Rudolph Technologies Inc. Q2 2008 Earnings Call Transcript

Sep.21.08 | About: Rudolph Technologies, (RTEC)

Rudolph Technologies Inc. (NYSE:RTEC)

Q2 2008 Earnings Call

August 4, 2008 4:45 pm ET

Executives

Robert A. Koch Vice President and General Counsel

Paul F. McLaughlin Chief Executive Officer

Steven R. Roth Senior Vice President, Finance and Administration, and Chief Financial Officer

Analysts

Stephen O’Rourke – Deutsche Bank Securities

Mahesh Sanganeria – RBC Capital Markets

Gary Hsueh – CIBC

Mehdi Hosseini – Friedman, Billings, Ramsey

Patrick Ho – Stifel Nicolaus

Operator

I would like to welcome everyone to the Rudolph Technologies second quarter earnings conference call. (Operator Instructions) it is now my pleasure to turn the call over to your host, Bob Koch, you may begin your conference.

Bob Koch

Rudolph issued its second quarter 2008 earnings release this afternoon, shortly after the close. If you have not received a copy of the release, please call my office at (973) 4484306 and a copy will be faxed or emailed to you. Joining us on the call today are Paul McLaughlin, Chairman and Chief Executive Officer, and Steven Roth, Chief Financial Officer.

As is always the case, I need to remind you of the Safe Harbor regulations. Any matters today that are not historical facts, particularly comments regarding the company's future plans, objectives, forecasts, and expected performance consist of forwardlooking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such estimates, whether expressed or implied, are being made based on currently available information and the company's best judgment at this time. Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that the statements are subject to a range of uncertainty that can cause the actual results to vary materially. Thus the company cautions that these statements are no guarantees of future performance. Risk factors that may impact Rudolph results are listed in the company's latest Form 10K as well as other periodic filings with the SEC. Rudolph Technologies does not update forwardlooking statements and expressly disclaims any obligation to do so. I will now turn the call over to Paul McLaughlin.

Paul McLaughlin

Thank you for joining us for Rudolph Technologies second quarter 2008 conference call. In our prepared remarks, I will give you our perspective on the issues important to Rudolph; then Steve will provide Q2 financial details, after which I will return to discuss our Q3 guidance.

To begin, relative to what has been reported for Q2 2008 by comparable companies, as well as by larger capitalization equipment companies, we are very pleased with our top-line results for Q2. Revenues increased 3% quarteroverquarter to $38.4 million, and overall gross margin improved approximately 500 basis points quarteroverquarter to 46%.

The drivers of this performance were the continued strength of our backend business, the early acceptance of some of our new products for front and backend metrology and inspection solutions, and acceleration of product sales resulting from our recent acquisitions, and an increase in software revenues.

You will notice in our results that we spent $8.4 million in R&D in the quarter, up from $7.8 million last quarter and up from $8.1 million in Q2 last year when revenues were $47.7 million, as we chose not to cut back on key R&D programs in our core business and to initiate and accelerate selected new product programs at both our acquisitions.

At our new PCTA division of our inspection business unit, we introduced the Precision Works VX4, the next generation of the divisions that market leading probe card test and analysis tools. The system, which will replace the PrecisionPoint VX3, adds configurable channels, will accommodate newer probe cards with higher pin counts and a user interface, and software architecture consistent with our other Works products.

With an install base numbered in the hundreds, the VX platform has become the industry standard for testing, analyzing, and reworking probe cards. Its advanced capabilities allow semiconductor manufacturers to evaluate and correct the planarity, alignment, contact resistance, leakage current, probe force, chip wear, scrub [inaudible] and numerous other critical probe card parameters that impact probing process performance.

Information provided by the new Precision Works tool can help test floor managers and test engineers reduce the losses in the probing process and extend the lifetime of increasingly expensive probe cards.

