Novanta Inc (NOVTU) 2003 Q4 法說會逐字稿

Welcome to the Q4 2003 GSI Lumonics earnings conference call. My name a Christy and I will be your coordinator for today's call. At this time all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star, followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host tour today's call, Mr. Charles Winston, President and Chief Executive Officer and Tom Swain, Chief Financial Officer. Please proceed gentlemen.

Thank you Christy. Good afternoon and thank you for attending our fourth quarter and 2003 fiscal year conference call. This call is being broadcast live over the internet in a listen-only mode at www.firstcallevents.com.

Tom Swain our Vice President of Finance and Chief Financial Officer joins me today. Before proceeding, I must mention that certain remarks made during this conference call may constitute forward-looking statements.

These statements are based on management's beliefs and assumptions and current information. And as such are subject to the risks, uncertainties and changes.

Our safe harbor statement that can be found on any of our financial press releases available on our website applies to this call. I'm pleased to report that our fourth quarter marked the completion of a turn around year for GSI Lumonics.

Looking at our results, the most notable for the quarter, revenues of $54.9 million, an increase of almost 22% from same period prior year. Net income was $2.5 million or 6 cents per diluted share, compared to a loss of 4.6 million or 11 cents per diluted share in the fourth quarter of 2002.

Bookings were $56.3 million, which excludes Westwind for the quarter, an increase of 72% for the fourth quarter compared with the prior year. Gross margins were up to 39.1%, compared with 29.7% in the same period a year earlier.

These results were achieved through strong fiscal controls, a focused business strategy, and careful monitoring of the business climate to be in tune with the early stages of a business recovery. Our conservative fiscal approach is providing upside leverage as we now enter a period of gradual economic recovery.

Our strategy of expanding our product lines in technologies in the laser and precision components segments continued with the acquisition of Westwind Air Bearings, a manufacturer of high precision rotary motion components in December of 2003.

Following the acquisition and with three weeks remaining in the fourth quarter, Westwind contributed $2.5 million of revenues. Westwind Air Bearings spindles also holds a dominant market share position in applications for optical scanning, semiconductor manufacturing, automotive and data storage with their advantages of higher speed accuracy and uniformity.

We anticipate that Westwind spindles will make significant inroads into a variety of complimentary markets with our other product lines.

Westwind was our final acquisition of 2003, following the earlier acquisitions of Spectron Lasers and DRC's encoders. Each acquisition has been accretive to earnings. All three acquisitions bring important technologies that are key elements in our growth strategy.

We are now developing synergies among these acquisitions and our divisions through product development, sales channels and market penetration.

Now let's review our performance by business segment. Our laser systems division, which is focused on the semiconductor and electronic markets, contributed $5.1 million of operating profit in the fourth quarter, the largest profit in three years and a significant improvement from an $18 million loss in 2002.

Sales were $25.8 million in the fourth quarter versus $20.8 million same period a year earlier. Steady improvements in the world wide semiconductor sales, and DRAMS in particular, are underlying drivers in the quarter.

All of our product lines are experiencing increased order activity, led by the strong demands for wafer processing equipment for both 2 hundred millimeter and 300 millimeter applications.

In 2003, our business came from a mix of existing and new customers. Of the total number of customers during the year, over 40% were new, including Micron in Japan, SMCI in China, Rhalic [ph] in Taiwan. And we continue to see -- receive strong repeat business from our established customers. For wafer marking and wafer trimming equipment, we remain the world's dominant supplier.

Our chip scale package marker is positioned for growth with the emerging implementation of chipped scale packaging in the next generation of semiconductor chips.

One of our standard products, the WaferTrim model M 310 enjoyed strong resurgence in the fourth quarter due to its superior performance in the manufacturing of mixed signal devices.

We also experienced year to year growth in our CircuitTrim product line. The major purchasing activity is originating in Asia-Pacific.

In 2003, this region along with Japan represented two-thirds of our sales for laser systems. The main drivers for activity are the increased production of PC notebooks, digital cameras. DVD recorders, flat panel displays and cell phones. These are leading the demand for semiconductor capital equipment.

Cell phones alone, according to industry research groups, are projecting sales of 560 million units in 2004. The rate at which chip makers are raising capital equipment spending plans indicative of a major upswing of the top Japanese electronics companies and chip makers, 40% have increased their planned CapEx for 2004.

Sony recently announced over $1 billion for semiconductor production equipment and Samsung is currently spending approximately $6 billion.

However, even with these considerable escalations in our customer's budgets, they did not translate into greater visibility for our sales projections. It is widening but it is still within the one quarter range.

In our laser segment, sales were $9.3 million this quarter, compared with 6.6 million in the same period a year earlier. For 2003, this business segment saw revenues of $33.4 million compared with 23.8 million in 2002.

While we are seeing a firming up of business in our laser markets the visibility is still relatively short with no more than two quarters. Improved business levels offset the dollar of sterling exchange rates during the fourth quarter.

Our improved JK laser sources combined with the Diode Pump cell state and CO2 products from Spectron are providing opportunities in the -- in a number of niche markets.

We are making good progress in our traditional markets from medium powered JK products, primarily in southeast Asian markets and Japan. Spectron products are generally benefitting from increased business activity in Europe where we have a good installed base.

Also going forward, we anticipate expanded North American sales for Spectron product line. In Europe and Asia-Pacific we are strengthening our distribution channels.

Our components business segment, $21.5 million of sales in Q4 compared with 17.9 million during the same period in the prior year. For reporting purposes, we include our Westwind results in our overall reporting of the components segment.

The components business is seeing increased demand across a broader range of markets because of its diversity. It is more heavily exposed to the medical market than most other markets that it serves.

Westwind recorded an increased order activity in the fourth quarter, mostly driven by printed circuit board manufacturing.

Materials, processing and marking applications are also experiencing a higher sales activity for our components as well as aerospace activity for our precision optics business. The medical markets are remaining steady.

North America continues to be the most active sales region for our components, more specifically the largest opportunities for encoders and optics.

