Materion Corp (MTRN) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Materion Corporation year-end 2012 earnings conference call. At this time all participants are in a listen-only mode. The question-and-answer session will follow a 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, 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 2012 results and the outlook, and Dick Hipple will give a market update. Thereafter we will open up the teleconference call for questions.

A recorded playback of this call will be available until March 15 by dialing 877-660-6853 or 201-612-7415. The conference ID number is 408800. 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 will turn it over to John Grampa for comments.

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

Today's agenda is similar to that of our past calls. I will review the results for the quarter as well as review the outlook for 2013, and following my comments Dick Hipple will review the current state of our key markets and provide his perspective on certain specific key new product initiatives. Following Dick, we will open the call for your questions.

As I normally do, I'll cover sales, earnings and margins, isolating the influence of high value pass through metal, which as most of you know, in our Company can cloud real margin levels and trends in both business levels and margins, particularly in an environment where pass through metal prices or shifts in metal mix or metal source can change meaningfully from period to period.

I will also review the key changes in business levels by key market, comparing the fourth quarter of 2012 to the fourth quarter of the prior year, as well as sequentially to the third quarter of the year.

For the quarter I will summarize the impact of the three previously announced non-recurring items. These being the facility consolidation charges announced in early December, the physical inventory adjustment announced on February 13, and the tax benefit also announced on February 13.

I'll follow these with a review of margins and brief comments on the balance sheet and cash flow. And then finally I will review the outlook for 2013 as we see it unfolding at this time.

Let's begin with the review of the fourth quarter. First, sales and business levels. Today we reported results for the quarter that were $0.01 per share above the high end of the range we provided in our February 13 prerelease. Adjusting results to exclude the negative impact of the facility consolidation and physical inventory adjustment as well as the tax benefit, earnings for the quarter were well ahead of what we expected coming into the quarter, due primarily to higher business levels across a number of our markets.

Sales for the fourth quarter were about $304 million, down approximately 9% or $31 million compared to sales of about $334 million for the fourth quarter of 2011. Comparing sequentially to the third quarter of the year, fourth quarter sales were up approximately 5%. Net of high value pass through metal influences, business levels for the quarter were actually up about 4% year-over-year.

The improvement in the fourth quarter business levels when compared to the prior year levels was primarily due to higher demand for our materials from the automotive electronics, consumer electronics, medical, telecom infrastructure, and industrial and commercial aerospace markets.

Automotive electronics was up approximately 26% year-over-year. Consumer electronics was up approximately 16%, and medical was up approximately 11%. Industrial and commercial aerospace, and telecom infrastructure were up approximately 5% and 2% respectively in the fourth quarter year-over-year.

The increases in these areas were partially offset in the year-over-year fourth quarter comparisons by decreases of about 14% in energy and 5% in defense and science. Comparing the fourth quarter sequentially to the third quarter of the year, business levels improved nicely in areas that had been weaker earlier in the year.

Energy was up about 17%, and defense and science was up about 4%. Automotive electronics and medical, which were up significantly year-over-year in the fourth quarter, were also both up sequentially as well, by about 13% respectively and 4% respectively.

Improvements in business levels in these markets offset the normal seasonal decline expected in consumer electronics, which was about 8% sequentially. For the full year, reported sales were down 17% to $1.273 billion from the 2011 level of $1.527 billion. Net of high value pass through metal influences, business levels were down only 3% year-over-year.

The principal drivers of the 3% decline in business levels were weaker market conditions, especially earlier in the year, in telecom infrastructure, defense and science, and energy. Weakness in these three areas was partially offset by increases in industrial and commercial aerospace, medical, consumer electronics and automotive electronics.

I will now turn to earnings. Reported net income for the fourth quarter was $0.12 per share. As I had noted earlier, adjusting fourth quarter results to exclude the negative impact of the facility consolidation charges and the physical inventory adjustments, as well as the identified fourth quarter tax benefit, earnings for the quarter were well ahead of what we expected coming into the quarter, due principally to the higher than expected business levels that I just reviewed.

The facility consolidation costs totaled about $0.13 per share, about $0.03 per share higher than we had initially expected to incur in the quarter. The physical inventory adjustment totaled about $0.25 a share. I will share more on this later. These were offset in part by unrelated tax benefits totaling about $0.09 per share associated with changes in projections.