Further, we introduced that earlier this Q3 at Semicon West that we have shipped our new WS 3840, the latest edition to the wafer scanner product for inspection metrology of backend semiconductor manufacturing process, including bump, probing, sawing, and dicing for a major outsource assembly and test house. The WS 3840 is designed to meet manufacturers' growing needs to manage back-end processes for maximum yield and profitability at a time when technical demand and costs are escalating rapidly. This new WS 3840 integrates Rudolph's exclusive laser triangulation technology for 3D bump metrology and sensitive to the image base macro defect inspection on the same wafer handler platform that is used by all of the companies’ advance inspection and metrology tools manufactured at our inspection business unit in Bloomington, Minnesota. The WS 3840 inspection system provides fast and accurate measurements of bump height and co-planarity.

The time delay integration line scan camera provides imagebased macro defect inspection for wafer surface and bump and measures solder and gold bump characteristics such as diameter, shape, and placement accuracy. High-resolution color imaging is also available for defect reviewing classifications.

Two takeaways from this brief discussion that I think will shed light on why we are cautiously optimistic for the third quarter, even in this difficult environment, first, the two new products Jeff mentioned were part of a rapid acceleration of engineering initiatives begun postacquisition of our probe card test and analysis and our wafer scanning technologies. We did this, in part, to show our customers that we were serious about investing and growing the business we added inorganically to our portfolio. The results have already been received by our customers favorably, and we expect this momentum to continue for these new products.

Second, these releases were part of our planned roll-out of new products from all our businesses. For those of you able to attend our analyst presentation and Semicon West, I know you will recall the presentations from our senior product management people going into much more detail on these justmentioned two new products and four other significant product releases.

Shifting gears, today we are announcing that our board of directors has authorized the repurchase of up to 3,000,000 shares of Rudolph stock. The primary goal of this program is to benefit longterm shareholders by repurchasing our stock at price levels which we believe undervalue our company. This will be an orderly program and will extend over multiple quarters. These repurchased shares will be used to minimize the dilution from stock-based compensation programs, offset shares, and lower the overall transaction value of the stock component used in our recent acquisition of probe card test and analysis technology and other general corporate purposes.

The repurchases will be funded from existing cash and will be effected from time to time in accordance with applicable securities law through the open market or in private transactions, depending on general market and economic conditions as determined by the company. The repurchase program is effective immediately and may be discontinued at any time. As of June 30, 2008, Rudolph had approximately 31,000,000 shares outstanding and approximately $65 million in cash and marketable securities. Steve will elaborate further in his upcoming remarks.

As many of you have come to know, we're up as a strong financial franchise. As we did in prior downturns, we chose to use our strong balance sheet, on a temporary basis, to support our operational objectives. Last conference call we forecast that we begin to see the benefits of that strategy; and with increasing top line for Q2, we have begun to see that effect and, just as important, I am pleased to say that our balance sheet initiatives after our acquisition are also beginning to show desired results as we reported a cash increase of $6 million quarteroverquarter. This is an excellent start. I will let Steve give you the details of the good news. With that segue, I will now turn the call over to Steve.

Steve Roth

As Paul mentioned, revenue for the 2008 second quarter totaled $38.4 million compared to $37.2 million for the 2008 first quarter and above the high end of our previous guidance. Included in the quarter is revenue from the wafer scanner product line that was acquired in the RVSI transaction and revenue from our new AXi 940 inspection product.

Now let me give you some additional details and specifics on the quarterly revenue. Frontend revenue was 64% of revenue, up from 60% in Q1. Backend revenue remained relatively flat at approximately onethird of our overall revenue. International sales represented approximately 74% of revenue, 77% of which was from Asia, while domestic sales accounted for the remaining 26%.

Revenue from a product perspective was inspection products accounted for 54%, metrology products 20%, and software products and parts and services accounted for the remaining 26%. Approximately 40% of our revenue was from memory customers and 300 mm sales accounted for 60% of pool revenue.

Switching gears, second quarter gross margin was 46% compared to 41% for the 2008 first quarter. Our second quarter gross margin was negatively impacted by 2 percentage points due to inventory written up to fair value as a result of our recent acquisition. Therefore, our adjusted gross margin was 48%. Our new AXi 940 inspection product, higher software revenue, and lower abovetheline operating costs contributed to the margin improvement.

