Coherent Corp (COHR) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Coherent fourth fiscal quarter 2004 earnings results conference call. For opening remarks and introductions, I would to turn the call over to Chief Financial Officer of Coherent, Helene Simonet.

Thank you, Angela. Good afternoon and welcome to our fourth-quarter fiscal 2004 conference call. As is customary with our calls, I will speak to the results of the fourth quarter and then John Ambroseo, our President and CEO, will provide a business and operational overview of the Company.

We will continue to provide forward-looking financial guidance for the current quarter only. Please remember that such guidance provided is an estimate and is subject to different risks and uncertainties such that actual results may differ significantly. Additional information concerning these factors are (sic) 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 Forms 10-K, 10-Q, and 8-K, as applicable. Copies are available from the SEC, from the Coherent website or from Coherent's Investor Relations.

Before I move on to the results, let me remind you that the full text of today's prepared remarks and the replay of the webcast will be made available through the Coherent Investor Relations website.

We reported fourth-quarter revenues of 133.2 million and net income from continuing operations of 9.8 million, or 32 cents per diluted share. Net income included an after-tax gain of 2 million, or 7 cents per diluted share, from the sale of a previously impaired note receivable. The fourth-quarter results also reflect the cumulative positive effect of a lower than previously guided annual tax rate adding approximately 5 cents per diluted share to our earnings.

Excluding the benefits of the two aforementioned items and the third-quarter gain on the sale of Technology, the sequential earnings per share growth was 39 percent on a sequential revenue growth of 4 percent, demonstrating strong positive income leveraging.

Fiscal year 2004 GAAP income from continuing operations was 17.5 million, or 57 cents per diluted share, compared to prior year's GAAP loss from continuing operations of 46.5 million, or $1.58 per share.

On a non-GAAP basis, excluding the restructuring, impairment costs and the onetime benefits, earnings per share from continuing operations improved from a loss of 14 cents per share in fiscal 2003 to an income of 49 cents per diluted share in fiscal 2004. We are very pleased with our margin improvements and the continued leveraging of our infrastructure.

Our overall book-to-bill was 1-to-1, resulting in a healthy Q4 backlog of 154.6 million. This compares to a backlog of 127.7 million a year ago. John will talk more about the bookings performance in the various markets we serve, but in summary, fourth-quarter orders of 132.7 million represent a 26.8 percent increase over the corresponding prior-year period and a 6.2 percent increase from the immediately preceding quarter. On a fiscal year basis, orders were up 28.7 percent.

Total Company sales in Q4 '04 were 133.2 million, up 31.7 million, or 31.3 percent from the same quarter a year ago, and up 5.3 million, or 4.1 percent sequentially. On a fiscal-year basis revenues were up 21.8 percent.

Sales by business segment were as follows -- Electro-Optics, 109.2 million, an increase of 25.5 million, or 30.4 percent from Q4 '03, and an increase of 3.7 million, or 3.5 percent from Q3 '04. For the full fiscal year, Electro-Optics sales were up 26.2 percent.

Lambda Physik, sales of 24 million for the quarter, an increase of 6.2 million, or 35.2 percent, from Q4 '03, and an increase of 1.6 million, or 7 percent, from Q3 '04. For the full fiscal year, Lambda sales increased 4.6 percent.

The Electro-Optics sales by significant market application for the fourth quarter and full fiscal 2004 are as follows. The numbers are in millions of dollars, and for each of the market applications, I will first read the fourth-quarter number followed by the fiscal year number -- Scientific and Government programs, 28.5, 116; Microelectronics, 31.8, 105.7; Material Processing, 17.6, 60.5; OEM Components and Instrumentation, 26.5, 101.7; Graphic Arts and Display, 4.8, 25.4; for a total for the fourth quarter of 109.2 and for the full year 409.3.

Lambda Physik sales by significant market application for the fourth quarter and full fiscal 2004 are as follows -- Industrial, 18.6, 53.1; Lithography 3.3, 15.4; Scientific and Medical, 2.1, 17.2; for a total of 24 million for the fourth quarter and 85.7 million for the full year.

Fourth-quarter gross profit of 59.6 million, or 44.7 percent of sales, was above the high end of our guidance range of 42 to 44 percent, and compares to 43 percent of sales last quarter. For the full fiscal year 2004, the Company's gross profit percentage of 41.9 percent, the highest level in three years, compares to 36.6 percent in fiscal 2003.

