Markets Outlook: Finding the New “Normal”

Presentation to Photonics Webinar

March 29, 2011

D. Mark Douglass, Vice President, Longbow Research

Special thanks to Eli Lustgarten, Vice President, Longbow Research

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• Our View: There’s 2010 And There Is The Recovery• 2009 Severe Recession With 1H09 Global Economy Really Ugly

o U.S.PMI Plummeted As Did European And China PMIo Credit Financial Crises Met With Massive Stimulus Programs

o Both Here (U.S. $787B, TALF, TARP) Ando Abroad (South America $775B; EMEA $900B; Asia Pacific $850B)

o Recession Likely Ended Mid 2009 Followed By Modest Recovery

• 2010 MOST LIKELY A TRANSITION YEARo Mfg.Capacity Utilization Of Around 70% Well Below Normalo 2010 Will Favor Short Cycle/Productivity Spendingo Faster Recovery of Technology, Components And Consumableso Bull-whip Effect Is Key Driver-recovery Of Production And Supply Chain FromVery Depressed Levels

• 2011 Economic Outlook Dependent On Real Growth In Demand• 2011-2012 Search For New Normal Level Of Demand

o Most Markets Won’t Return to Recent 2006 To 2008 Peakso 2006 Was Peak For Housing, Auto, Trucks, Construction Equipment

WHAT WE SAID IN 2009-10 APPEARS TO BE TRUE

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Great Recession likely ended in June/July 2009 followed by a gradual economic recovery Strong growth in China, India, and Brazil leading global economic upturn U.S. is generally positive with clear strength in manufacturing Europe and Japan show signs of slow economic growth

Numerous concerns which may lead to volatility in world financial markets Uncertain financial stability of Sovereign Nationals: Greece, Portugal, Spain, and Ireland; Even in the U.S. there are rising concerns about Fannie/Freddie and State Financialconditions e.g. California, New York, Illinois What is the exit path for all the fiscal/monetary stimulus Concern over Bank exposure to commercial real estate

Domestically, economy being driven by: Capital goods markets leading the U.S. recovery with the manufacturing ISM PurchasingManagers Index (PMI) showing a strong “V” shaped recovery Inventory change has become a key contributor to GDP growth Residential markets are sluggish since incentives have expired Sentiment has improved modestly across the U.S. economy

• University of Michigan 2010 Consumer Sentiment survey rose to 76 in June beforefalling to 67.8 in July, up to 69.8 in Aug., down to 68.2 in Sept., 67.9 in Oct., rising to71.6 in Nov., 74.5 in Dec 2010, 74.2 in Jan and 95.1 in Feb. 2011.• Small Business Optimism Index between 87 and 92in 1H10;Sept 89;Oct 91.7;Nov.93.2; December 92.6; rising to 94.1 in January 2011

GREAT GLOBAL RECESSION IS OVER

• Photonics stocks outperformed Russell 2000, w/ most of outperformance only since fall of2010 (strong sales and margin rebound, double-dip fears subside)

1-yr 3-yr 5-yrPhotonics Index +139% +103% +54%Russell 2000 (small cap) +32% +20% +14%

PHOTONICS STOCKS SMOKIN’ SINCE FALL 2010

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C&I LOAN DATA SHOWS SLOW BUT CONTINUEDLOOSENING OF CREDIT STANDARDS

C&ILOANDATA–1990TOPRESENT

U.S. ISM PMI SAW A SLIGHT DIP IN MID-2010BUT HAS PICKED UP AGAIN

U.S.ISMPMIINDEX–1992TOPRESENT

30

35

40

45

50

55

60

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CONTRACTION

EXPANSION

PMIAug!!!!56.3Sept!!! 54.4!Oct!!!!56.9

New!OrdersAug!!!!53.1!Sept!!!! 51.1!!Oct.!!!58.9

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CONTRACTION

EXPANSION

PMIDec!!! 58.5Jan!!!60.8!Feb!!! 61.4

New!OrdersDec!!! 62.0Jan!!!67.8!Feb!!! 68.0

EU LAGGED BUT COMING ON STRONG; CHINASTRENGTH WANING

EUROZONEPMIANDCHINAPMI-MARCH2006TOPRESENT

30

40

50

60

EU China

EXPANSION

CONTRACTION

EurozoneChinaNov55.355 .3Dec57.154 .4Jan57.354 .5Feb 59.051.7

HSBC,Markit

GDP REVISION SHOWED WEAKERECONOMY BUT SAME END TO RECESSION

• Economy was weaker over the past three years driven by weaker housing andconsumer spending.

