Coherent Corp (COHR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent Q4 2009 earnings conference call hosted by Coherent, Incorporated. 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) As a reminder, this call is being recorded.

I would now like to introduce Ms. Helene Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Thank you Yvette. Good afternoon and welcome to Coherent's fourth-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 encourage you to refer to the risk disclosures 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 posted on the Coherent Investor Relations website. A replay of the webcast will be made available for approximately 90 days following the call.

Let me first summarize the key highlights of the quarter. Orders grew 50.5% sequentially to $133.4 million resulting in a book-to-bill ratio of 1.24. Revenues of $107.6 million grew 9.3% sequentially and exceeded our expectations in our guidance. During the quarter, we generated $20.5 million cash flow from operations, resulting in an ending cash balance of $243.6 million representing an increase of $21.7 million compared to last quarter.

We continue to execute according to our plans and are on track with respect to our footprint consolidation programs. We exited three locations during the quarter. We closed the St. Louis, Missouri facility, vacated the leased facility in San Jose, California and consolidated the sales office in Japan. We ended the current fiscal year with annual run rate savings from these footprint programs of approximately $8 million. Once we exit Finland beginning fiscal 2011, annual savings will step up to approximately $14 million which is the high end of the promised benefits.

Our headcount at the end of the fourth quarter stood at 1,712 which reflects a reduction of approximately 24% from the headcount at the time we initiated the footprint cost improvement programs. About 45% of the reductions are the result of the footprint programs. The remaining 55% is the result of headcount reductions in response to the change in the economic environment.

On October 14th, we completed the acquisition of certain assets of StockerYale, Inc. and John will discuss it in more detail during his business overview. Excluding integration costs, the acquired businesses will approach breakeven in the third quarter and should be accretive in the fourth quarter of fiscal 2010 upon completion of the consolidation and integration of the acquired units into the Coherent structure.

With respect to the fourth quarter earnings, we reported a pro forma loss of $0.04 per share compared to a pro forma loss of $0.09 per share in the previous quarter. The GAAP to pro forma pretax reconciliation items include $1.7 million of restructuring costs primarily from the footprint consolidation efforts, $1.3 million stock-related compensation expenses, a $1.1 million valuation allowance against deferred tax assets and $0.2 million litigation charges.

Net sales for the fourth quarter increased 9.3% sequentially and declined 24.2% from the same quarter ago. The sequential growth was primarily the result of higher service revenues from increased capacity utilization and some signs of improvement in the low powered materials processing, flat panel display and medical markets.

The Company's sales by significant market application are as follows -- scientific and government programs $29.6 million; microelectronics $36.1 million; materials processing $15.1 million; OEM components and instrumentation $26.8 million, for a total of $107.6 million.

The fourth-quarter gross profit was $37.5 million or 34.9% of sales. On a pro forma basis, excluding $0.8 million restructuring and compensation charges, pro forma gross profit was 35.6%. The sequential decline of 140 basis points from 37% last quarter was primarily due to burning off more expensive inventory, partially offset by the benefits of higher volume and restructuring.

Pro forma period expenses of $42.2 million, excluding $2.3 million for restructuring and stock compensation charges, decreased $0.8 million from the previous quarter. This sequential decline is net of incremental spending from higher sales and net of increased R&D spending to qualify the new Sunnyvale facility.

Our cash and cash equivalents balance for the quarter was approximately $244 million, representing a year-over-year increase of $25.5 million despite the cash demands from the footprint consolidation programs. Restructuring and litigation cash outflows this fiscal year amounted to approximately $18 million and in addition, we invested about $9.5 million in building and equipment improvements in support of the consolidation efforts. We are in particular very pleased with our inventory reduction efforts during this tough economic environment. Inventory balances declined $23 million compared to the end of fiscal 2008. Accounts receivable days sales outstanding stands at 62 days, an improvement of seven days compared to last quarter and almost similar to our fiscal 2008 year end performance.

Capital spending for the quarter was $3.9 million or 3.6% of sales. For the fiscal year, it was $21.6 million or 5% of sales. As indicated before, a significant portion of this fiscal year's capital spending relates to the footprint consolidation projects. Excluding this, capital spending would have been approximately 3% of sales.

