II-VI Inc (IIVI) 2005 Q4 法說會逐字稿

[OPERATOR INSTRUCTIONS] At this time, I would like to welcome everyone to the II-VI Incorporated fiscal year 2005 fourth quarter and year end conference call. [OPERATOR INSTRUCTIONS] Mr. Creaturo, you may begin your conference.

Thank you, Vonda (ph), and welcome to the fourth quarter fiscal 2005 II-VI Incorporated investor teleconference.

As a reminder, this teleconference is being recorded on Tuesday, August 9th, 2005. The forward-looking statements we may make during this teleconference speak as of today and we do not undertake any obligation to update these statements to reflect events or circumstances occurring after today.

Joining me today is Fran Kramer, our President and COO.

The prepared comments for today's teleconference include a review of the fourth quarter and full-year financial results and a business and operational review. Following these prepared comments, we will conduct a question-and-answer session.

Total company bookings for the quarter ended June 30th, 2005, were $50.4 million and increased 10% as compared to the same quarter last year. Infrared optics bookings increased 16%. Near-infrared optics bookings decreased 36%. Military infrared optics bookings increased 9% and the Compound Semiconductor Group bookings increased to $6.7 million as compared to $2.3 million in the same quarter last year.

The results for the three months ended June 30th, 2005, include a full quarter of the operations of the company's subsidiary, Marlow Industries, Inc., which was acquired in December 2004. For the quarter, Marlow recorded $6.9 million in bookings.

Bookings are defined as customer orders received that are expected to be converted into revenues during the next 12 months. Bookings are adjusted as changes in customer demand or production schedules move a delivery schedule out past 12 months.

For the year ended June 30th, 2005, overall bookings were a record $187.8 million and increased 15% as compared to the same period last year. Bookings for the year ended June 30th, 2005, exclude approximately $11.7 million in backlog received from Marlow at the time of its acquisition by the company.

Total company revenues were a record $57.0 million for the quarter and increased 33% as compared to the same quarter last year. Infrared optics revenues for the just-completed quarter increased 16%. Near-infrared optics revenues increased 16%. Military infrared optics revenues 15% and the Compound Semiconductor Group revenues increased to $11.3 million as compared to $3.6 million in the same quarter last year. For the quarter, Marlow revenues were $8.2 million. For the quarter, international revenues accounted for approximately 39% of total company revenues.

For the year ended June 30th, 2005, total company revenues increased 29% to a record $194 million as compared to the same period last year. For the year, international revenues accounted for approximately 40% of total company revenues.

The company's backlog at June 30th, 2005, was approximately $76 million. The components of this backlog include infrared optics at $24 million, near-infrared optics at $14 million, military infrared optics at $21 million and Compound Semiconductor Group at $17 million. Backlog is defined as bookings that have not been converted into revenues by the end of the reporting period.

Gross margin on manufactured products, at 43.2% of sales for the quarter, decreased slightly from the same quarter a year ago, while gross margin on manufactured products for the year ended June 30th, 2005, also at 43.2%, decreased by approximately 1 percentage point from the prior year.

Gross margin for the just-completed quarter was nearly 3 percentage points higher than the third quarter of fiscal year 2005. The higher sales levels, combined with margin improvement from our military infrared optics business unit, were the leading drivers of the gross margin improvement from the prior quarter.

From an overall perspective, the addition of Marlow, since December 2004, has lowered gross margins as the current gross margins at Marlow are lower than the overall gross margin of II-VI before this acquisition.

The infrared optics segment is still experiencing margin pressure due to higher raw material cost, specifically, selenium. During the past quarter, we did not see a significant change in selenium pricing, but the price of selenium remains high at around $50 per pound or about 12 times our pricing from just a few years ago.

Internal research and development expense for the quarter was $1,805,000 and was higher than the same quarter last year in dollars, while the expense as a percentage of sales was on par with the prior quarter. The higher dollar expense is primarily the result of internal research and development at our Marlow subsidiary, combined with more corporate research and development expense. Internal research and development expenses increased during the quarter over the prior quarter by approximately $400,000 due to a higher concentration of company-sponsored, corporate research and development.

Selling, general and administrative expense for the quarter, as a percentage of revenues, was 21.9%, which was about 0.5 percentage higher than the 21.4% level from the same quarter last year. For the year ended June 30th, 2005, selling, general and administrative expense as a percentage of revenue was 21.6%, which was lower than the 22.8% level from the same period a year ago.

