Materion Corp (MTRN) 2012 Q3 法說會逐字稿

Greetings and welcome to the Materion Corporation third quarter 2012 earnings call. At this time all participants are in a listen-only mode. A 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 third quarter 2012 results and the outlook and Dick Hipple will provide a commentary and a market update. Thereafter, we will open up the teleconference call for your questions.

A recorded playback of this call will be available until November 9 by dialing area code 877-660-6853, or you can also dial 201 and the number is 612-7415; Conference ID number 401127. 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.

And now I'll turn it over to John Grampa for comments.

Thank you, Mike. Good morning, everyone and thank you for joining us this morning. Today's agenda is the same as that of our past calls. I will review the results for the quarter and then comment on the near-term outlook. Following my remarks, Dick Hipple will review the state of our markets and some of our key growth initiatives. Following Dick, we will open the call for your questions.

I'll begin with a brief summary of the key points that are in the release. Then as I normally do, I'll cover the factors affecting the reported sales levels, highlighting the effect of pass-through metal changes, which as many of you are already aware, can in our Company significantly cloud the level of real business change. We refer sales net of the influence of changes in pass-through metals as value-added sales.

Changes in pass-through metal can be either in the mix of metals, gold versus silver versus copper, for example, and their pass-through prices or their source. By source I'm referring to whether we provide or our customer provides the precious metal to convert to product. When we source the metal, its value is recorded as a sale. When our customer provides the metal, its value is not recorded as a sale.

I will review the change in value-added sales by market comparing the third quarter of the prior year as well as sequentially to the second quarter of this year. I'll also be reviewing the changes in gross profit and operating profit margin percent of value-added sales. In addition, I'll disclose the earnings impact of the cost associated with the initiatives that we had previously been discussing. Those being the start-up in ramp up of the new beryllium plant, the integration of the EIS Optics acquisition and the costs related to the shutdown of certain operations. I will review the balance sheet and the cash flow and I'll also wrap up by reviewing the outlook for the fourth quarter.

Let's begin with a brief summary of the release. Today the Company reported net income for the quarter of $8.1 million, or $0.39 a share, diluted, on sales of approximately $291 million. Results for the quarter were negatively affected by lower than expected sales volumes and a higher than expected tax rate. Results for the quarter were positively affected by improved margins. The reported sales and earnings levels for the third quarter continued to be down from the record or near record levels that we were achieving one year ago. This was expected and previously announced.

Sales levels in the third quarter fell by approximately $102 million or 26%, net of changes, due to pass-through metal factors. However, value-added sales were down from the third quarter levels of 2011 by only $10 million or about 7%. I will reconcile the $92 million gap between those two numbers for you in a moment. Comparing the third quarter sequentially to the second quarter of the year, reported sales were also down, in this case, by approximately 11%. Similarly, though, after considering the impact of changes in pass-through metal, value-added sales were basically flat sequentially.

The reported EPS for the quarter was $0.39 a share. As expected, this was lower than the near record $0.65 a share reported in the prior year third quarter, but was up sequentially from the first quarter's reported level of $0.30 per share and the second quarter's reported level of $0.38 per share.

Tax rate differences negatively affect the year-over-year comparisons by about $0.10 per share. The other primary factor in the lower EPS when comparing to the prior year third quarter is the 7% decline in value-added sales. While value-added sales were essentially flat when comparing the third quarter sequentially to the second quarter, pre-tax profit was up approximately 9%. This was driven by improving margins.

As we noted in the press release, the tax rate change diluted the benefit of the margin improvements by approximately $0.05 a share. The higher tax rate was not included in the guidance we had previously provided for the quarter and the year. Developing events resulted in our lowering the profit levels we expect from certain foreign sources in 2012, which in turn limits our ability to utilize certain foreign source losses as a benefit for tax purposes.

