Coherent Corp (COHR) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent first quarter 2009 earnings conference call hosted by Coherent, Inc. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. (Operator Instructions). I would now like to introduce Ms. Helene Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Good afternoon. Welcome to our fiscal 2009 first quarter conference call.

On today's call, I will provide financial information and John Ambroseo, our President and CEo, will provide a business overview.

As a reminder, any guidance and any statements in today's conference call pertaining to future guidance, plans, events or performance are forward-looking statements that involve risks and uncertainties, and actual results may differ significantly. We see encourage you to refer to the risk disclosure described in the Company's reports on Forms 10-K, 10-Q and 8-K as applicable, and as filed from time to time by the Company. The full text of today's prepared remarks, which will include references to historical bookings and sales by markets, will be made available through the Coherent Investor Relations website. A replay of the webcast will be made available for approximately 90 days following the call.

We reported first quarter revenues of $124.4 million, and a GAAP net loss of $14.7 million or $0.61 per share. On a pro forma basis, first quarter net income was $8.6 million or $0.36 per diluted share, and this compares to last quarter's pro forma income of $0.34 per diluted share, and the prior year first quarter pro forma income of $0.30 per diluted share. The current GAAP to pro forma pretax reconciliation item includes a non-cash goodwill impairment charge of $19.3 million, $4.1million in restructuring costs resulting from our manufacturing consolidation program and headcount reduction efforts, $1.7 million stock-related compensation expenses, and $0.4 million litigation charges resulting from the internal historical option investigation. Our EBITDA -- our adjusted EBITDA percentage for the first quarter was 13.1%, compared to 11.6% in the fourth quarter of fiscal 2008.

Before moving on with the current quarter's results, I would like to recap our previously-announced restructuring program, and also provide specifics on the additional improvement programs we just launched. Last fiscal year we announced the closure of two manufacturing locations, Auburn in California, and Munich in Germany. The Auburn closure is scheduled to be completed this quarter, and the Munich transfer is scheduled to be finished by the end of June 2009. Both consolidation efforts are estimated to improve our pre-tax income by $8 million to $10 million on an annualized basis. In addition, during last quarter's conference call, we announced headcount reductions of approximately 5.5%, yielding pre-tax annualized savings of roughly $9 million.

We are moving aggressively moving forward with our footprint reduction program, and last week we launched plans to close our St. Louis plant, and decided to move our Missouri development and manufacturing operations to the Santa Clara facility. Also in the US, we plan on vacating a leased building in San Jose, and move the current occupants into our existing Santa Clara building. Both moves are scheduled to be completed by the end of fiscal 2009. In addition, we initiated the planning stage of a multi-year project to exit our Finland facility, and instead establish capabilities in the Bay area. The combined annualized savings of the three additional footprint projects are estimated to be in the range of $3.5 million to $4.5 million, bringing the total annualized savings of the announced footprint program to a range of $11.5 million to $14.5 million.

Since our last conference call the global economic situation has not shown signs of improvement, leaving us to take additional cost reduction measures and headcount actions. We have introduced mandatory time off or a shorter work week. We continue to curtail discretionary spending across the Company. We have frozen salaries, launched other cost-reduction programs, and further reduced headcounts by 115 people. The sustaining benefit from the headcount reduction and certain other programs are estimated to be in the range of $13.5 million annualized. If we combine the expected benefits from all of the manufacturing consolidation programs, the reported headcount reduction, plus certain other sustaining cost reduction efforts, the aggregate benefit will range from $34 million to $37 million annualized. This does not include the savings from temporary measures, such as mandatory time off, salary freezes and other discretionary measures.

There are a few key other metrics I would like to share with you. By the end of June 2009, we expect our headcount to be below 1,850, which represents the reduction of 21% compared to our fiscal 2006 year end headcount. Once we complete all of the announced footprint programs, our square feet is estimated to be approximately 770,000, which represents a reduction of roughly 40% when compared to the end of fiscal 2006 available space.

Net sales for the first quarter declined 12.4% sequentially, and 13.8% from the same quarter a year ago. From a market prospective the scientific business was unchanged from the comparable period, while the other three markets experienced sequential declines in the range of 10% to 27%, reflecting overall weakness in these markets. The Company's sales by significant market application for the first quarter of fiscal 2009 are as follows. Scientific, $30.2 million; microelectronics, $40.0; material processing, $17.4 million; OEM components and instrumentation, $36.7 million; for a total of $124.4 million.

