II-VI Inc (IIVI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the II-VI Incorporated fiscal year 2013 third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As reminder, today's conference is being recorded. I would now like to [introduce your host of today's conference call], Mr. Craig Creaturo. You may begin, sir.

Thank you, Kevin, and good morning, everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Thank you for participating in the third-quarter fiscal year Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, April 23, 2013. 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.

Before we begin the call, we would like to note that we have been made aware of an erroneous EPS estimate that was included in the Thomson-Reuters first call report for II-VI Incorporated for the quarter we just completed. Specifically, an incorrect data point of an analyst estimate for $0.56 per share was included in earlier versions of this report, and this affected both the consensus estimates as well as the high and low range for the quarter. It appears that this issue has been corrected as of this morning, but we know this has caused some confusion with investors, analysts and news outlets. We point this out to make sure that you are aware that this issue impacted earlier versions of the Thomson-Reuters first call report for II-VI and to lessen the confusion that this issue has caused. I would now like to turn the call over to Fran Kramer.

Thank you, Craig. I am Francis Kramer, President and CEO of II-VI Incorporated. As I noted in the press release, we are pleased to devote -- deliver our third-quarter fiscal year 2013 financial results within the range of our guidance we previously issued. During the quarter, we made significant progress on integrating our three recent acquisitions, and we look forward to increasing contributions from each of these businesses in the future. I will now present you with a review of each of our business segments.

First in the IR Optic segment, during the third quarter, bookings were up 15% quarter-over-quarter to $51.2 million. We rebounded from a weak second quarter with North America, Switzerland, and the UK showing significant improvement. Low-power market also saw a pickup during the quarter. Although Japan showed some improvement from last quarter, booking levels are lower than what we've experienced over the past few years. Our German business continues to be stable, driven by demand for diamond optics and EUV systems. Scan lens bookings remain strong from customers in Taiwan and South Korea as that business shifts away from Japan.

For our IR Optics business in the United States, orders from domestic OEMs increased 50% quarter-over-quarter due to new blanket orders from some of our key OEM accounts. Shipments to our domestic OEMs increased 8% from last quarter. After-market bookings increased 15% quarter-over-quarter, as a result of improved CO2 laser machine utilization in North America. The outlook for the fourth quarter depends on the near-term economic impact of recent government policy decisions and consumer consumption, which drives laser utilization.

European bookings for the third quarter were up 14% compared to the second quarter. Our diamond optical windows for the EUV photolithography system business continue to grow as projected. Asian bookings increased 19% from the prior quarter, with both Japan and China showing good improvement. Actually, China increased 25% over the second quarter. The China after market reached record bookings in March. Sales of variable radius mirrors, called VRM's, and low-power cavity activity showed increasing demand. Other international bookings finished higher than expected due to the active South Korean via-hole drilling market. At HIGHYAG, bookings of $6.1 million for the third quarter were up 29% sequentially. Although we have seen a softening in bookings, we continue to see long-term growth in 1-micron welding, beam delivery and 1-micron laser-cutting markets.

Now moving to the Near-Infrared Optics segment, bookings during the third quarter were down 9% quarter-over-quarter to $32.8 million, while segment revenues were down 3% to $35.8 million. The bookings decrease was due to softening demand for optical components in the telecom market. Also, we experienced a product demand shift within our contract manufacturing services area. The Near-Infrared Optics revenue decrease was due to the Chinese New Year holiday and the softening in the telecom component business.

Now at Photop, our third-quarter revenues were down 3% from the second quarter. Revenues were impacted by several factors, including the slowdown in demand for 40G components due to the growing market shift to the 100G network. The Chinese New Year holiday inventory adjustments caused by vendor-managed inventory implementations and a market softening in the telecom component business. The telecom component business slowdown was mainly attributed to both 40G components as well as legacy products. In the data center and CATV-related areas, Photop made progress with new product design wins to support future sales growth. In the R&D projects area, Photop continues to work on its high-end optical components for the telecom market.

The Photop laser device business remains strong in the third quarter, driven by several applications in biomedical, industrial and government contract projects and emerging projects related to law enforcement and fiber lasers. The Photop optics business was flat in the third quarter in both the telecom and industrial markets. Fiber to the home filter revenues decreased due to the broadband China project delay and market competition. However we achieved good progress on new optics and laser assemblies for the life sciences market.

Photops contract manufacturing business experienced a slowdown and a booking adjustment due to a product change on the glass panels for tablets. The new product is anticipated to be qualified in the fourth quarter. Integration of the newly acquired Photop Advanced Coding Center in Santa Rosa, California is progressing well both in business continuity and team stability. We worked with our customers to assure a solid supply and seamless transition, and as a result, we were able to achieve increased business immediately.

