Rofin-Sinar Technologies (RSTI)

TOP CONTRIBUTORS

cam English

Rofin-Sinar Technologies (NASDAQ:RSTI) makes high-powered lasers for industrial applications. The company produces macro lasers for large-scale cutting and welding, micro lasers for spot welding and fine cutting, and laser markers for electronic components. These products serve three core markets: automotive, semiconductor and electronics, and machine tools.

In FY 2007, Rofin earned $55 million ^[1] on $480 million in sales ^[2]. These results compare favorably to earnings of $50 million on sales of $421 million in FY 2006 (an 11% and 14% increase respectively). ^{[2] [1]} 67% of sales stem from the company’s core markets, ^[3] including an increase in machine tool sales from 31% to 36% of total revenues. ^[4] Though a US company based in Plymouth, MI, Rofin sells a majority of its products to Germany (49.9%). ^[5]

Sales of Rofin’s high-intensity lasers depend upon client's capital expenditure budgets. Consequently, decreases in large-scale capital investment in the company’s core markets threaten future earnings. In addition, Rofin relies upon strategic acquisitions to acquire new laser technologies and expand its geographic reach. The current credit crisis and the subsequent decrease in Mergers and acquisitions (M&A) activity jeopardizes this strategy. ^[6]

Business Overview

Rofin solely manufactures lasers and products based on lasers. In particular, Rofin concentrates on the carbon dioxide and solid-state laser market. According to the 2007 Optoelectronics Report, Rofin has a 22% share in macro and micro lasers and is among the largest suppliers of industrial lasers in the world. ^[5] Rofin sells directly to end-users and Original Equipment Manufacturers that integrate Rofin’s lasers into production processes.

Business and Financial Performance

Source: 2007 Rofin-Sinar 10-K ^[2]

In FY 2008, Rofin earned $55 million on sales of $480 million. These results represent a 14% increase in revenue, an 11% increase in net income, and a 10% increase in Earnings Per Share (EPS) as compared to FY 2006. ^[2][1] Financial outcomes were driven by increases in Rofin’s core markets – machine tools, semiconductor and electronics, and automotive manufacturers. Specifically, machine tool sales grew from 31% to 36% of total sales, semiconductor and electronic sales grew from 18% to 23%, and automotive sales grew from 7% to 8% in FY2007 compared to FY 2006. ^[9]

In addition, the company’s after-market sales continued to produce consistent results, as 35% of the company’s revenues in 2005, 2006, and 2007 were generated from sales of replacement parts, components, and repair services. ^[10] Rofin employs 334 service personnel and offers 24-hour maintenance service to customers in both Germany and the United States. ^[10]

Rofin’s FY 2007 operating ratios improved slightly over FY 2006, continuing trends evident since 2003. Gross profit (revenues less costs of goods sold divided by revenues) improved from 37.4% to 42.4% from 2003 to 2007. During this same period, SG&A expenses (selling, general, and administrative expenses) decreased from 19.9% to 18.0% of sales. Also, income from operations increased from 9.8% to 17.7%, while income before taxes increased from 9.6% to 18.2%. Yet, the ratios were not all positive, as R&D (Research & Development expenses decreased from 7.0% to 5.8%. ^[7] R&D generates patents and new technologies that lead to increased sales and income. Consequently, lower R&D expenditures jeopardize future prospects. ^[11]

In FY 2007, Rofin generated 20% + year-over-year increases in three main measures – working capital, total assets, and stockholder’s equity. All three measures have had positive year-over year gains since 2004. However, the company’s increased its debt financing, as its line of credit increased by almost 20% during 2007. This increase comes after three consecutive years of debt decreases. ^[7]

Rofin operates chiefly in Germany and North America. Other sales stem mainly from the United Kingdom, Singapore, and Italy. ^[12] In FY 2007, the company generated 23.5% of its sales in North America, down from 30.1% in 2006. Contrarily, German sales increased from 44.6% in FY 2006 to 49.9% in FY 2007. Other sales during this period increased slightly from 25.4% to 26.7%. ^[13]

Business Segments

Macro Lasers, 47% of Product Revenues ^[15]

Since Rofin-Sinar solely manufactures lasers, the company is best understood by product category. In the macro laser category, Rofin produces industrial strength lasers primarily for the automotive and machine tool markets. These high-intensity lasers are used for cutting and welding. The company manufactures three main types of macro lasers: slab-based, carbon dioxide, and solid state.