For air bearings spindles, the printed circuit board market is heavily dominated by Asia and therefore, Westwind products.

New product development continues across our component lines where technology activities have been augmented by our DRC Encoders and Westwind acquisitions.

Going forward we will continue our acquisition program in the deliberate fashion, outlined previously, with a focus on investments that can be quickly integrated and accretive to earnings.

Now, Tom will provide more details on the company's operations and the financial results.

Thanks, Chuck. We are now seeing the results of our concentrated efforts to reduce operating expenses and manage our resources more efficiently.

While Chuck focused on our fourth quarter results I would like to take a moment to review the 2003 operating highlights. Revenues were up 16.7% from 2002. Backlog was up 78.5% including Westwind, and 23.2% without. Variable margin was up to 52.6% as compared to 48% in 2002. Operating expenses were down 16% from 2002.

We returned to profitable operations in the third quarter of 2003 and incurred a net loss of 2.2 million for the year versus a loss of 27.7 million last year, an improvement of 25 million on operating profit and a revenue increase of 26.5 million.

Net inventories declined by 8.3 million, excluding acquisitions in 2003. 21.8 million in cash was generated from operations, despite a 2.2 million operating loss. Gross margins improved quarterly from 36% in Q1 to 39% in Q4.

The 2003 gross margin of 36.9% compares to 30.5% in 2002, and represents a 19% improvement, approximately 30% of this improvement is attributed to the volume increase in revenues.

Looking at the fourth quarter of 2003, our net income of 2.5 million and earnings loss on a diluted basis of 6 cents for this quarter, compares with a net loss of 4.5 million, a loss of 11 cents per diluted share during the same quarter last year.

There was no income tax expense recorded in Q4. The area of deferred taxes is complex and dependent upon facts and circumstances within each jurisdiction.

We did adjust valuation provisions which have the effect of reducing the tax loss carry forwards available in the U.S. jurisdiction. At the same time, we valued deferred tax assets previously written down in other jurisdictions. The net affect is a tax charge of 322,000 for the fiscal year.

Our laser systems segment contributed a profit of 5.1 million in the fourth quarter, as compared to a loss of 2.4 million in the same quarter of 2002. This improvement was driven by a 5 million increase in revenues, augmented by a higher gross margin rate as compared to the same period last year.

The laser business generated a profit of almost one million from operations this quarter, compared to a loss of .5 million in the same quarter last year. The improvement was the result of a 2.7 million increase in revenues plus improved margins partially offset by higher manufacturing overhead and operating expenses.

Some recovery of inventory write-off in the fiscal -- from the fiscal year 2000, aided margins in the quarter. The component segments saw a 3.7 million profit from operations this quarter as compared to 3.9 million in Q4 of 2002, with an increase in revenues of 3.6 million.

The decline in profitability as compared to the same quarter last year is attributed to three factors impacting gross margin.

Approximately 1.5% of a loss was caused by expenses for the Napeon[ph] operations move which we anticipated will be complete in the first quarter of next year -- of this year, 2004. Approximately another 1.5% was a loss from a warranty claim from one customer.

Another 1% loss is attributed to a shift in product mix to lower margin products in the quarter as compared with 2002.

I would like to note that starting in the second quarter of 2004, most of the costs from the 1999 merger between Lumonics and General Scanning will be fully amortized. This reduces our amortization expense by approximately 1 million per quarter.

Offsetting this reduction will be an estimated 400,000 at quarter, relating to amortization of intangibles for the Westwind acquisition.

Now to the financial condition of the company as of December 31st, 2003. Our cash, cash equivalence short-term investments and other long-term investments totalled 107 million.

Cash flow generated by operations during Q4 was 13.9 million, largely the result from U.S. income tax refunds. Inventories exclusive of acquisitions were reduced by 1.7 million in Q4, despite the 22% increase in revenues from the prior quarter.

These results reflect our focus on inventory levels, particularly in the laser systems business. Receivables increased 11 million from Q3 to 53 million at the end of Q4 2003. The day sales outstanding is 93 without adjustment for the Westwind acquisition and approximately 82 days at Westwind is excluded from the calculation.

The primary contributing factor to the day sales outstanding is typically longer collection cycles in our laser systems business. The company remains free of debt.

In summary, both our Q4 and fiscal 2003 results reflect another step forward in our program for consistent improvement.

And now I turn the comments over to Chuck.

Thanks, Tom. As Tom and I have stated, we have focused on reducing our operating expenses, expanding our market penetration and both acquiring and developing technology and products that improve our margins.

We thank all of our dedicated employees for hard work and achieving these improvements and performance throughout the year.

At this time, Tom and I welcome your questions. Operator, please proceed to the questions.

Ladies and gentlemen, if you wish to ask a question, please press star followed which one on your telephone. If your question has been answered or you wish to withdraw question, press star followed by two. Questions will be taken in the order received. Press star one to begin.

Your first question comes from Deepack Chopra of National Bank Financial. Please proceed.

Good evening, guys.

Hello Deepack.

Great quarter.

Thank you.

I was wondering if you guys were willing to give us some guidance in terms of the top line for the -- this up coming quarter or this -- the Q1 ending March?

Deepack, as you know, we refrain from that.

Okay. That's fair enough. Maybe in terms -- maybe you can give us a bit of op ex-guidance in terms of what you think expenses will do given a full quarter with Westwind and, you know, some of the costs synergies that you guys expect?

Well, we haven't fully evaluated everything with Westwind yet. We know we -- what we want to do, what we have to do is go through a planning process with them to sort it all out. I think at this time, we'll hold off on making any comment there except that Westwind is accretive in the next quarter and it was accretive in this quarter.

Okay. Fair enough. Then maybe if we can just go over to the market. In terms of the semiconductor side, are you seeing initially more strength from the mixed signal vendors or are we starting to see some pick up on the memory side as well?

We've been fairly consistent and good performance on the memory side and that's been increasing on, you know, a nice steady basis, not in a while but we were pleasantly surprised with some strong orders beginning Q4 and continuing in Q1 for the -- for the mixed significant signal business.