Outside professional services relating to Section 404 of Sarbanes-Oxley increased over the prior period and during the quarter the company incurred approximately $250,000 in professional services relating to Section 404 of Sarbanes-Oxley.

From a percentage of revenue standpoint, the addition of Marlow and this business's selling, general and administrative cost structure, has lowered this metric for II-VI as a whole.

Interest expense for the quarter was $373,000, which was higher than interest expense in the same quarter last year. The company had a full quarter of the borrowings used for the Marlow acquisition in the just-completed quarter. The company capitalized approximately $70,000 of interest during this quarter, primarily in connection with the facility expansion that is occurring in Saxonburg, Pennsylvania.

During the quarter, funds on the company's credit facility were borrowed primarily to pay for capital expansions occurring in Pennsylvania, Singapore and Vietnam and also to purchase a non-controlling interest in SemiSouth Laboratories, which will be discussed later.

The majority of the company's debt has LIBOR-based interest rates. The company's weighted average interest rate at June 30th, 2005, was approximately 4.2%.

Other expense for the quarter was $449,000 while other income for the year was $261,000. For the quarter, the other expense reflects several factors, including foreign currency transaction losses as the U.S. dollar strengthened against the Singapore dollar, the Japanese yen and the euro and minority interests from our 25% that we did not own of II-VI Deutschland and II-VI LOT Suisse, our sales and marketing subsidiaries in Germany and Switzerland, respectively, and other expense items. In addition, approximately $100,000 of startup costs for our new Vietnam facility were incurred during the quarter. Other expense was offset, in part, by interest income, earnings from our minority investment in Canadian-based 5N Plus, Inc., and other income items.

Within the last month, the company has acquired the remaining 25% ownership of II-VI Deutschland in Germany and now owns 100% of that entity. The purchase price for this remaining ownership was approximately EUR1.3 million.

The effective tax rate for the quarter was 26.4% and was slightly lower than the 27% effective tax rate used in the first 3 quarters of the fiscal year. The full year effective tax rate was 26.8%.

The current year effective tax rate as compared to the effective tax rate in effect for the previous year reflects a lower tax rate on a substantial portion of our Singapore operations. During the first quarter of the just-completed fiscal year, the company entered into a development and expansion initiative with the Singapore government whereby II-VI Singapore lowered its effective tax rate to around 16%. It is expected that this favorable tax structure will exist for another 2 to 3 years.

Looking at earnings before income taxes, the results for the quarter ended June 30th, 2005, were $9.3 million or 25% higher than the same quarter last year, while the results for the year ended June 30th, 2005, were $34 million or 39% higher than the same period last year.

Net earnings for the quarter were a record $6,830,000 or $0.23 per diluted share. These results compare with net earnings in last year's fourth quarter of $6,024,000 or $0.20 per diluted share.

For the quarter, average shares outstanding were 29,174,000, while diluted shares outstanding were 29,876,000.

Net earnings for the year ended June 30th, 2005, were a record $24,843,000 or $0.83 per diluted share. These results compare with net earnings of $17,337,000 or $0.59 per diluted share last year.

For the year ended June 30th, 2005, average shares outstanding were 29,101,000, while diluted shares outstanding were 29,909,000.

All per share data have been adjusted to account for the 2 for 1 stock split of the company's common shares, which was paid to shareholders of record as of March 2nd, 2005, and distributed on March 22nd, 2005.

As noted in our press release, dated May 18th, 2005, the board of directors of II-VI Incorporated authorized the company to purchase up to 500,000 shares of its common stock, During the quarter ended June 30th, 2005, the company purchased 11,000 shares of its common stock as permitted by Securities and Exchange Act rule 10(b)-18.

As announced on April 4th, 2005, II-VI will be working toward the establishment of a Silicon Carbide substrate manufacturing facility in Mississippi. II-VI will locate this production facility near its silicon carbide epitaxial partner SemiSouth Laboratories, based in Starkville, Mississippi.

II-VI also announced an investment in SemiSouth. This investment consisted of a $2 million loan, which is convertible into equity under certain circumstances for a non-controlling ownership of SemiSouth. This loan is shown as a component of other assets on the balance sheet included in our earnings release.

