Good day, ladies and gentlemen, and welcome to the II-VI Incorporated Fiscal Year 2015 First Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to hand the conference over to Ms. Mary Jane Raymond, Chief Financial Officer. Ma'am, you may begin..

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

As a reminder, this call is recorded here on Tuesday, October 28, 2014. Any forward-looking statements we may make during this teleconference are given in the context of today only. We do not undertake any obligation to update these statements to reflect events subsequent to today. With that, I'll hand it over to Francis Kramer..

Thank you, Mary Jane, and thank you, everyone, for joining us. We delivered a solid first quarter. Both revenue and EPS were at the top end of our guidance. We had improved results in the Laser Solutions segment, and we established a steadier operation in our most recent acquisitions.

Nearly all parts of those acquired businesses are now under our control, and we expect to see continued improvement throughout this year. As we previously reported, we are now reporting in a new 3-segment format. The Laser Solutions segment largely serves the industrial market.

This segment's revenue of $72.8 million is 39% of the company's revenue for the quarter. The operating margin of 18% is a good improvement over the fourth quarter, which was 11%, and over last year's first quarter operating margin of 16%. The Photonics segment primarily serves the optical communications market.

This segment's revenue is $63.6 million or 34% of the company's revenue. The 51% growth from the first quarter of FY '14 is entirely due to acquisitions. The operating margin of 3% is an improvement and returns the segment to a profitable range and is also above the 1.9% in last fiscal year's first quarter.

Nevertheless, we have a long way to go with our expected operating margin improvement, and we expect to make progress this year, given prevailing market conditions. The Performance Products segment serves the diverse specialty markets using unique engineered materials. This segment's revenue was $49.4 million or 27% of the company's revenue.

The operating margin of 8.9% is lower than the fourth quarter that was 13.7%, but above last year's first quarter fiscal year '14, which was 7.3%. For this year, we expect to be able to balance the risk and opportunities in this segment to deliver stable performance.

We're on track to deliver in the fourth quarter of this fiscal year an exit rate of 200 basis points improvement in gross margin, EBITDA margin and operating margin compared to the third quarter of fiscal year 2014, as we previously had indicated. I will now turn the call over to Chuck to discuss our operating highlights..

Thanks, Fran.

During the quarter, we continued to make progress towards a major strategic goal of integrating our most recent acquisitions and taking further steps to transform those businesses into world-class providers of engineered materials and opto-electronic components across the large and growing industrial, communications, military, life sciences, semiconductor and consumer market segments.

So I would like to start out by acknowledging the continued hard work by our employees around the globe, and especially our customers for their renewed confidence in us as we move forward. As a measure of that confidence, we have regained customers that had turned most of their business to other suppliers prior to our acquisitions.

And during the last quarter, we expanded many of our customer engagements as we responded to an increase in request for information and quote. With much of the acquisition integration work behind us, we began to rebuild momentum on several new design win opportunities.

Our major focus areas during the quarter and this fiscal year are on improving gross margin, customer intimacy and product quality, while enabling our management teams to move quickly to win new business.

Also during the quarter, we began to see the benefit of some of the actions we took last year to improve the profitability across all of the segments by a combination of rationalizing the portfolio and discontinuing low-margin products, upgrading our manufacturing and IT capability, along with our quality systems in developing new products, while competing aggressively with today's portfolio in very competitive market segments.

During the remainder of FY '15, we will also remain focused on moving the company in the direction of new growth markets and applications that we are targeting with our technology and product roadmaps and by leveraging the synergies deriving from our vertical and horizontal integration.

We believe that such opportunities will have a number of benefits, including driving increased scale and utilization of our fab facilities while offering the prospects of long-term growth. Now I will provide some highlights across the operating segments.

At our Laser Solutions segment, Q1 bookings of $70.0 million were up 36% year-over-year, but down 15% sequentially from Q4 FY '14, our seasonally strongest quarter during which we book some large blanket orders. Q1 revenues were $72.8 million, which was up 2% when compared to Q4 FY '14.

