II-VI Inc (IIVI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the II-VI Incorporated Fiscal Year 2010 Third Quarter Earnings Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded. I would now like to introduce your host for today, Mr. Craig Creaturo, Chief Financial Officer and Treasurer. Sir, please go ahead.

Thank you, Karen, and good morning, everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated.

Welcome to the third quarter fiscal year 2010 II-VI Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, April 27th, 2010.

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'm Francis Kramer, President and CEO of II-VI, Incorporated.

Our third quarter EPS of $0.33 is above our guidance range of $0.26 to $0.29 and represents our results after including the Photop Technologies, Inc. acquisition. Revenues from Photop for the third quarter totaled $20.2 million of our $97.5 million consolidated results.

We continued to increase our full year fiscal year '10 revenue guidance and now expect revenues in the $330 million to $334 million range. We expect EPS to range from $1.08 to $1.12. Strong drivers for this improved guidance is the greater than 30% increase in the infrared segment earnings in the third quarter over the second quarter and the outlook for Photop's financial performance.

Let me first talk about the Near-Infrared Optics segment. As previously mentioned, the near-infrared business now includes Photop Technologies Inc. as the acquisition was closed on January 4th, 2010. During the quarter, Photop exceeded our initial expectations with bookings of $26.5 million and revenues of $20.2 million.

The third quarter saw all of Photop's optics-related businesses experience increased demands across the board for telecom, consumer, industrial, and medical applications. Photop's increased demand in the telecom market segment was primarily driven by increased bandwidth demands that are resulting from increased internet traffic worldwide, which in turn is being driven in the large part by new video services in mobile devices and the rapidly-expanding phenomena of social networking.

Overall, the increased demands continue to drive our investments in Photop in capacity expansion, an increase in its workforce, and close cooperation with its supply chain to maximize Photop's output. Based on our backlog, we expect to achieve similar revenues next quarter. Overall, we are very pleased with the pace and the progress of Photop's integration and thank all the Photop employees for their considerable contribution and sacrifices during this first quarter as part of II-VI, Incorporated.

During the quarter, our VLOC near-infrared business continued to experience increased revenues in the non-UV military market for laser-based range finders, target designators, and illuminator systems. Year-over-year military shipments have increased 30% for YAG, optics, optical subassemblies and crystal-based products. VLOC continues to address new opportunities in this market segment. An example of this was qualification of a new crystal material at one of our major customers for next-generation, laser-based military products.

On the commercial front, VLOC continues to see an improvement in the demand for products used in aesthetic medical applications as well as the industrial laser market, especially in China. The commercially-related revenues for the quarter were up 20% compared to the prior quarter and more significant was the fourth consecutive quarter-over-quarter increase in commercial revenue for VLOC. VLOC's lower cost manufacturing operations in China are addressing this increase by adding capacity when required.

During the quarter, VLOC achieved a business milestone by being recommended for the aerospace standard AS-9100 along with ISO 9001 2008 certification. We anticipate receiving the formal certificate during the fourth quarter. This achievement recognizes significant improvement to the VLOC quality and business processes, which we expect to execute and capitalize upon in the future quarters.

Turning to the IR segment, during the third quarter, IR optics bookings increased 17% quarter over quarter and 69% compared to the third quarter of fiscal year '09, which was our weakest quarter during the recent economic downturn. Orders for the quarter still remain 14% below our peak of $44 million, which was experienced in the third quarter of fiscal year '08. Quarters continue to strengthen. Orders continue to strengthen. And year-to-date fiscal year '10 bookings have now surpassed bookings for the same period last year.

In the US, new orders for domestic OEMs for the third quarter increased 46% quarter over quarter and tripled the booking rate of the third quarter of fiscal year '09. This strong growth was driven largely by increased demand for our high power CO2 OEM customers as improvements in machine utilization rates drove demand for replacement parts and a replenishment of spare parts inventory. High-power resonator and machine builds are beginning to improve, but they are still substantially below pre-recession levels. New orders for low power OEMs continued to be very robust, driven by increased demand for CO2 marking, engraving and material processing systems.

