II-VI Inc (IIVI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the II-VI Inc. fiscal year 2010 fourth-quarter earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Craig Creaturo, Chief Financial Officer and Treasurer.

Thank you and good morning, everyone. I'm Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Inc. Welcome to the fourth-quarter fiscal year 2010 II-VI Inc. investor teleconference. As a reminder, this teleconference is being recorded on Thursday, August 5, 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 Cramer, President and CEO of II-VI Inc. My remarks today will continue to showcase the improvements in results we have experienced in the quarters of fiscal year 2010.

Our fourth-quarter EPS of $0.51 was 143% above last year's fourth-quarter results and 55% above the third-quarter fiscal year 2010 results. Bookings and revenues in the fourth quarter increased 120% and 71% versus the same measures in the fourth quarter of fiscal year '09. Quarter-over-quarter bookings increased 15% and revenues 16%.

The effect of these fourth-quarter results was full-year bookings of $388 million, revenues of $345 million and EPS of $1.25. Bookings and revenues, excluding Photop, were 5% and 6% respectively below our prior peak in fiscal year 2008 for these measures. The recovery at II-VI has been steady in the IR optics segment and propelled in the near IR business segment by Photop Technologies Inc. acquisition.

Going into our business segments, the Photop integration into II-VI near-infrared group continued to progress smoothly on all fronts during the fourth quarter. For the second quarter in a row, Photop exceeded expectations with bookings of $33 million and revenues of $27 million. Photop continued to see increased demand across all markets, including telecom, consumer, industrial and medical. Photop's increased demand in the telecom market segment is mainly driven by increased bandwidth demands that are resulting from increased Internet traffic worldwide, along with the worldwide deployment of 40G optical networks and major infrastructure investments in Asia that are scaling in order to support mobile communications and computing applications. We continue to invest in our workforce and capital equipment expansion, as well as in research and development needed to meet increased demand of our customers.

Increases in raw material prices and leadtimes from some of our suppliers are continuing to be addressed. We are managing the supply chain by developing and qualifying alternate sources of supply to maintain delivery rates. Based on our backlog and our interactions with our major customers and suppliers, we expect to achieve slightly lower revenues at Photop next quarter.

In the other portion of our near-infrared segment, VLOC's fourth-quarter bookings were up 37% over the fourth quarter of fiscal year 2009 and up 22% on a full-year basis. The quarter bookings result was paced by military business with a large order for UV filter assemblies, which go into systems used for missile threat detection on airborne platforms. This order of approximately $4 million addressed a foreign military opportunity of our customer.

In the non-UV military arena, VLOC continued to experience growth with full-year revenues up 23% against the prior year. This year-over-year growth is spread across the VLOC optics, crystals and assembly product lines going into systems to support our troops with laser-based rangefinders, target designators and illuminator systems for both ground and air.

The quarter also saw the continued ramp up-of the Ceramic YAG Title III program, a collaborative effort between VLOC, II-VI's Advanced Materials Development Center, and Michigan-based Nanocerox, Inc. The purpose of this three-year program is to develop the production capability for laser ceramics for use in key future military high energy laser programs.

On the commercial market front, VLOC experienced growth with bookings increasing 20% versus last year. In the US market, the growth is driven by an increase in demand for aesthetic medical application products.

In the international markets, demand for low, mid and high power industrial products supporting laser-based marketing, welding and cutting applications is growing. In Europe VLOC continues to see growth across several product lines due to modest recovery in the automotive-related industry, plus components going into lasers being exported from Germany to China to address growing consumer product applications. In China VLOC is experiencing growth related to laser welding and marking systems being utilized in the industrial arena, as well as for the lasers for manufacturing consumer products such as MP3 devices, iPhones and batteries. In Japan the growth is driven by systems for flat-panel repair and instrumentation for the semiconductor industry.

VLOC is addressing this increase in the commercial market with its lower-cost manufacturing facilities in Vietnam and in China.

During the fourth quarter, the Infrared Optics bookings of $40.7 million increased 7% quarter over quarter and 76% compared to the fourth quarter of fiscal year 2009. Orders for the quarter are within 7% of our peak of $44 million that occurred during the third quarter of fiscal year 2008. As a result, FY10 bookings exceeded FY09 bookings 5% to 17%.

