II-VI Inc (IIVI) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the II-VI Incorporated full year 2011 fourth quarter and year-end 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 call is being recorded. I would now like to turn the conference over to your host, Mr. Craig Creaturo. Sir, you may begin.

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

Welcome to the fourth quarter fiscal year 2011 II-VI Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, August 2, 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.

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 for the just-completed quarter. We will also discuss the acquisition of Aegis Lightwave Incorporated, which occurred just after the end of the quarter.

The order of today's remarks will follow in the same order as our segment reports, so we will begin with IR Optics. During the fourth quarter in our Infrared Optics segment, bookings, including HIGHYAG, were $53 million, up 30% compared to the fourth quarter of fiscal year 2010. The last two quarters of FY 2011 broke historical quarterly bookings and revenues records for IR Optics. During the quarter, we continued to see strong demand from our international OEMs and especially after market customers. Utilization rates and new applications are driving the increase in the after market business. We also received several large military blanket orders in the quarter.

In the US, new orders from domestic OEMs for the fourth quarter increased 7% over the fourth quarter of FY 2010. The decrease in fourth quarter orders compared to the third quarter level was expected, as a number of OEM blanket orders were booked earlier than expected in the March quarter. The North American after market, which is a good indicator of laser system utilization, showed a 9% increase quarter-over-quarter and a 24% increase versus the fourth quarter of fiscal year 2010. We've seen quote activity and parts volume increase throughout the fiscal year, culminating with a record bookings month in June, and record bookings for the quarter at $4.8 million. We continue to experience pricing pressure from the OEMs and laser service companies, while we face increasing manufacturing and materials costs for the majority of our products.

While some companies are expressing concern about the long-term strength in manufacturing, all markets, with the exception of housing, are strong. US military orders for our Infrared Optics segment nearly tripled quarter-over-quarter, and were 175% higher than fiscal year 2010. The strong bookings in the fourth quarter were due to the timing of programs, which is a common pattern of our military customers. Overall, fiscal year 2011 military bookings were 54% higher than fiscal year 2010.

European bookings for the fourth quarter were consistent quarter-over-quarter and up 36% as compared to the fourth quarter of fiscal year 2010. New machine builds by high-power OEMs continue to increase and we are now at the high production rates of calendar year 2008. Laser utilization rates continue to strengthen, reflecting the improving economic conditions in Europe. We believe that the optics inventories are near optimal levels and the OEMs are monitoring these closely.

Japan bookings in the fourth quarter were 5% higher quarter-over-quarter, and flat compared to the same quarter last year. The high-powered Japanese OEMs are gradually returning to pre-earthquake production levels, while low-power manufacturers, who are mainly producing via hole drilling systems, continue to grow at a faster pace. The small portion of our customers impacted by the earthquake expect production levels to return to normal by the end of the calendar year.

China bookings in the fourth quarter are up 2% quarter-over-quarter, and up 19% compared to the same quarter last year. Quote activity has been high over the past quarter, which we feel will turn into bookings in the first half of fiscal year 2012. We continue to experience strong demand for industrial applications in the low-power and via hole markets, which shows no signs of slowing.

At HIGHYAG, bookings for the fourth quarter were 4% down quarter-over-quarter, but up 91% compared to the fourth quarter of fiscal year 2010. HIGHYAG is experiencing a demand shift towards Asia for cutting and beam delivery systems. Lead times are being stretched by issues related to sourcing components and manufacturing capacity. In the US, the increase in advanced automotive and manufacturing techniques are driving strong demand for our remote welding systems.

Now moving to the Near-Infrared segment. Photop contributed bookings of $24.1 million during the fourth quarter and revenues of $28.5 million. This marks the first revenue decline at Photop in five consecutive quarters, as revenues were down 12% sequentially from the third quarter. This mainly reflected the softening demands in the telecom segment for 40G systems, as well as inventory corrections by major customers. Looking beyond the telecom products, Photop's optics, crystals, and laser products for commercial and consumer applications were up slightly in the fourth quarter.

Despite the softening in the telecom market, we continue to invest in research and development activities, as well as in capital equipment, to expand the pipeline of new products, including a series of key components and modules in developments of Ramen amplifier, ROADM, and 40G systems, and technology innovations for commercial optics and lasers, while carefully managing capacity in our workforce. We are aware of industry reports that suggest the ROADM market may continue to remain flat, possibly for the next quarter or two, and that some 40G to 100G system deployments are also being delayed, for a variety of reasons. But we believe that Photop's product portfolio is well positioned to grow worldwide over the long run in the telecom segment, and we continue to add production capabilities, capacities and engineering capabilities to the non-telecom product lines where we see additional opportunities for growth.