Let me give you the guidance for the first quarter of fiscal 2010. As many of you know, the first quarter is our seasonally weak quarter due to the Thanksgiving and Christmas holidays. However, we are entering the quarter with a relatively strong backlog and, coupled with about $3.5 million revenue from our recent acquisition, we expect revenues in the first quarter to be in the range of $110 million to $116 million. It is important to note that the fourth-quarter bookings included several annual or larger bookings that will convert into revenue over the course of the fiscal year.

As we see a lower manufacturing cost structure starting to take effect, the pro forma gross profit is estimated to increase about 400 basis points when compared to the fourth-quarter actual results. We are projecting a range of 39% to 40% of sales.

Pro forma period expenses for the first quarter, excluding intangible amortization stock compensation and restructuring costs are projected to be in the range of 36.5% to 37% of sales.

Intangible amortization is projected to be $2 million inclusive of an estimated $300,000 related to the acquisition.

Stock compensation charges for the first quarter are projected to be $1.5 million and restructuring costs related to the integration of the recent acquisition and the closure of Finland will amount to approximately $1 million.

Other income and expense is projected to be minimal as interest income is estimated to be immaterial to the results. We are assuming an annual tax rate of 33%.

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

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

As Leen has already reported, there were a number of positive takeaways from Q4, but perhaps none more so than the key leading indicator of bookings with every market posting double-digit sequential growth. There were a number of contributing factors to this result, including increased fab utilization and select capacity expansion within microelectronics, share gains in the scientific research market, and the return to annual buying patterns in the instrumentation business. We hope to build on these results in subsequent quarters through design wins and new product introductions.

Orders in the fourth fiscal quarter totaled $133.4 million representing a 50.5% sequential increase and a decrease of 5.7% versus the prior-year period. The book-to-bill for the fourth quarter was 1.24.

Orders of $43.9 million in the scientific market set a new quarterly record and represented an increase of 55.3% from the prior quarter and 19.4% versus the prior-year period. The surge was due to three factors -- continued strong customer acceptance of our ultrafast portfolio, stimulus money in the United States, and a strong performance in Japan and Australia.

We established new booking records for Chameleon Series lasers used predominantly for biological imaging and our full range of amplifiers that support basic research in chemistry, physics and material science. Our internal estimate for stimulus-based orders in the US for the fourth quarter was approximately $4 million to $5 million with nearly all of the money coming via the National Science Foundation, or NSF. We could attribute very little to the National Institute of Health, or NIH, except through the Challenge Grant program. Funding decisions from the NIH notwithstanding, it is our current understanding that stimulus funds will continue to flow in the current quarter. Bookings in the Asia Pacific region benefited from stimulus money for basic research in Japan and pent up demand in Australia. In contrast, China had a very pedestrian quarter as government incentives favored manufacturing infrastructure over research and development.

Orders of $34.9 million for instrumentation and OEM components were up 36.2% from the prior quarter and down 7.7% versus the prior-year period. There was a significant pattern shift within the medical OEM space. Several key customers for excimer lasers used in refractive surgery placed annual orders which suggests that they have worked through their inventory and have confidence that their end market is in recovery. This is very welcome news, but it is important to point out that we expected this order value within fiscal 2010.

The instrumentation market also saw an increase in demand, especially in flow cytometry and confocal microscopy. There is a growing expectation within this market that stimulus funds from NIH will drive a round of adoption which could be behind some of the Q4 order growth. The defense market remains active and we have been working to better align ourselves with certain prime contractors. This is starting to pay off as we are becoming qualified on a number of programs mostly for designators and countermeasures requiring semiconductor lasers. Our recent acquisition of businesses from StockerYale will also contribute to these efforts.

And in the category of markets that refuse to die, we have enjoyed considerable success over the past couple of years in the light show market with our Taipin OPSL lasers. These lasers enable a compact electrically efficient platform that is easy to transport and set up. To date, we have delivered about 500 lasers to integrators. They are being used for full color, high-end displays in a variety of venues including conferences and concerts.

Bookings from microelectronics of $40.5 million increased 84.3% sequentially and declined 20% versus the prior-year period. The surge in orders resulted from the increased service demand to support higher fab utilization rates, selective capacity expansion tied to consumer demand, and continued design wins for next generation devices. Given our broad coverage in this space, it is our observation that tier one tool vendors are recovering more rapidly than tier two or three players. While not a surprising development, it does beg the question of what the customer landscape will look in 12 to 18 months.

