Newport Management Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 1.12 | About: Newport Corporation (NEWP)

Newport (NASDAQ:NEWP)

Q2 2012 Earnings Call

August 01, 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

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

D. Mark Douglass - Longbow Research LLC

Lawrence Solow - CJS Securities, Inc.

James Ricchiuti - Needham & Company, LLC, Research Division

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Ladies and gentlemen, Good day, and welcome to the Newport Corporation Second Quarter 2012 Conference Call. Please note today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Robert Phillippy, President and Chief Executive Officer. Please go ahead.

Robert J. Phillippy

Thank you. Good afternoon, and welcome to Newport's second 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 of them could prove inaccurate, and there can be no assurance that the results will be realized.

The Newport team continued to execute well in the second quarter of 2012. We achieved non-GAAP operating income of $20.2 million or 13.1% of sales and generated $15.1 million in cash from operations. Both of these numbers increased sequentially despite a slight reduction in revenue caused by challenging conditions in some of our end markets. While these challenges were not unique to Newport, our team responded to them quickly and effectively. We are also implementing a plan to achieve cost savings of $15 million on an annualized basis. These savings will come from a combination of synergies from our recent acquisitions and other business streamlining. We'll touch on both of these topics again later in the call.

But first, I would like to make some comments regarding conditions in our end markets. Our second quarter 2012 sales were $153.7 million, representing 18% growth over the second quarter of 2011 and a 2.2% decline sequentially. This result is slightly below what we had expected due primarily to current uncertainty in government funding, most notably in the United States. This impacts our business in 2 key end markets: research and aerospace and defense, and life and health sciences. Our research business is directly impacted by reduced grants for universities and other research institutions as these grants fund purchases our products. In the life and health sciences market, many of our OEM customers’ products are purchased using similar funding sources. The uncertainty regarding future funding levels has led many customers in these markets to delay purchases of higher-priced equipment. Similarly, our business with major defense contractors has been impacted by the uncertainty associated with potential cuts in U.S. defense budgets that could be triggered at year's end.

Given this scenario and the current political gridlock, 2012 is shaping up to be a difficult environment for government funding in the U.S. The scenario outside the U.S. is mixed, but overall, these factors have made our outlook for the rest of the year a bit more cautious.

Second quarter 2012 orders were $148.3 million, growing 3% year-over-year, but declining 20% sequentially. Both prior periods reflect tough comparisons as we received large OEM orders in each of these periods; one for $15 million in the second quarter of 2011 and the other for $37.7 million in the first quarter of 2012. Both of these orders cover multiple years of demand. With approximately half of our business now coming from OEM customers, our order patterns are increasingly subject to quarter-to-quarter variations.

Our total orders for the first half of 2012 were $334.4 million, representing 22% growth over the same period last year. Our recent acquisitions provided a positive boost to Q2 sales and orders, adding a total of $34.7 million of sales and $26.8 million of orders. Excluding the acquisitions, our sales and orders would have declined year-over-year. Not only have our acquisitions enhanced our near-term performance, they also provide excellent long-term growth prospects by enhancing our presence in applications such as laser surgery, infrared optics for military surveillance and commercial security and instrumentation for industrial laser measurement.

Second quarter orders from our scientific and research and aerospace and defense customers were $49.7 million, a 19% increase over the second quarter of 2011. Sales to this market were $47.8 million, an increase of 20% year-over-year. We remain well positioned in both the scientific community and defense contractors with our broad portfolio, strong channels and excellent customer relationships. And we continue to have visibility to a number of opportunities for new programs that are currently budget-constrained. If the government funding issues are resolved favorably, we expect to benefit from pent-up demand in this market.

Second quarter orders from life and health sciences customers were $19.3 million, declining 26% versus the second quarter of 2011. While sales to this market were $33.3 million, an increase of 34% year-over-year. While government funding constraints have impacted the near-term demand for our bioinstrumentation OEM customers’ laboratory products, we had a very strong quarter for design wins capturing 4 new programs with bioinstrument customers. As is typical for this type of OEM business, there will be an 18- to 24-month period before these design wins reach production volumes. Once in full production, we expect these programs to generate total revenue of $5 million to $7 million per year.

The clinical side of our life and health sciences business continues to be very active. Shipments of ultrafast lasers to our current OEM surgical equipment customers continue to be robust, and we have excellent traction on opportunities to expand our customer base for these applications. We expect clinical applications in the life and health sciences market to be a significant growth engine for us in 2013 and beyond as the application space expands for ultrafast lasers in surgical procedures.

Second quarter orders from microelectronics market customers were $42.5 million, a very healthy level for the second straight quarter. Sales to this market were $41.6 million, the highest level in the last 12 months. The ongoing pursuit of innovation in semiconductor manufacturing presents a meaningful opportunity for Newport.

As the requirements for chip features and manufacturing tolerances become more demanding, there is greater opportunity for ultra-precision products. This industry is currently at a technology inflection point where next-generation manufacturing technology is required to support ever increasing demand for computing speed, memory capacity and small form factor for mobile devices. This was exemplified by Intel's July announcement of a $4 billion investment to accelerate the development of extreme ultraviolet lithography and 450-millimeter wafers for semiconductor manufacturing.