The North America aftermarket, which is a leading indicator for our industrial business, showed an increase in bookings of 18% in the third quarter versus the second quarter and a 28% increase versus the third quarter of fiscal year '09. March bookings were at the highest level since October of 2008. This growth is not attributed to any one industry segment, but rather by market share gains and an increase in the average order size as customers are now ordering additional parts to replenish inventory and to address increased consumption rates. We're beginning to see small signs of improvement from accounts addressing the housing and automobile sectors, while those cutting steel use for armor plating appear to be softening.

Zinc selenide and zinc sulfide material bookings for the third quarter increased 27% compared to the second quarter and 37% compared to the third quarter of fiscal year '09. This growth is from market share gains at key accounts we have been targeting. We are now offering larger area, multi-spectral zinc sulfide material, which represents a growth opportunity for our materials business.

European bookings for the third quarter were up 6% compared to the second quarter and 39% compared to the third quarter of fiscal year '09. This continued improvement reflects a gradual but steady increase in high-power machine utilization rates and subsequent optics replacements. Production rates of new machine builds remain low at European high-power OEMs. However, most are now reporting a slight increase in demand. The outlook before-- low power in Europe OEMs remains stable with an ongoing upward trend.

Strong March bookings helped Japan finish the third quarter 9% above the second quarter and nearly 3 times higher than the third quarter of fiscal year '09. Production rates for both the high and low power OEMs are showing signs of a higher than anticipated growth rate. And this is expected to continue into the fourth quarter.

China bookings finished the third quarter at the same level as the second quarter, which was an increase of 55% from the third quarter of fiscal year '09. Quarter four is expected at the same rate.

Our HIGHYAG bookings for the third quarter were 23% above the second quarter and 22% increase from the same quarter in fiscal year '09. The key booking for the quarter was for laser manufacturing equipment for a large automotive plant in China and follows a trend of stronger one micron beam delivery system demand in Asia compared to the US and Europe. The majority of HIGHYAG quoting activity is geared toward beam delivery components, remote welding heads, and components for cutting systems.

The IR optics book to bill of 1.05 for the quarter created a $1.9 million backlog increase during this period, which is the second consecutive quarter we have built backlog.

In the military and materials segment, which consist of our Exotic Electro-Optics and Pacific Rare Metals subsidiaries, demand for products continued strong. At Exotic, our sapphire window product demand is driven by the electro-optic targeting systems for the joint strike fighter and sniper programs. We have recently entered a multiyear, sole-source agreement for the JSF program as we highlighted in our press release dated February 11th, 2010. The outlook for this product line remains strong.

Core military product demand is forecasted to be consistent with prior quarters and we expect this portion of our military business to improve by 10% in the coming year. Exotic experienced a slight downturn in profitability due to new programs ramping up to production levels and new equipment start up to address capacity constraints. This downturn is expected to be reversed in the fourth quarter. We're making solid progress in constructing our new 25,000 square foot sapphire fabrication facility, which we expect to occupy this summer.

At Pacific Rare Metals, the selenium and tellurium orders increased sharply in the third quarter, which was consistent with the trend we observed at the end of the second quarter. Additionally, the price of these products, which is based on metals index prices, increased over 30% during the quarter. Higher revenue levels for our selenium and tellurium products driven by the solar cell market resulted in improved profitability for this segment, which we expect to continue. As reported last quarter, the outlook for this segment is positive, in spite of a current tight supply line for selenium and tellurium and certain equipment start-up and production ramp-up challenges experienced in the sapphire fabrication in the third quarter. We have and continue to expect this segment to meet the increased cost of demand for our products.

In the compound semiconductor group, our Wide Bandgap materials unit has experienced year-to-date product bookings that are 79% higher than the same period last year. This trend continues from the second quarter and is due to renewed and large annual blanket orders for 6H semi-insulating silicon carbide wafers from US customers as well as large new blanket orders. Demand increases were spread over a range of products and applications, with large bookings for 2 inch, 3 inch, and 100 millimeter 6H semi-insulating wafers and significant business growth in both the RF and power segments. Demand increases has come from customers in the US and Asia. Product revenues were up year to date by 88% compared to last fiscal year. Meanwhile, year-to-date revenues from government contracts were equal to the same period last year and are driven by an Air Force contract of $5.6 million booked this quarter.