In the US, due to the timing of blanket orders from key customers, new orders for domestic OEMs in the fourth quarter decreased 12% quarter over quarter but 92% versus the fourth quarter of '09. High power laser resonator and machine builds improved this quarter, but they are still approximately 50% below pre-recession levels. New orders for low-power OEMs are robust as increased demand for low-power CO2 systems for marketing and grading and material processing continue.

The North American aftermarket, which is a relative indicator of laser utilization, showed an increase in bookings of 3% quarter over quarter and 49% as compared to the fourth quarter of fiscal year 2009. This growth is not attributed to any one specific industry segment, but reflects broad market share gains and increases in the average order size as customers are now ordering additional parts to replenish inventory and address increased consumption rates and service requirements. We see signs of improvement in the Automobile and Agricultural sectors, while the Housing sector remains slow to recover.

US military optics orders for our Infrared Optics segment for the fourth quarter increased 13% quarter over quarter, but decreased significantly as compared to the fourth quarter of fiscal year '09. In the fourth quarter of fiscal year '09, due to the lack of industrial business, the Infrared Optics segment placed a heavy focus on military programs. Military orders received in the fourth quarter were primarily follow-on orders for optics used in airborne infrared countermeasures and ground-based situational awareness platforms. We expect to see some follow-on orders in the first quarter of fiscal year 2011 for at least two ongoing military programs.

European bookings for the fourth quarter were up 6% quarter over quarter and 82% as compared to the fourth quarter of fiscal year '09, which was our weakest quarter in Europe last year. Fiscal year 2010 bookings were up 9% over fiscal year '09 with the fourth quarter being the strongest quarter. High-power OEM production rates have remained steady with low-power OEMs continuing their upward trend. Consumption rates continue to gradually increase, reflecting improving laser machine utilization rates.

Asia bookings remain strong in the fourth quarter, finishing up 40% from the third quarter and 170% up from the fourth quarter of fiscal year '09. The OEM production rates in both Japan and China expanded in the fourth quarter, contributing to their strongest bookings quarter of the year. Japan's bookings were up 47% quarter over quarter and nearly double from the fourth quarter of fiscal year '09. China bookings ended the quarter 50% higher quarter over quarter and more than 3 times higher than the fourth quarter of fiscal year '09.

Zinc selenide and zinc sulfide external material orders for the fourth quarter decreased 32% quarter over quarter, but increased 67% as compared to the fourth quarter of FY09. The decreased quarter over quarter is due to the early receipt in the third quarter of a large blanket order for one of our key military customers.

Our high YAG bookings for the fourth quarter were 7% lower quarter over quarter, but 26% up as compared to the fourth quarter of '09. The majority of the HIGHYAG activity continues to be geared towards 1 micron beam delivery components, remote welding heads and some components for cutting systems. The IR optics book-to-bill of 1.06 for the quarter created a $2.2 million backlog increase during this period, which is the third consecutive quarter of backlog growth for this business segment.

In the Military & Materials segment, which consist of our Exotic Electro-Optics and Pacific Rare Metals subsidiaries, demand for products remains solid. At Exotic our markets continue to reflect strength across the board. In the fourth quarter, orders for windows and components showed solid growth, along with a follow-on order from the Air Force Research Lab. The outlook for our Exotic business, which is focused on the Defense sector, remains solid. We have a significant order backlog, and although Defense spending is being closely reviewed and future budgets may be squeezed, we are positioned well in the programs we are supporting such as JSF.

Additionally, a significant amount of military hardware has been damaged in the war and will need to be repaired and replaced. We produce many of the optical components in this hardware and are likely to be the company of choice to repair or replace these items.

Demand for selenium and tellurium products produced by PRM remains solid. The price of these products, which is based on metal index prices, remained relatively stable throughout the quarter. However, in the past 30 days, we have seen a decrease in the tellurium index price of about 10%. We do not anticipate this index price decrease will have a significant impact on our business. Demand for our tellurium product is driven by the photovoltaic applications and selenium products from general industrial applications. Despite the supply tightness and strong competition for selenium and tellurium raw materials, we have been successful in producing -- procuring raw material quantities that are in line with our production rates and needs.

During the fourth quarter, the Military & Materials segment experienced an increase in profitability attributable to the sale of ancillary products from PRM and improved manufacturing operations with our new military products at EEO. Production capacity expansion is taking place at both of our manufacturing sites in this segment, and we are near completion of the new 25,000-square-feet sapphire fabrication facility at EEO and expect to start to occupy this facility in the next 90 days.

