Coherent Corp (COHR) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Coherent fourth fiscal quarter 2006 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, Ms. Leen Simonet. Please go ahead, ma'am.

Thanks, Jessica. Good afternoon and welcome to our fourth quarter fiscal 2006 conference call. In case you have not seen today's press release, let me first highlight one of the announcements.

Coherent has initiated an independent review by a special committee of its Board of Directors of the Company's historical stock option practices and related accounting. The Company requested the independent review following an internal review of its historical stock option practices, which was a voluntary review initiated in light of news of the option practices of numerous companies across several industries.

Independent counsel and advisors will assist this special committee with its review. At this time, Coherent has not determined if it needs to record any non-cash adjustments related to prior stock option grants, or to restate any of it's previously filed financial statement. The company will provide only select financial information while the special committee completes its review.

On today's call I will speak to certain financial information and then John Ambroseo, our President and CEO will provide a business and operational overview. We will also limit our forward-looking financial guidance for the current quarter to select financial information until after the independent review is completed.

Please remember any guidance and other statements in today's conference call pertaining to future plans, events or performance are forward-looking statements that involve risks and uncertainties and actual results may differ significantly. Factors that could cause actual results to differ significantly include risks and uncertainties, including risks associated with general market and business conditions, currency adjustments, contract cancellations, manufacturing risks, competitive factors, and uncertainties pertaining to customer orders, demand for products and services, development of markets for the Company's products and services, the final conclusions of the special committee and the timing of such conclusions concerning matters relating to the Company's stock option grants, and other risks as identified in the Company's SEC filings. Listeners are encouraged to refer to the risk disclosure described in the Company's registration statement on Form S-3 and the reports on forms 10-K, 10-Q and 8-K, as applicable.

Let me also remind that you the full text of today's prepared remarks will be made available through the Coherent investor relations website. A replay of the webcast will be made available for 90 days following the call.

Our overall book-to-bill for the quarter was 0.97 to 1 and our backlog at the end of Q4 '06 was $199.1 million. This compares to a backlog of $199.1 million at the end of Q3 and $194.1 million a year ago.

John will talk more about the bookings performance by major market applications, but in summary, fourth quarter orders of $152.8 million decreased by 6.8% over the corresponding prior year period, and were nominally flat from the immediately preceding quarter. Year-to-date orders improved 7.1% compared to fiscal year 2005.

Total Company sales in Q4 '06 were $158 million, a record for the company, and up 18.1% from the same quarter a year ago, and up 5.7% sequentially. On a year-to-date basis, revenues grew 13.2% with Europe and Asia growing 23% and 16% respectively.

The Company's sales by significant market application for the fourth quarter are as follows; scientific and government programs $28.1 million; microelectronics $64.6 million; material processing $19.5 million; OEM components and instrumentation $34.1 million; graphic arts and display $11.8 million for a total $158 million.

Our ending cash balance for the quarter, including restricted cash, was $497.7 million representing an increase of $31.5 million compared to last quarter. During the quarter, we had cash inflow of $5.2 million from the exercising of stock options, while capital spending for the quarter amounted to $4.5 million or 2.8% of sales.

The year-on-year cash balance, including restricted cash, increased $250 million of which $195 million, net of issuance costs, related to the sale of convertible notes. For the year, capital expenditures were $17.4 million or 3% of sales. Our long-term debt balance at the end of the fourth quarter was $201 million, which is similar to the balance at the end of the third quarter.

On October 25th, 2006, Coherent announced the German Federal Cartel offices decision to block our planned acquisition of Excel Technology, Inc. As a result of this decision, we are expensing all pre-acquisition costs that we previously capitalized. Our fourth quarter results will reflect a pre-tax charge of approximately $5.9 million. Expenses associated with services performed during the month of October will be included in the first quarter results. And John will comment more on the FCO decision in his section of the prepared remarks

Guidance for the first quarter of fiscal 2007 will be limited to sales and capital expenditures. We would like to remind everyone that the first quarter is our seasonally weak quarter due to the Thanksgiving and Christmas holidays.

As you have seen in prior years, our first quarter sales typically decline on a sequential basis, and we therefore expect our first quarter sales to be approximately 4 to 7% below the fourth quarter. This still represents a healthy sales growth of approximately 12 to 16% compared to our first fiscal quarter of 2006.

We expect a higher sales mix towards the scientific business following its strong fourth quarter bookings performance and a lower sales mix from graphic arts and display as we completed the shipments against the large volume printing business order we received in the fourth quarter of fiscal 2005. Capital spending for the full fiscal 2007 is projected to be approximately 4% of sales.