We continued to focus on both operational and technical improvements as well as cost reduction to enable us to meet the growing demand. Targeted process improvements in crystal growth, fabrication, and polishing have enabled us to meet the increased volumes and tighter specifications at several key OEMs. We continue to work towards expanding our position into the power market and have begun qualification at several major OEMs. We're responding to the strong interest of the OEMs for larger diameter substrates.

At Marlow Industries, third quarter bookings exceeded our internal forecast and were down 12% from a very strong second quarter bookings total. Revenues were up 24% compared to the second quarter with increases in all 5 of our major markets, of which defense, telecom, and medical markets led the way. We are experiencing increased demand in the telecom market, which we expect to continue over the next 6 to 12 months.

Our Marlow unit was recently selected as a primary supplier for three major new programs recently released by three of the top telecom component suppliers in the marketplace. Demand is also strengthening in new program starts in the defense market. The medical market is showing signs of a gradual recovery in bookings, revenues, and the introduction of new programs.

Our new high-volume, consumer application ramp-up has required a significant amount of program focused to successfully complete final product qualification and to complete our newly-added, high-volume production lines in Vietnam. Unfortunately, we're not at liberty to disclose more details about this program. These additional product lines have doubled the size of our Vietnam facility to 60,000 square feet. We now expect the high-volume production ramp for this private-label product to begin at the end of the fourth quarter.

The transitioning of our ceramic-processing capability to Vietnam for telecom production will begin in the fourth quarter. This will further strengthen our low-cost capability and differentiation advantages.

Craig, the markets for our commercial products are trending upward faster than we expected. The visibility on the length of this expansion in our commercial businesses in the IR business segment, in the near-IR segment, at Pacific Rare Metals and at the Marlow Industries subsidiaries is limited to about six months. We've completed the Photop initial stages of integration and a good portion of the purchase accounting. We are active in the M&A marketplace. Though we're not able at this time to issue full-year fiscal year '11 guidance, the increased marketplace momentum that we have seen over the last two quarters combined with our expectation for Photop, providing confidence in our outlook for growth in fiscal '11.

That concludes my comments.

Thank you, Fran. Here are the items that 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 March 31st, 2010, were a record $110 million. This was an increase of 77% over the same quarter last year. The bookings for the just-completed quarter were 40% higher than the December 31st, 2009, quarter when Photop was included and 7% when Photop is excluded.

The March quarter represented the third straight quarter where bookings outpaced revenues, which is helping to give us increased visibility into future revenues. The beginning backlog of Photop at January 4th, 2010, the date of the acquisition, was approximately $11 million. And this amount is not included in the Q3 bookings numbers we've reported today.

Total company backlog at March 31st, 2010, was $144 million. The components of the March 31st, 2010, backlog from continuing operations were infrared optics at $29 million; near-infrared optics at $40 million, which includes Photop's backlog of just over $17 million; military and materials at $53 million; and compound semiconductor group at $22 million.

On March 19th, we filed a Form 8-K/A, which included information regarding the recently-acquired Photop business. This filing included Photop's audited financials for the year ended December 31st, 2009, as well as some required pro forma financial disclosures.

As we described in our press release today, Photop has been combined with our VLOC business for segment reporting purposes as part of the Near-Infrared Optics segment. The overall purchase price for Photop was approximately $94 million, which includes the cash and stock issued for the initial consideration as well as an estimate of the present value of the earn out that is expected to be earned.

We have been very pleased with the operational and financial performance of Photop during the first three months ownership. In the press release, we described that bookings and revenues, which were recorded by Photop during the quarter both exceeded our expectations. Progress has been made on a portion of the required valuation work needed for the purchase accounting for the Photop acquisition. During the quarter ending June 30th, 2010, we will continue working on the valuation of the intangibles acquired for the transaction, with the goal of completing this process by the end of the quarter.

Our guidance for the June quarter also includes the estimated share-based compensation needed for the Photop performance and retention programs, which is approximately $950,000. This amount is similar to the amount that was recorded in the just-completed quarter for those programs.