I mentioned earlier that I thought it was important to reconcile for you the significant difference between the decline in reported sales and the decline in value-added sales. On a GAAP basis, sales were down about $102 million or about 26% in the third quarter compared to the same quarter of the prior year. Value-added sales, however, were down about $10 million or 7%. Of the $102 million year-over-year decline, about $43 million is due to the higher use precious metals sourced by customers for which we get no reported sales benefit and about $9 million is related to lower pass-through metal prices.

All other factors including lower volumes to the markets identified in press release and metal mix differences [net of remaining] $50 million decline. For the quarter compared sequentially to the second quarter of the year, sales were down, on a GAAP basis, by about $35 million or about 11% while value-added sales were essentially flat.

Of the $35 million sequential decline when compared to the second quarter of the year, about $29 million is due to the higher use of precious metals sourced by our customers. Higher pass-through metal prices increased sales by about $6 million sequentially, while other factors including volume and mix changes lowered sales sequentially by about $12 million. The 7% decline in value-added sales compared to the third quarter of the prior year is primarily due to weaker year-over-year demand for the Company's materials from the energy, telecom infrastructure, and automotive electronics markets. Energy was down 19%, telecom infrastructure was down 15% and automotive electronics was down 9%.

Helping to offset the global business development in those markets where year-over-year increases in both consumer electronics and in industrial and commercial aerospace. Industrial and commercial aerospace was up 20% while consumer electronics increased 7% after being down year-over-year by about 6% through the first two quarters of the year. Comparing sequentially to the second quarter of the year, third quarter value-added sales were essentially flat.

Shipments of materials for applications in automotive electronics were down 11% sequentially, while energy was down 16% sequentially. Offsetting those declines were increases of 18% in defense and science, 7% in telecom infrastructure and 4% in industrial and commercial aerospace. Consumer electronics was essentially flat sequentially with sales in the handsets up, while sales into our China-based display projectors business was down. Dick will comment more on demand levels during his review of the current state of our markets. Reported margins, as you know, began to reflect nice sequential improvement in both the first quarter and the second quarter of the year.

In the third quarter, margins again improved nicely. Reported gross margin was 16.3% in the second quarter, 230 basis points higher than the first quarter. In the third quarter, gross margin was up another 170 basis points to the 18% level. On a value-added basis, our gross margins have historically been above 40%. On this basis, gross margins were equal to prior year levels at about 40%, improving nicely from the levels seen earlier in the year.

Reported operating profit margin also improved nicely in the third quarter to 4.6% from 3.8% in the second quarter. Value-added operating profit margins improved by almost 100 basis points sequentially in the third quarter, taking us back into the double digits. In the third quarter of the prior year, our value-added operating margin was about 12%. We're confident that as macroeconomic conditions improve, our value-added operating profit margins will return to and exceed that level.

Let's turn now to the earnings impact of the initiatives that the Company has been undertaken. There are three specific initiatives that have been affecting earnings. These include the start-up of the Company's new beryllium plant, the integration of the EIS Optics acquisition and a shutdown and relocation of certain of our operations. There is no change to what we had previously disclosed regarding these initiatives.

After $0.17 per share in the first half of cost and $0.03 per share in the third quarter, we now expect another $0.07 per share in the fourth quarter, bringing the total for the year to the $0.27 per share range we had discussed in previous calls. The $0.03 per share in the third quarter and approximately $0.13 per share of the $0.20 per share for the nine months is related to start-up of the beryllium facility.

Now let's turn to cash flow and the balance sheet. Both the balance sheet and the statement of cash flows are attached to the press release. Consistent with our normal seasonal pattern, debt, net of cash, increased by about $31 million in the first half. And in the third quarter debt increased by an additional $7 million. Debt-to-total capital at the end of the third quarter was consistent with the first and second quarter levels at about 22%. Cash flow in the third quarter was below our expectations due primarily to higher working capital levels. Some of this was timing and some was due to a change in production schedules to take advantages of efficiencies and to plan for fourth quarter holiday shutdowns.

Cash flow from operations is expected to be positive in the fourth quarter in the range of $30 million to $40 million. Our balance sheet is very strong and we have significant liquidity. Expected operating cash flows and available funding under our revolving credit agreement, which today exceeds $160 million are more than enough to support our expected growth in related initiatives.