The breakout in gross profit by segments for the fourth quarter is as follows -- 46 percent for Electro-Optics, an increase of 0.6 percentage points from Q3; and 38.7 percent for Lambda Physik, an increase of 7.1 percentage points sequentially.

The Electro-Optics segment gross profit improvement is primarily the result of better utilization of manufacturing overhead, coupled with a favorable product mix. Within our Lambda Physik segment, gross profit increased to 38.7 percent from 31.6 percent last quarter and was up significantly from 20.2 percent achieved in the corresponding prior-year period. The sequential improvement was primarily the result of lower inventory charges and increased higher margin industrial business.

Compared to last year, gross margin was favorably impacted by a significant reduction in lithography service costs, as we continued to benefit from improved quality of our new tube design. In addition, we see lower manufacturing infrastructure costs following the completion of Lambda's manufacturing consolidation project at the beginning of this quarter.

Operating expenses for the quarter, including intangible amortization but excluding the 3.2 million gain on the sale of a previously impaired note receivable, were 47.5 million, or 35.6 percent of sales, compared to the guidance range of 34 to 36 percent of sales.

R&D spending for the quarter of 16.5 million was 12.4 percent of sales, within the range of 12 to 12.5 percent. SG&A spending for the quarter, including amortization of intangibles, was 31.1 million, or 23.3 percent of sales, compared to a guidance range of 22 to 23.5 percent. The full fiscal 2004 SG&A spending, including amortization of intangibles, was 24.2 percent, representing a reduction of 2 percentage points compared to fiscal 2003 spending, excluding the Lambda severance costs.

Let's move on to the balance sheet. Our ending cash balance for the quarter was 209.7 million, of which 38.9 million was classified as restricted cash. The cash balance of 209.7 million represents an increase of 16.6 million compared to Q3 '04, and this includes the 4 million cash inflow from the sale of our note. Cash flow from operations was positive at approximately 20 million, primarily the result of increased earnings and improved inventory management.

Capital spending for the quarter was 5.3 million, or 4 percent of sales. Fiscal 2004 spending, excluding the conversion of the synthetic lease in Q1 '04, was 23.7 million, or approximately 5 percent of sales, which is at the low end of our guidance range of 5 to 6 percent.

Coherent's book value at the end of the fourth quarter increased to approximately $19.37 per share. At the end of Q4 '04, Accounts Receivable Days Sales Outstanding increased by three days from Q3 '04 and stood at about 65 days. Although slightly higher than we would have liked, it is similar to the fourth quarter of fiscal 2003 and still very good, given the geographic distribution of our sales. Electro-Optic Days Sales Outstanding of 64 increased by 4.5 days from the prior quarter and Lambda's receivable Days Sales Outstanding was 71, an improvement of 3 days from Q3 '04.

Inventory days improved from 75 to 71 days at the end of the fourth quarter, our best showing since Q2 '01, mainly as a result of Lambda Physik's performance. Lambda's inventory improved to the best we have seen in a year, decreasing from 156 at the end of Q3 '04 to 136 at the end of the fourth quarter, an improvement of 20 days. Within our Electro-Optics segment, inventory Days Sales Outstanding decreased from 58 to 56 days.

The following represents management's guidance on operating results for the first quarter. This guidance excludes the impact from any Lambda squeeze-out developments.

Although we have a strong opening backlog, the timing of customer call-offs in the holiday period impact our revenue guidance. We are estimating first-quarter revenues to be in the range of flat to 4 percent down from Q4 '04. We expect gross profit to be in the range of 43 percent to 44.5 percentage of sales. R&D spending is expected to be in the range of 11.5 percent to 12 percent of sales.

SG&A expenses, including intangible amortization, are anticipated to be in the range of 23 to 23.5 percent of sales. Other income expense will be slightly negative, and the effective annual tax rate is expected to be approximately 35 percent. Capital spending for the full year is projected in the range of 5 to 6 percent of sales.

In summary, I am pleased Coherent continued to improve its gross profit and operating margins, and management remains focused on improving Lambda Physik's financial performance. Our backlog remains healthy and we plan to continue generating strong cash flow from operations. I will now turn over the call to John Ambroseo, our President and CEO.

Thanks, Helene. Good afternoon, everyone, and let me add my welcome to our Q4 conference call. At the beginning of fiscal 2004, we outlined a series of objectives for Coherent that included increased profitability, cash generation, margin expansion, and infrastructure leverage. I am pleased to report that we have accomplished all of these.

