Newport Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.31.12 | About: Newport Corporation (NEWP)

Newport (NASDAQ:NEWP)

Q3 2012 Earnings Call

October 31, 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

Lawrence Solow - CJS Securities, Inc.

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

James Ricchiuti - Needham & Company, LLC, Research Division

Mark Douglass - Longbow Research LLC

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

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

William J. Dezellem - Tieton Capital Management, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Newport Corporation Third Quarter 2012 Conference Call. [Operator Instructions] After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn today's presentation over to Mr. Robert Phillippy, CEO of Newport Corporation. Sir, you may begin your conference.

Robert J. Phillippy

Thank you. Good afternoon and welcome to Newport's Third 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 performed well in the third quarter. Our profit and cash generation both increased, with non-GAAP operating profit of 14.8% of sales and non-GAAP earnings per diluted share of $0.35, and we generated $26 million in cash from operations. We were able to deliver these results despite a sequential drop in sales, primarily due to a pronounced cyclical downturn in the semiconductor equipment industry.

Much of this success can be attributed to our prudent management of expenses. We recognized the deteriorating market conditions early and moved quickly to reduce our cost structure, as we did in response to the 2008-2009 recession. We continue to execute effectively, and we are ahead of our schedule in our plan to achieve cost savings of $15 million per year through integration synergies and other cost reductions.

In addition to this emphasis on profit improvement, we continue to invest in new product development, and establish and build upon customer relationships to drive future growth. For example we have now secured 3 early design wins for our 450-millimeter precision motion platform with semiconductor equipment OEM customers. In short, I'm very proud of our team's third quarter performance. Chuck and I will provide more color on these topics during the course of today's call. But first, I would like to comment on conditions in our end markets.

Company-wide orders were $143.8 million in the third quarter, representing growth of 21.2% over the third quarter of last year. Our sales were $142.9 million, growing 13.8% over the prior-year quarter. In both cases, the contributions from our acquisitions more than offset challenging conditions in our end markets, particularly the microelectronics market.

Third quarter orders from our scientific research and defense/security customers were $51.8 million, a 16.7% increase over the third quarter of last year and a 4.2% increase sequentially. The increase over 2011 was due to the addition of our acquisitions, offset in part by reductions in government funding in several countries and apprehension associated with the threat of sequestration in the U.S.

While we do not see this funding scenario changing significantly in the current quarter, if the U.S. government addresses the pending fiscal cliff issues early in 2013, we would expect to benefit from some pent-up demand for our products during the second and third quarters of next year.

Third quarter orders from life and health sciences customers of $33 million increased 37% versus the second quarter of last year and 70.6% sequentially. Orders from our bioinstrumentation and medical laser OEM customers rebounded strongly from the low levels we saw in Q2, due primarily to the timing of orders. While quarterly order patterns vary widely in this market, we continue to make inroads with our expanded product offering and growing presence in both laboratory and clinical applications.

Orders from customers in our microelectronics market of $32.6 million, increased 1.6% versus the third quarter of last year but declined 22.4% sequentially. This sequential decline is directly related to a sharp downturn in activity in the semiconductor equipment industry. Many chip makers have scaled back their CapEx spending, impacting the near-term demand for our products. Nevertheless, the fundamentals of this market remain strong. Consumer appetite for more powerful, energy-efficient and mobile electronic devices is driving the semiconductor equipment industry to develop more efficient, higher resolution and tighter tolerance manufacturing equipment.

As this manufacturing technology transition occurs, the demand for our ultra-precision products will increase. As an example, in our conference call in August, we discussed the introduction of our new solution for 450 millimeter wafer positioning and how we were able to leverage the proprietary technology we have developed over the past decade to design a system that outperforms current 300 millimeter wafer handling solutions, despite the inherent challenges associated with the larger wafer size.

Today I'm very pleased to report that we have received 3 early design wins for this system from semiconductor equipment manufacturers, and we look forward to working with these customers over the next few years to develop, configure and integrate these systems into their tools.

Third quarter orders from industrial and other market customers were $26.4 million, an increase of 46.1% over the third quarter of last year, but a 29.2% sequential decrease versus the all-time record performance in this market in the second quarter.