In the Compound Semiconductor group, our Wide Bandgap Materials unit's fourth-quarter product bookings of about $2 million were very strong, exceeding our internal forecasts by 50% and were up 50% over the third quarter. Fourth-quarter contract bookings, however, were significantly lower than forecasted due to a delay in an award of a large DOD contract focused on improvements in the manufacture of large diameter substrates for both RF and power applications.

Contract booking is now expected in the first quarter of fiscal year 2011. Fourth-quarter total revenues met our internal forecasts and were 5% above the third quarter. Full-year product bookings exceeded FY09 bookings by 77%, and fiscal year total revenues exceeded the prior year by 30%. For the quarter and the full year, the increases in product bookings and revenues were driven by strong demand for our products by OEMs in Japan and the US.

During the quarter, the demand for 100 mm diameter semi-insulating substrates for RF applications increased over prior quarters. We expect this industry transition to 100 mm substrates to continue and accelerate in fiscal year 2011. In addition, we are on track to achieve qualification of our 100 mm 4H-conducting substrates for power switch applications at several large OEMs in Japan and Europe. Early results indicate that qualification may be successfully completed by most customers as early as the second half of fiscal year 2011.

Once we are qualified by large OEMs, we expect that substrate demand will increase considerably. In anticipation of this increase, for all of our products, we began in the fourth quarter of fiscal year 2010 to add significant infrastructure to accommodate increased crystal growth capacity at our Pine Brook, New Jersey Tech Center and at our Starkville, Mississippi Advanced Polishing Center.

At Marlow Industries bookings in the fourth quarter were very strong, exceeding our forecasts. Fourth-quarter revenues also exceeded forecasts and were up 27% over the third quarter and were up 57% when compared to our December quarter as we experienced increases in all five of our major markets, which are defense, telecom, medical, consumer and government-funded research.

In the fourth quarter, the telecom demand continued to escalate. We also began to realize significant demand at a new consumer market application. During the fourth quarter, Marlow Industries was awarded a two-year $3.9 million contract from the Defense Advanced Research Projects Agency for the development of advanced cooling modules that can be used for cooling military electronics. As a result of the strong fourth-quarter finish, our fiscal year 2010 bookings were $54 million, which was an increase of 25% year over year.

During the quarter, Marlow ramped up its Vietnam manufacturing capacity to address the increasing demand in the telecom market. We also qualified our new Vietnam high volume consumer manufacturing facility to address the future high volume needs of a newly emerging consumer application.

In addition, we are experiencing an increase in new development projects in all of our major markets.

We are on schedule to transition additional processing capability to Vietnam for our telecom production during the first half of fiscal year 2011 to improve our cost and quality and to reduce our lead times and further enhance our competitive position.

So, in conclusion, let me talk about our guidance for fiscal year 2011. We are guiding turned revenues of $410 million to $425 million and EPS of $1.55 to $1.65. This represents increases of 19% to 23% year over year for sales and 24% to 32% for EPS. Achieving these results is consistent with our view that will be a continued slight improvement in the worldwide economic activity throughout fiscal year 2011.

Craig, that concludes my comments.

Thank you. 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 in the press release, bookings for the quarter ended June 30, 2010 were a record $126 million. This was an increase of 120% over the same quarter last year, including the bookings of Photop and an increase of 63% excluding the bookings of Photop. The bookings from the just completed quarter were 15% higher than the March 31, 2010 quarter. June 2010 was the fourth consecutive quarter where bookings outpaced revenues. The Company backlog at June 30, 2010 was $156.5 million, an increase of $12.5 million during the quarter. The components of the June 30, 2010 backlog from continuing operations were Infrared Optics at $31 million; Near-Infrared Optics at $48 million, which includes Photop's backlog of approximately $23 million; Military & Materials at $52 million, and Compound Semiconductor group at $25.5 million.

During the quarter ended June 30, 2010, we completed the valuation work required for the purchase accounting for the Photop acquisition. Based on the results of this work, approximately $15 million of the $94 million purchase price for Photop was assigned to intangibles assets. This included a portion of the purchase price that was allocated to Photop's technology and patents, customer relationships and trade names. The goodwill recorded for the Photop acquisition was just over $30 million.

During the quarter ended June 30, 2010, the share-based compensation expense for the Company was $3.2 million. Included in this amount is $800,000 of share-based compensation needed for the Photop performance and retention programs. The share-based compensation expense for the quarter also included some additional expense related to the recent retirement of our Chairman as an active employee and the application of some recent changes to the stock option vesting benefits given to our long-term nonemployee directors. These two items combine to account for approximately $900,000 of share-based compensation expense during the quarter.

