Materion Corp (MTRN) 2011 Q4 法說會逐字稿

Greetings and welcome to the Materion Corporation fourth-quarter and year-end 2011 earnings call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Michael Hasychak, Vice President, Treasurer, and Secretary for Materion Corporation. Thank you, Mr. Hasychak, you may begin.

Good morning. This is Mike Hasychak. With me today is Dick Hipple, President, Chairman, and CEO; John Grampa, Senior Vice President, Finance and Chief Financial Officer; and Jim Marrotte, Vice President and Corporate Controller.

Our format for today's conference call is as follows. John Grampa will comment on the fourth-quarter and year 2011 results and the outlook, and Dick Hipple will provide a market update. Thereafter, we will open up the teleconference call for questions.

A recorded playback of this call will be available until March 13 by dialing 877-660-6853, account number 286, and conference ID number 388589. The call will also be archived on the Company's website, Materion.com. To access the replay click on Events and Presentations on the Investor Relations page.

Any forward-looking statements made in this announcement, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The Company's actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release issued this morning.

Now I will turn it over to John Grampa for comments.

Thank you, Mike. Good morning, everyone, and welcome to the call. Thanks for taking the time to join us this morning.

Today's agenda is similar to that of our past calls. As Mike indicated, I will review the results for the quarter as well as the year. Then I will review the outlook for 2012.

Following my comments, Dick Hipple will review the current state of our key markets and he will provide his perspective on certain specific key new product initiatives. And then following Dick we will open the call for your questions.

As I normally do, I will cover the reported sales growth, isolating real or organic growth from the effect of pass-through metal prices, which as most of you know, in our company can cloud real or organic growth, particularly in an environment where pass-through metal prices are moving up or down significantly. I will also review the key changes in business levels by market, comparing the fourth quarter of 2011 to the fourth quarter of the prior year.

In addition to reviewing the volume-related market or business level factors, I will also review the other key items that drove fourth-quarter earnings to the reported levels. For the quarter and the year in the aggregate, I will summarize the impact of the four nonrecurring items that we have been tracking and reporting on as the year progressed. Those being -- the cost of the Company renaming and rebranding initiative, the impact of the startup and ramp up of the new beryllium plant, the acquisition costs, and the favorable discrete tax item recorded in the third quarter.

In addition, I will review the Advanced Materials segment fourth quarter. I will quantify the effect of pass-through precious metal prices as well as the impact of the lower fourth-quarter volumes, the inventory adjustment, the acquisition, higher metal consignment fees, and other costs. Then I will follow with brief comments on the acquisition, our cash flow and the balance sheet, and then finally review the outlook for 2012 as we see it unfolding at this time.

With that as my introduction, let's begin with a review of the fourth quarter.

Today we reported results for the quarter that, while consistent with what we had announced earlier, were significantly below what we had been experiencing throughout the earlier quarters of the year and significantly below what we currently expect looking ahead into 2012.

Sales for the fourth quarter were $334 million, down approximately 6%, or $22 million, compared to the fourth quarter of 2010. Higher average pass-through metal prices increased fourth-quarter sales by about $25 million compared to the fourth quarter of the prior year. Thus, excluding the impact of pass-through metal, sales were down almost $47 million, or approximately 13%, in the quarter when comparing to the prior year.

The reduction in the fourth-quarter business levels when compared to the prior year was primarily due to lower demand from consumer electronics applications as customers were driving inventory levels down. Lower demand from the appliance and defense and science markets was also a factor in the fourth quarter. The weakness in these areas was offset in part by solid ongoing growth in the energy, medical, and automotive electronics markets.

Net income for the fourth quarter was $0.04 a share compared to $0.61 a share in the prior year. The net income decline was about $12 million and was driven by five principal factors. In addition to the 13% lower volume and inventory adjustment, acquisition costs, higher than anticipated cost in the Company's Beryllium and Composites segment, and the nonrepeat of a prior-year LIFO inventory gain were factors in the year-over-year lower net income in the quarter.

