II-VI Inc (IIVI) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the II-VI Incorporated fiscal year 2015 second-quarter earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions).

As a reminder, this conference call is being recorded. I would now like to turn the call over to Mary Jane Raymond, Chief Financial Officer. Please go ahead.

Thank you, Nicholas, and good morning. I'm Mary Jane Raymond, Chief Financial officer here at II-VI Incorporated. Welcome to our second-quarter earnings call for fiscal year 2015. With me on the call today is Francis Kramer, our Chairman and Chief Executive Officer, and Dr. Chuck Mattera, our President and Chief Operating Officer.

As a reminder, this call was recorded on Tuesday, January 27, 2015. Any forward-looking statements we may make during this conference are given in the context of today only. We do not undertake any obligation to update these statements to reflect events subsequent to today.

Thank you, Mary Jane, and thank you, everyone for joining us. We delivered another solid quarter. Revenues of $176.8 million grew 3% over the second quarter of last year and were down 5% on seasonality from the first quarter of this year as we normally experience between the first and second fiscal quarters.

EPS was $0.24 without the $0.11 impact of a settlement agreement. This $0.24 includes $0.04 of tax benefit for the extension of the R&D tax credit rate right at the end of the year. The second quarter is typically our lowest quarter due to the holiday season in the US and Europe. We continue making good progress on achieving our key financial metric goals that I have been communicating over the last several earnings calls. Our book-to-bill ratio was 1.0 or greater in all our segments, contributing to a strong backlog as we enter the second half of the Company's fiscal year.

The laser solutions segment revenues of $67.7 million are 38% of the Company's revenues. The operating margin of 18% is consistent with the first quarter and above last year's first-quarter operating margin of 6%.

The photonic segment revenues are $60.9 million or 35% of the Company's revenues. The operating margin declined to 1% compared to the first quarter's margin of 3%. Photonics margins continue to be an area of considerable focus.

The performance products segment revenues were $48.2 million or 27% of the Company's revenues. The operating margin of 8.1% is lower than the first quarter that was 8.9% and the year ago quarter of 11.9%. The largest driver of this change is the reduction in the military business and the costs to move part of the Florida operations into California.

We still expect to incur some costs in the second half of the year to complete this consolidation.

We are pleased with the progress we are making, and we realize we need to continue. We are revising our margin guidance for the gross margin, EBITDA margin and operating margin to a minimum of 250 basis points for the full fiscal year 2015 over the full year fiscal year 2014. This represents an improvement above our prior indication.

We previously indicated a [minimum] of 200 basis points exit rate in the fourth quarter of FY 2015 over the third quarter FY 2014. Between these same two periods, we now expect a 300 to 400 basis point exit rate improvement. This translates to a minimum of 250 basis points improvement for the full year.

I will now turn the call over to Chuck to discuss our operating highlights. Chuck?

Thanks, Fran. In the II-VI laser solutions segment, Q2 bookings of $67.5 million were up 9% over last year's second quarter and down 4% sequentially, while Q2 revenues of $67.7 million were up 6% from last year's same quarter and down 7% sequentially. The revenue decrease quarter over quarter is typical of Q2, which has been historically laser solutions' lowest quarter.

Laser utilization in the North American market, driven by a steadier US economy, was strong during the quarter. We exited the quarter with strong bookings from both the OEMs and the aftermarket.

We have also seen an increase in demand for our fiber laser welding heads to auto assembly plants. The overall demand for our industry-leading high power products for automotive and EUV applications, as well as for our low-power products resulted in a 20% increase in North American shipments over Q1 and a 30% increase compared to Q2 of FY 2014.

As is typical in Europe, bookings and revenue were seasonally lower in Q2 compared to Q1 due to the expected slowdown over the holidays. Our EUV shipments in the region were at record levels, and our customer continues to take as much product as we can currently produce.

