II-VI Inc (IIVI) 2010 Q1 法說會逐字稿

Good day and welcome to the II-VI, Inc. first quarter fiscal year 2010 conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the conference over to Mr. Craig Creaturo, Chief Financial Officer and Treasurer. Please go ahead, sir.

Thank you, Cindy, and good morning, everyone. I'm Craig Creaturo, Chief Financial Officer and Treasurer of II-VI, Inc. Welcome to the first quarter fiscal year 2010, II-VI, Inc. investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, October 20, 2009.

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.

Thank you, Craig. I am Francis Kramer, President and CEO of II-VI, Inc.

In the press release we reported how our results for the second quarter of fiscal year 2010 compared to the first quarter of fiscal year 2009, which was the last quarter of normal results before the economic crisis heavily affected our business. When the first quarter 2009 results are adjusted to remove the tax benefit reported in that quarter, our year-over-year EPS results declined 53% on a sales decline of 25%.

The better news we have to report is that on a quarter-over-quarter basis we have begun to see a reversal of this declining trend. The first-quarter results versus the fourth quarter of FY '09 show an increase in bookings of 28%, while revenues and earnings held steady. We believe we have seen enough of a trend to release our first full-year fiscal year 2010 guidance for sales of $264 million to $274 million and EPS of $0.85 to $0.95 per share.

The bookings increases over the quarter ending June 2009 were led by $7 million more in bookings from our Military and Materials business that was split 60/40 between our PRM and EEO businesses, and an additional $5 million from our industrial focused Infrared Optics business.

Fiscal year 2010 first-quarter IR Optics bookings compared to fourth quarter fiscal year '09 increased 22% due to improved demand across most markets with particularly strong demand in the China and German markets. Orders from domestic OEMs for the first quarter we down compared to the fourth quarter of '09 because the just-completed first quarter did not experience the same level of new blanket orders that were received in the fourth quarter of '09.

Remember that in the fourth quarter some of the orders we received have been delayed from earlier in the year due to low demand and high inventories. Orders from high-power CO2 laser OEMs continue to be impacted by poor laser machine utilization rates and soft capital equipment purchases. Low-power OEMs are seeing signs of a recovery, but they have very poor to no visibility beyond the quarter. Cost reduction activities conducted by low-power OEMs have led to increased optics price pressure.

The North American aftermarket, which is a leading indicator for our industrial business, has had five consecutive months of increased bookings after hitting a low in April. Quarter one bookings were up 25% compared to the fourth quarter of '09, but this still is down from the first quarter of '09. We continue to capture market share in the aftermarket with aggressive pricing.

The zinc selenide and zinc sulfide material orders for the first quarter increased 18% compared to the fourth quarter of '09. However, this is down 4% compared to the first quarter of '09, due to delays in large program orders. We have penetrated several target accounts, resulting in substantial market share gain. We began offering large area multi-spectral zinc sulfide windows in the first quarter to some of our key military customers and prospects. This new capability will enable us to address programs previously not available to us. Efforts that began in fiscal year '09 to penetrate the European material markets have started to yield success with a sizable order for multi-spectral zinc sulfide blanks.

Military optics orders were strong in the first quarter of FY '10. They were 44% greater than the first quarter of '09 orders. Military optics orders continue to be driven by orders for imaging and laser optics used in infrared countermeasure systems.

A focused effort on growing our business in the IR imaging market is starting to reap awards and the first quarter received a strategic order for prototype thermal imaging optics with significant volume potential from a leading commercial and military infrared imaging system manufacturer in the US. We also received a large prototype order from a leading European manufacturer of IR imaging systems.

Total European bookings for the first quarter were 31% greater than the fourth quarter of FY '09. The marked improvement reflects increasing high-power laser machine utilization rates and subsequent increasing optics replacements. Production rates of new machine builds remains low at all European high-power OEMs. Their optics demand has gradually increased, driven by service and spare parts requirements and depleted inventories. Two of our largest European OEMs placed their highest monthly order amount since November 2008 in this quarter.

Japan bookings finished the first quarter of FY '10 down 50% from the first quarter of '09, yet remarkably 24% greater than the fourth quarter of FY '09. While the low-power CO2 laser market is recovering nicely, the high-power OEMs segment continues to languish. New high-power machine production rates remained down 77% from their running rate a year ago. There are some positive signs in Japan with a few of the OEMs increasing their machine build plan for the second quarter. The low-power recovery is primarily driven by increasing demand for electronics and related process equipment.

