II-VI Inc (IIVI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the to II-IV Incorporated fiscal year 2011 third-quarter earnings call. 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, this conference is being recorded. And now I will turn it over to your host, Craig Creaturo, Chief Financial Officer and Treasurer. Please begin, sir.

Thank you, Tyrone, and good morning, everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-IV Incorporated. Welcome to the third-quarter fiscal year 2011 II-IV Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, April 26, 2011. 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.

Well, thank you, Craig. I am Francis Kramer, President and CEO of II-VI Incorporated. My prepared remarks today will provide insight on each of our business operations while highlighting the significant events that drove our record quarterly bookings and revenues.

In the IR Optics segment during the second-quarter, bookings, including HIGHYAG, reached a record $53 million and were up 12% quarter-over-quarter and 38% compared to the third quarter of FY '10. During the quarter, we continued to see strong demand from our OEM and aftermarket customers, as machine utilization rates steadily improved. We see steady growth in new machine builds, approaching the year 2008 annual peak levels of 4,500 to 5,500 high-power CO2 laser systems. In the US, new orders for domestic OEMs for the third-quarter increased 51% quarter-over-quarter. This increase was the result of blanket orders from low-power OEMs. High-power OEMs continue to see stronger demand for spare parts, as machine utilization rates improve and new machine builds trend upward here in North America. And in the North American aftermarket, which is a relative indicator of machine utilization, we had a 13% increase quarter-over-quarter and a 19% increase versus the third-quarter of fiscal year '10.

We have seen quote activity and part volume increase throughout the past six months while we continue to face pricing pressure from OEMs and laser service companies . All markets, with the exception of housing, are robust. US military orders for our Infrared Optics segment decreased 38% quarter-over-quarter, and we were even with the third-quarter and fiscal year '10. This relatively weak bookings in the third-quarter were due to timing, and in the fourth-quarter we now expect sizable orders for a major military program. Overall, we forecast military bookings to be over 30% higher in fiscal year '11 versus fiscal year '10.

Our European bookings for the third-quarter were up 18% quarter-over-quarter and 51% as compared to the third-quarter of FY '10. New machine builds by high-power OEMs continue to increase, and we are now approaching in Europe the high production rates of calendar year 2008. Laser utilization rates continue to strengthen, reflecting the improving economic conditions in Europe.

Japan bookings in the third-quarter were 4% lower quarter-over-quarter but 46% higher than the same quarter last year. The high-power Japanese OEMs continued to gradually increase production, while low-power laser manufacturers, who are primarily producing via hole drilling systems, are growing at a much faster pace. We have not felt any impact on our business from the recent earthquake, but we realize this could be a factor in the next 12 months. All of our OEM customers in Japan are south or west of Tokyo, which received little to no damage. Our data shows that 83% of the installed CO2 lasers in Japan are also south or west of Tokyo. Only 5% of the working CO2 lasers were located in the three prefectures that received serious earthquake-related damage.

In China, third-quarter bookings were lower by 7% quarter-over-quarter but are up 85% compared to the quarter -- the same quarter last year. The quarter-over-quarter drop is related to the Chinese New Year holiday. We continue to experience strong demand for industrial applications in the low-power and via hole markets, which show no signs of slowing.

At HIGHYAG, bookings for the third-quarter were even quarter-over-quarter and up 79% compared to the third-quarter of fiscal year '10. The majority of the HIGHYAG activity continues to be one micron beam delivery components, laser light cables, and laser welding and cutting heads. We also are experiencing strength across advanced manufacturing applications and continue to sell more one micron laser welding heads and cutting heads by a factor of four to one. HIGHYAG is well-positioned in regard to lead times compared to our competition.

Now let me move to the Near-Infrared segment. Our Photop group contributed record bookings and revenues during the third-quarter. The quarter exceeded expectations with bookings of nearly $37 million, up 25% over the second-quarter and revenues of $32.4 million, up 5% from the second-quarter. The large increase in bookings reflects certain blanket orders from customers with supply-chain concerns following the Japan earthquake and continued infrastructure investment in China for passive optical networking and fiber to the home deployments. Demand for these products also drove the revenue increase for the quarter.