The volume-related factors represented about 25% of the change. The start up and ramp up of the new beryllium plant along with higher costs in this segment also accounted for approximately 25% of the change. The inventory adjustments and the acquisition costs each accounted for between 10% and 15% of the change and the nonrepeating prior-year LIFO gain and other changes in costs accounted for the balance.

Sales for the full year set a new high at $1.527 billion, up approximately 17%, or $224 million, compared to the full year 2010 which was just over $1.3 billion. Higher pass-through metal prices was the predominant factor in the increase in sales, accounting for approximately 15% of the growth.

After seeing organic growth of approximately 8% through the first three quarters of the year, the 13% decline in fourth quarter drove organic growth to 2% for the year. Growth was negatively affected, primarily in the fourth quarter, by the weaker demand from the consumer electronics, appliance, and defense and science markets. The weakness in these areas was offset by ongoing stronger demand from the medical, energy, industrial components and commercial aerospace, telecom infrastructure, and automotive electronics markets.

For the year, comparing to the prior year, demand from consumer electronics was down approximately 4% for the first half of 2011 over a very strong first half of 2010. I apologize, it was up. However, demand began to weaken in the third quarter leading to the significantly weaker fourth-quarter demand, which in turn brought the full year in consumer electronics down by about 7%.

On the positive front, for the year energy and medical each grew by about 30% while telecom infrastructure and automotive electronics both grew by about 20% and industrial and commercial aerospace grew by about 15%.

Full-year net income was $40 million, or $1.93 a share, down by about $6 million from the $225 a share reported a year earlier. The lower net income was due primarily to the costs associated with the Company renaming and rebranding initiative, the start up and ramp up of the Company's new beryllium plant, and the costs related to the previously announced acquisition. These factors in the aggregate more than offset the impact of the real growth that we had, plus the favorable effect of the lower tax rate.

Let me reconcile that a bit more for you. The nonrecurring items -- those being the Company renaming and rebranding initiative, the start up and ramp up of the new beryllium plant, and the acquisition costs along with the discrete tax items -- net to a negative impact about $0.35 a share for the year. The discrete tax item was a favorable $0.10 while the acquisition impacted earnings by about $0.13 a share, the renaming by about $0.13 a share, and the beryllium plant by about $0.19 per share. That is $0.45 a share of negative impacts partially offset by the $0.10 favorable tax item.

In the Advanced Materials segment, net of pass-through metal, sales were down in the fourth quarter and full year by $38 million and $8 million, respectively. Through the first nine months this segment grew organically by about $30 million, or 5%, after growing organically by about 7% through the first six months. Fourth-quarter sales in this segment were negatively impacted by weaker demand from consumer electronics, telecom infrastructure, defense and science, and industrial markets partially offset by significantly stronger sales from the medical and energy markets.

For the full year, improved demand from the number of applications, including diabetes test strips, LEDs, and precision optics, as well as growth in metal surfaces was offset by the lower demand from the consumer electronics market, particularly in the second half of the year. Operating profits in the fourth quarter of 2011 in this segment was approximately $12 million below that of the fourth quarter of 2010. About 45% of that change is related to the significantly lower volumes, about 30% is due to the inventory adjustment, and about 15% is the impact of the acquisition of EIS Optics, and the balance is due to the higher metal consignment fees and other costs we reported on earlier.

As we announced in mid-October, the Company acquired EIS Optics Limited. The strategic value of that acquisition is described in the press release. The initial costs related to this $24 million acquisition negatively impacted earnings in the fourth quarter by approximately $0.10 a share and for the full year by approximately $0.13 a share. Based on the current economic assumptions, we expect the acquisition to be slightly dilutive in early 2012 and become accretive as the year progresses.

The acquisition was funded by the Company's fourth-quarter cash flow from operations.

Now let's turn to the cash flow and the balance sheet. Both the balance sheet and the statement of cash flows are attached to the press release.

