Coherent Corp (COHR) 2003 Q3 法說會逐字稿

Good day everyone, and welcome to the Coherent Third Quarter Earnings Results Conference Call. Today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer of Coherent, Helene Simonet. Please go ahead.

Thank you Talorie (ph.). Good afternoon and welcome to our third quarter fiscal 2003 conference call. First I will speak to the results of the third quarter and then John Ambroseo, our CEO, will speak to operational activities achieved during the quarter and give his impression on the state of the company. He will also continue to provide forward-looking financial guidance for the current quarter only. Please remember that the guidance provided is only an estimate and is subject to different risks and uncertainties. Actual results may differ significantly. Additional information concerning these factors are contained in the company's filings with the SEC. Listeners are encouraged to refer to the Risk Disclosure described in the company's reports on Form 10-K, 10-Q, and 8-K as applicable. Copies are available from the SEC, from the Coherent website, or from Coherent Investor Relations.

Before moving on to the third quarter results, I want to provide an update on our tender offer to acquire all outstanding shares of Lambda Physik, now already owned by Coherent. On July 15, 2003, Coherent Holding GmbH with 84.3% of the shares tendered, including the shares already owned, waived the condition precedent of obtaining 95% of Lambda Physik share capital for acceptance of the tender offer. If we had not waived the condition when we did, the entire offer would have unwound and we would have reverted to the status-quo, which we already reported as being unacceptable. By waiving the condition, we automatically extended the offer period for two weeks and guaranteed our ability to acquire the maximum number of shares. Our goal remains to reach 95% ownership, so that we can initiate a squeeze-out under German rules and collapse Lambda Physik into a business unit within Coherent. As of yesterday, July 21st, 90.8% of the shares have been tendered.

Let me now move on and talk about the quarterly results. We reported third quarter revenues of $99.2m and a net loss of $2.3m or 8 cents per share. These results include a gain of $1.5m or 5 cents per share, related to the sale of 5.2m shares of Lumenis, a previously announced charge of 4.4m or 15 cents per share for in-process research and development related to the acquisition of Positive Light, and 0.9m or 3 cents per share tax benefits relating to a refund of prior year taxes. Excluding the gain on the sale of the Lumenis shares, the [RP] R&D charge and the tax benefits for the refund of prior year taxes, non-GAAP net loss for the quarter was 1 cent per share. Our overall book-to-bill ratio was about 1 at 1.04. Within our Electro-Optics segment, the book-to-bill ratio was 1.02 to 1; and within our Lambda segment, it was 1.15 to 1.

Q3 orders of $103.5m represent a 7.2% decrease from the same period a year ago and 0.5% improvement over the immediately preceding quarter. The Electro-Optics segment bookings of $85.4m included bookings of $4.5m from our Positive Light acquisition.

More specifically, Electro-Optics orders increased 2% sequentially and 8.1% compared to the same period last year. Lambda Physik's orders during Q3 were hurt by a weak lithography market, a slower than expected flat panel business, and the lingering effects of SARS during the first half of the quarter. Total bookings of $18.2m were down 44.4% year-over-year and 5.9% sequentially. Later in our report, John will provide more information on the state of affairs at Lambda.

Total company sales in Q303 were $99.2m, up 3.4% from the same quarter a year ago and down 4.2% sequentially. Sales by business segments were as follows; Electro-Optics, $83.3m, an increase of $7.4m or 9.7% from Q3 '02 and an increase of 5.1% from Q2 '03; Lambda Physik, $15.8m for the quarter, a decrease of $4.1m or 20.7% from Q3 '02 and down 34.6% from Q2 '03. The Electro-Optic sales by significant market application for third quarter of fiscal 2003 are as follows; scientific and government programs, 27.0; microelectronics, 14.7; material processing, 13.1; components and instrumentation, 21.5; graphic arts and display, 7.0 for a total of 83.3. Gross profits of $36.9m or 37.3% was below our revised guidance of 39-41% and was down compared to the prior quarter.