We also in Q4 had very good performance in terms of shipments and orders coming in for wafer marking equipment and we've just begun in Q1, we will shift some orders that we booked last year for our first systems for chip scale package marking.

So I think pretty much across the board, all the products are doing well in that segment.

And you've seen the trend line continue here for the first two months of Q1?

Say again, Deepack.

Like the trend line of strength, you saw in Q4 has continued in this quarter?

Yeah, we really don't see any major changes from Q4 to Q1. The backlog is was good coming into the quarter. As you can tell from the numbers that we published and it should continue.

Okay. One last quick question. In terms of the target model that you've published before of 15% operating income and so on, what target revenues do you forecast that to be at?

Well, we're still shooting to get to that model on op income when we get up into the 280 to $300 million range on revenues.

Okay. Thank you, guys.

Thank you, Deepack.

Your next question comes from Daniel Kim of Paradigm Capital. Please proceed, sir.

Evening, thank you. Good quarter, guys. Just a couple of questions here. With regards to Westwind, it was running around sort of in the low 30 range annually in terms of revenues. You booked 2.5 million for three weeks. Any lumpiness in that business? Can we use that as sort of a rough guage for go-forward quarterly revenues if we are to annualize that or can you give us a sense of how business is rolling out there?

Yeah, I think the revenue rate should hold for the next one or two quarters. Again, it's like everything else, we don't have the visibility out beyond that.

Okay. So it should, then, run at around $10 million per quarter you're telling us or --

It's -- that wouldn't be far off. We're seeing really good activity now, driven by the printed circuit board markets that are gaining strength from all of the sectors I mentioned that are demanding more and more board production, so I would say that's not far off.

Okay. Would we expect any further restructuring charges with regards to Westwind?

We don't anticipate any restructuring charges at Westwind.

Okay. With regard to your backlog, last quarter we saw a pretty nice sequential increase approximately I think it was $5 million last quarter to previous quarter.

But this time around it looks like the backlog has only increased sequentially 3 million versus your revenue increase which is even stronger and then when we kind of add back the fact that you had that not nice contract announcement back in December and January on the WaferTrim side, I was wondering why the backlog hasn't increased sequentially more, can I read anything into that at all?

No, we've increased shipments.

Okay. The memory repair market, you haven't really -- it's been kind of quiet on that front. Chuck, you kind of alluded to the fact that business is good on that side but previously you've disclosed a number of vendors you've been qualified with.

I think it was in the neighborhood of six. Can you talk about at least -- if not any vendors you're shipping with, at least how many vendors now you're qualified with or what type of activity you're seeing in that marketplace?

It's still about the same number and we're still working on getting additional qualifications with some of the smaller shops but we've got the big players who are qualified.

Okay. And any sense of when you'll be in material shipments?

I'm sorry, Daniel, I didn't follow the question on that one.

Any sense of when you'll -- you expect any type of material ramp in this business?

I think we're probably at the right rate right now. I don't think that it's going to grow materially above where it is but have it will continue at a nice pace, which is I think good for us because it's more digestible.

Okay. Tom, I know it's still early on the Westwind side. You said accretive for the quarter. Given that it's going to be a sizeable chunk of revenues going forward, can you give us any sense of the amount of accretion that this company is providing for you guys on the bottom line?

Well, we wanted to hold off on the guidance on that at this time. I think we're satisfied it's going to be reasonably profitable and I'll give you that much guidance.

It is a business that's a little different than our others and of the margins are lower but the value added is higher. But it's fairly consistent at the profit contribution with our other businesses.

Okay. Great. Thanks very much.

Thank you.

Your next question comes from Jim Ricchiuti of Needham & Company. Please proceed.

Thank you. Chuck, I wonder how you would characterize the orders in the quarter. It seems like you're moving well beyond the kind of ones and onsie and twosie type orders and into multiple systems. Is that true across the various segments of the systems business?

Yeah, the systems business has seen a good performance in terms of multiple unit orders at quite a few of the accounts and that's true for both the mixed signal as well as the memory business and not as strong in -- also in the circuit trim business, not as prominent in wafer marking because wafer marking tends to be more one unit at a time.

Okay. And I mean, do you get the sense you've been through these cycles before I mean, do you get the sense that this is fairly sustainable? By that I mean that you're not going to see, you know, a sudden down tick as folks try to digest what they've just bought and installed?

Jim, my sense of this cycle is, the dynamics are quite different than the last few cycles that I've been through and that is before people used to give us, for capital equipment, they would give orders going out several quarters, three or four quarters was not unusual and that was more to reserve capacity in our factory because they knew when things heated up there would be a lot of pressure to get equipment and they wanted to have an order in there in cue. Which they knew they could cancel in a down-turn.

Now, because the visibility is only out about a quarter and each quarter we keep seeing stronger order in-take as you've noticed, those are really hard orders that have no intention of cancelling.

Most of the customers we check with, they seem to be running up to the low to mid 90% capacity utilization on their current equipment before they place another order and those orders tend to be for two or three units at a time, which again supports the premises that it's a real demand, they really do need it and they have orders for it coming in the door at their shop so they're going to put this equipment on-line pretty quickly.

So we've been running with a very short order to delivery cycle compared to prior times and that gives me more confidence that this is a more sustainable recovery and I think we'll go out longer probably, you know, my best guess is we got at least another year and a half, possibly two years to go on this one.

Chuck, just regarding what you just mentioned, the short order to delivery cycle, you've also really stream lined the operation over the past year. Do you see any challenges in terms of meeting up with some of the demand?

No, actually, we've gotten a dual benefit. We went through a lot of outsourcing of low valued items so that we're getting some sub system level products brought in that we can then put some major sub systems together.

We don't require as many people to do it although they are higher level technicians as opposed to lower level direct labor. But we're able to expand our capacity.

We probably, you know, can go up by a factor of two to 2.5 times more, just in the Laser Systems business from where we are today before we would have to start adding fixed.

Okay. Great. Tom, one question I wonder if you could just help me on some of the nonreoccurring items and where they hit. There was some pension plan underfunding, also some restructuring.