The Company began and ended 2011 with a very strong balance sheet. The strength of the Company's balance sheet and its cash flow provided the flexibility to take advantage of the opportunity to complete the acquisition in the fourth quarter while still lowering the debt to cap ratio from 2010 levels maintaining an overall level below 20% or at about 17%. Fourth-quarter cash flow was very strong and debt decreased by approximately $31 million in the quarter while funding the $24 million acquisition.

I will now turn to the outlook. After a record sales year in 2010, the Company began 2011 with a healthy backlog. The overall level of business activity in the Company's key strategic markets also remained strong, as evidenced by the consecutive first- and second-quarter 2011 record sales levels and organic growth of about 11% each quarter.

Order entry in the second quarter increased over the first quarter, but did soften in the latter weeks of the second quarter. Global economic conditions weakened further as the third quarter progressed causing lead times to shorten as customers were adjusting inventory levels to the weaker conditions. The customary consumer electronics holiday build normally seen in the late third and early fourth quarters was weaker than expected as customers continued to drive inventories to lower levels, resulting in a much weaker than anticipated fourth quarter.

While business levels fell significantly in the fourth quarter, on average to this point in 2012 order entry is at a rate that is about 15% ahead of the fourth-quarter levels. In addition, the costs experienced in 2011 related to the beryllium plant start up, the Company renaming and rebranding initiative, and the Optics acquisition are, to a large extent, behind us and not expected to repeat in 2012.

To be clear though, both the beryllium plant ramp up and the acquisition will negatively affect earnings in the earlier quarters of 2012 by approximately $0.07 to $0.10 a share in total. Coming off of the weaker fourth quarter of 2011, which had significantly lower order entry and shipment rates, it is anticipated that the first quarter of 2012 will be weaker -- the weakest quarter of the year with the second and third quarters sequentially stronger. Assuming growth and no global economic setback during the year, the Company is confirming its previously announced earnings range of $2.05 to $2.25 a year for 2012 on a sales growth of 5% to 10%.

That concludes my remarks. I will now turn the call over to Dick Hipple. Dick will provide you with a market update.

Thank you, John. The weak holiday season last year in the advanced electronics market was a surprise. The global consumer was continuing to buy while the order pattern from our customers was actually below that of the prior year. As they say, this does not shake hands, so we believe there was an inventory liquidation that was overextended in the fourth quarter versus actual market conditions.

The two key markets that were particularly soft in the fourth quarter were consumer electronics and defense. I just discussed the electronics sector and the rationale for the softer defense business is pretty clear based upon the gridlock that has existed in Washington. We expect this to be somewhat relieved through the budget release, which should at least maintain near-term defense spending.

As we ramp the year up, I would like to express how pleased we are with the terrific financial results accomplished at the Performance Alloy and Technical Materials division. Performance Alloy achieved an all-time high record of both earnings and sales, and Technical Materials performed at sales and profitability levels last seen since the telecom boom with a much more balanced portfolio today.

As we enter 2012 we are encouraged based on several developments from the fourth quarter. Our order book has rebounded nicely in consumer electronics and we believe this reflects the under-order pattern that we saw in the fourth quarter. Defense bookings have increased and we expect them to stabilize.

Our automotive bookings, which have been stable, have also shown some additional strength. Our medical, energy, telecom infrastructure, and industrial and commercial aerospace markets were solid throughout 2011, held up nicely in the fourth quarter, and are off to a good start in 2012 as well.

As we look forward to the balance of the year, we expect our consumer electronics and telecom markets to strengthen, reflecting the ongoing growth in the number of applications we serve for wireless device and the growth in the number of devices along with the need to continue to build the infrastructure behind the growth of the wireless communication demand. This also includes our undersea business which we expect to be strong in 2012 based on numerous new line contracts. In fact, over 15,000 miles of undersea cables we expect to be built, at least those contracts led in 2012.