As we look ahead to FY11, we expect that the share-based compensation expense for the first quarter to be about $2.7 million based on some annual share-based compensation activities that are scheduled to occur in that quarter, and then the expense should average about $1.8 million in the second, third and fourth quarters.

The movements in foreign currencies during the quarter caused some foreign currency losses. The net foreign currency loss for the quarter, which is included as part of other expense income net in the income statement, was $1.8 million pretax and was related mostly to unrealized transactions. The majority of this loss is attributable to payables of our Netherlands holding company, primarily for future payments to the selling shareholders of Photop. Because these US dollar obligations reside in an entity whose functional currency is the euro, the euro's 9% weakening against the US dollar in the June quarter caused the recognition of unrealized for these future payments. However, the US dollar amount of these obligations, which is how they will be settled, remains unchanged.

The effective income tax rate for the quarter was 23.1% and brought the full-year effective tax rate down to 24.5%. This is a decrease from our prior estimate of the full-year tax rate of approximately 27%. The current tax rate reflects a higher mix of international sourced earnings than our prior forecast.

Photop, which enjoys a 15% high-tech status tax rate in China, had stronger than forecasted earnings. The consolidated tax rate does not reflect any extension of the US research and development credit that expired on December 31, 2009. An extension of the research and development credit is currently under consideration by Congress and if extended would provide an additional benefit to the Company. Our current forecast for fiscal year 2011's tax rate is 24% to 26% and will depend heavily on the mix of US and foreign earnings.

Our quarterly EBITDA performance of $27.7 million marked a significant improvement from the $12.5 million that was recorded in the fourth quarter of fiscal year 2009 and $20.8 million that we recorded in the third quarter of fiscal year 2010. We are pleased with the EBITDA percentage of revenue for the just completed quarter at 24%, which pulled out the full fiscal year average percentage to 21%. Our cash generation has been able to keep up with the increased level of capital spending. Our current projection for capital spending for fiscal year 2011 is $25 million with the highest area of spending plan for IR optics, Photop and the military Infrared Optics businesses.

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 the 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.

We are ready to begin the question and answer session.

(Operator Instructions). Avinash Kant, D.A. Davidson.

This is [Eric Renash] in for Avinash. In your guidance what are your gross margin assumptions for Q1 and for FY11?

I would say that they were fairly consistent. I think with the quarter we just completed, they have been trending upward based on the volumes of the Company. We have also got the dynamic of mixing in there the recent acquisition of Photop. So although we are not prepared to give any specific guidance within a range for gross margin, we can generally say that they should be relatively close to the quarter we just completed.

Okay. And for FY11, what is your depreciation? What do you think depreciation will be?

Again, Eric, we are not at this time giving out that detail. I would say you can look at the depreciation for the year we just completed, and that information was included in the last page of the press release in the Reconciliation of Segment Earnings to EBITDA. And the details you can see there for the year we just completed, Eric, it was $21 million. It will go up from there. We have been starting to, as you can see from today's release, starting to spend a little bit more in CapEx, and I did give a CapEx projection for next year of $25 million. So it will go up from that $21 million. To give you more specific guidance than that, Eric, we are not prepared to do that right now.

And on the Military side, specifically on the Joint Strike Fighter, what are you seeing? There has been a slowdown in bill rates? Are you seeing a slowdown?

Our original plan had discounted the numbers that were pointed out early. So the slowdown of three, four or five, which are what is being contracted, are very much in line with what we have been planning. So our discounts I think were wise, and we are feeling quite comfortable with the rates that are going forward right now.

Mark Douglass, Longbow Research.

Nice quarter. Can you talk about the FY11 guidance? Fran, you mentioned that you would just see continued slight improvement in the general economy. But typically your earnings sales growth sequentially throughout the year, and basically it looks like you are just kind of flatlining relative to your 1Q guidance. Anymore thoughts on how you put your guidance together I mean considering your backlog has been growing?

I think you hit it reasonable. I think we have very good visibility in the first half. If you take that first half well thought out and maybe the second half looks like the first half by the way we put together the guidance, but out of those six business segments, we have them moving in different directions. So we're trying to make a judgment on third and fourth quarter on what will happen with our Photop business, with our Infrared Optics business, what will happen with our Marlow CSG business, and each one seems to be very, very foggy out there for that second half. We know in a couple of those businesses we have very nice products that we are producing right now in the first half, but we do not have follow-on orders for the second half, and we are having a rough time deciding on those that are affected by consumer demand on how they will affect it.

