense industry is certainly in a soft spot at present. On the other hand, the longer-term prospects, we continue to believe and I was just reinforced by the conversations, remain quite strong. Because the military and homeland security departments in the U.S. are increasingly moving towards remotely monitoring unmanned apparatus for weapons and other security devices. So you couple that with the fact that when you think about, as I mentioned earlier, that aerospace and defense now is 10% to 15% of our total sales, put that up against the backdrop of the size of that industry, just the whole optics, plantronics [ph] , space and aerospace and defense, it's a big industry. So we got plenty of room to grow even if the industry is in a soft spot, not to even mention the transition towards increasing reliance on optical technologies as opposed to feet on the street in the military theater. So we're pretty upbeat about the long-term prospects, but as I mentioned in the prepared remarks, we're going to have a bit of a lumpy order pattern just because it's OEM business and it's program driven.

James Ricchiuti - Needham & Company, LLC, Research Division

And just, again, another question on Ophir, only because it's relatively new. How would you characterize the industrial portion, the commercial portion of their business in terms of the pipeline or the bookings you've seen in the past quarter?

Robert J. Phillippy

The big hitters in the industrial segment are automotive and laser measurement and commercial security. So the way we characterize industrial in the past, Jim, is that it's just such a broad array of applications that we just kind of roll it up into kind of an all-other mindset. But with Ophir, as I mentioned, automotive and that's night vision for cars, and commercial security is the increasing adoption of night vision technology and thermal imaging in commercial surveillance. And then laser measurement, remember, with the Ophir product line and by the way, of course, the ILX product line as well, we've now got a laser measurement solution for just about everybody, every laser, whether it's the kind of lasers we make or any other laser, high-power lasers, cutting metal or anything like that. We think that we've gotten pretty good growth prospects.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. And then one final question for me. If you just think in terms of what you have seen this past quarter in the research market, which has been a little softer, is there a way to characterize that in terms of the geographic regions you addressed? In other words, are you seeing have you experienced more softness in that area in Europe or is it the U.S.? Some, I think, companies with exposure have actually said the U.S. market has been soft, is that primarily where you're seeing?

Robert J. Phillippy

Well, it's hard to parse it out between geographic softness and just seasonal norms. So, I mean, just to walk through it, as I mentioned, in China, we had another quarter of record sales, although our book to bill was slightly less than 1. But again, that was no surprise, we expected the China market to slow a little bit. In Europe, our first quarter sales declined a bit, but that's consistent with historical seasonal patterns. We have seen some tightening in government-funded research activities in Europe. And in Japan, as you know, the government fiscal year ends at the end of March. And according to their policies, researchers need to receive purchases by the end of their fiscal year in order to ensure that they receive funding. So what that leads to is a seasonal cycle which says stronger orders in Q4 followed by stronger shipments in Q1, and we had that pattern for sure. So we did see a dip in orders in Japan in the scientific market in Q1. So we did see softness and as I mentioned earlier, it was really drawn more particularly along the lines of higher cost items and that was kind of a global phenomenon. But each of the regions have their own seasonal patterns, but are they more or less soft than they otherwise would be? That's hard to pick.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. But just with respect to the -- what would effectively as a modest downward revision, it looks like in your overall revenue guidance, you're basically on an apples-to-apples basis. Again, I think somebody's already touched on this. You're basically guiding toward the lower end of your prior operating margin target for the year, is that right?

Robert J. Phillippy

Yes. And let me be very specific on that, Jim, to help everybody else as well. The amortization this year is expected to be about $19 million. So you can take the $19 million by any part of that range you want, the 650 or 665 and get about 300 basis points, give or take, which goal post you choose. There's $8.8 million of stock comp, which if you choose the midpoint, is 130 basis points. So that's 430 basis points that we're now showing as pro forma, that before we did not. So the 10% to 12%, you can adjust that and see that maybe if we're at the low end of that range, we'd be at 9%. And if you take 400 basis points off the 14.5%, we're at 10.5%. So you can see, we could be at the low end of the range, we could dip below the range. It just matters whose model whether they pick the 650 or 665.

