Coherent Corp (COHR) 2002 Q4 法說會逐字稿

Good day, everyone and welcome to the Coherent fourth quarter earnings conference call. Today's conference is being recorded. For opening remarks and introductions, I would like to turn the conference over to the Chief Financial Officer of Coherent, Helene Simonet. Please go ahead, please.

Good afternoon and welcome to our fourth quarter conference call. First let me apologize for the unforeseen events that led us to postpone the reporting of our fourth quarter and year-end results. As indicated in our press release a week ago, the postponement was entirely due to a delay in the completion of the year-end audit at Lambda Physik, our 60% owned subsidiary.

As is our custom, first I will speak to the results of the recently-completed quarter and John Ambroseo, our CEO, will then speak to operational activities and milestones achieved during the quarter, as well as his summary on the state of the company.

Remember whenever we speak of results of operations, we are speaking specifically about results from continuing operations. We will also continue to provide forward-looking financial guidance for the current quarter only. Current market uncertainties make any guidance beyond three months quite difficult and please remember that the guidance provided is only an estimate and subject to all the risks and uncertainties detailed in our Safe Harbor statement which I will now read.

The statements in this conference call that relate to future plans, events or performance, including rates of growth, spending and profitability, are forward-looking statements that involve risks and uncertainties, including risks associated with uncertainties related to currency adjustments, contract cancellations, manufacturing risks, competitive factors, uncertainties pertaining to customer orders, demand for product and services and other risks identified in the company's SEC filings. Actual results, events and performance may differ significantly.

Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date here of. The company undertakes no obligation to revise the forward-looking statements, that may be made to reflect results or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Listeners are encouraged to refer to the risk disclosure described in the company's reports on form 10K, 10Q and 8K as applicable.

We reported fourth quarter revenues of $106.1 million, including $2 million royalty revenue and income from continuing operations of $6.2 million or 21 cents per diluted share. Excluding the effect of the royalty income, net of tax and minority interest, and a $3 million tax benefit related to a refund from prior year income taxes, income from continuing operations was $2.6 million or 9 cents per diluted share, which fell within the range of guidance provided during the last conference call and was also slightly ahead of consensus street estimates of 8 cents per diluted share.

To recap, we had earnings of 9 cents from ongoing operations, earnings of 2 cents from royalty revenue and earnings of 10 cents from a tax benefit, totaling 21 cents per diluted share. In addition, we had a small benefit of 1 cent per diluted share from discontinued operations related to the sale of our former medical segment. I'm very pleased that during these tough, challenging times, the company continues to remain profitable and generate positive cash flow from operations.

For the fiscal year 2002, we reported income from continuing operations of 36 cents per diluted share, excluding impairment charges, excluding the current quarter tax benefit and royalty income and excluding previous quarters disclosed exceptional items.

Our overall book-to-bill ratio was .8921. Within electronics -- Electro-Optics segment, book-to-bill ratio was .921. Within our Lambda segment, it was .8721. New orders of $94.5 million, written sequentially by 15% as we continue to see end market weakness in the semiconductor industry. Our Electro-Optics segment bookings of $72.5 million decreased 8% sequentially with the greatest weakness in lasers used in the semiconductor industry coupled with some cyclical order patterns in the scientific and instrumentation markets.

Also no surprise, Lambda Physik orders were impacted by the steady softening in the semiconductor industry. With less new capacity coming on-line, orders of $22 million were up 47% year-over-year, excluding last year's $14.4 million, bookings were down 33% sequentially. Later in our report, John will provide more information on Lambda's business. As a reminder, Lambda Physik will present their specific results in detail early tomorrow morning and John will supply you with the appropriate conference call numbers.

Total company sales in Q4 '02 were $106.1 million, up 10.6% sequentially from Q3 '02 and down 8.1% from the same quarter a year ago. As mentioned before, sales included a $2 million royalty payment received by Lambda.