In parallel at the Semicon West trade show in San Francisco, we introduced our new DynamYX air bearing 450-millimeter wafer handling stage. There are inherently greater challenges associated with wafer handling at 450 millimeters due to the longer travel range and higher payloads. However, by leveraging proprietary technology we have developed over the past decade, we have created a product that not only meets these challenges but outperforms current 300-millimeter stages. While production volumes of 450-millimeter tools are still 3 to 5 years away, we are well-positioned to support this transition. In fact, we were the only motion supplier to demonstrate a fully functional, high-precision 450-millimeter wafer handling solution at the Semicon West show.

Second quarter orders from our industrial and OEM market customers were $36.8 million, a new all-time record, representing growth of 101% over the second quarter of 2011 and 20% sequentially. This result includes the first production order for an earlier design win from an industrial OEM customer building next generation manufacturing equipment. We started shipping the order in the second quarter and expect this new business to generate between $3 million and $4 million in revenue per year. Second quarter sales to industrial customers of $30.9 million were also an all-time record, increasing 55% year-over-year and 1% sequentially. We continue to see pockets of strength in the industrial market and have been increasingly successful in serving applications for high-precision materials processing with our recently expanded line of laser and optics products.

Overall, our second quarter orders demonstrate how our balanced end market participation provides a degree of insulation from softness in individual end markets. In this case, pockets of strength in the microelectronics and industrial markets helped to offset slowness in our research and aerospace and defense market, and in part, of our life and health sciences market.

Before I turn the call over to Chuck for a more detailed review of our financial performance, I'd like to make a few comments related to our profit improvement plans. As mentioned on prior calls, our primary areas of focus in 2012 are the effective integration of our acquisitions and strong profit and cash generation. The current market conditions serve to reinforce the importance of streamlining the business to be as efficient as possible. A major part of our profit improvement plans are the synergies that come from effective integration of our acquisitions. The acquisitions are already having a positive impact on our EBITDA and cash generation, and we remain on track to achieve our integration targets for sales channel synergies, manufacturing and supply chain cost savings and expense reductions. As we have said previously, we expect to begin realizing the financial benefits of these synergies in the second half of 2012 and more fully in 2013.

In addition to acquisition-related synergies, we are driving increased efficiencies and reduced costs across our business. These come from increasing our low-cost manufacturing and sourcing presence in Asia, leveraging our global IT infrastructure to facilitate communication and business process commonality and collaborating across our sales channels to increase our effectiveness. We are also implementing additional cost reductions where practical, while retaining intense focus on gaining market share and ensuring we do not diminish our ability to respond when conditions improve.

As mentioned previously, we expect the combination of synergies related to integration of our acquisitions, increased efficiencies and other cost reductions to result in annualized cost savings of $15 million per year. The $2.2 million sequential reduction in SG&A expense in the second quarter was due in part to the early results of these actions.

I will now turn the call over to Chuck to comment on other aspects of our financial performance and to communicate our outlook for the third quarter. Chuck?

Charles F. Cargile

Thank you, Bob. First I'd like to mention that 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 newport.com and specifically the section titled Company Investor Information where we've posted a lot financial information. We've included the presentations that we've made at recent investor conferences. 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 the schedule showing supplemental non-GAAP financial information and a reconciliation to the corresponding GAAP measures.

Bob already discussed the second quarter sales and orders from each of our key end markets. I'll provide a summary of the performance of our divisions and also provide information on other aspects of our financial performance. Our Photonics and Precision Technologies division, or PPT, recorded sales of $82.9 million and segment income of $19 million or 22.9% of sales. This is a very strong result for the quarter. In fact, PPT's operating income increased 18.7% compared with Q1 of this year. This division has consistently produced industry-leading profitability and has demonstrated the ability to sustain this performance by leveraging our strong channels, broad product portfolio and significant brand equity. Our Spectra-Physics laser division recorded sales of $44.7 million, reflecting weak economic conditions. We believe that the current funding uncertainty has caused customers to delay purchases of higher-priced products, such as lasers, more than purchases of our photonics components products. The current quarter sales for our laser division were flat compared to the second quarter of 2011 due to the acquisition of High Q Laser. Without the sales from High Q, the division second quarter sales would have declined approximately 15% compared with the year ago period. The lasers division segment income in the second quarter was $2.9 million or 6.4% of sales. We are confident that the division's competitive position remains strong, and we've continued to achieve new design means during these challenging market conditions. And during the quarter, we initiated cost reduction actions in this business, which will improve the division's profitability in the second half of this year even if the revenue remains at this relatively low level.

Our Ophir division recorded sales of $26.1 million in the second quarter. This is 9.8% lower than the first quarter level of $28.9 million. Ophir's Q2 segment income was $1.9 million or 7.3% of sales. We expect to capture increasing synergies from this acquisition in the second half of '12 and into 2013. In addition, we've initiated target cost cutting actions within Ophir to increase their profitability even at this low level of revenue. Approximately 1/2 of Ophir's revenue is dependent upon defense-related spending. Although it is difficult to predict when this market will recover, Ophir is extremely well positioned with defense contractors and will certainly generate higher revenue and profit when this market rebounds.