Operator

We'll take a follow-up question from Larry Solow.

Lawrence Solow - CJS Securities, Inc.

Just a quick follow-up. The D&A number in the quarter, I know you gave that, I just missed that. What was that number?

Robert J. Phillippy

Depreciation and amortization in total was 10.8%, which includes the 5.1% of amortization. So 5.1% of amortization of intangibles and about 5.6% of other noncash depreciation.

Lawrence Solow - CJS Securities, Inc.

And I imagine that the amortization, the intangible number will stay pretty flat for the year or will that start to decline? Or is that all amortized over the life of the assets or is there some upfront that increases it a little bit...

Charles F. Cargile

Yes, the amortization will decline a little bit, but not a lot. I think you should expect it to gradually decline. So from $5.2 million in the quarter, maybe down $100,000 or $200,000 each quarter.

Lawrence Solow - CJS Securities, Inc.

Okay. And the other part of -- the core depreciation...

Charles F. Cargile

Depreciation will be pretty flat.

Lawrence Solow - CJS Securities, Inc.

Okay, so like a $22 million and then, okay. Okay, good. And then just [indiscernible] 22 from the 5, 6 x 4 is 22, right?

Charles F. Cargile

For the year. Okay, good.

Lawrence Solow - CJS Securities, Inc.

Just, obviously, you've done 3 acquisitions in the last 9 months and I think Ophir is -- well, High Q is pretty big, too, but Ophir is the biggest one. Now, you had a few months -- I realize it's still pretty early in the game, but if you had to say what is sort of the most -- the biggest positive surprise and sort of the negative surprise, if you will? And a follow-up question to that, then we can stop, is any update on the dental scanning business?

Robert J. Phillippy

Yes, Larry, this is Bob. So as it relates to acquisitions, let me make a couple of over-arching comments. First of all, we are really pleased with our new colleagues. Each of the 3 acquisitions that we've completed in the last 3 quarters, they're very different size, they're very different scale and they are at different stages in their own development. But the people side of it has worked out, really exceeded our expectations. In each case, we've got extremely capable and professional fit and we've been able to retain the key leadership in the organizations, and so that's coming together nicely. But each of the 3 acquisitions have different characteristics. When you say what's the biggest disappointment? I'd say in general, we're pretty pleased at this point. I don't have a particular disappointment mind, we're just proceeding to do what we do, which is going to be effective implementation. And as I mentioned in the prepared remarks, ILX is a bolt-on type, it fits into our PPT division and the key objective is magnifying sales efforts, which we're working on. High Q, the primary objectives were to scale the business, which we've been successful at doing. And secondarily, it's helped to win new OEM customers, which we're in the process of doing. And I guess, thirdly, it's -- High Q inserts some pretty good DNA into our ultrafast laser capabilities. And so that collaboration between Spectra-Physics and the High Q, we think, is going to hold great promise. And then Ophir participates in some markets that Newport has had a relatively light position in historically, namely aerospace and defense. And so it's about capitalizing on that opportunity and our position there. Of course, some of the objectives remain the same, accelerating growth through optimizing sales channels and using our low-cost region manufacturing and supply chain in order to drive improved material costs, and that piece just takes time. So we're in the middle of doing it. We feel good about our progress. We're achieving and, in some cases, exceeding our milestones. I wouldn't be able to frame up a disappointment other than the fact that it would always be nice to be done, but it's just work in process.

Lawrence Solow - CJS Securities, Inc.

Fair enough. And then just any update on the dental scanning business you acquired with Ophir, or any milestones we should -- we can maybe look forward to?

Robert J. Phillippy

No, not really. I would just characterize it as we have in the past, which is sort of a start up within the context of Ophir. Some very interesting and very differentiated technology, but we're certainly in the early stages and it's going to develop. And so that means that the pace of the ramp or the pace of the next milestone is uncertain.

Lawrence Solow - CJS Securities, Inc.

I know they, at one point, I guess when you first acquired them, there was talk of this new handheld device that they were supposed to launch this year. Is that still potentially out there?