Can you just give me a sense of where some that have hit because it sounds like, you know, your bottom lines would have been a little bit better.

Yeah, the -- we had a -- it was a lawsuit that was a small one and related to an employee matter.

Okay. SG&A

That was about 400,000 that hit in our G&A.

Right.

And then we had about a -- the pension and the -- was our pension and rugby, our laser group. We kind of got surprised with that one. We closed down the pension plan and froze it but it was an actuary adjustment based on the earnings of the plan.

So, since that plan is closed, then it looks like economic conditions are getting better, we would hope that we get that plan up to break even and then we would totally close it out. It's not something that will probably happen again.

Then the other item is, we were in the process of moving our Napeon[ph] operations to California and there's a couple hundred thousand dollars in our - that affected some of our margin operations. That, again, the move is all - it's mostly done now. They're in the final stages. It will be a little bit in the first quarter of this year and then we'll have the benefit of that operation closed down.

Then the last item, I believe there was -- was the 700,000 charge for Munic. And this is an ongoing thing. We've got a facility there that we're not fully utilizing. We're trying to sublease it or get rid of the entire building and move somewhere else.

But market has been quite depressed so we've made an additional provision figuring we'll go another one to two years before we find anybody to sublease it. But it -- it's there. We just continually reevaluate it and we'll hopefully get rid of that in the future. But that was about it then.

I think, Jim, they represent -- we're getting to the bottom of the barrel on legacy items.

Okay. Okay. Well, that's great. Congratulations on the quarter.

Thank you.

Your next question comes from Susan Streeter of Sprott Securities. Please proceed, Ma'am.

Thank you, great quarter. Just wondering if you can talk at all about the market share currently on the memory repair side? I think in the third quarter saying that in your mind you were winning about half of the business. Does that still apply?

Yeah, on the -- all the areas where we are qualified supplier, that is true. We -- this is for new equipment. There's some legacy equipment that sold that, you know, a customer wants to buy one more of an older product, then that I couldn't tell you about.

But on the new equipment going in, we're -- you know, where we're qualified, which is all the major houses, we're getting about half of that business and we expect to be picking up from the smaller shops as we're getting qualified there.

They tend to do overflow work for the bigger shops where we are qualified, so now that we've gotten some experience under our belts with the larger companies, we can go to their overflow safety valve suppliers and work on getting qualified there.

Okay. Great. And the other question I had, the composition of the backlog, if we exclude Westwind, would that be -- would that primarily be composed of the systems business?

It's about -- actually, the dominant part of the backlog right now is more on the component side. The systems business is going through fairly quick shipping cycles, so their backlog is about the same as it was last quarter. The dominant part of the backlog, which is about a third of it, is in the components group.

And that does exclude --

Excuse me, the components group is actually with Westwind is about 60% of the backlog.

Okay.

At this time.

And just so I understand, would you -- could you clarify just with respect to amortization, you expect that to drop, it sounds like a net 600,000 in the second quarter or --

In the second quarter, that's correct. Actually, in the first quarter we will start amortizing the Westwind acquisition, which is about 400,000, and we will still have the last of the amortization of about a million from the merger of the two companies in 1999.

Then in the second quarter, we will have amortized, we will be dropping about a million dollars of amortization related to the merger but we'll still have the 400 from Westwind.

Okay. Terrific. And I think that's all. Thanks very much.

Thank you, Susan.

Your next question comes from David Hodgson of O'Ryan Securities. Please proceed, sir.

Good afternoon. I'm calling for David. He's unavailable today. I just have a couple of questions. First was on Spectron and perhaps you could just talk a little more about your strategy of rolling that out to outside of Europe.

Basically, we're trying to get more business in the United States where they have not really been focused over the years. Being a UK based company and a small one only about 10 million in sales prior to the acquisition, we -- they focused most of their activity in two segments, one was in Europe and the other was in certain portions of Asia.

And through some distributors, they're continuing to ramp up in Asia. Europe has actually been quite down due to the economic conditions in Europe, especially Germany, which has always been a strong laser consuming market.

And so we focused in on North America. We've added some sales people here in the middle of the country and on the west coast in the U.S. and that activity starting to take hold now. We're starting to get some orders coming in. These folks were added late in last year, one of them joined in the end of the third quarter and the other one joined toward the end of the fourth quarter and they're actually starting to produce some business now.

Great. Sounds fantastic. Other question was in terms of your memory repair business. You're talking a lot about smaller shops that you are now marketing into. Could you try to perhaps size the number of potential shops out there?

I couldn't tell you offhand. You know, it's not in the hundreds. It's like in the ten, 20, 30 range of shops and you might have one or two shops that would be there to take overflow work from a bigger company like a Samsung, but, you know, you -- so you don't really spend a lot of -- we don't really spend a lot of effort trying to get qualified there until we have a nice steady state of business and the main customer is very well satisfied.

Then you get an endorsement and you go and do your trials there because the overflow shops don't need very much equipment while the major shop they support is still ramping up.

They tend to put older devices out the door to these guys first, rather than add new equipment for older model devices.

So as we get our newer equipment installed in there and a year or so goes by and then they start to look toward having these guys buy machine or systems similar to the one that we've been selling, because then they will be in the range of getting some overflow for the newer devices that are being put on this equipment.

So it's a time consuming process and it spreads out over a period of time. So I don't expect it to have a major impact as I mentioned earlier in a question I answered.

I don't see it to be a really material change to the rate of shipments on memory any time soon but it represents a potential continuation of more sales out in the future.

Okay. And just finally, the encoder business, you -- it looks like you've done most of the integration of that. Same thing going well. Could you perhaps talk more about expansion of sales. Obviously in the quarter, 3.6 million total from components 2.5 with Westwind. How do you see that other segment growing, that encoder segment?

Well, the encoder segment is -- it's actually doing better than we expected than we made the acquisition. One of the key products they make goes in the Hummer and the market demand has been going well with that.

We actually expect that to be probably in the range of up to 10% or more of the component sales in the next year. So it has a good outlook.