In summary, fiscal 2006 proved to be a strong year for the company. While it is unfortunate that we were not able to close on the Excel transaction, we expect to continue on the path of increasing financial performance for the company for the upcoming fiscal year. The company remains a global market leader in photonics for a wide range of commercial and scientific applications, and we continue to have an attractive business model.

I will now turn over the call to John Ambroseo, our President and CEO.

Thanks, Leen. Good afternoon, everyone, and welcome to our conference call.

Before I discuss the business climate, I would like to address our announcement regarding stock option practices. Our decision to voluntarily launch an internal investigation is consistent with emerging best practices. Our management team is firmly committed to a thorough, independent review.

Let me now turn my attention to the quarterly results. We posted record quarterly sales and solid bookings in Q4. The jump in sequential revenues was particularly impressive and most welcome as we kept pace with customer demand. I want to commend my operations team for a job well done.

Bookings benefited from our portfolio breadth and depth, as well as our emphasis on emerging applications. In particular, we saw -- we are seeing new uptake in flat-panel display and solar cell manufacturing. It is also noteworthy that FY '06 was a new high watermark for annual sales.

Orders in the fourth fiscal quarter totaled $152.8 million, giving rise to a book-to-bill of 0.97. Total bookings for the year were $583.8 million, which resulted in a fiscal year book-to-bill of 1.

Orders in the scientific market increased 16.1% sequentially and declined 4% versus the prior year period. The Chameleon product line continues to perform well in the biological imaging market with unit bookings close to our all time high. The more traditional applications in physics, chemistry and material sciences did well, especially for ultrafast products.

Demand also picked up in the custom laser market where the trend towards higher power and repetition rates continues. On a geographic basis, orders in North America and the Pacific Rim were strong, Europe exhibited its seasonal softness, and Japan was flat quarter-on-quarter.

Bookings in the microelectronics space were down 4% -- 4.1%, sorry, from a record third quarter and rose 36.3% versus Q4 FY '05. The overall story for Q4 was continued strength for leading applications in semiconductor CapEx, flat-panel manufacturing and packaging applications.

In the semiconductor arena, demand for lasers used in 300 millimeter photomask processes, wafer inspection and metrology remained robust. Of particular note was customer investment in 45-nanometer node process control development where our lasers play a key role.

Business was brisk for lasers used in FPD manufacturing as well. Incoming orders were received for lasers used in annealing, glass processing, and LCD repair. We also received our first order for an emerging application in color filter processing for FPDs. This could prove to be an attractive opportunity for us in FY '07 and beyond.

The advanced packaging area is a mixed bag. While microvia demand softened, we saw growth in laser direct imaging for PCBs, wafer singulation and solar cell fabrication. Our resiliency in microelectronics highlights the benefits of our strategy to invest in emerging technologies.

Orders for instrumentation and OEM components were down 2.2% sequentially and 20.9% versus the prior year period. The large year-over-year change is related to certain events in the medical OEM market. Among these are the timing of certain annual orders, customers pacing ahead of major ophthalmic tradeshows, and changes in procurement practices in China.

For those of you who may not be familiar with the latter, the Chinese government has instituted tighter controls over the procurement of medical equipment. Any equipment order over 100,000 yuan, which is equivalent to $12,700, must go for public tender, thereby lengthening the purchasing cycle.

The instrumentation market is in solid shape. Our Sapphire and Cube product lines continue to be the industry standard in flow cytometry. A number of repeat and new orders were placed by customers in this space. Over the next several quarters we plan to expand our product offerings to increase spectral coverage and functionality. We expect these changes to be well received by the customer base.

Bookings for graphic arts and display were down 9.6% sequentially and 79.5% versus the prior year period. The quarter-on-quarter change reflects the typical lumpiness in this market. The year-over-year change results from erosion in the high volume printing business.

As I have said on several past occasions, the printing market is highly competitive for our customers and is very price sensitive. We have been shipping a high performance product called an IAB to a single customer.

The end market pricing and demand for the tool in which it is used has declined dramatically. In order to retain this business, we would have had to significantly lower our ASPs on far fewer units. This combination was wholly unattractive and we did not chase this piece of business.

We continue to make progress in the use of OPS lasers for display. We shipped additional units to various customers for development work. And as we predicted earlier, interest has expanded beyond the consumer electronics market into large format display including simulators and cinema.

Orders for materials processing were off 4% from a record Q3 and up 6.1% from the prior year period. We also established a new all-time high for bookings during a fiscal year. Several key applications contributed to the quarterly and annual bookings performance. Marking applications have maintained momentum through the quarter. This is driven by increased demand for product safety, such as serialization and lot coding.

