Favorable Outlook for Rofin-Sinar Technologies

Rofin-Sinar (NASDAQ:RSTI) develops carbon dioxide (CO2), solid-state, and diode lasers for customers in the machine tool (36% of fiscal 2007 sales), semiconductor and electronics (23%), and automotive (8%) industries. Other markets include medical devices, consumer goods, packaging, aerospace and defense, jewelry, and research institutions.

In fiscal 2007, 55% of revenues came from Europe, 23% from North America, and 22% from Asia. The Macro segment generated 43% of fiscal 2007 sales. It makes CO 2 lasers with up to 8kW of output, solid-state lasers with 350W-4 kW of output, and diode lasers with 10W-3.6kW of output. High power lasers cut and weld metal. Lower power lasers are used for soldering, surface treatment, and welding plastics.

The Marking/Micro segment accounted for 48% of sales. Marking lasers produce just 2-120W of power. They mark integrated circuits, electronic components, smart cards, automobile labels and components, and packaging products. Micro lasers range from 1W-1kW of power. They are used for fine cutting, spot welding, and micro-structuring medical and dental equipment, electronics, and jewelry. Micro lasers are also included in perforating systems for easy-tear products, foils for food packaging, and cigarette paper.

The Components segment produced the remaining 9% of sales. It offers power supplies, fiber and optics technology, and laser diodes. RSTI recently augmented this segment with the December acquisition of Nufern. Demand is strong because laser technology offers a non-contact, high-speed, and low cost alternative to traditional mechanical tools. RSTI’s geographic reach has also contributed to its growth. Revenues from Europe and Asia grew 31% and 11%, respectively, in fiscal 2007.

These gains offset weakness in North America, which saw an 11% decline. Fiscal Q1 results reflected similar trends. Fiscal Q1 net revenues jumped 20.5% year-over-year to $134.7 million. Favorable foreign exchange produced half the gain. Macro revenues jumped 38.4% to $61.2 million. Marking/Micro revenues grew 10.1% to $63.4 million. Components sales climbed 1.2% to $10.1 million. The gross profit margin improved 250 basis points to 43.55% thanks to a more favorable product mix and improved productivity. The operating profit margin grew 233 basis points to 18.51%. Net income jumped 47% to $16.9 million or 53 cents per share. RSTI booked $157.9 million worth of orders during the quarter.

Of course, unexpected cutbacks on capital expenditures would have a detrimental impact on business. RSTI is particularly exposed to the machine tool, and semiconductor and electronics industries. Nonetheless, it should enjoy continued growth as it capitalizes on the expanding Chinese economy. It is constructing laser diode and laser marker facilities in China, which should come on line later this year, and it is also in negotiations to acquire a Chinese high power laser manufacturer.

The short-term outlook is also favorable. RSTI has a healthy backlog, a predictable stream of service and spare parts revenues, and will receive incremental contributions from the Nufern acquisition. Weakness in North America may continue for some time, but U.S. results may surprise on the upside thanks to the accelerated depreciation provision in the Economic Stimulus Act of 2008. RSTI will also benefit if the U.S. manages to avoid a prolonged recession.