Fantastic. Thank you very much..

Your next question comes from Todd Coupland of CIBC World Markets. Please proceed, sir.

Good evening, everyone.

Hi, Todd.

Could we just go back to the nonreoccurring items? If I add that up that's about $2 million or about 5 cents a share before tax. Is that math right?

Sounds right to me.

Okay. And I think you printed a good quarter as well, so don't take this question the wrong way, but let me just lay it out. With Westwind you don't expect any restructuring charges you know the revenue is, you know what the expenses and operating margins look like yet you don't want -- you've closed the deal, you booked it into backlog it, you don't want to provide us any particular guidance.

So I guess I'm just wondering what you're waiting for in order to give us a sense on how we should be modeling this in as opposed to just guessing relative to your other business model.

Well, if you want me to put some of this in context, we close the acquisition in December. We've had to do a valuation of all the goodwill and assets and so forth as a result of that acquisition, which we've been dealing with that as part of the year end close. And, of course, our real focus has been getting everything rapped up for last year.

One of the issues is we -- we see some opportunities with Westwind and the next step in the process will be working through the planning cycle with them and understanding when we can realize what.

Once we get done with this, then we'll be looking at our overall business model and see how everything fits together. Obviously, we don't want to start making statements until we've gone through that process.

I think, Todd, we gave you some hints here, you know, in the sense that we gave you the backlog at the end of December for Westwind and what the shipments were for the three-week period that we had, respectively $23 million and $2.5 million, and the fact that it was a minor accretion during that period of three weeks, so I -- you know, I think there's some bread crumbs that you can follow down the forest path.

One of things we're going to be careful about, is we do not now provide product line P&L to anyone and we have gone last year to this three segment reporting and as I mentioned in my opening comments, the Westwind business will be unfolded in the components segment of our business, otherwise we'll wind up reporting every product line and that's just too much.

So I think as we move forward into the end of Q1 and start talking to you in the next conference call, you'll, I think, have a better picture of what has happened to the components business through the acquisition of Westwind into that segment. I hope that helps you. I'm not trying to be too evasive, but I'm obviously trying to be evasive.

Great. No, that's helpful. And then just on the demand at Westwind, what are the Westwind products being used for in printed circuit board market?

Well, the main application that they're -- is driving their business pretty heavily and is a big component in their backlog right now, is an air bearing spindle.

The spindle holds the little drill bit that actually drills the hole in the board and there's usually about six spindles operating simultaneously on one drilling system, mechanical drilling system, and they're drilling multiple holes simultaneously in boards at a very high speed. And the fact that these spindles are operating at 200,000 RPM allows them to be drilling holes as small as a hundred microns right now.

And, as you recall, a single human hair on your head is about 150 microns in diameter, so this two-thirds the diameter of a hair right now is the predominant drilling going on. This is for very small holes and boards that are going into cell phones and these little cameras and digital cameras and so forth.

So all of this consumer electronics drive and printed circuit boards for PCs, they're driving the business right now way up and the change over to smaller components, more compact boards with more holes to be drilled and in smaller spaces has caused a technology shift which is were these guys are the enabling technology at Westwind.

That's helpful. And in terms of the demand, I think you said Asia-Pacific region was a large driver. Have you not seen the board manufacturers in North America come back and certainly some of them are reporting better results, would you expect to see that rise over '04?

Well, the customers -- most of our business for Westwind is not to the end user who is actually drilling the boards. It's mostly to the manufacturers of the drilling equipment. For example, Tong-Tai [ph] in Taiwan, there's several companies in Taiwan. There's several in Japan like Hitachi and a few others. And then there's several in Korea and a few in China, who actually make the big drilling equipment, the big systems that sell for 200, $250,000 each. They're buying most of the spindles now for new business.

Okay. And just moving back to your other activities, do you think you'll see any of your normal seasonality in the first quarter of this year, or because of the strength in the systems business that that business, you could see results at least flat or better excluding Westwind?

That's a good question, Todd. I think we'll probably see some seasonality in the first quarter in the components business. Other than the Westwind business, which is as I said moving very briskly along because of this recovery in the drilling business, printed circuit board drilling business. So their demand is very high and that will overshadow any Q4 to Q1 change over.

I think the systems business is also maintaining a very strong pace, which is driven more by the recovery in the semiconductor industry and that will -- that I believe will overshadow a Q4 to Q1 normal decline.

In the laser business, we're seeing also very brisk activity and I think there because we've been going through a recovery mode internally, plus the addition of Spectron, which as I mentioned, we only had since May, really June, June was really the first full month we owned it and we had some, you know, integration hiccup problems moving them across into the facility and getting their MRP set up and so forth.

So I think any cyclicality or seasonality that would be have been involved in a Q4 to Q1 for lasers, I think will be overshadowed by just more continued production or more consistent production cycle in the business.

Okay. And lastly, on the tax rate, no taxes in the quarter. Should we be modeling assuming you're profitable in '04, should we be modeling an effective tax rate for you in '04?

We've just gone through a knothole at the end of the year trying to figure out how deferred taxes should be reported. There seem to be a lot of opinions on it.

What I would say at this point, I believe when you look at our financials, we'll be releasing, we significantly eliminated the valuation on the U.S. tax assets, meaning we basically wrote them off. I think there's very good probability those will be coming back in the next year.

What we haven't sorted out is how it happened. I think one answer is it will be as we earn money in the U.S. which is where a lot of our strength is at. So that would mean we'll probably have a favorable tax rate in the - at least for next year driven by the U.S. That's what it appears like right now.

So are you saying that we should model a zero to a very low tax rate?

I would not model zero because we still have taxes in other jurisdictions. I think you're -- it will be down from our normal, which is around typically been around 38%. I would take it down from there but not too much.

Okay.

And it's -- it's very difficult to project how that one is going to turn out. But I -- there is a benefit there. I'm just not sure when it'll come and how.

And would that lower tax rate or your benefits in the U.S., would those play out over several years or will you chew through them in '04?