Although at the end of the quarter we saw no unusual signs of slowing demand in the near term, we are concerned about Europe. Experts point to early warning signs that the economy is slowing, as well as the uncertainty around euro currency valuations and the impact of Swiss monetary policies on our business. Mary Jane will discuss this later in her overview.

Turning to Asia, the material processing market continues to be a great area for us in Japan, Korea and in China. China is moving more rapidly towards adoption of fiber laser technology than any other country. Our low-cost fiber laser cutting head is getting strong interest in this market, and we continue to field inquiries about related low cost and low power optics. We are experiencing strong pricing competition and see many players vying for a position in the China market. We are adding resources in the region to better service our customers by enhancing executive relationships and providing quick responses to RFQs and RFIs.

Laser diode shipments continue to be strong for both our high-powered laser diode assemblies, as well as our high-volume components. Several next-generation laser diode products are in qualification that target growth opportunities.

As we look forward to areas we can further improve upon, we will focus on our epitaxial growth and wafer fabrication platforms and contract manufacturing assembly yields. Retooling these manufacturing steps with increases in automation and process control, as well as beginning to bring them in-house and under our strict quality and cost controls, will be a key initiative over the next 12 to 24 months for laser enterprise.

Across all markets and regions, our 1 micron and related product revenues from this segment were flat sequentially but were up 40% compared to Q2 FY 2014. Capacity has been added, and we have built inventory in all locations to improve our customer service. We initiated a campaign to increase market share through close cooperation with our leading customers to develop a new portfolio of products.

Our II-VI photonic segment consists of two market focus groups. The first is our Optical Communications Group, which designs, manufactures and markets a broad range of optical components, modules and subsystems. We are a leading supplier to customers in the traditional undersea, long haul and metro telecom markets and are targeting increased intersection with the emerging growth market segments stemming from data centers, enterprise networks and Web 2.0 applications.

The second, the Photop Group, is also a vertically integrated business which provides crystals, advanced optics, display products and precision optical assemblies for industrial fiber laser, life sciences and consumer display applications. Photonics bookings of $66 million were up 27% over last year's second quarter and flat sequentially, while revenues of $60.9 million were up 11% to last year's same quarter and down 4% sequentially. The increases relative to last year are mainly attributable to the timing of acquisitions compared to Q2 of FY 2014.

The sequential revenue decline can mostly be attributed to a weaker demand for our optical amplifiers for optical transmission systems as customers worked through inventory issues and confronted delayed network deployments.

We cooperated with our customers to help them manage unforecasted demand changes during December. We also experienced weaker demand than we had forecasted for our products associated with new network deployments and understand that this was partly affected by constrained wireline investment and project delays at two large North American carriers.

Other products such as pump lasers and optical components for telecom, crystals and laser optics for fiber lasers and optical coating filters for a Fiber to the X broadband network architectures, as well as data center applications, showed growth over the prior quarter.

In particular, the fiber laser market, which has been growing rapidly in China and also in Japan, continues to show a strong demand for fiber laser optics, including our micro-optics, fiber laser pump combiners and filters for high-powered isolators.

The overall market remains strong for QSFP+ and other transceiver products for data centers in enterprise networks, as well as EDFAs and WDM components for cable optical networks. We are in the final stage of product qualification and are initiating the volume production ramp of our 40G QSFP+ transceiver products. We are able to leverage our internal technology and micro-optic platform advantages to deliver differentiated solutions, and we will continue to invest in QSFP+ transceiver products for 40G and 100G client-side transceivers that will support bandwidth growth opportunities and which will further our ability to serve our data center customers and their cloud applications.

Customer engagements and feedback continue to be positive. We have experienced a significant increase in the number of design end projects with customers across multiple applications and have achieved several design wins associated with new product sales expected to phase in in the coming six to 12 months.

Additionally, we were awarded share allocation increases from key customers during annual share negotiations that concluded this quarter.