International sales accounted for 59% of our revenues during the quarter and 60% for the entire fiscal year. By business segment, sales were as follows: Electro-Optics $80.8 million, an increase of 6.4% from Q3 '02 and a decrease of 4.2% from Q4 '01. For the full fiscal year 2002, the Electro-Optics segment had sales of $307.6 million, a decrease of 13.8% from fiscal 2001 sales of $356.8 million. Lambda Physik had sales of $25.3 million for the quarter, an increase of $5.3 million or 26.9% from Q3 '02 and a decrease of $5.8 million or 18.6% from Q4 '01. Lambda sales for the full fiscal year 2002 were $89.7 million, a decrease of 25.9% from fiscal 2001 sales of $121.1 million.

I will now provide the Electro-Optics sales by significant market application for both the fourth quarter as well as for the fiscal year 2002. Semiconductor equipment Q4, 13.9, fiscal year 47.1. Telecommunications, Q4 .7. Fiscal year, 2.7. Material processing, Q4 14.7. Year to date 41.8. Scientific and instrumentation, 45.8. Fiscal year, 192.9. Printing and metrographics, Q4 5.7. Fiscal year, 23.1- for a total of 80.8 for the quarter and 307.6 for the year.

Gross profit of $40.5 million or 38.1% of sales is approximately 3 points below the low end of our guidance of 41%. The breakout in gross margin by segment is 40% for Electro-Optics, a drop of 2.1 from Q3, which is primarily the result of unfavorable product mix and some unabsorbed fixed costs.

Lambda's Q4 gross profit percentage is 32.4%, a decrease of .8% from Q3. If we exclude the royalty benefit, Lambda gross profit percentage decreased 6.6% compared to last quarter and excess capacity issues are the main reason for this decline in performance.

Gross profit is clearly the area of focus for the company and we have begun the process of mapping out actions required to bring us back to the gross profit levels we enjoyed four to five quarters ago. A first step in this direction was a decision to outsource our PC board manufacturing. This transition will occur over the next six months with benefits expected in the second half of fiscal half 2003. In light of current market conditions, we are in the process of evaluating our global manufacturing infrastructure to simplify the supply chain and rationalize the overall manufacturing operations.

For fiscal year 2002, the company's gross profit percentage was 40.5% and in fiscal 2001 it was 44.5%, excluding the impact of the $13.5 million Lambda inventory write-off. Total operating expenses of $37.6 million, including intangible amortization, were flat with Q3 '02 expenses, reflecting our ongoing efforts of monitoring control costs.

Subsequent to our quarter end, we have taken the additional measures needed to if we are to meet our own guidance numbers for Q1 '03. In response to the continuing market softness, we've further trimmed the workforce and announced a domestic wide shut down during the weeks of Thanksgiving, Christmas and New Year's.

R&D spending for the quarter of $12.5 million was 11.8% of sales, which fell slightly below our guidance of 12 to 14% of sales due to the higher than expected sales numbers. It is our intent to continue investing R&D dollars in those areas we see as most promising for the creation of long-term shareholder value. To that extent, you may have seen our press release a couple of weeks ago, referencing the newly-formed technical advisory board, which John will talk about later during the conference call.

SG&A spending for the quarter, including amortization expense, expressed as a percent of sales, was 23.6, which was about 2.4% below the guidance range provided last quarter. Of course, revenues were higher, but on balance we feel the company has done a good job controlling its costs and will continue doing so. Despite weak market conditions, our balance sheet remains healthy and very strong with almost $244 million in cash, equating to $8 per share and a book value of approximately $19 per share.

Our cash position increased $8.6 million during the fourth quarter while total long-term and short-term borrowings decreased by $3.4 million. Again, it is worth noting that we met our stated goal of maintaining at least a cash neutral position from operations both for the quarter and the fiscal year. Our balance sheet remains an emphasis of management.

At the end of Q4 '02, accounts receivable day sales outstanding decreased to 65 days, three days less than the level of Q3 '02. Electro-Optics receivable day sales outstanding stands at 63 days compared to 62 in the prior quarter. Lambda's receivable day sales outstanding improved measurably to 69 days from 92 the prior quarter, Lambda's best showing in a year and a half.

Even excluding the royalty revenue, day sales outstanding decreased 17 days quarter on quarter.