The commercial aerospace market will continue to expand as the new planes are now being manufactured to an increased build level. We believe the oil and gas market will remain strong, but its growth will be slightly stunted due to the low price of natural gas and the [attentive] slower drilling initiatives for that sector. Automobile sales across the world are expected to continue to grow and defense spending in our space, particularly optics and data collection, are expected to hold up.

All-in-all we are looking for 2012 to be a positive transition year for us as we complete the start up of our Be pebbles plant and bring on several new initiatives which expand our capabilities to serve the Asian markets more effectively. With regards to our new beryllium plant start up, we have put the key issues we were struggling with in the fourth quarter behind us and, assuming no new big surprises, we expect to be at a production rate in the third quarter to internally produce all of our requirements and are on pace to accomplish this.

As you know, the true success of our company continues to be driven by both our position in strong secular growth markets and through driving new products into these markets. I would like to list a few of these promising new products for you.

This year we are introducing a new precious metal process which improves thin-film deposition performance when fabricating semiconductor devices, components, and LED. We are extending our capabilities in our copper-based nickel alloys for use in both the commercial aerospace and oil and gas sector. We are extending our value-add services in the heavy equipment market to provide semi finished components.

We have new inorganic chemical materials being introduced in both the LED and OLED space to enable our customers to develop next-generation products. We have enabling technology for selective plating that is also being designed in to the newest hard disk drive technology called DSA or dual-stage activation. We have further penetrated the thin film solar market with the development of a new rotary target for TCO layers, or transparent conductor oxide layer, that should offer our customers superior performance.

New patented rotary target technology is being introduced in both the architectural glass and thin-film solar coatings market. We are also developing breakthrough technology for optics applications to enable high productivity coatings at the wafer level, which will lower the cost of production of many industrial applications in security and safety. We are also dependent upon to develop the most difficult optical coatings to overcome our latest challenges in national defense, and sometimes these demands are got to have it tomorrow.

Finally, for all of you acoustic aficionados, we expect you will be hearing more and more from our Be material being used in a broad range of high-end speakers so the best and clearest sound is replicated unmatched by any other material. These new product launches, some of which occurred in 2011, provide for a promising future. I am very excited about what we are doing and how we are making a difference for our customers.

Operator, we can take questions.

(Operator Instructions) Luke Folta, Jefferies & Co.

Morning, everybody. First question I had -- couple of questions on cost. You have an inventory adjustment that you recorded for the fourth quarter; can you give us some sense of what that was? Is that a write-down and is that something that you think will be a factor in the first quarter of next year?

Sure, I will comment on that a little bit further, Luke. As you might expect, we, like other manufacturers, take periodic physical inventories. In our year-end physical inventories we had a short in our precious metal operations.

Given the high level of throughput in those operations and current high metal values, even a small short can have a noticeable impact as you might expect. For example, operating a refinery or cleaning shields involves estimating the quantities of metal that are ultimately confirmed and recovered, and the nature of that estimating process and what is ultimately recovered can be high variable.

So while having a noticeable short is for us very unusual, it can happen from time to time and it is not something that we would expect to repeat. When this occurs we do do comprehensive post-physical diagnostics to ensure that our accounting, our systems, our procedures, our security, our operating practices, for example, are all intact and performing as intended.

So to the final point of your question, we do not expect that this would be something that repeats. It's not something that occurs frequently and it's not something that we would anticipate repeating.

Okay. Secondly, in the release you talked about some cost issues, some manufacturing cost issues in your performance outlook segment related to nickel alloys. Then there was some outside fabrication costs you cited in beryllium. Can you give us some sense of what is going on with these and how we should think about those going forward?

Well, I think in the Performance Alloys segment we talked about that earlier in the year. And that is really what we were referring to is that there were some yield issues in -- I can't remember at this point whether it was the second quarter or roughly the first part of the year. Those were corrected and, no, they won't affect us going forward.

What was the second part of your question?

On the beryllium business, you had talked about some outside fabrication costs. I just wanted to get some more color on what was going on there.