With factory utilization rates continuing to rise at semiconductor fabs, service orders have picked up as predicted and are trending towards historical norms. Bookings to support new tool builds have also improved and we remain optimistic about the mid to long term future.

The advanced packaging market behaved much the same way as semicap with service orders rebounding following several down quarters. There are signs that the microvia market is working through its inventory overhang. This will be aided by the introduction of new tools that reduce feature size, improve quality and increase throughput. We expect these tools to start shipping in the first half of calendar 2010. The longer term catalyst for this submarket is 4G deployment which requires approximately twice as many microvias per board compared to 3G.

Orders from the flat panel display market were up dramatically due to significant OLED capacity expansion at a leading manufacturer, continued wins in mobile touch screen manufacturing and service. The multi-system order for excimer laser annealing systems was valued at approximately $10 million. We had expected this business as part of our fiscal 2010 plan and we're delighted to receive the orders up front.

Trends for crystal and silicon devices in the solar market are similar to last quarter. There is an ongoing cost-based share shift from European vendors to ones in Asia and continued interest in enhancing cell conversion efficiency. To address both, we have expanded our offering of solar tools to include production units as well as development in pilot production tools. The new Equinox systems were introduced in September at the European Solar Show in Hamburg. We are currently working on a number of deployment opportunities.

Materials processing orders of $14.2 million increased 10.6% sequentially and decreased 13.3% versus the prio- year period. The modest demand improvement within materials processing comes from lower power applications for marking, engraving and textile manufacturing. Customers are citing inventory replenishment, service needs and new system builds as driving order volumes. It would appear that the low power end of the market, defined as less than 100 watts of laser output power, has stabilized and possibly reached a turning point. By contrast, high power applications remain sluggish due to excess capacity and challenging cash flows.

New order activity in China continues to improve for carbon dioxide and semiconductor laser systems. Based upon customer profiles, many of these orders are targeted at the Chinese domestic market which is consistent with stimulus programs to promote manufacturing infrastructure. Orders for lower power carbon dioxide lasers in Europe and North America also showed improvement painting a geographically consistent picture of stabilization and early recovery.

As announced last month, we acquired the laser diode module and specialty optical fiber businesses from StockerYale, Inc. for $15 million in cash and the assumption of certain operating liabilities. These business generated $15.4 million in revenue in our fiscal 2009 and we expect them to contribute $16 million to $17 million in revenue in fiscal 2010. The laser diode module, or LDM business, which is currently based in Montreal, Canada is complementary to our existing LDM portfolio.

These new products position us in the machine vision market and enable new applications in bioinstrumentation, especially in the area of structured light. We have already informed customers and the Montreal-based employees that we will consolidate the LDM operation into our existing network within nine months.

The specialty optical fiber, or SOF business, in Salem, New Hampshire develops and manufactures active and passive optical fibers used in materials processing, medical, defense, communications and other applications. Having these capabilities will support our internal fiber laser programs, improving time to market, reliability and reproducibility. They also create an attractive consumables opportunity since many of the passive fibers are intended for one-time use, such as in laser-based surgical procedures. We intend to maintain the Salem facility as an ongoing operation.

The final phase of our previously-announced footprint consolidation is proceeding and we expect to exit our epitaxial growth facility in Finland on time by the end of fiscal 2010. An important milestone towards this goal was satisfied during Q4 as the first semiconductor laser devices came off our new Sunnyvale line.

The bookings performance was a welcome change and helps replenish our backlog that has been drawn down over the course of fiscal 2009. Coupled with the acquisition and recent design wins, we have the foundation to generate between $475 million and $500 million in revenue during fiscal 2010. As revenues ramp to these levels, we will return to profitability with the usual caveats of mix and currency risks. It should also be noted that as we progress forward, we will be unwinding some of the temporary cost controls imposed during fiscal 2009, such as reduced work schedules and other compensation measures.

Leen and I will be presenting at the Needham Growth and CJS Securities Conferences. Both will be held in New York during the week of January 11, 2010. I'll now turn the call back over to Yvette for the Q and A session.

(Operator instructions) Larry Solow.

Good afternoon. John, sounds like sort of a mixed bag on why the big increase in bookings, sounds like some of it's just from annualized orders which I imagine will exacerbate the increase on the upside. And was there was also some inventory rebuilding and some pent up demands? I mean, how do you look at the whole package? Is it just different by segment or -- ?