Inventory day sales outstanding improved even more noticeably and fell to 76 days at quarter end versus 97 at the end of Q3 '02. Electro-Optics inventory day sales outstanding was cut down to 58 days during the quarter, a drop of almost 14 days, the best results in years. Lambda's inventory days decreased 129 from 189 and we are very pleased that the operating programs initiated 4 to 5 months ago are clearly starting to pay off.

Capital spending for the quarter was approximately 6% of sales, slightly below what we expected and tapering down to next year's projected capital spending of 6 to 8% of sales. For the full fiscal year, capitalizations were $14 million or 10% of sales at the low end of our guidance of 10 to 12% of sales.

Let me now move on to the guidance for the first quarter. The reduction in quarterly orders and limited visibility from our customers requires to us take a conservative view for guidance during the holiday abbreviated first quarter of fiscal 2003. While we are fortunate to have a sizeable backlog and a diverse customer base, the current market conditions still make it very difficult to forecast beyond one quarter. Taking all of this into account, we anticipate that Q1 '03 revenues will be plus or minus 5% from Q1 '02 levels.

Please note that we are comparing to the same quarter a year ago since historically Q1 sales numbers are lower than Q4 sales numbers. We expect gross profit rates in the 38 to 40% range. R&D should run in the range of 11 to 13% of revenue. SG&A expenses including intangible amortization will likely fall in the range of 24 to 26% of revenue. And I anticipate other income and expense as a favorable amount between 1 and 2% of sales. We anticipate the annual tax rate is expected to be approximately 34%.

Finally, today we announced the termination of activities of our telecom active group. Based on new market information and insight and the status of our development project, we now believe that our return on investments for at least the next several years would be unsatisfactory and therefore additional investments are no longer justified. The closure will result in Q1 '03 restructuring and impairment charges on discontinued operations in the range of 16 to $22 million. It is anticipated that 25 to 35% of these charges will impact cash. We estimate that these actions will result in first-year savings of approximately $6 million.

Effective October 1, 2002, active telecom will be reported as discontinued operations. The operating benefits are already reflected in the Q1 guidance range I just provided.

To summarize, we are still in a very uncertain market with limited visibility. We are doing everything we can to sustain profitability and we continue to produce innovative cost-effective quality products and solutions which is how Coherent became the leader in the markets we serve. With many opportunities in front of us, our goal is to continuously improve our already-strong financial condition. I am now pleased to turn you over to John Ambroseo, our CEO.

Thanks, Helene. Good afternoon, everyone. I would like to add my welcome to our fourth quarter conference call as well as my apologies for the events leading to its delay.

Most of you are aware I succeeded Bernard Couillaud as President and CEO of Coherent on October 1. This completes the transition announced last March. Bernard, now the Chairman of our board, made numerous contributions to the company during his 19-year career, which includes the last seven years as President and CEO. On behalf of the organization, I'd like to thank him for his dedication and leadership. On a more personal note, I look forward to continuing our working relationship that's spanned the last 14 years. [Cough] Excuse me.

Fiscal 2002 was a challenging year for Coherent, but I'm pleased to say we were able to deliver on the three fundamental goals we established at the beginning of last fiscal year. To remain profitable from operations, to remain at least cash neutral on an operating basis and to continue investing in those areas with the greatest promise of long-term shareholder value. I want to commend all of our employees for accomplishing the goals, as these achievements are not trivial considering the severity of the global economic climate.

Put another way, if business is a marathon rather than a sprint, then the survivors of this downturn are the companies with staying power. They're the market leaders in the respective industries. Coherent is one of those companies.

Our business is all about innovation, with the ability to identify and evaluate new and emerging technologies is more critical than ever. This is especially true given the accelerated rate of deployment of tools across a range of commercial and scientific markets.

During fiscal '02, we made sacrifices in a variety of areas to maintain our commitment and funding for R&D, which totaled $52.6 million and was essentially unchanged from fiscal '01, which was the spending of $53 million. The spending was distributed amongst new product R&D, continue in engineering and advanced research, which is chartered with assessing new platforms, two or more years from possible deployment.