The first quarter gross profit was $50.4 million or 40.5% of sales. On a pro forma basis, excluding $3 million of restructuring costs and $0.3 million stock compensation charges, gross profit was 43.2%. Despite the lower revenues, gross profit compared favorably to the pro forma gross profit of 40.8% last quarter and 42.2% during the comparable quarter a year ago. The impact of negative market mix and higher inventory charges was more than offset by our headcount and cost reduction efforts, and the benefits of a weakened Euro versus the dollar.

[Period] expenses of $59.6 million includes goodwill impairment in our CLC segment, stock compensation, restructuring and litigation charges, for a combined total of $22.2 million, resulting in a pro forma expense of $37.4 million, which compares to pro forma spending of $47.3 million last quarter. We have seen benefits from headcount reduction and other discretionary spending controls; however, the sequential reduction of approximately $10 million reflects an incremental favorable impact of almost $5 million, resulting from investment losses from the employee deferred compensation plan. An offsetting cost is captured in other income and expense, so the net impact to the Company's results is immaterial.

Let's move on to the balance sheet. Our cash and cash equivalents balance for the quarter was approximately $200 million, represent a sequential decline of $18 million. Let me highlight the major reasons for this. Cash flow from operations for the quarter was negative, primarily due to slower collections as more of our OEM customers, particularly in the United States, closed offices at the end of December, resulting in postponed payments until the beginning of January. This negatively impacted our day sales outstanding at the end of December by approximately four days. Inventory did not drop in proportion to the revenue decline, as raw material receipts were already in the pipeline, and as you may recall from previous conference calls, we are building safety stocks to mitigate risks associated with the outsourcing and consolidation of certain of our manufacturing locations.

As we are approaching the end of the Auburn facility closure, the cash outflow from restructuring costs increased approximately $2.5 million during the quarter. Also the income tax payments during the quarter were high, at $10.4 million. However, the second quarter cash flow from operations will reflect a tax refund of $5.6 million.

During the quarter we closed the Lambda acquisition chapter, and settled the remaining shareholder payment, eliminating the restricted cash balance of $2.5 million. Capital spending for the quarter was approximately $9 million, which is higher than anticipated, as we purchased semiconductor production assets for approximately $3 million; and John will discuss this further as part of his prepared remarks. Please note that although we experienced negative cash flow in the first quarter of this fiscal year, we are projecting positive cash flow from operations for the full fiscal year, and we estimate capital spending to return to historical spending rates during the remainder of the fiscal year.

Let me give you the guidance for the second quarter of fiscal 2009. We project our second quarter sales to be in the range of $108 to $116 million. We expect pro forma gross profit to be in the range of 42% to 43%. Pro forma R&D spending is estimated to be approximately $14.5 million to $15 million, and pro forma SG&A expense is projected to be approximately $27 million to $28 million. Intangible amortization costs are planned to be unchanged from the first quarter at $1.9 million, and other income is projected to be approximately $600,000.

The annual pro forma tax rate is estimated at approximately 32%, and the stock compensation charges for the second quarter are estimated to be in the range of $2.5 million, of which $300,000 relates to cost of sales, $300,000 to R&D and $1.9 million to SG&A. The second quarter restructuring costs are projected to be in the range of $5.5 million, of which $4 million relates to the footprint project, and approximately $1.5 million relates to the recent headcount reduction we discussed earlier. We continue to stay focused on executing against our footprint and other cost-reduction efforts, as these programs result in lasting cost reductions that will give us the benefits we are looking for when the market recovers.

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

Thanks, Helene. Good afternoon, everyone. Welcome to our first quarter conference call.

Macroeconomics remains the dominant force in our business environment, especially in microelectronics, medical OEM, and parts of materials processing. As Helene highlighted in her comments, Coherent took early action to respond to this downturn, which in turn supported our Q1 results. With end user demand under greater pressure, Coherent is maintaining its conservative posture. We have further reduced headcount and program spending, as well as announced the elimination of three additional sites.