The breakout in gross margin by segment is as follows; 41% for Electro-Optics, a decrease of 2.3 points from Q2. About half a percentage point of this 2.3% points decrease was due to the accounting for the stepped up basis of inventory purchased in the Positive Light transaction. The remainder of the decrease was due to product mix, cost incurred due to the duplicate operations during the transfer of CO2 production from Santa Clara to Bloomfield and traditional inventory reserves. In the Lambda business segments, Q3 '03 gross profit percentage fell to 17.5%, a drop of 10.1 points from Q2 primarily as a result of the lower shipments of higher margins flat panel display and next generation lithography unit. In addition, Lambda booked more inventory and warranty reserves totaling $1.5m.

While we were disappointed with the gross margin results achieved during the quarter, we are confident that the previously announced supply chain programs will deliver the profit improvements we promised three quarters ago. We have now fully completed the outsourcing of printed circuit boards and we should complete the consolidation of CO2 manufacturing to Bloomfield, Connecticut, towards the end of the fourth quarter. In addition, since we have either completed, or we are nearing completion of these first two supply chain projects, we have begun several new similar projects each with the end goal of improving manufacturing efficiencies and reducing cost of goods sold over the long term.

We are in the process of consolidating our Auburn laser measurement and control business into the operations of the Molectron acquisition housed in Portland, Oregon. We estimated this move will be completed by the end of Q4 '03 with a cost of $400,000-500,000 to be booked in Q4. The anticipated payback on this project is within 12 months and the costs implement are included in the Q4 '03 guidance that I will provide later.

We have also begun to take a closer look at our optics manufacturing business, as well as several, other manufacturing processes performed in Auburn, California. We did inform our employees earlier today that one of the first steps in this reorganization process relates to the optics business and probably carries a fourth quarter impairment reorganization charge of up to $3-4m. While many of the optical capabilities found in our Auburn operation are both proprietary and enabling, the results were enough work down for others at disappointing gross margin levels, so they are non-additives to our core competencies. This business will be reorganized to minimize any work that's not either proprietary or core. We expect that this reorganization will happen over the next 3-4 quarters, and will likely result in fewer people, reduced space, and equipment requirements.

Operating expenses for the quarter, including intangible amortization, but excluding the charge of approximately 4.4m IPR&D or $39.8m or 40.1% of sales, compared to a revised guidance range of 39-41% of sales. R&D spending for the quarter of $12.7m was 12.8% of sales and came in within the upper range of our guidance of 12-13%. Absolute dollar spending in R&D has remained fairly constant during the past several quarters.

SG&A spending for the quarter including amortization of intangibles was 27.1% of sales a the low end of revised guidance of 27-28%. Our balance sheet remains healthy and includes $224.5m in cash and short-term investments. This total is about $13.1m lower than the balance at the end of Q2 '03. This relatively small decrease is despite the fact we paid approximately $43.5m to acquire Positive Light. Assets acquired in this acquisition included $8.3m of cash and notes, netting to a cash outflow of approximately $35m of which the majority was paid during the quarter.

At the same time, total debt decreased $7.1m primarily the results of paying down our outstanding long-term bond. In addition by selling the 5.2m shares of the Lumenis stock, we added $11m to our cash balances and triggered an income tax refund claim estimated at approximately $22m. The refund claim is reflected as a current asset in our balance sheet as of June 28th, 2003 and will be claimed as part of the filing of our 2003 tax returns. Coherent book value remains at approximately $19 per share.