It's going to vary a bit by end market application, Larry. The business in -- if you take, as an example, the business in instrumentation for medical OEM customers, that was really a return to historical buying patterns where most of those customers operated on annual purchase orders. And they had moved to shorter-term orders over the past year, not only to manage inventory, but also to manage what their demand profile looked like. So the fact that they've returned to annual buying we see as a very positive sign that confidence in their end markets has returned.

With respect to other areas, it's select capacity expansion as we mentioned, or as I mentioned around microelectronics, a very big win within the OLED manufacturing space. The scientific market was quite frankly a stunning performance for our team where we grew significantly in terms of bookings and it appears, based on other public reports that we've done a pretty good job of capturing share during the quarter.

Okay. And in terms of gross margin, I know you -- sounds like you pretty much have finished unwinding the higher priced inventory or is there still sort of a tail to that?

Hi Larry, it's Leen. We actually -- it went a little faster than we initially estimated because our inventory turns were better.

Okay.

So there's always a little tail, but it's smaller and that's why we also gave the guidance for the gross profit to go up 400 basis points.

Right. And as orders or sales, I guess your $110 million implies, relative to your guidance, that you could see a little increase sequentially through the year in volume. Would we expect gross margin to come up a little bit higher? Obviously mix comes into play there, but based on what you see in your backlog today? Obviously -- well I guess that scientific order's still being a pretty significant piece. And being lower margin is sort of 39, 40 a good ballpark figure to use for the year or do you think there's more upside to that?

I think you highlighted the fact that we do have still a mix shift towards scientific. It's -- the bookings were very strong in the fourth quarter so we'll continue to see a higher share of scientific. But hopefully we will see, as we move further out, we will see some improvement in the higher margin businesses, such as microelectronics and OEM and components and instrumentation. And then as the volume picks up, then indeed we should see some. But never forget that we also, as we go through the year, we need to flow in some of these temporary measures that we took last year. So you have to take that into account as well.

Right. So I imagine there should be -- that could take away some of your leverage as you bring back some of the -- as you unwind some of these temporary curbs that were implemented.

That's correct. It will take away some of the leverage.

And then just lastly, just in terms of -- about your new products, I know they're pretty much focused on the high power end of the materials processing market and that sounds like there's still a lot of excess capacity there. So is it fair to say that most of your increase in sales are -- there's minimal coming from your new products?

Larry, we introduce new products all the time. We don't highlight all of them --

Right.

-- as we see this as normal operations of the business. We did highlight the high power portfolio because it was a departure for what we have historically done within the materials processing space. But it is by no means the only thing that we're doing within the materials processing market or for other markets, for that matter.

Okay. Great. Thanks.

Sure.

Mark Douglass.

Good afternoon, John and Leen.

Mark.

Mark.

Leen, can you review again the savings you have already in hand prior to the Finland closure? And then obviously we know the -- it's $14 million once Finland closes just before fiscal 2011.

Yes. As of the end of September, we had a run rate of $8 million already included and beginning of fiscal '11, that will step up to $14 million. There is not a lot of increased benefit during fiscal '10 because we are maintaining two facilities and we're stepping up costs here to bring up the facility in Sunnyvale while we are maintaining the facility in Finland.

So during fiscal '10, the increased benefits are not very large. It will come in during fiscal '11, in Q1, effective Q1.

I see. Okay. So it's not so much that Finland itself is providing $6 million, it's the fact that you have two facilities going at once doing the same -- similar operations. Okay. So would you say the R&D going forward, is there still some more costs in there for Sunnyvale? And then once that rolls off, qualifying Sunnyvale, do you think you could keep R&D relatively flat, the run rate relative to the 4Q for 2010?

So the savings that we talk about are across all lines. They're not just in the gross margin line. They're in expenses as well. So there will be some modest amount of R&D expense that comes out as we wind down Finland.

Okay. The $8 million -- of $8 million, how much is kind of structural permanent and how much is -- can return with volumes and you have to maybe could return people to work?

Mark, the footprint savings, the $8 million, they're all structural.

$8 million's all structural?

Mm-hmm. Yes.

Okay. So right now any savings you have from just reduced work weeks, that's absent from the $8 million?

Correct. The $8 million does not include savings from the temporary measures.

Okay. That's helpful. And then finally, you grew the cash in the balance sheet. There's still a lot of cash there. What are you thinking right now in your uses for that cash? Thank you.

