Coherent Corp (COHR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Coherent Q1 '11 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) 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, Louisa. Good afternoon and welcome to Coherent's first fiscal 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 and involve risks and uncertainties, and actual results may differ significantly. We encourage you to refer to the risk disclosures and critical accounting policies 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 market, 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 begin by giving you the highlights of another strong quarter for the Company. Bookings were $234.4 million, representing an all time record for Coherent. The book to bill ratio was 1.28 and our backlog of $308.9 million was the highest ever for the company. Net sales were $183.1 million, and our pro forma EBITDA percentage was 20.3%, compared to 17.7% last quarter, and 12.9% a year ago.

The first quarter pro forma net income of $0.85 per diluted share compares to a pro forma income of $0.21 per diluted share a year ago and $0.59 per diluted share last quarter. Sequentially, pro forma earnings per share grew 43% on a revenue growth of 10%. We entered the quarter with a cash balance of $297 million, an increase of $34 million compared to last quarter. Net sales for the quarter of $183.1 million grew 49% compared to the same quarter a year ago, and 10% compared to the previous quarter. Both our microelectronics and Scientific markets delivered record revenues this quarter. Substantially higher revenue in the flat panel display market was by far the largest contributor to the microelectronics growth.

Geographically, Asia continues to be our growth region. Asia revenues in the first quarter represented 43% of the Company. And on a trailing 12 month basis, Asia represented 39% of the Company's revenue. The sales by market application are as follows -- Scientific, $38.1 million; microelectronics, $84.4 million; material processing, $22.3 million; and OEM components and instrumentation, $38.4 million, for a total of $183.1 million.

The first quarter grew as profit excluding stock compensation was $82.6 million or 45.1% of sales, and compares to 44.2% last quarter and 42% a year ago. The significant improvement versus last year is the result of a sizable increase in revenue, the positive impact of our restructuring activities, and a more favorable product mix. With respect to operating expenses, we continue to see solid leveraging of expenses as revenue increases. Pro forma period expenses of $54 million excluding the $2.7 million stock compensation charges, represent 29.5% of sales, compared to 30.7% of sales last quarter, and 36.4% a year ago.

The first quarter earnings per share was favorably impacted by a lower than usual tax rate for the quarter. At the end of December 2010, the government retroactively reinstated the federal R&D tax credit resulting in a one time benefit of approximately $0.02 per diluted share. Going forward, we expect the annual tax rate to be around 33%.

As mentioned before, our cash and cash equivalents balance for the quarter was $297 million. Cash flow from operations for the first quarter was approximately $30 million, and was positively impacted by strong earnings and outstanding accounts receivable management. Day sales outstanding at the end of the quarter was 53 days compared to 60 days last quarter. The receivable balance declined while revenues increased $16.7 million sequentially.

Annualized inventory turns are slightly down on a sequential basis. Inventory balances increased to support higher revenues going forward. Capital spending for the quarter was $5.1 million or 2.8% of sales.

On January 5th, just a few days after the end of the first quarter, we completed the Hypertronics acquisition, reducing cash by approximately $50 million. John will explain more about our plans with respect to Hypertronics, but it is important to note that for the remainder of this fiscal year, the acquisition will be diluted for the Company's results. The second quarter is negatively impacted by purchase price accounting, and our second quarter guidance will include about $2 million revenue with an estimated loss of $0.05 per share.

The projected third and fourth quarter for Hypertronics reflect investments in headcount, training, and manufacturing capacity to gear up for several product transfers. We anticipate the loss of roughly $0.05 per share in each of these quarters. Starting fiscal year 2012, we anticipate that the Singapore entity will be accretive to the company's results.

Let me give you the overall guidance for the second quarter. We project our second quarter revenues to range from $187 million to $192 million, the equivalent of approximately a sequential 2% to 5% increase from our record first quarter. As mentioned before, the guidance reflects about $2 million revenue from the recent Hypertronics acquisition. The full year revenue guidance of $760 million to $780 million includes approximately $9 million revenue from the acquisition.

Pro forma gross profit levels are projected to be approximately 45%. Pro forma operating expenses which is excluding stock compensation costs are projected to be in the range of 29.5% to 30% of sales, which is a touch higher than last quarter as a percentage. The slight increase in percentage from the first quarter is mainly due to the impact of less vacation days in the second quarter relative to the first quarter, and increased investments in Singapore.