In addition to our internal resources, we recently formed a technical advisory board, comprised of outside experts in various disciplines within the [[technonics]] universe. Our expectation is that the technical board will provide key insight into emerging technologies.

Innovation alone won't ensure our future success. The combination of innovative, cost-effective designs with efficient operations is of paramount importance. To this end, our EO segment operations were restructured in January of 2002. As part of the exercise, we recruited Debbie [Sholquist] as Senior Vice President of Worldwide Operations. She brought to Coherent over 20 years of general management and manufacturing operations experience from the Quantum Corporation and Hewlett-Packard; two, of the Bay Area's major high-tech companies. She's thoroughly evaluated and making significant changes to Coherent's supply chain.

Coherent is consolidating all CO 2 laser manufacturing at our site in Bloomfield, Connecticut, which is home to Coherent LLC. The consolidation should be completed by May, 2003. We have also decided to transfer our circuit board manufacturing activities in Auburn, California to a global electronics contract manufacturer, who has factories in North America, Asia and Europe.

This enables to us remain highly flexible, responsive and have the business model that meets our continuously changing needs at the lowest total cost while retaining high yields and strict quality controls. Helene mentioned the transition should be completed in about six months. Cost for both projects will be incorporated into our guidance. Upon completion, the projected cost savings in each area are significant. The cumulative impact is a reduction of two to three percentage points of current costs in the Electro-Optics business segment. Both moves are designed to improve gross margins from their current levels.

As has been previously mentioned, Coherent will remain profitable on an operating basis for the quarter and the year excluding telecom impairment charges. It also appears we're gaining market shares versus our competitors, although we have felt margin pressure during this projected downturn.

Now I will speak to various segment performances. For scientific and instrumentation, bookings were down 1.5% from the prior year period, 12% sequentially and 1% year to date. These markets are stable to slightly weaker, but we expect to see a pickup in the instrumentation business in the next two quarters.

We introduced a new forensic product, called the Incriminator, at a recent trade show. The Incriminator was developed at the behest of a number of major organizations, including the U.S. Army, F.B.I. and Secret Service to name but a few. The Incriminator is a high powered light source easily transportable to different locations, including labs and crime scenes.

There is also a high level of interest in our bio hazard agents. We're seeing significant strength in the customers in the defense market for a wide range of products.

We are beginning to see the first volume orders and shipments of our Chameleon Laser. To remind everyone, Chameleon is the first ever fully-automated hands-free tunable ultra fast titanium sapphire laser in a single box. It's unique blend of features makes it an ideal work horse for multi-photon exertation, lapricoscopy, and other bio instrumentation applications.

We have also expanded our OPS offerings with a 200 milliwatt version of the 48 nanometer sapphire. The two hundred milliwatt product emits 10 times the power of the first version, that was introduced less than two years ago. We expect this product to be a key contributor when pharmaceutical spending begins to turn back on.

The sapphire is a competitive differentiator for our customers and engineered specifically for demanding applications like bio-instrumentation, digital imaging and semiconductor inspection.

Material processing bookings were up 34% from the prior year period, up 2% sequentially and up 17% year to date. The increased sales are a direct result of expanded use of photonic based tools in manufacturing environments. The laser base solutions address shrinking feature sizes, improved yields and in some cases reduced tool maintenance.

The Gem Series of CO 2 lasers are designed for medium to high volume applications in cost sensitive markets, such as engraving and specialty medical applications, where the size and pricing is particularly attractive. We have seen good and growing interest from Asia in this product for a variety of material processing applications, such as micro-welding in use in men's devices.

The semiconductor production equipment bookings were down 7.5% from the prior year, down 4% sequentially and 44% year to date. There should be no surprise in this news, considering recent announcements from Intel, Motorola and others that bookings related to semiconductor markets for inspection, mass writing, micro view drilling and other applications were down last quarter.