Orders in in the first fiscal quarter totaled $103.3 million, which were down 27% sequentially and 33.3% versus the prior year period. The book to bill for the quarter was 0.83. Included in net bookings was a $3 million cancellation, thus reducing bookings by this amount in the current quarter. Orders of $30.9 million in the scientific market were down 15.9% from a strong fourth quarter, and were virtually flat versus the prior year period. However, this was a typical first quarter in the scientific market. Europe and Asia posted solid bookings, and the US was weaker after a very robust Q4. In general market dynamics were stable, although there is evidence of aggressive pricing from smaller competitors trying to sustain their order stream. We are watching this carefully, and still believe that product differentiation and company sustainability represent the winning formula.

As part of our market strategy, Coherent introduced a new high-performance ultra-fast amplifier, called the Libra HE, at last week's Photonics West trade show. The HE is a black box system that delivers flexible performance and applications for photo chemistry and material science. We are confidence that this combination represents a compelling option for researchers. The outlook for this market remains stable, as the primary funding sources, which are public funds, seem secure. The decline in value of university endowments has a small influence on revenue opportunities in the scientific market, mostly for start-up grants for new professors. It remains to be seen whether the Federal Government's stimulus package, including $10 billion set aside for research and technology, will have a meaningful impact on the photonics market.

Orders of $27.5 million for instrumentation and OEM components were down 27.2% from the prior quarter and 42.1% versus the prior year period. As a reminder, the prior year period included approximately $3 million in optics bookings, and we have exited this business. The trends that emerged in the fourth quarter have continued in Q1. Orders for lasers used in aesthetic and refractive applications continue to be pressured by reductions in consumer spending. Non-refractive ophthalmology showed signs of strength, based on the adoption of the Genesis 577 laser for retinal therapies. In general, bioinstrumentation customers remain in good health, and are managing inventory and risk by shipping to smaller, more frequent, orders. We expect this pattern to continue for the near-term future.

The OPS portfolio expanded, with the introduction of the Genesis 532-2000, a continuous wave green laser suitable for a variety of uses, including instrumentation and scientific research. This system boasts the same benefits as other OPS offerings, including compactness, power scalability, high wall plug efficiency, and long operating lifetimes.

Bookings for microelectronics of $31.9 million decreased 36.9% sequentially and 40.8% versus the prior year period. The drop in consumer confidence and spending continues to depress the microelectronics market. Non-service orders during the first quarter can be characterized as technology buys or design wins. And while service orders have nominally held up, we are very mindful how changes in fab utilization rates will affect this part of the business.

Orders from semi-cap applications remained weak, due to further rejections in projected CapEx spending for 2009. Despite this trend, previous design wins led to key technology buys that in turn should lead to share gain over the next 12 months.

Bookings for advanced packaging users softened further, as integrators are running their inventories out and end users struggle with excess capacity. We believe this market will remain depressed until broader economic stimuli reignite consumer demand for electronics. Orders for flat panel display manufacturing were driven by service needs. From an application standpoint, the [OLE] transition across various FPD formats is creating new opportunities, and has expanded demand for sensitive, mobile touch-screens that contributed to new order activity in the segment.

Bookings for solar cell manufacturing reached an all-time in the first quarter. Demand was strongest from crystalline silicon applications, where our UV lasers are used in critical process steps that enhance yield and optical to electrical conversion efficiency. We are working closely with customers to push these to processes to full-scale manufacturing. The offset to this good news is that tight credit, low energy prices, and sagging consumer confidence are slowing the rate of investment in the broader solar and renewable energy markets. The short-term health of this market will remain dependent on Government incentives, and there is hope that the proposed US stimulus package will spur higher investment. All things considered, we are guardedly optimistic about this opportunity.

Materials processing orders $13 million decreased 20.4% sequentially and 42.2% versus the prior year period. The aforementioned $3 million [in] bookings is included in the materials processing numbers. In other words, gross new bookings were approximately $16 million. In the prior quarter we had seen a slowdown from domestic customers. In Q1 it was Asian and European customers that saw their businesses weaken. We believe that two primary underlying causes are credit tightening and the erosion of the Euro.

While the slowdown has been broad-based, we are seeing some pockets of strong activity. For example, orders for non-metal drilling, mostly for filter production, are near record levels. While the current market conditions are unfavorable, materials processing remains a key long-term opportunity for the photonics market. We are making targeted investments to increase our participating in the materials processing markets.

At Photonics West, we introduced the HighLight 1000F, which is a fiber-delivered direct-diode system that produces one kilowatt at the end of the fiber. It can be equipped with up to 50 meters, and that is approximately [154] feet of delivery fiber, to bring light directly to the work (inaudible), making it suitable for a wide range of applications including welding, cladding, brazing and [featuring]. Among the many benefits of the 1000F are outstanding electrical to optical efficiency, ease of integration, and operation. The evaluation of beta units has gone very well, and we have received our first orders. Revenue shipments will begin in Q2.