In addition, over the long term, we're confident that Ophir's unique capabilities in infrared optics provide us great growth opportunities in areas such as automotive vision systems and commercial security cameras. Also, Ophir continues to build on its position as the industry leader in instrumentation for measuring the performance of lasers of all types.

Our consolidated gross margin was 43.5% for the second quarter of 2012 versus 45.9% in the second quarter of 2011. As we've said before, we expect our recent acquisitions to give us better opportunities for revenue and profit growth in the mid- to long-term. In the near term, the combined contribution of these businesses is dilutive to our gross margin while still accretive to our EBITDA and cash flow. As we capture the synergies and implement the profit improvement we mentioned, we expect to return to gross margins of 45% or better, possibly as early as Q4 of this year.

In the second quarter of 2012, we've continued to report our GAAP and non-GAAP results. In an effort to ensure clarity, I'd like to explain the items excluded from our GAAP results and their impact as well as how they compare with our historical results and the guidance we've provided in May. Please refer to Page 8 of our press release for the reconciliation of our GAAP and non-GAAP results.

On a GAAP basis, our operating income was $11.3 million or 7.4% of sales. On a non-GAAP basis, our operating income was $20.2 million or 13.1% of sales. There were 3 broad categories of non-GAAP expenses that impacted our Q2 operating income: first, acquisition restructuring and severance-related items that totaled $1.9 million or 1.2% of sales; second, amortization of intangibles was $5 million or 3.3% of sales; and third, noncash stock compensation was $1.9 million or 1.2% of sales. These adjustments totaled $8.9 million or 5.7% of sales.

By way of comparison, our Q1 non-GAAP operating margin was 12.7%. We're pleased to see a sequential increase in non-GAAP operating income and operating margin despite the lower sales. Furthermore, we believe that our operating income as a percentage of sales will increase in Q3 and Q4 due to our synergies and cost savings actions. And that will put us a little bit ahead of the guidance we gave in May for the operating income as a percent of sales.

Our tax rate for the second quarter on a GAAP basis was 34.4%. So keep in mind, as we've said in the past, our cash tax rate is significantly lower than that due to our net operating loss carryforwards and tax credits.

Our earnings per diluted share in the second quarter on a GAAP basis were $0.24. On a non-GAAP basis, our earnings per diluted share were $0.30.

As I mentioned before, our non-GAAP income excludes $8.9 million of adjustments to operating income. In addition, in the quarter, we recorded a $5.3 million gain on the sale of an investment. For non-GAAP reporting, we excluded this gain. So the net impact of all the adjustments on our pretax earnings was $3.6 million, which equates to $0.06 per diluted share. With the benefit of the cost reduction actions we've initiated, we're confident that our earnings will increase in the second half of 2012 even if our revenue levels remain flat. Then as revenue levels increase, we'll benefit from even greater profit leverage.

Lastly, we had a very good quarter from a cash management and debt reduction standpoint. In the second quarter, we generated cash from operations of $15.1 million, and we reduced our indebtedness by $11.1 million. We were pleased with our second quarter cash generation and the fact that we've reduced our total debt by 5.5% in the quarter. And in the first half of 2012, we reduced our indebtedness by $32.6 million.

In summary, we increased our cash from operations and our profitability in the second quarter compared with the first quarter. We're taking actions to enhance our competitive position, profitability and cash, including gaining share with our research customers and our Tier 1 OEM customers, capturing synergies with the companies we recently acquired and reducing our cost structure to enhance our profitability. We're following the playbook we've used successfully in the past and we fully expect to benefit from these actions going forward.

Turning to our outlook. We now anticipate market conditions in the third quarter to be similar to those in Q2. As such, we expect our revenue in the third quarter to be similar to or slightly less than the Q2 levels. Our revenue visibility is limited beyond the third quarter. Nonetheless, as a result of our cost savings actions, we expect our non-GAAP operating income and earnings per share to increase slightly sequentially in Q3 despite our expectation of flat to slightly lower revenue.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Mark Miller with Noble Financial Capital Markets.

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

You mentioned you're going to be focused on gaining share. I'm just wondering if you could perhaps provide a little more definition of what areas you think are right for that opportunity?

Robert J. Phillippy

This is Bob. Well, we mentioned a couple of design wins, actually 4, to be specific, that we had in our life and health sciences business during the course of the quarter and that's a continuing area of focus for us. We think we've got the right product portfolio and an appealing value proposition. Also, on the clinical side of life and health sciences, we continue to work to expand our customer base for ultrafast lasers for surgical procedures. So both of those are meaningful opportunities. Also, turning to the microelectronics market, which has inherently been cyclical, as you may remember because you followed us for a while, we gained share in the last downturn and have historically done so in downturns because it's a time when the semiconductor equipment OEM manufacturers are taking the time to reassess their supply chain in light of having a little bit of time to breathe when they're not shipping so much for revenue, they're reflecting on their suppliers and that's been an opportunity for us to gain share and that's using basically the same model that we've used in the past, which is very, very close working relationships with the Tier 1 OEMs.

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

Just stepping now graphically, I'm just wondering how you did in China sequentially and also what you're seeing in Europe?

Robert J. Phillippy

China was another consecutive record for sales. Europe, we saw a sequential softening as I guess you would expect, with macroeconomic conditions. And as we've talked in the prepared remarks, it was a soft quarter in the U.S. for us related to some of the things we described. What does that leave? Japan continues to be weak, but we think it's in the process of a very slow but steady recovery.