Finally, in our acoustics performance product segment, Q2 bookings of $53.2 million were flat year over year and up 17% sequentially. Revenues of $48.2 million were down 9% year over year and down 2% sequentially.

Bookings were up significantly in our silicon carbide semiconductor device substrate and thermoelectric businesses both year over year and sequentially. Increases were driven by our new Air Force Research Labs contract focused on the development of 150mm and larger diameter silicon carbide semiconductor device substrates and the continued growth and demand for our semi-insulating products, enabling the cost effective deployment of 4G wireless base stations around the world.

We closed a major follow-on order for our first vetting customer that employees our differentiated thermoelectric solution at the core of its product and experienced increased demand for our thermoelectric products from multiple life science customers who placed significant replacement orders.

Bookings in our military business increased sequentially. We are pleased to announce that a significant long-term contract was received in the quarter for sapphire windows. The initial sapphire window order for $11 million is the first release against this multiyear contract valued at approximately $36 million.

The revenue decrease year over year and sequentially was driven by a culmination of factors. These include lower defense spending in our military business, lower rare earth element sales and significantly reduced shipments in our ceramic silicon carbide semiconductor equipment business.

However, we continue to be very encouraged by the strong growth in demand for our 150mm silicon carbide products, which we believe will be a key driver to enable market share growth in major commercial markets for silicon carbide-based electronic devices.

To address the growth in the semiconductor substrate demand, we are nearing completion of a major infrastructure expansion of our crystal growth capacity. In an effort to offset the impact of the slowdown in the semiconductor equipment business, we have diversified our silicon carbide ceramics business and achieved several new product design wins among back-end semiconductor tools suppliers where persistent motion control applications are increasing. We are now servicing customers in the back end of the semiconductor fab with robotic end defectors, vacuum trucks and thermal transfer components.

In addition, we continue to see increased demand in our silicon carbide display business driven by G8 LCD television production in Korea and China.

In our military business, we continue to execute a plan to consolidate our California and Florida operations due to lower market demand, and we are on track to complete these activities in our fiscal fourth quarter. While military bookings were up from the prior quarter, the outlook for the military market still remains uncertain, and continued program delays are expected.

Lastly, in our performance metals division, the core business remains stable under the new operating model and has a solid order backlog for the next several quarters.

I will now turn it over to Mary Jane to walk us through a review of our overall financial performance. Mary Jane?

Think you, Chuck, and thanks, Fran.

For the second quarter, our book-to-bill ratio was 1.06. Our backlog is $228 million compared to $218 million last quarter, the first fiscal quarter of the year. This $228 million consists of $73 million in laser solutions, $54 million in photonics and $101 million in performance products.

The gross margin of 35.7% declined 80 basis points compared to the first quarter but improved 460 basis points compared to the second quarter of last fiscal year. The year-over-year margin increase is a combination of general operating improvements and the recent acquisitions in particular and not having the one-time inventory step up recorded in last year's second quarter.

The operating margin of 9.3% declined from Q1 by 110 basis points but improved by 370 basis points over last year's quarter. This also is affected most importantly by operating improvements, as well as the absence of the inventory step up last year.

The adjusted EBITDA margin, which excludes the income from the settlement we noted, improved 80 basis points over Q1 and 290 basis points over a year ago quarter. The GAAP EPS of $0.35 included $0.11 on the settlement we noted. This settlement is related to certain payment obligations we had in the purchase agreement for the acquisitions we did last year. Adjusted EPS, excluding the settlement, was $0.24 and exceeded our guidance of $0.15 to $0.18. This $0.24 adjusted EPS includes $0.04 of income tax benefit, primarily related to the extension of the R&D tax credit.

Turning to our cash and capital expenditures, our cash flow from operations was $48 million compared to $22 million for Q2 of last year. Year-to-date cash flow from operations was $49 million compared to $56 million last year. The difference to the first half of 2014 is due to, as Chuck said, our accommodating some of our customers changes in schedules in the second quarter. We don't expect this change to be permanent. Importantly, you can see we recovered the lagging receivables collections noted during Q1.