In Q4, we achieved healthy results, including increased sequential bookings in both business segments, despite uncertainties in the global economy. As Helene mentioned, the Company's gross margin improved to the highest level in three years. The 44.7 percent gross margin in Q4 was driven by positive operating results in both segments. The Electro-Optics segment gross margin of 46 percent surpassed our own goal of 45 percent. Lambda Physik has also shown vastly improved operating results during the past quarter. It is our intention to use these achievements as a springboard for fiscal 2005.

Our book-to-bill ratio for the Electro-Optics segment was 1. Orders for E.O. were up 5.1 percent sequentially and 22.3 percent from the prior-year period. Bookings were up 26.6 percent year-to-date.

As mentioned during our last quarterly conference call, bookings in the scientific market rebounded during the start of the fourth quarter and finished strong, as research spending thawed from the delays in spending during the third fiscal quarter.

Bookings in our scientific and government programs business were up 27.5 percent sequentially and 21.3 percent over the prior-year period. For the full fiscal year, bookings increased by 21 percent.

Demand was up sharply in both the U.S. and Europe, while Asia posted typical results for the region. Many of the orders that were postponed in the June quarter were booked in Q4, which accounts for the healthy book-to-bill ratio of 1.28 for the scientific business.

We received record orders for our Chameleon hands-free femto-second laser systems from the biological imaging market. The Chameleon is a critical component, introducing high-resolution three-dimensional images. We also experienced strong demand for our high-performance, ultrafast amplifiers for biological imaging and high-energy physics.

Bookings in microelectronics decreased 6 percent sequentially and increased 87.1 percent over the prior-year period. For the full fiscal year, bookings increased by 122.5 percent. The continued strength in our microelectronics bookings is a direct result of our prior investment decision. Today, more than 60 percent of our revenues are derived from leading-edge investment. This has allowed us to withstand recent downturns in capacity-driven demand.

Orders for lasers used in wafer processing were mixed. Our emerging technologies for use in the 65- and 45-nanometer nodes remain strong, especially for photomask, inspection and repair tools. Demand for lasers for wafer metrology tools has also been stable. Bookings for wafer inspection market slowed down, as these are mostly capacity driven. Service revenues across all applications were healthy.

Bookings in the advanced packaging market were led by the increasing interconnect density and demand for motherboards and chip packages for consumer electronics. Many of the laser-based tools sold into this market are dual-head systems, which means they contain two lasers of different wavelengths, ultraviolet and infrared. This configuration allows manufacturers to process different materials and feature sizes.

We believe future demand will shift towards the ultraviolet for two reasons. First, the ultraviolet tools are capable of producing sub-50 Micron features that are critical for next-generation chip scale and wafer level packages. Second, our recent introduction of the high-power Avia Thor laser will increase the throughput of packaging tools, thereby enhancing productivity and lowering cost of ownership.

During the last conference calls, I discussed the emergence of the laser direct imaging for printed circuit board manufacturing. I am pleased to say that this trend has continued in our fourth quarter. Order volume is solid and market penetration continued to increase. The keys to broader penetration are higher throughput and more leverage on the cost of ownership model. We are committed to addressing both drivers with our next platform, the Paladin 8000. We expect to have the Paladin 8000 in production next spring.

Orders for OEM components and instrumentation increased 7.6 percent sequentially and 9.2 percent over the same prior-year period. For the full fiscal year, orders were up 8.6 percent. We continue to expand our share in the bio-instrumentation market, as we have added two new moderate-volume OEM accounts for our Sapphire product line.

Last quarter, I mentioned new opportunities for a higher-power Sapphire laser. Among these was confocal microscopy, a technique used to resolve three-dimensional structure in a variety of samples, from biological tissues to semiconductors. I am pleased to report that we have established a beachhead in this market with our first volume order for the 200-mW Sapphire. Future applications for high-power Sapphire include lab on a chip and DNA sequencing. Activity in the medical laser market was also solid, paced by orders for carbon dioxide lasers, diode lasers, and optics.

Bookings within Materials Processing were down 11.7 percent sequentially from an exceptionally strong Q3, but increased a modest 3.2 percent from the prior-year period. Year-to-date Material Processing bookings were up 6.8 percent from the prior year.