In her commentary, Helene outlined our plans to exit facilities in Tampere, Finland; St. Louis, Missouri; and San Jose, California. When complete, these projects will further contribute to improvements in our operating efficiency. Helene also described the acquisition of certain assets for semiconductor laser manufacturing. Semiconductors lasers are a core technology for Coherent. They directly serve applications and are used as an excitation source in all diode pump lasers, which when combined represents about 40% of total Company revenues.

Since 1996, we have relied on Molecular Beam Epitaxy, or MBe, as our growth process for semiconductor lasers. Our MBE-based devices continue to provide competitive performance and industry-leading reliability. However, as with any technology, MBE has its limitations. Some of the new semiconductor architectures that we envision would benefit from metal organic chemical vapor deposition, or MOCVD-based growth, and we sought to add this capability. We were very fortunate to acquire two state-of-the-art MOCVD reactors, other process equipment, and a properly-configured leased facility within two miles of our Santa Clara semiconductor facility. The total cost was about 10% of what new equipment and a facility upgrade would have cost. We expect to ship first articles within the next 12 to 15 months.

The lack of visibility makes it more challenging to manage any business. Our end market diversity may seem like a burden at times like these, but we have clearly benefited from sustainability in certain end markets. We cannot predict where or when the bottom occurs. We can and will take the necessary steps to ensure that our business execution and financial performance are commensurate with our position as a market leader.

For those of you who will be in the Bay area, Helene and I will be presenting at the Thomas Weisel Technology Conference on Tuesday, February 10th, and we hope to see you there.

I will now turn the call back over to the operator for the question-and-answer session.

(Operator Instructions). Your first question comes from Mark Douglass with Longbow Research. Please proceed.

Good afternoon. Just a couple of things. Can you tell me what was the orders for scientific again? I missed that.

$30.9 million.

$30.9 million. Okay. Thank you. When do the -- sorry, investigations roll-off for the legal expenses?

The remaining costs are tied to the derivative litigation, and there is ongoing dialogue with the Plaintiffs in that matter. We can't tell you an exact timeframe for it.

Okay. But you would expect them to continue to trend down, I assume?

Can't make any predictions at this time, Mark.

Okay, fair enough. Can you give a little more color, I guess, into the microelectronics market? What is it that you are seeing? Your solar, I guess, you said is doing okay at this time? Are those orders -- are they starting to roll off?

The solar market has performed reasonably well over the last few years. I think if you look at the numbers for '08, '07, '06, you saw roughly a doubling of the business every year. Certainly the first quarter this year, we have record bookings for any given quarter, and that is good news. But as I said, there are a lot of moving pieces in the solar market, and funding is the big question mark right now, not only from the Company end but also from the consumer end. That is the reason that we use the term, or I use the term, that we're guardedly optimistic rather than wildly optimistic about the opportunity.

As far as the sales to the microelectronics market, I think the pressures in that segment are well documented by companies who have much greater exposure to it than we do. There is weakness in chip demand, their is weakness in end your demand. So it is pretty broad spread at this point.

Right. Your gross margin performance was nice. You were able to get those [tops] out of there fairly quickly, quicker than I anticipated. That was good to see. Are you expecting -- I assume the movements you made and the footprint -- refootprinting of everything, you're confident that your 42%, 43% say, pro forma gross margin is more or less sustainable for the rest of the year, and then going forward?

You know, I would love to be able to confirm that. But here is a lot that goes into it, including revenue levels and mix. I think there is enough uncertainty in the marketplace right now that we will stick to the 90-day guidance.

Okay, fair enough. Thank you.

(Operator Instructions). Your next question comes from the line of John Harmon with Needham & Company. Please proceed.

Good afternoon. A couple of questions. First of all, given the remarks you made about the MOCVD versus MBE, I just want to confirm that it is your intention to move the functions performed in Finland into this new facility, and equipment that you acquired, or is this a new capability for you?

This is new capability, and we will be making future comments about the over-arching technologies once we've completed all the statutory discussions in Finland.

Okay. But you did say you are doing -- closing the Finland fab, clearly -- this is probably the logical location for that activity to go. I just wondered if you could kind of talk about the economics of Finland, which is probably an expensive place to have a fab, versus the Bay area, which is also an expensive place for a fab?