At Photop Aegis, third-quarter revenues were down 14% quarter-over-quarter, but were up 2% compared to the same quarter one year ago. This sequential decline is primarily a result of price erosion for legacy products. Aegis continues to see strong growth in China for its optical channel monitor products, with revenues more than doubling from the second quarter of fiscal year '13 in that country. Ongoing investment is being made in low-cost, small form factor and high-performance optical channel monitors that address the flexible bandwidth requirements and transmission networks with data rates of 100 [Gbps], 400-gigabits per second and beyond. Further, new product offerings in tunable filers and TWDM-PON solutions for the metro and access networks are scheduled for the second half of fiscal year '14.

In our Military and Materials business during the third quarter, segment bookings of $22.1 million were down 20% from the second quarter due to shortfalls at our PRM Materials business. Bookings in the third quarter included those realized at our recently acquired LightWorks Optics business, which helped offset shortfalls from our other Military businesses. Revenues for the third quarter of $28.9 million increased 35% from the second quarter of this fiscal year. As compared to a year ago, we have experienced a significant decrease in revenue from our Materials business, which is partially offset by our recent acquisition of LightWorks.

Our Military business is now comprised of LightWorks Optics, Exotic Electro-Optics, VLOC, and Max Levy. Integration of LightWorks and Exotic is progressing and has been well received by our customers, as previously communicated. Some of the most significant expected synergies due to the acquisition are a high level of engineered products and considerable foreign Military sales, which will provide a solid base for the next several years. The IRST program, which is the acronym for infrared search and track system, is deployed on the F-18 fighter aircraft, and its outlook continues to gain strength. This program is underpinned by foreign Military sales to Saudi Arabia and should help offset the softness we might experience in the domestic defense market. Overall, our Military business remains solid and we would expect this will continue through fiscal year '14.

In our Materials business, PRM continues to experience low demand for tellurium and selenium products. The low tellurium demand is due to a large build up in the supply chain and is expected to continue for the next several quarters. This buildup is mainly attributable to tellurium production output that was put in place several years ago when the tellurium index price rapidly rose to over $400 per kilogram, primarily driven by photovoltaics. Although we have seen some increase in demand for a short period of time, over the past year it has not been sustainable. The tellurium index price has maintained at $110 per kilogram for the past few months in spite of the weak global market demand. We continue to experience lower demand for our selenium product from the agricultural feed and glass industries, as falling index prices caused buyers to delay purchases and opt to use inventory on hand in anticipation of further price declines.

The Chinese manganese market is down due to a combination of environmental issues and lower manganese demand for steel production. Although we do not sell directly to the manganese market, it is estimated to account for over 50% of the total selenium demand worldwide, and therefore its weak demand significantly impacts the index price. At the start of the third quarter, the selenium index price was $40 per pound and eroded slightly to $38 per pound, a decline of 5%. Since the end of the quarter, the index price has eroded further to $35 per pound, which is the pricing level we used for our fourth-quarter FY '13 forecast for selenium.

The low levels -- the low yields and production output challenges of our rare-earth element product-line development continued in the third quarter. During the quarter, we met with our customer and renegotiated a contract both parties believe provides better value. As part of the renegotiated contract that went into effect on April 1, we will receive a markup on production cost incurred, plus a per-kilogram fee for all finished product. The term of the contract was also extended. We believe these changes should lead to profitability for our rare-earth product line.

Also during the quarter, we experienced losses on the sale of precious metals due to the eroding price of gold and weak market conditions related to the contained tellurium in the precious metals residue that was sold. Historically, precious metals sales have been a source of modestly profitable additional revenues. For the quarter, the segment operating loss was completely attributable to our PIM operation, while our profitability from our Military businesses remained in line with our expectations. We believe going forward our rare-earth product line will be breakeven or better with a new contract in place, and we will continue to take further cost-reduction measures in our selenium and tellurium product lines.

Moving to our Advanced Product Groups, at Marlow, bookings for our third quarter increased 79% from the second quarter due to initial production orders in the personal comfort market, increased [8 -- at flare] orders in the defense market and an end-of-life purchase for a major automotive platform. Revenues for the third quarter were up quarter-over-quarter as a result of increases in the defense market, as we continued to see greater demand on legacy products for repair and maintenance in our automotive business due to end-of-life sales for this product line. These increases were partially offset by lower revenues in the telecom market and government contracts.