Going forward, our margins will continue to be impacted by the acquired writtenup inventory over the next two to three quarters. The value of the inventory step-up from both acquisitions remains at $3.1 million as of June 30, and we expect approximately $1.3 million of the stepup to negatively affect the third quarter margin.

Excluding inventory stepup adjustments and any nonrecurring charges, we currently expect gross margin to be approximately 46% to 48% in the third quarter of 2008 primarily due to a shift in product mix and lower software revenue.

Research and development expenses for the second quarter totaled $8.4 million compared to $7.8 million in the first quarter of 2008. As a percentage of revenue, R&D was 22% of revenue in the 2008 second quarter and 21% in the first quarter. The increase in R&D in absolute dollars was primarily due to increased compensation costs, new product costs, and acquisition integration costs. Based on our current investments in R&D, we currently anticipate the third quarter 2008 spending in R&D will be approximately 20% to 21% of revenue.

Selling, general, and administrative expenses totaled $10.5 million for the second quarter of 2008 compared to $9.1 million in the 2008 first quarter. SG&A was 27% of revenue in the second quarter and 24% in the first quarter. The increase in absolute dollars was primarily due to an accrual for the company's incentive compensation plan, which included a catchup amount for the first quarter that was approved by the board of directors in the quarter. We expect SG&A costs to decrease in absolute dollars; as a percentage of revenue it would be approximately 24% to 25% of revenue in the 2008 third quarter.

Our provision for income taxes in the second quarter was a benefit of $829,000 with an effective tax rate of 29%. We are currently forecasting a tax rate of 38% for the year excluding the deduction for the research tax credit that was not renewed by the U.S. congress.

For the second quarter, we report a net loss under Generally Accepted Accounting Principles of $2 million or $0.06 per share. These results were impacted by the following items: acquisitionrelated costs, which include integration costs, stay bonuses, and a sale of writtenup inventory totaling $1.1 million or $0.03 per share after tax; $607,000, or $0.01 per share after tax, for the additional amortization expense as a result of recent acquisitions; and stockbased compensation expense of $841,000, or $0.02 per share after tax.

In the 2008 first quarter, the net loss totaled $1.6 million, or $0.05 per share, and also included similar items. Excluding these items, we would have been breakeven in both quarters.

Looking at our balance sheet, we made great progress in our accounts receivable and inventory reduction initiatives. In the quarter, we reduced accounts receivable by $9 million and inventory by $3.4 million from their first quarter balances, which contributed to the $6 million increase in cash for the quarter.

Going forward, we anticipate continued reductions in both accounts receivables and inventory in the third quarter, contributing to our cash balance and helping fund the stock repurchase program that Paul just mentioned. We are also focused on goodwill and intangible assets that we have recorded on the balance sheet. For accounting purposes, we constantly monitor our goodwill with what we call our level 1 test to determine if there's a potential that the goodwill is impaired. That test is a market capitalization approach.

With our stock price trading at a near 52week low, there is the potential that we will fail that test and be required to perform a more indepth evaluation analysis. This may result in a noncash impairment charge in future quarters. With that, I will turn the call back over to Paul to discuss our guidance.

Paul McLaughlin

Now for our guidance. As we preannounced earlier last month, we believe the drivers are there for us with our strengthening backend business, earlier success with the new products introduced in the third quarter last year, and the six new products and models introduced at Semicon West this year, combined with recent customer endorsements of our probe card analyzer and 3D wafer scanner acquisitions.

Counterbalancing those positives, we remain concerned that our frontend business may still be bouncing along the bottom at cycle trough revenue levels with minimum shortterm visibility for a breakout to the upside. Pushouts and outright cancellations are still possibilities. Nonetheless, with our mix of twothirds frontend and onethird backend business, we believe there are two differently phased cycles affecting our business: one, a frontend business driven by technologyknown changes and resultant capacity buys; and, two, a backend volume driven, read that as driven by high capacity utilization rate at fully producing fabs.