During the quarter, Photop experienced some mixed trends in the telecom segment, similar to what has been reported in the industry during March by other public companies. On the long haul and Metro network side, the demand softened during the quarter for [roadem] and [40G] products due to inventory corrections and some level of reduced investment by certain end customers. In the access market, Photop experienced increased demand for both FTTX and fiber to the home products, along with increased demand for products supporting the 3G wireless network. The visibility of near-term demand in the telecom market segment remains limited, although we believe that sustainable market demand will continue as more people worldwide gain access to the Internet and as increased video service and mobility-related deployments unfold.

At Photop, the demand for products related to the various consumer market segments remained strong during the third-quarter. This included optics, crystals, and assemblies for use in projection and display applications. Also, there was an increase in demand for the glass panels used in touch screens for a variety of consumer products, which is managed through Photop's manufacturing services group. It is expected that these consumer market applications will continue to grow.

We made significant progress during the quarter in establishing the new advanced optics product line at Photop . This included completing the transfer of the near infrared manufacturing operations from the II-IV Suzhou site to the Photop site in Fuzhou. We also made considerable investments in capital and employees to expand capacity in key Photop technologies, such as thin film coating, and to provide rapid prototyping that many of our customers are expecting, along with the high quality of the Photop optics products. The expansion is to address the growing opportunities in markets such as medical, instrumentation and industrial.

With limited future visibility from our telecom customers and a backlog of $28 million, mostly for deliveries within the next 90 days, Photop will continue to rely on short interval orders coupled with the anticipated growth in the non-telecom applications to fill current and projected capacity. Therefore, for Photop, we expect the June quarter to have slightly lower bookings in revenues when compared to the record set in the third-quarter. During the fourth-quarter, we will continue to invest in our workforce and capital equipment, as well as in research needed to meet the future expectations of our customers.

In the VLOC portion of our Near-Infrared segment, the third-quarter bookings were up 21% year-over-year and up 65% when compared to the second-quarter of FY '11. This was driven by a large military order for UV filters and continued growth in the commercial business. The operational results for the quarter included the resolution of an open customer dispute. This negatively impacted the overall II-IV gross margin for the quarter by 60 basis points and the Near-Infrared segment earnings by 150 basis points.

Looking at VLOC's military bookings, we received a $4.3 million order for UV filter assemblies used in the common missile warning system, which protects helicopters against missile attack. Demand for this program remained strong, both with our customer's business with the US Army, and also for foreign military sales. Other key military product orders received during the quarter for products going into systems for long-range surveillance and current and next-generation laser designation systems for both US-based and foreign military platforms. These products enable improved target identification and tracking with portable systems for ground troops and on Humvees and other mobile platforms. Although our bookings for these programs contributed to our third-quarter performance, we have experienced a delay in several other military programs, as government budget constraints and the uncertainty of funding levels are rationalized.

With respect to VLOC's commercial business, we experienced continued growth in the medical laser market, driven by strong demand for aesthetic lasers from the international markets and increasing demand for lasers in the domestic market. As mentioned in prior calls, the aesthetic market is for lasers for plastic surgeons and dermatologists for a elective cosmetic procedures. Regarding new medical applications, on the ophthalmic side of the market, one of VLOC's strategic customers has received final FDA approvals for a new and exciting laser-based procedure. This application is expected to grow significantly over the next several years. Also during the third-quarter, VLOC experienced continued strong demand for optical components used in the industrial laser segment of the business, with the largest demand from customers in China, wherein they are used in a variety of automotive and consumer product marketing -- manufacturing applications. VLOC continues to address this increase in the commercial market with its manufacturing facilities in Vietnam and China.

Now in our Military and Materials segment, exotic electro-optics experienced some signs of reduced military spending. Comments from Defense Secretary Gates announcing reductions in the JSF program have been reviewed by our customer, Lockheed Martin Corporation. Based on their updated forecast, our revenue stream for the JSF Sapphire Windows for the next few years is expected to be flat. In spite of the recent news with JFS, we remain optimistic on the future of the EEO business, as the defense industry continues to invest in intelligence, surveillance, and reconnaissance applications. We are also expecting an upturn in orders in the current quarter, now that the defense budget has been approved and some level of uncertainty in the spending plan has been eliminated from current procurements.

Additionally, we have made progress on the integration of Max Levy Autograph, which we call MLA, and that's the company we bought in December of 2010. Our military customers have shown interest in the MLA coating applications used for high-speed missile programs. MLA manufactures microfine conductive mesh patterns for optical, mechanical, and ceramic components. MLA will continue to work with EEO on the current programs, such as the JSF, and will enhance EEO's opportunities with new military programs.