The personal comfort market is developing with shipments of prototype products to customers and the receipt of our first production order. The Climatherm product line is selling well in Europe, where we had multiple design wins again this quarter. In the power-generation market, we see growing interest in waste heat recovery and co-generation. Customers can harvest otherwise wasted energy from the temperature differences that exist in a variety of different environments to power wireless sensors and actuators. We are focusing our efforts to align our costs with our revenues to mitigate market uncertainties and to focus our engineering effort on the more promising emerging markets and major new opportunities.

Moving now to our Wide Bandgap Materials Group, bookings for the third quarter increased 152% from the second quarter, due to a blanket order for 100-millimeter semi-insulating substrates by a large Japanese OEM. Revenues for the third quarter were up 34% compared to the previous quarter. Shipments of semi-insulating substrates for RF applications were flat from the prior quarter, with increased bookings in the third quarter for semi-insulating substrates, customer demand and product deliveries will increase in the fourth quarter. This increase is driven by commercial applications in the wireless infrastructure market.

During the third quarter, we saw increased interest in our 150-millimeter products and began shipments of 150-millimeter semi-insulating silicon carbide substrates to several large OEMs in the US and Japan. These OEMs are focused on gallium nitride-based electronics for both RF and power applications. Growth in the power device market demand for low-cost, large-diameter silicon carbide substrates continues to be driven by the promise of more energy- efficient products and solutions.

The early introduction of 150-millimeter diameter substrates by the industry should enable device manufacturers to lower their device costs and enable them to manufacture using existing 150-millimeter diameter silicon and gallium arsenide device processing lines. We believe that this will expand the potential market share for silicone carbine devices and accelerate the transition to 150-millimeters. During the third quarter, we continued to add new polishing and fabrication tools in our Mississippi facility for manufacturing these substrates. We expect to complete the expansion in the fourth quarter.

At our new M Cubed subsidiary, bookings and revenues for the third quarter were $11.3 million and $11.8 million respectively. We are seeing improved conditions in the semiconductor industry, especially in demand by OEMs for product to support 20-nanometer and 28-nanometer logic capacity additions. M Cubed also benefited from spending on new product development activities to support next-generation tool deployment at both the 300-millimeter and 450-millimeter diameters.

The increase in semiconductor sales was partially offset by weakness in the display sector, which saw a push out of plan spending until the second half of calendar-year 2013. Spending in the defense sector continues at reduced levels, although sales for aviation armor remained stable in support of platform upgrades and planned retrofits. Operations at our new manufacturing facility in Newtown, Connecticut began during the quarter to support expansion of our wafer handling product line. The new plant will house advanced machining and clean-room assembly and metrology centers focused on supporting OEM tool deployment in the lithography, metrology, and inspection areas of the semiconductor manufacturing process.

M Cubed continues to invest in the creation of new tools and processes, with particular emphasis on the optics and energy sectors, where the Company can take advantage of its unique manufacturing processes and capabilities to tailor new materials to meet specific application requirements. New products for the semiconductor, industrial, and energy sectors are planned for fiscal year '14, and the Company is planning for further investment in its sales and marketing organization to be ready for those introductions.

In summary, as we look back to the just-completed quarter, we can point to several operational improvements and customer developments that will help II-VI its growth and profitability objectives. While we have some markets such as telecom that are expected to be soft in the near-term, we all like the overall outlook for our collection of businesses focused on engineered materials.

As we look to the June 30, 2013 quarter, we are expecting quarterly revenue growth in the 1% to 5% range, and we are forecasting a broader range of EPS expectations than in the past to allow for a variety of possible market, operational, and economic factors that may impact our businesses. We will continue to focus on our long-term growth objectives by growing both organically and through acquisition, while looking for other ways to return value to our shareholders, which we have done for 40 -- going on 41 consecutive years. Craig, this concludes my comments.

Thank you, Fran. Here are the items that I would like to highlight before we open up the question-and-answer portion of the call. As described in today's press release, consolidated bookings for the quarter ended March 31, 2013 were $140.3 million, which was 4% lower than the same quarter last fiscal year. The three acquisitions we completed in the December 2012 quarter added about $22 million in bookings during the just-completed quarter and nearly an equal amount of revenues.

Total Company backlog at March 31, 2013 was $194 million, down 2% from the December 31, 2012 backlog. The components of the backlog at March 31, 2013 were Infrared Optics at $42 million, Near-Infrared Optics at $33 million, Military and Materials at $72 million, and Advanced Products Group at $47 million. The gross margin for the quarter was approximately 35% of total revenues and is expected to remain at this general level during the next quarter. Although this is slightly lower than historical gross margin rates for II-VI, we attribute most of this change to a combination of our recent acquisitions, which carried lower gross margin profiles when compared to some of our historical businesses, combined with higher material cost in certain of our business units.

