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End Time: 14:11

Coherent, Inc. (COHR)

Third Quarter 2010 Earnings Conference Call

July 29, 2010, 1:30 PM ET


Helene Simonet - Chief Financial Officer, Principal Accounting Officer and Executive VP

John Ambroseo - Chief Executive Officer, President


Larry Solow - CJS Securities

Mark Douglass - Longbow Research

Ajit Pai - Stifel Nicolaus

Jiwon Lee - Sidoti & Company

Mark Miller - Noble Financial



Good day, ladies and gentlemen, and welcome to the Coherent third quarter 2010 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.

Helene Simonet

Thank you, [Jenita]. Good afternoon and welcome to Coherent's third 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 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 start by mentioning that we had another outstanding quarter with record bookings, revenue and operating profits. Our revenue grew 12% sequentially with a corresponding pro forma earnings growth of 48% and a GAAP earnings growth of 70%.

We achieved pro forma income of $0.66 per diluted share compared to a pro forma income of $0.45 per share in the previous quarter. Our pro forma EBITDA percentage for the quarter was 19.7% compared to 16.6% last quarter.

During the quarter, we completed the Beam Dynamics acquisition for $6.25 million and we repurchased approximately 477,000 shares for $16.8 million.

Net sales for the third quarter grew 11.8% sequentially which is primarily the result of a record microelectronics quarter coupled with solid growth in the materials processing market. Increases in microelectronics can be attributed to significantly higher solar, advanced packaging, and semiconductor revenues.

Solar revenues were exceptionally high and reached $13 million this quarter with the majority recorded against the large order of $22 million that was booked in the first quarter of this fiscal year.

Materials processing was strong in non-metal cutting and marking applications and OEM Components and Instrumentation growth was dominated by strength in the bioinstrumentation market.

As anticipated, scientific revenues declined when compared to the first half run-rate as we are now seeing less stimulus money; scientific is returning to a more GDP growth business.

Geographically, Asia represented 38% of the third quarter revenues resulting from a growing microelectronics business for which the customer base is strong in Asia. The company’s sales by market application for the third quarter are as follows: Scientific $33.7, Microelectronics $69.6, Material Processing $23.3, OEM Components and Instrumentation 40.1 for a total of $166.7 million.

The third quarter gross profit was $74.3 million or 44.6% of sales. On a pro forma basis, excluding $0.8 million restructuring and compensation charges, pro forma gross profit was 45.1% compared to 44.6% last quarter and 37% a year ago.

The sequential improvement was primarily the result of favorable product and market mix and positive leverage from increased sales volumes, partially offset by higher exit costs related to the StockerYale asset acquisition. The significant improvement versus last year is clearly the result of a sizeable increase in revenues, the positive impact of the manufacturing restructuring activities and a more favorable mix towards commercial markets.

Pro forma period expenses of $49.3 million, excluding $2.6 million for restructuring and stock compensation charges, decreased $0.7 million from the previous quarter and represent less than 30% of revenue compared to 33.4% last quarter.

The higher gross profit and lower operating expenses resulted in a pro forma operating income percentage for the quarter of greater than 15% of sales.

Our cash and cash equivalents balance for the quarter was $254 million, representing a sequential decrease of $11 million. The decrease is primarily due to the previously mentioned cash expenditures for the Beam Dynamics acquisition and our stock repurchases.

Cash flow from operations for the quarter was approximately $22 million. Capital spending was $4.4 million, or 2.6% of sales, resulting in free cash flow of approximately $18 million for the quarter.

We continue to be pleased with our working capital management results; inventory turns increased from 3.4 last quarter to 3.7, which represents another record for the company. Accounts receivable DSO of 53 days is slightly higher than last quarter, a remarkable result though particularly since 68% of our revenue is generated from international customers.

I will now give you the guidance for the fourth quarter. Revenues in the fourth quarter can range from $162 million to $170 million depending on the timing of certain tool deliveries. As indicated before, the third quarter included $13 million of solar revenue and this magnitude of solar revenue will not be repeated in the fourth quarter.

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