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

Okay. And just one other thing. In the past, you said if the U.S. was going to be slowing up, you thought you'd pick it up from government spending elsewhere and I'm just wondering are you still seeing that or are you seeing other areas of the world kind of cutting back in some of their research spending?

Robert J. Phillippy

So I'll touch on the regional comments in a second, but just in general and I want to reiterate some of the comments that I made in the prepared remarks. The activity in the research market was slower than we anticipated in the second quarter and that was most notably in the U.S. In discussions with customers, there is an overwhelming sentiment that, that slowdown is really specifically related to government funding constraints. And recall that stimulus funding in the U.S. and other countries, for that matter, is no longer present, no longer plays into the equation. And in addition, we've got this dynamic in the U.S. where apprehension about political budget cuts -- I'm sorry, about potential budget cuts due to political dynamics have caused research organizations to focus spending on more maintaining staffing levels and dealing with operating expenses rather than purchases of equipment. And as I look around the world, it's a mixed bag. There are pockets in Europe that continued to spend, particularly Germany. As I mentioned, Japan is in the midst of what we believe is a slow and steady recovery, that goes for research market as well. And China continues to produce record results for us, albeit a deceleration of sorts. And so you lump all that together and even though the best of it, it is a mixed circumstance around the world and we are dealing with a slow environment or a slower environment than we'd anticipated relative to government funding-related business.

Operator

Let's now go to Mark Douglass, Longbow Research.

D. Mark Douglass - Longbow Research LLC

Can you just flesh out a little bit more the kind of cost action stuff that you're being -- that are being taken. And then when are the full benefits you're expecting to accrue, is that first quarter of '13, second quarter '13 you kind of kind of layer in this $15 million annualized or something, you already have $2 million maybe a little less than that now, but kind of at a similar pace as we go through the upcoming quarters?

Robert J. Phillippy

Yes, what we talked about was $15 million in annualized savings overall. The cornerstone of that is integration of acquisitions. We've been talking about that in the last couple of conference calls, but we haven't definitively quantified it except in certain instances. But it's a meaningful piece of that. In fact, the integration of Ophir is expected to bring $5 million worth of savings. The rest of the $15 million, the other 2/3 will come from a variety of things, integration of other activities along with reductions in discretionary spending, increased channel efficiencies, supply chain savings and related adjustments just in terms of belt tightening.

D. Mark Douglass - Longbow Research LLC

Okay. Are there facilities that need -- that are going to be moved around and consolidated? I mean you talked about, I think, lower cost regions so I assume you're moving more manufacturing to China or what's...

Charles F. Cargile

Mark, I think -- I don't think you should expect any factory shutdowns. I think we'll be aggressive in making sure that we utilize the facilities that we have, especially and including the low-cost manufacturing facilities in China and in Romania. And in some of the locations, there will be factory shutdowns for periods of time. But again, then I don't think there'll be any closures.

D. Mark Douglass - Longbow Research LLC

Okay. Back to Ophir, you mentioned about half of it is defense. How does that split between U.S. and I assume that you have a fair amount of defense sales to Israel. Can you talk a little bit about where they're -- what kind of defense markets you're exposed to?

Charles F. Cargile

Primarily, the U.S. There is a little bit in Israel. But when we acquired Ophir, 15% to 17% of their revenue was in Israel and when we say half of Ophir, that's aimed at the U.S. defense part of the market.

D. Mark Douglass - Longbow Research LLC

Okay, that's helpful. And then, on the life science orders, I realize High Q was the big impact in the second quarter -- in the first quarter. Looks like a pretty big sequential drop from kind of the run rates you had prior to High Q. I assume that, that's just solely reflective of pullback in OEM expectations?

Robert J. Phillippy

There's 2 dynamics, Mark. So first of all, keep in mind that in the life and health sciences market, a big percentage of the business is associated with OEM activity and OEM activity, particularly in the bioinstrumentation and even the laser surgical activity, is subject to lumpiness and order patterns because you don't always get a single quarter's order that you're expected to ship in that quarter. In fact, as exemplified by the $37.7 million order we had in the first quarter, you wouldn't expect that to repeat every quarter. In fact, because it was explicitly for a couple of years worth of demand. But the dynamics in the life and health sciences market, as I mentioned in the prepared remarks, are really, I'll call it split into 2 subsegments. In the clinical piece, things continue to go and activity levels continue to be robust. I would also mention that we've got some really good near-term and longer-term growth opportunities that are pretty exciting. The near-term growth opportunities are, of course, expanding our customer base because we have opportunities to do that with existing technologies. And longer-term, we think the market has an excellent opportunity to grow because of the inherent advantages of leveraging ultrafast laser technology in some surgical procedures. So that'll be our customers doing the development work to try to expand their market opportunity and us being an OEM supplier. On the bioinstrumentation side, and I'm sure you see this by looking in general with the -- at some customers that serve the bioinstrumentation space, they're impacted by the same things that we are in the research market associated with apprehension about uncertainty in government funding. So for us, it's the second order derivative because we're an OEM supplier for bioinstrumentation and bioimaging applications. And in this case, it's our customers' products that have had softer sales than they anticipated, which leads to not as fast of reorders on programs that we participate in. Now, of course, we're offsetting that to some degree by virtue of capturing new design wins. But in the case of the design wins that I mentioned during the quarter, that's really just a small prototype order and -- or I should say beta system order in some cases, and it doesn't really get into production in 18 to 24 months. So we're sowing the seeds for growth in the medium term. But in the near term, it's not enough to offset the general softness in that market sector.