While macroeconomic headwinds are impacting overall activity levels in this market, we continue to find new customers and applications that benefit from our continually expanding and highly differentiated line of Photonics products.

As an example of this differentiation, I'm pleased to report that our new beam track sensor has been honored by R&D Magazine as 1 of the 100 most technologically significant products introduced over the past year. This unique product developed by our Ophir Photonics team enables users to monitor all of the laser's main parameters, power, energy, beam position and beam size, with a single compact device. This dramatically reduces laser alignment and calibration time, which in turn increases throughput in a broad array of laser manufacturing applications.

We are continuing to focus on our growth initiatives by aggressively driving our product development roadmaps and expanding our customer relationships. These efforts are producing positive results, and OEM customers are increasingly calling on Newport for applications and products that fit our capabilities. Due to our strong relationships and innovative technologies, weak market conditions have proven to be an opportune time to win new customers and programs. We have historically gained share during downmarket cycles, and we expect to do so again in the current environment.

In parallel with our focus and investments in future growth, we continue to implement our plan to reduce our cost structure by $15 million per year. We have reduced our worldwide headcount by approximately 5% and cut our discretionary spending. And we expect to achieve additional savings from the integration of our acquisitions, low cost region sourcing and manufacturing and increasing the efficiency of our sales channels.

We are currently implementing these actions and realizing the benefits more quickly than we had planned. This was evident in the third quarter, as our cost reduction actions drove a significant portion of the $4.6 million in sequential reduction in SG&A expense.

Now I'd like to turn the call over to Chuck to comment on other aspects of our financial performance and to communicate our outlook for the fourth 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 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 a schedule showing supplemental non-GAAP financial information and a reconciliation of the corresponding GAAP measures.

I'll now provide a summary of the performance of our division, and also provide some information on other aspects of our financial performance. Our Photonics and Precision Technologies division, or PPT, recorded sales of $76.2 million and segment income of $17 million, or 22.3% of sales. We're encouraged by the fact that PPT's operating income as a percentage of sales remained strong in the quarter. This division has consistently produced industry-leading profitability and has demonstrated the ability to sustain this performance by leveraging our strong sales channel, broad product portfolio and significant brand equity.

Our PPT division has historically been very successful at gaining market share and expanding customer relationships throughout industry cycles. And we're confident that PPT is achieving that success with customers through this current cycle as well.

Our Spectra-Physics lasers division recorded sales in the quarter of $42.5 million. We believe that the current uncertainty related to government funding has caused customers to delay purchases of higher-priced products, such as lasers, more than purchases of component products. Despite this weakness in top line revenue, the division's operating margin was 9.3% in the quarter, an increase of 290 basis points compared with the 6.4% reported in the second quarter of this year. The division's operating margin for the first 3 quarters of 2012 was 9.9%, an increase of 120 basis points over the 8.7% recorded in the comparable period last year. We're confident that the division's competitive position remains strong, and we've achieved several new design wins during the past few quarters that will position us well for future growth.

We're very encouraged that our Ophir division achieved its highest quarter of operating income since our acquisition 1 year ago, $2.5 million or 10.3% of revenue. Ophir's effective response to the tough market conditions and our ability to capture synergies, give us great confidence that they will deliver stronger financial performance in the future. Although it's difficult to predict when the market will recover, Ophir is extremely well positioned with defense contractors, and will certainly generate higher revenue and profit when it does. 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 night vision systems and commercial security. 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 for the third quarter was 44%, an increase compared with the 43.5% in the second quarter of this year, despite a sequential reduction in sales of $10.8 million or 7%. On a GAAP basis, our third quarter operating income was $12.6 million, or 8.8% sales. On a non-GAAP basis, our operating income was $21.2 million or 14.8% of sales. When we provided guidance for our third quarter back in August, we indicated that our non-GAAP operating income would increase sequentially, even if revenue declined, due to the benefits of our cost reduction actions. And in fact, it did. We increased our non-GAAP operating income by almost $1 million from 13.1% to 14.8%.