China orders finished at a record high for the first quarter. This high watermark reflects a 47% increase over the first quarter of FY '09 and a 157% increase over the fourth quarter of FY '09. Continued strong optic orders are anticipated in the second quarter to satisfy a healthy China electronics market.

In summary, for the CO2 Optics business, the core business performed much better than projected for the first quarter. Customer plant shutdowns over the summer months did not have as much of a detrimental effect as was anticipated. Equipment manufacturers and job shops continued to work steadily during the July-August time period, although at a much lower rate than the first quarter of last year. The low-power optics segment has started to recover.

Now, the quarter-over-quarter bookings at our VLOC near-infrared business increased 31%, due to a large follow-on order for UV filters that was in excess of $8 million. VLOC continues to meet or exceed the required schedule for deliveries of UV filter assemblies. This order will sustain current production levels through the balance of fiscal year 2010. As mentioned in the previous quarter, our VLOC near infrared business also has experienced a significant increase in other military programs, driven by optical subassemblies and components used in laser-based rangefinders, target designators and illuminator systems. During the quarter VLOC has been addressing the challenges of this military business ramp up and is focused on process and capacity improvements.

An example of this was the qualification of a new barge-capacity coating machine dedicated to military-related coatings. During the quarter the commercial near infrared business started to receive more positive indications from customers regarding inventory levels and modest increases in demand. This was led primarily by increased optics and YAG orders serving the industrial market.

In regards to revenues, Q1 declined 12% from the fourth quarter of FY '09. However, we are now projecting nearly a 20% increase in the second quarter over the first quarter revenues, as the military programs continue to increase, including a title III R&D contract and the ceramic YAG area.

In the Compound Semiconductor Group bookings increased quarter over quarter by 7%. At the Wide Bandgap Materials group, first-quarter bookings increased 258% quarter over quarter. WBG booked two large annual blanket orders for semi-insulating silicon carbide wafers that were received earlier than expected from two US customers, due to increased demand in both the RF and power segments.

Product revenues were up quarter over quarter 25%. The growth in product revenue was a result of a greater than 50% increase in total wafers shipped during the first quarter versus the fourth quarter of '09. This increase was derived from three-inch semi-insulating wafer shipments and 100-millimeter 4H power wafer shipments to Japan OEMs. The increase was also due to growth in demand from our existing US RF customer base. In addition, we are preparing to ship initial 100-millimeter 4H our wafers into a major European OEM for process qualification. We expect this increase in demand to continue into the second quarter and have adjusted our manufacturing plan to meet this anticipated growth.

Meanwhile, revenue derived from government contracts was on target for the quarter.

During the first quarter, we continued to focus on further operational and technical improvements that will enable us to meet the anticipated growth in our business. Some of the operational changes included bringing additional furnace capacity online, decreasing cycle times in both fabrication and polishing and continued yield improvement with the most significant progress made in crystal growth.

At Marlow Industries, the first-quarter bookings were down 18% quarter over quarter and revenues were down 29% from our record quarter, ending June 30, 2009. The primary drivers for the revenue decrease included a major industrial follow-on order of $1.6 million that has been delayed, a $400,000 reduction in demand in the medical diagnostic market by our two largest medical customers and a reduction of $600,000 in our Defense and Space market segment. Overall, our Defense bookings and revenues for Marlow are down from fiscal year '09 due to program cycles and overall demand reductions that are resulting in part from the wind-down of Operation Iraqi Freedom.

Although telecom demand continues to increase, we are limited in capturing the upside opportunities due to a critical piece part supply constraint. We are seeing aggressive pricing in the telecom market, particularly inside of the expanding China market. We continue to make positive progress on new major industrial programs, which we expect will contribute to revenues in the second half of the year. The automotive market demand has been volatile after showing some positive signs of recovery during the quarter ending June 30, 2009. We are continuing to expand our manufacturing capacity in Vietnam to address our forecasted growth for the second half of fiscal year '10. We continue to transfer non-defense products from Dallas to Vietnam to increase our global competitive position.

Challenges at our Marlow Industries units are revenue growth in the defense market and demand in the medical and automotive markets.