As noted in our press release, beginning in our fiscal year ending June 30th, 2006, II-VI has implemented Statement of Financial Accounting Standards Number 123 (revised), share-based payment, beginning in the first quarter of this fiscal year. FAS123R required expensing based on a calculated fair value of incentive stock options and this new requirement is expected to reduce earnings by approximately $0.01 to $0.02 per share in the quarter ending September 30th, 2005, and approximately $0.06 to $0.08 per share in the fiscal year ending June 30th, 2006.

This concludes the financial review and Fran will now give a business and operational review. Fran?

Thank you, Craig. The IR optics business achieved record bookings of $26.8 million in the fourth quarter. This is a 16% increase compared to the fourth quarter of last year. IR bookings for the full year finished at $102 million, which was 13% above last year's total of $90.4 million.

The U.S. market showed continued strength, growing 25% year-over-year. The price of selenium has been stable over the past 3 months. The market has accepted price increases associated with the higher material cost for zinc selenide products. Market demand continues to be strong while supply remains short for zinc selenide materials.

The low power optics market is projected to increase more than 15% during the next 12 months. Lower prices for laser marking systems are enabling market share gains against conventional inkjet marking systems. Additionally, new, stricter environmental regulations require phasing out of solvent-based inks. This government-driven initiative is aiding the advancement of laser markers.

A July 19th article in the “New York Times” by Julia Moskin discusses how laser marking technology will replace adhesive-backed labels on fruits and vegetables. Such labels frequently fall off or are very hard to remove. In contrast, laser marking is permanent and is edible, since it is part of the produce.

Since 9/11 the produce industry has been encouraged to develop track and trace technology to allow protection of the produce throughout the distribution chain. Next year federal regulations will require all imported produce to be labeled or marked with the country of origin. Sunkist has already adopted laser marking technology in some of its plants and many other companies are in the testing phase. New applications such as this will ensure continued double-digit growth in the laser marking industry.

Industrial high power laser system builders continue to develop higher power cutting systems. New designs incorporating 6 and 8 kilowatt lasers are being commercially introduced. The combination of increasing powers and a growing installed base will keep optics consumption increasing at a solid pace.

Growth in the U.S. carbon dioxide laser market carried the other segments of the world's CO2 major markets. The U.S. economy is expected to continue its current pace of expansion through 2005. The Asian economies continue to expand, while Japan is experiencing its best-- its best growth in several years. Meanwhile, Western Europe lags other markets with growth projected to be 1% or less.

For our VLOC near-infrared laser optics business unit, fourth quarter bookings were down 36% compared to the same quarter a year ago. This decrease is attributable to the timing of large blanket orders, especially in the UV filter area. Full-year bookings have increased over last year by 11%, heavily driven by the UV filter bookings.

VLOC revenues were up 16% over last year's fourth quarter and were up 32% for the full fiscal year. A little more than half of this growth was in the UV filters. The balance was spread across all the other business segments, with the strongest area being optics shipments into the industrial and medical laser markets, followed by YAG and other crystal shipments into the military market.

VLOC continues to meet UV filter product line ramp-up targets. Capacity expansion continues at both Florida and at our Advanced Materials Development Center in Pennsylvania. VLOC recently expanded its UV filter product offering to include electromechanical assemblies.

During the quarter, VLOC was awarded an initial contract for high-volume optics utilized in ophthalmic medical procedures. This contract will fit well into our Asian manufacturing capacity expansion plans.

VLOC continues to work on increasing efficiencies in both the optics and YAG business segments in Florida. The main areas of focus are thin film coating yields and YAG material utilization.

Our new 35,000 square foot factory, located in the Vietnam-Singapore Industrial Park near Ho Chi Minh City, Vietnam, will be ready for occupancy during the current first quarter of fiscal year '06. VLOC anticipates the startup of manufacturing in the late first quarter or early second quarter.

The Exotic Electro-Optics military optics business segment achieved bookings of $9.5 million in the fourth quarter, up 9% from the fourth quarter bookings last year. Fourth quarter bookings were primarily driven by strong demand for mature products and new orders for advanced targeting systems. Infrared domes, infrared windows, sapphire windows and optical subassemblies made up the majority of bookings for the quarter.