The flexibilities [of our] strong balance sheet and projected performance provide led us to our initiating a quarterly dividend in May of this year. Today, as press release [still notes] we announced the fourth quarter dividend of $0.075 per share, which is an annual yield of about 1.25%. The dividend is payable on December 4 to shareholders of record on November 16.

Prior to moving on to the outlook, I'd like to pre-answer a couple of the other financial model questions that are usually asked. For the year, we expect EBITDA to be in the range of $85 million to $90 million. Depreciation and amortization to be approximately $40 million, capital spending to be in the range of $33 million to $37 million and our tax rate to be in the 33% to 34% range.

Let's now turn to the outlook. As we noted in the press release, significant progress has been made in resolving the start-up issues associated with the new beryllium facility, which over the past several quarters had been dragging our earnings. It's now anticipated that the output of the plant will support demand levels through the fourth quarter and into 2013. In addition, the initial steps in the integration of the EIS acquisition are complete and the previously announced shutdown of certain operations is progressing on schedule. The cost associated with these initiatives are expected to be behind us as we enter 2013.

From a market or demand level perspective, as I noted earlier, through the latter part of the second quarter, and throughout the third quarter, the global macroeconomic environment continue to be very unsecure and uncertain. Visibility was bad and it's now short. While order entries did increase by approximately 12% in the first quarter of the year, when compared to the fourth quarter of 2011 and was increasing further as the second quarter began, the then improving pattern shifted as the second quarter developed, leading to a [bigger] start to the third quarter.

Order entry continues to be inconsistent from week to week throughout the third quarter and did not reach anticipated levels. Business levels did however begin to improve nicely in the last four weeks in the quarter, but are still inconsistent from week to week. September order entry was up by over 20% compared to the first nine weeks of the quarter and our book-to-bill was a positive 1.02 for the year. This in conjunction with the tax rate change should now result [in full year] that's below the low-end of previous guidance for the year.

We currently expect earnings for the fourth quarter to be similar to those in the third quarter. This would bring the year to $1.40 to $1.45 per share range. This is below the previously provided range of $1.50 to $1.60 per share and includes the additional $0.05 per share tax rate impact, as well as the impact of lower than anticipated business levels and $0.27 per share of cost for the initiatives that I mentioned earlier.

Operator that concludes my remarks. I'll now turn the call over to Dick Hipple.

Thank you, John. So far in 2012 we've had some challenges and gaining the traction needed to achieve results that we initially targeted at the beginning of the year. Although, I'm pleased with the quarter-to-quarter earnings and margin improvements, we're certainly not where we expected to be at this time. The slowdown in macroeconomic activity across the globe has impacted our revenue. However, we have used this economic weakness as an opportunity to initiate and invest in some operational restructuring that will help us achieve our longer-term goals.

Slower macroeconomic conditions in combination with our restructuring activities [temper] slower than expected start-up of the beryllium plant has certainly created a drag on earnings as John has outlined. I'm happy to report that our pebble plant continues to remain on track to be in our targeted production rate by the end of the year. And the previously reported relocation of our microelectronics packaging operations to Singapore is also going very smoothly.

And due to the challenging market conditions and operational capabilities from our recent acquisitions, we are reducing cost through operational efficiencies and further consolidations where appropriate. Our strategic initiatives on pricing is contributing to our margin growth and we look forward to further improvements. All of these actions will bring us better results as we move forward into 2013. We also recently began an expansion at our Lorain facility to significantly increase our capacity to produce our ToughMet Alloy, which will continue to see ongoing growth in commercial aerospace and oil and gas.

During this time, we have also been investing in a terrific pipeline of new products that are beginning to hit markets or late in the qualification stage. Now I'll give you a few examples. Some of these new products have already seen a strong lift in orders in the third quarter. These included our technical materials operations, products for the DSA or dual stage activation for the hard disk drive market. The speakerphone application for acoustics in our BE and composites group.