This is Jim Marrotte. That related to certain specific jobs. Beryllium is more of a job order type operation and there were certain jobs that we took that, unfortunately, it took a little additional costs, a little different additional effort to get the product to where we needed it to be.

We don't anticipate those type of costs at that level repeating as we go forward. I think our traditional margin rate should hold as we look down the road.

Okay, that is helpful. Regarding the inventory situation for consumer electronics, what do you guys look at or what could we look at as outsiders to gauge what these trends are doing and how we should think about your products within that channel?

Also, to the extent that there was a reduction in inventory to a significantly low level, I was curious to know if you thought there was any potential pricing opportunity for you there now. Entering the new year in a tight inventory position is that something that will allow you to raise prices and maybe you can [then defer them]?

No, I don't think the situation -- usually on the raising prices there has to be a shortage situation and that is really -- or very, very tight supply. That is really not the situation at this point. And the answer to your question about who to monitor, I think that the good space that we are in is the overall wireless phone, smartphone, tablet type market.

So there is a whole portfolio of our customers that you could have a look at just to see. Sometimes they steal one another's market share so you have to look at the total grouping, but companies like a Skyworks, TriQuint, RF Micro Devices, Avago they are all good indicators of that general market segment.

Just last one if I could, are you able to give us your value-added sales by end-market? I know you guys put it in the presentation, but I was just curious if you can give them now.

I do not have it here, but it will be out when the presentation is up in -- several days, few days.

Okay. All right, guys. Well, thank you.

Avinash Kant, D.A. Davidson.

Good morning, Dick and John. A few questions. Could you talk a little bit about the EPS guidance that you have given for 2012? What kind of organic growth assumptions do you have? Either you could give us some idea about revenues or at least about organic growth assumptions (multiple speakers).

In my comments I provided the sales level for the year, which obviously as you are pointing out is not the organic number. The range that I provided from a revenue perspective was growth of 5% to 10% in sales. The organic tied to that would be 3% to 6% roughly, and obviously that is coming off a weak, very weak second half and very weak fourth quarter of 2011 levels.

So the 2012 organic growth is roughly 3% to 6%?

Off of -- that is correct.

Off of the organic numbers in 2011?

Yes.

Also, you talked about Q1 being the weakest quarter of at least the three that you talked about in 2012. Is Q1 going to be down sequentially or up sequentially? Could you give us some idea about that?

Up sequentially from the fourth quarter?

Yes.

Down or up from -- it should be up from the fourth quarter, but well below first quarter last year levels.

Okay. And then you are also talking about some negative impact from EIS early on in the year and then some [pass-through] in the second half maybe. Could you talk about the breakeven levels of EIS at this point?

I think the comment that we made is -- that I made was there is $0.07 to $0.10 a share for those two items, the beryllium plant ramp up and the EIS acquisition. Those cost $0.07 to $0.10 a share for both through the earlier course of the year.

I would suggest that that is -- probably 60% to 70% of that is first quarter and the remaining portion is second quarter, so we would anticipate being accretive in the third quarter on the acquisition. Again that is a very small acquisition so we are talking about de minimus impact. We are talking about pennies per share.

Right. The $0.07 to $0.10 was for the full year, right?

No, it was for the first two quarters of the year.

First two quarters. Okay, 60% to 70% of that in Q1 and then rest in Q2.

Right. And the majority of that is -- I could also comment that 80% of that -- 70% to 80% of that is the beryllium plant.

Okay. Could you give us some idea about -- we talked about the beryllium plant. What kind of capacity do you have at the beryllium plant or how much will be the capacity utilization? When you talk about Q3 you will be able to get all of the (multiple speakers)?

Avinash, this is Dick Hipple. How we are defining that is basically all of the market needs of the plant will be provided from the plant. Its capacity is actually significantly higher than that.

So do have -- in other words, the plant was designed with significant upside capacity at the time that the government may want to pull a lot more material for special reasons that we might have on a national security basis. So the plant is designed -- it's not designed for ongoing business levels, but we have significant upturn in the plant should it ever be required. So that, based on current business level conditions, we will be supplying -- certainly have all the capability to supply that.