Looking to the first quarter of fiscal year 2012, we expect the bookings to be flat to up slightly, and for the revenue to be in line with the fourth quarter. In addition, with the acquisition of Aegis Lightwave Inc. into the Near-Infrared Optics segment, we are working to integrate various facets of the Photop and Aegis organizations that are complementary to each other, in order to leverage our global resources and sales, material and component supply, product engineering and manufacturing, and to respond to the increasing interest from our customers, especially our key customers in China.

In the VLOC portion of our Near-Infrared segment, fourth quarter bookings were down 33% compared to last year's fourth quarter, and down 17% compared to the third quarter, due to the timing of orders for UV filter assemblies which go into systems used for missile threat detection or airborne platforms. In the non-UV military space, the fourth quarter bookings increased by over 50% compared to last year's fourth quarter and the prior quarter, sequentially. This was driven by a large order for a complex optic used in equipment to support ground troops in ranging and designating of targets. There were also two key military R&D orders for optical sub-assemblies relating to protection of soldiers. This type of sub-assembly business is a strategic growth area for VLOC.

Other military product orders received during the quarter were 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, aircraft, Humvees, and other mobile platforms. Although our non-UV military bookings on these programs were stronger in the fourth quarter, we are still experiencing a delay in some military programs, as the government budget constraints and the uncertainty of funding levels are rationalized.

VLOC continue to experience strong bookings in the commercial and medical areas. During the quarter, VLOC received a large follow-on order for windows used in refractive surgeries in the US and Europe. The opthalmic portion of the market continues to be a growth area for VLOC, as new laser-based surgeries are becoming commonplace in the opthalmic market, paired with an aging population.

Also during the fourth 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, where they are using a variety of automotive and consumer product manufacturing applications. VLOC continues to address this increase in the commercial market with its manufacturing facilities in Vietnam and China, and is working with Photop to further elaborate synergistic opportunities in this area.

For Aegis Light, we -- on July 5, 2011, we announced that we had completed our acquisition of Aegis Lightwave, Incorporated. Aegis is headquartered in Woburn, Massachusetts, with additional locations in New Jersey and Australia. Aegis is an industry leader in tunable optical devices required for high-speed optical networks that provide the bandwidth expansion necessary for increasing internet traffic. Aegis offers a broad portfolio of cost-effective, optical channel monitors, which we refer to as OCMs, specifically designed for reconfigurable optical add drop multiplexing applications and high-speed optical networks featuring 10G, 40G, and 100G transmission. Aegis' AOFR subsidiary in Australia is an industry leader in fused fiber components required for fiber lasers used in military -- in materials processing applications. AOFR also manufactures optical couplers used primarily in telecom markets.

Aegis and its subsidiaries had revenues of $26.8 million during the year ended December 31, 2010, and $14.8 million for the six months ended June 30, 2011. Aegis is led by Jeff Farmer, general manager, and is part of the Near-Infrared Optics segment, which includes Photop and VLOC. The Near-Infrared Optics segment is directed by Chuck Matera, our Executive Vice President.

Similar to our other telecom businesses, Aegis has experienced softness in its core telecom markets. This mainly reflected softening demand in the telecom segment for ROADM systems, as well as inventory corrections at major customers. Despite the softening in the market, Aegis continued to invest in research and development activities to expand the pipeline of new products, including a new family of high-performance OCMs for the ROADM market, as well as high-power fiber laser combiners for industrial fiber laser markets.

Looking to the first quarter of fiscal year 2012, we expect bookings and revenues to be down compared to the just completed quarter. We believe that our ROADM and amplifier customers will work through their excess inventory by the midpoint of this quarter, and that booking levels will begin to rise again near the end of the quarter.

Within the Near-Infrared Optics segment, there are a number of technology and market synergies between the businesses that have already been identified. These synergies will be a key focus of the long-range planning actions to grow the business of the Near-IR segment. Interactions with our customers in the past few weeks have been quite positive.

Moving to the military and materials segment. For FY 2011, the segment grew nicely with bookings and revenues increasing 16% and 27%, respectively. The bookings improvement was primarily driven by our PRM subsidiary, where the index price of selenium and tellurium set record highs during the year and demand for our products increased. The annual revenue increase for this segment was attributable to both our military and PRM businesses.