During the quarter, the Company repurchased 524,000 shares of its common stock, for a total amount of $9.1 million at an average price of $17.44 per share. These purchases completed the $25 million Board-authorized repurchase program announced in May 2012. Under this program, the Company repurchased approximately 1.443 million shares and an average share price of $17.30 per share. The Board periodically reviews the benefits of share repurchase programs and may open up other programs in the future.

The year-to-date effective tax rate was 24.9%, compared to 21.9% for the same period last fiscal year. The effective income tax rate for the quarter was [15.1%], compared to 25.8% in the same quarter last fiscal year. The effective tax rate for the quarter was driven by a shift in earnings to lower taxing jurisdictions, combined with the extension of the Federal Research and Development Tax Credit Program. During the quarter, there were no material changes in our tax reserves. We expect the income tax rate for fiscal year 2013 to range between 23% and 25%.

As a result of recent acquisitions, including those from the quarter ended December 31, 2012, we acquired tax carry-forward attributes which should result in cash tax savings of $3 million per year annually for the next three years, and then $1 million to $2 million annually thereafter for the subsequent 10 years.

As of March 31, 2013, outstanding borrowings under our credit facility were $118 million, down $3 million from December 31, 2012. During the nine months ended March 31, 2013, we generated over $69 million in cash from operations, a 20% increase from the same period last fiscal year. During the quarter, we used $4 million of our cash for capital expenditures and $9 million for the reshare-repurchase program. Our outstanding cash balance decreased by $7 million during the quarter and now stands at $152 million at March 31, 2013, compared to a total debt balance of $121 million. The interest rate on our borrowings at March 31, 2013 was approximately 1.5%.

As a result of current-year acquisitions, our March 31, 2013 consolidated balance sheet includes preliminary purchase price allocations for all assets acquired and liabilities assumed from these recent acquisitions. Our goodwill increased approximately $42 million during fiscal year 2013 as a result of these purchase price allocations. The Company intends to finalize the purchase price allocations by June 30, 2013.

Fran, this concludes my prepared remarks for today. Before we begin the question-and-answer session, I would like to mentioned 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, 2012. Kevin, we are ready to begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Jim Ricchiuti with Needham & Company.

The question I have is just on your industrial business -- the markets that you're addressing there. It seems like the activity you're seeing in the market suggests that the market is holding up fairly well. It looks like your after-market bookings were pretty strong. How would you characterize the business overall -- the industrial piece?

I think it's good. This is Fran -- and it is lumpy. That's the challenge, although we had good numbers in three out of four of the continents, we just see the laser utilization not being as constant as we had expected. But it does add to a nice number, but it does it in steps rather than the consistency that we had maybe in prior years. And so we can't hone in on what's driving that lumpiness, except for the manufacturers themselves are uncertain with the economy, so they don't place orders at their usual rate. It's just a start-and-stop kind of an attitude out there.

We think overall it's good. I can't add any more clarity to it. It's just not that the -- the demand for their products is -- when it's laser utilization, which is 80%, 90% of what drives us, they can't predict it. And they don't maybe do as many upgrades to their systems -- change to their systems as they have. So, just spotty, that's the best I can say, maybe volatile. But we do see a good trend, not a great trend.

Just in terms of the bookings as you went through the quarter in the businesses, is there any color that you could provide there? Or is it just difficult to make any real observations? How were the bookings later -- toward the latter part of the quarter?

You do get our press release and all our details on bookings, so you can see that two of our business segments were really up nicely quarter over quarter, and two of them were down. So, from our overall bookings, as the quarter goes by, we did okay all quarter long. But it's these down units that hurt somewhat in the predictability on how to staff or build the capacity due to that volatility has left us a little bit behind in getting to the margins we want. We'd like to run more steady, and when that happens, we have a better margin. But when we are doing this start and stop -- and maybe two of our units had that this quarter. IR had some nice bookings, but also some -- a weak couple of weeks in there. And then our near-infrared unit had some dropping off in bookings really as the quarter went by.

Okay. And Craig, maybe you can take this question. If we look at the range that you're providing for earnings in the June quarter, can you talk a little bit about some of the variables there that could get you to the higher end? What needs to happen, and conversely, what is it on the low end that you're concerned about?

Yes, I think we are expecting -- in any of the revenue ranges, we are expecting growth there. So, again, that's now apples to apples with all three acquisitions in the just-completed quarter, and also the June quarter. I think also, too, Jim, we are realizing that we had a lighter tax rate in this quarter -- the third quarter, than what we forecasted as the average for the whole fiscal year. So, we know that that's an item that we expect to go up. Again, we're ranging for the whole year to be between that 23% to 25%, but we just came off a quarter where we did 15%. So, we are factoring that into the guidance for Q4 as well.