At the end of Q3 '03 accounts receivable day sales outstanding stood at 67 days, which is 6 days less than the level of Q2 '03. Electro-Optics days sales outstanding stood at 62 days compared to 63 the prior quarter, a slight improvement. Lambda’s receivable days sales outstanding was 96 days compared to 107 the prior quarter and Lambda's days decreased by 11 days from the prior quarter as some large customers stayed early in the quarter on balances pushed out at the end of Q2 '03. Inventory day sales outstanding increased in Q3 '03 to 96 days from 83 at the end of Q2 '03. Clearly, this demands the full attention of management. Some of the 4.5 days increase within the Electro-Optics business segment can be attributed to increases of inventory within the CO2 business unit.

Besides operating duplicate manufacturing lines during the transition of manufacturing to Bloomfield, large inventory buys were made within this group in advance of customer orders that were subsequently pushed out, while there are no obsolescence issues with this early purchased inventory, it directly impacted our days sales outstanding. Of greater concern is the level of inventory that Lambda Physik, where days increased to 221 days from 131 as of the end of Q2 '03. Much of this can directly be attributed to the significant drop in revenues from prior quarters. While currency rates and pushed-out sales can explain most of the increase in inventory during the quarter; this performance is of concern to management. We will continue to keep you updated on a quarterly basis and we do anticipate that the integration of Lambda into Coherent will have a positive impact on Lambda's future performance. And John, will add more on this later.

Capital spending for the quarter was approximately 6.8% of sales and well within our guidance. Our capital spending for the remainder of fiscal 2003 is still projected between 6.8% of sales. The following represents management's guidance on operating results for the fourth quarter. As usual such guidance is limited to current quarter only as market conditions make it difficult to go much beyond this timeframe. As a reminder, our guidance is exclusive of any estimated impairments or major restructuring charges.

We anticipate that Q4 '03 revenues will increase 4-8% over Q3 '03 levels and that growth will be achieved within each of our operating segments. Gross profit rates from operations are anticipated to fall in the range of 38-40%. We expect both segments to contribute to this improvement. While this range is slightly lower than the rates achieved in the first half of fiscal 2003, we are reluctant to estimate anything higher until we get full control of the operations of Lambda.

R&D is again expected to run in the range of 12-13% of revenues, and SG&A expenses, including the amortization of intangibles, will continue to fall in the range of 26-27% of sales. Other income and expense net of minority interest is estimated at 0% of revenue. At the levels of proxibility (ph) within the guidance ranges, using a 30% tax rate will not materially mislead your estimates.

In summary, Coherent maintains its overall excellent financial condition. The future quarters will continue to put significant demands on management in many areas including supply chain improvement and the integration of Lambda into a business unit of Coherent. John will soon speak to you about new product introductions, and new and continuing market opportunities for the company. We are confident that the changes we have made or will make through our supply chain will have a positive influence on future operating results. The same applies to the acquisitions we have made. The volatility in global economics experienced over the last several years has dictated changes in how we must do business in the future. We cannot be afraid to make the changes necessary to better serve what is now a much more demanding customer base, thereby maintaining our market leadership position, and while doing so achieve the desired economic results. Let me now introduce John Ambroseo, our CEO.

Thanks Leen. Good afternoon everyone and welcome to our third quarter conference call. Let me began by reiterating my comment from this afternoon's earnings press release. Our Q3 financial performance was unsatisfactory. While some may wish to give us benefit of certain unfavorable extraordinary events, the fact remains that we did not execute at the level of which we are capable. We remain committed to profitable growth and we will achieve this goal. As is customary, I will begin with a review of the Electro-Optics business and conclude with a discussion on Lambda Physik. Orders for our Electro-Optics segment were up 2% sequentially and 8% from the prior year period. We also added an additional $4.1m in backlog from the Positive Light acquisition. The following market review will provide insight as to where the growth has occurred.

Bookings in our scientific and government programs business were up 38.8% sequentially and 43.6% from the prior year period; about half the gain resulted from our acquisition of Positive Light, which has a strong presence in the scientific community. Funding delays that plagued the prior quarters have begun to thaw in the U.S. and Europe as local and federal governments have approved their respective new budgets. Government contract R&D sales were also up sharply as large program awards continued from last quarter.