For the quarter ended March 31st, 2010, the gross margin percentages for product sales was 38% compared to gross margin in the same quarter of the prior year of 35.2% and compared to the quarter ended December 31st, 2009, of 38.4%.

The increase in the quarterly gross margin percentage year over year is primarily a result of the higher sales volume, creating incremental gross margin dollars. We also saw a yield in productivity improvements in several of our businesses during this time period, including our VLOC, PRM, and Wide Bandgap units. The slight decrease in gross margin percentage since the December 31st, 2009, quarter was mostly a result of the addition of Photop into our financial results, as Photop's gross margin was less than the overall gross margins of II-VI. Also during the quarter, certain purchase accounting adjustments were made to Photop's inventory. And these adjustments drove an additional cost of sales expense of approximately $1.1 million during the quarter. Partially offsetting these downward factors were gross margin improvements at our PRM, Marlow, and WBG units.

The effective tax rate for the quarter was 29.1% and brought the year-to-date effective rate up to 25.5%. Our current outlook for the full year is an effective tax rate of around 27%. This has increased from our prior estimates of between 23% and 25% for a number of factors. The current tax rate reflects a modestly higher mix of US-sourced earnings than our prior forecast. Also, there are certain Photop transaction and other-related costs that will be only partially deductible or non-deductible for tax purposes. Finally, the tax rate used during the quarter and estimated for the remainder of the fiscal year does not reflect any extension of the federal research and development credit that expired on December 31st, 2009. This last factor could turn into a positive item for the June 30th, 2010, quarter if this credit is extended before that time. In spite of these upward rate changes, Photop will continue to enjoy a 15% tax rate as a result of being a foreign-owned, high tech company within China.

While our revenues for the year ending June 30th, 2010, are expected to outpace the prior year, our earnings per share for the comparable time period will be lower as a result of three major factors, which we have discussed in prior forums. First, the prior year had four months of strong performance before we were impacted by the economic downturn. Second, the prior year had a favorable impact of about $0.12 per share caused by lower taxes as a result of the completion of some IRS audits. And third, the current year financial results include the Photop transaction and other-related costs including the performance and retention costs that I mentioned just a moment ago.

The outlook contained in today's press release for the year ending June 30th, 2010, includes the expected results of Photop for the last 6 months of that year. When compared to the guidance we gave as part of our January 19th, 2010, earnings release, our revenue outlook for Photop has increased and we now expect to have some slight accretion in FY '10 as a result of Photop compared to our earlier expectations of breakeven performance after considering transaction costs and share-based compensation programs and the impact of the shares that were issued for this transaction.

Fran, this concludes my prepared remarks for today.

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 Factors section of our Form 10-K for the fiscal year ended June 30th, 2009.

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

(OPERATOR INSTRUCTIONS) And our first question is from the line of Avinash Kant of D.A. Davidson.

Good morning, Fran and Craig.

Morning.

Good morning.

A few questions. You did give us some idea about the revenues and bookings and backlog from Photop. And you also said that their gross margins were slightly lower than the corporate gross margin. As the effect of this transaction will go away after the June quarter, in order to model the next fiscal year, how should we think of the gross and operating margins from Photop, excluding all these costs?

Avinash, it's a good question. I think really two points. One is we have said that the gross margins of this business are pretty similar to the segment that it's in, in the infrared segment. And the second point would I would point you back to the audited financial statements for December 31st, 2009, that were included in that 8-K filing from March 19th. I believe in there it showed the gross margins for that calendar year to be about 32% to 33% and it also showed some other operating margin metrics for you as well. So, I think, overall, we are pleased with where they're at. And again, the performance has been a little bit stronger than we anticipated but that'll hopefully give you some more specific guidance there.

Right. And for all the transaction-related expenses will be done by the June quarter, right?