The estimated range is inclusive of $2.4 million in tangible amortization expenses, reflecting an increase of $300,000 resulting from the acquisition. Stock compensation charges are estimated to be approximately $3 million which is comparable to the first quarter. We are assuming an annual tax rate of 33% and we anticipate our capital spending for the year to be about 4% of sales. I will now turn over the call to John Ambroseo, our President and CEO.

Thanks, Helene.Good afternoon everyone and welcome to our first fiscal quarter conference call. We started building momentum in the first quarter of fiscal 2010 and I'm pleased to report that it continues today. We established new records in many areas, including sales, profits, and bookings.

Let's turn our attention to what's happening in the end markets. We set a record for quarterly bookings with first quarter orders of $234.4 million representing an increase of 21.8% sequentially and 48% versus the prior year period. The book to bill for the first quarter was 1.28. Orders of $43.3 million in the Scientific market were down 0.8% versus the prior quarter and up 11.1% compared to the prior year period. The book to bill was 1.14.

Orders in the first quarter were unseasonably strong as record bookings in Europe and Japan complemented solid performances in North America and the Pacific Rim. We are especially pleased with the performance in Japan because we had established a strategic goal of increasing our share in the Japanese biological imaging market. The Chameleon product family and Ultrafast amplifier systems remain the mainstays of our Scientific business. Chameleon orders were very strong and we established a new bookings record for amplifier systems.

We introduced several important product extensions at this week's Photonic West Trade show in San Francisco. The Chameleon Vision-S raises the performance of our industry leading platform with shorter pulses for higher resolution imaging. The Verdi G10 is the latest incarnation of our highly successful OPSL family and expands our offerings in the Scientific pump market.

Orders of $36.3 million for instrumentation and OEM components were down 23.8%, compared to the record setting performance in the prior quarter, and up 1.7% versus the prior year period. The book to bill ratio was 0.95. The sequential decline in orders reflect the timing of large orders -- we had a number of them in the September quarter -- and tightening in defense spending following the news of projected budget reductions for the US Department of Defense.

Looking past the lumpiness in orders, reports in the sub-markets are encouraging. Medical OEM customers have pulled in orders for certain products due to rising demand in Asia. Instrumentation customers report a solid outlook and also emphasized the contribution from Asia. We launched a new instrumentation platform at Photonics West called OBIS. It incorporates our next generation OPSL and diode lasers to create a family of plug and play lasers that span the spectrum from the ultraviolet to the near infrared. The wavelength flexibility of OPSL allows us to add new colors with relative ease, an important feature that is always important for developing new test protocols.

Microelectronics orders were a staggering $129.5 million, up 63% sequentially and 94.5% versus the prior year period. The book to bill was 1.53. Recent news out of the semiconductor market has been upbeat, as many chip manufacturers, foundries, and the capital equipment manufacturers have raised their outlook for 2011. The positive sentiment resulted in record orders for semi-cap OEMs.

We are investing to increase capacity for two products to satisfy customers' volume requirements and delivery schedules. We posted record orders for the advanced packaging market. The via drilling market is undergoing a rapid expansion due to increased utilization of high density interconnect, or HDI, printed circuit boards. As an example, approximately 75 million Smart phones sold in 2010 relied upon HDI PCBs. That number is expected to double in 2011.

The market has attracted several new equipment manufacturers who incorporate our E series CO2 lasers into their products. Similar trends are fueling the growth of laser based direct imaging, or LDI, which provides flexibility, more precise layer to layer registration, and less setup time than it's analog counterpart. Estimates have LDI system sales growing as much as 2 X in 2011 and nearly all that using our lasers.

As reported last quarter, the LED market was taking a pause while older generation, non LED LTD panels were flushed from inventory. The latest industry data suggests LED penetration in the LCD market will grow from 44% in 2010 to 67% in 2011. This trend will absorb the industry wide capacity expansion that occurred over the past 12 months. The general expectation is that a bounce-back in LED investment is a 2011 event.

We had record orders for FPD manufacturing, including the $37 million order announced during our last conference call. Many of the orders were for Viper Lasers, our most advanced Excimer light source. We have received another substantial order in the current quarter for $32 million. Interestingly, these lasers will be used to produce larger format LTPS LCD displays, and are going to different panel manufacturers than last quarter's order. Indications are good that additional sizable orders may be placed during this fiscal year.

Material processing orders of $25.3 million rose 16.3% sequentially and 47.8% versus the prior year period. The book to bill ratio was 1.14. During the first quarter, we received a number of annual and semi-annual orders for lasers used in marking, engraving, and prototyping. Also included in the Q1 total, are record orders for laser based manufacturing tools. We believe these are signs that the material processing market continues on the road to recovery.