And the non-metal processing market has also done well as the use of lasers in converting and textile processing gains broader acceptance. We believe these areas will continue to provide solid growth opportunities. And to this end, we are making investments in key technologies including diode, solid-state and CO2 lasers. We anticipate introducing new product platforms during FY'07.

Let me now touch on operations. And I'd like to provide you some insight on our focus during FY '07. We will continue to exercise our supply chain model, driving economies of scale through consolidated procurement.

We also intend to drive improvements in inventory turns through the year. And finally, we will introduce lean manufacturing concepts into the network. I look forward to quantifying and timing the benefits in an upcoming call.

As was announced last week, the German Federal Cartel Office or FCO informed us that they were blocking our proposed acquisition of Excel. We have received many requests to provide some insight into the process. So, here goes.

There are many extraordinary aspects to this case. First and foremost, it is distressing that the FCO has subordinated the primacy of the United States Department of Justice in a combination of US firms, especially when the US represents the largest revenue base for the combined entity.

It is not clear if this is an isolated incident or if it represents a change in posture on the part of the FCO. The process by which the FCO reached its conclusion is perhaps more disturbing. As we have said earlier, the investigation was focused on low power CO2 lasers.

The FCO received input from 22 customers, only one of which was outside Europe and an additional one outside Germany. Of those surveyed, 17 were supportive to neutral on the transaction and five expressed concerns. One of the opposing parties had mistaken Coherent for one of our German competitors since the customer identified products that were not part of our portfolio.

The four dissenting customers were predominantly providers of cutting and engraving equipment and accounted for well less than $10 million in total CO2 sales for Coherent and Excel on a TTM basis. As a reference point, the combined revenues of Coherent and Excel on a TTM basis exceeded $700 million.

The numbers only tell part of the story. The FCO concluded that there was no difference between Excel's CW and Coherent's pulsed CO2 technology, thereby allowing them to aggregate the CO2 sales of the parties. This was done despite customers and technical experts telling the FCO that the technologies were not interchangeable due to process requirements.

The treatment of vertically integrated manufacturers was similarly astounding. The FCO held that vertically integrated suppliers, in other words, our customers' competitors, did not influence pricing for CO2 lasers. They ignored sales of CO2 lasers incorporated into an end user system by vertically integrated vendors. This allowed them to conclude that one of our German rivals sold less than $10 million per year in sealed CO2 lasers per year.

You can imagine the impact that this had on market share projections. In addition, they stated that there is very limited substitutability between CO2 lasers and other technologies, even though they were provided ample evidence to the contrary, including the SEC filings of competitors.

Although we considered the FCO position to be based upon an incorrect market definition and a parochial investigation, we chose pragmatism over conflict. We made multiple remedy proposals including the divestiture of certain product lines. The FCO deemed these proposals to be inadequate.

We have been asked what legal options are available. There is a judicial appeal process by which we can challenge the FCO's findings. It could take up to 18 months from start to finish, and as a matter of practice, the German courts do not grant injunctive relief in regulatory cases. We are evaluating whether an appeal is necessary to protect our longer term interests.

While we're disappointed that we were unable to complete this transaction, we remain committed to the use of our resources to grow the company organically and via acquisitions. We will continue to pursue transactions that are consistent with our market strategies and meet our criteria for financial return.

In closing, we began our fiscal 2006 with a solid backlog and product pipeline. We committed to grow revenues and generate significant cash. We are pleased to have satisfied these objectives. As we embark on fiscal 2007, we find ourselves in an equally strong position.

Our backlog has expanded modestly over the course of the fiscal year and we are working on a number of new product offerings designed to meet the ever increasing needs of our customers while providing a sound financial opportunity for our shareholders. We'll also evaluate all possible uses of our considerable cash position to maximize value for our shareholders.

I'll now turn the call back over to Jessica to begin the Q&A session.

Thank you very much sir. [Operator Instructions]

We'll go first to Jiwon Lee with Sidoti & Company.

Good afternoon. I just have a quick question on your options review. I'm just kind of curious; is there a little more color that you can provide as to the scope of these options in question? And what led to you know, your decision of launching this review?

Jiwon, it's obviously a good question. Unfortunately, we can't comment on the scope at this time. We have come to this point after conducting an internal review and determining the most prudent course of action was to do an independent review.

Okay, all right. Good enough. Your graphic arts and display, sequentially your bookings declined pretty considerably. Was that more of an issue of, you know, your big customers sort of kind of satisfying their annual purchase? Was there a little more competitive pressure that emerged during the quarter?