Right. So you will be talking with -- you are talking about your internal needs and external too, right?

Yes, yes, yes. Internal needs, internal market needs is what I am talking about.

Right. So if you were to supply the total market needs by Q3 what percentage of the capacity would you be needing for usage?

Probably in the range of 60%.

So you will be 30% to 40% underutilized in the plant despite meeting all the needs?

Theoretically that is accurate, but the plant is designed for that. In other words, we are designed to operate at a much lower level.

Right, right, right. Also, maybe John can answer this one. So your inventories did come down in the quarter; going forward do you expect inventories to come down further into Q1?

That is a tough one. It depends on demand levels and what we anticipate occurring in subsequent quarters. Inventory came down in the fourth quarter because of demand levels. I would anticipate flat to maybe up slightly in the first quarter.

Okay. Perfect, thank you so much.

Anthony Sorrentino, Sorrentino Metals.

Good morning, gentlemen. Would you go into further detail concerning the problems at the new beryllium plant?

There were two key ones that we struggled with in the fourth quarter. One in particular was -- the plant is fully automated and so it was just getting the entire plant to -- we had flushed down all the unit processes in the plant and they were working well. Then you have to get everything working uniformly.

With that there was issues in getting it all to work together, so it's programming and those kind of issues. We pretty much have that behind us, so that was one of the key areas. Then we also had some ventilation issues in the fourth quarter and we also were able to overcome those.

Okay, fine. Based on your outlook for 2012 and the fact that the first half of 2011 was a record half would it be reasonable to expect first-half 2012 earnings to be down year-to-year and second-half earnings to be up year-to-year?

Of course, yes.

Okay, very good. Thank you very much.

Mark Parr, KeyBanc Capital Markets.

Okay, thanks very much. Morning, guys. I had a question on the comment you made regarding order momentum.

Dick, I was wondering if you could talk about orders relative to where you were in the first half of 2011 and how that might be unfolding for you thus far.

So first quarter 2011 versus first quarter 2012 quarter entry path, is that the question?

Yes, sir.

Okay. I would say -- Jim, do you have that?

I don't have it broken out by that (multiple speakers)

We don't have the (inaudible) broken out, but both were up by roughly the same percentages on a value-add basis. In looking at the first quarter comparing sequentially to the fourth both years were up roughly the same amount.

With the fourth quarter of 2011 being lower than the fourth quarter of 2010, is that fair?

That is correct. We are seeing the same pattern, roughly the same upward swing.

So on a year-over-year basis 1Q order momentum is still down?

That is right and probably the largest single factor, Mark, is that when you come into -- when we were coming into 2011 you had a lift coming in consumer electronics off that fourth quarter. And this year fourth-quarter consumer electronics was considerably weaker.

Okay. As you look at the composition of the order book, have you seen anything that would suggest that there may be replenishment of the consumer electronics inventory supply chain?

I think the answer to that generally is yes, there is some lift there. However, it's not identical to the lift that we saw back in the first part of actually 2010 whenever you had a major inventory build going into that chain.

I think what we are going to see -- what we are hearing primarily from our customers at this point is that they expect the second half to start to really see -- late in the second quarter, third and fourth. That is what we are getting from the customers. That really maybe reflects the more classical seasonal build on the electronics sector.

Again, we are seeing the lift now but I would say the lift that we are seeing now is higher than what we normally see seasonally at this time, but that is to be counterbalanced against how weak it was in the fourth quarter. So that all makes sense.

And so what our customers are saying is that they expect the additional pull coming in the second half of the year for the seasonal build. Again, I think the fourth quarter was particularly impacted last year because of the concern in Europe and everybody was just keeping their cards pretty close to the vest here.

Okay, all right. That is helpful. Had another question if I could just about -- Dick, I think you made a comment about some investments that you wanted to make to improve growth out of the Asian markets. Is that something, would it be a good use of the time to give a little more color on that?