Well, we have-- the most significant ones really were in the Q3 and that included that some of the times that I mentioned during the prepared remarks. That included some inventory write-ups to fair value. That included some performance and retention program expenses that comes through the share-based compensation. In the fourth quarter, there will be an equivalent amount, about $950,000, that will come from the share-based compensation programs for Photop. We also have put in, not only this quarter but modeled out for future quarters as well, extra depreciation for asset write-ups, extra amortization for intangible write-ups. So we've modeled most of that out. But as we get through really the fourth quarter, some of the significant share-based pieces of the Photop program, they will go down noticeably. And we'll provide more information as we get onto those quarters. But the most significant quarter of those purchase accounting related items was the Q3 and Q4 will have-- we'll still have a fair amount in Q4.

And Craig, in your next quarter's guidance, what kind of gross margin assumptions do you have? And do you expect the cost to change meaningfully from the current quarter?

Are you asking Avinash Photop-related or just overall?

No, overall, overall.

Overall, I'd say that we are continuing to really see a few of our businesses, a couple that Fran highlighted, really have strong performance. We are expecting some slight gross margin improvements from some of those businesses. I think specifically the one where we have continued to be strong but also are seeing some further strengthening as the volume increases is in the infrared optics business. So that's one that I would highlight and say we have some little slightly higher expectations in Q4. But I don't think it will be-- it won't be revolutionary. I think it'll be more incremental, the gross margin improvements for the quarter.

And the final question and I'll get back into line later on, but what's the CapEx assumption for the fiscal year?

In the information we reported today, we showed that we did about $9.4 million is the year-to-date CapEx. We're thinking around $15 million to $16 million will be the full-year CapEx. We do have some capital expansion and Fran touched on this a little bit in his prepared remarks for Photop as well as the capital build out for the new sapphire facility for our Exotic Electro-Optics subsidiary. So we're building out that building. We're also starting to see again some pickup in capital that will be needed for volume as volume levels are increasing around the company. So we're anticipating it'll tick up quite a bit from the under $3 million mark that we showed this quarter, we'll spend maybe $5 to 6-ish somewhere around that million in Q4 is what we currently estimate.

Perfect, thank you.

And our next question is from the line of Mark Douglass of Longbow.

Hi, good morning, gentlemen.

Morning.

Morning, Mark.

Fran, I'm sorry I got on the call a little late. Can you just go back the highlights on the CO2 optics? And then also and what you're seeing on the OEM side of things and may even-- yes on the OEM side of things?

Yes, whether it's-- which one-- any of the three places on the globe, whether it's North America, whether it's Asia or Europe, we do have improved order rates quarter over quarter and certainly this quarter over the prior year's corresponding quarter. Very significant. And it comes by way of the OEMs or straight from the aftermarket customers. But it is really driven by increased laser utilization. And it seems to be in most all fronts.

I think I only highlighted one that seemed to be down and those are the people who are cutting steel plate for armored vehicles, these MRAP production, that type of stuff here in the states. Those people are starting to slow as one might expect. You can see a little bit of trend up in auto worldwide. But these are running rates of lasers that they're using for production. So they're at-- ordering more spare parts or replacement of the parts that have been gradually worn down from their inventory or taken down. The assembly line build of high power CO2 lasers maybe a slight trend up, but not really. We don't feel that yet. Just they're talking about it. Low power CO2 people are going well, this marking, engraving, that type of thing. And the materials business, where the IR optics group improved sales and orders bookings there, mainly on market share take away, military programs for what we call multi-spectral zinc sulfide are up quite a bit.

On the market share gains, is that a combination of just a more targeted sales efforts? Is it poor quality from competitors? Is any of it the cost of pricing?

Yes, I would say it's two things. We have decided to be more aggressive in selling the materials to the prime contractors. If they have an internal optics manufacturing, we'll sell more there. We've taken pricing actions and we're really increasing our utilization of our capacity that was sitting idle, eight, nine months ago, a year ago. So we've been out to try to load up that shop. And it's working pretty well.

Okay, so that's market share gains more on just the raw material side?

Yes, that's what I was commenting there. On market share gains in the CO2 laser optics business, yes I would say they're account-by-account gains in the aftermarket. I think the market share we have with the OEMs pretty stable. We might have lost something here and gained something there. But very stable with the OEMs.