The final business to comment on is the Military and Materials business segment. At PRM, bookings and revenues exceeded expectations for the quarter. The strong bookings performance is due partially to a higher market price for selenium and an increase in orders in both the selenium and tellurium product lines. Higher revenue is attributed to increased ancillary sales of precious metals, which are extracted during the selenium and tellurium refining processes. Selenium orders have increased primarily due to demand during the quarter from China's glass and steel sectors and globally from animal feed applications. Increased orders for tellurium are mainly from new customers that were acquired within the last two quarters. PRM currently has approximately half of the second-quarter through fourth-quarter fiscal year 2010 projected revenues in their order backlog.

As previously mentioned, selenium and tellurium are part of the minor metals market, and historically there has been significant price volatility. These prices impact both the cost we pay for our raw material and our end product selling price. The tellurium price index remained stable at $130 per kilogram during the quarter. The increased demand and tight raw material supply of selenium attributed to a 57% increase in the selenium price index, from $18.50 per pound to $29 per pound throughout the quarter.

Raw material sourcing continues to be a critical success factor of the PRM business. Inventory of raw materials were again in line with our demand requirements and the first shipment of tellurium feedstock from a new long-term supply contract with a large copper refiner was received by PRM during the quarter. However, the situation of tight supply of tellurium and selenium raw materials and higher pricing from increased competition reported last quarter continues as copper refining production, which is the main source of tellurium- and selenium-containing feedstocks, remained suppressed.

Also during the first quarter, it appears the Chinese built inventories of these materials in response to their stimulus package, which is not expected to continue.

The highlights at Exotic Electro-Optics include bookings revenues and profits that exceeded our expectations. First-quarter bookings and revenues were 38% and 22% above the first quarter of FY '09 levels, respectively. First-quarter revenues were 1% above the fourth quarter '09 levels and represented record revenues for the eighth consecutive quarter.

In the sapphire business, the first two sets of sapphire windows for low-rate initial production two, which we call LRIP 2, for the JSF program were completed. EEO is on schedule to deliver one set per month, consisting of seven sapphire windows for the LRIP 2 contract for the remainder of the fiscal year. Concurrently, EEO will be increasing production to two sets per month for the LRIP 3 contract, starting in the fourth quarter.

During the quarter EEO booked a large optical components and assemblies order for the lightweight laser-designated rangefinder called LLDR program from Northrop Grumman. The order consists of multiple optical components and two optical assemblies to support production of this lightweight portable rangefinder used to designate targets for laser-guided and GPS-guided weapons for the U.S. Army. In the ATP program sapphire production output declined in the first quarter from previous levels due to fabrication issues. Fabrication issues were resolved in September, and we expect to recover ATP panel output back to the forecasted level for the entire second quarter. Fortunately, the ATP shroud shipments remained well ahead of contract delivery dates, so the shortfall did not impact our performance rating with our customer.

Craig, in summary, I'm reporting that our markets are improving as we look out for the remainder of the fiscal year, allowing us to project our full-year fiscal year 2010 results. While the movements of the worldwide economy may continue to be volatile, we are ready to return to more of a growth mode in most of our businesses. That concludes my comments.

Thank you, Fran. Here are the items I would like to highlight before we open up the question-and-answer portion of the call. As described in the segment information from continuing operations in the press release, bookings from continuing operations for the quarter ended September 30, 2009 were $73.3 million. This was the first time since the quarter ended June 30, 2008 that our bookings outpaced our revenues, causing our backlog to increase.

This level of bookings, combined with the revenues recognized for the quarter, increased the overall backlog from continuing operations at September 30, 2009 to $111 million. The components of the September 30, 2009 backlog from continuing operations were Infrared Optics at $26 million, Near-Infrared Optics at $23.5 million, Military and Materials at $42 million and Compound Semiconductor Group at $19.5 million.

The first quarter of the fiscal year is normally where we have limited cash provided from operating activities and many times have had cash used for these activities. The just-completed quarter was a departure from this normal pattern and was the highest first quarter ever in terms of cash flow from operations at over $15 million.

Increased collections on accounts receivable and improved inventory management were two key drivers for the cash flow performance for the quarter. That level of cash from operations allowed us to make our initial $2.9 million investment in our recently announced China joint venture. This investment represented one half of the cash we are committed to providing for the joint venture for our 40% noncontrolling investment of this new entity. Capital spending payments of consideration for prior acquisitions and debt payments during the quarter totaled another $4.1 million of cash uses.

By the end of the quarter our cash balance had increased by $9.5 million or about 10% to push our cash total to over $105 million.