Within the OEM component and instrumentation segment, orders increased 7.8% sequentially but decreased 14.9% from the same prior year period. In Q3, we experienced strength in the bio-instrumentation (ph) market as our diode pump lasers both Compass and Sapphire are rapidly gaining market share. But the company experienced overall weakness compared to a year ago as a result of the sluggish world economy which has had a direct impact on our OEM components business.

For materials processing, bookings were down 6.6% sequentially and down 2% from the prior year period. We had experienced significant growth in Taiwan and China during the first half of the year. SARS imposed travel restrictions especially within China proved problematic for our customers. We believe this market should return to its growth trajectory as Asia recovers and expansion of photonics- based tools and manufacturing environments proliferates. Also as mentioned earlier in the call, we are introducing two new CO2 products that will primarily serve the materials processing markets.

Microelectronics bookings were up 5.7% sequentially and 14.3% from the prior year period. The increased strength in bookings arose from initial orders and ongoing qualifications across our broad range of customers. As we have mentioned before, the semiconductor capital equipment market continues to adopt light-based solutions at an increasing rate. Given our product depth and breadth, Coherent stands to be a direct beneficiary of this trend. We will also enjoy the added benefit of margin improvement as the products going into microelectronics markets are typically at the higher end of the margin scale.

Graphic arts and display bookings were down 66.1% sequentially and 2.1 % from the prior year period. I would like to remind everyone that we had an extremely large annual order placed in the second fiscal quarter of 2003 when comparing the sequential results. We remain enthusiastic about this market, especially since our customers are benefiting from the superior performance, reduced downtime, and lower overall cost of ownership of our products compared to those of our competitors.

In R&D, we maintained our investment during the third fiscal quarter. Coherent spent $12.7m or 12.8% of our revenues on R&D in Q3. We continue to innovate and expand our product portfolio with an emphasis on performance, ease of use, and reliability. During the quarter, three new CO2 products were introduced, two lower power devices targeting the marketing and grading space, and one higher power device for metallic and non-metallic cutting. We also introduced a number of new products in the laser test and measurement marketplace for both research and industrial applications. Government R&D contracts also continued to accelerate during the quarter.

Let me now switch to a discussion on our Electro-Optics operations. As I have previously stated, our goal is to achieve margins in the low-to-mid 40s at the current revenue levels. To this end, we initiated two supply chain restructuring programs. We completed the transfer of all print circuit board assemblies to our contract manufacturing partner by the end of June. I would like to congratulate the transfer team as there were no adverse impact on shipments, revenues, or quality during the quarter.

Our second project the consolidation of all CO2 laser manufacturing at our site in Bloomfield, Connecticut is also nearing completion. The phase out of our CO2 facility in Santa Clara is schedule for the end of August 2003. To remind everyone of our previous project guidance, the expected cumulative impact from both projects is the reduction of 2-3 percentage points of costs for the Electro-Optics business segment. The full benefit will be realized in Q4 -- in Q1 of '04, pardon me.

We are now turning our attention to the next round of supply chain restructuring. During the fourth quarter, we are consolidating all our laser measurement and control business at our facility in Portland, Oregon. This allows us to better utilize our R&D, sales and manufacturing resources, while eliminating duplicate overhead structures. The expected cost savings is approximately $400,000-500,000 per year beginning in Q1 of '04.

Earlier today, we internally announced the reorganization of our U.S. based Optics business headquartered in Auburn, California. The main impetus was to better align customers, capability, and capacity. Put in another way, we've a diverse customer set that draws on various technologies and processes. The mix results in under-utilization of the factory, high R&D expense, and poor operating margins. Streamlining the customer set will permit us to provide greater value while running a more efficient business. In addition, we will use selective subcontracting for non-value added fabrications as a means of cost control. The entire program will take approximately 12 months to implement and should drive annual savings of $2-4m, which should be fully realized in fiscal 2005.