This was driven by increased CO2 laser utilization, stronger demand for components for CO2 laser-based EUV applications and demand for our 1-micron laser components. Our beam delivery components and laser diodes showed particular strength.

We have settled into our new state-of-the-art manufacturing tech center in Berlin, where we are increasing our production capability and output, as well as investing in an expanded technology and product portfolio. During Q1, we achieved record shipments and had a number of engagements with new potential customers.

We believe that CO2 laser utilization continued at a sustained rate, as was evidenced by strong demand from U.S. job shops tool for automotive production. In fact, during Q1, we experienced record demand levels in the North American aftermarket.

We continue to expand our presence in the materials processing markets in Asia, including in China, where we are seeing steady demand for our CO2 laser optics and in the fiber laser market, where we are seeing strong request to decrease price as a number of new entrants continues to increase significantly.

We recently opened a new sales and service center in Korea to address the increased opportunities we see there across multiple markets. We experienced strong VCSEL demand from the consumer market during Q1, which is historically a strong quarter.

Furthermore, we experienced increased demand for our high-speed VCSEL chips that are used in the rapidly growing data center market, where they enable short-distance optical lengths and faster communications by removing bandwidth bottlenecks.

The higher laser fab utilization in combination with our cost-reduction activities that we implemented last year resulted in the expected financial improvement. The operational disturbances caused by the transitions into our own operating systems are largely behind us.

This is allowing us to focus on further improving our operational efficiencies in customer service going forward. We also continued to develop into several new laser diode-based technology platforms and products that we will -- that we believe will drive our scale and our growth in the future.

Next I turn my attention to our Photonics segment, which is focused on optical solutions for communications, networks and data centers, as well as advanced optical components across multiple markets, including industrial, life sciences, semiconductor and consumer.

In particular, our Photonics segment supplies a broad range of advanced optical components, integrated modules, subsystems and even full-line card solutions to many of our customers in these markets. Bookings of $66.3 million for Q1 FY '15 were up 63% year-over-year, while revenues of $63.6 million were up 51% to last year's first quarter.

These comparative increases relative to last year are mainly attributable to the timing of the pump laser and optical amplifier business acquisitions that occurred in FY '14.

The sequential revenue growth compared to Q4 FY '14 was driven mainly by amplifiers and pump lasers for both the terrestrial and submarine markets, as well as product for the data center markets. The increase in 980 pump module demand in turn created a strong internal demand for laser chips from the Laser Solutions segment.

We experienced a strong demand for amplifiers and related components supporting 40G and 100G channel upgrades, which was offset somewhat by delays in orders for products associated with new network builds. We understand these delays to be primarily due to constrained wireline investment priorities at some Tier 1 network operators.

Customer feedback on our value proposition has been encouraging, especially regarding our global footprint, world-class team, leading-edge platforms and vertically integrated model.

We have been responding to many new requests for information and quote around our next-generation products, which are well aligned with customer roadmaps designed to cost-effectively increase bandwidth.

We have recently achieved several Tier 1 design wins that are expected to drive long-term revenue growth starting to phase in over the next 12 months.

In addition, the Photonics segment is expanding their investments in the advanced optics product portfolio and is working aggressively to address with their component products adjacent market segments, including the fiber and direct-diode lasers, semiconductor metrology tools and a number of emerging applications in life sciences around medical diagnostics and laser treatments.

Going forward, this diversification initiative will remain a key priority for us. In our Performance Products segment, our Q1 bookings decreased 4% sequentially, while revenues were down 11% sequentially. The bookings decrease year-over-year was largely attributed to the personal comfort bedding market related to our thermoelectric solutions business.

The decrease was caused by a delay in the expected follow-on order from our largest bedding customer.

Other causes for lower bookings were the continued softness of government funding for basic life science research equipment that employ our thermoelectric systems, as well as continued softness around military spending in the increasingly extended designing cycles for new technologies and products in that market.