As of FY 2007, Rofin is the only laser manufacturer of high-powered slab-based lasers. These lasers are controlled by radio frequency and powered by the discharge of gases between electrodes. Three patents, two of which expire in 2008, protect the main slab-based technology ^[16]. Moreover, the company has exclusive, worldwide rights to license this technology for power levels above 500 watts. ^[16]

Rofin’s carbon dioxide lasers operate through the fast-axial principle, in which the gas discharge flows in the same direction as the resonator (a device that generates waves of pre-specified frequencies). ^[17]This structure lets the gas flow at high speeds, thus producing significant power. Carbon dioxides lasers are used in the machine tool, automotive, and packaging industries.

In addition, the company manufactures solid-state lasers to use with fiber-optic beam systems. Since the fiber optic design accomodates multiple power output configurations, these products are used in complex manufacturing operations. Furthermore, solid-state lasers produce a high quality beam and efficiently channel energy. Rofin sells solid-state lasers to automotive and consumer electronic manufacturers. In FY 2007, the company had $205 million in macro sales, up 19% from FY 2006. ^[18]

Micro Lasers / Laser Cutting, 53% of Product Revenues ^[15]

Micro lasers use the same basic technology – carbon dioxide and solid state, along with minor variations of these types – for spot welding, fine cutting, and perforations. These small-scale applications let Rofin serve more diverse end markets, including paper, jewelry, photovoltaic, and cigarette companies. ^[14] Moreover, these smaller lasers are significantly cheaper than Rofin’s macro lasers. Consequently, these products suffer less from major decreases in capital expenditure budgets than the macro category. ^[6]

In the laser-marking category, Rofin produces lasers that etch data onto hard surfaces. In the semiconductor and electronics market, the company marks circuits, smart cards, and plastics. ^[14] Due to the complexity and small size of these products, laser marking is the only effective way to identify different components. Rofin entered the laser marking business through the acquisition of the German laser manufacturer, Laser Optronic GmBH, in 1989. ^[18] Since the acquisition, Rofin has mass produced a line of standardized power ranges and wavelengths and manufactured customized products for large clients. In FY 2008, the company had $231 million in micro and cutting sales, up 9% from FY 2006. ^[14]

Key Trends and Forces

Downturns in the machine tool, automotive, and semiconductor and electronics industries threatens macro laser sales

Rofin depends heavily on capital expenditures in the machine tool, automotive, and semiconductor and electronics industries. In FY 2007, 67% of lasers sales came from these three markets. ^[3] These three industries exhibit cyclical behavior, resulting in sharp increases and decreases related to market cycles. Furthermore, Rofin’s high-powered macro lasers represent significant capital expenses. During economic downturns, manufactures heavily reduce capital expenditures while maintaining operating expenses. Thus, macro sales are more susceptible than micro revenues during times of decreased investment. ^[6]

In addition, Rofin incurs administrative and R&D expenses to support ongoing product development and customer support. These expenses bear little correlation to sales and profit margins. Consequently, in the face of a steep decrease in demand, the company risks incurring high expenses to support lower earnings.

Rofin relies upon strategic acquisitions, which leads the company to recognize significant goodwill. Yet, the current credit crisis limits Rofin's acquisition prospects

Rofin grows through both organic means and the acquisition of companies that produce similar laser products (both to acquire adjacent technologies and expand geographic breadth). Since 1997, the company has completed eleven acquisitions, including four acquisitions in 2007. ^[16] These acquisitions have led to the recognition of significant goodwill – excess price over market value of the acquired company’s equity worth. In FY 2007, 13% of Rofin’s assets, or $80 million dollars, resided in goodwill accounts. ^[19] While some companies such as Proctor & Gamble and Peoplesoft maintain 30 – 40% ratios, 13% represents a sizeable portion of the firm’s assets. ^[20] Given that acquisitions constitute an important part of Rofin’s growth strategy, the constrained credit environment has the potential to seriously alter Rofin’s business plan. In the credit crisis, banks and other lending organization have significantly decreased lending. Consequently, mergers & acquisitions have decreased precipitously. ^[21]