Our military business began FY 2011 with a very strong order backlog. And this backlog, coupled with the acquisition of MLA, generated strong revenue growth for the year. At PRM, the high index prices and increased shipment volume were the drivers for increased revenue. For the quarter, for Exotic Electro-Optics products has shown some weakness as a result of a slowdown in the defense market, although bookings were up 6% as compared to last year's fourth quarter, driven primarily by the joint strike fighter program.

Historically, we have been somewhat resilient to the defense spending reductions, as our addressable markets grow to surveillance -- to service intelligence, surveillance, and reconnaissance applications. This is coupled with our strong base of legacy products, including those used for refurbishments or replacements. However, we are seeing some softness in our bookings and certain program awards delayed, due to funding concerns. For the quarter, revenue was up 2% from a year ago, representing increased shipments in our Safire product line, primarily related to the JSF program.

We made significant progress in the quarter at EEO, moving up the value chain from our core products of optical components to lens assemblies. A contractor design and build prototypes of the visual near-infrared channel of a hand-held target designator was received and the first prototype delivered within the quarter. This program has the potential for $5 million in revenue over the next several years. In addition, we won three contracts to design and develop IR assemblies for surveillance purposes. Two of these contracts have $1 million of follow-on sales potential. These orders represent nice progress in our growth initiative to participate in the market for advanced optical assemblies.

At Max Levy Autograph, which we call MLA, we continue to see strong interest in our coatings for high-speed missile programs. We received initial funding to develop specialized high-temperature coatings for the long-range, anti-ship missile, which is called LRASM. This development contract is expected to exceed $700,000. Manufacturing process improvements related to gridding JSF sapphire windows have resulted in significant improvements in production yields and reduced cycle time, and has allowed us to increase the quantity of JSF panel gridded at MLA. Plans to qualify MLA for grids on additional EEO programs will be implemented in fiscal year 2012. These initiatives should roll our production cost and improve product delivery.

At PRM, bookings and revenues were below our expectations for the quarter, although up significantly from the first quarter of last fiscal year. Index price declines for both selenium and tellurium during the quarter affected the value of new orders and also negatively impacted the value of orders and backlog by $3 million. In the fourth quarter, selenium and tellurium index prices decreased slightly. Decline of the index prices has caused certain customers to delay placing orders, as they prefer to work off inventories, based on the possibility that index prices may decrease further.

For fiscal year 2011, selenium and tellurium index prices increased during the year, at $36 per pound for selenium and $200 per kilogram for tellurium in July, 2010, and climbing to a high of $61 per pound and $400 per kilogram, respectively, at the end of April, 2011. The erosion in the index price was anticipated and is very normal after such a long and strong run-up. Although anticipated, the exact timing of a pullback in the index price is unknown, we currently expect to see the softness in index prices and product demand continuing through the first quarter of FY 2012.

Despite this recent softening of the index prices, the raw material market remains tight for selenium and tellurium. This suggests, and we believe, that demand for selenium and tellurium will continue once index prices stabilize. Additionally, the long-term underlying demand for selenium and tellurium in photovoltaics, infrared optics and thermal electric cooler applications appear strong, and we remain confident in our outlook for PRM. As previously reported, we have completed a 50% production capacity increase in our tellurium product line, through a combination of capital investment and product yield improvements. This increased tellurium capacity, combined with adequate capacity for our selenium product line and our success in the procurement of raw materials, has us well-positioned to meet our customer needs through fiscal year 2012.

In the compound semiconductor group, our Wide Bandgap's unit full year FY 2011 bookings of $24 million represents an increase of 159% year-over-year. 85% of the fourth-quarter bookings were for 100-millimeter semi-insulating silicon carbide wafers for RF applications. Revenues for the fourth quarter of $4.9 million were up 28% compared to the third quarter and 52% year-over-year, representing increased shipments of substrates from both power and RF products, and increased contract revenue for the new Department of Defense program aimed at power electronics technology. Backlog at June 30, 2011 for WBGs was $11.7 million.

Shipments. 100-millimeter diameter semi-insulating substrates for RF applications continues to increase at a rate of 50% quarter-over-quarter, and has increased more than 100% from the first half of FY 2011. With a large booking in the first quarter directed toward 100-millimeter substrates, we see this trend accelerating in fiscal year 2012. As in the prior quarter, this industry migration to 100-millimeter substrates is being driven by requirements for increased volume and decreased process costs. Although the primary market today remains defense dominated, we see accelerating customer demand for both product deliveries and qualification of devices for commercial applications.

In the RF device market, these applications include 3G and 4G wireless-based 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 in industrial motor drives, as well as inverters for solar energy and other green energy applications. As a result of this market growth, we are projecting continued volume increases in 100-millimeter conversion throughout our next fiscal year.