In our Advanced Materials group, we have a new alternative chemistry for [steel] tip cleaning and this was recently qualified by a major customer and production is now being ramped. The Department of Defense placed the initial order for rebuilding the US government BE stockpile and this was a Phase I proof-of-concept order. An upside surprise is that our new small UK acquisition as new Formula One teams have placed significantly larger orders for the 2013 racing season. And Performance Alloys received the first high volume order in automotive for ToughMet [stroke] for a thrust washer application in the gear box for Volvo.

On the qualification front, great progress also is being made. Our Red Phosphorus from AMG, our Advanced Materials Group, have been approved for use by two major LED producers. Advanced Materials Group has panel and value metals in trial and we have reached Phase II trials for the new targeted gesture control platform at our Thin Film Coatings Group. And we are in [final stage of] qualification trials for the track bushings made out of our ToughMet product for all the Bradley Fighting Vehicles and our amorphous alloys products continued to expand in the qualification process in both commercial and aerospace applications.

During the quarter, we have started to see some strength in the consumer electronics market. Our commercial aerospace sales are now at record levels and our medical market remains strong. In the markets where we saw weakness, automotive, oil and gas and telecom infrastructure, the good news is that we expect all of these markets to rebound as each market has had some special circumstances.

Automotive can be seasonally weak in the summer months and our oil and gas has only been recently soft, as inventories have been undergoing some adjustments to reflect the lower drilling activity in natural gas. And the telecom infrastructure market is now poised to regain strength after an ongoing inventory adjustment from our record product sales into the pipeline last year. And to reinforce what John said earlier, we have begun to see order entry strengthen in these markets. All of these key markets are poised to regain strength as we move into 2013. And certainly, part of the unstable demand factors is the hesitation for customer commitments as we head into the economic murky waters of the possible fiscal cliff.

Operator that concludes my remarks and we can now take questions.

Ed Marshall, Sidoti & Co.

Good morning. As I sort of parse through the guidance and I look at the discussion about the sequential equality call in the revenue, and I try to look at why we're seeing a sequential decline in EPS? I'm thinking where on the margin, what segment are we actually beginning to see the decrement? Because, I would assume that with the margin improvement we've been seeing over the prior three quarters that would continue into the fourth.

Generally the fourth quarter is weaker in all of our segments than the third quarter with the possible exception of defense, which has tendency to move around, counter the holiday period. So, generally, the fourth quarter is weaker in the larger -- in all three of the remaining segments. Relative to the previous guidance, the fall off versus again previous guidance is principally in our Thin Film Coating operations and largely due to a fall off in China, and in particular the acquisitions in China.

The projection display business there fell -- it's really down by over 25%, began to fall in mid-third quarter and it's off dramatically. But more importantly, a key optics customer lost his business to his largest competitor during the third quarter and while we're in the process of qualifying product to ship to that competitor that process, as they normally do -- they do move slowly and it is moving slowly. So, the Thin Films Coatings operation, which is part of the Advanced Materials segment is the area that we'll see the fall-off again versus our previous forecast for the fourth quarter.

So that's -- I mean, you're saying the lower volumes caused the lower margin, I'm assuming is what you're saying. Do we see that rebound again in 2013? I mean, is that 4.8% that you're putting up in the Advanced Materials Technologies business, AMT, certainly sustainable as we move forward? I mean is that a step for the next leg up?

Yes, Ed, I'm not sure, I understand your question. The 4.8% is what?

The operating margin of 4.8% in the Advanced Materials. I mean is that sustainable going forward into 2014?

Frankly, we think it will grow.

You do think it'll grow. Okay. So I mean, this is -- I won't call it as a base case because obviously we've seen it weaker, but certainly a stepping stone for the future.

Yes. [Look out].

Now, when I look at the beryllium segment, I mean, it looks like you're nearing a break even. You had some good comments on the pebble plant. Do we potentially see that swing to an operating income? I think the original guidance was first quarter 2013, but I mean you're darn close right now.

Right. You're absolutely correct. We expect that to be certainly profitable next year.