Well, I can just give you a quick recap. Obviously our acquisition in Asia is one major one that will be helpful there, the EIS acquisition, but also from an organic standpoint we have an operation in Singapore which we are expanding our capabilities in our microelectronics sector. We are also going to begin to be able to produce and sell precious metal from that location. Currently we only do that in the United States, so that is going to give us lot more effective customer service, production, and quick delivery from Asia on precious metal.

Then we are also expanding our operations in Suzhou for our capabilities in supplying the optics market. So we have got initiatives going on to expand our footprint and then we have some -- actually some of these other applications I had mentioned on some of our new products. If they take off, we will probably be scaling those up in Asia because that is really where the markets are being served.

Okay, I appreciate that, Dick. Phil Gibbs has got a couple of questions here, if you don't mind if we stay on for just a little longer.

Sure. I did want to correct a comment, I think if Mr. Sorrentino is still out there. I think I had mentioned -- you had asked the questions on the beryllium pebble plant sort of. Give you one on the automation.

The other one was I think I mentioned ventilation that was -- although there was an issue there, the second major one that we worked our way through was in the final filtration system in the plant was really getting plugged up. And that was a key design issue that we worked our way through in the fourth quarter, so I just didn't want to -- correct that comment that I gave you earlier.

Go ahead, next question.

Dick, out of the new product opportunities that you had mentioned for 2012 which one of them do you believe is going to have the most impact near term?

Oh boy, that was a lot I gave you there. Which one is the most impactful, now that is a good question. I tell you what, I would -- certainly the commercial aerospace market and the oil and gas with the [tough met] we had some opportunities, particularly in the OLED space which could be quite interesting, and then the dual-stage activation.

There is a lot of -- the reason why I kind of went through that list is we are not counting on anything on a singular basis for a breakthrough. We have actually got some really nice multiple platforms that I would say if we get a 50% hit rate we are going to be very happy campers. But I would say that probably some of our rotary target technology in thin-film solar, the oil and gas, and possibly the OLED applications could be the most interesting runners for us.

Okay. Lastly here, John, your operating profit as a percentage of your value-added revenue. I know it wasn't very much because it was only $1 million of profitability in the quarter, but can you give us a number there?

Well, we don't get specific, Phil, as you know about the numbers but you can -- it's still double digits. If you think in terms of where it's headed, I think that by the time we get through the weaker first quarter and into the second quarter and we get some of the volume influences behind us we will be back to the low teens in OP percent of VA and above 40% in GP percent of VA, which as you know fundamentally is about where we operate on a fairly consistent basis.

So, yes, we were below both those numbers in the fourth quarter and we will climb back up through there. There is nothing happening with pricing or share or anything else that would suggest that margins have deteriorated to levels that will be sustained at a lower level. We will be back to the pre-fourth-quarter numbers within due course.

Okay. And then of the book to bill in the fourth quarter, what should we think about that as -- that level at?

I don't have that at my fingertips.

That was slightly unfavorable in the fourth quarter.

Yes, that would make sense.

Thank you.

Ray Rund, Shaker Investments.

Thank you for taking my question. I was wondering if you could comment on the trajectory of your operating expenses going forward.

Well, as we make these investments that Dick referenced operating expenses will decline netting out the non-repeats from 2011 to 2012, but historically our operating expense levels have grown at less than half the organic sales growth rate and I don't see the future being any different than the past. So having said that if organically we are growing -- if sales are growing organically 3% to 6% then operating expenses would grow at the lower end of those numbers.

Okay. Just for reference, I don't know if you have said this and if you have I apologize, but what was the value added in the quarter as opposed to the pass-through metal portion of revenue.

Well, I did say it. Let me find a specific data point and I will repeat it.

Thank you.

Sales were down 6% in the quarter but average pass-through metal prices did increase sales by about $25 million, so net of that sales were down 13% in the quarter.

Okay, thank you very much.

(Operator Instructions) Brad Evans, Heartland Investor Services.