Year Reported GDP Revised GDP

2007 2.1% 1.9%

2008 0.4% 0.00%

2009 -2.4% -2.6%

• But recession likely still ended in Mid-2009

QUARTER INVENTORY % GDP FINAL SALES PCE

1Q09 -$125.8 B -2.5% -3.9% -0.5%

2Q09 -$161.8 B -1.4% 0.2% -1.6%

3Q09 -$128.2 B 1.1% 0.4% 2.0%

4Q09 -$36.7 B 2.8% 2.1% 0.9%

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Productivity is STRONG comingout of recessions

Date After Recession Growth

1975 2Q 6.5%

1980 4Q 4.4%

1983 1Q 5.1%

1991 2Q 5.9%

2002 1Q 7.2%

2009 2Q 8.4%

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PRODUCTIVITY GAINS HAVE BEEN SIGNIFICANT SINCE 2Q09DRIVING 2009-2010 EARNINGS SURPRISES

Productivityusuallyweakinarecession

MFG.Productivityimprovedsince2Q09whilecostsplummetedDate MFG.Productivity Unit Labor Costs

4Q10 5.8% -2.9%

3Q10 1.4% +0.1%

2Q10 5.7% -0.8%

1Q10 1.7% -8.1%

4Q09 8.1% -3.5%

3Q09 16.9% -11.6%

2Q09 6.2% 0.3%

Date Productivity

1981 0.16%

1991 0.23%

2001 3.60%

2008 0.3%

IMPROVED PRODUCTIVITY SEEN IN PROFITABILITY REBOUND

• Increased productivity evident in strong operating marginrebound for many companies, post 2009 restructuring

• Margins for many have approached or exceeded 2008 levels,though absolute earnings trailed prior peaks in 2010 due to lackof revenue recovery– In 2009 temporary (zero bonus pay-outs, furloughs, pay reductions, travel

restrictions, eliminate overtime) and structural measures (layoffs, plantconsolidations and closings, increased automation ) used to reduce costs

– Structural measures will continue to offset the return of temporary costssavings (about 60% of costs).

– Employee compensation (base wages, healthcare) likely outpacesinflation, hiring will be kept in check

– 2011: Earnings can rise above prior peaks, but incremental margins willtrend downwards.

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U.S. ECONOMIC OUTLOOK:Recovery Beginning