The financial guidance in today's press release shows our current view of the expected performance for the quarter ending December 31, 2009 for both revenues and earnings per share. The press release also introduces our first guidance for the full year ending June 30, 2010 for revenues and earnings per share. The markets that we service, including the industrial markets, continued to improve, and our customers appear to be more positive and longer-term with their outlooks. This has given us the ability to return to providing full-year guidance. Assuming our visibility remains the same or improves, we believe that we should be in a position to continue to provide full fiscal year guidance in the future.

Two items from the income statement that are worth highlighting for both the just-completed quarter as well as our full-year guidance are in the areas of share-based compensation expense and income tax expense. The non-cash share-based compensation expense for the quarter was $2.4 million pre-tax and was driven higher by the granting of certain vested stock options during the quarter and a lower actual stock option forfeiture rate than was estimated for stock options that became fully vested during the quarter. These two items accounted for approximately $1 million pre-tax of expense for the quarter.

For FY '10 the Company expects share-based compensation expense to be approximately $6 million pre-tax, which would be up from the $5 million pre-tax level from FY '09. The effective tax rate for the quarter was 25% and is expected to approximate that level for FY '10 based on our current income projections and the expected worldwide mix of earnings in the countries where we transact business.

In the first quarter of the prior year, the low effective tax rate that we recorded was driven by a favorable tax benefit relating to the reversal of unrecognized tax benefits resulting from the completion of the Internal Revenue Service's examination of certain of the Company's federal tax returns, which was partially offset by additional tax exposures at certain foreign locations. The net favorable impact of these changes in the first quarter of the last fiscal year was approximately $3.6 million or $0.12 per share diluted.

Fran, this concludes my prepared remarks. 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 these actual results to differ materially, please refer to the risk factors section of our Form 10-K for the fiscal year ended June 30, 2009.

Cindy, we are ready to begin the question and answer session.

(Operator instructions) Avinash Kant, D.A. Davidson & Co.

A few questions -- you did give us some guidance about the tax rate for the fiscal year '010. That's roughly 25%. Is there any reason to expect that will change going further?

I would say it's probably not going to be drastically different. We will come up, as we -- in FY '10, that will be the last year that we have a tax holiday in Vietnam, so we will start paying some taxes in Vietnam. That won't be a large change to our overall effective tax rate. But that is the one item that is changing a little bit for us. We do expect some slight upward changes in our China tax rates as well. So directionally, I think it will be around that 25% range going forward -- again, highly dependent upon the mix of earnings in the countries where we do business. But I don't think, right now, we are anticipating any significant changes off the tax rate that we expect for FY '10.

So those changes will come after FY '10, right, in China and Taiwan?

That is correct, in China and Vietnam. That's correct.

Okay, so we can expect it to inch up slightly, but not much?

That's right. I don't think it will change much, Avinash. And again, to the extent that we have a further mix shift or, again, take on a little bit more international business versus US business, that changes the dynamic. But right now, we are not anticipating anything very drastically different from what we are going to have for FY '10.

And would you comment on Europe a little bit? You did talk about China and Japan. How is Europe doing at this point?

I made a few comments in my prepared remarks about Europe. We have the two large OEMs who placed their biggest orders since last November here during the quarter, and they were mostly probably replacement parts for their spare parts business. The low-power OEMs there are also doing a little better. And I think laser utilization, what we conclude, would be up in Europe maybe more than any one of the other two or three continents. And we can only conclude that based upon what the two large OEMs bought in the spare parts business.

So, Fran, you say that sequential uptick is the most in Europe or the absolute utilization rate in Europe is the highest compared to other places?

I think I'd have to say first it comes -- the sequential uptick is most in Europe. But from that, we've backed into the idea that the laser utilization is higher there. Also, in just talking with our people, that's what they also conclude.

So absolute utilization is also higher in Europe, you say?

Yes.

Okay. And one quick question about the Defense side of the business. Of course, you have significant exposure to the JSF program, Joint Strike Fighter. Could you comment on that -- what do you see there going forward for the end of fiscal year '010?

Well, right now the commitments that are pretty well on the defense budget are probably through what would be called LRIP 5 or 6. And like I made my comments on, right now we are producing parts on LRIP 2 and 3. So -- and we are negotiating on 4 and 5 right now, so I think our customer has pretty firm orders for 4 and 5, out through 4 and 5. So those take it out a few years. So the negotiation of how far this JSF will go over the next five to 10 years is out in front of us to be dealt with. But I think, for the next two to three years, we think our runway for JSF is pretty clear.