They have different characteristics. Some are related to current assets like those that are related inventories and so forth. What we will, most likely, use up at this time, I believe we'll use up the NOL part of it, which is about 4 million in tax benefits, so we should chew through that this year.

And there's a possibility we'll get more than that, just depends on what the results are and how they -- the income distributes among all the taxing jurisdictions.

Okay. Great. Thanks alot.

Your next question comes from Jim Ricchiuti of Needham Company. Please proceed, sir.

Yeah, Chuck, just another question on Westwind. I mean, it seems like you really timed this acquisition very well, just given the way the recovery seems to be taking shape in the PCB market.

I mean, this company I guess going back to the peak of the last cycle had almost 70 million of revenue. Now, obviously you don't have a lost experience with this and I'm not trying to get you to give any kind of guidance but I wonder as you talk to the people who run this business, what's their sense on the kind of recovery they're seeing in this area?

Well, actually, you weren't trying to get me to give guidance. Truth in advertising here, Jim.

Not really, Chuck. Qualitative.

That was very well done, Jim. You had me believing it. What basically is the question?

Well, I mean, you know, this company had 70 million of revenue a few years ago, bag back to 2001 it looks like it had around $40 million.

You guys don't have a lot of experience with it but you've been talking to the management, the managers of the business. What is their sense in terms of how this recovery is taking shape for them? Is it -- do they feel it's sustainable, are they a little wary of it, do they feel that it's -- you mentioned some pretty strong end driving demand factors. And I'm just curious what -- you know, they obviously have been running this thing. What are they saying?

Well, what they're saying is fairly similar and this is why we felt very comfortable when we got involved talking to them.

They're seeing an awful lot of similar characteristics to what we saw in providing equipment to the chip makers in the semiconductor industry back in 2000.

You know the cycle was pretty much the same story, just different names, if you will, but there was a lot of double booking and even triple booking going on that they -- people were going in and giving them orders that were really not hard orders and all of a sudden when the music stopped a lot of cancelations took place.

The same thing we saw in 2001, they saw that the same way. So the ramp up that they went through in '99 and 2000 was very similar to what happened to us in the semi area and that is the bubble got too heated too soon, too fast and a lot of the purchases that were made really pulled forward capacity buys that should have taken place on a more orderly basis in 2001 and 2002 they got pulled forward into '99-2000 and the orders that were remaining out there that were unfilled as the cycle peaked, got cancelled. And they saw the same thing happen to them which is why their business fell off dramatically.

You could overlay a curve of their revenues and profits on top of ours for that same period and you couldn't tell them apart.

So their sense of it is pretty realistic, the same as ours. So they're spending a lot of time as are we doing in our semi business as well, they're spending a lot of time hand holding and taking the pulse of the customers and so when an order comes in, they really are screening it tightly and really talking to the customer about how real is the order, as opposed to just sticking it on the books and kidding themselves.

The second they're doing is also what we've been doing in our -- in our systems business and that is, not putting on a lot of fixed costs but using outsourcing and using temporary labor so that when the music does stop eventually, you can take your costs down pretty quickly.

Okay. Parts of the PCB business are kind of notorious for having no visibility. Is their business in that they're selling to the drill manufacturers, is it very limited visibility?

Well, there's three things going on in the business. One is the sale to the OEMs, the new equipment makers who are, you know like the Hitachis and the Tong-Tais who are actually selling the equipment to people like a Flextronics.

So that business, they've got pretty good visibility going out about one quarter and they're really, as I said, they really are squeezing hard on making sure the order is a real solid order that the customer does in fact need, and that the customer is not just looking up cue space in the factory.

So that one, I think they have pretty good visibility on and they're pretty well booked out right through this quarter and into April at this point.

Second segment of the business is actually replacement of older spindles that were sold in prior years, older equipment that's out there in the marketplace that's not the new generation but -- so they have a replacement market where these spindles do ware out. They last so many hours and then they actually ware out and have to be either rebuilt or replaced. That's a fairly steady piece of business. It's a smaller piece of business but it's -- it can be counted on. It doesn't just go away, because even when the business goes down, they're still making printed circuit boards.

Right.

And then the third piece is the nonprinted circuit board portion of their business, which, I don't know off the top of my head, Tom, that's about 25 or 30% of their sales?

Yeah, I think about 30%.

That's the part where they're selling air bearing spindles into companys that are making equipment to do wafer grinding, wafer cutting, into applications for imaging on film, high speed imaging on film with lasers, just a number of different applications.

One of them is related to a new generation for server writer technology to be able to spin the disks faster to write more tracks in a shorter period of time.

So they're into a number of nonprinted circuit board related things which we believe will continue to grow. The key here is to get growth in those segments to go up quickly enough so that there won't be a major, major fall off when the printed circuit board business slows up.

But we're fairly comfortable with the fact that it's not going to just fall off the end of a cliff the way it did last time.

Right. Chuck, how big is the replacement portion of their business that -- I mean, it's somewhat recurring I would think it's also --

I think it's 10 to 20%. We don't have a break down.

Somewhere in the 10 to 15% of sales.

Okay. That's helpful. It does look like a great piece of business that you bought.

That's going to be a little bit distorted right now because the new business portion has grown so rapidly in the last two quarters. It's actually going to be a little bit less than that. My guess is probably for the next quarter or two it will look like 7 or 10%.

Okay. Thanks very much.

Thank you, Jim.

Your next question comes from Kevin Beck of Denver Investment Advisors. Please proceed, sir.

Hi, good afternoon. I wondered if you could just maybe update us on the acquisition pipeline. I know you can't say a whole lot but are you seeing more opportunities the last -- you know the three deals you did in the last year seem pretty opportunistic and are those type of deals still out there? or --

How are you, Kevin?

Good, good.

Good to hear from you.

You too.

There are still deals out there and as I mentioned on a couple of the calls prior, we really went through a fairly extensive search and screening process to narrow down to companies like Westwind, which we felt were really a good fit for our business strategicly, and then of course the pricing issue comes up is -- we want to pay cash and be accretive, so it has to be a profitable business coming in.