Okay. And when you say the tax -- just last question related to the tax question. You mentioned -- you weren't able to capitalize. Are you referring to a deferred tax asset that just wasn't able to be capitalized in the quarter? I'm assuming that it was -- you ran it at a loss in foreign exchange?

Let me express it a little differently.

Okay.

To let you know exactly what it is -- what it was. I guess you can almost look like it -- look at it as a perfect storm in the sense that a combination of two factors. One I've already referenced and that is the Optics business in China, in the subsidiary in China falling-off dramatically. Our projections of profits being lowered significantly there due to both display business falling off by [that] 25% that I referenced a minute ago and the key optics customer being lost to a large competitor. That in and of itself is probably two-thirds of this issue and it is losses that were there from the integration of the acquisition that cannot be absorbed or offset per se. So they'll be offset in the future as business respond.

The second piece of that is in Europe and it's linked to the European solar markets falling dramatically. And in particular our operation in the Czech -- our shield kit cleaning operation in the Czech Republic. That operation has historic losses that we cannot offset as well. So it's a combination of those two factors that caused us to reassess the tax rates and it caused -- and it hurt third quarter earnings by about $0.05 a share and the year.

So it's one quarter true-up. I mean it's essentially what it is, right.

That's right.

Okay. What was the total amount there?

$1 million impact on the bottom line is $0.05 share.

$1 million. Okay, perfect. Thanks guys.

Sure.

Martin Englert, Jefferies.

Good morning, everyone.

Good morning.

Good morning.

I wanted to see -- you talked a little bit about price increasing and we've seen margin improvement in some of your segments there. Have you initiated or do you intend to initiate any price increases that would impact 2013?

Well, that's a constant effort on our part to strategically increase pricing everywhere we can. And with our new efforts on pricing, it's a very strategic methodology that we go through on examining volume order sizes and value -- it's more of a value sale that we're after these days. So we are pushing margins and pricing throughout the Company at this point. So I do expect pricing in general to be higher next year than this year.

Okay. Any other, I guess, qualitative commentary on what your expectations may be for 2013. I understand that it's still fairly early and you noted visibility as low. But any kind of insight you can provide on sales, earnings expectations, or whether you're more or less optimistic today than you were, say, six months ago about prospects for 2013?

Right. You hit the nail on the head. It's way too premature to be talking about what we would expect in 2013 in this Company. I think a lot depends on not only the elections, but what kind of economy we have, what kind of macroeconomy we have, because we are a global company, that we have going into 2013 and then throughout the full year. Volume has a significant impact on our bottom line.

And you can see that in our margins and if volume starts to come back, we see profits beginning to get closer to the historic levels. And you recall the early part of last year, we were earning far more than what we're earning today. Volume is important. With volume loss will come improved margins and significant flow through. So beyond that it's way premature to predict what 2013 would look like.

When you look across the different end markets, where do you think the largest volume has been lost, is it in consumer electronics?

The defense and science, consumer electronics, I think, are the two largest year-over-year volume loss.

I guess when you look at consumer electronics, is there any indication that you've lost any kind of market share to a competitor or have you seen substitutes replacing any of your offerings in those products?

No, I don't think so. There has been a couple of shifts in customers, but at the same time we've gained some customers. As we look at it in general, we believe actually our market share has increased. Some of this has to do with the specific applications going on. But I will say that we think on a longer-term basis that particularly on the product substitution, for example, when we talk about one of our -- we have a couple of major applications in consumers electronics. One is gold based and there's always a question about people trying very, very hard to design [to add] gold in the electronic applications and there has been some of that that's occurred. But at the same time, as we move forward, there's design changes going on that will increase the demand for gold.

So, for example, as the market moves from a 4G to a 5G, which actually you can -- actually buy routers in the stores today that have 5G capability, which is actually the ability to watch video, movies not online, but actually streaming video is the 5G capability and that's called 802.11ac. And that particular technology will demand a lot higher use of gold for the power amplifiers and some of the compound semiconductors.