So in terms of the run rate for JSF, you see upticks there. What kind of growth do you see there year-over-year in fiscal year '010 compared to fiscal year '09?

I think, Avinash, I think we have gotten to the point where -- maybe not to make a comment so specific about JSF, but just give you sapphire product lines in general for our EEO business; that, right now, represents roughly about a third of our total business. And we do expect that that will be one of the areas that will continue to grow, JSF obviously being one of the larger drivers of that growth. And we are also on other programs just beyond JSF. But that is one of the overall drivers of the growth. As Fran mentioned, it has been one of the keys behind kind of the record quarterly revenue that they have had over the last two years, and that continuing increase in the amount of sapphire content is continuing to push up the overall EEO business.

So we anticipate that it will continue to grow. It will continue to get to be a larger portion of the overall EEO business, and it will be kind of ratable changes, like -- as Fran was mentioning, as we go into these larger and more voluminous types of LRIPs. Those will help drive the overall revenue for the business.

So in your fiscal year '010 guidance, what do you factor as -- for Defense as a percentage of overall business, roughly?

Roughly, I think we are -- we ended FY '09 with total Defense, all II-VI, Inc. businesses, being roughly about 40%. Our forecast in the guidance that we gave in today's release, that should be roughly about the same. The thing that will tend to push that down is not so much that the military business is off as if we continue to see the strength in the industrial business like we started to see here, that will start to potentially push that down a little bit, maybe push it down as low as 35%. But it should be, in FY '10, in that 35% to 40% range total Defense business, for II-VI.

Your bookings have been up a lot sequentially, up almost 28%, but your revenue guidance is more or less flattish here. Is it that you are getting bookings for some longer lead time products? Why is the booking uptick not showing up in December quarter revenues?

I think we are -- the strength in the September quarter, there are certain military programs. We mentioned one of them, in particular, for instance, the UV filter program for our VLOC, our Near-Infrared Optics business, is $8 million. And that will really run us through the rest of FY '10. So that's a program that's going to be kind of extending out past the upcoming quarter. I would say that the bookings that we recorded this quarter were definitely higher than we anticipated. That is giving us the confidence that we needed to come out with not only December guidance but also full-year guidance. But I think certain of the orders that we took, and even Fran mentioned a couple in the WBG area -- those are programs that are not going to necessarily ship out just within the next quarter or so. But we have been able to recalibrate our December forecast, and we have moved that up internally and also been able to kind of see how the rest of the fiscal year is going to play out.

Mark Douglass, Longbow Research.

Just for clarification, so the split between PRM and EEO was 60-40?

I made that comment relative to the $7 million or so of total increase quarter over quarter that came out of the Military and Materials segment. But 60% of that $7 million was -- call it $4 million, was on the PRM side, and $3 million was on the EEO side.

Okay. Can you describe what it was in the quarter for sales, the split?

For the quarter -- I'll just tie in Fran's comment because he was making a comment on the bookings increase. But j9 the bookings for the quarter -- it was roughly two-thirds from our Military Infrared Optics business and one-third from PRM. And the revenue was roughly in that same range, roughly about two thirds from the EEO business, Military Infrared Optics business; one third from PRM.

Okay, thank you. Can you go through maybe what your relative expectations are for each segment as we look into your guidance for revenues? And then, where might you see some surprises on the upside?

We'll try to give you some visibility to that, Mark. I would say that our expectation for the Infrared Optics, based on where we completed this quarter and the level of bookings that we saw -- we are expecting a similar amount of revenues in that business. But that is up nicely from what our forecast was, say, back in the August time frame. So the strength that we saw in the quarter, especially what we saw within the month of September, is giving us confidence that that business is going to do a little bit better than we anticipated.

So I would say, overall, that we are looking for a similar level of revenues from that business. But I think, in the rest of the fiscal year as you look out to the back half of FY '10, that's when we think the traction will start to show from what we anticipate to be further increased bookings.

In the Near-Infrared Optics segment, we are anticipating higher revenues in the second quarter. And again, part of that is driven from some of the things that Fran touched on in his comments where we are expecting some of the military-based businesses and programs that we have to start to take hold.

In the Military and Materials business, we are continuing to anticipate further growth in the EEO business -- again, steady and kind of consistent growth, but nonetheless growth. And the PRM business, we are also expecting some growth not only for the quarter but also for the fiscal year as well.