The European business remains strong and China was slow leading into Chinese New Year. I'm also pleased to report sales of the E1000 CO2 laser are making inroads, with approximately two out of three orders replacing the competitive laser in the field.

As Helene previously discussed, we completed the acquisition of Hypertronics in early January. As a reminder Hypertronics designs and manufactures laser and vision based tools for flat panels, storage, semiconductor, and biomedical applications at facilities in Singapore and Malaysia. We plan to complete the transfer of at least four key products to these locations by the end of 2012. This will reduce service cycle times and cost of goods.

We also expect to enhance Hypertronics core revenue by integrating Hypertronics scan vision technology and systems capability with our laser technology and global sales, marketing, distribution and service network. Incidentally, this is Coherent's third acquisition in the last 16 months. We continue to do an exceptional job of generating cash. We plan to deploy some of it on target acquisitions. We have also received Board approval to repurchase up to $75 million in common stock over the next 12 months.

We'll be presenting at the Stifel Technology conference in San Francisco on February 10th and we look forward to seeing some of you there. I'll now turn the call back over to Louisa for the Q&A session.

(Operator Instructions) Your first question comes from the line of Larry Solow with CJS Securities. Please proceed.

Hi. Good afternoon. Congratulations to a very nice quarter. John, just on the Hypertronics, or maybe Helene, you can answer this one, just the purchase accounting, is that, I imagine, is that a one time lump sum or is that a continual amortization charge?

The purchase accounting is predominantly a second quarter event. The only ongoing item is the amortization of intangibles which is about $300,000 per quarter.

Got you. So I guess that number will be -- I guess not included in your 45% gross margin number?

The 45% that I guided for the second quarter does include, does reflect the higher cost associated with the purchase price accounting.

Oh, it does.

Yes.

Okay, so essentially then if we look -- that relates to my next question. Obviously, mix moves around, and what not, but based on your microelectronics and some of your stronger orders in the higher margin areas, I mean, do you think that the gross margin could actually be higher than 45 going forward? Excluding this quarter obviously in the charge.

It's a question that obviously is on a lot of people's minds. I think there are two things to consider here. The first is that we do have a lot of moving pieces. So mix will change from quarter to quarter.

Right.

I think it's also important to recognize that as we receive some of the these quite frankly very large orders that there is volume pricing that is included in this.

Right

And there's probably more leverage on the SG&A line or the [piered] expense line than there is on the gross margin line for some of these orders.

Got it. So a couple of these two orders, obviously neither one of them, have flowed through the income statement yet., right? There is some potentially discounting on large orders. That makes sense. And then just the last question on leverage and you sort of touched on the SG&A side, excluding Finland where I know eventually there'll be another opportunity there in a few quarters, but the leverage was pretty good this quarter. Nice increase. Just looking at R&D and then the two components, is that number sort of a sustainable high teens on an absolute basis or is that a little low for the quarter due to timing? Any help there?

The only exception in the first quarter is that the expenses are lower than normally because we have a high number of vacations in that quarter, vacation days.

Right.

So when you look in my guidance, I increased the percent of sales to capture the incremental costs associated with less [data vacation] in the quarter in the second quarter. So there will be a step-up in period expenses from Q1 to Q2.

Right. Then I imagine Hypertronics the expense you talked about in the back half of the year, will a lot of that will be in -- will that be across the board or will that be more in -- where would that show up on the P&L?

I think the majority of the step-up will most likely be in manufacturing because we're gearing up for transferring the four product lines that John was talking about. So I would say it is more than 50% of that is definitely in manufacturing. And there is always going to be some administrative and some R&D cost as well.

Okay. So it will impact the gross margin?

It will impact the gross margin.

And then, the four products that you transferred over, is this just sort of the tip of the iceberg? Just so you can get feet wet in starting the transfer? Is there a lot more to potentially come on board?

As I mentioned in a previous call and I think it was last quarter, we are looking at a strategy where we will grow our manufacturing base in Asia over time and keep our current manufacturing base more or less stable. So the growth will be closer to the customer in a lower cost region. Right now, the plans call for the four transfers in the next year or so. And of course, we are going to continue to look at that for future opportunities as the business dictates.

Okay, great. Thanks again.

Sure.

Your next question comes from the line of Mark Douglass with Longbow Research. Please proceed.

Hi Helene and John.

Hi Mark

Hi Mark.

Nice results. The considerable uptick in sales guidance - that be a -- good chunk of that is from the big [Oled] LCD orders. But can you give a little bit more color on where the rest of it is coming from? I assume it's predominantly microelectronics, maybe Mitchell's processing. Can you flush that out a little bit?