Well, we spent a little bit of it in October in acquiring these two businesses. We continue to look for acquisition opportunities that are complementary to what we're doing and that can be accretive in the short term. Certainly, as the marketplace recovers, some of those opportunities will start to look better and better because they have some lift under them, rather than buying just simply distressed businesses.

We're also continuing to look and consider other uses of cash. As we've said in the past, we're not opposed to things like buy-backs and even potentially dividends if the circumstances warrant.

Thank you.

Ajit Pai.

Yes, good afternoon.

Hi Ajit.

Hi Ajit.

Couple of quick questions. I think the first one is addressing the gross margin relative to scientific and -- the scientific markets that you talked about being quite strong. Aren't the available margins for that business still significantly higher than 40% on the gross margin line and higher than 30% on your operating income line?

You're talking about incremental margin?

Incremental margins. I mean why would it have a negative impact on your margins? I mean all of that should be incremental.

It is incremental, Ajit, but the margins today are significantly lower than the microelectronics or OEM margins. So there is still a gap between the two.

Right. But on an abs-- -- on a variable margin basis, it's still higher than 39, 40%, right through the gross margin line for the scientific and -- the scientific vertical?

It's probably a little better. You're right. But not -- it's still below the margins that we have for microelectronics --

Okay.

-- and OEM components.

Okay. The second is that I think you highlighted when you were explaining the gross margin this quarter, some of it was expensive inventory that was getting worked [down.] You talked about a little bit of it [being left there], but you also mentioned for qualifying Sunnyvale there were some expenses. So I take it that that completely goes away going into the next quarter from the gross margin line. And can you quantify how much that was? Was it like in the range of a couple of million or much less than that?

I believe I made the comment with respect to period expenses and it's mainly in the R&D pool. I wasn't referring --

Okay. So it may be in R&D, it's not in [COGS] so much?

Correct. Right now the doubling up of expenses to get the facility up and running and qualifying products is captured in development. And I would say in the fourth quarter alone that was probably about $500,000.

Got it. And then when you look at your verticals, I think you talked about -- especially in the tool side -- I think you talked about when demand is coming back, the tier ones are benefiting more than sort of customers that have sort of less secure market positions. Is that a negative or a positive for Coherent? I mean, is your pricing with the tier ones better or is it better with sort of smaller players?

And if the market concentrates at a customer level, is that longer term a negative trend for you because your pricing ability will probably deteriorate?

So the comment about the universe really has to do with the fact that we sell to a variety of customers up and down the line. It is not our practice to determine who's successful in the marketplace and who isn't. Our pricing isn't tied to whether somebody's a big customer or a small customer, it -- meaning their own business, but rather the business that they do with us, because a lot of it in the commercial space is not only value based, but also volume based.

So the comment that the tier one guys are recovering quicker, quite frankly not surprising. Customers want to go with known quantities. They want people who -- or they want partners who are going to survive and thrive. So that's playing out pretty much the way one would expect. Does it have a big impact on us or not? We're probably somewhat skewed to the larger players in the market rather than the smaller players, so net/net it's probably a positive for us.

Got it. And then the last question would just be on the broad set of pricing trends you're seeing across your markets. Is it fairly benign or has it gotten quite aggressive during the past couple of quarters? And just given your rebound in orders right now, did you have to be aggressive in pricing to be able to capture it or there's no change in trend?

So, the commercial business is -- as I just stated, is really a value/volume discussion that we have with customers. In the scientific market -- in fact we've looked at this and talked about it internally -- while we did see some aggressive pricing in isolation, pricing has held up remarkably well within that space.

Got it. Thank you.

Mm-hmm.

Jiwon Lee.

John, you may have said this in different ways, but just going back to your fiscal 2010 sales guidance of about $475 million to $500 million, could you give us a little sense -- a little more sense on the kind of mix assumptions that you have in there? And the second part of the question is, I didn't hear you guys discussing the modified EBITDA margin for the quarter. And given that you have a pretty good sense for the structural savings going forward, and perhaps some of the loosening of previously saved expenses, would there be some EBITDA margin goal for next year?

So, the first question you asked about, what the mix looks like, certainly we would anticipate some of the trends that have established themselves in the fourth quarter to continue to play themselves out, meaning that the commercial markets continue to recover, microelectronics, instrumentation. And hopefully we'll start to see a similar pick up in materials processing, although we think the challenges within materials processing are somewhat different than the other two markets.