D. Mark Douglass - Longbow Research LLC

It's also probably fair to say that their order patterns are -- they're shortening the time frames and their visibility is probably not very good either, so that's part of it.

Robert J. Phillippy

Absolutely.

Operator

Larry Solow with CJS Securities.

Lawrence Solow - CJS Securities, Inc.

I know you guys are not updating annual sales guidance. But just from where you stand now, I know you are at $650 million was the low end. If we just sort of double the first half and assume that Q4 is sort of flat from Q2, which is flat from Q3 or vice versa, would that be a ballpark? And I believe Q4 is also seasonally normally a little stronger when some of these research budgets are sort of spent what they were saving for the year?

Charles F. Cargile

Yes, Larry. I think the focus and the message that we want to give today is that it's hard to know -- it's hard to predict what's going to happen in Q4. As we look at the second half of the year, we do see a lot of opportunities that could give us a boost in revenue. As you mentioned, Q4 is traditionally strong, our pipeline for orders is very full but customers are just unusually cautious.

Lawrence Solow - CJS Securities, Inc.

I mean what I'm trying to gather, is there a risk that, just from the research funding and budget issues, concerns that you take another leg down or you sort of just hopefully bouncing off the bottom and waiting for increased confidence funding, economy, whatever that driver may be?

Charles F. Cargile

The research market is the primary reason for the Q2 miss from what we had said. And our level of revenue in that market is at the levels that it was in the 2008, 2009 recession. That's how low it's been. So there could be an argument made that we're bouncing along the bottom. And so the important thing there is that's why we're taking the cost actions that we are now. The idea being if this is the level of revenue that we're going to have for several quarters, we're going to ensure that we can increase our profits. If revenue comes back, we'll leverage that into greater profitability.

Lawrence Solow - CJS Securities, Inc.

Right. Okay, now that's good to know. So basically, you guys are already at that sort of recessionary low and who knows if you go back that far again. But I guess in some funding areas, we already are at that level. Okay, now that's good to know. On the operating margin, again you're essentially already at sort of the low end of your adjusted margins like a little under 13% for the year. So I know you haven't adjusted that officially, but it does seem like you're going to be -- if you've got any improvement in the back of the year, you should be at or above the high end of the prior range, is that fair to say?

Charles F. Cargile

Yes, I think it's important to focus on that because in the quarter even though we did see the $3.5 million reduction in revenue, we actually increased our operating income by $300,000. And I think that, that's why the percentage was better at 13.1% versus the 12.7%. And you're right, when we gave the guidance before we had said in the second half of the year would be between 13% and 14.5%. So we're a little ahead of that and that was even before we had fully contemplated the cost actions that we we've implemented now. So I think it is fair to say not only do we expect to increase the operating income dollars, but also the percentage of revenue.

Lawrence Solow - CJS Securities, Inc.

And if I could just follow up on Mark's prior questions. So the $15 million annualized number, I think what he was trying to -- or I thought what he asked and I don't think was answered was when do you sort of -- it's an annualized number, when do you expect to reach that annualized run rate? How long is that going to take? Is that something that you're going to be -- by Q1 of fiscal '13 you're saving the annualized number or can you approximate when you reach that?

Charles F. Cargile

Yes, I think just like you've already started to see some of it captured in Q2, you'll see increasing amounts in Q3 and Q4. My guess is to be at the full run rate, it's going to be the middle or second half of 2013 because a good portion certainly of the synergy savings involves changes in supply chain and manufacturing. And those take a little bit longer to implement. And then even when you're getting those savings, oftentimes they're reflected in cost of sales, which means inventory and they will flush out as the inventory turns. So that's why we say, many of them will be captured early on. Some of them will be later in the year.

Lawrence Solow - CJS Securities, Inc.

And do you -- I mean, is -- was there a number you can give? I mean did you capture some of them already this quarter? From that $15 million or I mean like I assume so, but...

Charles F. Cargile

Yes. And the actions and the way to think of that is the actions began occurring in the quarter.

Lawrence Solow - CJS Securities, Inc.

Right. It takes a while to get the expenses to come through, right.

Charles F. Cargile

If you see the SG&A down $2.2 million, not all of that, but some of that is because of the actions we've already taken.

Lawrence Solow - CJS Securities, Inc.

And will you -- the tail end, I don't know, of the $15 million, is there any of that, that will require revenue growth and some leveraged efficiencies or this is all assuming independent of revenue?

Charles F. Cargile

Independent of revenue.

Lawrence Solow - CJS Securities, Inc.

Okay. Just switching gears a little bit on the -- this DynamYX, the product. Actually, one of my colleagues was actually out at the trade show. Apparently, there was a lot of buzz around the booth. Can you tell me, is there like if I was looking at you guys in the 300-millimeter market, how much revenue that, ballpark, what type of revenue deliver that is to your business and are there a lot of competitors in it, so you would think it would be a lot coming out of the 450 and you're ahead of a lot of these competitors, or are you one of the leaders in that piece already at the 300-millimeter level?