Clearly with the strength in microelectronics orders over the last several quarters, not just this one, a good chunk of the business is coming from there. And in the last two quarters, we booked 37 and 32. I 'm doing the math. Just about $70 million for FPD, which is obviously having a big impact on our annual guidance. We are seeing continued strength in all of the markets, obviously microelectronics is an out layer, but if you look at the performance in instrumentation and also in materials processing, the growth numbers there are terrific. And under normal circumstances, everybody would be dancing around those numbers. They're just getting dwarfed with what's happening in microelectronics.

Right. Scientific? Think we can see some growth there?

So I think you have to consider two things in Scientific. And they may be opposing forces in some respects. The comp year-over-year still takes into account stimulus money that came in, in 2010 from Aura and from other stimulus sources internationally. A lot of that we believe is already out of the system. The first quarter for us as I mentioned was unusually strong for a first quarter. And that obviously was an encouraging sign. And again, to repeat something I said last quarter, we do believe that we've experienced some share capture. But we need to see a few quarters of clean numbers, in other words clean of the stimulus money, to really determine whether a shift change has occurred or not.

Okay. And a lot of your life science applications are in the Scientific, right?

Actually, a lot of the imaging, the Ultrafast imaging for [multi-photonic citation] falls into the Scientific market. A lot of the life science stuff for clinical, all of that is in instrumentation.

Okay. Okay.That's helpful. And then you talked about acquisitions. Are they going to be primarily or necessarily focused on materials processing? Or could it be all of the above?

We're looking at acquisitions that will fortify our strategy in all our markets. To presume that they would be in one market I think would be incorrect. And the interesting thing about M&A is the deals have a life of their own. So we're not trying to time these things in any particular order. We're processing a number of them. And as they reach completion, we'll announce them.

Okay. Thank you, all. Nice seeing you at Photonics West.

You too, Mark.

Thank you.

(Operator Instructions) And your next question comes from the line of Mark Miller with Nobel Capital. Please proceed.

Congratulations, this is getting boring. Every quarter is a record quarter, for you guys practically. At least in the bookings.

It's like California weather.

Yes. Hopefully it won't turn as quickly sometimes. Again, from the comment about the Photonics show, I was surprised to see so many new lasers pointed at the solar business. We didn't hear a lot about solar. I know that has been one of the areas of interest to you. I was just wondering if you can give us some more color about what you're seeing in the solar area. Because some companies, I know, supply and equipment, are starting to explode there, in particular, [diffusion] for instance, stuff like that, have really ramped up and I'm just wondering what you're seeing in solar.

We continue to see a lot of interest in laser based processes for solar. There is no question about that. What I think is happening for a lot of solar companies, because as you listen to industry reports, conference calls, et cetera, many of them are reporting that they're sold out for quarter two, three, and sometimes even longer for existing products. And a lot of the laser technology that we're seeking to apply is to make, to augment products, to make them more efficient and to improve yields or decrease costs. Those are investments that actually are taking second place right now to just getting product out the door. But the number of tests that we do with customers is holding steady, and the dialogue continues to be good. It hasn't translated into orders yet.

I just wanted to make sure I understand Hypertronics. You were saying that it was going to hit you for $0.05 this quarter and for the remaining quarters of this fiscal year and become accretive in 2012?

It will be negative $0.05 each quarter, Q2, Q3, and Q4, and then accretive starting fiscal 2012. That's correct, yes.

Okay. Thank you.

Your next question is a follow-up from the line of Larry Solow with CJS Securities. Please proceed.

Just a -- two quick follow-ups. On the CapEx, I think your outlook was 4% of sales for the year and that would be a step up from last year and certainty a little of a step up from this quarter. Do you know there is a couple initiatives out there that probably can get it up there. Is that still a good number to use? The 4%?

Yes, Larry, it is a good number to use. Remember that we also have to invest some money in the Singapore entity. And now it does reflect a certain amount of spending that we have to do there.

Okay, and I don't know if you mentioned, I assume you finished the prior share repurchase authorization this quarter or maybe not?

We didn't. We had a 10B51 plan in place and the price levels on that, the stock price exceeded the levels there. That authorization was due to expire in April.

Got you.

There was about $6.7 million left so we actually retired that at the same time we put this new $75 million purchase in place.

Got it. Okay. Great, thanks.

Yes.

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 any additional or closing remarks. Sir?

Thank you. We'd like to thank everyone for their participation. And we certainly look forward to seeing you at an upcoming conference or speak to you at next quarter's conference call.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a great day.