Full-year bookings were $25 million, down from $29.2 million last year. The reduction was primarily driven by timing issues in the defense procurement cycle and increased competition in the military optics market.

Revenues for the quarter were a record $8.3 million, up 15% from the fourth quarter revenues last year. Fourth quarter revenues for core military products were up-- were $6.1 million, up 11% from last year and sapphire products were $1.6 million, down 8% from last year. The reduction was due primarily to delays in shipments of coated sapphire windows for advanced targeting systems due to lower production yields.

Our fourth quarter revenues were impacted favorably by $700,000 as a result of a contract to remove a government-owned large coating chamber from the EEO facility. This represents the final activity for the airborne laser program for our company.

Year-to-date revenues were a record $27.3 million, up 8% from last year. The increase was due primarily to strong demand for core military and sapphire products.

Profitability improved at EEO for both the quarter and full year. The majority of the improvements for the quarter were attributable to the higher margins for core military products and the disassembly and removal of the government-owned large coating chamber. The improvement for the year was due primarily to product mix with a higher percentage of revenues coming from core military products with higher margins.

While the business continues to benefit from strong demand for mature products, the primary focus is on new programs for advanced targeting systems. In the just-completed quarter, EEO received a $950,000 order from the Office of Naval Research to develop enhanced sapphire window products. The order, plus other investments in business systems and product quality, are expected to promote continued growth and improved profitability of the business going forward.

Bookings for the Compound Semiconductor Group were $6.7 million for the fourth quarter and $27.3 million for the year. Both represent substantial increases from the prior periods.

Revenues for the fourth quarter of FY '05 were $11.3 million and revenues for fiscal year '05 were $31.5 million, representing year-over-year growth of 161%. Contributing to the bookings and revenue growth was Marlow Industries, acquired in December.

Our Wide Bandgap Materials Group continued-- continued its focus on the development and manufacture of silicon carbide substrates and recognized $800,000 in bookings and $1.2 million in revenues for the fourth quarter, resulting in full-year bookings of $4.1 million and full-year revenues of $5 million. All the bookings from the fourth quarter were for product with more than 50% of the bookings derived from 4H polytype substrates for power applications.

During the quarter, product revenues represented 55% of total revenues. Over 80% of product sales were derived from shipments of 2- and 3-inch substrates to the RF base station market, reflecting continued development activity and interest in wide bandgap materials in this market segment. The remainder of the product revenue was derived from shipments of 2- and 3-inch 4H polytype substrates.

In the fourth quarter II-VI continued its progress on 2 DoD-funded programs. Material optimization efforts as part of DARPA's silicon carbide initiatives have resulted in improved 3-inch substrates. And MDA AFRL program focused on the development of next generation silicon carbide substrates and has resulted in the growth of 100 millimeter crystals.

The fourth quarter bookings at our eV PRODUCTS division were a negative $900,000, driven by two year-end de-bookings. The order cancellations were for the remaining product on blanket orders. The 2 OEM customers involved recently made decisions to discontinue certain products or product lines for undisclosed reasons.

During the quarter, the unit booked the third year of a research and development contract with the Army, which partially offset the order cancellations. Additional orders were received, resulting in full-year bookings of $5.9 million.

Revenues were $1.9 million for the fourth quarter and $8.6 million for the full year for eV PRODUCTS. The makeup of the revenues included shipments to core OEM customers and medical, industrial and security markets. The division also completed certain activities on the Army research contract.

The unit continues to focus on operational improvements, including increased end yields and reducing cycle times in its crystal growth and sensor fabrication areas.

Our Advanced Materials Development Center continues to support the VLOC subsidiary by ramping up its production of UV filter materials, while continuing its forward-looking work on next generation engineered materials platforms, including the development of ceramic materials for electro-optic and optical applications.

Marlow Industries' bookings for the fourth quarter were $6.9 million. Revenues for the fourth quarter were $8.2 million. Revenues continue to be up year-over-year in 3 target markets, defense, space and photonics, which we call our DSP market, medical and industrial, while telecom was slightly down year-over-year, representing some customer inventory adjustments.

We continue to see strong growth in our DSP and medical markets. Quoting activity in DSP is exceptionally strong due to the replacement and refurbishment strategy of the military, driven by the war in Iraq.

Although the telecom market growth was relatively flat, quote activity has increased. The transition to micro techs for XFP package and tunable lasers continues to increase in the telecom markets.