Robert J. Phillippy

Yes, good question, Larry. I can't talk about revenue for a specific product with a specific set of customers because, as you know, our customer base in the microelectronics industry, our OEM, semiconductor equipment customers is a fairly small set of Tier 1 people. So for competitive reasons, I can't talk about specific product by customer. But I would say that in 300-millimeter air bearing wafer handling solutions, we have a handful or less of pretty good customer relationships where we're the incumbent supplier. And in 450, it was a pretty exciting time at Semicon West because it came right at the -- right on the heels of the Intel announcement about the big investment in 450 and we were the only motion supplier to show a working 450 fully functional production-ready solution. And so I guess the way I'd characterize it is we're pretty well known for our technology and we clearly have the opportunity to gain share at this industry inflection point.

Lawrence Solow - CJS Securities, Inc.

Got you. And it would still be sort of several years away before it really started impacting your results, is that right?

Robert J. Phillippy

Correct, yes. The way this will play out is it'll be 3 to 5 years before it's in full production. I mean the announcement was literally just made on July 9 about the acceleration of the technology.

Operator

At Needham & Company, let's go to Jim Ricchiuti.

James Ricchiuti - Needham & Company, LLC, Research Division

I wonder if you could talk a little bit about your target non-GAAP operating margins looking out to next year, just in light of what you're doing on the cost side. Is there anything you might be able to share with us at this point? I assume that you talked a little bit about where you think you're going to be in terms of gross margins.

Charles F. Cargile

Yes. I think, Jim, I think it's fair to say that our long-term targets for profitability that we established before and that we've talked about for some time are still very much in place. And what we used to say is that we would -- our target would be 15% when conditions were good, and we might bottom out at 10%. And then if we're somewhere in mid-cycle, it might be in between there. And I think that, that's still certainly the target and that would be excluded in any of the restructure charges. But if you then adjust that for the amortization of intangibles and the stock-based compensation as we're providing those now as our non-GAAP numbers, that implies about a 400 basis point improvement. So that would be between 15% and 19%. And I think that's still very much the target. And when we looked at our cost reduction plans, part of that was aimed at identifying how much improvement we need to ensure that we get in that range.

James Ricchiuti - Needham & Company, LLC, Research Division

And Chuck, just getting within that range, as we think about your end markets and the environment that you're seeing right now, I mean that, clearly, I guess assumes continued improvement in microelectronics because that's among your higher-margin areas and then what does that imply for the markets that you're seeing some tough times from government funding? I would assume you need to see some improvement there to get to those margins at the low end?

Charles F. Cargile

Actually, Jim, here's the way I would encourage you think about it. In Q2, we did $153 million in revenues and $148 million in orders, so let's just say $150 million for the ease of round numbers. If you exclude the restructuring and acquisition-related charges of $2 million, that implies a little over $13 million of operating income, okay? If we had already in place all of the cost reduction steps that we've talked about. So one quarter of the $15 million, that would increase the profit by $2.6 million; $15 million divided by 4. That would give us an operating income of $15.7 million, which would be 10.5% of revenue. So what we're saying is to get over that 10%, we could bounce along this level of revenue and still get there once we've implemented our cost reduction steps. Then when any one of our markets -- if any one of those markets starts to show some life and we increased the revenue, we already have the benefit of the cost reduction savings and then we target about $0.50 of every dollar of incremental revenues to also fall to the bottom line.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay, that's actually -- that's helpful. And looking at the segment, you talked about what you are hoping to do with respect to Ophir in terms of maybe getting some improvement in the operating profitability there. The laser business, what are we seeing now -- what are you seeing now in the most recent quarter? Was it a mix issue as well as lower volumes that led to the lower operating margins and are there some steps you can take within that business?

Robert J. Phillippy

Jim, this is Bob. In general, the circumstances with lasers was the same as what was an impact to the rest of the company in that the uncertainty and constraints relative to government-funded type things impacted the business. They seem to have impacted it to a greater degree on higher ASP items and, of course, the lasers that we sell into the scientific community have a selling price well in excess of $100,000 and so they're more of a capital purchase for people rather than part of researchers ongoing operating expense. So the lasers revenue stream was hit a little bit harder than some other areas of our business. We have responded to that by dealing on the cost side. And as you know, over the last several years, lasers has done a lot to improve the efficiency and productivity of their business and we're just going to make sure that we streamline it. We started those actions during the second quarter, but we still had the operating margin decline a little because you can't start the actions and implement them as quickly as you can see markets soften. But that said, we expect lasers' operating expenses to be $0.75 million. That's maybe $1 million lower than in Q2 going forward, and that will get lasers back in the 10% operating income range or maybe even over in the second half of this year even without a quick recovery in the end markets.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay, that's helpful. One final question. You may have provided some color on this. But just curious, what was, if you didn't, what was driving the strength in bookings in the industrial portion of the business and I realize that's a fairly diverse area for you, but I was just wondering if there was anything particular?