We've also begun planning the consolidation of our worldwide scientific business, following the acquisition of Positive Light. While I do not have details to share with you today, you should expect an announcement no later than our Q4 '03 conference call this October.

I will now switch to the discussion on Lambda Physik business. During her discussion, Leen provided an update as to the status of tender offer for Lambda Physik. I would like to spend more time than usual on this segment and revisit the motivation behind the tender and discuss possible next steps. The decision process began with simple question-- all in or all out? Anything else was essentially maintaining status quo, which was unacceptable. The all in creates opportunities for growth but carries risk. The all out will generated additional cash without risk.

Excimer laser technology remains unique in its ability to produce large quantities of ultraviolet light. This capability is a key enabler for the lithography and TFT markets. While Lambda has enjoyed success in TFT, some of us (ph) have suggested that given Lambda's small share in lithography and the strength of the market leader, it would be wise to deploy resources elsewhere.

I respectfully submit that there are few opportunities in the photonics universe equivalent to lithography. That Lambda possesses the core technology to serve these customers, that the customers strongly desire a viable second source. Lambda has improved upon the reliability of its products. The [stepper] tool and chip manufactures has made it clear that our product portfolio must be ready to go within the next 12 months. We are prepared to support this time line.

On an operational basis, consolidating Lambda will allow us to cross leverage technologies, providing our customers with even more enabling products, drive supply chain synergies, and reduce SG&A through the elimination of the added cost of operating two separate public companies. On July 30, 2003, we will purchase the shares of Lambda tendered during the offer period. Thirty days later, we will call a shareholder meeting to vote on a domination agreement, if the 95% threshold is not met, or squeeze-out resolution if the 95% condition is achieved. The squeeze-out method is preferred as it permits 100% acquisition of the shares. Domination agreement would allow us to exercise total operational control while the minority shareholders retain very limited rights.

As the tender runs its course, we are reviewing candidates for the Managing Director of Lambda. Next on the list is rationalization of the R&D programs with particular emphasis placed on reliability engineering. The third priority is restructuring of the customer [into] space for sales and service. We will use a combination of direct and distributor sales and leverage Coherent's existing network wherever appropriate. While this may seem daunting, we are fortunate to have a number of talented people in the technical and mid management ranks that are eager to turn this business around. You can expect more detailed information following the close of the tender at the end of this month.

Returning to operational performance, sales for the third quarter of $15.8m were down 35% sequentially and 21% from the year ago. Lambda Physik's new orders of $18.2m during the third fiscal quarter of 2003 were negatively affected from weakness across all three business segments caused by a weak Asian market environment. Lambda’s orders for the fourth quarter were down 6% from the immediately proceeding quarter and declined 44% from the prior year period. It should come as no surprise to anyone that the lithography market remains in the doldrums. From what we are hearing in the marketplace, it appears that the first signs of recovery in lithography will be the December quarter. On a positive note, we are encouraged with our relationships with the lithography stepper community and they continue to show interest in Lambda Physik's products offerings. Quality and reliability are the cornerstones of new Lambda products and we feel Coherent's acquisition will only improve on the customer service side of the equation. We eagerly await healthier times in this market.

As mentioned in Lambda's prior releases, we continue to see weakness in the flat panel display market. The reasons for the weakness are unclear but may be related to customers working for previous inventory and delays in deployment in the field due to lingering effects of SARS during the earlier part of the third quarter. It does not appear to be a result of market share loss. The science and medicine side of Lambda's business was hurt as a result of product transition in the refractive eye surgery market. Lambda is introducing a new product to vendors in this market during the fourth fiscal quarter, which caused a delay in ordering patterns during the third quarter.