REALGDPSLOWGROWTH

CAPITALSPENDINGTOIMPROVE

2005 2006 2007 2008 2009E 2010 2011E

YEAR/YEAR 3.1% 2.7% 2.1% 0.4% -2.4% 2.9% 3.5%

4Q/4Q 0.1% 2.8% 3.5%

STRUCTURESEQUIPMENT

ANDSOFTWAREBUSINESSFIXEDINVESTMENT

2004 1.1% 7.7% 7.3%

2005 1.5% 8.5% 6.5%

2006 9.2% 7.4% 2.3%

2007 14.9% 2.6% -2.1%

2008 5.9% -2.4% -6.4%

2009 -20.4% -15.3% -18.3%

2010P -14.0% 15.1% 3.8%

2011E 1.% 9.5% 7.0%

IMPROVING OUTLOOK FOR GLOBAL GROWTH BUT2011 GROWTH MODERATING

2006 2007 2008 2009 2010E 2011E 2015E

GLOBALGROWTH 5.1% 5.2% 3.0% -0.6% 4.8% 4.2% 4.6%

US 2.7% 2.1% 0.4% -2.4% 2.6% 2.3% 2.4%

EU 2.8% 2.7% 0.6% -4.1% 1.7% 1.5% 1.7%

GERMANY 3.0% 2.5% 1.2% -5.0% 3.3% 2.0% 1.2%

FRANCE 2.2% 2.3% 0.3% -2.2% 1.6% 1.6% 2.2%

ITALY 2.0% 1.5% -1.3% -5.0% 1.0% 1.0% 1.3%

UK 2.9% 2.6% 0.5% -4.9% 1.7% 2.0% 2.5%

SPAIN 4.0% 3.6% 0.9% -3.6% -0.3% 0.7% 1.7%

CENTRAL/EASTERNEUROPE 6.5% 5.5% 3.0% -3.7% 3.7% 3.3% 4.0%

JAPAN 2.0% 2.4% -1.2% -5.2% 2.8% 1.5% 1.7%

CHINA 11.6% 13.0% 9.6% 8.7% 10.5% 9.6% 9.5%

INDIA 9.8% 9.4% 7.3% 5.7% 9.7% 8.4% 8.1%

RUSSIA 7.7% 8.1% 5.6% -7.9% 4.0% 4.3% 5.0%

MIDEAST 5.7% 5.6% 5.1% 2.4% 4.1% 5.1% 4.8%

BRAZIL 4.0% 6.0% 5.1% -0.2% 7.5% 4.1% 4.1%

MEXICO 4.9% 3.3% 1.5% -6.5% 5.0% 3.9% 4.0%

CANADA 2.9% 2.5% 0.4% -2.6% 3.1% 2.7% 2.1%

*SOURCE:IMF1010

INDUSTRIAL CAPACITY RECOVERS IN2010 BUT STILL BELOW NORMAL

Wehavedugadeepholetoclimboutofin2011 CapacityUtilizationisstillintheMid-70’s(MfgCapUtilinlow70’s)comparedtomorenormallow-80slevelsofpastdecade

VirtuallyEveryIndustrialSectorisCurrentlyOver-CapacitizedGlobally Yet,companiesclearlystillinvestingincapitalequipment

67%

69%

71%

73%

75%

77%

79%

81%

83%

85%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Industrial!Production Capacity!Utilization!"#"$%&'(")"$*"

Gross Fixed Investment (GFI) In MatureMarkets Will Likely Grow At Least Through 2012 Pressuretoreducecosts,increaseproductivityandexpandcapacitywilldrivemulti-industrycompaniestoincreasecapitalspendingaspartoftheirongoingcompetitivepositioning;

CompaniesthatreducetheirCAPEXduringthedownturnwillnowbeforcedto“catch-up”

Industrialinflationwillspurproductivityinvestments

Estimatesvary,butnon-financialcompanieshave>$1Trillionofcash;alreadydeployingthiscashonCAPEXandlikelytocontinuethrough2012

Companieswanttoincreaseproductivity(eveninlessmaturemarkets)whichnotonlyimprovesprofitsandreducesscrap,butlimitsneedtohirenewworkersthisshouldplaywellw/Photonicsproductswhichoftentimesenableautomation—sensors,materialsprocessing,machinevision,metrology,etc.

Global Capital Spending Will Be Strong Led ByEnergy And Infrastructure/Durable Goods

Major Industrial Companies Will IncreaseCapital Spending Sharply in 2011-2012

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CURRENT ECONOMIC DATA IS MIXED:FOR NOW IT’S SLOWER GROWTH

THE POSITIVES– A Major upward revision in personal saving rate coincided with a sharp decline in overall

financial obligations as a percentage of disposable income suggesting that the consumers arein better shape than suggested by earlier data

• The savings rate peaked at 7% in 2Q09 and remained above 5% all year

• 1Q10 savings rate was 5.5%; 2Q10 was 5.9%; 3Q10 Was 5.9%; 4Q10 5.4%

– We are seeing decent real growth in disposable income, growth in exports and businessspending for equipment and software

THE NEGATIVES– 4Q10 housing 3.4% Vs. 3Q10 housing -27.3% says housing still going nowhere; and state and

local government spending soft at -0.9% in 4Q Vs. +0.7% in 3Q ;• Consumer confidence indexes are consistent with stagnation in real consumption

• Housing still mired at low levels of 8 months ago falling back after end of new buyer incentiveprograms

– The current high level of inventory benefit to economy is coming to an end;

– Poor monthly jobs reports continues trend of slow recovery in employment

THE CONSUMER IS STILL RELUCTANT TO LEAD

• CONSUMER SPENDING IS SLUGGISH BUT IMPROVINGPERSONAL CONSUMPTION EXPENDITURES:

2008 2009 2010

1Q -0.8% -0.5% +1.9%

2Q +0.1% -1.6% +2.2%

3Q -3.5% +2.0% +2.4%

4Q -3.3% +0.9% +4.4%

• Lack Of Confidence In The Economy; Even the FED is concerned• Changing Consumer Spending Patterns

“just drop off the key, Lee, and set yourself free”-Paul Simon Apple up 94%; Starbucks 61%, Mercedes 25%--splurge in hi-end electrics P&G struggling as consumers cut back name brand shampoo and toothpaste;

Dollar Stores instead of Target

JOBS OUTLOOK: NO PENT UP DEMAND ANYWHERE

• Jobs Data Confusing as Ever– Overall jobs increase in January 2011 was only 36,000

– December revised to 121,000 (was 103,000) and Novemberto 93,000 (was 71,000);

– Hourly earnings up $0.08 in Nov. and 1.9% over 12 months

• But Softness Beneath The Surface– Work week 34.2 hours in January down from 34.3 hours;

Length of work-week barely budged in 6 months

– 39,000 uptick of manufacturing jobs in January confirmsstrengthening in sector

– Unemployment at 9.0%; Total unemployment still 16%

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CLIMBING TOWARD MORE NORMAL DEMAND:WILL EQUIPMENT DEMAND SURGE IN 2011?