Our medical market continues to grow rapidly as a result of competitive replacement and the reception of our XLT technology. XLT stands for extended lifetime.

Plans to start up manufacturing in Vietnam are on track to begin in August. Production shipments will commence in September. Also, we are leveraging the Compound Semiconductor Group global procurement to accelerate cost reduction on materials purchased.

In conclusion, fiscal year 2005 was a year of great accomplishments, with revenues up 29% and EPS up over 40%, the combined efforts of all of our employees were evident and we thank them for that.

To repeat the outlook for fiscal year 2006, as contained in our press release, we expect full-year revenues to range from $216 million to $222 million and earnings per share to range from $0.84 to $0.88. The earnings per share guidance estimates the expensing of stock options in fiscal year 2006 of approximately $0.06 to $0.08 per share.

Craig, that concludes my comments.

Thank you, Fran.

Before we begin the question-and-answer session, I would like to mention that these comments and answers to certain questions contain forward-looking statements which are based on current expectations. Actual results could differ materially.

For information about factors that could cause the actual results to differ materially, please refer to the risk factor section of our Form 10-K for the fiscal year ended June 30th, 2004.

Vonda (ph), we are ready for the first quarter.

[OPERATOR INSTRUCTIONS] Pierre Maccagno, Needham & Company.

Heartiest congratulations on the quarter, Craig and Fran. I just wanted to clarify the earnings guidance that you're giving. That includes the expense in the incentive stock options?

That is correct.

OK. So pro forma it would be higher than that?

That is correct. On a basis similar to this year where we did not expense stock options on the face of the income statement, you would want to do that calculation and we did put that $0.06 to $0.08 range. That's our best estimate at this time as far as the impact for FY '06.

And then regarding your guidance for 2006, that kind of implies very small sequential growth second, third and fourth quarter. I mean, are you being like too conservative, maybe, or any reason for that?

I think, again, we're trying to put out guidance that we're comfortable with. We have always done that and I think we're also trying to put out specific guidance for not only the upcoming quarter but also the full year. That's guidance that we've updated since the last time. We've raised that guidance since the last time we gave it back in April.

Again, it's an ongoing process. We look at it each-- each time we have an earnings release and we'll update it accordingly. But we think it's-- we're confident in it and that's why we put it out.

OK. And then regarding your far infrared, could you give a breakdown of the revenues from marking versus high power, approximately?

That's a pretty tough one for us to nail down, because we're selling-- small optics are usually into the marking field and high power would be something that would be larger optics, but the split we really don't track. I will take a guess at small optics in the 15% to 20% of our total IR optics business, which is a little over $100 million business. So 15% to 20%, I'm thinking, is in the small marking side.

That market is growing quite fast?

Yes.

And then going forward, for SG&A expenses, I mean, how do you expect that-- I would expect that to drop, correct, after you've acquired the remaining German distributor and also with manufacturing in Vietnam. Can you give an idea of how this would impact operating expenses and gross margins?

Well, I think you're right. We're expecting to, as Fran mentioned in his comments, starting to utilize the Vietnam manufacturing. We, I think, have talked about on previous calls starting to do some diamond turning, also, work, starting to do some of that in Singapore during FY '06 and finishing out the facility expansion, primarily in the coating area, that we have here in Saxonburg, Pennsylvania.

So we're seeing all those as the long-term right decisions to make for improved gross margins. I would say over the next 1 to 2 quarters you probably won't see a whole lot of improvement from all 3 of those initiatives, but long term we know it's the right-- the right moves to make.

As far as SG&A, we think we shouldn't see any significant changes there in FY '06. We'll have a little bit better-- we'll have Marlow in there for the full year. That should, potentially, pull the SG&A down slightly. But we shouldn't see any drastic changes in that-- in that metric for the company. We should be around the 22%-- 21%, 22% of sales range that we have been for the last few quarters or so.

And finally, what was CapEx for the quarter and what do you expect that to be for fiscal '06?

CapEx for the just-completed quarter we spent $7.4 million and for the upcoming year -- maybe I should step back for just a second. And then for the full year we finished out the year just a tad over $19 million. We would expect the capital spending to not be quite up to that level in FY '06. The 3 items that I mentioned -- Vietnam, Singapore and coating expansion here in Pennsylvania were big projects and most of those dollars were spent in FY '05. So we're thinking about capital spending that would maybe be 80 to-- 80% of that number, somewhere thereabouts.