New technologies continued to adopt light-based solutions at an increasing rate, but the cat list for volume orders has not yet occurred. Bookings were down 23%, from the prior year period, down 7% sequentially and up 3.5 for the year. The weak bookings were no surprise given the softness and broader [INAUDIBLE] business whereas the weak economy has literally forced the printers wishing to survive, into the digital work flow paradigm as an effort to control costs.

The computer to plate business remains buoyant and we're seeing a shift to dialed-based solutions. This is creating demand weakness for [INAUDIBLE] products and new systems. The replacement business of our installed base has been uneffected by the shift.

We're excited about a number of new products being introduced into the graphic arts market. We have fast tracked delivery of our first violet [INAUDIBLE] graphics laser module to a key European customer that resulted in successful qualification. Our new [U-V] laser generated excitement in two large industry's trade shows this past quarter and we will begin shipments next quarter to qualify this product with key customers.

In the telecom space, we've seen virtually no new activity on the sales front. As customers and suppliers continue to struggle with the demand forecast, we have seen a market increase in M&A opportunities from established players and start-ups.

One of the opportunities includes technology that is similar to our tunable transmitter program but in a more advanced stage of development. While this validated the technical feasibility of an OPS transmitter, it did raise questions about manufacturing and cost models. To achieve the same level of packaging and performance, we would need to commit several tens of millions of dollars to development and manufacturing capital.

It is difficult to justify such an investment. An acquisition would mitigate much of the initial cost, however, a detailed financial analysis suggests that the gross margins would be meager for the next few years even with fixed factory costs as zero.

Our goal has been to pursue telecom opportunities capable of a reasonable return on investment. The tunable transmitter program field deployable use doesn't meet the requirement and we let it terminate our effort. Helene has already provided the cost associated with the restructuring.

I will now speak to the Lambda Physik segment. Sales of $25.3 million, which included $2 million in royalty revenue, were up 27% sequentially, but down 19% from year due to the slow down in the semiconductor market, the medical segment and industrial market. Also no surprise, Lambda Physik's orders were impacted by the downturn in the semiconductor industry with less new capacity coming on-line. Orders of $22 million, while up 45% year-over-year, excluding last year's $14.4 million debooking, were down 33% sequentially.

Forecasts from Lambda's largest lithography competitor indicate it could be a few quarters before any pickup in litho orders. On a positive note, [Inoptic] AG and Lambda Physik AG's extreme technologies joint venture received their first order for a EUV light source for shipment 2003. The customer, Exitech Limited in Oxford England, said it was for the initial test phase of the next generation of lithography source.

Extreme technologies offers the favorable UV light source with the highest output power available worldwide. At the end of September, Lambda Physik received funding for [157 Nanometer] technology from the Germany Federal Ministry of Education and Research, also known as the BMBF. BMBF has approved the funding of the European 157 nanometer micro-litography consortium that includes ASML, shot and others as well as a number of European universities and research institutions. The 157 nanometer laser technology node also has interesting potential in the micro machine and life sciences areas.

To hear more about Lambda's end markets, please listen to a replay of Lambda's conference call which can be heard tomorrow morning at plus 49-69-920-53-444. Again, that replay number is plus 49-69-920-53-444. The call will be held in English.

While many economic pundits forecast 2003 will be a repeat of 2002, Coherent will maintain and in some cases expand its emphasis on fundamentals. We will strive to maintain profitability from ongoing operations, generate cash from ongoing operations, vigorously pursue our R&D agenda, emphasize supply chain management to improve gross margin and inventory turns and targeting at least three turns exiting fiscal year '03. We will lay the ground work to drive a long-term improvement in our return on assets with a goal of 10% annual return at the end of fiscal '05.

And we will create revenue growth and technology strength through our acquisitions. I will now turn the call back over to the operator and we can begin the question and answer session.

Thank you. Today's question and answer session will are conducted electronically. To ask a question, press the star key followed by the digit 1.

We will come to you in the order that you signal. We will take as many questions as time permits. We will pause for a moment to assemble our roster. Our first question today comes from Max Scheutz with Credit Suisse First Boston.

Hi, guys. Two questions: One, you mentioned the -- the drop in gross margins was caused by some overhead absorption. I wondered it looks like with revenues up sequentially, and the benefit of the royalty income at Lambda, if you could talk in a little more detail about how we got that drop?