Okay, that's helpful. And then just sticking with IR optics, the sales run rates are starting to approach those prior to the downturn. The margins are still lower versus where they were before. When would you expect to kind of recover those margins? I mean there's a number of things at play. I know you had some increased-- you expanded capacity in calendar 2008 but you also reduced costs last year. Can you kind of describe some of the puts and takes and where you think margins can go for IR optics?

Go ahead, Fran.

Well, I would just say that certainly maybe in this quarter we've averaged in IR maybe $12 million a month out the door in revenues. And the peak's been 14.5, almost 15 a month. So we're still well below where that extra leverage would really help us. We're picking back up sure. 12 months is a heck of a lot better than 8 or 9. So that's improved. But we're still-- the percentage of maybe as much as 15%, 18% below the peak rate. So it's-- we're not going to have that leverage until we get to that number. We're not ready to guide toward that number yet. We just don't and that's why I made the comment that we have visibility in our guidance or at least our own thinking of maybe six months out, which might take us in well past the first quarter maybe. And that first quarter's a little down, first quarter over fourth quarter. So, I can't give you an exact time when I think we'll get back to the number. I think it's a ways out yet. I think we've had a really, really nice return of order business here in the last two quarters. But can't tell you when we're going to get the rest back. Just it's not visible yet.

And certainly March performance is doing well. I was just kind of curious too, some of the puts and takes versus you've reduced costs last year, but you also increased your costs. Certainly some depreciation in calendar 2008 just cause you expanded-- added--

(inaudible) earnings, yes.

Correct.

Yes, yes.

So, just in general, would you expect the margin capability to be similar to where you were in the past?

I think, Mark, I think you're starting to see kind of the trend of it. I would say in the segment earnings too for the infrared optics, remember we do have certain kind of corporate or unallocated items that go in there as well. So, you do-- there is a little bit more fluctuation in that segment earnings. It's not as pure or consistent maybe as the other ones because again, it does bear some of the non-recurring things or share-based compensation changes, things of that nature. So, I'd say overall to kind of echo what Fran said, I think we have been pleased. There were a lot of actions that were taken and kept that business with the highest profitability of the corporation. It still continues that way today. And I think overall, as Fran mentioned, I think over the next whatever quarters or period of time it takes to get back to that peak, I think that's when we're going to really start to see some incremental margin. We started to see some of that here in this quarter and the last couple quarters, but we'll start to see some more of that as we get closer to those peak revenue levels of that business.

Okay, thanks. And congratulations on a good quarter.

Thank you.

Thank you, sir. And our next question is from the line of David Kang of B. Riley.

Yes, good morning. I guess the first question is Craig, depreciation and amortization going forward. Will that be kind of comparable from the March quarter level?

It will, Dave. It was about, in the last page of the release, it was about $6.4 million this quarter. And we anticipate it being similar to that amount. The only thing that we will do in the fourth quarter and I mentioned-- touched on this a little bit in my prepared remarks is, we will hopefully be finalizing the intangible valuation of Photop. So many changes versus our preliminary estimates will impact that. But I'd say it's probably going to be very close to about the 6.4, maybe a little bit higher, just because of capital that we plan on adding in the fourth quarter, but it should be pretty close to that number.

Okay. And on China, sounded like it was flat in the March quarter from the second quarter. And sounded like the June quarter will be flat as well. Can you just give us more color what's behind that?

I made that comment really having to do with a high bookings rate we had for China in the second quarter. So the third quarter was flat with the second. And the fourth's going to be about equal. But those are really nice numbers for China. They're really hitting well on the CO2 business, whether it's for their assembly line. One or two of the customers there are building some good quantity of lasers, really, really quantity increase on low power over there and some slight increase on the high power. But then their laser utilization rates are up. So they're taking reasonably number of aftermarket parts. So, it's hard for us to tell you first quarter '11, second quarter '11, whether that's what I call flat. We'll stay at that number, but it's really a nice increase year over year when you put the whole year together, FY '10 compared to '09 for China.

Got it, got it. And on Photop, can you tell us who the top customers are? Any significant customers for Photop?

I would say we've got really good customers in Asia, China, and North America. It's a variety of customers that you would expect for somebody doing optics in telecom and so on. We're going to tend to shy away more on our conference calls from talking about customers. We have a lot of competitiveness in this whole business. And in some cases, there are only three or four major customers. So, we're not going to be talking about it as much as we have in the past.