So -- I have to be somewhat delicate in answering this question, John, because we are involved as I said in statutory discussions in Finland, and before we make any defintive comments we need to complete those good faith discussions.

As far as what we're seeking to do , we do believe that the next generation of technology will be MOCVD-based for a number of different applications, which is why we made this investment. You can do things with MOCVD that you can't -- simply can't do with

Okay. All right, thank you. Regarding your materials processing business, you reminded us Photonics West that you are mostly in inorganics, but certainly with your Nuvonics technology you are more in the high-powered part of the space. Would you say that all portions of materials processing have been affected equally, or do you think inorganics might have fared any better or worse than metal cutting and other high-powered applications?

I will reserve judgment on some of the high-power applications, although if you look at the end markets that the high-power devices are going into, they all seem to be under pressure. So I wouldn't be surprised if there is some pressure there, but again our participation at this point is really in low-power and organic processing. The HighLight is -- has been good and continues to be good, and that is very refreshing, but it does represent a break in the cost model as well as the ease of use and integration. So I don't -- I guess I am hesitating because I am not sure if it is a new technology that is gaining people's attention, or if it is simply another tool in a market that is holding up well. I don't think we have enough visibility yet to make that call.

Thank you. A question for Helene, please. The goodwill that you wrote off, you said it was in the CLC segment, but to which acquisitions exactly does it pertain?

Well, John, the analysis is done on the reporting unit level, which is at -- for us, two segments, CLC and SLS. So the fair value calculation is basically done on the entire CLC segment. I can tell you what rolls up into it a little bit, but it is not done on the lower-level basis.

Okay.

Some of the entities -- some of the acquisitions that are part of the CLC segment would be our Portland organization, would be the Nuvonics acquisition. It includes some older technologies that we bought awhile back as part of semiconductor. It include the Island technology that we bought about a couple of years ago. But as I said, the analysis is done at the segment level, not at the individual acquisition level, because our reporting unit is equal to segment. And we also have in there the CO2 acquisition, I think we did in 2000.

[DIOS], uh-huh. Okay, that helps. Thank you very much.

You are welcome.

(Operator Instructions). Your next question coming from the line of Jiwon Lee with Sidoti & Company. Please proceed.

Thank you. First of all for Helene, the other income in the expense line, that was predominantly from, I guess, the compensation charge, right? The losses from the compensation? Could you give us a little more idea about how much that was in that quarter?

Sure. During the quarter it was probably about $6.8 million. As I said, the the way it is reflected in the income statement, it is grossed up. So there is -- in this particular quarter, we saw benefits of about $6.7 million in the period expenses, and the reverse expense comes then in OIE. So net-net, it has no impact to the Company's results, or very immaterial. But it is done on a grossed-up basis from an accounting point of view.

Okay, and the second question is to John. How has order trended so far in the March quarter? Obviously, things are bad across your key markets. But is there any bright spot? As you have alluded, in the flat panel display maybe there is some share gain opportunity, but how has the order tracked so far in the March quarter?

Jiwon, I'm sorry, but we can't comment on order patterns for the current quarter.

Okay, fair enough. I gave it a shot. Thank you.

Your next question comes from the line of Ali Motamed with Boston Partners. Please proceed.

Hi. You gave some guidance. I was just hoping to clarify some things. You had mentioned revenue, $108 million, $116 million. Gross profit, R&D and SG&A, and then below that you talked about stock-based comp. When you gave those three cost items, did that include the stock based comp or would that be additive, in the sense that, you know, do I take 42% to 43% gross margin and then add stock-based comp to sort of further reduce that gross margin?

Yes, that is correct. When I gave you the percentages and the dollars for gross profit and R&D and SG&A, it did not include stock compensation expenses, nor does it include the restructuring costs.

Right, or amortization. I'm sorry, could you aggregate stock-based comp, the whole lot of it again for me one time?

Stock-based comp is going to be estimated at $2.5 million, of which $300,000 relates to cost of sales, $300,000 to R&D, and $1.9 million to SG&A.

Okay. Thank you very much.

At this time we have no further questions in the queue. I would like to turn the call back over to Mr. John Ambroseo for additional or closing remarks.

I'd like to thank everybody for participating in the call, and we certainly look forward to talking to you in three months' time.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.