And then you round it out with the Compound Semiconductor Group, and they had a quarter where, by design, we knew we would have lower revenues in the quarter we just completed than in first quarter, but we are expecting a nice increase in the overall business from the levels we just had. It will be more back-end loaded, though, more so in the second half of the year rather than the first -- than the second quarter, necessarily.

I don't know if I gave you enough color there. But I think it's fairly consistent -- that is consistent with the general comments that Fran made, and hopefully, maybe, that helps to tie it in a little bit more.

So for the most part, you're expecting sequential increases here?

I don't know, Mark, if you can conclude exactly that Craig said that. I think we have some very good beliefs that we are at a better plateau right now for our sales in that we have one or two of our businesses that will have a bigger second half, and that's certainly our CSG Group. Our Military and Materials -- I think Craig implied something like that at EEO, for sure. PRM is the tricky one for us because the pricing on selenium and tellurium can swing. When selenium swings 57% up in the quarter, like it did this time, we are not able to project what's going to happen third and fourth quarter on pricing of either of those.

So the PRM could be an add or it could be a take away. So maybe we do have an upward trend, we think, slight upward trend. And we don't want to overstate how strong -- our visibility is very, very good for second quarter, good on third, not good at all on the fourth. That's when this worldwide economy might come around to haunt us because this past quarter the Chinese stimulus package, I think, helped. It drove the prices high in copper, which took selenium and tellurium up. We are not able to tell you that that's going to continue. It looks like the Chinese might get out of the buy-in market for a quarter or two now, which will cause prices in selenium and tellurium to drop in some of the stimulus that's happened around the world to slow a little bit.

Right, but at least in the IR optics, though, certainly it appears you are coming off the bottom, you are not --

Correct. That I'm not trying to -- not persuade you on that. We are coming off the bottom on IR. That's right. I could not tell you about what the fourth quarter will really be for IR. That's what I'd like you to hear.

Okay, okay, so the fourth quarter, right now, is the real --

Just because our visibility gets better. It may be two quarters where people are optimistic and are moving. But out in that third quarter, we couldn't get a promise from anybody for the April, May, June story.

Okay. And then on the segment margins it looks like your guidance is implying something around the 13% to 14% range for total segment margins. Are you expecting things to be relatively flattish for the first quarter, that a lot of your cost savings initiatives have already been realized, fully realized? Can you just talk about your margin expectations?

Sure. I think a lot of the moves and pretty much all of the moves that we made back in FY '09, we did get a full quarter of benefit in the just-completed quarter. And so I think you're right on as far as our expectations are kind of this similar level of segment earnings. I think there are a couple pieces that will be improved. We'll have some lessening of the share-based compensation, as I mentioned in my prepared remarks, in some other areas. But I'd say overall, to your point, we did about 13% segment earnings as a percentage of revenue. And we generally think that's roughly about where we will come out at.

Back to Fran's point, it's really the second half of the year that we're starting to get much better visibility into, especially that third quarter. And again, our expectations are now higher than they were, say, 30, 60, 90 days ago.

And then, when you talked about the share-based compensation, does that, to a large degree, explain the uptick sequentially in SG&A (multiple speakers) versus the fourth quarter?

Yes, Mark, that is the biggest piece. Of that share-based compensation, roughly 75% of that finds its way into the SG&A line. So that is one of the biggest drivers of that uptick.

Okay, and you expect a similar rate going forward, and that was just in this quarter that it really had the big uptick?

Yes. It really ticked up in this quarter, Mark. For the rest of the fiscal year we are saying it's going to be for the remainder of the fiscal year, so we did $2.4 million this past quarter. For the remainder of the fiscal year it's going to be -- for the second, third and fourth quarters combined, it will be $3.6 million or roughly about $1.2 million is what we are forecasting right now.

(Operator instructions) Jiwon Lee, Sidoti & Company.

So, if I heard you correctly, Fran, in your commercial IR Optics on F '10 guidance, you are blending about a similar level of revenue vols for fiscal 2010, which is about $20 million or so?

I'm missing that comment. What do you mean $20 million or so? We have been doing quarterly, in the IR business, 25-29.

Let me step back and re-ask you that question. What kind of year-over-year revenue growth or decline assumptions did go into your fiscal 2010 guidance for commercial IR Optics?