Regarding other cash items, we paid down $24 million of our debt this quarter, bringing our debt level to $212 million. We purchased $5 million of stock and about 373,000 shares at an average price of $13.41 a share. Our total share count now is 62,276,212.

During the third quarter, we expect to buy $3 million to $4 million of stock as we continue to focus on paying down the debt.

Regarding property and equipment, we spent $10 million in CapEx for the quarter. We expect to spend about $40 million in fiscal year 2015 on capital equipment, not including the $13 million we used to purchase the building in Germany in Q1. Our equity compensation in the quarter was $2.8 million. For the full year, we expect the stock comp expense to be $12 million to 13 million. Our effective tax rate was 10.9% due mostly to the R&D tax credit.

In addition, most of the income from the settlement was tax-exempt. We expect the year's tax rate to be between 14% and 16%. This range compares to last year's rate of 16%, which also benefited from the R&D tax credit.

Turning to our outlook, the revenue outlook for Q3 is $174 million to $182 million. This compares to $173.6 million in Q3 of FY 2014. Our EPS is expected to range from $0.18 to $0.24 per share compared to $0.13 per share in Q3 of FY 2014.

During Q3 we expect to incur about $900,000 in restructuring costs for the consolidation of some of our Florida operations into California. We also anticipate some unfavorable effects of the Swiss franc movement.

Before we turn to questions, let me just let you know that our third-quarter earnings release date is slated for Tuesday, April 28, 2015.

With that, I will turn it over to the operator to open the line for questions.

(Operator Instructions). Avinash Kant, DA Davidson & Co.

So a few questions. The first one is that you talked a little bit about fiber lasers in your presentation. Also some of the diode sales. Could you give us an idea of what percentage of your overall sales right now are exposed to fiber lasers?

We really don't report it that way, Avinash. It is stepping up -- it is training to become more of our business, but we haven't collected the data that way. We do have it. We just haven't chosen to report it. When we went to the three segments, we felt like we would be able to give you the best view of the business. But if you -- if we keep working at it, I guess maybe we will have to report it in another session. But right now today we are not prepared.

Okay. Because earlier you had high add, but now, of course, you're more into the diode and other things too, so clearly your exposure has gone up. But just some rough idea at this point that that's what we are looking for.

I think that is a good question really, and I have to say I don't feel we are prepared today. But in the 90 days, we should be ready for that.

Okay. Perfect. And Mary Jane, you just talked about the foreign exchange impact of the Swiss franc. Could you give us some idea in terms of, in this quarter, in the December quarter that you just reported, how did foreign exchange impact you in different ways and maybe you can talk a little bit about the euro and other currencies too?

Right. So, first of all, the FX in the quarter was probably in the neighborhood of about $0.5 million. With respect to the Swiss franc -- well, let's start with the euro.

The euro had obviously a much greater impact on us in the first quarter as we reported at the time, largely due to the intercompany loan we had outstanding. That has now significantly been retired.

With respect to the Swiss franc, obviously where the Swiss franc spun out on the new monetary policy, it kind of ended up back where it was last May. So while we saw in the first quarter probably a little bit of a pickup of the Swiss franc, we expect to see that down in the third and fourth quarter of this coming year.

So was the currency negatively impacting you in the current quarter that you reported?

No, it was positive. Positive up. [500] up.

So how much did it contribute to the bottom line?

So it was probably about two-thirds of a $0.01 kind of thing. A little bit under $0.01.

Okay. So if I understand it correctly, the $0.24 that you are reporting on an operating basis had $0.04 from the R&D tax credit, right?

Yes.

Okay. And then maybe less than $0.01 from the currency?

Right.

Okay.

And a lot of our revenue, actually, a lot of the actual product content and the revenue is priced in dollars, so we don't tend to have large swings in the currency, generally speaking.