The year-on-year growth was disappointing, since we believe this is an underpenetrated market. There are several factors that influenced the results. The Asian market, and China specifically, drove much of the growth for the first half of fiscal 2004. New credit policies established midyear by the Chinese central government to slow economic growth proved successful. High energy prices also took their toll on investment from manufacturing infrastructure.

Lastly, the market is looking for aggressive gains in the cost of ownership, which requires more than simple changes to the existing product portfolio. To this end, we are planning to introduce several new products for medium- to high-volume marking, engraving, and desktop manufacturing. We expect these products to contribute revenues in the upcoming quarters.

Orders in the Graphic Arts and Display Market weakened 17.1 percent sequentially and decreased 31.5 percent from the prior-year period. Year-to-date bookings fell 34.8 percent from fiscal '03, while sales increased 1 percent for the full year. The drop in orders is due more to technology migration than market conditions.

Direct diode lasers have been adopted at a much faster rate during fiscal '04. They displaced certain types of visible lasers due to their size, efficiency, and cost. In fact, the difference in average selling price between a direct diode laser and a visible, diode-pumped solid-state laser can be more than $5000 per unit. Clearly, the volume gains have been insufficient to offset the ASP reduction.

As we move into fiscal 2005, we expect a number of newer products, such as a version of our Paladin laser, and new diode laser technology will gain traction in the marketplace. Next-generation disk mastering for Blue Ray DVDs is also a significant opportunity for the second half of fiscal '05.

During Q4, Coherent spent 16.5 million, or 12.4 percent of our revenues, on research and development. R&D spending as a percentage of sales remained fairly constant during the quarter and fiscal year. As I have previously mentioned, our investments emphasize new applications, better cost of ownership, and enhanced performance. Over the coming year, several of these investments will hit the market and we look forward to the opportunities they are poised to create.

Helene has already reported the improvement to our Electro-Optic gross margins to the 46 percent level. While we're pleased to have delivered on our commitment, we want to build on our past successes. We are outlining plans to add 2 to 4 points to the Electro-Optic gross margin over the next 24 months. We will accomplish this by better exercising our buying power to reduce material costs and migrating to more common components and platforms to drive volume. Since engineering investments need to precede some of the gains, we expect a gross margin improvement to be partially backloaded. The cost incurred in these programs will be part of our ongoing guidance.

Let me now switch to Lambda Physik. For Q4, Lambda posted revenues of $24 million, growing 7 percent sequentially and increasing 35.2 percent from the prior-year period. Q4 orders of $24 million were up 11.5 percent sequentially and increased 52.4 percent from the prior-year period. The book-to-bill ratio for Lambda was 1.

The industrial market continued to dominate revenues and orders. Sales were up 81.2 percent from the prior-year period and increased 31.7 percent sequentially. Industrial bookings were up 14.9 percent from the prior-year period and increased 9.2 percent from Q3 '04.

Incoming orders originated from several applications. We received a large order for inkjet nozzle fabrication. We had anticipated this order arriving in Q1, but the customer needed to build capacity sooner. Lasers used to produce LTPS flat-panel displays remain solid, despite varying results amongst flat-panel display suppliers. Increasing penetration of LTPS displays and more rapid deployment of OLEDs are likely driving the strength in orders. In addition, we are receiving (ph) several new applications in product security and display technologies.

Q4 Sci Med bookings of 6 million were up 24.9 percent from the prior year and 22.8 percent from Q3 '04. Sales decreased 54.2 percent from the prior-year period and 58.2 percent sequentially as a result of the timing of orders.

Bookings for our Optex line for the medical OEM market were up sharply during the quarter, as we received a large annual OEM medical order. We also experienced renewed interest in the scientific market stemming from laser-assisted deposition of exotic materials. While still in the research mode, these techniques could rapidly migrate into the commercial realm.

Lithography revenues of 3.3 million and orders of 3.6 million remained primarily service-related during the quarter. We also continue to make excellent progress on the lipons (ph) of our 248 nanometer lasers. A first light source test of our LithoTEX laser was conducted. The laser met or exceeded all test parameters. We will make a final decision on deployment in December 2004, as promised.

Coherent's privatization of Lambda reached a turning point this week. At a meeting in Germany yesterday, Coherent agreed to increase the price to be paid to those minority shareholders who did not accept the squeeze-out proposal to EUR14.80 per share in exchange for their agreement to waive their rights to a court appraisal. This agreement is subject to execution of a definitive agreement and court approval. This should be completed in two to three weeks.