Okay. But you don' t have any-- I mean they don't have any significant customers where they represent like 20% or 30% of Photop business, right?

They have a couple G customers, Dave, in that-- in the 8-K that we filed back in March. We have for Photop standalone, again, I want to make sure that I'm making these comments correctly. But we had-- we disclosed that there was two customers of Photop. We didn't name them obviously. But they each accounted for 10% or more of Photop's total sales. That was in calendar '09. I think as Fran mentioned, there are a lot of customers that they have. But they have a couple of significant ones that in the overall II-VI business, they will not be 10% customers of II-VI at all. But they are fairly significant to Photop on a standalone basis.

Got it. And then, Fran, I thought you said Photop will be flat in the June quarter. Certainly, I don't think it's really that demand picture. So is that more of a capacity issue?

Correct. Yes, we did $20.2 million here in the third quarter. And I think we're trying to guide you toward that same number. Revenues, we stated what the bookings were, refreshed us at 26?

25.6.

25.6. So we are building backlog and it's probably getting it out the door kind of an issue.

Okay, so some of your-- or actually a couple of your competitors mainly AFOP and Oplink, they are dealing with capacity issues as well. And they are increasing headcount. So you guys are in hiring mode as well? And can you go over what the headcount was-- I'm talking about Photop's headcount at the time of acquisition and what they are now? And what they will be maybe by end of this calendar year?

Yes, I'll try to give you a little bit of perspective there, Dave. And I just want to make sure I was clear on-- we were referring to the bookings-- Fran was talking about the bookings for Photop and it was 26.5

Right.

Bookings as disclosed in the third paragraph of the release today. It end the quarter at Photop and maybe it's as Fran mentioned, I think it's kind of a multi-pronged approach we're addressing. We are adding capital. And the capital spending that we did for the quarter, roughly 25% of that was for Photop this quarter. So we are investing in the capital side of things. But we're definitely also investing in the people side of things as well, as Fran mentioned, for some of these short-term needs that they have. But, we have roughly about 4,000 or so people at Photop. And remember a good chunk of those are contract manufacturing employees. So, take that into consideration. When you look at our employment at the end of December, we were about 2,043. That's at the end of December. And without Photop, we ended up going up to about 2,200. Now the biggest increase during the quarter we just completed was a ramp up in our Vietnam facility. Fran touched on this for our Marlow product line. And we had some opportunities there that we're taking advantage of. So we added about two-thirds of those adds during the quarter came from Vietnam adds. But, Marlow definitely has been adding to their workforce since we acquired them three months ago.

Photop.

Photop, I'm sorry, yes.

Right, right. And any kind of a supply chain issues with Photop? I know some of their competitors certainly have been talking about that for the last couple of quarters?

I made a comment in my script there that we have been working closely with our supply chain. And I think we'll be hit or miss. Some can turn on and give us what we need and that's working well. But there are a few who are challenged to do it. So and it's not overwhelmingly a problem. But there's a challenge there.

Okay, all right, thank you.

You're welcome.

Thank you. And our next question is from the line of Jiwon Lee of Sidoti & Company.

Good morning.

Good morning.

First, so on the CO2 laser optics, to sum up Fran, where did the biggest positive swing from the March quarter original guidance come from? I would imagine most of it was an aftermarket swing. So if you could sort of highlight geographically where was the biggest positive swing?

Yes, probably the biggest positive swing, if I had to pick one, would be Japan compared to what we expected. They and I made the comment as I was talking, their order rate was three times what it was in the third quarter of '09. So that was the biggest. We expect a little bit of recovery on all places, but that one was stronger than any. And it was-- it came by way of the OEMs, but it was really not for the assembly line. It was probably mainly for this aftermarket that they sell direct to.

And Fran I missed your comment on the European high power OEMs?

Well they were up about 6% over the second quarter and maybe 30%, 40% over the third quarter of last year. It's the same issue. Their spare parts inventory is down at the OEMs. They're replenishing it. They're selling on to the aftermarket as laser utilization increases. In Germany, like Japan, the bigger part of our sales into the aftermarket goes by way of the OEM. So it really was laser utilization in Europe also, not assembly line builds.