Lambda Physik did have some significant product accomplishments during the third quarter, including introducing a new 2-kilohertz NOVATEX Excimer Laser, which is available at both 248 nanometers or 193 nanometers and is an ideal solution for photomask writing applications. In addition to photomask writing, this Excimer targets such applications as micro-structuring and micro-drilling, cable marking, optics testing, surface inspection and semiconductor inspection and metrology.

In the industrial business, Lambda Physik introduced the new Lambda Steel 2000 Excimer, the highest UV power available from any laser source today. The higher power enables TFT manufacturers to increase the panel size which is a key driver to growth. The Lambda steel 2000 can also be used for drilling of PCD's, ink jet printer nozzles, and the hardening of automotive engine cylinders. Before turning the call over to the operator for the question and answer session, I have one announcement and two housekeeping issues to bring to your attention.

Earlier today in a separate press release, we announced the appointment of Larry Tomlinson to Coherent's Board of Directors. Larry recently retired from the role of SVP and Treasurer of Hewlett Packard after a very successful career that spanned four decades. During his tenure, he held a number of other senior financial and administrative positions in global operations. On behalf of the Coherent organization, I would like to extend a warm welcome to Larry. On Thursday, November 6, Coherent plans to hold an analyst day for institutional investors at our facility in Bloomfield, Connecticut. Bloomfield is located approximately one and half hours from Boston and two hours from New York City. Our Investor Relations Department will send those of you on our e-mail list further information about this event in the near future. I am also pleased to inform you that the Coherent domain name is back in our possession on the Internet. You can now find the company at www.coherent.com. I will now turn the call back over to the operator and we can begin the Q&A session.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question today, please do so by pressing the "" followed by the "1" key on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order you signal us and take as many questions as time permits. Once again, it's "" "1" to ask a question, and we'll pause a moment to assemble our roster. Our first question comes from Ali Irani with CIBC World Markets.

Yes, good afternoon gentlemen -- and ladies. This is Mary for Ali Irani. It seems like you’re seeing a pretty broad based pick up in some of your businesses. I was hoping you can comment a little bit further on perhaps the pickup in the semiconductor markets. Is that also flowing into semiconductor businesses?

Sure, Mary, it's John.

Hi.

We are seeing -- obviously we have seen some increase in the order rate during the quarter for Microelectronics. And, as I mentioned during the prepared statements that this was broad based, it's going into a number of front-end and back-end applications. As we see the market for a presumed growth vector, which is now being predictive for the latter half of this year and we're anxiously waiting that. Our main focus as I've mentioned in previous calls, is to make sure that we are embedded in as many applications as our technology and support structure allows and I believe that we have achieved it.

Okay great and I was hoping you can just comment on how much do you think you could potentially lose in revenues in that business of your transitioning out of the -- I guess, as you are restructuring the Auburn facility?

On the optic side you mean?

Yes.

The answer to that is not as clear cut as you might imagine. We are having discussions or we have began discussions with customers that could be affected by this and a number of things will influence what customers will want to remain with us and what customers would choose to go elsewhere. The key point here is that there is actually a small number of external customers that are impacted by this, and they tend to be those customers that utilize technologies and processes that are not part of our core business. So, the number is probably, you know a couple of handfuls of customers at most and they tend to be low in terms of dollars contributed. So, it's probably going to be a blip in the grand scheme of things.

Okay great. Thank you.

And our next question comes from John Harmon with Needham & Company.

Hi good afternoon this is a question for Leen. Leen I was wondering if you could walk us through exactly where those unusual items hit the P&L, the sales of Lumenis shares and the tax refunds, please?

Okay. While the sale of Lumenis share is in the other line, below operating income, and the tax benefit is included in the tax line.

All right that's pretty simple. Thank you.

It is [inaudible].

And we will move on to J. D. Paget (ph.) with Founders Asset Management (ph.).

Yeah. Hi guys. Couple of questions, one Leen, I was hoping you could may be go in to a little more detail about the gross margin impacts for each of the divisions? You spoke little bit about, you know, some mix impacts and the duplicate costs and sounds like -- you stepped up some inventory reserves, so I was just kind of hoping get my arms better on those.