The demand for selenium and tellurium products sold by Pacific Rare Metals remains strong, with prices increasing over 40% during the quarter for both of these minor metals. We have met the product demand of our customers and continue to develop and expand our raw material sources of supply. Selenium and tellurium raw material supply is currently extremely tight, and acquiring sufficient raw materials continues to be the main challenge of this business. Our outlook is for demand to continue at this higher levels, driven primarily by overall industrial production and the demand for photovoltaic applications. Recently, PRM completed a 30% production capacity expansion of [arturium] metal product line. We expect 100% of this capacity expansion to be consumed in the upcoming year. Our selenium production capacity is sufficient to meet current product demand.

In the Compound Semiconductor Group, our wide-band gap unit's year-to-date bookings of $15.5 million represents an increase of 112% year-over-year. Over 50% of the third-quarter bookings were from large Japanese OEMs. Revenues for the third-quarter of $3.8 million were up 12% when compared to the second-quarter and 24% year-over-year, representing increased shipments of substrates for both power and RF products and increased contract revenue from the new Department of Defense program aimed at power electronics technology. The demand for 100 mm diameter semi-insulating substrates for RF applications increased 50% quarter-over-quarter and 100% over the past two quarters. Our customers are quickly moving to large diameter silicon carbide substrates in an effort to reduce overall process costs. Lower device cost is enabling this technology to rapidly expand from a largely defense-dominated market to one with significant growth in commercial applications.

In the RF device market, these applications include 3G and 4G wireless base stations and high-linearity line amplifiers for cable TV. In the power device market, growth is being driven by high-voltage diodes for power factor correction and industrial motor drives, as well as inverters for solar energy and other green energy applications. Driven by this need to lower costs, we expect the industry transition to 100 mm substrates to continue, and we are forecasting a continuing increase in 100 mm substrate shipments for the remainder of this physical year and further acceleration into fiscal year '12.

Anticipation of a significant increase in demand of all of our silicon carbide products, we are adding significant infrastructure to accommodate increased crystal growth capacity. Earlier in FY '11, we completed Phase 1 of the infrastructure expansion in New Jersey, and we have now begun installing crystal growth furnaces during the third-quarter. We expect to more than double our crystal growth capacity before the end of the calendar year to meet the forecasted demand increase. During March, we celebrated the ground breaking ceremony for our new 10,000 square foot polishing and fabrication facility in Mississippi that will accommodate a significant increase in process capability for wafer diameters up to 150 mm. We expect to occupy the new facility, located adjacent to the site of our current polishing center, in the Thad Cochran Technology Park in March of 2012.

At Marlow Industries, bookings for the third-quarter were $14.9 million, which is a 23% year-over-year increase. Bookings were driven by customers in the defense, medical, and gesture recognition markets. All markets except telecom and gesture recognition were either at or above our expectations for the third-quarter in bookings. Although we continue to see some softening in the telecom market bookings, which were down in Q3 due to a combination of lower end market demand and inventory adjustments, year-to-date bookings of $47 million increased 33% year-over-year and were also driven by customers in the gesture recognition, defense, telecom, metal, medical, and automotive markets. Backlog at the end of the third-quarter was $22.5 million and was evenly distributed across all of Marlow's end markets. Revenues for the third-quarter from Marlow were $13.1 million, up 16% year-over-year, and year-to-date revenues up $48.1 million were up 63% compared to the prior year and were primarily driven by customers in the gesture recognition and telecom markets.

During the quarter, we encountered extended lead times with some of our critical component suppliers and also experienced raw material prices increasing, including those for tellurium metal and metalized ceramics. While we expected bookings to be down in the current quarter, primarily due to the reductions in defense spending in several major defense programs which are approaching the end of their life, we are expecting the fourth-quarter revenues to be up sequentially and year-over-year as we fulfill backlog for these customers. The new program activity and adoption of thermoelectric technology for emerging applications continued to increase in all of our markets.

In summary, Craig, we are pleased with our year-to-date, a strong performance. We are making strategic capital investments worldwide, including Vietnam, China, and the United States, to keep up with high demand. We expect the final quarter of fiscal year '11 to be a solid improvement over the same quarter in fiscal year '10, which should lead to full-year revenues of $0.5 billion while more than doubling our EPS. If we are able to achieve this level of revenues, we would have grown an average of 17% per year every year since we went public back in 1987.