So we have somewhat done what you said, put a guidance into the second half that is consistent with the first. Normally it would tend to be up.

Right. But the economic uncertainty is just keeping you (multiple speakers) conservative?

I don't want to say conservative. I think we are --

Prudent?

We are reading into everything that everybody is putting out there that the economy could be softening. We would like to think it was slightly going to -- slightly improve, and that's what we've said that. Because the trends that our customers are coming to us with are, for example, look, the US was talking about only making 10 million out of 60 million cars. Now we are thinking about 12 million, not 10 million. So we are hearing a lot of rumors that things are headed upward nicely, but then we are watching what is happening with unemployment and all of those things and saying, jeez, we've got to guide a path through the middle here, and that is what it is. I think it is a good guide.

Right. And then you have had very strong margin recovery in your three segments other than Infrared Optics, which is doing well but sequentially. Did they appear relatively sustainable given current order and volume trends? Anything out of the ordinary in the quarter in regards to margins for those or anything in particular in [Near-IR]. Do you think you get a little bit of improvement as Photop integration moves forward?

I think we are pleased as you kind of noted or pointed out. We are pleased with the improvement that happened sequentially. I would say that in the Near-IR, it is definitely being driven by Photop. As Fran mentioned, we did have a very strong quarter from Photop. We are expecting the first quarter to be a little bit lower from them than the quarter we just completed in the fourth quarter. But overall we have been pleased with kind of the margin profile of Photop for the last two quarters and think that will continue to pull up the overall Near-Infrared profitability.

In the Military & Materials group, Fran mentioned in the quarter we just completed we had some sale of ancillary products for PRM. Mostly our products are selenium and tellurium. From time to time, we do sell some odd products. We had some extra margin in that quarter because of that that we don't expect will repeat. But overall we are pleased with kind of the direction of that business segment, including the continued improved performance for EEO.

And then for the Compound Semiconductor group, really the main driver there is really the volume increases at Marlow. We believe we can kind of hang onto that at least over the next couple of quarters where the visibility is good, the margin profile should be pretty good for that business as well. So hopefully that gave you a little bit of additional detail on where we are thinking those will go.

Coming back to Fran's points on the guidance again, I think the visibility in Q1 and Q2 are pretty clear. Coming back to the tail end of the year, we have got several businesses that we're not exactly sure how to model those out, and a range of modeling is what we tried to do in coming up with the guidance.

Right. And then if volumes just kind of modestly uptick, then it might be offset by -- you mentioned that there are going to be -- several segments have some capacity additions, so that just might be a little bit of a wash?

That is kind of how our model plays out.

I would say on the Near-Infrared, you ask about margins sustaining possibilities. We do feel like we have had a nice real strong burst here in Near-Infrared, especially fourth quarter, and we will have a little less of that burst -- I mean a decline a little maybe first and second. So that burst helped us achieve in Near-Infrared a bigger margin. When that volume slows down, I think our margin will go down a point or two there, but it will not bring the weighted average down much. So I think Craig's comments are right on.

Jim Ricchiuti, Needham & Co.

A couple of questions. Just again, on the full-year guidance, I was just curious, in the full-year guidance, is there any seasonality to the Photop business in the March quarter that we should be aware of, or is it just a case of -- it sounds like it is more a case of just being relatively cautious in the environment?

I would say right now the third and fourth quarters we've just experienced, it was not a seasonality expected. It just had to do a lot with the stimulus money that was put out there and the need which seemed to come on rapidly, although everybody had been projecting it, for this Internet traffic expansion and the need for all the telecom cable kind of products. It happened in this past third and fourth quarter, and the customers of the Near-Infrared group are giving some visibility to the first quarter and maybe the second quarter of 2011, but nothing at all in the third and fourth. So, at this moment, since it is such a quick turn on, quick turn off, we are not able to give any strong guidance for third and fourth. But we put our judgment into those numbers for the third and fourth of 2011, but not as strong as the third and fourth of this year.

Got it. And I wonder if you could comment on just the order trends thus far in Q1 and perhaps talk a little bit about what you're hearing in terms of utilization rates or just the level of aftermarket bookings that you're seeing thus far in the quarter?