And second, we've seen a slide -- I guess for the last two quarters now in the scientific and instrumentation revenue, if you could comment a little bit on what was causing that and what your outlook was in that segment, as well. Thanks.

Okay. Max, it's John. Regarding the gross margin, it's true that we've seen activities or effects in two areas, which is absorption and mix. And on a quarterly basis, we do see a shift in factory utilization based on the mix of the two are actually tied together.

Again, I'd want to focus on the fact that we recognize that this is an area that we have to be concerned about and we are taking actions to -- to improve that. And the second part of your question?

The -- the slide and the scientific and instrumentation revenue.

The -- the split there -- the scientific business -- the scientific part of that business remains nominally stable. And the instrumentation business is a bit cyclical. We are seeing some trending in the bio-instrumentation segment, for example. That area has been hard hit if you look at pharmaceuticals, et cetera. So, we are seeing some softness that particular piece.

And does the softness there, is that part of the driver for the lower gross margin?

It is part of -- it is part of the driver and lower revenues, it is not necessarily part of the driver and lower gross margins.

Okay. I guess what I'm looking for is a little more -- some more specs in terms of which part of the mix shift is driving the decrease in margins.

We are seeing -- in some areas, we are seeing shifts. For example,the instrumentation segment as I mentioned, while the bio-instrumentation segment may not drive a change in gross margin, we're seeing an adoption of lower cost technologies. Some carry lower margins with them.

For example, as an increase in the use of diode-based -- or diode products versus diode-based products, they have a slightly lower margin. In the CO 2 area, we've seen a market increase in demand for low power CO2 devices such as the 30 watt gem product. That adds a lower gross profit than on the higher items we've sold in the past.

Thanks.

Sure.

We will take our next question from John Harmon with Needham and Company.

Hello, good afternoon, I have quite a few little small questions. For starters, what did the Lambda royalty income, what was the source of that?

John, could you speak up?

Could you repeat that, John?

Of course, what was the source of Lambda's royalty income and if it is something that's going to continue?

It was a one-time fully paid up license from one of their competitors.

Okay.

I would refer you Lambda 's call for more details that.

Okay, another Lambda question if you please. Was it the sequential gross margin decrease or something in the operating expense line that drove it into unprofitability in the quarter?

We have a sequential gross margin decrease, as I mentioned, 6.6% drop, which was primarily the result of excess capacity.

Okay. Thank you. And what was cash flow from operations, if you can break it out?

Well, our -- our net cash -- net of debt, cash net of debt, increased in the quarter $12 million.

Do you have the breakdown with you? Operations, financing, investing?

Actually we had very, very little financing in the fourth quarter. So it would be predominantly operations.

Okay. Thank you very much.

Once again, as a reminder to our audience, if you do wish to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone phone at this time. Once again, that's star 1 on your touch-tone phone to signal for a question. We will take our question from Derrek Wilder with U.S. Bancorp Piper Jaffray.

Just a quick question. Did you have any cancellations in the quarter?

Can you repeat the question a little louder, please?

Yes, did you have any cancellations during the quarter? Any order cancellations?

The reason I'm hesitating is there is nothing significant. Every quarter we have a nominal number of cancellations, but there was nothing extraordinary.

Okay. Thanks .

Once again, as a reminder to our audience that, is star 1 to signal for a question on your touch-tone phone. At this time, we have no further questions standing by.

Before turning the conference back to our speakers, I would like to announce that there will be a replay of today's presentation beginning at 6:30 running through November 8. To access the replay, dial 719-457-0820, using the access code 494-248. Once again, there will be a replay of today's conference call beginning at 6:30 central time running through November 8th. To access the replay, please dial 719-457-0820 using the access code 494-248. At this time, I'd like to turn the conference back to our speakers for additional or closing comments.

Thank you.

Yeah. Thank you for your participation. We will look forward to speaking with you next quarter. Bye-bye.

Thank you for your participation on today's conference call. You may disconnect at this time.