In anticipation of an increase in the demand for all of our silicon carbide products, we continue to add significant infrastructure to accommodate increased crystal growth capacity. Earlier in fiscal year 2011, we completed phase one of the infrastructure expansion in New Jersey, focused on increasing our support system for power and cooling capacity. In Q2 and Q3, we added more crystal growth capacity without our -- within our existing floor space. In the fourth quarter, we doubled the floor space for crystal growth. The new growth area is now 50% occupied with new furnaces, and we expect to be fully occupied by the end of the calendar year. In April of 2011, we began construction of 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 millimeters. Process towards completion of the new facility is on schedule to be operational in April of 2012.

At Marlow Industries, bookings for the fourth quarter with $13.2 million, down from the previous quarter and from the fourth quarter record bookings a year ago, due to lower bookings for telecom products and the timing of bookings for gesture recognition products. Part of the telecom reduced demand appears to be caused by market inventory adjustments. Full-year inventory bookings of $60.1 million increased 12% year-over-year and were driven by stronger than budgeted demand in the gesture recognition, defense, medical, and automotive markets. Backlog for Marlow on June 30, 2011 was $20 million.

Revenues for the fourth quarter for Marlow were $15.7 million, an increase of 20% over the third quarter. The quarter-over-quarter growth was driven by increases in defense, industrial, automotive, and medical markets. Increase in automotive was a direct result of the startup of a new automotive program that entered full production. Year-to-date revenues of $63.9 million at Marlow were up 46% compared to the prior year, and were primarily driven by major growth in gesture recognition, telecom and automotive markets.

Plans are underway to further increase our capacity and capabilities at our low-cost commercial production facility in Vietnam. This facility was -- has enabled Marlow's growth and ability to compete cost-effectively in our targeted markets. It also has enabled us to expand our market share in the gesture recognition market in the fourth quarter. New program development continues at a high level. Next quarter, we will begin our ramping for the consumer electronics cycle, which should result in good growth quarter-over-quarter.

So in conclusion, fiscal year 2011 was a very successful year for II-VI, with bookings and revenues increasing 34% and 46%, respectively, while earnings were more than doubled. We invested over $41 million in strategic capital spending to meet current and future market demands, we acquired Max Levy Autograph, laid the groundwork to acquire Aegis Lightwave, and remained active with other acquisition opportunities. Our outlook for fiscal year 2012 is for another year of solid performance.

Craig, that concludes my remarks.

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 today's press release, consolidated bookings for the quarter ended June 30, 2011 were $131.2 million, while consolidated revenues were nearly an equal amount at $131.8 million. This had the effect of keeping our consolidated backlog at June 30, 2011 very close to the amount reported at March 31, 2011. But, as shown in the segment information section of today's press release, the individual segment results varied, causing some changes in the segment backlogs. Total company backlog at June 30, 2011 was $176 million. The components of the June 30, 2011 backlog order, infrared optics at $44 million, near-infrared optics at $37.5 million, military and materials at $62.5 million, and compound semiconductor group at $32 million. When you look across all of the II-VI businesses during fiscal year 2011, the top three markets that we serviced were industrial at 42% of total revenues, followed by military at 23% and telecom at 22%.

During his prepared remarks, Fran gave you some additional insight regarding our latest acquisition, Aegis Lightwave. During the quarter ended June 30, 2011, we incurred transaction-related expenses, mostly legal and due diligence expenses for the Aegis acquisition, which impacted our earnings per share by about $0.01. The financial result of Aegis will be reflected in II-VI's results beginning with the quarter ending September 30, 2011. In this upcoming quarter, we expect to have certain purchase accounting-related expenses that will negatively impact Aegis' financial results, and we will begin to incur a higher level of share-based compensation that resulted from the transaction. These factors have been contemplated in our guidance for both the first quarter and full year of fiscal 2012.

As we announced on June 15, 2011, we entered into a new credit facility to replace the facility that was set to expire in October, 2011. The new credit facility is with PNC Bank and has a five year term. The size of the current facility allows for borrowings of up to $50 million, and this can be expanded to $80 million under certain circumstances. The interest rate for the new facility are similar to the rates we enjoyed under the old facility. Near the end of the just completed quarter, we utilized $15 million of borrowings to assist with the cash needed for the Aegis acquisition, and the interest rate on that borrowing was 0.815%. We believe that this facility will give us adequate flexibility to address cash needs that may arise from working capital, capital spending, and acquisition opportunities. For large acquisition opportunities, our financial profile would allow us to consider other financing arrangements.