I think, Jiwon, maybe a way to answer your question -- I think this quarter, the September quarter -- and if you look to last year, so September of '09 was really the first -- was really the last full quarter, if you would, of really very strong results from the Infrared Optics business. That downturn impacted us, really, in the November time frame. So the quarter we come up against, in the December quarter, is going to be somewhat of a mix. And so I think we are anticipating growth in Q3 and Q4 off of the very low rates. And that's back to Fran's comment about we are not expecting things to deteriorate further than what we saw in the earlier part of the calendar year, last part of the fiscal year '09.

So I think what we are saying is we will have another quarter that will be a little bit of a challenge comparability for the Infrared Optics business, for the December quarter. But after that, we are expecting some growth thereafter.

Okay, well that's helpful. And then, do you really have some sense as to roughly where the high-power industrial laser utilization is and where that utilization might need to rise for new laser orders to start picking up?

I don't really think we have a comment on what the utilization rate is around the world of these 55,000 lasers that are out there doing work. We have no way to make a judgment of that. You can do a sample, you can go to one factory and they'll say they are running five days a week, two shifts, and they used to run 7-by-24. So you get a flavor there. But we don't have an integrated view across.

We think it's better than what it had been back in April, but we do not have a number to tell you, yes, it's 60% utilization or 50% or 40%. There's no way we can collect that data. We've looked and tried, we feel it by way of the aftermarket parts order come through the OEMs or direct from the customers. It's improved, but we don't have a percent for you.

Okay, that's good enough. And then, Fran, you gave pretty detailed comments on each of your business lines but I didn't hear much from the HIGHYAG high yet business. I wonder what was last year's revenue numbers for HIGHYAG and where that trails so far in fiscal 2010.

That's a good question -- I did not make a comment about HIGHYAG. Certainly they are doing reasonably well, and we have been on a pace from the time we bought them of a few million a quarter to now maybe they are up at 2.5 per quarter. Their pace is steady and slightly increasing. The deployment of these one-micron welding heads and a little cutting is continuing. It certainly is writing along with the fiber laser, which is -- during this economic downturn is turning down. But HIGHYAG has hung in there very nicely because they are working on new applications for laser welding and cutting with the fiber.

Overall, we are not making the rates of profitability with that area that we do in CO2, but it's an investing, developing business. And their prospects are good, have a few nice applications around the world they are working on.

And as some of your commercial or your optics business came back, has there been a noticeable pricing changes?

I made a comment on that. A little bit of pricing pressure on the low-power optics that we are selling, whether it's into China or whether it's here in the United States or even Europe. The lower-power lasers take a less sophisticated optic, so there are more competitors there. So there is some pricing pressure.

On the high-power side, yes, we have pricing pressure because the OEMs are not making the profits they've made in the past. So they want lower prices, and we have granted, here and there, lower prices. So yes, we have the pricing. But at the same time, I think the pricing issues will -- they are a little diverse because it's not for an assembly line of one product that a company is asking for price reductions. They'd like pricing reductions on all optics for the aftermarket, for the spares business. And some we can grant on, others we cannot.

And one question for Craig. How does the weak dollars affect your financial on a consolidated basis?

Sure. It's a -- [for us you wanted] we sell a fair amount in yen, in Japan. So that actually helps us a little bit on the top line. But from the bottom-line perspective, that's usually pretty much offset by the predominantly dollar-based expenses or dollar-connected expenses we have in our Asian operations, primarily in China and Singapore and Vietnam and in Vietnam and the Philippines, to a lesser extent.

So those two usually tend to fight off each other a little bit. The weak dollar usually means a little bit more of the top-line growth for us. But then we are also going to take it on the operating side, and have a little bit more expenses in those countries. So right now it's not a significant either help or hurt to us. And we have not factored in anything beyond that in our FY '10 guidance.

And last question is, Fran, has any of the targets that you look at for potential acquisitions -- has any of the dynamics changed, or is there any update on that front?

We continue to look pretty diligently on a couple of areas where we are really interested, but nothing meaningful that I can comment on. We are certainly in the marketplace. All of our businesses -- I think there's something we could acquire and add to, maybe one or two more exciting for us at this moment than others. But I can't go anything further. We don't have anything to announce.

And it appears we have no further questions at this time. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

If there are no more questions, I would like to thank everyone for participating today. Our next earnings release, for the quarter ending December 31, 2009, is tentatively scheduled for before the market opens on Tuesday, January 19, 2010, with a conference call to follow that same day at 9:00 AM Eastern time. Thank you for participating in today's conference call.

Again, that does conclude today's conference. Thank you for your participation today.