Tim Slevin, Parker/Hunter.

Just a couple of quick questions and then I'll jump back into queue. The-- just going back to SG&A, in terms of 3Q to 4Q and the sequential increase, that was a pretty sizable sequential increase and I was just wondering if you could call out some of the major factors there?

Yes, one of the major factors, Tim, finalizing and getting through the process for the Section 404 Sarbanes-Oxley. That was a piece that was in there. I think, also, too, we have a fair amount of our bonus programs that are tied to profitability so if the profitability is up, the contribution to those bonus programs on a worldwide basis is up. Those would really be the 2 largest items that are in there.

And sequentially the bonus program would be the biggest one?

I think, yes. I think it would be-- that probably would be just slightly ahead of the Sarbanes-Oxley cost.

So it's probably more like, I guess, FY '03 or something in terms of a fourth quarter catchup on bonus accruals because of very strong performance in the final quarter of the year?

That's correct. Again, a lot of that-- the bonus programs are, again, bottom-line focused and profit-driven and, again, we did have an excellent quarter here we just ended so we had to make sure we accrued enough bonus dollars for that.

So you expect some moderation sequentially going into the first quarter in terms of SG&A?

That is correct.

OK. And is 404 largely done at this point?

Yes. We will be filing all of our information as part of our 10-K. It's been a long process, but we're seeing the light at the end of the tunnel and that information will be in our-- the 10-K that we'll file in early September.

OK. Looking at contract R&D, you had a very substantial increase sequentially and was that all the large optics coating deconstruction?

Actually, the increase was really a result of more corporate research and development efforts. I think the increase you're looking at was about $400,000 quarter-over-quarter and a majority of that really is due to some activities that we have going on here in Saxonburg, Pennsylvania, that either a -- we took on a little bit more activity than, say, in the previous quarters that's company sponsored, or b -- we weren't able to charge as much of that as we had in the past to outside contracts.

So we're doing a little bit more. We're getting a little bit less-- having a little bit less available to charge out to contracts. The combination of those 2 was the net-- resulted in the increase that you're seeing.

The increase in contract R&D.

In internal R&D.

Right internal. I'm sorry, you had a really big increase in contract R&D.

I'm sorry. Yes. I'm sorry, Tim, I was answering your question on the internal R&D line.

OK.

You're exactly right. The finalization of the shutdown of the large optics coating facility at Exotic, that did help out on the contract sales line and also in the contract-- that gave us some more margin, as well, too.

So you don't expect that kind of margin to be repeated in future with any consistency, over 35% margin on contract R&D?

No, we definitely do not. I mean, the full-year margin was about 28%. Historically that metric for us has probably ranged right around 20%-ish, plus or minus, so that's about where we would expect it going forward.

OK. And in terms of the total amount of contract R&D, is that dropping next year, you think, compared to the $9.5 million or $9.4 million?

It's probably going to be a similar level. I think it's probably going to be, as a percentage of our sales, of our overall sales, it's probably going to be slightly lower.

Right.

And we see the continued growth in the other-- in the businesses-- in the product sales, if you would, but I don't think it's going to be drastically different than the year we just completed, but as a percentage of sales it should go down from the roughly 5% it has been the last couple of years maybe down to 4.5%, 4%, something like that.

OK. And in terms of absolute dollars, it may increase a little bit. Not much, but--

Tim, the large optics coating facility, that $700,000, that will disappear, but we have the other contract that I mentioned, the sapphire development program from ONR that's probably going to step in and replace it. The other programs at VLOC and our WBG and eV will run about the same rate, so I think your comment that we're going to be about the same number or a slight hair up is pretty good.

OK, great. Looking at Marlow, I just wanted to try to confirm. You all did about $31 million at Marlow for the fiscal year, if I-- I'm not talking about the contribution to revenues, but just how Marlow performed quarter by quarter in the fiscal year?

On an annual basis, Tim? Are you asking that question?

Yes, FY '05. Yes.

They would have run at about-- maybe just a little bit higher. That running rate for the 7 months annualized would have, maybe, been about $33-$34 million, somewhere thereabouts.