So there has been a little bit of a trend going down in the use, but that's going to start to turn back up again. So that's generally how these things kind of work out there that there is a little bit of ebb and flow and I think we probably had a little bit of ebb going on maybe in the last year. And now it's going to start pick up again as far as how I see the technology shifts.

Let me interject something I had referred to your question. I said defense and science and consumer electronics, I intended to say telecom infrastructure, not consumer electronics. Consumer electronics is down a bit, but not significantly versus prior years. Telecom infrastructure that is off significant.

That is strictly an inventory situation, because in the telecom infrastructure, we had all-time high record sales in 2011, and the nature of that particular market for us is, it swings quite a bit and they get -- we knew this was coming this year that -- at least there was a high chance of the lower sales to telecom infrastructure just because we just thought that the supply changes [bought] too much and they have kind of worked down their inventory at this point in time and we are starting to see the order entry pick back up in the telecom infrastructure. So that was down significantly this year, but really it wasn't a market situation, it was an inventory situation.

Thanks for all the color there. If I could, one last question. You noted in the release some of the customer shifting to supplying their own metals rather than having you supplying them, so that's pulled some out of that raw material or pass through there. What was the reason behind the shift?

That's a pattern that does occur from time to time. When a customer has metal, he will choose to -- he can choose to supply it or look to us to buy metal. I think that it was just unusual to see that volume of it occur in a given quarter. I don't know that there is any significant factor that we can cite that would tell anyone why and I really don't expect that will occur at that level in future quarters.

Thank you, again and good luck.

Thank you.

Avinash Kant, D. A. Davidson.

Good morning, Dick and John.

Good morning.

So, few questions. First did you have a chance to talk about Q4 revenues? I know you give us some idea about the EPS?

No, we did not. Again as you know, we do not, we do not forecast revenues because of the nature of the metal price movement. And again, as you just heard, customer metal swings and also customer uses versus our own metal swings as well as shifts between gold, silver, platinum, palladium and copper can effect revenue dramatically without really affecting value-add sales. What we did say is that we expect the business levels to be similar.

Okay. Now your commercial aerospace seems to be one of the better segments and one of the high-growth segments at this point. As you had record sales, are you in a position to give us some idea of how big it is with respect to overall business?

How big, what is --?

Commercial aerospace.

Commercial aerospace?

As a percentage?

Yes, any order would do?

Well, order of magnitude, it's a $30 million or so business.

Currently on a quarterly run rate basis, right? Hello?

I am sorry, we're having trouble hearing you, Avinash. I don't know whether it's your phone or ours?

Yes, I got cut off a little bit. So is it on a quarterly run rate basis right now $30 million?

No, that's annual.

No, that's annual.

Annual, okay. Okay. And could you give us some idea about when the beryllium plant comes up most likely early next year. What kind of contribution should we expect, of course, it will ramp over time. But for 2013, what's the level of contribution in revenue or EPS terms that we could expect from there?

Well, there is no change, there is no change in revenue because we are just shifting supply source. Today the supply source are, where it's been coming from is the government's strategic stockpile. So instead of going -- instead of getting the raw materials from the government, the raw material now will ship to our mine in Utah. So, there won't be an increase in revenues, what will improve is the cost and in the profitability of that segment.

So for example, this year that division will those money primarily driven by the start-up cost of the new facility that will shift now to a profit making as because we're going to be again, it's -- the plant won't be starting up through next year. I mean it's starting up now and making very good progress. So we expect to have a minimal impact. On the negative side of the beryllium plant we saw this year, it will be a far less impact, much, much less impact next year and we're going to make significant profits in that division next year.

Okay. So is more the profitability that will be impacted?

Yes.

So with respect with that now, any kind of guideline intensive, if we had similar revenues compared to what we had this year, what kind of feedback should we expect on the margin?

We are looking at -- I've said this many times, we're probably looking at somewhere [of only] at least $0.20 to $0.25 per share shipped in the Company with the change in that business.

And that could have start to show up from the first year itself on a full year basis, right?

Yes.

Okay, perfect. Thanks so much Dick.

Rob Young, William Smith.