The year-over-year revenue decrease was primarily driven by lower military spending and reduced demand for performance metals after we exited the selenium chemical refining business last year.

We have also experienced weaker demand for products related to the semiconductor capital equipment market, as customers adjusted their inventory levels and business plans. During the quarter we experienced continued growth in demand for our products that address the wireless mobility market.

3G and 4G wireless base station component suppliers continued to increase their demand for our silicon carbide substrates. We also experienced growth in our ceramic materials products that underpin our Ceramic Materials business, driven by strong display of fab utilization in China.

In our Military business, we are continuing to execute a plan to consolidate our California and Florida operations in light of the lower market demand. While recent military bookings are up the overall outlook remains modest.

As a result of a significant decrease in demand for a family of legacy products manufactured at one of our Florida facilities, we announced plans to close that facility and move the remaining products to other locations that have common manufacturing platforms. We expect this change to be executed over the next few quarters.

The consolidation should position the Military business to achieve improved margins in FY '16. We believe that we are strategically positioned in the military optical system supply chain based on our differentiated platforms and products that enable high-end performance in intelligence, surveillance and reconnaissance applications.

As a result, we continue to position our portfolio by responding, during the quarter, to an increased level of request for information and quote. And the performance metals division of the business delivered solid performance in Q1 and has a strong backlog for the next few quarters.

Production levels for the critical rare-earth element that we refine in the Philippines have stabilized as we implement process improvements for the current and future raw material streams, while continuing to generate strong operating results. I will now turn it over to Mary Jane to walk us through a review of our overall financial performance.

Mary Jane?.

one, it's the first quarter we have apples-to-apples comparison with the inclusion of all acquisitions; and two, it eliminates the majority of the onetime items. It's just cleaner to be able to compare from Q3 forward. Turning to our cash and capital expenditures. Our cash flow from operations was $800,000 compared to $24.3 million in Q1 last year.

The main driver of this significant difference was higher accounts receivable at quarter end than had been initially anticipated. We had one item shift into Q2 of $10.6 million that is now completely collected here in October. Apart from that one, though, we are experiencing longer payment terms with some of our larger trading partners.

It's imperative for us to scrutinize our working capital at a much more detailed level, and we have directed all the divisions to put in place plans to restore the cash flow back to more typical levels. Apart from the cash flow from operations, other cash expenditures in the quarter included the purchase of our building in Berlin for $13 million.

This was previously recorded as a capital lease. That, in addition to $8.5 million for equipment, accounts for our capital spending this quarter. We expect to spend about $40 million in fiscal year '15 on capital equipment, not including the purchase of the building in Germany.

We also paid down $5 million of our debt and repurchased approximately 480,000 shares. Our share repurchases in total were $6.3 million, $5.1 million of which cash flowed in the first quarter. Our stock-based compensation in the quarter was $3.6 million. For the full year, we expect the stock comp expense to be between $13 million and $14 million.

Our effective tax rate was 25.5% due to some discrete items in this quarter. We expect the full year's tax rate to be between 20% and 22%. This range compares to last year's tax rate of 16%. Last year's rate was lower due to less U.S.-based income and a particularly good use of the R&D tax credit. With respect to my comment about lower U.S.

income last year, you'll remember that last year we had transaction costs for our acquisitions. Those are recorded in the U.S., as well as the operating and closure cost for Tucson, just to name 2 of the larger items. With the U.S. income improving, the tax rate will rise.

Our outlook for the second quarter of fiscal year '15 is $172 million to $180 million in revenue compared to $171.8 million in Q2 of FY '14. Our EPS is expected to range from $0.15 to $0.18 per share compared to $0.12 in Q2 of FY '14.

Just as a reminder, our second quarter tends to be the lowest revenue and earnings quarter of the year, assuming no acquisitions, of course. This is largely due to the holiday period in November and December. To wrap up, our second quarter earnings release date is slated for Tuesday, January 27, 2015. This concludes our prepared remarks.