Craig, 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 section of the press release, bookings for the quarter ended March 31, 2011, were a record $142.9 million. This was an increase of 30% over the same quarter last year. Bookings for the March 2011 quarter increased 7% from the December 2010 quarter. Total Company backlog at March 31, 2011, increased to $176.5 million . The components of the March 31, 2011, backlog were Infrared Optics at $42 million, Near-Infrared Optics at $44 million, Military and Materials at $60.5 million, and Compound Semiconductor Group at $30 million.

The effective income tax rate for the quarter was 14.3% and brought the year-to-date effective tax rate down to 19.9%. There were two main drivers for the lower effective tax rate during the quarter. First, based on the expiration of the statute of limitations for the Company's US federal tax return for fiscal year 2007 and the reversal of previously unrecognized tax benefits, the Company recognized an income tax benefit of approximately $1.2 million or $0.04 per share. Second, the Company benefited from a higher mix of foreign source income, which was driven by the strong performance of our businesses serving the industrial and telecom markets; including Infrared Optics, Photop, Marlow, and PRM. This increase in foreign-sourced income lowered the Company's overall effective tax rate. Our current forecast for the full fiscal year 2011 effective tax rate is around 21%. Looking ahead into fiscal year 2012, we expect this favorable mix of US and foreign earnings to continue, which translates into the expectation of an effective tax rate for fiscal year 2012 between 20% and 23%.

It's worth highlighting a few items in the condensed consolidated statements of cash flow for the nine months ended March 31, 2011, and 2010 that were included in today's press release. Cash provided by operating activities is up 11% year-to-date. While this is trailing our growth percentages in revenues and earnings, it's important to note that we are making significant working capital investments during the current fiscal year to address our growing markets. The investments we have made in the nine months ended March 31, 2011, for accounts receivable and inventory are more than $30 million greater than the same period last year. Our spending on additions to property, plant, and equipment has accelerated to keep up with business demands, and we now expected to finish the current year with total capital spending around $43 million.

In the financing section of the cash flow, the $6 million payment represents the achievement of the calendar year 2010 earn-out targets for the Photop transaction. A second and final payment of a similar amount is expected in March 2012. The total increase in cash during the current year has exceeded $20 million, with 45% of that increase coming in the past three months.

As Fran mentioned during his prepared comments, we did not experience any significant disruptions from the earthquake and tsunami in Japan last month. In fiscal year 2010, about 6% of our total sales were into the country of Japan. In the quarter we just completed, we had approximately $8 million of sales in Japan, an increase of 19% over the December 2010 quarter. Reports from our customers have been favorable regarding the impact they foresee due to the earthquake. As of today, we have not seen any conditions from customers or suppliers in Japan that have caused us to make significant changes to our business plans, but we are staying alert for longer-term buying trends of our customers and monitoring suppliers with operations in Japan.

The current plan to provide our initial guidance for fiscal year 2012 is to do so with a separate announcement during the month of June. This announcement will be made after the completion of our fiscal year 2012 budgeting process and will provide our initial targets for revenues and earnings per share for the full year. We have elected to establish this as an appropriate middle ground time to initiate guidance for the upcoming fiscal year, because such an announcement today would precede the completion of our approved budgeting process, and an announcement as part of our August press release and conference call would be greater than one month into that fiscal year.

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 30, 2010.

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

(Operator Instructions).

Our first question is from Avinash Kant of D.A. Davidson. Your line is open.

A few questions. First of all, when you talk about CapEx for the year, you are talking about roughly $43 million now. Could you give us some idea how do you see CapEx going forward? Do think you have kind of peaked in the CapEx here, or you could maintain at this level?

I think, Avinash, I think what we have seen during this fiscal year is kind of indicative of how we think it is going to shape up for the rest of the year . And what I mean by that is, we have been accelerating here. We spent $14 million just this past quarter. We definitely are -- I mean, the majority of those investments are for capacity expansion, for other investments for this ongoing demand that we are seeing across the variety of markets.

I would say that the $43 million, definitely, we believe, based on our current expectations, will go up next year. I think as part of our budgeting process, we are finalizing exactly how much it will go up. But I think that this run rate that we are starting to get into, somewhere between $10 million and $12 million to $14 million per quarter, I think that is probably a reasonable run rate for the next few quarters. How rapid or how slow, we will kind of update you as we go, but I would say FY '12 CapEx will be above what we are projecting for here in FY '11.