Hey, Good morning, guys. One question on the capital expenditures. That looks like you increased the guidance for that a little bit. I was wondering if that solely pertained or largely pertained to the ToughMet expansion project.

That's part of it.

Okay. And is that being driven by the commercial aerospace side of the world?

And oil and gas.

And oil and gas.

Yes.

Is there something else that's contributing to that increase or is it --?

No, I think it's largely that, there may be some timing in other projects, but it's largely that.

Okay, okay. And from a CapEx perspective going forward next year, I know that you said that it's ways off. But what level of capital expenditures should you be looking for next year. I mean, is it going to be higher or lower? You're not going to have the beryllium plant next year, but --

It's -- beryllium plant isn't showing up on our capital because that was funded elsewhere.

Right, right.

Yeah, it's likely to be higher, but maybe $3 million to $5 million higher.

Okay, okay. Last quarter you talked a little bit about lead times being shorter than typically you've seen. Can you comment on a little bit on that in terms of an update?

Sure. That's much the same.

Okay.

Week to week, things are very, very choppy, as I indicated in my preamble, business to business from week to week is extremely choppy.

Okay. Do you have the amount of contribution from acquisitions in the quarter in terms of, well, I guess, what I am looking for is the organic portion of revenue contribution?

I don't have it handy --

Just our two most recent acquisitions?

Yes.

It's very small.

Very small.

Very small. Okay, all right. That's all I have. Thank you very much.

Hendi Susanto, Gabelli & Company.

Good morning gentlemen and thank you for taking my questions.

Good morning.

My quick question, when you look at the higher tax-rate of 33% to 34%, should we think that the rate will stay in the near to mid term or should we think it's a temporary one that may -- where we may see it [refer back to OREO] tax rate?

The 33% to 34% rate for 2012 is what you're referring to and particularly we apply that rate to fourth quarter as well. We don't have our arms around 2013 yet, but I think your assumption is probably a fair one and that it might return to the historic level, which is a little bit lower.

Okay. And then could you indicate what the targeted production rate of the new beryllium plant in terms of, let's say, run rate or output?

It's -- it will be running at probably around a 60% level. The plant is designed for more than what the normal market is. So, we have to be a little careful and that was done jointly with the government because they wanted the plant design with peaking capacity in case they were a situation where there was a much higher demand for beryllium from a defense standpoint.

So we designed the plant with, what I would call from an engineering perspective, high turndown ratio, which means that you can operate it at lower levels efficiently and that's how we've designed it. So that we have lots of upside capacity in this facility, but it was done intentionally in case there was a spike in demand by the government.

Okay. And then when you report to that --

And by the way it's actually something to keep in mind because that business itself, we have a strategy behind that business that, although today it certainly is highly dependent on the defense industry, we might have about 60% of our business dependent on defense and science, maybe 65% when you throw in the science side of it. We are aggressively pursuing growing the commercial side of that business. Today it's already 30% commercial products and we will be growing that. So we have no limitation on that plant and we can use it for unlimited commercial upside. So it's our job as a good management team is to grow that business outside of defense and science, so we can tap the capacity that we have in that plant.

And then when you report to that 60% level, would you share like some idea about the timing or the gradual ramp up like whether we'll see that, let's say, like in the first half of 2013 or later toward the year?

We plan to be certainly at that level in the first quarter.

First quarter, okay. And then last question. Could you refresh our memory about your capital allocation strategy with regards to the hidden cash on the balance sheet, cash for making strategic acquisition and capital structure? I'm wondering whether that has changed (multiple speakers).

Yes. I'll comment on that and let me begin by saying it has not changed. Our view related to the use of our cash and our credit lines has always been and continues to be first growth, second, strategic acquisitions or augmentation to the business. And then finally to maintain the flexibility that we do have. In other words, maintain that strong balance sheet so that we can take advantage of opportunities as they occur.

Related to returning cash to shareholders, our current view is also the same. And that is that our priority would be the dividend and growing the dividend secondarily should we see significant excess cash build and significant liquidity build in the Company, then we begin to look at alternatives relative to our share buybacks and that kind of thing.