The effective income tax rate for the quarter was 14.1%, and brought the year-to-date effective rate down to 18.4%. From an overall tax rate perspective, we continue to benefit from a higher mix of foreign-sourced income. In addition, we were the beneficiary of some incentive tax programs in foreign locations, including Singapore and China. For fiscal year 2012, we expect this mix of foreign and US earnings to continue, which translates into the expectation of an effective tax rate for fiscal year 2012 between 19% and 21%.

Our guidance for both the quarter ending September 30, 2011 and the year ending June 30, 2012 is contained in today's press release. The full-year guidance for revenues and earnings per share remains unchanged from the guidance we provided on July 5, 2011.

We offer the following factors that we considered when we constructed our ranges of expectations for both the upcoming quarter and the full year. For infrared optics, we expect continued market strength, higher laser utilization rates, and more favorable pricing to outpace production and material cost increases. For Photop, we believe there will be a leveling off of demand in the telecom markets in the next quarter, but we believe the medium and longer term outlook of the business remain very strong.

Aegis should be able to generate between $30 million and $35 million in revenues in fiscal 2012, and we expect the transaction to be accretive for the fiscal year. Both our military infrared optics business and our PRM business are expected to grow in fiscal year 2012, with the majority of this growth appearing in the second half of the year. Marlow's business should show similar seasonality to last year, as the gesture recognition consumer market gets geared up for the 2011 holiday season. And last but not least, our Wide Bandgap Group is expecting continued product acceptance and then the capacity needed for record level of revenues and profits in fiscal year 2012.

When you put all this together, we are looking for another good year of growth in revenues and earnings per share, and we will continue to identify acquisition opportunities that can accelerate this level of growth. 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 factor section of our Form 10-K for the fiscal year ended June 30, 2010.

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

(Operator Instructions)

Our first question comes from Jim Ricchiuti with Needham and Company. You may begin.

Thank you. Good morning.

Good morning. Craig, you gave some break out of fiscal 2011 revenues by market. Was that excluding Aegis? That wasn't a pro forma number, where you talked about telecom represent 22%.

That is correct, Jim. That was historical fiscal year 2011. Again, industrial at 42%, military at 23%, and telecom at 22%. Those were the top 3. 2 we didn't mention, or the next 2 largest ones, would be medical at about 4% and alternative energy/photovoltaic at 4%. But, those were historical numbers, not including any future look-out for Aegis or anything else.

Got it.

And the question I had just with respect to the military and PRM business, you are expecting a pickup in the business in the second half of the year. And I wonder if you could talk a little bit more about the potential for that pickup in the military-related portion, just in light of the concerns folks have about defense spending.

Again our military business, 2 or 3 programs that were on, that are going to go funded -- that are funded and we have been producing on them for the last couple years, ATP and joint strike fighter and some work on Arrowhead. Those will continue approximately where we are, with just a little bit more production as scheduled on each 1. We are not saying we are gaining more orders, but what turns out is the orders we have, some have an uphill slant to them right now. And that's going to happen in the second half.

Got it.

And 1 final question and I will jump back in the queue. Don't know if there is any color you can give us on the bookings activity in July, just in terms of the -- some of the industrial markets. It sounds like business is pretty strong. Has that trend continued in infrared optics through July?

I can make the comment that July is sometimes a bit of a letdown month from June, but this July has better than June.

Okay. Thank you.

Thank you.

Our next question comes from Mark Douglass with Longbow Research. You may begin.

Hello. Good morning, gentlemen.

Morning.

Craig, can you discuss the Near-Infrared Optics performance in the quarter and kind of what you're thinking going forward? There is quite a sharp drop in the profitability. I don't know if maybe you've been some of the Aegis costs in that segment, assuming they bore those costs. But, can you just go through the puts and takes there?

Sure. I would say, Mark, there's probably a couple factors that we could help you understand for the quarter we just completed. 1 is, as the revenues of Photop, as we noted, went down for the first time since we owned them, obviously, we saw some margin compression because of that. We've also seen a little bit more of a difficult pricing environment as well, so we are dealing with that challenge for Photop's products.

I think the other thing to factor in, too, is that we have taken on a little bit more contract manufacturing work, and while at Photop we generate good margin on that business, the margin profile of our overall contract manufacturing business is a little bit lower than what we experienced in the rest of the near-infrared segment.

So, I'd also say that we are also, you know, kind of looking at that going forward and have factored that kind of leveling off of revenues for Photop into our guidance. But, those were a couple of the key factors, including also what you just talked about, Mark, as far as transaction-related costs, et cetera, in there as well.