As we turn to Q&A, I'll remind you that our answers to your questions may contain certain forward-looking statements. They are based on our knowledge today, and we may have results that differ materially. With that, I'd like to open the line for questions..

[Operator Instructions] Your first question comes from Ted Moreau from Barrington Research..

Just a question on the debt levels. You haven't had a lot of debt in the past. You took on a lot of debt to acquire the Oclaro assets.

So what's your view of your capital structure and uses of cash?.

Well, it's a balance this year, certainly. I think we would look to pay the debt down through this year. We're not putting a specific number and, obviously, there's a repayment plan on it, anyway, as well as balancing that with stock repurchase. It's our goal to optimize between the 2 of them how we would use the cash this year.

But as you say, II-VI is not used to being a debt company, and it's something that I wouldn't say we're looking to retain permanently..

I'd add to what Mary Jane said, but we are quite comfortable where we are here. We understood going in that we'd carry this a little longer than we typically would, but we're very comfortable..

Okay, that sounds great. And then I believe Chuck was talking about, in the Photonics group, some new growth markets.

Just curious what the timing of maybe products intros are of that and when you think you can start to make some traction there?.

Okay. So we have some design ends and some design wins recently. And what we will really need to see is the uptake by our customers and their customers. But I believe that we will start to see some of the revenue uptake in the third quarter of this year..

Well, that's great. And then finally, I know it's early yet, I think Mary Jane mentioned that fiscal Q2 tends to be seasonally slowest of the year, but just kind of curious about your visibility going into the March quarter and what your thoughts are there and -- I mean, if you think that things could be in line with the typical seasonality..

Well, I think as we discussed in the conference call last time, the company is moving -- has moved to a quarterly guidance. Nonetheless, I think as we've said, we have a margin improvement that we're looking to achieve and we are very focused on achieving that.

But as for any specifically about our fiscal year Q3, probably no comments about that at this time..

And our next question comes from Jim Ricchiuti from Needham & Company..

Mary Jane, I may have missed it, did you give an organic growth rate for the quarter?.

I did not give one. Move to your second question, I'll come back to you..

Sure.

And I guess where I'm going with this, just in light of the new segment reporting, and I'm wondering -- maybe, Fran, you can address this or Chuck, because in broad terms, how should we think about the growth rates in these segments? I mean, you've got some unique drivers in each of them, but I'm just wondering if you can talk a little bit about the broader growth characteristics of these business segments..

I think take the organic businesses we have, it's been flat to up 2% to 3%. It's not large. Certainly we're adjusting, even in our traditional businesses. Like Chuck reported, the Florida operation is slowing down a little, and so that's taken some growth away, being offset by more in the traditional IR business.

So a little Military climb, it's up in one hand, down in another. In our Photonics, our original Near-Infrared business, that's tending down a few points. So I would say we expect this year, overall in our traditional businesses, to be flat to up to 2% to 3%. And our overall acquisitions are the ones that are adding..

And within the larger segment, the infrared segment, can you talk a little bit about your view of CO2 over the next several quarters?.

Well, I think CO2 business may come -- we always try to tell you about the installed base because that's certainly the business we're in. We're in 73,000 installed lasers out there in the field doing work. Coming down the assembly line for new CO2 seems to about 2,700 to 3,000 units.

And we're seeing retirements against that installed base of 1,000 to 1,500. So the installed base is very, very critical. That's the market where we do best, and we think that's coming along nicely.

I'd make another comment in our HIGHYAG business unit, which we consolidated into our infrared unit that we had in the past, that business is up quite nicely. And I think Chuck made the comments. And as we move into our new Berlin facility, we've gotten our production in better condition.

And I think we're expecting to get a little bit more capacity off this as the next few quarters go by. So that would be more of our growth engine right now on top of IR, while our Laser Enterprise group, which is in our Laser Solutions area, is coming on, as Chuck made the comments, too..