We anticipate that the Göttingen Court, which has local jurisdiction, will approve a final merger in the first calendar quarter of 2005, following a statutory notification and review period. Once the approval is in place, we will complete the integration. We will provide details of the impact on our financial statements during our next conference call.

I'm pleased by Coherent's performance during fiscal 2004. We delivered on our top goals of profitability, infrastructure leverage, and cash generation. Our past R&D investments are paying off and are a good barometer for the future.

We also continued to solidify our operational foundation, which positions us for future growth. We remain committed to improving our fundamentals and unlocking the earnings power of this Corporation. I will now turn the call back over to Angela for the question-and-answer session.

(OPERATOR INSTRUCTIONS) John Harmon of Needham & Company.

John, let's see if I can get you to comment a little more about Lambda, please. Given the state of the calendar, that we're very close to Thanksgiving and that business activity slows down towards the end of the year, and certainly given the state of the lithography market, it seems that the probability would be pretty low of a positive decision about Lambda's fate. What else am I not taking into consideration?

There are a number of considerations, John, which is the total picture of our business. I realize that many people would like to hear a decision at this point. We are still evaluating information. We will render a decision in December, as we committed.

Okay, thank you. Are all of the productivity improvement programs that you have undertaken, are they all in full swing in this quarter or is there still a bit of leverage going in future quarters from the things you've been working on?

These are the programs that we had previously announced, you mean?

Yes.

They are in full swing and we have taken advantage of those benefits. The actions that I described today are the second round and are intended to create greater opportunities.

Okay, thank you. A couple of questions for Helene, if I may. Helene, do you know what Lambda Physik's operating loss was in Q4?

It was 1.4 million.

1.4 million. Looking at income from operations for Lambda Physik for the unprofitable years and the last three quarters, I get net losses of 24.5 million. Adding this to it, that gives us 25.9 million. Are those the NOLs that you could incorporate in the future? And is that embedded in your tax rate guidance for next fiscal year?

The NOLs are approximately EUR30 million, so you're very close there. And we will first have to restructure our legal entities, to wait for the merger completion. And then we will release at some point in time the allowance we have against their deferred tax assets.

Does the 35 percent tax rate guidance incorporate some of that?

No, it does not.

Okay, thank you very much.

Mark Miller with Hoefer & Arnett.

Congratulations, John; another good quarter. I just want to talk about what you're seeing in the semi space from your semi customers. A lot of people are reporting things are slowing down there. You had a good quarter for orders. Was the quarter linear? And what percent of your revenues and orders are roughly from semi this quarter?

I believe that Helene gave you the numbers for the quarterly revenues in her presentation, and I will have to defer to her to repeat those. In terms of linearity, Mark, are you asking the question were orders linear or were revenues linear?

Both.

The revenue linearity I believe was pretty good. And the order linearity I really can't comment on because I don't have that detailed level of visibility.

Okay, the other question, your tax rate from that – if that's not Lambda, why was the tax rate lower? Is that some of the charge for the note or specifically why did that dip so much this quarter?

For this quarter?

Right.

Well, we had a range of -- some of our benefits estimates came in different from what we previously anticipated. And then we had a smaller benefit also from a merger of entities that Lambda Physik on its own did in Germany.

Thank you.

Ali Irani with CIBC World Markets.

It's Marian for Ali. I have a couple questions. The first is actually on gross margins. You had given guidance -- your outlook for an additional 2 to 4 points over the next couple years. Can we assume that once Lambda is integrated that you're going to -- fully integrated, like this whole buyout and everything, the privatization is completed, that you'll get a boost almost immediately and then it will be more back-end loaded as you continue to go through?

I'm not sure that I follow the question, Mary, because the integration -- I think what you're asking is more on SG&A than it is on gross margin. The gross margin is really a reflection of what it costs to build and support the product. That number I would not expect to change dramatically due to the integration. Other actions could help there.

With respect to what the impact is of the merger on SG&A, as I said, we will give those numbers out and will provide a full detail of the financial statements during the next call.

Right. Okay, great. Then on another point, you talked about the industrial business of Lambda Physik actually doing very well. How is that trending going into the fourth quarter? Are you still seeing it following similar trends to what you saw in the third quarter or is that starting to fall off, just given what is going on with flat panels in general?

As I said, the demand that we saw from the industrial market was actually quite good for the quarter, with bookings going up from the prior-year period and also increasing on a sequential basis.