In short, we recognized the deteriorating market conditions early in the year and acted responsibly and quickly to adjust our cost structure to protect our profitability. In the near term, we will maintain solid profitability levels, while positioning the business to deliver record financial results when market conditions improve.

Our tax rate for the third quarter on a GAAP basis was 34.4%. That's unchanged from the second quarter of this year. Keep in mind that our cash tax rate is only approximately 15% due to our net operating loss carryforwards and tax credits.

Earnings per diluted share attributable to Newport in the third quarter were $0.20 on a GAAP basis and $0.35 on a non-GAAP basis. In August, we said that we would increase our non-GAAP earnings per diluted share sequentially in the third quarter and we did, increasing it by $0.05 over the Q2 level.

Lastly, we had an excellent quarter from a cash management standpoint. In the third quarter, we generated cash from operations of $26 million, reduced our indebtedness by $4.6 million. Over the first 3 quarters of this year, we reduced our indebtedness by $37.2 million and have generated $54.3 million in cash from operation.

In summary our cash from operations and our non-GAAP operating income and earnings per diluted share for the third quarter were at the highest levels we've seen in 2012. We're taking actions to enhance our competitive position, profitability and cash, including gaining share with research and OEM customers, capturing synergies with the companies we've 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.

Now turning to our outlook. Our outlook continues to be very cautious because we do not see a near-term catalyst for improved macro conditions. As such, we expect our sales, non-GAAP operating income and non-GAAP net income in the fourth quarter to be similar to the third quarter levels. We'll continue to implement our cost reduction actions and aggressively capture integration synergies with our acquired companies to preserve our profitability and position us for strong growth and financial performance when market conditions improve.

That concludes our prepared remarks. We'd now like to address your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Larry Solow from CJS Securities.

Lawrence Solow - CJS Securities, Inc.

The $15 million in cost savings, so it sounds like you are ahead of schedule. I don't know if you sort of mentioned this, but I think that you had talked about reaching that sometime mid next year. Is there like an updated number to that? And how much of these savings -- can you sort of quantify what you think you've already realized. Is there a way to do that? Has that number maybe gotten bigger, maybe if you think you can get more than $15 million even...

Charles F. Cargile

Well, we certainly are ahead of schedule, as you said. We took action earlier in the year, and we see the benefit in the reduction in the operating cost and SG&A and R&D. If you annualize those savings, it would in fact be larger than the $15 million that we said. But part of that is nonpermanent savings. For instance, we've had some factory shutdowns, we've reduced incentive compensation accruals. So those are 2 examples of things that wouldn't sustain into next year but are certainly savings for this year. So we're sticking with the $15 million number even though we are seeing the benefits of it a little bit earlier than we might have thought 3 months ago.

Lawrence Solow - CJS Securities, Inc.

Okay. Fair enough. And then it seems like, just in summary, sort of your outlook, though it sounds like certainly the chip makers have scaled back spending even more so than the last couple of quarters. But would you say your other industries, your other end markets are sort of certainly not good, I mean they're lackluster. But have things really changed much, or are we sort of in a status quo flat pattern?

Charles F. Cargile

On the order side, we saw each of our end markets other than microelectronics and industrial and other increase. So research was up a little bit, sequentially, life and health science was up quite a lot sequentially, and then the other 2 were down a little bit. But the drive -- the main driver of the large reduction in orders sequentially was the microelectronics.

Lawrence Solow - CJS Securities, Inc.

Right. But just in terms of, sort of, anecdotally, customer engagement, or just sort of a pulse on the market out there, would you say customers are sort of still in the similar holding pattern-type views, things haven't gotten better, but really maybe not much worse. Is that fair to say, or...

Robert J. Phillippy

Larry, this is Bob. In terms of customer engagement, we've got a lot of activity going and across multiple markets. In the semiconductor equipment market, I mentioned a couple of specific things. But there is an inflection point going on in the industry where they're transitioning to EUV lithography and 450 millimeter wafers. And in general, that means more exacting manufacturing processes and in general, that's good for us because the more highly precise things become, the better it parlays into our technologies, because we're all about nanometer scale resolution. That's just one example. But I would say in the other markets, customer engagement remains high, and I think you probably characterized the markets accurately.