And then just finally, in light of the macro concerns in Europe and to some extent, in China, have you seen any noticeable change in demand in aftermarket sales or demand in the CO2 area?.

Not really, but you're always a victim by what just happened. So as the quarter plays out, we're watching it. We're just watching what everybody's talking about, too. We've been rolling pretty well in most continents. But if you see China, the way they are, and Europe a little bit different at times here, North America is very good.

The economy here is very good for us. But the rest of the world, I think we're just timid to say that everything is going to be healthy like this all along. But right now, it's in our projections that the market conditions remain about the same..

[Operator Instructions] And our next question comes from Avinash Kant from D.A. Davidson & Co..

Just a question on the guidance, maybe from Mary Jane, the guidance that you just issued for the December quarter, what kind of gross margin and operating margin assumptions do you have in that quarter?.

We're not giving guidance on all the margins for the quarter. Obviously, I think in order to try and adhere to the 200 basis points improvement that we're talking about, in the fourth quarter we need a little bit of a lay-on to achieve that.

So we would hope that the margins would continue to improve, but we're not putting specific numbers on this for the quarter..

So if I understand it correctly, you had given the comparison from fiscal Q3 2014, and you are already like 300 basis points -- 310 basis points up from the Q3 level, the current quarter that you just reported.

So if you're talking about the exit run rate of 200 basis points compared to the same quarter, you're expecting margins to come down in some of the quarters..

No. I think, first of all, the current fiscal quarter had a particularly strong performance from Laser Solutions.

And I think Fran just gave a good answer on watching some interesting market trends that cause us to watch the market trends exactly as he said and not get too far out in the limb with respect to how we expect the margins -- the various markets to perform vis-à-vis the experience we've just had here in Q1.

I think, also, we had with -- just in Q1, a little bit of a turnover from Q4, a little bit of return of accruals, not so, so major.

But I think, frankly, we're just trying to be cautious on being sure that the significant improvement we had, I think maybe particularly in the gross margin, is we're not getting too far ahead of our headlights when we're only 1 quarter into the year..

I'll also add to what Mary Jane said, we do have this Florida facility shuttering that we have to go through, and we've baked it into what will happen. We won't have so much of that impact in Q2, but 3 and 4 will have some impact. So that's why we're suggesting -- got some flatness here..

But seasonally, you would expect Q2 to be the kind of the worst in terms of margins and revenues, seasonally?.

We would, Avinash, but we're also saying this is the first full year of having all our acquisitions. And we really -- we know how -- when we start to get a little handle on how it behaves, but we don't have a full year worth of behavior for the Photonics and for our Laser Enterprise group that really were associated with our foundry in Zurich.

We need to get our load on that foundry up. And if that happens along with the seasonality we usually see in the third and fourth quarter, I mean, we might do better.

But there are a couple of these things that I just outlined are in our mind, and one of them for sure is the Military rightsizing, let's call it, is going to be a cost to us, and we've worked that in, at least, for the second quarter..

Okay. And as far as the facility rebalancing, restructuring and everything that you talked about, especially with respect to the Oclaro acquisition, there were some furnaces that you were thinking about moving or not moving.

Are all those actions, are they taken care of now?.

Avinash, this is Chuck. Let's see, the -- I would say that almost all of them are completed. We are still relying on Oclaro for one critical or major process that's in the front end of our wafer fab. There are some other minor operations, but by and large, all of the other facility moves and equipment moves have been made..

And maybe adding to Chuck's comment, just so that you understand that when he makes those comments, he's completely talking about what we did with the prior owners. We still have the contract manufacturer that we're dependent on, and we have a transition plan relative to that probably over the next period of time. So we don't like to forget that..

And would that be impacting us in Q2, Q3, Q4 or 1 or 2 of the quarters, not all 3?.

If you mean the contract manufacturing agreement, Avinash?.

Yes..