Okay. One final question. So you talked about the taxes. The current quarter we understand that benefited from the R&D tax credit. Now going forward you are talking about 14% to 16%. Would you have kind of a higher tax rate at the beginning, and then at fiscal year end you have -- or December quarter -- you have like a lower tax rate. Is that how we should think of it, or it will be continuous?

Well, so are you talking about the four quarters of the fiscal year? How you should think about the pattern across four quarters of the fiscal year?

Yes, exactly.

Yes, okay. So this year is probably a little bit indicative. So the first quarter was a little bit higher because we did take the tax effect of repatriating some cash. But generally speaking if, for example, we see the same sort of pattern on the R&D tax credit where it is not formally extended until the end of the year, then yes, we do not have that to book in the first quarter of the year.

So if that sort of renewal pattern continues, this sort of a pattern is probably what you will see that the first quarter is somewhere probably more on an operating basis, call it [20%] to [22%] and then might cast down over the rest of the year, which is a little bit the pattern we saw last year.

So your guidance is you will have R&D tax credit by the end of the year again?

The guidance that we had for second quarter, that was set for the second quarter, did not assume the R&D tax credit.

Okay. But the 14% to 15% forward guidance?

Oh, certainly. Well, it is in there. We have it.

Okay. Good. Thank you so much.

Jim Ricchiuti, Needham & Company.

Wanted to follow up on the bump up in your margin targets for the year. Is there anything you could say maybe to either isolate or elaborate on which areas you have become maybe a little bit more confident in in terms of expanding margins?

I will start and maybe Mary Jane or Chuck will add to it. Certainly the laser solutions business is the one that is starting to get better traction. Certainly the CO2 business is solid, but our laser diode business is where we are getting a little more confidence. If you said there is an area where we are a little bit less confident, it might be in our photonics area. We did have a lighter quarter here in the second quarter compared to the first, and that is where we are focused. Our performance products segment is right on, just about where they have been. And the performance areas kind have modulated with the diversity we have in that segment.

I think that's a perfect summary. I think in the first quarter we had the same consistent story that we've kind of had this quarter, but particularly in the laser diode, the fiber laser, etc., that is just very, very good focus on operating efficiencies are causing us to now see after a couple of quarters of that that that looks to be at least steady. And I think the rest of Fran's comments are exactly on the mark.

And then with respect to the photonics segment, is there anything we can be looking for in the next quarter or two that might signal some signs of improvement there? It clearly seems like this is going to be a longer turnaround, and you have already alluded to that. But are there any things in the next one to two quarters that we might be looking for that could signal some changes in that business?

I would say that increase in demand will be in the near term is the most important part of our plan. As we are working the things that we can control in the operations to improve the operating margin, those things are happening every day.

As I indicated in my comments, that we have seen a weaker demand for our optical amplifiers, and we are faced with some customers who are telling us that their customers have delayed network deployments. So an indication that the market which was a little stronger in Q1 than it was in Q2 warms up is going to be an important part of our near-term picture.

Yes, and just with respect to that, Chuck, are you assuming kind of a similar outlook in the optical communications market in terms of the demand picture over the balance of the year?

I would say that what I'm thinking is that the current quarter over all might look similar to the prior quarter. And we are hoping that by the fourth quarter we will start to see some increases. We are well-positioned. We have won some good allocations based on our negotiations. Now allocations is the first part of the equation. Our customers need to have demand, and then we will catch some of it into our bucket.

Got it.

I just wanted to add, so what Chuck makes all kind of sense on how we see the business, we are going to make some cost reductions in the photonics group. That's the only thing that we're not really -- we're not quite the cost we want to have with this level of business -- increase in the marketplace sure will fix this, but we cannot wait for that. We're continuing to work on all avenues, including certainly moving our production around.

Got it. Thanks, Fran. And one final question, if I may. I think you alluded to Europe being a concern, and I don't know if that is more just the headlines that we are all seeing or if you have begun to see any signs of softening across any of the businesses?