Operator

Your next question comes from the line of Patrick Newton with Stifel, Nicolaus.

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

I guess -- I wanted to jump into Ophir. It was great to see the operating margin expand sequentially. So if we think about the cost savings that you've already driven through Ophir and assuming that Ophir generates pre-acquisition revenue and growth metrics sometime in the future, what is a reasonable operating profit level for this segment? Is the company rightsized to exceed the stand-alone kind of 10% to 12% rate that it had as an independent company?

Robert J. Phillippy

Yes. I think -- first of all, we are pleased with Ophir's profit leverage in the quarter. Getting over 10% was a near-term goal that we had for the business and frankly, I didn't expect them to get there in Q3 and I'm very encouraged that they did. And you're right. Historically, pre-acquisition, they were in the low-double digits. But we've said consistently, and with the traction that they've already made, we're even more confident that they can get to 15% operating income. And I think that would just take just a little bit momentum on the top line for them to get there.

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

When you say momentum on the top line, are you talking $35 million -- oh, I understand that. Are we talking $30 million in quarterly revenue, $35 million? Do you have kind of a target revenue level to get to that 15% level?

Robert J. Phillippy

No, we -- I don't. We can model it separately and talk about it, Patrick, but we don't have a number that we've discussed that would get them there.

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

Okay. And I guess to ask the prior question perhaps a little bit differently, you had orders improve nicely sequentially in scientific and life sciences. You had microelectronics and industrial manufacturing see a sequential downtick. These are inherently lumpy businesses. You have timing issues, you talk about not seeing a near-term catalyst. But as you sit here today, if you kind of go through your 4 end markets, do any of these orders, or the tone of your customers, make you feel better or worse in these end markets relative to last quarter?

Robert J. Phillippy

Well, traditionally, we've experienced stronger conditions from a seasonal perspective in the fourth quarter of the calendar year, particularly in the U.S. and Europe. So if that dynamic occurs again this year, we may get some positive momentum in both orders and sales. Because this year's been weak across the board, in the guidance we've given, we hadn't counted on that type of budget flush. But we could -- we certainly could see it. Because the level that we are certainly in scientific research is still well below what we reported last year in the fourth quarter. So if we even get close to last year's fourth quarter level, there would be a nice increase in orders.

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

Okay, and I guess kind of dovetailing off that research side and budget flush, can you talk about research and the orders feeling a little bit better on a sequential basis and even revenue a little bit better on a sequential basis, specifically by geography? And I think, with China last quarter, I believe you saw a record quarter and around China, do you have any thoughts on the potential for stimulus coming out of this Chinese government transition either from internal conversations or with customers?

Robert J. Phillippy

So a couple of general comments about the research market first. And just a reminder that we've been in this business for a lot of years, and we've enjoyed a great, collaborative relationship with the scientific community. We also have continued to expand our product line serving those customers and as we sit here today, we're the only company in our industry that really has a full suite of solutions for anybody who's doing laser work in a chemistry, biology or physics lab because we're the only company that stretches across lasers, Photonics and motion control and opto-mechanics, et cetera. And the reason I make those remarks is to kind of give you a sense that if the business is there, we're going to be well positioned to achieve it. Chuck mentioned the characteristics of the market environment. If you look at it regionally, I'd say that there's nothing really that is an outstanding data point one way or the other. It's kind of consistent. We did see a bit of an uptick in Japan. And as Chuck mentioned, we would historically expect an uptick, particularly in the research market in both the U.S. and Europe in Q4.

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

Okay. And then just quickly, thoughts on the potential stimulus coming out of the Chinese government transition?

Robert J. Phillippy

Yes, we don't have a whole lot of data on that. I think we read the same things everybody else does. It's certainly a probability. The Chinese government has not backed off of their long-standing commitment to increase R&D as a percentage of GDP. They continue to state that that's their objective and they continue to fund that accordingly. But their overall economy has cooled, there's no doubt about that.

Operator

Your next question comes from the line of Jim Ricchiuti with Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

I was just wondering, I'm not sure if you mentioned this, but did you talk at all about what -- whether there were any particular drivers in the improvement that you saw in the life and health science bookings in the quarter?