Okay. And did you give bookings and revenues for Photop?

We gave -- in the press release, we gave the details of Photop's bookings, not only for the quarter but for the nine months. We included in the backlog information -- we included Photop in what we said for the Near-Infrared segment, and that Near-Infrared segment as a whole is $44 million in total backlog. So we're starting to -- for just one more quarter, we will be calling out the Photop information separately. Then it will just wrap in normally as part of the Near-Infrared segment.

But you did give revenues for Photop in the quarter?

That was also in the press release on the third -- excuse me, the fourth paragraph of the press release. That was detailed there as well.

Okay, perfect. And margins -- you did mention that there was some positive impact, almost 40% increase in pricing of selenium and tellurium. Did it eventually help your margins, given the raw material pricing may have been up to, or was a net-net, not much impact?

But it did help our margins on the M&M segment. I'm sorry, I can't quantify it. I don't have that information. But the -- you hit it right on the head. Although we get a higher price for what we sell, we are paying a higher price for the raws that we are buying. But there is some lag on that in this quarter. We got the benefit, a little bit, of having some older raws that we sold against the higher price, everything we sell is indexed to the price at the moment we ship it.

And the final question -- Fran, maybe. You have exposure to different segments. Could you give us some idea in terms -- it looks like the defense-related revenues will be actually be up in the June quarter, that's what I thought, and then maybe kind of stabilizing a little bit, or coming down some going forward. Could you give us how much overall exposure you had in terms of revenues to the defense sector?

I will maybe start, and then I will let Fran give you some other -- some additional comments, Avinash. Last fiscal year, FY '10, we were about 30% of our total business found its way into military defense programs.

This year, for FY '11, it will probably be a little bit closer to 25%, not in its -- in part, because our other businesses, the commercial businesses and telecom businesses are rebounding nicely, but I think you are accurate in saying that in many of our military-oriented business for this year, we are experiencing some growth. I think it is in certain areas where we are starting to see or get better information that we are now saying in FY '12, at least certain of those are looking to be flat.

Fran, do you want to add to that?

You kind of -- in our prepared comments, they were stretched out, certainly. Our IR segment has a good military component that probably will be on the rise for a quarter or two, based on the orders they have taken, and that is a small portion of the IR total revenues. So, VLOC is moving in there well. The UV filter business is going to be right on track here in the next two quarters or so. However, some of the programs that we have been getting onto, they're not moving as fast. I think I described uncertainty with budgeting there on VLOC. So that part of the -- that military stream it might be a little less.

Our Marlow Industries, about right on with their military stream. WBG has a portion. And then the biggest one we have is EEO, and I think the comment I made there was our JSF business will be flat for a year or so or a number of years. So, I think we have the growth is in there in Military in total. Ups and downs by unit is the best way to describe it.

Perfect. Thank you so much.

Thank you. Our next question is from Jim Ricchiuti of Needham & Company. Your line is open.

The question I had was just on the operating margin improvement that you are seeing in the Infrared Optics. It has been pretty steady for several quarters, and I'm wondering, do you continue to see this trend? I guess going back to -- it looks like margins peaked in this business in the December quarter at 28.5%. Do you see margins continuing to improve as the utilization rates continue to expand?

I think it is a little tricky at the moment . We are getting a little bit of a squeeze there, with the raw material prices shooting up dramatically. The selenium has had such a large increase, and some of the metals that we use, copper and silicon, also prices are up that we have been paying. So that is going to squeeze the margins. We'll try to recover some of that with our pricing, but I think it -- I wouldn't be able to tell you we're headed up. I think we have projected pretty much where we have been, plus or minus just a little.

Okay. And then just looking at a couple of line items. Your internal R&D was up sequentially by a fairly significant amount. Do you -- should we assume that on a go-forward basis, or was there anything unusual in that -- the quarterly spend on internal R&D?

I think, Jim, there is probably two factors there. One is, I think we continued to invest, especially in Photop. I think that is an area that we are continuing to make further investments in and we will continue to make. Those investments now are higher than when we first acquired the company at the beginning of last calendar year. So we are spending some more dollars there.

And I think the other is that we are continuing to work on other, more material-centered US-based areas here in the US. Nothing that we are ready to disclose or describe right now, but kind of other areas where we think cap long-term, good growth potential, and we are starting to pick up the spending a little bit in those areas as well.