So there's a number of criteria that we're trying to meet and so it quickly limits down to not a huge number of potential acquisitions but a reasonably good number. So we are continuing to move along on it.

Obviously, there is -- there are some external factors that may affect the future opportunities and that is, as valuations start to tighten up and some of the properties might get to be a little bit more expensive than we would like to pay, so we may -- we may bypass them. But for right now, the current moment we still have a few more opportunities in front of us that will get us to the targets we were talking about for the past year.

Would you be surprised if you didn't do anything say in the next six months or --

I wouldn't be terribly shocked but I think I would be surprised that we didn't do one because we have a couple of opportunities that we should take advantage of in the near term.

And these are more components and, you know, the laser source related or nothing in the systems business?

Correct, correct.

Okay. And you know, one thig as you speak about your model going forward and your goals for 15% EBIT margins, if you look over the last several years, it looks like you've taken a hatchet to the R&D line with only 14 million spent in '03. You know, this was a 30 million run rate in years '99, 2001.

It's dropped to almost 6% of sales from the 10% that you had kind of averaged historically. And frankly, the 10% that ESIO does or some of your competitors, how do you see this progressing going forward and what might be an explanation for that?

It's going to have a certain degree of cyclicality to it because we did put forward several new products in the systems area in the past year and a half to two years and that consumed a lot of R&D and then we did a lot of that in the down cycle when sales were less, so it looked like a lot more and we've gone to a different model where we have a core talent pool of engineering in the company and then we supplement that through contracting out certain portions of the design, both hardware and software on a project basis.

We manage it from internal to the company. But once the work is done, for example, we might contract out some applications software engineering and then when it's done, we will bring that software in-house and maintain it internally but you might pay $500,000 for a consulting group to do the work for you, but once it's done, it might take six months, they're off the payroll so you see a drop off in R&D spending but it's not -- it doesn't phase me at this point. I'm not worried about it.

As you ship more and more of the business toward a components model, components because of their long-term design in, tend to not be in the 15% range. They tend to be more in the 6 to 8 to 9% of R&D range of sales.

Great. That's helpful. And then just lastly, Tom, any updates on the property that's still on the books and anything we could expect from that? Then just on the one-time events, if I understand correctly, Chuck's saying we're getting to the bottom of the barrel, we shouldn't see these 700,000 - $500,000 extraordinaries going forward?

Well, to put the properties in perspective, basically, there's two large ones. We had paid over 18 million to acquire and construct these buildings. That was about three or four years ago, maybe five, and they're nice, new buildings. We wrote them -- wrote off one-third of the value, so they've been taken down to 12 million.

Our assumption is that at some point we will sell them for that value and get our cash out and back into working capital.

We also have a lease in Germany. It's in a nice facility. It was actually built for us and that's one that we're not -- we're only utilizing about 25% of it. We've been trying to find subtenants or find someone to take the entire building. It is a long-term lease that goes out to I think about 2011 -- 2013. And the point is, we hope to get a tenant in there or get rid of it, one way or the other.

We provided for the part of the costs that it takes us to carry the don't that don't support our operations. We have provided that in the provision and that looks out making assumption I think it's 18 -- two years actually provided for two years of not having somebody in there.

So, you know, we make these provisions. We would hope the markets will be able to absorb these properties. It's just been very difficult in the last couple of years with the whole economic cycle.

Are the properties in Canada actually up for sale then?

Yes, we also have -- there's much less exposure up in Canada the total cost on that building is only a couple of million. It's in a good area by the airport. We expect we can sell that one.

We did sell our facility in Conoda[ph] and took back a mortgage on it. We have those -- well, the only property left in Canada is the Napeon facility, and that one is being offered for sale. We also have a few people in it and we do get some use out of it. But that's one we expect to recover value from, so we're not too concerned about it.

Okay. And the charges were sort of getting to the end here?

Yeah, at this point, we assume we'll eventually sell them for what we've got on the books. We have to revisit this every quarter and, you know, it's just a matter of what happens and what develops. We would hope as the economy comes back we would have good prospects, but all we can do wait. We only need one buyer for each one.

Okay. Great. Thank you guys very much I appreciate it.

Okay.

Your next question comes from Joe Arsenio of Arsenion & Associates. Please proceed.

Hi everybody.

Hi, Joe.

Can you hear me?

I can. How are you, Joe?

How are you?

Very well, thank you.

I wanted to ask you a little lit about exchange rates and how that influenced your quarter. I looked at the cash flow statement and I think there's a nick in there somewhere for exchange, so what -- what was the influence there?

Actually, our net loss for exchange in the quarter, I think, was 180,000.

Okay.

It's not a -- we've done a few things. What we're trying to do is deal with a problem and avoid some of the risks and exposures.

We tried to manage our sales from a factory in the currency of the factory. So that helps a lot in minimizing the exposure. Then we obviously try to hedge by balancing the assets and liabilities in the overseas locations.

You know, currency is a tricky thing. There's several aspects to it. It's what we sell in and then it's the materials that we buy. But I think generally in the U.S., we haven't seen an impact on the cost of our operations based on international purchases and generally we've, -- I would hope it's due to our diligence, we've avoided exposure. But I don't think we really have a high degree of risk.

Now, it changes a little bit with Westwind because they do sell in British pound and they're selling to the far east, so they have more issue mainly with maintaining price and margin as much as anything.

I think when you look at our markets from the U.S., components business is largely selling in the U.S. but the systems business sells internationally so you have astute customers and of course they want to play it which ever way is most favorable to them and it's up to us to maintain the other side.

Well, let me understand this a little bit better. On the cash flow statement, it shows a negative 2 million 195 as the effective exchange rates on cash and equivalents but what you're saying is the actual effect was 180,000?

Oh, what this is, it's -- it's called accumulative translation adjustment. And actually, if you look at our statements, it's because of the assets we hold in Great Britain, in particular.

Where you're putting out figures in U.S. dollars.

Right, when we do the conversion and it's actually worldwide assets because the dollars come down, it affects everywhere.

What happens is the assets are valued based on the current translation rate and the difference goes through this adjustment and it goes back to stockholders equity and it's not going through the income statement.