Rofin's reliance upon a limited supplier base threatens production and leads to higher costs

In FY 2007, 21% of Rofin’s sales required specialized components available from only one supplier. ^[22]Moreover, the company relies on a limited number of small contractors to produce select products. This supplier concentration has two effects: Rofin risks production slowdowns should these suppliers declare Bankruptcy and Rofin has limited ability to drive price decreases from a concerted supplier base. Without the ability to switch suppliers, the company has restricted bargaining power in price negotiations.

Competition

The market for lasers contains a number of companies, many of which are small or privately owned. These companies compete with Rofin in specific locations, applications, or product categories. However, management believes that no company competes in all of the same geographic markets, product applications, or industries as Rofin.

The following companies are Rofin's largest competitors:

GSI Group (GSIG)

GSI Group produces lasers that compete in the micro cutting and laser marking category for the industrial, electronics, and medical markets. In FY 2007, GSI group earned $19 million on $319 million in sales. ^[23]

Excel Technology (XLTC)

Excel Technology began merger negotiations with GSI Group in July 1007 and completed the acquisition process on August 26, 2008. ^[24] Excel produced both macro and micro laser products. In FY 2007, the company earned $18 million on $160 million in sales. ^[25]

IPG Photonics (IPGP)

IPGP competes with Rofin in the laser marking and micro product categories. In FY 2007, the company earned $29 million on $189 million in sales. ^[26]

Coherent (COHR)

Coherent is the world's largest company solely focused on laser production. COHR competes with Rofin in the macro category, especially in the carbon dioxide space. In FY 2007, Coherent earned $16 million on sales of $601 million. ^[27]

Trumpf

Trumpf is a privately owned, German company that offers the most comparable products to Rofin. Trumpf sells both macro and micro lasers, but concentrates on the medical device market. In FY 2007, Trumpf earned $196 million on $3.15 billion in sales. ^[28]

References

1. ↑ ^{1.0 1.1 1.2} Rofin-Sinar 10-K, page F5
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7} Rofin-Sinar 10-K, F-5
3. ↑ ^{3.0 3.1} Rofin-Sinar 10-K, page 21
4. ↑ Rofin-Sinar 10-K, page 15
5. ↑ ^{5.0 5.1} Rofin-Sinar 10-K, page 5
6. ↑ ^{6.0 6.1 6.2} CEOs describe decreases in capital expenditures
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7} Rofin-Sinar 10-K, page 29
8. ↑ ^{8.0 8.1} Rofin-Sinar 2008 10-K, p32
9. ↑ Rofin-Sinar 2007 10-K, page 14
10. ↑ ^{10.0 10.1} Rofin-Sinar 2007 10-K, page 16
11. ↑ R&D expenditures
12. ↑ Rofin-Sinar 2007 10-K, page F18
13. ↑ Rofin-Sinar 2007 10-K, page F24
14. ↑ ^{14.0 14.1 14.2 14.3 14.4} [http://www.secinfo.com/dScj2.u8r8.htm Rofin-Sinar 2007 10-K, page 9>
15. ↑ ^{15.0 15.1} Rofin-Sinar 2007 10-K, page F-25
16. ↑ ^{16.0 16.1 16.2} Rofin-Sinar 2007 10-K, page 7
17. ↑ Rofin-Sinar 2007 10-K, page 10
18. ↑ ^{18.0 18.1} Rofin-Sinar 2007 10-K, page 11
19. ↑ Rofin-Sinar 2007 10-K, page F4
20. ↑ Serial acquirers
21. ↑ Decrease in 2008 M&A
22. ↑ Rofin-Sinar 2007 10-K, page 18
23. ↑ GSI 10-K
24. ↑ GSI offer for Excel
25. ↑ Excel 10-K
26. ↑ IPGP 10-K
27. ↑ Coherent 10-K
28. ↑ Trumpf 2007/2008 report