Yes, I was just stepping through and looking through on your pro forma stuff and as I was able to call it out, it looked like it was about $31 million compared to $22 and change the prior year, approximately.

Yes, when we acquired Marlow back in--

It was about $26, right?

Exactly. And so we've seen a nice increase. They've done a really nice job since the-- since we acquired them and you're right, now the running rate is now in the low $30s and not the high $20s like it used to be.

OK. And so the very sharp growth that you all saw year on year in Marlow you don't expect to-- and I guess, you don't expect that to-- you expect that to moderate somewhat, I presume?

Yes, we would expect them-- I mean, one of the attractivenesses to Marlow for us was that it is a business with long-term growth potential and we're not expecting-- like you're saying, we're not expecting as steep a growth rate as what we have seen in the past, but definitely we're expecting big things from them. So--

OK. Do you expect-- do you see much seasonality in going from fourth quarter to first quarter for Marlow? Does that tend to be fairly flat or is it down? And actually, the other question I had is Marlow exceeded my expectations for this quarter and I guess you all called out the DSP business particularly and that was with the absence of the large contract-- the large contract revenues that you get seasonally in the third quarter. So I mean, it was down sequentially but it was still much stronger than I expected and was that just a broad-based kind of demand in DSP?

In Marlow, in general, I think we could expect the third quarter to be the strongest, just a hair let up in the fourth and first and that's not on DSP, but on this commercial product making Mosquito Deleto, Mosquito Magnet, those products. DSP in general, though, the comment that I made was that it is-- it's picking up very nicely, so that is offsetting the normal trend, I think, and we think that could continue for 2-3 quarters, especially with this replacement work from the war in Iraq.

OK. Just to confirm, the $1.2 million in revenues for WBG and I missed that for eV, the revenues?

$1.2 million for WBG for the quarter and for eV $1.9 million for the quarter for revenues.

$1.9 million. So you had a nice sequential growth in eV, even with the de-bookings. Is-- what are your expectations in terms of prospects for those 2-- for those 2 groups for the coming year?

Let me talk about eV first. I think we might have just a hair let up in the first quarter because of how these de-bookings will fall into the first quarter, but overall the year looks good for us in our eV PRODUCTS.

Remember we have the business in baggage inspection that we'll be getting a nice prototype order on. We have the medical business with GE Lunar, with osteoporosis scanning, Neoprobe, the cancer business, breast cancer probe and all those businesses, the 3 or 4 major-- small animal imaging business we're in, they seem to be steady to improving. We had had a little bit of a slacking by GE Lunar. That's improving, I think. There is a new product that our product is in that will be previewed at RSNA in early December, so we think that'll bring it on. So eV is now taking a turn upward, but we will have a lighter first quarter.

The second comment, having to do with WBG, both the RF and the power markets we're shipping into. I made the comments, I think, that the 6-inch or the 6H semi-insulating product we're shipping 3-inch diameter product, which is going well. The power product, the 4H N-type-- 2-inch, we're not to 3-inch there. I think we need to move up our size there.

In all of these markets -- power and RF -- we are challenged by the competitor, Cree, who's out there and working hard to get our products in place and we're in good shape with 2 or 3 customers and then we have a few, let's say the customers in Japan, that we have to improve our product in order to get into their order book and we're targeting for a good shot at being qualified there in the late first quarter, early second quarter.

Great. So if you look at eV you had a little bit-- or, excuse me, at WBG you had a wee bit of kind of softness sequentially but it's going to be a bit lumpy for a while until the product revenues continue to grow. Is that a fair statement?

That's a good way to describe it.

OK. And do you-- do you see the first quarter being a little bit up for them or it's just hard to discern at this point what the timing is like?

I think they're the same. It's probably going to be down a little bit, first quarter over fourth quarter, and it, again, has to do with just what you said, the lumpiness of making product shipments when we're in a startup of all our customers.

RFMD, Emcore, Fujitsu, Hitachi -- they're very-- Fairchild -- they're lumpy and we're now moving more toward product taking more of our revenues, a hair less in contract R&D. So it'll be a little lumpier and I think first quarter might be down a little.

OK. And I guess my final question is really the-- looking at the Mississippi facility, I was wondering about the expected scale you have in CapEx there and just confirming the approximately mid-teens millions in CapEx for FY '06. That still seems-- with the completion of a lot of these major facility upgrades, that still-- that seems kind of heavy and--

Let me address that. Our number one challenge around the company at 3 or 4 of our divisions is our coating plants.