So, that penny was included in the Near-IR?

That is correct.

Okay.

And then, looking forward to the sales guidance, Frank, you talked about some of the puts and takes as to -- given actually in the month or so since you gave the guidance, there's an increase especially in the manufacturing environment. Can you describe maybe why you held it even versus where it was in June and what you are looking at in different segments, again?

Yes. I would say that the big -- when you look at the pluses and minuses, puts and takes, certainly, the IR Optics business being strong here in the first quarter, our Photop business having a little bit of a touchdown. We think that will level off. We have maybe a product that won't be selling so much, but another product that we are going to sell more of.

So, we can't, in our mind, tell you how much leveling off there will be, or whether there will be touchdown or touch up. But, a little bit of mix shift coming in the first quarter at Photop. And then going over to our compound semiconductor group, and I did highlight that pretty well, I think, toward the end.

Our silicon carbide wafer business is really doing very, very well and the orders are strong. Couple that with the ramp-up at Marlow of the gesture recognition cycle for the next 2 quarters, and that group should do very well.

Okay. But even in this last month, nothing really changed, particularly in your IR Optics expectations?

I made a comment about that, that certainly July was a better order taking month than June, and June was a very good month. So, it's strong right now, and I made that comment, I think in my script, that the order business in the IR Optics is strong.

And that's global? Any particular region that's --

No, I'd say global. We used to talk about 3 different sections of the globe. Now we have 4. We have North America, Europe, Asia. And Asia before was Japan, but now Asia is, call it Japan. And then we talk about China as the fourth group.

We had such a strong third quarter in China, we just met that same quarter in the fourth quarter. There was not growth in China fourth over third, but the third was really strong. So, I was pretty happy with the fourth quarter.

Okay.

Finally, so CO2 laser sales sound like they are doing pretty well across the board globally, except kind of some hiccups with the Japanese OEMs, I guess, that's on the high-power side.

The comment I would make, and I would say this always, is there are 55, 60,000 high-powered CO2 lasers out there doing work in the world. That's the place where we get a lot of our business. Ultimately, 70%, 80% of our business comes from laser utilization out of that 55, 60,000 lasers. That's all going very, very well.

Evidence that it's going well is the number of new high-powered CO2 laser systems sold. Last time, last quarter, I reported it was approaching the 4,500 to 5,500 systems per year, which was the peak in 2008.

Now I think I could say the number is closer to 5,000 to 5,500. So, it is right up there at the peak level. More people are buying high-power CO2 systems than they were a quarter ago, or 2 quarter. They won't buy more systems unless they are utilizing their current systems pretty strongly.

Right.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from Greg Halter with Great Lakes Review. You may begin.

Thank you, and good morning.

Good morning.

Craig, I think you mentioned the $0.01 on the EPS from the Aegis. My math says that's about $640,000 on an after-tax basis. Is that in the ballpark?

You are right in the ballpark there, Greg.

And for the first quarter, you talked about PPA issues and so forth and share-based compensation which have already been contemplated in the guidance, but just wondering if you could provide any kind of dollar figure there.

I would say it's mostly purchase-related -- purchase accounting-related items, Greg. For instance, write up Aegis' inventory to fair market value. And based on the historical terms of that business, that is a charge that we would expense during that first quarter. So, we factored that into the guidance as well.

We factored in, you know, the level of additional share-based compensation, and not only for a specific transaction, but also just for the overall business as a whole. As we grow, that is also growing as well.

So, I'd say the main item, though, that we are looking forward to is kind of known items from a purchase accounting perspective as we value, for instance, the very valuable intangible assets that we have at Aegis.

We will start amortizing those as well. Those will be some of the things that we are thinking about or leaning into in our Q1 guidance.

Okay. And any guesstimate on what the dollar impact may be in the quarter?

Not a lot of guesstimate, necessarily, Greg, but more so that we've -- in the range that we've given, we believe we've kind of adequately addressed where we think we will need to be.

That is something we have not yet completed, as that acquisition is only one month old right now. That is something we will complete later in the quarter. But we believe our range is adequate to cover kind of the different scenarios that we could come up with from a purchase accounting perspective.

Okay. And relative to foreign currency, was there any positive or negative impact in the quarter on your revenues, and then secondarily on operating income?

I would say the foreign currency impact, Greg, on the revenues, very, very slight. We still continue to benefit from a strong yen, which is good for us. We do a lot of our sales, not only just in infrared optics but in many of our other businesses, in Japan.