Robert J. Phillippy

It is.

Operator

Our next question comes from Al Tobia with Sidus.

Alfred Victor Tobia - Sidus Investment Management, LLC

Right. Chuck, I've been on a couple of conference calls, I just wanted to make sure I have my numbers straight here. If I take your operating income that you're guiding in your revenue, I get something like operating income in the $85 million to $95 million or $85 million to $93 million range, something like that?

Robert J. Phillippy

That's exactly right.

Alfred Victor Tobia - Sidus Investment Management, LLC

Okay. And that equates to something close to $1.70 of earnings?

Charles F. Cargile

That would be too high. Are you reducing that by $8.8 million or so of interest? And then taxing at 35%?

Alfred Victor Tobia - Sidus Investment Management, LLC

So, yes. If we take $90 million, take it right off of that 80 -- call it $80 million...

Charles F. Cargile

35% tax rate, 39 million shares.

Alfred Victor Tobia - Sidus Investment Management, LLC

What was the share count?

Charles F. Cargile

39.

Alfred Victor Tobia - Sidus Investment Management, LLC

39?

Charles F. Cargile

Yes.

Alfred Victor Tobia - Sidus Investment Management, LLC

Got you. So $1.30.

Charles F. Cargile

Yes, that would be at the low end if you're assuming that the $650 million and $85 million in operating income.

Operator

Our next question comes from Dave King, B. Riley & Co.

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

Yes, just a quick follow-up. Bob, you talked about the research market. In terms of a geography, you talked about the China, Europe and Japan. Just how big are those countries in terms of research revenue and how do they get even [ph] on North America?

Robert J. Phillippy

Dave, we don't break out research by -- I'm sorry, we don't breakout by end market, by country, typically...

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

Just qualitatively and just which ones are really relevant?

Robert J. Phillippy

Yes, I would say probably go along the same lines as we do for the total company and you wouldn't be too far off. So Asia and Europe, represent mid-20s each. U.S is in the 40%, 40% to 45% range. We've historically had a very strong position in Japan and continue to have that. So that's an important piece. We've got a growing position in China and I told you about that, and then Western Europe has been a stronghold as well.

Operator

We'll take a follow-up question from Mark Douglass.

D. Mark Douglass - Longbow Research LLC

Just real quickly, Chuck, on the interest expense, it's a little lower than expected. Was that related in part to your accelerated paydown? And then are we thinking closer to $9 million for the year?

Charles F. Cargile

Yes, $9 million for the year is a better number. I know looking at the different models that you had it modeled in at 3, which was a little higher than most. So I don't know if you had done the math differently or what, but it's -- the only thing that causes that line to vary much is it includes things other than just the interest, the pure interest on the debt, foreign exchange gains and losses that may occur. They're usually pretty small, but they might move it in the noise a little bit. But for the most part, for the most part, we're modeling or expecting it to be around $2.2 million to $2.4 million a quarter.

D. Mark Douglass - Longbow Research LLC

Right. Sort of what it is in 1Q.

Charles F. Cargile

Yes.

Operator

And with no questions remaining, I'll turn the call back over to management for any additional or closing remarks.

Robert J. Phillippy

Thank you. And thanks again for your participation in today's call and your interest in Newport. The Newport team developed -- delivered another solid financial performance in the first quarter of 2012, and we're off to a very good start in what should an excellent year for the company. As always, these results represent the cumulative efforts of the highly capable and resourceful Newport employee team around the world, which now includes the talented people of Ophir, High Q and ILX. My sincere thanks goes out to all my Newport colleagues for their support and diligent efforts to continue our quest to be the world's premier source for photonics technology and products. We look forward to reporting to you on another strong performance in Q2. And in the meantime, for those of you who are interested, we'll be presenting at 3 conferences during the second quarter. The first is the Jefferies Global Technology Internet Media and Telecom Conference in New York City on May 8, the second is the B. Riley Investor Conference in Santa Monica on May 23, and the third is the Stifel One-on-One Conference in San Francisco on June 13.

So with that, thanks again for your interest and bye now.

Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.

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