Okay, that's helpful. And as your visibility improves, you mentioned you have now as much as two quarters of visibility. Could you take another stab at how you approach the fiscal [2000] growth? If you cannot be specific on the level of growth, could you just talk a little bit more about the industrial versus the defense outlook?

Yes, I think we're continuing with this upward trends in our expectations for at least the first, second, into the second quarter of FY '11 on the commercial CO2 industrial business, driven by the aftermarket, driven by really worldwide economy. If there's more steel being-- going to be produced, that's good news. We'll expect ourselves to go upward. Same on auto, same on-- those consumer-driven products will cause us to be a little more bullish in the first and second quarter. That's what we're counting on. And we're still 14% below our peak. And I think it's going to be quite a while before we see that get back to that peak. And I'm quite a while, I'm sure not expecting it in the next few quarters, that's for sure, maybe in the year.

So, we have to make kind of a judgment of how the-- cause there is no barometer for laser utilization. And we're making a judgment based upon how all our-- the OEM people talk to us about the aftermarket and how our people direct-- talk to the direct aftermarket people to see how well they're running their lasers. And I really-- we've tried to calibrate on how much of the peak laser utilization are some of the big guys at right now. And we can't get a calibration. Nobody wants to talk about it. And there is no direct way to measure it. So, I just think we're trending upward. We've got maybe three to six months of visibility into next year and we will trend it up slowly we think. We think we've had maybe the jump that we're going to see and then it might trend up on a slow term GDP growth rate or something.

Yes, that's helpful. And for your Photop, the fourth quarter guidance, how much contribution from Photop was included?

From a--?

Revenue please?

From a revenue. We do think it'll be pretty similar to the quarter we just completed around the $20 million-ish or so that we just completed.

Okay, and then the market breakdown of Photop business, telecom versus others, is that sort of kind of 60/40 breakdown?

I'd say telecom is definitely the largest portion, Jiwon. That has historically been and we anticipate it that it will be in the future, the biggest portion. To give you any more specifics, we will-- again, when we put the 10-K together for this year, we will give some more market descriptions for Photop. But for right now, you're on the right track thinking that that's the largest market that they service.

Okay, two more questions. Could you talk a little bit more about the rough dollar content for joint striker fighters?

Jiwon, we have in the release that we had where we announced we had a $40 million order, we were able to really put out all the details that we're able to at that time, based on what we want to put out and what our customer, Lockheed, wants us to put out. We're not at liberty to disclose any particulars on the purchase price. It is a very significant purchase price, one of the highest dollar products that we sell. It is a kind of a multi-year program that was announced in that. Those are really the details that we're at liberty to talk about now. I think we're very happy that within the context of that release, we also announced that we will continue to be the sole-source provider for the next few low-rate initial production plans that they have. But going into any more specifics, we're probably not able to do that at this time.

Okay, fair enough. And lastly, Fran you highlighted there's still prospects for M&A. And I wonder where we could be sort of kind of focusing you to make those initiatives?

That's a good question. We're again back looking at all four of our business segments and what could we add on to each one that would be complementary. And I think we'd like to look at something to add to the IR business that would keep us right in there, growing that business. The other units, we have things we're working on, people we're talking to. But nothing that I can say is strong enough. I think the thing we are focused on is trying to be material centered when we look at an acquisition. However, things like our Photop acquisition. We do have to do a good job of digesting it so that there's something that we'd like to pick up because of Photop, we'll be able to add it to the near-IR segment. So, we got some work doing in digestion of what we've just purchased. But we are looking at every one of our segments to add on. Nothing specific.

Okay, that's all for me. Thank you very much.

Thank you, Jiwon.

Thank you. And we have no further questions in queue at this time.

Thank you, Karen. If there are no more questions, I would like to thank everyone for participating today. Our next earnings release for the quarter and year ending June 30th, 2010, is likely to be during the week of August the 2nd, with a conference call to follow the same day as the press release. Thank you for participating in today's conference call.

Ladies and gentlemen, thank you for participating today. You may now disconnect.