• Real increase in demand will likely be the driver of economic growth in 2011

– 2010 was the year of the component supplier but Supply chains will likelyhave been stabilized by 2011 ending component boom;

– Virtually all industrial end markets will grow at least low double-digitsin 2011; trucks strongest (+over 50%); Defense weakest (minimal)

– Focus : employ lean techniques and improve Factory Thru-put to reduce fieldinventories compared to history;

• Impact of original Government stimulus program will wane.

• Congress passed a bipartisan bill supporting extension of accelerated/bonusdepreciation rules set to expire at year end 2010 including a 1 year 100% write-off of Capital expenditures in 2011 and back to 50% in 2012; Likely to bringdemand forward in 2011 at expense of 2012.

• 2011 will be the Year of Equipment demand which will strengthen markedly

• Will movement to “Re-Shoring” effect to reduce the length of the global supplychain have a material effect?

2011-2012: FINDING THE NEW LEVELOF NORMAL DEMAND

• New more NORMAL level of demand perceived to be lower than end market demand realized in2006-2008; Note: 2006 was recent peak for housing, trucks, autos, construction equipment

– Auto unlikely to return quickly to 16 to 17 million car sales that prevailed from 1999-2005;perhaps 12.0 million to 14.0 million is the new norm;

– Housing unlikely to return quickly to 2 million starts; New norm may be 1.3 to 1.6 millionover the next few years with cautious funding keeping starts well below 1 million at leastthrough 2011 if not 2012.

– Truck market likely to return to more normal levels of demand as early as 2011 e.g. class 8trucks in the 200,000 to 240,000 range. Prior level peaks of over 300,000 unlikely until at leastthe next emission cycle;

– Construction and mining, engines and turbines, railcars and other heavy equipment will seerenewed recovery through 2012 to levels likely below 2006 to 2008; 2011 gains will likely bestronger than previously expected due to tax write-offs. Will demand be borrowed from 2012?

– Steel production follows heavy equipment and infrastructure spending.• Electrical markets probably resume growth post 2010 driven by improving capital spending trends

and the initial recovery of both residential and non-residential markets.• Energy/Alternative Energy market growth awaits resolution of Government policies and priorities• Farm equipment end market demand growth dependent on global economic growth, global demand

and weather. Growth likely in 2011 and 2012 as recent global weather issues have tightened globalsupplies amid rising demand. Potential for shortages exists!

23 Source: Emerson

MANUFACTURING INPUT COSTS ARERISING SIGNIFICANTLY

FY11Y/YGrowth FY12Y/YGrowth

COHR 29% 7%

IPGP 23% 12%

IIVI 41% 10%

NEWP 11% 7%

RSTI 34% 10%

CYMI 19% 11%

CGNX 32% 12%

ESIO 71% 18%

OCLR 27% 12%

FNSR 54% 20%

FLIR 21% 10%

JDSU 32% 12%

Wall Street Expects Photonics Companies toHave Healthy Growth Through 2012

Thomson, LongbowEstimates

Machine Tools:

SURPRISINGLY STRONG RECOVERY IN 2010, 2011 LOOKSPRETTY GOOD

MACHINE TOOLS: A SURPRISINGLY STRONGREBOUND

STRONG UPTURN IN 2010 AFTER 58% DECLINE LASTYEAR WITH METALCUTTING DOWN 61%

UPTURN DRIVEN BY BIG STEP UP IN FOREIGN DIRECTINVESTMENT, AND A DOUBLING OF SPENDING BYAEROSPACE AND CONSTRUCTION EQUIPMENT COMPANIES

REBOUNDING SHARPLY OFF DEEP TROUGH,ALMOST BACK TO 2008 LEVELS

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100,000

200,000

300,000

400,000

500,000

600,000

Machine!Tool!Consumption 3!month!avg. 12!month!avg.