Well, I'd say it's two things. Number one this market has a -- it's a low base to begin with, in terms of absolutely sales or absolute bookings. So it's been prone over the past few years to have some fairly significant fluctuations in the actual booking level.

As I highlighted during my commentary, there was a change in the IAB business, which had been a product we were shipping over the past year. And actually have received an order for in the fourth quarter of fiscal '05 as Leen had alluded to, that we will not be booking a repeat order for because of pricing and volume constraints.

Okay. And finally, you received the first order for color filter processing. Could you just give us a simple sort of introduction to how your lasers help this color filter processing?

Well, I can touch on it a little bit. There is certain customer confidential information in here. So I have to be somewhat limited in my comments. But this is a process that's used in the flat panel market to print, essentially print red, green and blue filters on to the panels themselves.

Okay. That's what I thought. Okay. Thank you.

We'll move next to Mark Miller with Brean Murray.

John, congratulations on another record quarter, for the third quarter at least. Just wondering, any history or any feel you can give us, if you do perceive with the legal appeal process, as the German courts upheld the FCO or is there some latitude to expect reasonable -- they should be more reasonable?

So this is, I asked the same question of our legal teams to determine whether this was pure folly or whether there was something behind it. It turns out that the FCO has issued 35 well I guess now 36 prohibition orders. About two-thirds of those have been challenged. Our understanding is that of the two-third that were challenged, approximately six, or I believe six, have won their appeal, and there were 11 or 13 that were still pending.

So the success rate on the ones that were -- that pushed to a trial and have reached conclusion, is alarmingly high, quite frankly. I would think a regulatory agency would want to win more than half of the cases that have been heard already. It remains to be seen what happens to the remaining 13, whether they're winning half of them or whether they're winning a quarter of them.

Any feedback from the people at excel? I assume they were also disappointed or any thoughts from them you can tell us?

Well, you know, we were all somewhat stunned by the conclusion, because when we looked at the information that was being considered, and I hope that I did it justice. We just couldn't believe that they were going to do anything but pass it, until fairly late in the process, so well into the month of September when they told us that they had a real issue.

Because of the relatively small and the fact this is between two American companies, has the United States Department of Justice or anyone commented or any way to get a read or is it basically hands off with them on this decision?

The DOJ was fully informed of what was going on. They made several calls on, to the FCO to discuss the situation. As you may be aware, there was another US-US merger, which was also being held up by the FCO, in fact the same review team. That one ultimately got passed. Ours did not.

All right. I'll move aside for others. Thank you, John.

Thank you.

We'll go next to Rohit Pandey with HSBC Securities.

Thank you. Your guidance for the first quarter, 4% to 7% decline. Is that --- I'm not conducted worse than seasonal or do you think it's in line with historical guidance, you have had for the first quarter?

I think that's sort of typical for what we see during the first quarter, Rohit.

Not a little worse off?

I don't believe so.

Okay. And then I'm just reading the news here, it seems like Excel has terminated the acquisition, so is there a termination fee involved on the part of any party?

There's no breakup fee.

There's no breakup fee?

Yes. This is -- this was somewhat a prudent action for to be taken, because the transaction was blocked and the agreement should have been terminated.

And what are your comments on further synergies and improvement in the margins, should we wait for the next quarter call to hear about it, or can you give us more color on that today?

Well, I hope that you understand that since we have this option investigation open, we can't make any comments on operating results and therefore I can't quantify what those gains may be. When we're cleared to discuss financials again or full financials, we will certainly make that known.

And are you reviewing until mid '90s, kind of a review for option grant, or is it going much beyond that?

Can't comment, sorry.

Okay. Thank you.

Sure.

We'll go to Nikolay Tishchenko with Global Crown Capital.

Thank you and good afternoon, gentlemen. I have two questions, the first one, John, how long it will take to review the options. What is your best estimate?

Nick, there are no timeframes on this kind of thing because we don't control the process. This is done by an independent review team, as Leen mentioned, that will be retained by the Board of Directors. If you look at other companies and there obviously have been quite a few of them that have gone through it, that is few months, probably at a minimum.

So we're talking about January timeframe?

I wish I could give you an answer. I can't.

Okay, I understand. And the second question, could you elaborate on the use of cash or what options you are looking at?

Well, I think the uses of the cash are all the predictable ones. We can continue and we will continue to look at acquisitive opportunities, historically that's been a significant part of our growth strategy. The questions about whether we will use it in terms of reducing the debt. Other possible use, the short answer is we're going to look at all of those things. We're not ruling anything out at this point. As we have consistently done. We've always looked at all options for the cash.

So you also are looking at share buyback program?

Can't comment.

Okay. Thank you very much.