I would say that a little bit of the mix of where the revenue growth will come, to Fran's -- maybe to dovetail on Fran's comments, to the extent that we get a little bit more lift or get a little bit more industrial intake from our infrared optics business, that will probably put some more dollars down to the bottom line. That's obviously our most profitable business. To the extent that we see selenium prices, for instance, remain at the lower levels or possibly go down a little bit, that could push us down to the lower side. So, I think we've tried to be sensitive to try to broaden that range out a little bit. I think it's a range that we are comfortable with. But I think also, too, we tried to factor in maybe a few more scenarios or a few more variables in there, and to try to give a range that we are comfortable with. But I think those are the kind of factors that would push us either to the higher side or to the lower side of that range.

Okay, thanks very much.

Our next question comes from Mark Douglass with Longbow Research

Craig, what were the sales contributions in the quarter for the three acquisitions?

They combined -- both bookings and revenues, Mark, they were combined about $22 million each. And we will give some more details on each one of those in our Q that we will file in a couple weeks here. But collectively, they were about $22 million.

Okay, that's helpful. And then I missed some of the Q&A, but Fran, did you discuss military and how it's reacting, at least your military business, to the sequester, and how customers are pulling back or maybe not pulling back, and what's going on there?

No, I did not, but that's a good question. I think we are feeling reasonable about it. We've had some delays, but the orders have come, and are offset there. If there is any timidness on the standard military business that we've been doing since the acquisition of LightWorks, we've had a nice offset.

Certainly the program I mentioned in my script, that the IRST program's doing well for us at LightWorks. And that we expect, in the near future -- and I can't tell you when because we really don't know. It just seems to delay this large IRST order from Saudi Arabia, and I think that will help us in the military business. Although, it is performing very nicely, just about where we planned. We reported in the military and materials segment, and the segment that's had -- the part of the segment that's had the problem has been our PRM materials business.

Okay, so at least in the quarter, it played out relative to expectations, even though the sequester went through?

Correct.

That's fair to say? Okay. And then I suppose that's baked in your assumptions for 4Q, that things will stay -- remain relatively stable there?

Yes, yes.

Okay, and then can you remind us what percentage of M&M is US military?

If you look at the segment as a whole, Mark, or you are asking what piece is M&M? Or what piece is military, sorry.

Yes, exactly, US military.

Sure. If you -- really, of the US military is really the vast majority of the military -- (multiple speakers) You pick up some foreign military sales from LightWorks. We have had some at EEO, but definitely LightWorks had a higher concentration of foreign military sales than our EEO business. If you were asking -- or I can say that when you look at what we are expecting for revenues for the full fiscal year from that segment, roughly about 75% come from the collection of military businesses. Again -- EEO, LightWorks, Max Levy, and our VLOC business, and about 25% comes from the PRM business.

Okay, and of that 75%, the vast majority is US military?

That is correct.

Okay. And then on -- going through the P&L, on margins, would you expect that -- obviously, the sharp declines in tellurium and selenium prices have hurt PRM. But eventually, with -- looks like the price is being more stable, are you going to benefit on the margin side as you start rolling in lower input costs, at least in some of the other businesses?

I think that's something that can flow through there, Mark. It does take a while though for that to really happen, because, remember, in our zinc-selenide business, our infrared optics business, we are procuring the selenium. Then we are creating the zinc-selenide material, qualifying it, polishing it, coating it. It takes quite a while for it to eventually turn into a finished part.

But yes, overall, there is a little bit of consolation prize that we have for lower-priced selenium, and that is for our infrared optics business. We are at a period of time right now though, where that higher selenium cost from two, three quarters ago is actually negatively impacting our business. But to your point, when we look out two or three quarters, as that price has declined, that is something that, as we get into the middle part of FY '14, that will actually be a little bit of a tailwind rather than a headwind for us.

So, it's later in calendar 2013?

That is correct; that's right.

Okay. Finally, have you considered stepping up share repurchases on the capital allocation? I realize you find double taxation and dividends distasteful, but also would you consider those at all? Thank you.

Certainly, our Board will be thinking about it, and they always are. And I think the program we just completed was a good investment. And if it happens that we find our way to spend some more money on share repurchase, it could happen. Certainly, we are constantly spending on capital expenditures in these last three acquisitions, so we just have to get our Treasury on the right spot in order to make that decision. It could happen.

Okay, thank you.

Our next question comes from Avinash Kant with DA Davidson.