Okay. Thank you. And all the best.

Thank you.

Thank you.

(Operator Instructions) Phil Gibbs, KeyBanc Capital Markets.

Good morning, gentlemen.

Good morning.

Good morning.

John, why has there been so much variability in the D&A component?

The largest factor in the variability there is the mine amortization. The amortization of fundamentally beryllium stockpile and that moves around based on the use of the material.

This is Jim Marrotte. If I could (inaudible) on that, the amortization occurs when we extract the ore into our facility. We campaign the facility based on the efficiencies of the plant. So we don't use the same quantity of ore in a given period from period to period. So you'll see the choppiness in the D&A accordingly.

If I can amplify on that, the amortization occurs when we extract the ore into our facility. We campaign the facility based on the efficiencies of the plant. So we don't use the same quantity of ore at any given period, from period-to-period. So you'll see the choppiness in the DNA accordingly.

Okay. In the oil and gas business, that business is down, sequentially down year-over-year. I mean, I think it is -- we've seen similar things with other companies with exposure there. What do you think aside from just the rig count drop that may be due to are you seeing a lot of inventory in the supply chain and when that -- when are you forecasting that business may potentially (inaudible) turnaround?

Yes. I think it's just -- you have to split the business up in different categories. You've got -- the deep sea is certainly continuing on and you had a lot on the directional drilling, particularly on natural gas and it pulled the rigs up. They are trying to control the -- so anyway, you've got a shift going on. So what happens is you get this (inaudible) and we still pick up the business as they shift over to oil, we pick up that business. So it's not like business gone forever, but there is always a shift in timing.

So what happens is that you've got tools -- they have an oversupply of tools in the natural gas side and what they do is they use the tools that they have to continue to support their current drilling activities. So you have this kind of lack of an order book for a while as they use their inventory of tools for the active rigs. You know once they get through that, then the business starts to pick back up again.

So I just see this as a transitory issue because at the same time as they're increasing their drilling for the oil side -- on the liquid side. So, net-net, on a longer-term basis, they're still drilling for carbon units. Let me tell you. So, we just, we've seen it kind of, what I call, a hole in the bucket here for maybe a six month period of time because of their shifting. Yes, they're shifting into oil and you've got an oversupply in the natural gas side. So you can't expect when that shift is going on to have a stable market situation. But long-term, I had no concerns at all.

Do you have any sense the division between your products as far as the oil side and the gas side?

You know what I would be guessing. That's a good question, as I don't have the answer to, but if I were asked for a educated guess, I would probably say it's 65% to 70% oil and the balance gas.

Okay. And lastly, I'm just looking for a little bit more color on EIS. I think, John or Dick, you said something to the effect of business in the display side is down drastically and it sounds like you lost a big customer. How do we think about that going forward as far as your ability to potentially -- your right to shift there? Thanks.

Well, I think the big objective there -- in fact let me just talk a little bit about the strategic platform. When we bought EIS, their major product and they have a very large market share, global market share for the Digital Light Processing market. But that's not we bought them. We bought them because they had a -- that was kind of a nice stable core market. It turns out [sort of stable as we thought]. But we bought them to grow that business in other areas.

And so in my commentary, I had mentioned about a new platform of business there which is gesture control, which they were not in and it's a sizable market. And we hope to have a significant order book for that market starting in 2013, as we've finished our kind of second stage qualifications for that. So we're looking to grow that business in other commercial applications besides their core business. And so that's the job that we have in front of us is to make that happen. And we believe that we have those opportunities. And it's just not a belief. We've got things in qualification and products that we've already developed.

And the nice part of that is that we have been able to bring technology to that operation that they didn't have heretofore from our other Optics operation here in the United States. So we brought them more -- really a stronger technical capability to get into some of these new areas that they weren't able to do otherwise. So but they have equipment. They have equipment to do it, which is the nice thing.

Gentlemen, there are no further questions at this time. I'll now turn the floor back over to management for closing remarks.

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

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.