So on overall bookings trend, we are on a pace to do about what we have projected here or given guidance for, one-third of the way through the quarter, one month down. Okay? Our worst seasonal month is August. And that is why I think Europe goes to sleep, and we will see lasers turned off, and the auto industry in Europe stops a little bit. The rest of the world maybe has the normal pace. But in July and August, for us in Asia and North America, we do see July and August just being down on average. So if we have a slightly lower seasonal quarter, it is this quarter, and I think our IR numbers when we put them together in our model reflected that. (multiple speakers)

In terms of aftermarket US, I think I was talking to one of our salespeople. We are on about the pace expected. Just down a little bit because of summer doldrums, but overall it's not wiped out like it was last summer.

Okay. And just two final questions if I may. Since the R&D spend going forward was up subsequently in Q4, I'm just wondering if you can comment on how you see that in fiscal 2011? And then just a final question on tax rate. What is your guiding in terms of tax rate?

The internal R&D with the addition of Photop, prior to the Photop acquisition, we were around the $2 million spend rate per quarter. We jumped that up to the $3 million rate, and we do see that increasing a little bit. I think in FY11 we do have some key activities that we are working on, things not only at Photop, but also around the other units where we do material research.

So we do see that ticking up, and we have forecasted that to tick up a little bit in FY11. And then for the guidance for or the outlook for our tax rate, right now our pass for FY11 tax rate would put us in somewhere between 24% and 26%. Again, depending upon the mix of earnings is how it would shake out within that range.

Dave Kang, B. Riley.

Nice quarter. Did I hear you right that you expect Photop will be down this current quarter, September quarter?

I think they will be off slightly from what we just reported.

Okay. Is that primarily what, telecom, non-telecom, any color there?

I think across those four segments that we have kind of enjoyed, this April, May, June, we are going to see just some slight let up on all of them. It is just the way the order flows that we got our capacity together to deal with it, and now we are seeing there is just -- now that we are getting maybe a little bit more on our game there that things are going to be just lighter.

Okay. And who are some of the key customers of Photop in telecom? Are we talking about maybe major Chinese players like Huawei, ZTE or --?

I think you would have to speculate on that. We have all of those normal telecom customers. We are really not compared to -- in that business, which is so competitive and there are three or four very competitive companies that will be honed in on where we are getting our business just like we are honed in on theirs, we have every one of the companies you could think about for passive telecom components. That would not go any further.

Got it, got it. And can you just talk about new products in the pipeline for Photop?

No, again, a little bit comes on this -- when we do produce to people's requirements, their black box, their specifications, they are not interested for us to talk. It is such a competitive world for these telecom parts that we are advising ourselves and we are sticking to it, we are not going to be talking about the products. But I can say they are the typical products that all in the telecom space want.

Got it. And then is there any desire for you to get into actives right now? Photop is all passive or mostly passives. Any desire to get into actives going forward?

I cannot comment there. I would think it would be best just not the comment. You have characterized us well. We're mostly in passives, and where we are headed, it is just not an area that I think we should be commenting on. We are going to do our best to provide for our shareholders, our sales headed into the right products. But, at this moment, passive is where we are working really well.

Got it. And lastly, just any update on green lasers? I'm curious as far as the pico-projectors and how your green lasers will fit into the pico-projectors?

I think the pico-projector opportunity is there. It seems to delay a little bit. It seems like getting the right amount of lumens out of the projectors and with the right battery life are the challenges. And without all that, remember we are a parts supplier to those manufacturers. So until the whole product gets to be what the market wants and are cost competitive, we are doing our job of treading water, supplying parts. And so at this moment I think -- we think we can do some good production there, but I'm not sure the customers already. Or let's say there -- the product the customer is delivering right now is not what the market is going to take. I think it is going to delay a little longer, I think.

(Operator Instructions). Jiwon Lee, Sidoti & Co.

Just going back to some of the earlier points, first on the product margin for the June quarter, how much could you point to the Photop side of things the better than expected margin profile there?

I would say within the Near-Infrared Optics segment, if you look at the segment earnings for the quarter, we were almost up to 19%. If you look at the prior quarter, the March quarter, we were about 13%. I think about half of that pull-up up the margin profile was due to this -- again, this, as Fran mentioned, this burst or this stronger than expected profile from Photop. We definitely think it will continue again to help the margins within the Near-Infrared Optics business as they were kind of right around the single digits before that or just barely above double digits. But overall it definitely had a couple of percentages pull up of that segment earnings as a percentage of revenue this past quarter.