A few questions here -- the first one is that -- could you talk a little bit about the downward revision to the guidance? What is it coming from?

I think, broadly speaking, Avinash, I think there's probably two prime areas that we looked at. When you look from an operational perspective, I would say number one is our PRM business. We -- as we noted in the release and also in the -- Fran's prepared remarks, we continue to be challenged on the rare-earth material business, and we know that we are not quite getting up to the levels of either shipments or profitability that we had expected. The good news behind that is that we have some new customer arrangements that will help that quite a bit in the future. But that is definitely something that changed between -- over the last 90 days or so, as our expectations as to how we will finish out the fiscal year.

I would say the other area is in our telecom near-infrared optics business, as well. Again, we are seeing -- again, to reiterate a little bit of some of Fran's comments on this same subject, we are seeing a bit of softness there. We are seeing a bit of softness with those telecom optical component parts that we are manufacturing, and we expect that to continue really for the remainder of the fiscal year. So, I think those are probably the two areas where we've seen the most change, I'd say, in the last 90 days or so.

Did you give out exactly how big was PRM, Craig, in this quarter, and maybe the year-ago fiscal Q3?

We didn't give that detail out, Avinash. I did say that for the full year -- when we look out for the full year, that we expect PRM to be roughly about 25% of our total sales. By comparison, if you look back to last year's FY '12, that number would've been more like 40%. So, just to give you perspective that that business has shrunk quite a bit, not only because of the demand changes, but obviously the index pricing changes the value of the shipments that we are having as well.

So, Avinash, what Chuck was -- or what Craig was referring to is that it's 25% of our M&M segment revenue, and had been 40%. So, you get a range there of -- we've really watched the price erosion on selenium and tellurium just take off. We are down in our shipment volume, but our sales dollars are a lot bigger decline.

Right, but with the prices now stabilizing, do you expect further decline in this one, and this should stay at these levels?

It's possible. That's one thing we have to add, that this volatility on selenium and tellurium, although we are getting closer and closer to trying to surround it and prevent it from hurting us so much, it's still out there. Since we wrote the script and put this together, I said it was down to $35; now it is down to $34. So, volatility on selenium and tellurium, both of them is a lot more. It could just as easily be turning head upward; that's the challenge for us.

I think previous question you were asked about the military exposure overall, and did you talk about what percentage of your revenues came from the US military in the quarter and --?

Yes, I think we said of that -- especially within that military and materials segment, Avinash, which is, again, about 75% composed of military, we would say the vast majority of that, 90% or so, would be attributable to US military sales rather than foreign military sales. When you look at II-VI as a whole, we will be right on -- right about 20% or so for the whole year, whole fiscal year, will be total military sales. And again, I'm including the military that we do in not only the military and materials segment, but also in the infrared optics segment, as well as what we do in the advanced product segment in that overall total consolidated 20% of our business is military.

That business you think is stable for the rest of the year?

Yes, yes, for sure. We have good order coverage, and certainly the platforms we are on are like the IRST. They're in good shape. And playing out the next maybe two years to three years, it will be a little bit more question is some programs might end up getting reduced in magnitude. But at this moment, we don't see that in FY '14, which is what we are looking forward to starting July 1.

Any specific comments, Fran, on the JSF program? How do you see it trending compared to the last fiscal year, or what's the outlook?

On which program?

JSF.

JSF, okay. Yes, I think we're steady state for that in the rest of '13 and '14. '15 and '16 it's yet to be completely played out in Congress, and then how our -- what share we'll get of that business; I think it will be very high share. But no, it's a little -- we originally felt pretty confident out to the year, maybe, 2020, but now that the sequestration fallout is going to happen, and there will be some reductions, that that might come down a little from our expectations. But I think we're good for 1.5 to 2 years, and after that, it just depends.

If we vote to -- if the Congress votes to run the production rate -- not as originally expected, but it will gradually trend up. No matter which way it is, it's going to trend up. It's just whether it will trend as high as expected, or only partially that will affect us.

So, you say down from your expectations, but do you think compared to fiscal-year '12, you could maintain that level in '13 and '14 for JSF?

Yes, yes, yes. Yes, sir. We will do '12 again in '13 and '14 on JSF.

One final question -- I think, Craig, you talked about the tax rate for the fiscal year being 23% to 25%. Now, could you talk about what's it going to be in the quarter -- upcoming quarter?

It should be right around that same range, Avinash. Our quarter to date -- for the fiscal year, our quarter-to-date effective rate is right around that same range, about 24.9%. So, we are saying -- we are coming in 23% to 25%, so we have to have a quarter that would be pretty close to where that average is, so a rate in the 23% to 25% range would get us there.