Robert J. Phillippy

Well, it was a good quarter in general and you said it exactly right. We do serve a fairly broad array of applications in the segment. Industrial manufacturing, rapid prototyping, telecommunications, automotive, commercial security and we also sell to other laser manufacturers. And also, in addition, remember that some of the growth opportunities in that sector have been enhanced with the acquisition of Ophir and ILX because with Ophir we have taken a position as the world's leader in industrial laser measurement as well as having infrared optics for commercial applications and thermography and automotive security and commercial security. So there's lots of opportunity there for medium to growth -- long-term growth. What happened in the quarter is we had a nice first production order from a design win that took place actually over a year ago. That's going to be about a $3 million to $4 million a year run rate for us and it was just really the first production order of order a design win that happened previously and it's for an OEM customer that I can't be real specific about, but they're a building manufacturing equipment.

Operator

[Operator Instructions] From Stifel, Nicolaus, let's go to Patrick Newton.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

So great job on the operating margin and I guess especially in the face of the revenue pressure. I don't mean to beat a dead horse on the cost savings side, but just from a modeling purpose, it sounds like we're going to see a little bit more of the immediate impact on the OpEx side and then should see some more trailing positive benefits in the COGS line as we move through 2013. Is that a fair assumption? And then could you help us bucket that $15 million in annualized savings between those 2 operating lines?

Charles F. Cargile

I think it is fair to characterize the near-term being SG&A because those savings are immediate and the gross margin improvement will be a little bit -- will trail that a little bit. And I think that for modeling purposes, it's appropriate to put the majority of the savings in the SG&A. There will be some in cost of sales, as we said, but I think for modeling, it's probably best to put them in SG&A, at least the majority of them.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

And is it fair to say that the majority of the COGS savings are going to be coming from streamlining Ophir operations, maybe lower-cost fracturing areas?

Charles F. Cargile

Yes, that'll be the most obvious place, yes. But we'll also get some benefits elsewhere. But I think it'll be in most apparent in Ophir, particularly since that's a stand-alone division that gets reported.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then I guess, Bob, shifting to the research side, one of your key competitors there discussed kind of an expectation that we're in the process of resetting the revenue levels post this expiration or slowing of stimulus spending worldwide. I don't want to put words in your mouth, but it seems like you feel that this is probably a lull rather than a reset although you're setting up the cost structure to be a reset. Is that a fair characterization of what you're trying to say? And if you do think it's a lull, I guess could you maybe help us quantify why that opinion as opposed to potentially a reset?

Robert J. Phillippy

So I think the right answer is that there's a little bit of a combination because, as I mentioned in the prepared remarks, stimulus funding has passed so any sort of activity related to purchases and commerce associated with that is gone. However, I do also think that there's a lull because I believe that the uncertainty associated with the current political environment is creating what we believe will be some pent-up demand a couple of quarters from now. In fact, there was an article in The Wall Street Journal on Monday, it's on page A-5 and it's called, Federal Spending Cutbacks Slow Recovery, and you can kind a see what's happened in the U.S. from an overall perspective in terms of spending and that's starting to have an impact directly on us in the research market and as a second derivative in part of our life and health sciences market. So I think that, that will ultimately clear itself away and we will have post-stimulus funding levels. And recall that our research business, we've always characterized it as GDP plus a few percent or so. I think that's a reasonable expectation for the market activity. Of course, I think we can do a bit better than that because we can have a broad product portfolio and some great brand leverage and great channels. But the research market is not suddenly going to become a fast-growing market, but I think that it will return to more steady and stable behavior and right now we are at a lull. By the way, if I could add another comment there because we have talked a little bit market uncertainties and funding situations. Market conditions in our business, and I would argue in any of our peers' business, continually change in association with macroeconomic variables, some of which are beyond anybody's control and very difficult to anticipate. Our job, we're not going to be trying to control the market, but we are building a business model and implementing a strategy that is going to and has enabled us to be successful in both good markets and bad, and we're doing just that. You've seen our strategy being implemented. Our end market balance insulates us a bit as it did in the second quarter from some degree of cyclicality and volatility in any given market and our organic investment and acquisition strategy has enabled us to grow the company overall despite market headwinds. So pretty proud of the team for the way we're executing, but we certainly are in an environment where we've got some headwinds in some of our markets.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

I guess, Bob, wanted to shift to the life and health sciences side, pertaining to that $30 million hike -- or $38 million or High Q order last quarter. Can help us understand how much of that is shipped, thus far, through June and how we should think about shipments in September? I'm just trying to get a sense of the linearity of that order and how much of the revenue from the order is still forthcoming?

Robert J. Phillippy

The expectation is that shipments will be relatively linear over a couple of year period of time. Shipments started in the second quarter. So if you do the math, it's, call it, $4.5 million or $5 million.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Okay, perfect. And then I guess also, while we're still on the life sciences side, I appreciate the color on clinical being relatively robust. But I guess given even if I normalize for the $38 million from that High Q order, I'm still looking at about a 24% sequential decline. Could you characterize maybe the demand in terms of geographic regions, that'd be helpful.