Robert J. Phillippy

Yes, Jim. So we did mention that there was some things associated with the timing of orders and that last quarter was particularly low. But I think the more general piece to think about is that and we mentioned this a couple of times in previous calls, is that now we participate in both the laboratory and clinical environments in life and health sciences. And we have some very interesting opportunities in both. In the laboratory environment, we continue to expand our relationships with bioinstrumentation OEMs and also bioimaging is quite active for us. We introduced a couple of quarters ago our new InSight DeepSee laser, which is an ultrafast laser used for multiphoton across big applications. It's getting great traction. And so we're really excited about that. And then on the clinical side, we have, in particular, an ultrafast laser that is just very differentiated for ophthalmic applications. And so there, we, of course, earlier in the year, as you know, we were primarily focused on ramping up capacity in order to meet customer demand. We're there now. And so the next phase is expanding our customer base, not only in terms of more customers for the existing set of ophthalmic applications, but expand the application set. And so we're active in both areas.

James Ricchiuti - Needham & Company, LLC, Research Division

Bob, with respect to High Q, did it see follow-on orders to that same customer of any significance of size in the quarter?

Robert J. Phillippy

If you're referring to the $37 million order that we had in the first quarter of this year, the answer is no. But if you're thinking about just how we're doing in the space in terms of ophthalmic applications and penetrating not only new customers, but ongoing activity with the existing ones, it's active.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. So with respect to orders, did you receive orders from other customers -- other players in that space for similar applications?

Robert J. Phillippy

We didn't get any large-scale orders on the clinical side in the third quarter. A lot of the big activity was in bioinstrumentation.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. And then looking at the margins, with respect to laser -- the laser margins, which picked up nicely, is there much -- in terms of improvement, if we don't see the kind of catalyst for revenue growth?

Charles F. Cargile

Jim, you mean specifically for the laser business?

James Ricchiuti - Needham & Company, LLC, Research Division

Yes. Just -- yes, you showed nice margin improvement sequentially, 9.3% versus 6.4%. Is there much left in terms of the synergies and savings that you're implementing even if revenues don't improve over the near term?

Charles F. Cargile

Yes. Not a ton, Jim, but I would expect the SG&A to be a little bit lower in the fourth quarter than the third quarter even if the revenue remains flat. And the main reason for that is the laser business has been very successful in squeezing their costs and some of that we didn't get full capture in Q3 and we will in Q4 . So I would expect SG&A to be down a little bit, sequentially, And if we do get any kind of increase in revenue, you'd see very good profit leverage.

James Ricchiuti - Needham & Company, LLC, Research Division

Got it. And then on the -- again, just switching back to the bookings that you saw in the quarter, was there any further color that you provided in the bookings for scientific research and defense security in terms of parsing out the scientific portion and the defense portion? I'm trying to get a sense -- as I would assume defense is still fairly soft.

Robert J. Phillippy

Yes, the overall defense market is kind of a well-publicized thing that it has contracted a bit. But we did see an uptick in both defense and research in the third quarter, in orders.

James Ricchiuti - Needham & Company, LLC, Research Division

Versus Q2?

Robert J. Phillippy

Up sequentially, yes.

Operator

Your next question comes from the line of Mark Douglass with Longbow Research.

Mark Douglass - Longbow Research LLC

Going back to research, I assume it's pretty fair to say it's a short cycle, so if it were above, you wouldn't even be seeing it yet. I suppose a lot of that comes in November, even maybe December typically?

Robert J. Phillippy

Yes. In general, because the research market is an end user business, orders are placed for immediate shipment. And so the only visibility I guess in terms of actual order placement at the time of shipment is the lead time of the product, which varies across our product lines longer for lasers, obviously, than it is for some of our component products, which we stock and they're available for immediate delivery. So I guess back to your comment, the specific answer is, if there's to be a bump, it is certainly possible that we haven't seen it yet. But it's still to come.

Mark Douglass - Longbow Research LLC

Right. But when you do have these bumps, they're usually late enough in the quarter, such that you can't see it when you're like giving guidance like right now?

Robert J. Phillippy

Yes, that's fair.

