Newport Management Discusses Q2 2012 Results - Earnings Call Transcript

Newport (NEWP)

Q2 2012 Earnings Call

August 01, 2012 5:00 pm ET

Executives

Robert J. Phillippy - Chief Executive Officer, President and Director

Charles F. Cargile - Chief Financial Officer, Senior Vice President and Treasurer

Analysts

Mark S. Miller - Noble Financial Group, Inc., Research Division

D. Mark Douglass - Longbow Research LLC

Lawrence Solow - CJS Securities, Inc.

James Ricchiuti - Needham & Company, LLC, Research Division

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Ladies and gentlemen, Good day, and welcome to the Newport Corporation Second Quarter 2012 Conference Call. Please note today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Robert Phillippy, President and Chief Executive Officer. Please go ahead.

Robert J. Phillippy

Thank you. Good afternoon, and welcome to Newport's second quarter 2012 conference call. With me is our Chief Financial Officer, Chuck Cargile.

Before we get started, I'd like to remind you that during the course of this conference call, we will be making a number of forward-looking statements that are based on our current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings. Although we believe that the assumptions underlying these statements are reasonable, any of them could prove inaccurate, and there can be no assurance that the results will be realized.

The Newport team continued to execute well in the second quarter of 2012. We achieved non-GAAP operating income of $20.2 million or 13.1% of sales and generated $15.1 million in cash from operations. Both of these numbers increased sequentially despite a slight reduction in revenue caused by challenging conditions in some of our end markets. While these challenges were not unique to Newport, our team responded to them quickly and effectively. We are also implementing a plan to achieve cost savings of $15 million on an annualized basis. These savings will come from a combination of synergies from our recent acquisitions and other business streamlining. We'll touch on both of these topics again later on the call.

But first, I would like to make some comments regarding conditions in our end markets. Our second quarter 2012 sales were $153.7 million, representing 18% growth over the second quarter of 2011 and a 2.2% decline sequentially. This result is slightly below what we had expected due primarily to current uncertainty in government funding, most notably in the United States. This impacts our business in 2 key end markets: research and aerospace and defense, and life and health sciences. Our research business is directly impacted by reduced grants for universities and other research institutions as these grants purchase our products. In the life and health sciences market, many of our OEM customers products are purchased using similar funding sources. The uncertainty regarding future funding levels has led many customers in these markets to delay purchases of higher-priced equipments. Similarly, our business with major defense contractors has been impacted by the uncertainty associated with potential cuts in U.S. defense budgets that could be triggered at year's end.

Given this scenario and the current political gridlock, 2012 is shaping up to be a difficult environment for government funding in the U.S. The scenario outside the U.S. is mixed, but overall, these factors have made our outlook for the rest of the year a bit more cautious.

Second quarter 2012 orders were $148.3 million, growing 3% year-over-year, but declining 20% sequentially. Both prior periods reflect tough comparisons as we received large OEM orders in each of these periods; one for $15 million in the second quarter of 2011 and the other for $37.7 million in the first quarter of 2012. Both of these orders cover multiple years as demand. With approximately half of our business now coming from OEM customers, our order patterns are increasingly subject to quarter-to-quarter variations.

Our total orders for the first half of 2012 were $334.4 million, representing 22% growth over the same period last year. Our recent acquisitions provided a positive boost to Q2 sales and orders, adding a total of $34.7 million of sales and $26.8 million of orders. Excluding the acquisitions, our sales and orders would have declined year-over-year. Not only have our acquisitions enhanced our near-term performance, they also provide excellent long-term growth prospects by enhancing our presence in applications such as laser surgery, infrared optics or military surveillance and commercial security and instrumentation for industrial laser measurement.

Second quarter orders from our scientific and research and aerospace and defense customers were $49.7 million, a 19% increase over the second quarter of 2011. Sales to this market were $47.8 million, an increase of 20% year-over-year. We remain well positioned in both the scientific community and defense contractors with our broad portfolio, strong channels and excellent customer relationships. And we continue to have visibility to a number of opportunities for new programs that are currently budget-constrained. If the government funding issues are resolved favorably, we expect to benefit from pent-up demand in this market.

Second quarter orders from life and health sciences customers were $19.3 million, declining 26% versus the second quarter of 2011. While sales to this market were $33.3 million, an increase of 34% year-over-year. While government funding constraints have impacted the near-term demand for our bioinstrumentation OEM customers laboratory products, we had a very strong quarter for design wins capturing 4 new programs with bioinstrument customers. As is typical for this type of OEM business, there will be an 18- to 24-month period before these design wins reach production volumes. Once in full production, we expect these programs to generate total revenue $5 million to $7 million per year.

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