Robert J. Phillippy

Yes. I don't think we're going to go to by-region, by-market segment because the numbers are going to be small enough that they'll -- it'll be hard to really gain insights on the trend activity. But what I will say is 2 things: first of all, as I said earlier, we are going to have lumpiness in our order patterns associated with the fact that life and health science is OEM-based, particularly in consideration -- and you mentioned the data point example of High Q. Particularly in the case where we get orders that cover multiple years of demand. So we didn't get any significant orders like that in the second quarter, but our pipeline is pretty full. We have good visibility. We did get a number of design wins and the way this business works for us is that you get a design win and in a research application, that means -- a design win means that the customer has selected your product but they still have to integrate it into their product, introduce or finalize and test their product and then introduce their product and then start with production demand for it. So that gives us that 18- to 24-month lag time. So what I'm saying is we've got good medium-term growth prospects in the pipeline, but we had a soft quarter for orders. But I don't think that's going to be a continuing phenomenon.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Perfect. And then just one last housekeeping question for Chuck. Of the $1.5 million in acquisition-related costs, what was the split between cost of goods sold and OpEx?

Charles F. Cargile

Let's see if I have that handy. SG&A, it was all in SG&A. I'm sorry.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

All in SG&A, okay. I think last quarter, you had 800K that was over.

Charles F. Cargile

Yes, it went away last quarter.

Operator

Gentlemen, our final question comes from Mark Douglass.

D. Mark Douglass - Longbow Research LLC

Bob, can you talk about just what you're seeing in the semi cap market and some of the dynamics. It looks like it improved a little bit, but it's still not really taking off. Is there some pent-up demand there, too, as people wait out to see what happens with Windows 8 and how's that going to affect Ultrabooks and things like that?

Robert J. Phillippy

Yes, so -- well, first of all, just to talk about the second quarter, both orders and sales were over $40 million, which is a pretty healthy level for us. So it wasn't a bad quarter, in microelectronics by any means. And as you know, Mark, semiconductor equipment OEM customers make up the vast majority of this business. We saw strength from a subset of our customers. It wasn't universal, but there was some pretty good activity there. Now we, of course, read all the recent industry publications and guidance from our customers, meaning their external guidance that reflect a cautious near-term outlook. But most have characterized that as a pause. And as the Q2 results show, we haven't been impacted by that directly. And also, keep in mind that as an OEM supplier, we have at least a quarter of visibility before industry cycles impact our sales. So while we're no longer anticipating much growth in the second half of 2012 over the first half, we certainly don't expect an extreme downturn in the near term either. And most of the discussions by industry observers indicate that 2013 could be more attractive than 2012 has been, but that's not for us to speculate. We just respond and make sure that we have a good flexible model in response to the cycles.

D. Mark Douglass - Longbow Research LLC

Right. It seems like instead of having maybe a more normal 3-, 4-quarter continuous uptick, you've seen a little bit of recovery and it just kind of stalled out and then the hope is that maybe 2013 it accelerates again, is that a fair way to characterize it?

Robert J. Phillippy

Well, so just to characterize it, in the third quarter of 2011, we saw what we would characterize as a typical downturn. It turned down abruptly and our orders were down in both the third and fourth quarter, more from -- more in the $30 million a quarter range down from the $40 million range. And then, it's now picked up and it's been over $40 million for a couple of quarters now, which again is a pretty healthy level for us. And so already, the dynamics of the -- you can argue the downturn that started in the second half of 2011 have been less severe and shorter in duration than typical downturns, which have lasted for 4 to 6 quarters in the past. So we're already seeing kind of a modest downturn. People characterize what's happening right now as maybe a pause, anticipating new releases of devices. But regardless, we're right now in kind of a mixed environment and so that's kind of where we are.

D. Mark Douglass - Longbow Research LLC

All right. And I think that reminds me, last quarter you said that on the orders, it wasn't from your full customer base, it was some were on, some were still off.

Robert J. Phillippy

Exactly, and that was the case again. If we had all the throttles wide open, it would be certainly a greater upside than we've seen. By the way, the other thing to keep in mind, Mark, as you're looking at the market dynamics, is that year-over-year comparables get easier for us in microelectronics in the second half because we saw in second half of 2011 a fairly precipitous downturn on the order line.

Operator

And with no further questions, I'll turn the conference back over to Robert Phillippy for any closing remarks.

Robert J. Phillippy

Okay, thank you. Thanks, everybody, for your participation in today's call and your interest in Newport. As many on this call know, we have a track record of gaining share in weak market conditions. So we certainly expect to do so in the current market environment while at the same time effectively managing our expenses. We will also continue to aggressively implement our product development agenda as exemplified by some of the recent product introductions that we talked about during the call and we expect to introduce an ongoing stream of new products in 2012 to enhance our growth opportunities. As always, my sincere thanks to the Newport team members around the world for your steadfast support and perseverance as we tenaciously pursue our business and financial objectives. And I guess the last thing is we look forward to providing an update on our progress at the next call. And for investors interested in a more thorough update, we plan to attend and present at 4 events during the third quarter. The first is the Needham Industrial Technologies Day in New York City on August 7. The second is the Deutsche Bank Technology Conference in Las Vegas on September 12. The third is the Longbow Research Industrial Manufacturing & Technology Conference in New York City on September 13. And finally, the Crédit Suisse Small Cap and Mid Cap Conference in New York City on September 20. So with that, thanks again for your interest in Newport. Bye now.

Operator

Ladies and gentlemen, we now conclude today's presentation. Thank you very much for your participation. You may now disconnect.

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