I would just like to add to what Craig had to say, certainly at Photop, we would like -- we are and we are wanting to spend more in R&D as we look at products that we think we could add to our portfolio and be on the leading edge of what the customers want.

Okay. And just in terms of head count. You've given us some color in terms of CapEx, and I'm just curious in terms of head count in the different segments, are there any areas where you are adding significant head count or making some investments there?

I would say, Jim, that overall -- maybe just a couple broad comments. We ended fiscal year '10, June of 2010, just a little bit under 7,000 employees worldwide. That picked up, especially in our Vietnam facility in the September and December quarters, as we ramped up and got higher volumes for our gesture recognition program. And we were up over 7,000 in the December quarter, and we are down to probably a little bit -- right about the same number, maybe a little bit less, about 6,700 people in total as of the end of March.

We have begin to scale back a little bit in Vietnam. We are adding to our US domestic worldwide employment, and we have added probably about 100 positions in the US in that nine-month period . But I think it is our international operations where, as needed, as production needs, we are moderating the headcount there, mostly on the hourly side.

Got it. Okay. Thank you.

Thank you. Our next question is from Mark Douglass of Longbow Research. Your line is open.

With the -- you talked about -- there is a resolution of a customer issue at VLOC, and that hampered the Near-Infrared margins little bit, 150 basis points, if I remember that correctly, in the segment earnings. I'm assuming that goes away in 4Q, and you get those 150 bps back. I mean, are we looking at closer to the 18%, 19% range that we saw earlier? Is there still going to be some -- I think we were told about some mix with Photop, then maybe margins would have been down a little bit from one and Q2 in fiscal '11 . Could you just talk about the Near-Infrared margins a little bit?

I think what you said about 150 basis points -- yes, that is a third quarter event, not happening in the fourth. I think I didn't allude to it much in my comments, but I do see, and I think I said that the fourth quarter Photop portion of Near-IR will be down slightly from the third quarter. And I would relate most of that to what appears to be a mix shift within our telecom product area. We have some growth in product line, but it is a lower margin line, and one of those that is slowing down, was maybe a little higher margin line that will be dropping out.

And that is what I can tell you about what we can see for the next, say, 60 days, but the quarter is 90 days long, so there is uncertainty on the latter part. And that is so prominent, I think, for the telecom supply situation. We see a softening as the quarter goes on.

It could change at the last moment, just like happened to us a little bit in this third quarter. And I would love it to be better.

So right now, the order rates that you published, you are seeing similar type -- I mean, you are seeing similar demand trends as we move through -- we are almost through April here? Things are still on track?

Yes. For the numbers we've told you about, we are on track for those numbers. And I think we feel very confident.

Okay. Then with the Compound Semiconductor. What is the size of the silicon carbide business right now? Is it essentially the balance, taking out Marlow? And then just basically talking about, what is the opportunity or the market size for your silicon carbide, and what do you see going forward?

Mark, you are correct. Really, the two businesses within the CSG, Compound Semiconductor Group, are Marlow and then the other one is the -- really, the remainder is the WBG, the silicon carbide business. That business definitely has grown quite a bit in terms of revenues this past year .

During the prepared comments, Fran -- one data point, we said year-to-date bookings for WBG were $15.5 million. Just to give you an appreciation of where that's at, that's more than double what it was in that same nine-month period, as compared to last year. So that is kind of the other portion, if you would, of the CSG segment. I'll let Fran kind of answer the other portion of your question about the overall market opportunity.

Yes, and the market for me would be hard to quantify. I can tell you, there are three or four pretty active players in there, and we think we're maybe the second -- in second place on market share. I can't comment on our shares, because this market is moving very rapidly, and things keep changing. And probably the most rapid -- and I made in the comments in the script, was the move to 100 mm, where it's a larger product, the prices are much higher. But price per cubic -- or per square millimeter is not higher.

So we have a size of scale up and pricing coming down per square millimeter, and active pricing around the world. But it is really getting good traction right now, so our investment is ramping pretty quickly. For getting a quantification of the market, you would probably have to go to somebody like Yole, one of these public studies out there, to get a good flavoring, and I think that is the best way to leave it.

Okay. And then just finally, along the same lines. Is it -- the CSG is a little lumpy here. Is Marlow a more lumpy business, or is it the silicon carbide that tends to be a little more lumpy, right now at least?