We believe this mix will lead to a more stable and predictable environment for Rudolph. I again caution that this does not mean we are immune to semiconductor technology and capacity cycles. Rather, we have a balance of businesses that can help dampen the amplitude of business downturns, like the one our industry is currently in.

As an example of this, I refer to the fact that booktobill ratio for frontend semiconductor capital equipment has not been above 1.0 since January 2007. Yet backend booktobill ratios have been above 1.0 seven different months during that same period. Consequently, we are forecasting revenue for the third quarter ending September 30, 2008, to be flat to up 5%.

The company is expecting earnings per share to be between 0 and $0.02, excluding the impact of acquisitionrelated expenses, which includes acquired amortization; litigation expenses, which in Q2 were nominal but are expected to increase significantly in Q3 as we prepare for trial in our lawsuit with Camtek; and stockbased compensation expenses. All totaled, our forecast is $2 million in unusual and noncash charges in Q3.

On a GAAP basis, including these charges, earnings are forecast to be between minus $0.05 and minus $0.06 per share. At the $38 million to $39 million revenue level, we are essentially break-even to a couple cents positive, excluding unusual and noncash charges. We believe to get into the middle of our longterm model range of 18% to 25% we need to get back to topline revenues in the mid to upper $50 million range.

We have been at those revenues and operating profit levels in the past as recently as quarters two, three, and four of 2006, when revenues ranged from $54 million to $58 million per quarter and operating margins ranged from 18% to 22%. We fully expect to be at those levels when the frontend capital equipment business is in its next upturn. Now let me open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Steve O'Rourke.

Steve O'Rourke Deutsche Bank Securities

Couple of questions; two unrelated. One, first, any pushouts or cancellations in the quarter for front end? And if you could elaborate a little on that if there were some. And second, could you comment a bit on KLA's proposed acquisition of Vistec and how this might affect your position in the market? If I remember the Dataquest data last year, I think it said that Vistec may have gained some share.

Paul McLaughlin

We did not have, since our last conference call, we've had no cancellations our pushouts. I will admit that we have had orders forecast to come in, particularly in the front end, that have not arrived yet. That's all that we've experienced so far. I'm very cautious, after listening to the conference calls of several of my peers, that everybody is a little bit nervous right now, particularly in the memory environment. No pushouts or cancellations, but we're nervous.

Second part is about Vistec. We're very familiar with Vistec, and you may recall when we purchased ISOA five to six years ago, ISOA licensed their technology to Leica, which is Vistec, for inclusion in their microscope line to get into macro defect inspection. They have used that microscope approach to get into somewhat a different segment of the market that we are in, but it's a microscopebased macro defect inspection tool. I think it's a good move for KLA.

It would be a better move for them than it would be for us with the German operations and the multiple plants over there. We don't see any difference in the landscape because of it, though.

Operator

Your next question comes from Mahesh Sanganeria.

Mahesh Sanganeria RBC Capital Markets

With some companies talking about revenues growing significantly in the December quarter. Could you give us your outlook on how the December quarter in 2008 looks like?

Paul McLaughlin

Let me address it the following way. There are a couple ways to look at it. I am basically an optimist at heart, but I'm also a pragmatist. When I look at this, I break it down like any engineer would, there's probabilities. I think there's a reasonable probability for a substantial pickup in total shipments for front-end with all three, logic, foundry, and memory all contributing in the fourth quarter. Having said that, I believe the probability is probably only one in three that the confluence event that happening.

While setting scenario, as the front-end continues to bounce along the bottom, I think we've reflected in the Q3 the fact that we think it's going to bounce along the bottom at least until 2004 before that confluence. I know I've hedged the question a little bit, but it's a 50/50 toss-up in my mind. There are encouraging things out there.

One of the things I noticed in the New York Times over the weekend, the sentiment index. I am reading this from an article by Mark Hubert, editor of the Financial Digest. He said that because the bottoms are typically covered by exceptionally high levels of despair, history suggests when the bear market hits bottom, whenever that may be, stocks will be more attractive and he noted that we have not had investment advisors, you people and others, are now more pessimistic than they have been since early 1995. That is one data point. I bring it up because I think it's so uncertain, the visibility is so uncertain, particularly in the memory area, where we have to have some, a couple of players sort out the deck chairs here on which part it is on the Titanic and which part of it is not on there.