No. We will have the contract manufacturing agreement in the rest of this fiscal year and at least into the first half of the next fiscal year, FY '16, at least..

Okay, perfect.

And did you talk about the CapEx for the full year?.

Yes. The CapEx for the full year is about $40 million with respect to capital equipment. And in addition to that, we have the $13 million building in Berlin, again, the one that was previously recorded as capital lease..

And you recorded all of that in Q1 already, right, $13 million?.

For the building?.

Yes, for the building..

Yes..

So the building part is already there in the number that you just reported.

I believe the CapEx was $21.5 million or so, that includes the $13 million, right?.

Yes..

Okay. So the total for the....

So if you're asking the balance of the capital for the year, so sorry, it'd be about $31.5 million off the $40 million. So we had $8.5 million in the first quarter, $40 million anticipated for the whole year, so $31.5 million for the rest..

[Operator Instructions] Your next question comes from Dave Kang from B. Riley..

I was hoping if you can just go over some of your assumptions regarding the fiscal second quarter outlook, as far as Laser, Photonics and Performance Products, what your expectations are with respect to the first quarter?.

Well, as you know, we don't give guidance by segment. I think if you -- there's a pattern between the 3 segments at this point established here in the first quarter. I don't know if it materially differs from that necessarily in terms of relative relationship.

I do think, though, that the one thing that we are managing through at this point, Fran just talked about, which is in the Performance Products segment, some consolidation of facilities as we see consolidation, particularly in the military area -- military contracts that will potentially have an effect in the Performance Products segment.

But beyond that, it's probably what we can say..

Historically speaking, I mean, isn't IR and also optical comm, they tend to be seasonally stronger in the December quarter because of the budget flush?.

No, I would say IR is just the opposite, Dave. IR has that October, November, December kind of doldrums because of this long holiday that happens in Europe in November, December. That's the Infrared business.

The optical communications, I might turn to Chuck to give me -- is there a seasonality there?.

There is with some customers, and some are around a 3-month and 6-month and 1-year buying pattern. And so we're in the middle of that with some customers.

Dave, I would say that for this quarter, this December quarter, that 1 or 2 orders, they get scheduled for shipment in the quarter, could make a difference one way or the other, and that's really what it comes down to. So....

It sounds like it's going to be kind of flattish then, plus minus for you, is what it sounds like, right, Chuck, on the optical comm?.

Yes. And Dave, there will be some opportunity for a pull-in, and some customers may choose for the pushout. And that's really what we're talking about when we say yes to your plus or minus..

And I was wondering, Chuck, if you can just give us a little bit more color as far as U.S. and China, what you see, what your customers are telling you, because obviously, there's a lot of concern about the domestic U.S.

markets slowing down, with Tier 1 operators reducing CapEx in the second half and what's going on in China as far as optical activities are concerned..

Yes. I would say, Dave, we don't see anything, any sharp changes to the mix that we've typically seen. Nothing there that's a surprise. We have opportunities.

In fact, across all 3 of those regions that we're looking and working hard with our customers on, our recent design wins in areas including compact amplifiers for 100G transponders, custom amplifiers for new customers and new ROADM line products with integrated amplification and monetary functions, those are opening up some new opportunities for us in each of those regions..

Got it. Got it. Okay. I guess just one last question from me.

As far as the upcoming price adjustment, price negotiations in the month of January, what's the chatter, what are you expecting personally? Is that going to be something out of ordinary or within the, call it, 10% to 15%?.

Are you referring to optical communication?.

Yes, optical comm..

I don't think we have an idea that it's going to be any more dramatic than usual, but it's usually, it's aggressive stuff here, that the business is that way, and we're preparing to be as competitive as possible in there. Our job right now, Dave, is to recover some of these customers that left us while the acquisition was going on.

And I think we're making some progress. I can't tell you the numbers we'd like to have, but we're making progress..

Our next question comes from Ted Moreau from Barrington Research..