With respect to what the EBITDA margin looks like, there are a number of different ways to look at this, Jiwon. As we mentioned -- or as I mentioned during my comments, mix is obviously critically dependent. Timing is also going to be dependent as it pertains to unwinding some of these temporary expenses. And right now, while we have a view to what total revenue could look like, the margin model could fluctuate quite significantly from quarter to quarter and therefore influence what the year looks like, depending on how the different markets recover and what that does to the gross margin line, and also to the expense line.

So we're going to refrain right now from talking about long term operating income or EBITDA and we'll continue to do that on a quarterly basis. When we get to the point where we do have a good sense of what the full year looks like, we'll be happy to provide that update. It's a little early to go all the way down to the bottom line, however.

Okay. That's fair enough. And what was sales breakdown geographically was like during the quarter? And then was there any foreign exchange impact?

I'm sorry, what was the second part of the question?

The foreign exchange impact.

Okay.

The -- Jiwon, for the revenue growth was 9.3% and there's about $1.3 million in --favorable from currency.

Okay.

So at constant currency the growth would have been 7.6% sequentially.

Okay. And then the geographic sales breakdown roughly for North America, Europe and Asia, if you could?

Are you looking for the full year or for the quarter?

Either way. Quarter would be more helpful.

There isn't a large shift yet compared to last year. The 12 trailing months are -- I believe US is 34%, Europe 29%, other countries 5%. And then the delta would be Asia which is -- as you can see, I don't have it front of me here. It's 32%.

Okay. Well that's fair enough; we can follow up on that. And some of your laser [com] commented on a lot of the sequential improvement out of China, and obviously these are companies that have a little more material processing mix. However, I wonder with your new product introductions and you're sort of focused back on the material processing, what kind of opportunities you might see out of China next year or so.

Well we -- as I mentioned, Jiwon, in the materials processing space, we did see good activity in China. It was in the research space and the other markets where the Chinese influence is not quite as high. So again, no surprise there. We do look forward to participating more broadly in the Chinese market, especially as we start to roll out some of these higher power systems that will begin early next year with the formal launch of the E1000 and then continue with the fiber platform next year. Can we quantify it today? No, we can't, but certainly that is our intent.

Okay. And lastly, should we read anything into your consolidating Japanese sales out there?

Read anything into it? No, I don't think so. We had two locations and we didn't need two locations. We were able to put everybody in one location.

Okay. Fair enough. That's all for me. Thank you.

Okay.

(Operator instructions) Larry Solow.

John, just a follow up and you briefly touched on it. In terms of the -- your headcount reduction, you mentioned about a little more than half of it was sort of economic related. How do you view bringing these people back? I mean do you -- is it -- do you have certain sales levels? Or is it based on -- in other words, would you -- do you just bring them back slowly? Do you do that conservatively? Do you know -- avoiding any head fakes in the economy? How do you look at that?

We will be very cautious in adding headcount. If I had to gauge this, I would say that the first thing -- the first order of business will be to move away from these temporary shutdowns or furlough programs that we've been using. And that will allow us to bleed capacity back in. And once we get to the point where we've completely absorbed that capacity, then we would look at adding headcount as necessary. It's really quite that simple.

Right. And then, Leen, the gross margin, the 39 to 40%, is that an adjusted number, that guidance for Q1? I assume that's an adjusted -- that takes out the amort- -- the stock comp and any restructuring charges in there?

Yes, that's correct Larry. It is a pro forma gross margin. It does include the acquisition but it excludes stock comp and restructuring costs.

Got it. And then last question on CapEx for this fiscal '10, should that trend down as some of it was related to the consolidation?

That's correct. This year we had 5%. A more normalized run rate for us is about 3.5% so I would use 3.5% for the year.

Okay. Great. Thanks.

Mark Douglass.

Hi. The StockerYale, you said it's about $15 million to $17 million in fiscal '10, correct?

Correct.

How does that split between your end markets, just roughly?

The bulk of it -- I don't have an exact breakdown, Mark, but the bulk of it will be in instrumentation.

Okay. And you said it's accretive in fourth quarter 2010, right?

That's correct, yes.

Okay. Thanks.

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

Thank you. We'd like to thank everyone for their participation and look forward to speaking to you again in three months.