Like Chuck said in his note, we didn't -- as the quarter ended, we didn't have any turn down there, but we are watching every bit of news. And when there is so much turmoil in a region, it would be impossible for it not to have an impact on us in the next six months. So maybe it's not going to be in this quarter, but we just see too many unfavorable issues there.

How were the bookings in Europe as you went through the quarter?

I think they ran the pattern we were expecting. We had a little bit better in October and November, but December was maybe close to just unpleasant. Because those last two weeks are really weak, and you are wondering we are going to finish the quarter where we expected because they fell off. But we were about -- we're right on where we expected on Europe overall. Just December is always weak for us.

Yes, maybe I could add to that, Fran, because I think it is consistent with the question Jim is asking. I'll turn my attention just to the shipments. I would say that the last couple of weeks of the second quarter we had a what seemed to be like a lot more activity than what we were expecting.

So we worked real hard between Christmas and New Year's to be able to keep pace. And I would say that in the first week or two in January in Europe, you could feel a little bit of a slower start. We are not reading anything into that, but I would say if you look at the pace in the first couple of weeks of January, it is not at the same pace we had in the last couple of weeks of December.

Okay. Thank you.

(Operator Instructions). Ted Moreau, Barrington Research.

Congratulations on a great quarter. Just wondering, Chuck, you were just talking about the last two weeks of December, and you saw the pickup of activity there. Could you kind to go through where was the activity stronger, and then was it the same activity that kind of slowed, or was it different activity that kind of slowed in January?

My comment -- I was answering Jim's question, which I understood was about Europe in general.

Right.

And my comments about the last two weeks of December, first two weeks of January were predominantly around the laser solutions segment.

Okay. And then within laser, you have talked about competitive pressures, I think largely just showing up in China. Has that spread to other regions of the world?

Competitive pressures on our laser solutions products in general?

I'm sorry, the fiber lasers.

Oh.

I think we are seeing more intensity on pricing just because of the substitution of fiber lasers for CO2. CO2 product manufacturers are trying to be more price competitive, so there's pressure to drive down those component prices. At the same time on the fiber laser because everybody's trying to get that early share, we are getting pressure there.

It is not -- it's just a little more intense than it has been, and I think the most intense is China. Does that flew over to other places in the world? Yes, because they are trying to sell into China.

Okay. And then on the photonics group, just curious what do you think your exposure is to the North American Tier 1 carriers? You are talking about a little bit of weakness there or at least delays. So just curious what percentage of that business is correlated to North American Tier 1s?

Well, they're an important part of our business. We are designed into virtually all of the optical network equipment companies, so it depends on their ability to capture the business with the carriers.

In the end, the carriers will pull everybody forward. That's probably the best way I can say that that's where we experienced some of our pushback in the quarter.

Okay. And so if we think about maybe that business being a little bit flattish sequentially, what are your assumptions for annual price declines in that business for the calendar year 2015?

For the calendar year 2015, I would say more generically because I don't have calendar year 2015 in front of me, but typically we have been reporting that customers are asking and negotiating for roughly 2% to 3% pricedowns per quarter. We try to offset that with improvements in our operating efficiency, in our cost reductions in the factory, and in introduction of products that have enhanced features. But that's pretty much the menu.

Okay. And 2% to 3%, that is in line with historical figures?

In the aggregate, yes.

Okay. And so final question, still on photonics group, I think you were talking about some product introductions there and whatnot. Can you talk about on the 40G QSFP+ transceivers what the competitive dynamics are there, and you need to introduce a multimode fiber product because I believe it is currently a single mode? Do you have to introduce a multimode product?

I would just make a general comment that it is a strong growing market. There are entrenched suppliers. We have a number of competencies that we feel real strongly about. We have some leading customers, and we offer a full line of supply of transceivers for 40G and for 100G, and we are investing accordingly. Some of this will be based on uptake for our leading customers and the timing associated with multiple qualifications that are in play.