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MACHINE TOOLS: A SURPRISINGLY STRONGREBOUND

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

Metalcutting $2,369 $1,906 $1,737 $2,775 $2,935 $3,703 $3,982 $3,897 $1,510 $2,958 $3,801

% Ch -33% -20% -9% 60% 6% 26% 7.5% -2.1% -61% 95.9% 28.5%

Metalforming $347 $345 $295 $366 $397 $395 $441 $501 $236 $210 $254

% Ch -45% 0.5% -15% 24% 8% -0.5% 12% 13.5% -53% -11.0% 21%

Total $2,716 $2,251 $2032 $3,143 $3,332 $4,098 $4,423 $4,398 $1,746 $3,168 $4,055

% Ch -35% -17% -10% 55% 6% 23% 8% -0.5% -60% 81.4% 28%

• Machine tool markets should still see reasonably stronggrowth into 2011 as they climb out of deep hole but stillmay not even be at 2006 levels until 2012

SEMI EQUIPMENT:

After 2-year Decline, Sales Doubling; Does theCycle Extend to 2012?

Semi Equipment Book-to-Bill Falling, but CycleLikely Taking a Breather

• 2-yr decline, incl. a precipitous drop in ‘09 (-46% y/y) resulted in severe inventory depletion in channel• Talk about bullwhip effect! Semi equipment is roaring back in 2010• Book-to-bill falling since July peak and under 1 since November, so the cycle’s over right????• Not necessarily

– Likely just a pause as industry digests the surge in capex spending and inventory levels more in-line withdemand

– Increased spending coming from Intel, TSMC, GLOBALFOUNDRIES, etc. likely flows through by 2Q-3Q2011

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Growth Moderates in 2011/12 After 2010 Surge

• Trends supporting growth– Technology upgrades, e.g. smaller feature sizes– LED’s look “bright”– Display technologies (smartphones, iPod/Pad’s, TV’s): LCD’s, OLED’s– Solar (crystalline as well as thin film)

• Equipment industry likely more than doubles in 2010 vs. 2009 in which it experienceda 46% drop

• According to SEMI, only modest 4% growth in 2011; BUT, this was Novemberforecast, since then Intel, TSMC, others have significantly increased expected capitalexpenditures likely closer to double digit semi equipment growth in 2011

– Gartner anticipated slight drop in 2011 semi capex spending in 4Q10, but now +10%• Current cycle peak expected in 2012—roughly 2006 levels

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inbillions

EquipmentType 2006 2007 2008 2009 2010E 2011E 2012EWaferProcessing $28.74 $31.95 $22.03 $11.84 $28.11 $30.19 $30.83Assembly&Packaging 2.46 2.84 2.04 1.41 3.96 3.76 4.08Test 6.42 5.06 3.45 1.55 3.59 2.97 3.31Other 2.85 2.92 2.00 1.11 1.88 2.03 2.30TotalEquipment $40.5 $42.8 $29.5 $15.9 $37.54 $38.95 $40.52Y/YGrowth 23% 6% ‐31% ‐46% 136% 4% 4%

SEMI(Nov30,2010forecasts)

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Automotive

THE UGLINESS IS OVER; FOR NOW IT’S JUST UGLY(BUT GETTING BETTER!)

SALES CYCLE IS IN MASSIVE DECLINE

SOURCE:DESROSIERSAUTOMOTIVE CONSULTANTS34

35SOURCE:DESROSIERS

AUTOMOTIVE CONSULTANTS

AUTO INDUSTRY FACES SOME DIFFICULT YEARS

OE GLOBALOEMPRODUCTIONREGION 2008 2009 2010EDETROIT3 16.6 11.8 13.3EUROPEOEM 18.6 15.9 16.9JAPAN/KOREAOEM 21.1 17.5 19.9OTHER(INDIA,CHINA) 10.4 9.6 10.6

TOTAL 66.7 54.8 60.7 Source:CSM

YearNAFTAPRODUCTION

(inmillions)

2004 15.8

2005 15.75

2006 15.25

2007 15

2008 12.6

200E 8.5

2010E 11.5‐11.8

2011E 12.5‐13

European build 2009: 15.9 Million, -25% 2010E: 18.0 to 18.2 Million 2011E: 18.0 to18.6 Million

Markets Outlook: Finding the New “Normal”

Presentation to Photonics Webinar

March 29, 2011

D. Mark Douglass, Vice President, Longbow Research

Special thanks to Eli Lustgarten, Vice President, Longbow Research

37