Okay. Okay.

You will notice, we lost money but our net worth went up almost $10 million and that was this basically a currency adjustment.

I see. A favorable. So the --

It's favorable. It goes up and down and that's the reason it goes through the -- they call it accumulative translation adjustment.

Right, right. So if we were to then look at the total business, because of your foreign assets being denominated I guess in foreign currencies, the fact that dollar got weaker boosted the dollar value of those assets, is that --

Right Right? That's right

And hence the unexpected jump in shareholder's equity or above and beyond or the decline in that accumulated other comprehensive loss, is that the gist of it?

Right and that will vary and since the dollars is our currency, it's just the relative position of the dollar against all of the other locations we have in their currency that they operate in.

Okay. Another sort of balance sheet question. This is consolidated as per all acquisitions, everything is in as well as all adjustments that you believe are appropriate; is that correct?

That's correct.

And so, I mean, this is a follow up to someone else's question where they were concerned about, you know, more sort of out of the blue one-time items, one would assume that you've sort of done all of the obvious things in making the consolidation relative to adequacies of reserves and payables and receivables and what have you. So we should assume the acquisitions and all the relative adjustments, including sort of the year end audit adjustments are there?

That's correct, everything is in.

Everything is in. Okay. Great. Thank you very much.

Thank you, Joe.

Your last question comes from Nathan Churchill of Sidoti & Company.

Good afternoon, everybody. I was hoping we could hone in on just a couple quick points, one on the acquisition front, is there a preference? I know it's in the components business but are we looking for something that has semiconductor electronics exposure or is it much more general?

Well, we're looking for technology that has a broader market appeal, Nathan, you know, as we reviewed with you, we're looking for technologies that have broad market niche applications.

They may start out with a strong presence in one particular market as I described the Westwind situation, much stronger in the printed circuit board area right now but we hope to be able to grow their other segments. The same thing here.

We may -- we're typically going to find a business because of the smaller nature of a business they will tend to focus more in one market than another, so it could be stronger in semi when we start out but the appeal to us is that it has broader reach accross more markets and that's where being a larger company and acquiring a business that's 30 or $40 million in sales for example, we can take that product to more markets because we're in contact with more customers than they may have been.

Okay. I understand. So you don't necessarily have a bias towards semiconductor electronics, you're simply looking for things that you think you can leverage your sales and distribution channels?

Leverage both the sales and distribution, Nathan, as well as the ability to take the technology and put it into possibly other products that we have in a different market for example.

I understand. Now, looking more closely at the PCB drilling applications for Westwind. How does laser drilling for PCB stack up against that? Where do we draw the line between the two?

Well, one of the interesting things was we have been in the laser drilling business. We don't sell very much anymore because what happened when we were -- got into it four or five years ago and did very well at that time, there was a demand because of the hole sizes had gotten smaller than could be drilled with a mechanical drill and a laser was one of the only ways to do that.

The negative part of laser drilling is you drill one hole at a time because you have one laser. With Westwind's technology, advancing to much higher speeds, very high rotational speeds going from 100,000 thousand RPM up to 200,000 RPM, they were able to advance in reducing the size of the hole that could be drilled down into the range where it competes with the hole sizes drilled by lasers, roughly a hundred microns in diameter.

And therefore, since you can drill six holes simultaniously by having six spindles mounted on the arm of the machine and the board going underneath it, so you are drilling multiple holes at the same time, rather than sequentially drilling one hole at a time and a laser takes longer to drill the same hole than a mechanical drill bit, quite a bit longer in terms of number of holes drilled per minute.

So there are some significant advantages. The one thing that was keeping the mechanical drilling from going forward into the smaller board requirements for smaller holes was it's inability to drill these tiny holes. But now, with Westwind having made these improvements in spindle speed and accuracy and linearity and tolerance, they're able to take the mechanical drilling technology to a new level of performance and therefore, the market has returned very strongly in favor of mechanical drilling.

I see. So they're actually are some performance advantages right now. How about on the cost front if you are were to look at both systems?

There's no question that mechanical drilling is cheaper to -- you can get a machine that drills six holes at a time for about 200 to 225,000 or $250,000. The cheapest laser drillers with one laser in them are in the 250 to $350,000 range. The good ones.

So there's a cost advantage. There's a speed and through put advantage. In addition, the maintenance requirements are pretty much simpler on the mechanical drilling equipment, so mechanical drilling and the big application is, I'd say probably 90% of the boards being producing today are being drilled mechanically.

There is a segment of dia[ph] drilling, where you have to drill blind dias[ph] in very complicated boards and the speed doesn't matter because the quantity of boards you're producing is fairly limited. They're fairly customized type boards. That's where laser drilling really excels.

I see. And last thing, if we could just kind of get a quick picture on pricing over all across all the business segments particularly with regard to the systems. Where is it now and what are your thoughts on that assuming we see a steady increase in unit demand?

Well, I think the pricing is fairly firm now. We haven't seen ourselves in a position where we can raise prices substantially. We will probably be able to get with away with some smaller price increases that, at least offset any expenses and maybe pick up a little bit on margin but the other side of the coin, pressures to reduce prices have also invaded somewhat as our customers, you know, put delivery ahead of price for the time being.

Okay. Now, on a go forward basis, assuming unit demand, at least, stays stable or likely increases, do you think that prices will remain stable or do you think you will have more leverage to potentially increase price?

I think there will be at minimum stable and there might be a little bit of room to make some small increases in prices. I wouldn't see large increases possible. But, you know, certainly some things in the range of 3 to 5 to 7% will be doable over a period of time.

Okay. Great. That's helpful. Thank you.

Have you no other questions in the cue.

There's no more questions, I'd like to thank everybody for their interest in following the company and investing in the company and thank you very much for participating in the conference call today, and we look forward to speaking with you in the next conference call, which will be coming up in April, end the April, which will be announced shortly. Again, thank you very much. And wish you all a good weekend.

Thank you for your participation in today's conference. This concludes the presentation. We now disconnect. Good day.