Okay. And what would be the timeframe of release of the new products?

It will depend by customer, and it will depend by the qualification cycles. But I am hoping that we will have the beginning of meaningful orders in the next couple of quarters.

Okay. Sounds good. And sorry just to continue on this one one more time. Do you need these products to drive -- the new product intros to drive revenue growth?

Yes. Our plan depends on a combination of improving our cost position and deriving the benefit from our product development investments.

Okay. All right. Thank you.

(Operator Instructions). Zack Rodenbough, Sidoti & Company.

My first question is just about the CO2 business as compared to last year. Are you guys seeing demand in revenue for that kind of dropping off as a portion of the laser solutions business, or is it kind of holding steady here?

It is holding steady, maybe a slight incline up. Certainly it is great business. The installed base is very good, and when the economy is going the way it is here in North America right now and even Europe, it really does have some growth to it. Japan is not doing so well, but overall very good quarter for that group.

Okay. And is there a chance for you guys to use kind of pricing power there to add to your topline growth as this progresses and demand does start to maybe cull throughout the cycle?

That group is always using whatever tool they can to gain market share. Since they have such a market share, they are pretty active with it.

Okay. And the last time I think you mentioned HIGHYAG is the main growth driver in laser solutions and that laser enterprise was starting to come on strong and just wondering where that is standing now. Are you still seeing that level of growth from HIGHYAG, or is that starting to level off as the transition takes hold? And I guess is laser enterprise starting to experience that same turnaround?

I'll make a couple of comments. First of all, on HIGHYAG, the business is really solid. That's probably the best way to say it. We have a new management team there. They've really done a fantastic job stabilizing the business, building confidence in the customer, doing all the right things to position us for this year and for the long-term.

I would say compared to the last quarter, if that's what you like to compare it to, it is right in there. They are just doing a fine job.

On laser enterprise, likewise. I would say the new management team there have the same determination for delivering value. They have created a plan, they are sticking to it, and we saw a real good performance from them in the quarter.

Okay. And then my last question for now is, kind of where you expect R&D to go as a percent of revenue? The last few quarters have been up around 7%. Is that kind of the new normal with these new businesses, or are you expecting that to eventually trail back down to that 4% to 5% range?

So I think, first of all, we are still at about the same rate that you say. I think that will be the rate for the year. I don't know that it will trail down to where it was before with significantly added capability, but I will say that we continue to be very, very focused on ensuring the yields out of the engineering, both resources in terms of people, as well as money that we put into it.

I agree, Mary Jane. I would add that our Chief Technical Officer has a process in place, and one of the things that we will do -- I agree that I think that the spending as a percentage of sales will stay in that range, but we will be less patient about the opportunities that we have in front of us.

We have an ability to be able to make changes in our R&D investment in certain areas where we see opportunities -- newfound opportunities -- that we went to go after. So I think there may be some reallocation and refocusing, but overall as a percentage of sales, I think we are in the model.

Okay. And then I guess finally following on that, just very generally where is that focused on right now for that R&D spending I guess by segment or product offering what you guys are really focusing on, if you can speak to that?

Okay. I can give you some sense for it. I would say the Optical Communications Group inside the Company is a group whose value proposition depends on that investment and delivering on it, more than any in the short term and over the long haul.

So I would say in the photonics segment, maybe 40% -- 40%, 50% -- of the R&D investment and then maybe roughly equally divided across the other two segments.

Okay. That's all I have for now. Thank you very much.

Thank you. And with no further questions in the queue, I would like to turn the call over to Mary Jane Raymond for any closing remarks.

Okay. Well, first of all, we would like to thank you very much for joining us for the Q&A today. And this call will be recorded, and we would like to wish you all a good day and safe in the snow. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does include the program, and you may all disconnect. Have a good day, everyone.