I am referring to the multiplicity of things going on among Infinia, [inaudible], Micron, Nanya, Mia, etc., in the memory area. All combined with the need for people to rationalize capacity. There's so much uncertainty, I think it's 50/50 on either one of those. If it's the latter, where the business stays flat, it will come on another quarter and we just move to the right.

I think we've been able to benefit from the fact that during these times, if you look at TSMC and a couple of the other foundries, their capacity is very, very high, particularly at the 65 nanometer mode, which is essentially the leading edge stuff. It backs down a little bit in the 130 nanometer, etc. Fundamentally, that's good for us at the back end, because the back-end business is volume driven. I know that's a roundabout answer to your question, but that's the way I look at the market right now. I don't have any crystal ball; and, to me, it's a 50/50.

Mahesh Sanganeria RBC Capital Markets

That makes sense, there is that level of uncertainty, even if some people are suggesting an upside, of course with the qualifier, the uncertainty qualifier. Moving on to follow up on Steve's question. Looks like KLA is aggressively going after acquiring anything they can find. You have been saying that you wanted to be a consolidator. How do you think the whole space, how do you see the whole space moving to three players? Five players? Or what's your role in the whole scheme?

Paul McLaughlin

We have been quite vocal about our goal to be a consolidator. We are active in the inorganic growth market as we speak. As you know, we've done a couple of transactions already in the past couple quarters. If I were a betting man, I would say that you may see more in the coming quarters from Rudolph. We intend to consolidate our position, our goal is always to get best-of-breed technology in some very specifically chosen niches. We define that as being number one or number two in that niche; or we don't want to play.

We're very active looking at those people with proprietary positions in markets that are adjacent to ours or in ours. We have expanded our total addressable market by almost double in the last year, year and a half. And I expect we can continue to do that by bolting on some things that make a lot of sense to us. So the answer to your question is KLA is going down that way, because I think they've got some organic growth issues that are related to their competitors and picking up share in some areas. And they're looking for inorganic growth, so they're grabbing some things. As you mentioned to Steve on the Vistec thing, I think that's a good deal for KLA. It would not have been a good deal for Rudolph.

Mahesh Sanganeria RBC Capital Markets

One question for Steve, where are you putting the probe card thing? Is that in metrology category or inspection?

Paul McLaughlin

It's really backend test probe analysis, the kind of things that it does do as I mentioned during the prepared comments, is all sorts of different metrology and inspection parameters you get from our products on the probe card itself, the tips itself. And that combines very nicely with our flagship NSX product line, which by the way, was awarded the advanced packaging best product award for our new NSX 15 that we introduced at Semicon West this year. That, combined with our probe card testing analysis systems, puts us in a very strong leadership position in both metrology and inspection in the probe card area in the test [inaudible].

Steve Roth

The numbers, when I gave out the breakout, that area, that is in the inspection product line.

Operator

Your next question comes from Gary Hsueh.

Gary Hsueh CIBC

Paul, just at the top line, trying to figure out what issues are fundamental driven and what's specific to Rudolph here in terms of inorganic growth with acquisitions. How many of the five tools that you had deferred recognition on from RVSI and the Applied Precision acquisitions, how many of those five tools that Recognized in terms of revenue in Q2 and how much more can we recognize in Q3 here in terms of your guidance?

Steve Roth

There were four tools, I think, that were deferred in the first quarter. They were all recognized in Q2. Most of those were from the RVSI wafer scanner product line.

Gary Hsueh CIBC

Quick question, if I look at the map. Basically you had a stepup in inventory negatively impacting growth margin by $700,000 in the June quarter. And it's going to $1.3 million in Q3, is that right?

Steve Roth

I think about $500,000 is the stepup piece.

Gary Hsueh CIBC

And it's accelerating in terms of write-up in Q3, why is that? And is Q3 basically the peak in terms of write-up of inventory?