That is Heartland Funds. Good morning, everybody. Just what are you using for a tax rate for 2012?

The tax rate in 2012 is somewhere between 30% and 32%.

Okay.

Okay. John, do you have a CapEx budget preliminarily for 2012?

Sure, I would give you a range of $33 million to $37 million.

Okay. And can you just look at that fourth-quarter D&A rate and just annualize that so you are running closer to $45 million or $46 million now?

Actually, depreciation and amortization will vary a little bit for us due to my amortization. I would assume $40 million to $45 million fair rate in 2012.

Okay. And stock-based comp shouldn't move much off that $5 million, so plus or minus a little bit depending upon how you perform I assume?

I am sorry, I missed your last point, there was some line noise.

Sorry, I was just -- stock-based compensation should be fairly close to 2011 levels?

Actually, we are hoping it's higher than 2011 levels. We obviously didn't accomplish what we thought we would accomplish in 2011, so I would hope in 2012 we deliver results and that the stock-based compensation is a little different. So I think the answer to your question is, no, it should be up.

Okay, good. Well, let's hope that is the case. It looks like just kind of building the mosaic here, the midpoint of your earnings guidance would get you to $115 million of EBITDA including the stock-based comp. Is that about right?

If you are adding back the stock-based, yes, yes.

If you are adding back the stock-based comp, yes.

Okay. And it looks like if you hold working capital constant, and hopefully it's a [use] which would portend much stronger sales. But if you were to assume a neutral outcome on working capital then we are looking at, call it, $60 million to $70 million in free cash flow?

Well, I think that is the assumption that probably can't made, Brad, and that is if we do grow the business -- we have liquidated some inventory and we saw receivables come down in the fourth quarter. That will go back in so I don't think we can see those kind of numbers. I think the numbers will be well below that assuming, again, some inventory receivables to support the growth.

But it's still very strong free cash flow.

Yes, I would think.

So here is the dilemma I guess you all have is you have done a really nice job of diversifying the business and attaching yourselves to some very attractive secular trends. I think there is still a perception out there that you are a commodity metals company. Let's be realistic, obviously you can't escape the cyclicality of your end-markets and we saw that this quarter, although the cash flows were remarkably strong and you did a great job of deleveraging the balance sheet even after the acquisition.

So I just wonder whether there is an opportunity to try to maybe reset expectations with the Street in terms of the long-term secular dynamics of your business and sustainability of your earnings and cash flows. And maybe put a small dividend in place reflecting the more stable outlook of your business over the long-term. Any thoughts there?

Well, I think that, Brad, there is always alternative uses of the cash flow on our mind. Certainly it's something that we do give and will give fair consideration to.

I think the earlier point that you made, though, is the one that is really relevant and that is when you consider the secular growth. We have taken this company -- from a step function perspective, we have taken this company up twice now in the last six years to a different level of performance. Albeit you hit the cyclicality, as you point out, of the consumer electronics market especially seems some time to take us to a level two years in a row that is now between $2 and $2.25 a share.

Let's say for the sake of argument, taking out the nonrepeat factors, maybe three years in a row at that level from levels well below that previously. So I think really for us it's putting the capital to use to take it to that next level and to get it to that next level on a sustainable basis pretty quickly. And I think as we move along that path we will give consideration to alternative strategies for the use of the cash that we generate and what we do with our balance sheet.

I think it's great. You have done a great job managing through a difficult environment. Your balance sheet reflects the strength of your cash flows to both organically invest through CapEx the benefit of acquisitions that position the business for longer-term growth, and your balance sheet reflects the strength of that cash flow. I think you benefit from a small dividend in attracting longer-term shareholders who could see the longer-term outlook of your business.

So congrats on managing through a difficult environment and let's hope 2012 is a better year for you. Thanks.

Well, thank you. We appreciate your perspectives.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

This is Mike Hasychak. We would like to thank all of you for participating on the call this morning. I will be around the remainder of the day to answer any further questions. My direct dial number is 216-383-6823. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.