IIVI

II-VI Incorporated (IIVI)

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II-VI Incorporated (IIVI)

F1Q2013 Results Earnings Call

October 23, 2012 9:00 AM ET

Executives

Craig Creaturo - Chief Financial Officer and Treasurer

Francis Kramer - President and CEO

Analysts

Jim Ricchiuti - Needham & Company

Avinash Kant - D.A. Davidson & Company

Jiwon Lee - Sidoti & Company

Mark Douglass - Longbow Research

Presentation

Operator

Good day, ladies and gentlemen. And welcome to the II-VI Incorporated Fiscal Year 2013 First 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 be given at that time. (Operator Instructions)

As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Craig Creaturo, CFO and Treasurer. Please go ahead, sir.

Craig Creaturo

Thank you, Jonathan, and good morning, everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Thank you for participating in the first quarter fiscal year 2013 II-VI Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, October 23, 2012.

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.

Francis Kramer

Thank you, Craig. I'm Francis Kramer, President and CEO of II-VI Incorporated. My prepared remarks today will discuss operational results for each of our businesses. During the just completed quarter, we experienced softness in most of the markets we serve and we are responding to orders for shorter time durations and normal.

While our first fiscal quarter is normally one of our lighter bookings quarters of the year, the quarter we just completed was even lighter than we had projected. Resulting impact on our backlog drove the reductions to our outlook for the fiscal year. In spite of these market conditions, our businesses did have some bright spots that I’ll highlight in these comments.

During the first quarter our Infrared Optics segment, which includes HIGHYAG had bookings of $47.5 million, which is down 7% compared to the first quarter of fiscal year ’12, primarily due to reductions and new laser build especially in Japan.

We did not see reductions in bookings from the aftermarket especially in North America, which indicates steady laser utilization. However, military spending is down in the U.S. due to the proposed sequestration and budget cut, and the uncertainty related to the upcoming election.

For our Infrared Optics business excluding HIGHYAG in the U.S. orders from domestic OEMs decreased 15% quarter-over-quarter. This was a result of timing of blanket orders from high-power OEM, despite the orders decrease shipments to the high-power OEMs increased 17% quarter-over-quarter.

Bookings from power OEMs were flat quarter-over-quarter and shipments declined 32%. The low power market is expected to be weak into the third quarter due to inventory adjustments in global economic conditions.

European bookings for the first quarter were down 14% compared to the fourth quarter due to a delay in receiving a large diamond order that will be receive in the second quarter.

In addition to the typical seasonal effective of the summer holiday period in Europe. We are now hearing that several high-power OEMs are experiencing a softening in orders attributed the unfavorable economic conditions resulting in a decrease in their current production rates.

Asian bookings were up 5% quarter-over-quarter. However, we continued to experience much lower demand from Japan with high-power OEM bookings dropping to a yearly low in September.

Total Japan bookings in the first quarter were down 6% quarter-over-quarter and 33% year-over-year. The stagnate Japanese economy in conjunction with the stronger Yen has created a challenging environment. This trend is expected to continue for at least the next few quarters.

China bookings increased 8% quarter-over-quarter, while the Chinese economy continues to grow at a slower pace. We are seeing increased activity in the [Fuzhou] drilling market in variable radius mirrors. In addition, we have seen favorable results in the aftermarket due to our increased efforts to service this growing segment.

At HIGHYAG, bookings for the first quarter were up 7% quarter-over-quarter and revenues exceeded $8 million in the first quarter, which established a record for the quarter.

We have increased capacity in streamlined key processes to enable volume production. We continue to see growth opportunities in all addressable markets, including one-micron welding, beam delivery systems, laser light cables and one-micron laser cutting heads mostly driven by the auto industry.

In summary, our IR Optics business segment including HIGHYAG continues to see bookings pressure driven by the worldwide economic uncertainty.

During the first quarter, at our new Infrared Optics segment which now excludes our VLOC business, bookings compared to the same quarter last year were up 10% to $35.1 million, while segment revenues were up 31% to $40.6 million.

The bookings increase was mainly attributable to increased demand for Photop-related green laser devices and Aegis-related optical channel monitors. Revenue increase was driven by improvements across most of the Photop and Aegis product lines.

Compared to the fourth quarter FY ’12, bookings were down sequentially by 21%. This was the result of order timing in three areas, green laser devices, medical optics and certain China and North American telecom orders. Revenues were up 2% from the fourth quarter of FY ’12, marking the fifth consecutive quarter of revenue growth for the near-IR segment.

Now at Photop, revenues grew 3% from the fourth quarter of FY ’12, despite the continued broader market softening in the optical component business for telecommunications. Revenue increase was led by shipment of green laser devices, display products in our contract manufacturing business and optics for industrial and medical applications.

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