Okay. John Harmon with Needham & Company.

Hi, good afternoon.

Hi, John.

I would say, congratulations, it feels a bit funny without all the numbers out, but congratulations on a record quarter and the year.

Thank you.

I'm not fishing for a specific number, but the end of the fiscal year was a targeted end for your second gross margin improvement program. Let me ask the question this way, did you accomplish everything that you set out to accomplish?

John, I can't answer that question, because to answer it one way or another would be giving you an indication and I can't do that. I'm sorry.

Okay. All right, thank you. And what's if you hadn't gone down the road towards the Excel acquisition, I mean what would you have been pursuing in terms of improving profitability at this time in other words, you have focused on manufacturing, and I mean infrastructure costs are something you hinted at before. Is that the plan B. until you identify acquisitions or other opportunities?

Well, the answer is that we haven't really let up on striving to improve operations. I mean, that was your first question alluded to the fact that we've been driving that concurrently with driving an acquisition strategy. So things are continuing to move along, you know I've highlighted some of the things that we're going to work on for this year and it's really is an evolutionary processes. You know, there isn't an end point because you should always be striving to achieve best practices in your manufacturing operations.

As far as, you know the SG&A piece, I have said in the past that we're going to look at that at some point. We probably will dedicate some time to looking at it. Although we have no firm plans at this juncture to outline for you. And perhaps answering a question that you sort of asked, I guess. When we made the decision to pursue excel, you know, we had looked at a variety of opportunities and considered those, and chose to pursue excel for the reasons that we had previously stated.

There is -- there really is no shortage of opportunity for acquisitive growth. There's always a challenge to do acquisitive growth under the right of set of circumstances. And that's been our guiding principle. Not to just go out and buy things but to buy things that make strategic sense and buy things financial sense. And I'm confident that we will be able to identify other opportunities going forward.

Okay. Thank you. And well, during your call it just hit the wire that the acquisition agreement had been terminated. How could that work with an appeal process? I would imagine to do an acquisition you would need another acquisition agreement?

We do not look at the appeal process -- in the absence of injunctive relief, which has its own risks associated with it, this appeal process is not going to save the current transaction and to expect excel and coherent act under the constraints of a contract for perhaps 18 months and who knows, maybe even longer than that, is not practical. This was the prudent thing to do, to terminate the agreement.

Okay.

If and when an appeal goes through, you know, we'll go back -- we'll look at all options at that point as well. We're not cutting ourselves off. But again, I want to highlight that this was a practical business decision. You shouldn't read anything more into it than that.

Okay. And now, that the acquisition is for most intensive purposes behind you, I mean at the outset of the announcement, you really didn't release a lot of details because it was a deal in process. But now in hindsight, was the primary motivation for excel, was it to bulk up in your CO2 business or was it just to increase your size, or was it to get to gain a foothold in the systems business?

Well, I think we outlined a number of things, John. And I'm happy to repeat those. I mean it's sort of ancient history at this point. But we have identified four quite sometime that the material processing space is an important market for us. We continue to invest on -- in that market independently.

Excel would have obviously increased our -- the acquisition of excel would have increased our footprint in that space. There were some operational synergies, there were some distribution synergies, there was you know the potential for financial accretion. All those things were important.

Okay. Thank you. And just finally one more, please, if I may. Your orders in the fourth quarter were down year-over-year, and based upon the guidance you gave that would imply a slower year-over-year growth rate in your first quarter. Do you feel there's a bit of picking or slowing in your business?

Well the orders for the quarter were down year-over-year, that's a correct statement. Orders on an annual basis were up. So you know the thing that I guess I'm struggling with in, how to answer your question, is if you look at any 90-day period you can draw lots of different conclusions about a business.

Our business is not based simply on 90 day performance. We get orders coming in at different periods of time. And you know for example, Q3 turned out to be a very strong quarter. I would say that was an unusually strong one. So orders came in, orders move out.

You need to look at longer than 90 days to say what is the business doing? If I look at some of the core markets that we participate in, look at the booking strength, for example in micro electronics. Unusually, strong following not one but two record quarters and still showing a lot of strength.

So from that standpoint, I wouldn't read too much into the fact that there was a year-over-year or prior year period change. I'd look at a longer time frame to determine that.

That helps. Thank you very much.

Sure.

[Operator Instruction].

There are no further questions at this time. I would like to turn the call over to back to Mr. Ambroseo and Ms. Simonet for any additional closing remarks.

Thanks, Jessica. I'd like to thanks everyone for participating and we look forward to providing you updates on all of these issues in the future. Thanks very much.

And that concludes today's teleconference. We thank you for your participation and have a great day.