So, the strong yen is a positive for us, because we just have sales and marketing there. We do not have production costs that are denominated in yen. So, a strong yen -- we continue to benefit from that, but quarter-over-quarter we really didn't see much change in those rates.

We did have a little bit of, from the bottom-line perspective, a little bit of foreign currency loss. And that is from some of the strengthening of other currencies against the US dollar, but that was pretty much offset from other income that we experienced.

We experienced some other income from some of our minority investments that we have and some other sources of other income, where that negated the little bit of foreign currency loss. And that is why for the quarter, we ended up showing that we only had about $57,000 worth of other income for the quarter, but there were some foreign currency losses in there that were offset by other factors.

Okay. Thank you for that.

And would you expect that to be the same in fiscal 2012? Obviously, no 1 knows where currencies are going, but it appears you don't have a whole lot of foreign currency exposure, despite the fact that 60% of the revenues come from outside of the US.

Yes. To your point, we obviously are not skilled enough to try to give you a guesstimate on what we put in for foreign currency impact for fiscal year 2012, but I think we are sensing that we should continue to enjoy that strong yen position. You know, we do have to watch production costs.

I think 1 of the concerns that we are watching on our infrared optics business is a lot of our costs, even at our foreign locations in Singapore and China, they are tied to the local currencies there. So, we have to watch as those currencies strengthen against the dollar, or if they continue to strengthen against the dollar, I guess I should say, that is something we have to make up through better yields, better productivity, et cetera.

But, I would say overall, we are not anticipating any significant either positive benefit or negative benefit from foreign currency changes, at least based on our viewpoint right now.

Okay.

And with the Aegis acquisition, I know you've only had it for a month, but what have you been pleased by so far or surprised by so far?

I think we're pretty happy with the personnel that are running the business. We knew the people pretty well, were able to recruit the team to come forward with this. And I think the interaction of Aegis with our Executive Vice President and his team at Photop, that's going to be very, very good for us, it's going to make us much stronger.

So, that would be the excitement and the things we are pleased with so far. And just starting to talk about how to take advantage of this new product is maybe where we should be, but obviously we are anxious to get on with it.

Okay.

And 1 last 1 for you. You may not have seen it, but given the share price weakness today, just wonder what your thoughts are relative to a share repurchase, given your cash position as well as other capital deployment activities you may undertake.

Okay. Really, we don't have a position on that at this moment. We like our cash and we'd like to make some more acquisitions, so that's where we are going to spend our time.

But you know, things could change in the market. If it responds downwardly on different global economic issues and so on, we might think about something else. But we really haven't discussed it.

Okay. Thank you.

Thank you. (Operator Instructions)

We have a follow-up question from Jim Ricchiuti with Needham and Company. You may begin.

Craig, you may have touched on this. And if so, I can circle back to you off-line. Just on some of the expense items, I was just curious on the internal R&D, there was a pretty good increase sequentially. And I wonder if you could talk a little bit about that, and maybe help you should think about some OpEx and particularly R&D going forward.

I would say we saw a little bit of tick-up, Jim. I would say in the current quarter, to your point, doing about $5 million of internal R&D, where the prior quarter was closer to $4 million. Really, 1 of the -- I would say there's a couple of key drivers there. We do have some corporate R&D activities that we have continued to work on, primarily here in our Saxonburg, Pennsylvania headquarters.

Some of those activities are starting to pick up. Some, Jim, are on items that we've talked about in the past. Some are on new materials that we are not yet ready to disclose or to talk about. So that was 1 area that we had some additional spending.

We did have a little bit of tick-up spending in Photop. I think in Fran's comments, he touched on some of the additional R&D efforts we are doing for next generation products, so that's an area that we've started to spend a little bit of dollars on.

And also, we are spending some dollars and continuing to do limited, but it is ticking up a little bit, further research in our military materials business, including our PRM business. We continue to look at other areas that would be of interest in the business beyond our typical selenium and tellurium. And that also entails picking up a little bit of R&D costs.

I would say for the full year we ended at about 3.2% of revenues -- excuse me, of internal R&D as a percentage of revenues. I would expect our next year number to be a little bit higher than that, but still start with a 3% number, so maybe 3.5% to 3.7%, something like that.

Again, we are trying to factor in where we think we will spend time, from a corporate perspective, but also where we are going to spend time when we include the R&D efforts of Aegis as well. So, I think that's maybe some additional color I can give you right now.

That's helpful.

And then with respect to SG&A expense in the quarter. Again, you may have actually broken it out, but the Aegis-related professional expense that might have impacted SG&A in the quarter?

Yes, I'd say that $600,000 to $700,000 range was kind of what we would translate down into about $0.01 or so per share.