Okay well the -- lets see the largest component is probably the fact that we have a significant amount of cost in this current quarter and in Q3 related to the move of the operations from Santa Clara to Bloomfield. That will continue during -- for a certain extent during Q4 as we are not completing the move until end of August. So, you won't see that benefit coming through. In Q4, you will see that benefit completing coming through in Q1 '04. The inventory reserves, as you may have noticed, our inventories have increased and we have the program in place to, well at least a goal in place, to bring our returns up to three. We have not succeeded in that yet and typically when your inventories go up there is a risk. You always have a high risk that you have excess of obsolete (ph) inventory. So we -- that's what happened this quarter and there was bit of exceptional a -- bit higher than what we normally see. So, of course, we hope in the future that this will be at a lower level.

But how much was that? I think you called out $1.5m on the Lambda side.

We did call them the Lambda side because the $1.5m for Lambda is a very significant number as a percent of their total cost of sales. Ours as Electro-Optics, it wasn't as high, but I could probably say it was higher than $1m and normally we typically run probably about %500,000 less.

So you took a -- so it was kind of $1m incremental or $500,000 incremental?

No, the total was $1.3m.

Okay. So it was like $700,000 incremental?

It was about 500 incremental.

Okay. And then the other two questions I had. How should we think about other income and expense looking forward? I know you gave some guidance around that forward to be flat and from backing out all of these things directly and trying to get a pure (ph) looks like it was a pretty significant expense this quarter.

Yes, we had some foreign exchange loses in that number and the interest is certainly low right now. So the net interest income is almost rounding to zero. So some of the other items that go in there are now showing up as an expense and the majority was currency, foreign exchange and then we also have the Jay-zee (ph) and Lambda Physik that's booked in other as well. The expenses associated with the Jay-zee (ph) and Lambda goes in that account as well.

How come that's not in minority interest?

The minority interest is a 40% portion that we -- on the total income of Lambda Physik, net of taxes.

Okay. So going forward, you think other income expense net is kind of, roughly flat or zero?

Next quarter we still have a minority piece, so I am projecting zero. Going forward depending on what the interest rates do, it will be slightly negative.

Okay. So that would be somewhat--

Slightly negative depending on how the interest rates will do.

And with some FX losses and so forth?

There is always going to be fluctuation from FX going one way or the other, so it's hard to forecast. I mean that's the main item that's in other.

Okay. Thank you.

And once again as a reminder, please press "" "1" if you have a question or a comment today. We will move on to Byron Walker with UBS.

Yes, I may have just missed the answer to my question. Could you go over how the minority interest is going to be handled once -- let's assume that you prevail with the buyout. Do we prorate it for the quarter and do you still see this as accretive or will it have negative effect on earnings?

For the next quarter, we will have to prorate it because if the tender offer closes at the end of July, it will only 60% up until July 30th and then for the next two months will take the number, the actual number that we're on, if it is 95 or--

So there will be a minority interest line that will only be for a month.

There will be a minority interest line for next quarter.

Right.

In future quarters, we are assuming 100% ownership and then that line disappears.

And are we -- at one point, you thought this would be accretive. Do you -- will it be immediately accretive or not at this point?

We really haven't sized the -- any costs associated with the integration. So as John had mentioned I believe in his call, after the tender offer, we will -- is complete, we will look at the cost, and then in the future it should be accretive.

I understand. Okay, so there could be yet another charge then, as early as the September quarter?

That depends on how we are moving forward. That depends on how much progress we make in the short period of time.

I understand. Thanks.

Our next question comes from Nathan Churchill with Sidoti & Company.

How are you doing? Just a follow up on that Lambda Physik; if and when it's folded in, roughly how quickly do you think we'd start to realize some cost savings?