Perfect, thank you so much.

Avinash, I had a couple comments. So, it's not that there are not opportunities. Certainly in each one of -- three or four of our businesses, we have opportunities that are going to [ship] here in the fourth quarter and then into next year. And in our Marlow business, which I commented this personal comfort business is coming on. I think it's going to be really quite strong in the fourth quarter.

In our infrared optics business, this EUV photolithography systems, we're really going well there. And I think the diamond business is going to stay, and we can see a runway for that for the next 1.5 to maybe 3, 4 years. Then our M Cubed business, again, toward the EUV systems -- the move up from 300 millimeter photolithography production work to 450; that's a big project for us. So, those three will be areas that I think will be very good for us.

And, yes, and I think you talked about the IR optics that was pretty strong. And one quick question on that vein actually -- maybe I forgot to ask that the three businesses that you acquired recently, they contributed $22 million in revenue and bookings for the current quarter. I think they had $8 million contribution to the revenues and bookings in the previous quarter. But what was it in fiscal Q3 of '12?

We had none -- fiscal Q3 of '12, yes, we had none of those in the prior fiscal year. So, all three of the acquisitions that we talked about that contributed this quarter came on just the most -- just in December of 2012 quarter. So, they were not there in the March 2012.

Perfect, perfect, thanks so much.

Our next question comes from Dave Kang with B Riley.

So, Photop was down -- did you give the actual dollar amount?

I guess, Dave, the near IR is really the combination of Photop and the Aegis business. That's really the two businesses together. So, again, when you look at the details that we provide for near IR, you're looking at really everything is controlled by our Photop organization. So, near IR and Photop, fairly synonymous, so.

Got it, and then you said 40G and legacy were down. How much would 40G be? And also same question for legacy?

We don't usually report that Dave, so I just tried to give some explanation of it, but the amount we do in the optical communications business at Photop, we tend to give a high-level review of it, but not go into the details, due to the competitiveness of that business.

Got it, got it. But then sounds like 40G is in decline then? Not even flat, but then you expect 40G to continue to decline?

Yes, we think the shift to 100 is coming, and maybe even 400. And those customers that were in the 40G space are not getting the business, because people are holding. This whole project in China that was going to spur the market, the China government has held off on it, and I think that they're just going to wait for the 100.

Right, right. And then China Mobile, they announced the 100G. Their plans are last -- I think it was this week, and so shouldn't there be some kind of a lift in second half for you guys?

Sometimes in China that does happen that quick. I agree with that comment because things happen there quickly, but we haven't seen it yet.

Got it, got it.

We haven't put it in.

Right. And then just wanted to clarify as far as Aegis is concerned. So it was down, but then did I hear, Craig, that China was up? Did it double? Did I hear that correctly?

For the Aegis business specifically, Dave, you're asking?

Yes.

Yes, but that was double for the optical channel monitor [Pride] of Aegis, second -- or third quarter over second, yes.

Right, right. So then, is it safe to assume that maybe domestic market was down then, if China was up that much?

Yes, and the rest of the world, I think, is probably what it'll be.

So, China's -- (multiple speakers)

[That's an assumption]; I don't have the fact, Dave. So, I can only say it seems logical, but I don't have that fact.

Fair enough. And then going back to China doubling, as you know, Chinese -- they don't use [rotems], so I'm assuming it's a Chinese OEM customer that has increased orders for you. And they're probably using that for their foreign customers. Is that a fair assumption?

I can't comment, because they do -- all the China manufacturers ship their product all over the world, especially places like Africa and other countries, not Europe or North America.

Yes, yes. And China also doesn't use rotems, so I'm assuming it's got to be Chinese OEM customers. That's what I was trying to get at.

Anyway, and then you kind of answered it already, but expectations for Photop. This current quarter you expect to be flat to down, or just down? What's the color there?

I would say flat, and some of the products that are in Photop might have some lift, but the ones that are passive optical components to the bigger customers, they might be down.

Got it, thank you.

Our next question comes from Jiwon Lee with Sidoti & Company.

Fran, I just wanted to talk a little bit about HIGHYAG. How did that shape up during the quarter, first of all?

I made some comments in -- let me get my script here. Bookings were about $6.1 million, which is up 23% -- or 29% over the second quarter. So, good performance. Our business is -- and I made the comment in my script there that there was softening in bookings toward the end of the quarter, or maybe it was -- I didn't really comment, but it was more like the February-ish, early March time period. I think right now bookings are reasonable. Our business there is very nice business. We've got a very good product, and we continue to work in all fields, whether it's welding, which is a good product for us, cutting and beam delivery.