Just curious, so in the Photonics group, revenue was up a couple million sequentially, is that all because of customers coming back? Or is it did you actually see an improvement in end markets there?.

Well, that's a -- Ted, that's a combination of existing customers coming back stronger in the communications side, but also in our II-VI growth upside, they did see and experience an increased demand for fiber laser components. That drove some of it.

Also, in our display business, typically, December is a seasonally strong quarter for our display business, ahead of the Christmas season buying patterns for mobile devices. And even though it's a small part of our portfolio it's important, and it did experience a very good growth quarter-over-quarter..

Okay, sounds good. And then continuing on with Photonics. I know you guys mentioned having an opportunity with ROADM, which I believe is tied to or could be tied to upcoming metro 100-gig network rollouts, at least maybe later in calendar 2016. Just kind of curious as to how you're positioned for those opportunities..

We believe that things are shaping up for us to be well positioned with at least the major network operators and their Tier 1 equipment vendors..

And is it all ROADM products? Or is it -- do you have other products as well that could benefit there?.

We typically refer to our portfolio as a wavelength management portfolio, Ted, including amplification, monitoring and routing for our wavelengths. That's our focus..

And did you -- before those networks get rolling out, do you need to win more customers there to take advantage of service provider opportunities? Or do you feel like, given your customer relationships now, that you will be -- you're well-positioned depending on how those play out?.

I think that we are well positioned. And we are working to be sure that our portfolio overlaps, intersects and underpins, whichever one of the equipment vendors end up being the winners..

Okay, sounds good. Just one final question, kind of shifting gears a little bit. International exposure is about 2/3 of your overall business.

Just curious, I mean, I know you have a lot of exposure to China, but what other markets, regions of the world do you have a lot of exposure to?.

Oh, boy. So we're spread very nice and evenly across the globe. Certainly, Europe is the big deal for us right now. Maybe one of the hottest businesses right now is in Turkey. The amount of new products into the laser field that's happening there is surprising to us. And another place we're doing well is Korea, just started into that.

Certainly, they're getting big in the auto industry. And as you said, China, you're right there, a little bit into South America, not as much as you'd hope for, but Brazil's talked about. We tried but we haven't seen it be a boom like we've seen in Turkey.

Anything else, Chuck?.

No..

Okay..

We have a follow-up from Jim Ricchiuti from Needham & Company..

So I think you've given some good color as to how we should think about gross margins over the balance of the year just, I guess, in light partly with the consolidation of the facilities part of it. I wonder if you could talk a little bit about operating expense.

Was there anything unusual in operating expense in the quarter just ended? And maybe, how should we think about operating expense going forward?.

I don't see anything sticking out in our mind on it because we have done a round or 2 of taking our costs down there since we made those acquisitions. And in our other businesses, we've been running like the normal, still pretty lean.

I would say the most -- the thing that stuck out most to us right in the quarter was just our receivables and how much cash we tied up there as people extended terms and then we took on this whole business.

All the business we bought last year is now on our balance sheet this year, and so that took an extra $10 million or so onto receivables to -- for cash for the extra sales that we brought on. That's probably the one that sticks out most. And I know that's not operating expense, but it's a cash issue..

Yes, I agree. I mean, I think that, certainly, the operating expense profile changed a bit with the acquisitions of last year. Having said that, exactly as Fran said, I don't think there's any one kind or a few little major things kind of standing out.

This is a company that has been very focused on its expenses, and I am sure that we will continue to be..

Okay.

And Mary Jane, I don't know if you're able to get your hands on the organic change in revenues?.

Oh, sorry. Fran did such a beautiful job. So for the quarter, it was pretty flat from an organic point of view -- from an organic growth point of view. And I think, as he was saying, for the year, we're not expecting significant organic growth there..

And I'm showing no further questions at this time..

All right. If there are no further questions from you, we want to thank you very much for joining us today. This will be available on our website later on. And thank you, again. Have a good day..

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day..