Steve Roth

It's just a function of when we did the acquisitions, we had a lot of products obviously that create that number, were products that were already completed or substantially competed in WIP. It's effectively just mapping up getting those sales with that exact product mix. We're seeing a very nice pickup in the PCTA or the Seattle operations where we had a lot of those tools. Matching up orders, customers' requests, with what we have in stock, versus having stuff to build.

Gary Hsueh CIBC

You did a great job on gross margin in Q2 and looks like your guiding to pretty strong gross margin still here in Q3, any kind of mix changes basically underpinning your guidance for gross margin, the high 40% level in Q3?

Steve Roth

I think I see the mix working with little against us in Q3. Again I note a little lower software revenue, but again, nothing dramatic, just take a little software revenue out and then some of the mixing around between our metrology versus inspection products. The mix is most of the play in the guidance of 46% to 48%.

Gary Hsueh CIBC

Just moving to the balance sheet real quick. You took down the accounts receivable number and in terms of tools out there, can you help me break down what inventories were in terms of finished goods, materials, and some parts and when would you expect the inventory numbers to start working down in line with AR?

Steve Roth

Let me give you where we are. The inventory breakdown is made up about $35 million in materials, $17 million in WIP, $24 million in finished goods.

Gary Hsueh CIBC

So the finished goods went up sequentially?

Steve Roth

Hold on a minute. $20 million finished goods. I want to make sure the reserves don't throw us off here. $20 million finished goods, $17 million workinprocess, the rest is materials.

Gary Hsueh CIBC

Any expectation on when we can start squeezing some cash out of the inventory account?

Steve Roth

I think that was in my remarks, you are going to see it continue to come down. We've got focus programs in that, obviously. We talked about them on the first quarter call. Some of those things have only been a couple weeks in the mill and obviously a separate function of having the right sales match up with the inventory we have. It's got everybody's attention here at Rudolph, and I think you will see momentum pick up in the next quarter.

Operator

The next question comes from Mehdi Hosseini.

Mehdi Hosseini Friedman, Billings, and Ramsey

I have one question for you, Paul, and a couple for Steve. I want to focus on your inspection actually metrology. Most of the memory guys that are planning to migrate to 55 nanometer for DRAM. They have one or two layers of copper for critical layers. Whenever the cycle turns around for memory guys, that will be incremental for you in my opinion. So, rather than talking about the cycle and the timing, could you help us understand, maybe quantitatively or qualitatively, the kind of step up in business that particular segment would bring to you? And I have a followup question.

Paul McLaughlin

It depends upon how many levels of copper, obviously. If you look at the major memory manufacturers in Kehung, Korea, they're talking one level of copper only on this first round. It's going to be marginal increase, maybe [inaudible], maybe two. So they're going to add more generations and more levels of copper as they progress. They're starting small. On the margin, it will be good for us, but not like an overwhelming endorsement like a logic guy did or foundry guy did. It's not quite the same.

Mehdi Hosseini Friedman, Billings, and Ramsey

Then I hear about revenue contribution from new products, especially in Q2 and also higher levels of R&D spending. Help us the understand at least the percentage of revenue that came from these new products and then also these R&D dollars, what are the areas that you focus on and is this going to be like four quarters out before it turns into revenue? What are the milestones or the timeline that you are thinking of?

Paul McLaughlin

When you look at our R&D spending, we tried to accelerate very rapidly in the first and second quarters this year programs that we thought, when we did our due diligence, would indicate to our customers in the probe card business and the wafer scanner businesses that we were serious about investing and growing. There was a concern within the marketplace when we did our diligence that, oh, boy, Rudolph is just going the take this and milk the product line. That kind of thinking. We wanted to indicate quickly. So we ramped up in both the PCTA, the Seattle operations, and the operations out in Bohemia, Long Island. Those two operations ramped up for new products, and that was the number one thing. We dropped a number of other things and put lots of engineering resources on those two items, partly because we just want to also send a message.