Okay, good. And on your outlook, you did mention that the PRM and the optical telecom were the weak spots now. Now, looking at the June quarter, you expect within the revenue guidance delta, IR optics revenue to grow? And where would that upper range of the delta come from?

Yes, I do think we expect, for the segment-wise, Jiwon, I think we have seen some good traction in the infrared optics business and the segment as a whole. I think we are expecting some growth out of that business in [the Q3 and] Q4. Again, to the extent that that takes off a little bit faster than our expectations, which is probably some of the upside for the quarter, that definitely could drop more down into the bottom line than maybe some of our other businesses that are not as profitable. So, we are expecting some growth -- some Q4 growth out of the infrared optics business.

Okay.

And maybe a good way to characterize it though, IR fourth quarter over third might be up 2% to 3% on the revenue side. So, it's really a combination of all the other -- especially those four items that I highlighted a moment ago on personal comfort, EUV diamond, EUV silicone carbide, those will be the newer products for our sales, plus a quarter -- another quarter of our three new acquisitions.

Okay, and you're guiding the gross margin at least over the next few quarters, if I heard correctly, at about 35% range. How does the margin improve from there?

I think we are saying, Jiwon, we were just giving comment to 35% for the fourth quarter. And I think it does start to improve after, again, we get past some of the purchase accounting items for the acquisitions, as we start to get them ingrained and a little bit into some things that we have been working on or are working on to improve the margins on all those businesses. But again, the three businesses -- we bought solid businesses, good-margin businesses, not -- each of them though not quite up to the corporate averages. So, we've got some things that we've been already starting to work on to increase the margins from that level. So, I think as we lean into FY '14, I think you'll see a little bit of slight incremental changes each quarter, is what we would expect. And again, depending upon where the mix of businesses' revenues are, if it's a little more heavily weighted IR optics, a little higher gross margin; if it's little weighted toward some other units, a little lower gross margin.

Okay, and with the visibility that you have now, how do you see the second half of this year shaping up for you?

You're referring to calendar year?

Correct.

2H -- I think we're getting a little more optimistic. It does seem like the economies around the world are trying to stabilize in spite of all the bad news that just keeps coming. And our -- we haven't put out any guidance or any direction for that time period, but I'm optimistic that it will be a little stronger.

Okay, thank you so much.

Our next question is a follow-up question from Mark Douglass with Longbow Research.

A couple more -- looking at IR optics -- a couple quarters of some relatively weak margins, at least for that segment. Do you think this mid- to high-20%s in the operating margin is sustainable, assuming there's not a downtick in volumes?

I think so. I think so, Mark. When you look back, to your point, we're segment earnings -- about 26% of that segment earnings is the percentage revenue this quarter. If you go back, it was 23% in the prior quarter; 23% in the quarter before that. So, I think we are in a level -- and again, especially when we had a quarter where we jumped from $45 million in revenues for that segment in the December quarter up to $53 million, that definitely will help -- that definitely helps the margins as well. So, I think we're in the right range there, that low- to mid-20%s, and starting trending more toward the mid-20%s, I think that is the right direction for IR optics.

Right, because you were at $51 million and $53 million in 3Q and 4Q of '12. You had the margins of 27% and 25%, and then there's a significant step down in the first half of the fiscal year. I just want to make -- trying to confirm that the first-half margin performance is behind us, and back to a more normal run rate.

I think, Mark, there is maybe one-half to two-thirds of that, that is related to this selenium high cost flowing through our inventory that's going to pull down. But maybe there's 25% to 30% of it on selling price. I think we're pricing down a little, as there's a little bit more competition now. And we are -- that's going to affect us I think a little longer term. It might affect us 0.5 point, maybe, longer term.

Okay, and then finally, did you talk about where you see net CO2 laser deliveries right now?

No, I didn't, but coming down the assembly line, I think last report in February I said maybe around 4,200. Right now I think it is running about 4,500, according to our survey. And we do this survey, which helps us with laser utilization of maybe 50 to 70 companies around the world, users of equipment in Europe, North America and Asia, so I think our number's pretty good. Actual laser utilization, we get a feel for that. I'm thinking it's running 4,500.

Okay, you said it was 4,200 in February?

Well, when we reported in our last quarter report, it would have been February -- or January -- sorry, January.

January, right. Okay, thank you.

I'm not showing any further questions at this time. I would like to turn the conference back over to our host for closing remarks.

If there are no more questions, I would like to thank everyone for participating today. Our next earnings release for the quarter ending June 30, 2013 is currently scheduled for Thursday, August 1, 2013 before the market opens, with a conference call to follow that same day at 9 AM Eastern time. Thank you for participating in today's conference call.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.