The flat-panel market, at least for us, has not shown some of the softness that other manufacturers in the space have. And again, we believe that is partially due to the fact that LTPS may be making some penetration and people may be building some capacity for OLEDs that are not factoring into some of the revenue projections that are out there right now. There has also been broadening of the industrial business, which is new for us. Over the past year, we have been working on some of these applications and they're starting to prosper for us.

Right. And then just also in Lambda Physik, science and medical has basically had pretty rough quarter, and I know that you said it was basically the timing of orders. So we can assume that as we go forward into this quarter and even into the next quarter that you should maybe start to see some of that pick up. Am I reading that correctly?

That is what we guided to, yes.

Right, and then just on the graphic arts and design, I guess it's more looking at late 2005 as you basically put your tools out into the market then that should ramp. Do you expect it to get back up to say 10 million range? Is that what you guys are internally forecasting to?

We’ve given guidance for the next quarter. I don’t think we’re in a position where we can tell you what the outlook is for the end of the year because it depends on adoption rates, introduction of products, etc. (multiple speakers) It was a good try, though.

And actually can you just give me a quick comment on I guess the competitive landscape? I know that one of your primary competitors out there had been recently bought by Newport. Have you seen any increases in competition there, any new tools coming to the market?

The activity that we are seeing is not much changed at this point. Pricing has been pretty consistent. I would say if anything the one thing that has probably changed in the sales approach is we're seeing a lot of optical tables being quoted as part of packages. That, in and of itself, has not posed any problems for us at this point in time. So it may be too soon to tell what the impact is going to be.

All right. Thanks, John.

(OPERATOR INSTRUCTIONS) Mark Roberts with Wachovia Securities.

Good afternoon. A couple of questions. You mentioned the parts marking business. In that business, are you going to be selling that through your direct or indirect channels (multiple speakers)?

What you have to take into consideration here is that we are a light source supplier here. So we would not be selling the tool; we would be a provider of an OEM component. So those would probably go through our direct channel, but to reach the end market, they would go through our OEM's channel. Whether that is direct or indirect depends on the particular OEM.

Okay. But these components are not sold anywhere through like a distributor or somebody who is sourcing or also selling competitors’ parts?

Generally no. 90 percent of our worldwide sales are direct channel, and the 10 percent that goes through distributors, we have agreements in place that they don't carry competitive lines.

Okay, and Helene, did I understand you to say that you're anticipating the 35 percent tax rate for the next quarter to be -- is that a good rate to use for the whole year?

I guided that as the annual tax rate, correct.

Okay. I think my other questions have been answered. Thank you.

A follow-up question from John Harmon of Needham & Company.

Another question for John or Helene, please, about your balance sheet. Due to your strong cash flow generation, cash is piling up on your balance sheet. What level do you feel you need to have around to be comfortable with, and then what would you do with excess cash beyond that level?

Okay. We have about 209 net of 27 debt, and then some of it is restricted, as you remember, for Lambda as well. We have always said that if we do small acquisitions, we can afford it with our own cash. That is certainly our intent, to use the cash to grow the Company. What are we comfortable with? I like to have 100 million in the bank.

Thank you. So meaning you have 70 million for acquisitions and other purposes. Would you consider buying back shares or paying a dividend or would you hang onto it for acquisitions?

We are currently not considering buying back shares. We would rather use it for growth opportunities. And if we buy back shares, we would have to spend a whole lot.

If I may, then, follow up to John, how does the M&A market look? You haven't made an acquisition in a while. Are your potential acquisition targets relatively expensive or plentiful or scarce?

Well, I would say that we have evaluated a large number of opportunities, and our selection criteria has tightened up significantly in terms of what we want to accomplish. So that is the reason we have not done a deal, because we have not found the right deal at this point in time.

With respect to prices of potential acquisitions, I would say that they are pretty much similar to where they have been over the past few years. So they are not at the peak of the craze, but for a good company you are going to pay a good price. And we're not opposed to doing that. Again, we want to make sure that the criteria that we evaluate them by is the correct one. So I would say the bolt-on strategy does not work for us anymore.

Okay, thank you.

Mike Whitfield (ph) with Wachovia Securities.

My question has been answered, thank you.

(OPERATOR INSTRUCTIONS) We have no further questions at this time.

We would like to thank everyone for their participation and we look forward to speaking to you again in January. Good afternoon.

That concludes today's conference. We thank you for your participation and you may now disconnect.