We think the benefits from those particular introductions, product introductions, really have two pieces. One, people see that we're interested in our investing, which then makes the other products more successful in the market. Our VX3 has seen increased activity, based upon the fact that we've announced a growth map and timeline and specifications and shown the product released, VX4, at Semicon. That immediately translates into customers saying these guys are serious about this.

The same thing in the wafer scanner business, with the bump business, and all of the benefits of laser triangulation. That was the whole purpose of that. I would expect we will not get R&D in the long-term ahead of our top line. That we will get down to a more nominal number, but we're still a quarter or two away. I think good companies, and we consider ourselves one, should definitely invest to get out of the downturn and we're doing that across the board. We introduced four organic new product lines, and two that I mentioned earlier are the inorganic ones at Semicon this year.

Those probably will not ring the cash register significantly until Q4 at the earliest. Then the revenue recognition and you know all of that, so it would easily be Q1 2009 before significant input from that. Right now, we're getting significant input from the things organically we introduced a year ago.

Steve Roth

If you take the most recent products of each of our product families, what we're shipping today, it would be about 42% of the quarterly revenue.

Paul McLaughlin

[inaudible]

Mehdi Hosseini Friedman, Billings, and Ramsey

For you, Steve, D&A dollar amount for Q2 and your expected level for the whole year and also the CapEx?

Steve Roth

Depreciation expense, is that what you asked? A million dollars in the quarter. CapEx was about $900,000 and change.

Mehdi Hosseini Friedman, Billings, and Ramsey

And then expectation for the whole year for D&A and CapEx?

Steve Roth

I think depreciation will stay running at that milliondollarish level for the rest of the year. CapEx will probably pick up a little bit, because we're obviously moving some of the acquisition locations around in New York and in Seattle to new locations. But I would say you can probably do another $2 million to $2.5 million for rest of the year.

Mehdi Hosseini Friedman, Billings, and Ramsey

So for each?

Steve Roth

No, for the two combined.

Operator

The next question comes from Patrick Ho.

Patrick Ho Stifel Nicolaus

One housekeeping question for Steve, first, then a question for you, Paul. In terms of the charges that you mentioned, I just want to make sure that it's correct. The acquisitionrelated costs of $1.1 million, is that all in cost of goods? And the amortization expense of $607,000, is that in SG&A and not in the amortization line?

Steve Roth

Let's go to the second one first. The $607,000 is in the amortization line, not in SG&A. The incremental amortization from the recent two acquisitions, the incremental pickup. The $1.1 million is not all above the line. There are some above the line; a good amount would be in R&D and in SG&A, spread across the spectrum.

Patrick Ho Stifel Nicolaus

Would it be like twothirds expenses, onethird cost of goods? Would that with a good enough estimate on my end?

Steve Roth

There's about $700,000 with the writtenup inventory above the line, and then I would say about $300,000 in R&D and the rest is SG&A.

Patrick Ho Stifel Nicolaus

Paul, in terms of the new product accepted, does the larger scale that you provide for these companies that you've acquired, is that part of the reason that has accelerated, I guess the product acceptance for them? Then, secondly, following up on that, how are you able to ramp these new product capacities? You've kind of just brought them online over the last few quarters. Obviously customers are taking it. How are you able to ramp so quickly to meet their demand?

Paul McLaughlin

Good question. I will hit it in two different fronts. One is the PCTA, the probe card test and analysis division, which is part of IBU. We've been doing integrations in the past, and we had a very successful integration team led onsite by one of our vice presidents from Minnesota, Jeff Nelson, who took the leadership and made that work there and accelerated a number of the programs to move the operation to new manufacturing platforms and push the engineering programs to develop that over the short term, so we really spent a lot of money in the R&D to get things on our platform and to get a legitimate road map in front of our key customers. We've done that in both the PCTA division and wafer scanner business on Long Island. That's been our approach. We have spent our way into that. Does it make sense?

Operator

There appears to be no questions at this time. I would like to turn the floor back over to Bob Koch for any closing comments.

Paul McLaughlin

I thank you all and we look forward to speaking with you next quarter and enjoy the balance of the summer. Thank you and good evening.

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