Nathan, its John Ambroseo. With respect to things like consolidation, etc., some of those could move very quickly if you start to look at distribution offices, etc. But it's going to take probably, I would guess, at least a quarter for us to really get a detailed plan in place, and full knowledge of the organization, so that we can make informed decisions rather than making quick decisions.

Okay. So at least a quarter until we begin to see any impact, you are saying, and then after that --?

No I said at least a quarter till the plan is in place.

Okay, got it. The inventory -- there were few items that were causing it to be little out of whack as far as, turns for this quarter. Can you give us an idea what you are doing for each of the individual businesses to control that, you know, to form some sort of accountability?

Well. I can tell you that there is a fairly significant amount of pressure within EO on the heads of the various business units to control their inventory, and to a large extend they have done a good job of that for the first half of the year, stumbled a bit in the third quarter, as they dealt with some changes in mix, etc. And it is a key metric for the groups’ performance and their individual performance. So, there is a high level of accountability. On the Lambda Physik side, we intend to bring that same level of accountability into that organization.

Now you are saying that high level of accountability, is compensation into this?

There are aspects to it, yes.

Okay, and another item, acquisitions. You guys looking around at anything still, or what we are going to expect to see in that area?

We constantly have exploratory discussions with other companies. Right now I would like to get the Lambda tender under our belt. And work through some of the integration issues before we try to work a deal with another company. I don’t think that we have the bandwidth to do something the size of the Lambda integration and try to do a second deal of any significant size at the same time.

Okay that’s what somewhat comforting. Thanks John.

And once again as a final reminder, press "" "1" if you have a question today. We do have a follow-up from J. D. Paget (ph.) with Founders Asset Management (ph).

And just two of the housekeeping type items. The amortization was about 1-4 this quarter, is that kind of what you thing going forward?

The amortization includes a full quarter of the acquisition of Molectron and Positive Light. So this is our new run rate.

Okay that is the full quarter, so keep that going forward?

This is a full quarter --- yes.

Okay and then in tax rate, you said was 30%?

Well I said that's for Q4 using 30%, would not materially misstate the estimate.

Okay that's kind of your best guess?

Yes.

Okay, can you sustain that in to the next fiscal year?

We will give new guidance for next fiscal year next quarter. But I think you should always assume and go back to our rates of 33, 34 % -- 34% statutory rate.

So there is just some factors that are pulling that down a bit in the September quarter?

Well our earnings are not our annual projected earnings, because of the loss in Q3, are lower than we initially anticipated.

Okay, so it's just some catch up?

Yes.

Okay thank you.

We do have a question from John Taro (ph.) with Taro and Company (ph.).

I apologize if you've answered this or talked about this earlier because I was late getting on the call, but moving to Bloomfield, Connecticut, and you go over again exactly what you are moving from Santa Clara?

We had a CO2 R&D and manufacturing facility in Santa Clara. We've acquired a business in Bloomfield, Connecticut, a couple of years ago, also in the CO2 space. And given the leverage that we could create in Bloomfield, we decided to consolidate all CO2 manufacturing and research in that site. So we have been in the process of moving product lines across, moving some people across, and bringing up the production capability in Connecticut. All that has taken place over the past few months. And we will be at a point where we will actually close the facility, the CO2 facility, in Santa Clara at the end of August.

John, will that leave any property and building in Santa Clara to sell?

It's embedded inside the building here, and it's actually relatively small space and we will absorb it into other businesses that require additional space.

Okay. Thank you very much.

Sure.

And that does conclude our question-and-answer session. I will turn the call back over to Ms. Simonet for closing comments.

Thank you very much for joining the conference call and we look forward to next quarter's conference call.

And that's concludes today's conference call. If you would like to listen to the replay of the call, you can access this by dialing 719-457-0820 and that's from July 22, 2003 at 6.30 p.m. Central Time till July 24 at 11.59 p.m. Central Time. Once again that's 719-457-0820. Thank you.