OK.

That's in California or in Singapore or down in Florida. We need to upgrade our coating plants and we're really now moving from bricks and mortar into machinery and equipment. So we have-- within the next month 2 new coating machines arriving in Florida at our VLOC subsidiary. We're doing the same thing in our California factory and here in Saxonburg moving in a couple machines that have been being built. So lots of that money will be in the coating plants throughout our different divisions.

And the other portion of your question, the Mississippi factory, that's probably second and third quarter would come together. It's not going to be a large operation at the onset. I do not know the exact capital amount. Do you have that, Craig?

I think it's not as significant. We are not buying a facility down there. We would just be renovating and leasing a facility down there. So it's not going to be a very large capital expense.

And we are planning to move machinery and equipment from Saxonburg, where we've done a lot of the development, that we'll move to Mississippi and some other machinery and equipment from our New Jersey development center to Mississippi. So most will be, probably, capital transferred. I could think a quarter million to a half million of our own capital going in down there.

OK.

That's second and third quarter.

And are you going to be locating-- co-locating a lot of development there, as well, in Mississippi? Or is development locus still going to be remaining in New Jersey, mostly?

Most material growth, crystal development and so on, it'll all be done in New Jersey and the site in Mississippi will be a wafer processing and it'll hand it right off to our partner, our customer, SemiSouth, which will be right on the same campus.

I got you. Got you. Great. So and just coming back to the CapEx question regarding coatings, again, you expect to see those as kind of-- those are investments that should deliver improvements in margin?

Yes, they're big yield improvements. That's why we've, maybe-- everybody has a weakness and our weakness would be our coating yields, which affects our on-time delivery, our process consistency. I think we lead, maybe, industries in how we do, but we have to do better.

[OPERATOR INSTRUCTIONS] Dave Kang, Roth Capital.

Nice quarter. Just a couple of questions. First, on your backlog, it was down from third quarter's $82.5 million. Is that just seasonality?

I think, again, it's just a direct result of the lower bookings that we had this quarter compared with the higher sales revenues that were generated this quarter. So we're feeling comfortable that it's still a very, very decent level at $76 million, Dave, but we're not-- it's really just a direct result of the quarter's activities in bookings and revenues.

We see a little bit of seasonality in first quarter. We usually have a little bit lower overall shipments in our first fiscal quarter. But other than that, really haven't seen too much seasonality in the backlog. Again, I think it's just directly attributable to the bookings and the revenue for the quarter.

I think about $1.9 of that, Dave, would be the order cancellation or booking-- de-booking that we took in eV, which had been on our books for 2-3-4 years and not moved. So you might compare an $80 to a $76 as opposed to $82 to $76.

Got it. If you look at some of the public laser system companies' results for the June quarter, I guess most of them were either flat to down. Certainly nobody was up sequentially like you guys. I'm just wondering whether they're building inventories at your customer level?

Oh, I don't feel our customers are. We're tuned in just in time to a major-- Trumph and Rofin-Sinar and I think most of those play it very close and we're kept real close. So I'm not suspecting that's happening in the industrial CO2 side of the business.

Where we are-- the order ramp-ups that we're having, like going from 140 sets a month to 160 for the UV filter business, that's a military product that's going very well and most of-- the ones that are ramping quickly I think we see right where they're going into their assembly line, military or commercial.

Got it. And lastly, on your Compound Semis, you had a loss of $144,000, was Marlow profitable? And if that is the case, where did the loss come from? Is that from eV or silicon carbide or both?

Yes, Marlow did make a contribution for the quarter. They have made a contribution in every period that we have acquired them. The loss has come from eV PRODUCTS and also CSG, probably in about equal parts, Dave.

At this time, there are no further questions. Mr. Creaturo, are there any closing remarks?

If there are no more questions, I would to thank everyone for participating today. Our next earnings release for the quarter ending September 30, 2005, is currently scheduled for Wednesday, October 19th, with a conference call to follow the next day, Thursday, October 20th. Thank you for participating in today's conference call.

This concludes today's II-VI Incorporated fiscal year 2005 fourth quarter and year end conference call. You may now disconnect.