Got it. Okay. Thanks very much.

Thank you.

Our next question comes from Ray Rund with Shaker Investments. You may begin.

Thank you for taking my question.

Just another Aegis-related question. Is the margin profile of Aegis similar to the corporate profile, or does this represent a change for you?

I would say, Ray, I would say overall the margin profile of Aegis very similar to the segment for which it is going to be put in, and that is the Near-Infrared Optics segment. Aegis has a good margin profile.

It is something that we believe there are synergies within the Near-Infrared segment that will be able to enhance that. And whether from the sales and marketing, whether production, lots of other areas that we think we can enhance that.

So, I would say we have started with an organization that has a good margin profile, kind of similar or close to what the segment is, but with some upside that we should realize over the next few years.

And the margin profile you are referring to is both gross margin and operating margin?

Yes, I would say it's pretty similar on the gross margin standpoint, as well as the operating margin standpoint. That's correct.

Okay. Thank you very much.

Thank you.

We have a follow-up question from Greg Halter with Great Lakes Review. You may begin.

Thank you. Hello, again.

I think in the past you've commented that your cash is approximately 50% in the US and 50% out. Does that still hold true?

Greg, that held true for June 30. We had a little bit more than half, about 57% or so of our total cash was in the US.

1 thing to remember, though, is that's a point in time at June 30. We used $52 million of that for our acquisition of Aegis, and we used a little bit more for the working capital adjustment that's also needed for that transaction. When you strip that out, if you want to exclude that $52 million from both the denominator and the numerator, if you know what I'm trying to say, that would push the cash in the US down to about 25%.

So, we are fortunate we have generated cash, can generate cash in the US, but the Aegis transaction did use up some excess cash that we had and that was here in the US.

Okay. And 2 last ones for you.

Just wonder your thoughts on capital spending for fiscal 2012 and what that may be on? And then also, depreciation and amortization, given higher CapEx over the years, as well as Aegis in there.

Sure. I would say, Greg, our view toward capital spending for FY 2012 probably very similar to what we just completed for fiscal year 2011. We completed just under $41 million CapEx, quite a significant ramp up from FY 2010, but we are looking at a general level of capital spending, I would say, around that range. And that would include capital spending that would be needed for the Aegis transaction as well.

As we have touched on over the last few quarters, we have had some pretty significant ramp ups in certain areas and have been catching up with production demand in certain areas, but we also see other areas where we are going to need to be spending those capital dollars as well. So, I think you will see a continued investment in infrared optics. I think that will be 1 of the continued drivers of our capital spending into fiscal year 2012.

And I think also for our international operations as well, broadly, not necessarily specifically for any particular business, but we will continue to invest in our facilities in countries like Vietnam and the Philippines and China and Singapore, as well. So, those would be probably 2 broad areas where we know we have some planned investments in fiscal year 2012.

And then the depreciation question, Greg. This year we ended with depreciation and amortization about $28 million, a little bit more than $28 million is what we ended for depreciation and amortization.

When you factor in the capital spending that we did for this year, as well as what we anticipate for Aegis and kind of our preliminary look at how the amortization will shake out from that purchase accounting, I think you are going to end up looking at a number that's probably in the $34 million to $36 million range, somewhere thereabouts. Again, depending upon kind of the Aegis purchase accounting, but also our capital spending for fiscal year 2012.

Okay, great. And I lied. 1 other 1 for Fran.

You've obviously had a very strong business in the infrared optics, and you had a nice discussion about the high-power lasers as well, which have been increasing here. We've also heard quite a bit about the fiber lasers. And I just wanted to get your thoughts on how you see that whole battle, if you will. Maybe it's not a battle, whatever you want to call it, playing out over the years.

Fiber laser is certainly having a good run. It's doing a lot, a lot of welding work, and our subsidiary we have called HIGHYAG, which has had a very good year also is selling 2-to-1, 3-to-1 welding over cutting heads. So, we right now see not an impact to the CO2, the new systems coming down the line.

That could change if some development happens. And certainly, there is the concern, will more cutting be done by fiber than has been done in the past? It's been a challenge for that tool over the last 3, 4 years. I don't know how it will play out, but we are working to understand it, and our HIGHYAG unit is taking advantage of wherever it can win business, whether it's welding or cutting. But, I can report right now, it is more welding than cutting.

Okay. Thank you.

You're welcome.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back over for any closing remarks.

Thank you, Shannon.

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, 2011 is currently scheduled for Tuesday, October 25, 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, this concludes today's conference. Thanks for your participation. Have a wonderful day.