Mark Douglass - Longbow Research LLC

Okay. And then also speaking of orders, anything -- how do they change in the quarter? Was September -- did September not quite come in as you thought it would? Or does it tend to be kind of lumpy orders even within the quarter anyways?

Robert J. Phillippy

Because more than 50% of our business is OEM, there is some inherent lumpiness in the order pattern and you saw that in a couple of segments when you take a look at the sequential comparisons. And so that -- that becomes increasingly more dependent on the order patterns and cycles of particular customers for particular programs. The thing that we keep focusing on is are we winning? And when I say winning is are we gaining new customers and winning new programs within existing customers? And I made a couple of comments earlier about the fact that as you look -- as you look out in the distance, you say, "Well, we're participating in some pretty exciting things." I mentioned the semiconductor equipment piece in the prepared remarks. I talked a little bit about life and health science. Just for example, to add color on that in the industrial market, Chuck touched on it, but IR optics for automobile night vision and commercial security applications are 2 areas that we are very well positioned for and engagement is high. And both of those have potentially robust growth prospects when you look out a little bit further than the next couple of quarters. So the way we think about it is, hey, we're managing the business as is required based on the market conditions, but we're looking long term.

Mark Douglass - Longbow Research LLC

Okay. And then finally do you expect to keep R&D here roughly at 9%? If there are more savings to be generated, is it mostly SG&A line?

Charles F. Cargile

Yes, our philosophy is generally to leverage the SG&A as a percentage of sales when the revenue increases. So try and keep SG&A from increasing at the same rate as revenue. But to try to continue to invest in the R&D at a similar increase as the revenue. And I would expect to see -- I'd expect to see that in Q4 as well. As you can see, that -- if I look at the financial statements, that there's a -- nowhere near the amount of cost cutting in R&D as there was in SG&A.

Mark Douglass - Longbow Research LLC

Right. So you're being careful to protect that. Things are soft.

Robert J. Phillippy

That's right.

Operator

And your next question comes from the line of Mark Miller with Noble Financial.

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

I'm just -- if you could give us a little more color on Ophir. Was the improvement there driven more by cost cut?

Robert J. Phillippy

Yes. Ophir's revenue was down, and their profit was up. And it was from cost cutting and from some of the integration savings that we're already starting to get the benefit of. And there'll be even more integration savings in 2013.

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

This was kind of touched on in one of the previous questions, but in the past, I mean, we've seen laser firms benefit at the end of the year from what's called the budget flush. Is that something you're anticipating this year?

Charles F. Cargile

It's not something that we've baked into our guidance. As we said, we expect the conditions in Q4 to be similar to Q3. And the reason for that is because this year has been unusual to say the least, compared to our historical perspective. If there is budget flush this year as there has been in the past, then there would be some upside opportunity to the orders.

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

This is a more speculative question, but we've seen these moves in the EUV area with ASML getting substantial infusion of funds and then them acquiring Cymer. Some people are interpreting that as a sign of concern that EUV and 450 millimeters might not be online when people are feeling. I think it's 2014. Just -- how was -- how do you think that affects you and the industry if that happens?

Robert J. Phillippy

So a couple of things. Number one, is we don't have 2014 dialed in to any of our forecasts at this point. We see the implementation of EUV and 450 millimeter to be out a little further, maybe a year or so beyond that in production quantities. Now for us, we'll get preproduction revenue as we go through prototype and beta phases. So it's not a 0 and then big number thing. It'll slowly grow during the course of that period. That's thing number one. As it relates to the availability of EUV technology, I think that ASML in particular has been pretty communicative about the fact that they've got some technical challenges, one of which is the power of the light source. And I think that the combination of the 2 companies helps them accelerate that process. As it relates to the availability of the technology and the interest in the technology, I just liken back to basic consumer demand. And that is as long as people want smaller, faster and more powerful phones with longer battery life, the industry in total is going to have to cross that inflection point for next-generation manufacturing technology and equipment. And from what we've seen in terms of engagement with some of our customers, there's a lot of confidence out there that a lot of the science is done, it's just now a matter of engineering. It's certainly not trivial, but it's engineering that's going to get us there. It's going to take some time, but I think the industry will ultimately get there.