I think I made the comments in there. I think our two products that have been -- if there's a fluctuation, certainly, our telecom has been on a nice run. Maybe it has a little swelling. But the other is gesture recognition, which looks to us to be a strong product in the first and second quarter of each fiscal year, but not so strong in the third and fourth.

Right. Okay. Thank you.

Thank you. Our next question is from Greg Halter of Great Lakes Review. Your line is open.

Yes, good morning. Excellent results. Congratulations on that. Regarding the Company's cash, I think in the last quarter, you had indicated about one half of that is in the US. Is that still the case?

That is still the case, Greg. It's roughly, fairly evenly split, half inside of the US and half outside of the US.

And no plans to repatriate that at any time, given the current tax situation?

We are counting on some kind of tax law to make that practical for us to do. But we are not counting too heavily, and otherwise we won't move the money until we come up with the right investment to take advantage of.

You and everyone else out there.

Right. Exactly.

Relative to your backlog, you indicated that Photop is included in the -- I think the Near-Infrared side. But I don't know if you gave the dollar amount of the backlog related to Photop.

Greg, we did not. We are starting to try to address Photop within the context of Near-IR a little bit more broadly, so we're not giving that specific piece of the backlog. We gave the overall Near-Infrared backlog at $44 million, but we didn't call out the specific pieces of it.

Okay. And relative to the acquisition program of the Company, I'm just wondering if you could comment on what you are seeing out there in terms of what may be of interest, or whatever the case may be, or not of interest?

Well, in each one of our business segments, we do look for businesses that we could acquire that would align well with us, and we also look for -- is there another business line that we could add to the four that we have. And we are pretty active in one or two of our business segments, more than the other two on acquisitions. I can tell you we are working hard on trying to acquire a business that would fit well with us, and it would be complementary, add to the breadth that we need in our one business area.

It's like all acquisitions you work on, you think you have got it about right, and it will happen within some short period of time, but then again it might not. So we are working hard, probably with one or two closer than the others. We like every one of our four businesses, and we think there's something that we could acquire in each area, but we have got to have a willing seller at the right pace. So, we are working it.

Okay. And do you see private equity shops as competition there, or is this an area where they really have not participated?

Well, I guess we can see a couple of them trying to sell businesses. In the Near-Infrared area, there is one or two large ones out there, trying to be sold right now that are private equity guys who have owned that business for five years or so. They owned it just before the downturn, rode it down the downturn, now it's popped up and they're ready to sell. I see that on a couple. But for us, on competing for -- to where we have been looking, to see somebody wanting to buy what we are wanting to buy, this private equity. No, I haven't right now.

Okay, great. Thanks a lot.

(Operator Instructions).

Our next question is from Jiwon Lee of Sidoti and Company. Your line is open.

Thank you, and good morning. Several questions, but first off, I realize you are having some conversations with your key OEMs on the commercial IR front, and I wonder what the expectation -- at least the initial expectation is from some of your key OEM customers, as the new high-power laser, as well as the laser utilization reach the 2008 peak level?

I think -- certainly, we are having a conversation on that all the time. High-power laser, where is the business headed, and I think right now, such activity on both sides of the -- whether it is CO2 or fiber -- really active, and I made the comment that the production rate down the assembly lines 4,500 to 5,500 per year on the CO2. And you probably would say, well, what is the one micron fiber on our side -- in our belief, it is about 1,000 to 1,100. And about that 1,000 to 1,100, 80% or more is to high-power welding.

So the CO2 business is in the cutting side, as you know. So you're looking at, let's call it 5,000 new high-power CO2s into the cutting, and the fiber you might have 200. So fiber is 200 out of 5,200. What do people expect? The growth in the overall market has been so great right now that the fiber laser, at the moment for CO2 people, they see at expanding the addressed market. And the belief is that that will continue for some time, but it could very well change. Most of our CO2 people are very determined to keep bringing down costs, improving the product, and it's setting up to be a very interesting next five to 10 years, let's say.

Well, that is a very insightful comment. Thank you. And then just kind of moving on to China side. You said quarter-over-quarter on the IR front was down about 7%. I wonder whether the dynamics is different if you are kind of breaking out the IR versus the new IR in China, or high-power versus the low-power, however you find it more relevant?