Okay. That is very helpful. Thanks. And then moving on to the fiscal 2011 guidance, could you give us some sense as to how much Photop was included there? And some of your assumptions for other key products such as IR optics and the military, how you view those segments?

Yes, it is a good question, and we are -- I think we've given a fair amount of detail today in the release as far as Photop revenues and bookings, also giving out the backlog information for them as well. We are at least at this point not prepared to talk about any specific business within the guidance as far as revenue or other more specifics.

As Fran mentioned, we've got the four segments. We have got eight businesses. We are going to try to at least in this early of a stage stay away from a lot of those specifics. Really this time last year we were not able to give any full-year guidance, and we're glad that the backlog has come back to give us visibility so that we can do that. But unfortunately we are just not at the liberty to give out any more specific details for FY11 by business or by business segment.

Fair enough. And then the first quarter of guidance, could you talk a little bit more outside of Photop your revenue assumptions and where the margin profile would be?

We do think, as Fran mentioned, we will see Photop revenue down just slightly. We do always experience the Infrared Optics business being a bit slower in Q1 than it historically has been in Q4. We see that profile. We do, as Fran mentioned, in the Marlow business we do see this consumer opportunity continuing to ramp up. So that will be a positive pickup in revenues.

Those are really the major changes that we will see in the profile. And, again, when you look at the profile of the businesses, we are thinking not too many things drastically different profile-wise from margin, from gross margin or from other ways other than, as I mentioned previously, we will have some extra internal R&D expense, and that will start to pick up in the short-term. It will not be a major increase. It has historically been brought around that 3% to 3.5% range. It might pick up to maybe 4% at the most, but that will be something that did influence our guidance for the first quarter.

Okay. And then you mentioned that on the CapEx spending, you are going to spend some on the IR expansion. What type of product lines or expansions are you expecting on the IR front?

I think it is just broadly speaking it's really production capability. It is really across the board, not so much on the crystal growth side, but more so in the other two main areas, the fabrication and the coating areas. Those are areas where over the last 24 months with the business as it had slowed down we really did not spend a lot in those two areas.

Now, as volumes have come back and, as Fran mentioned, we are starting to get close to, not quite up there yet, but close to the peaks that we had a couple of years ago, we are going to start to push the envelope on some of the areas in some of the equipment that we have. So we have put funds in there and anticipate some spending in IR, mostly for fabrication and for coating as well.

And that expansion would mainly take place outside the US?

Really around the world. That is not so much a bricks and mortar expansion as it is an equipment expansion. We don't have any major significant facility renovations within the IR Optics group plan. But we definitely will be continuing to build out all three of our IR Optics facilities both here in Pennsylvania, as well as both of our Asian facilities in Singapore and in Suzhou, China.

Each one of the three manufacturing areas of focus has capital. The diamond turning business Craig did not mention, but we have a number of machines we plan to procure, coating machines, and then in the fab side of things, some more automated processing. So it is more of a finesse improve yields, and that is when we are always focused on improving yields. So the equipment we are looking at is yield and slight capacity, but yield and cost-effectiveness.

And the last question maybe for Fran, is there anything on the acquisition front that you guys are thinking about? Any updated thoughts?

We are working on one or two that we really like. We think they will be value-enhancing for us. They will help us have a better position on a product or two that we are working really hard. But we have not sealed the deal. We are talking, and it is just like we try to picture and present to you in the past. We are looking at all four of our business segments and looking to add something in a jab. And one or too of them, I would just like to say we are close with one. But, as soon as we think we are close, we might not have a willing seller. So we're working hard, and it is for us those that would add a better full stream value for our business to add to our one or two of our product lines, just a logical step for us either up the food chain or down. We don't go very far up. We try to go down here and there. We have one that just fits in there very well, not large. But over a five-year picture, it will allow us to get a much, much better share of the business we think.

Perfect. I look forward to that. Thank you very much.

(Operator Instructions). I'm showing no further questions in the queue.

If there are no more questions, I would like to thank everyone for participating today. Our next earnings release for the quarter ending September 30, 2010, is currently scheduled for Tuesday, October 26 before the market opens with a conference call to follow that same date at 9 AM Eastern time.

Thank you for participating in today's conference call.

Ladies and gentlemen, thank you for participating in today's conference call. This concludes the program. You may all disconnect. Everyone, have a great day.