Operator

[Operator Instructions] Your next question comes from the line of Dave Kang with B. Riley.

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

Chuck, a couple of questions on numbers. Did you give out depreciation and CapEx for the quarter? And how they will trend going forward?

Charles F. Cargile

Yes. CapEx for the quarter was $2.1 million. It's 8.3 for the 3 quarters or year-to-date. It will be a little bit higher in Q4. But I would expect it to be below $4 million. But we will be spending some money on our new manufacturing facility in Romania. So that will increase a little bit over the $2.1 million. But probably not more than maybe $1.5 million more. And then for depreciation and amortization, it was$10.2 million in the quarter. It's $31.6 million year-to-date and it'll be about the same in Q4.

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

Got it. And then regarding your guidance, I'm assuming your micro will be down sequentially in Q4. If that is the case, so where should we expect the segment to -- that will make up the difference, to make it flat?

Charles F. Cargile

That one is very pretty hard to predict. There's not a lot of visibility. But one thing you can do is look back at last year because interestingly, this year has been very similar to last year where we were running over $40 million in orders in the first 2 quarters and then it fell dramatically down to about $32 million in Q3. So if -- so the $32 million level is relatively low already. And so if it would go down further last year in Q3, it would have been maybe around $26 million. So if you think it's going to go as dramatic as it did last year, then that would be about the number.

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

Got it. And the last question is regarding budget flush. I think December quarter, budget flush is more from European countries, whereas September you see that in the U.S. So how do you think Europeans' budget flush will play out given the way things are in Europe?

Robert J. Phillippy

Well, as Chuck mentioned, we didn't factor it explicitly into our forecast, but if history holds true, we might see something which would potentially be upside for us. And I'm not going to repeat what many people have said and read about the European economy, but what I'll say is there's some countries within the EU that continue to invest in R&D. They are steadfast in the notion that developing their country's science and technology prowess is going to yield good results in the future . And we're right there to be able to service those customers.

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

Got it. And the last question is, it's been a while since your last 2 major acquisitions. Can you just give us an update on your M&A strategy, what's on the table and all that?

Robert J. Phillippy

Yes. Our acquisition strategy hasn't changed, in that acquisitions continue to be a part of our strategic plan. However, as we've communicated, in the near term, we are focused on integration and optimization rather than new acquisitions. And so anything that you would see from us in the near term would be more likely the size of ILX or High Q rather than something much larger. So I categorize ILX and High Q more in the bolt-on category, where it's a good gap-closer in terms of particular technology or enhancer or expander in terms of a particular technology or customer segment. But it's not a more meaningful play. Because we've got plenty of opportunity to optimize the acquisitions that we made over the last 18 months.

Operator

Your next question comes from the line of Bill Dezellem with Tieton Capital.

William J. Dezellem - Tieton Capital Management, LLC

You referenced the fact that the Spectra-Physics margins were up. Can we infer from that, that since your components were a higher percentage of the total since large laser sales were down, that, that's actually the reason that you saw the higher margins, components just tended to be that way?

Robert J. Phillippy

The -- within our laser business, there's no components part of it. The components product lines for our business are in our PPT business. So the lasers margin would all be related to the higher priced items. So the improvements were from cost savings and manufacturing efficiencies.

William J. Dezellem - Tieton Capital Management, LLC

All right. So I mixed 2 things up and the reality is that the margins went up because of your actions not because of the mix issue?

Robert J. Phillippy

That's a fair way to explain it.

Operator

Thank you. There are no further questions at this time. I would now like to turn the conference back over to Mr. Robert Phillippy for any closing remarks.

Robert J. Phillippy

Thank you, operator, and thanks, everybody, for your participation in today's call and your interest in Newport.

Just to repeat, we're pretty proud of the fact that the Newport team executed well in the third quarter and we expect to continue this performance going forward. And as always, my sincere thanks to the Newport team members around the world for your continued support and resourcefulness, as we pursue our business and financial objectives.

So, everybody, we look forward to providing an update on our progress on the next call. And thanks again. Goodbye.

Operator

Thank you for participating in today's conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!