Yes, and my comment was really on the infrared business over in China. And that was on a quarter down, because in the second quarter, which was not very -- it was not holiday-affected in China. But here in the third quarter, you had a big week off there, so that was holiday-affected, and that's why think it was really 7% down. The mix of high-power and low-power in China -- a number of optics we sell for small, low-power -- smaller optics into China is much, much greater than the high-power number of optics, but our dollars are much bigger on the high-power side.

I don't know if we -- I do not personally know right now how that mix was affected, third quarter versus second. My gut feel, about normal. China does a lot of low-power laser businesses, and these low-power CO2 lasers sell for -- please don't quote me on this, but in the $700, $800 range, and they throw them away after one year. That is how the cost effectiveness of low-power CO2 and marking is done in China. So very, very aggressive low-power CO2, and it will be tough to beat out of its place.

On the high-power CO2 in China, you've got the major multi-national OEMs setting up some shops there in China, and they are gaining ground. The price of such a high-power CO2 laser will be quite a bit higher than a CO2 laser designed and built in China, which also has a lot of traction and a bigger installed base, I would say. So both of those high-power avenues of production and distribution into China are moving full speed.

Okay. Thanks, Fran. And staying on the IR side. Your operating margin quarter-over-quarter really picked up very, very strongly. The question is, if the high-power, in the aftermarket orders, stay up as they are, is there a lot of room for the margin expansion on the IR business?

The IR business can have a little bit more margin expansion, but we do have to work on the price side of that in order to make it happen, because remember the comment I made about selenium, copper, and silicon costs climbing up quickly now. So in order to get a little bit more margin, or to hold the margin, we have to make some moves on the prices.

Okay. And then the Military side. Is there any programs you feel a little more comfortable, or at least secure about the outlook, looking at fiscal 2012 that you can comment on?

Well, the ATP Sniper is a big program for us at EEO, and that's running very, very well. And although I said the JSF program, which is a big program for us, will be flat, we are not quite to the point where what it will flatten out. The number of Sapphire Windows sets per month -- I cannot make -- I can't tell you that number. But we are not quite to that. But let's say we get there in two, three months or so and then flatten.

So those two are our big programs at EEO, and big program at the VLOC is the UV filter business, so those are the three, and I think we feel good on all three of those. And after this budget dilemma that's been going on, I do think here in the fourth quarter, first quarter, second quarter, some of the heritage businesses we have been on we will cut loose again. So those will be the marquee programs, I think, and to go into more detail, I would really have to have a little more prepared comments to tell you.

Well, that is helpful. And lastly for me, please, if you could give us any qualitative expectations for your operating segment growth, which of the key operating segments you expect ,at least a little better growth versus the others?

I would say, broadly speaking, Jiwon, if you look for the next, let's say three to four to five quarters, I would say continue to increase in expectations for the Infrared Optics is there. As far as the revenue demand, like Fran has already mentioned, the raw material pricing challenges, etcetera, that go along with that, but set that aside overall, and we continue to prepare for a higher level of both, as Fran was touching on, utilization and deployment of systems. So that is there.

I think in the short term, too, our, over the next few quarters, as selenium and tellurium prices remain high, that will continue to drive higher levels of revenue for our PRM business and the Military and Materials segment. So I think those are a couple of key ones that we are looking at, saying that they have good growth outlook here in the next few quarters.

Okay, and one last thing. Did I hear Fran correctly in assuming that acquisition is still one of the top priorities at the Company now?

It is a top priority, and I tried to condition that with -- we have to have sellers that want to sell, and we have to get good value for what we are willing to buy. So we have to put a little condition -- I think we are rather selective buyers, and I wish I was able to do you that we have a business that we are going to buy in the next 90 days. Obviously, I could not make such a comment if I thought that was where we were or weren't. But it's tough to be able to give you any more insight to where we are on acquisition, but I can tell you we are working on that front quite actively.

I understand. Thank you very much.

Thank you, and we have a question from Greg Halter of Great Lakes Review. Your line is open.

Yes. Thank you for allowing me to ask again. Relative to the medical opportunity in the ophthalmic area, is that cataract surgery related?

Yes.

All right. Thank you.

Thank you, sir. There are no further questions at this time. I would like to turn the call over to management for any closing remarks.

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 30, 2011, is currently scheduled for Tuesday, August 2, 2011, before the market opens, with a conference call to follow that same day at 9.00 AM, Eastern time. Thank you for participating in today's conference call.

Ladies and gentlemen, thank you for your participation today. This concludes the conference. You may now disconnect, and have a wonderful day.