Considering these three factors, which net $0.29 per share, adjusted results were $0.41 per share in the quarter, slightly above the high end of the previously announced estimate that results for the quarter would be in the range of $0.37 to $0.40 per share adjusted for these same factors. The quarter on this basis was also well ahead of the expectations we had coming into the quarter.

Let's walk through the three factors in more detail. The first, the facility consolidation charge of $0.13 per share, relates to our Advanced Material segment. This includes the shutdown of five smaller facilities and the consolidations of the business of those locations into other Company operations. This was announced this past December.

The costs for these were expected to be in the range of $0.20 per share in total, to be incurred in both 2012 and 2013. The P&L benefit in 2013 -- the P&L impact, I should say, is expected to be neutral in 2013, with some costs incurred earlier in the year being offset by benefits beginning to appear in the later quarters of the year. The full benefit, which appears in the year 2014, is expected to be greater than $0.20 a share. This program is progressing on schedule.

The second factor, the fourth quarter physical inventory adjustment, was announced on February 13. In January, as the year-end physical inventory was being taken, the Company became aware of a potential theft of precious metal from its Albuquerque, New Mexico, refinery. An internal investigation ensued, and an arrest was made, and a minor amount of stolen material was recovered.

The Company began further investigations, including an investigation of the physical inventory results, and engaged an outside team of forensic experts and criminal investigators. While the results of these investigations are not yet complete, preliminary indications are that some if not all of the year-end physical inventory adjustment, which totaled about $7.4 million or $0.25 per share, may be due to theft.

Recent inventories taken at other Company facilities were all within the normal type tolerances. The result of this physical inventory and the potential for theft remain under investigation.

Throughout the Company's long history a material theft has not been discovered at this location or any of the Company's other locations, and the Company has never made a material claim under its theft insurance. Given that an extensive criminal investigation is ongoing, we cannot disclose anything other than what has been disclosed to this point, and as such we may not be able to respond to any questions you might have today related to the potential theft.

The third of the three factors, the $0.09 per share tax benefit, is a result of changes in projections and is not related to the other two factors. The benefit is linked to changes between our domestic and foreign operations and the expected utilization of specific foreign deductions. The net effect is an ongoing reduction of our effective tax rate, which I will provide an estimate of during my review during my review of the outlook of 2013.

I would now like to spend a few minutes reviewing margins and, in particular, value added margins. To date we have only been commenting on value added margins at the consolidated company level in our quarterly calls. As many of you are aware, we plan to publish value added margins and related comparisons by segment, beginning with our first quarter 2013 earnings release this coming April.

As a reminder, value added margins are gross profit and operating profit expressed as a percentage of value added sales. Value added sales are sales excluding the impact of high value pass through metals, primarily precious metals and copper, changes in which are normally passed through to customers on a timely basis. The high value of these metals, along with the changes in their value and changes in their source, often do distort reported margins and margin trends.

In the fourth quarter, value added operating profit margins improved when comparing to the fourth quarter of the prior year, and were about equal when comparing sequentially to the third quarter levels, in spite of seasonal factors. Operating profit as a percent of value-added revenue was about 9% in the quarter -- was above 9% in the quarter and increased about 200 basis points when comparing to the same quarter of the prior year.

These percentages are adjusted to exclude the impact of the facility consolidation costs, the inventory adjustments, and costs related to start up and ramp up of the new beryllium facility, as well as acquisition related costs.

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

The Company began and ended 2012 with a very strong balance sheet. The strength of the Company's balance sheet and its cash flow provided the flexibility to return cash to shareholders in the form of a regular quarterly dividend, which was initiated during 2012. The Company debt to total capital level remained at a healthy 19% in 2012. Fourth quarter cash flow was very strong, and debt net of cash decreased by approximately $33 million in the fourth quarter.

I would like to now turn to the outlook for the year 2013. As noted in the press release as well as in the prerelease dated February 13, we currently expect earnings for 2013 to be in the range of $1.75 to $2 per share. As the Company entered 2013, the near term outlook for many of the markets it serves was improving, especially in those areas that were weaker in the earlier quarters of 2012.

The fourth quarter of 2012 brought sequentially higher business levels in energy, automotive electronics, medical, and defense and science. Consumer electronics, while down sequentially from the third quarter of 2012 levels due primarily to seasonal factors, was up significantly from the business levels seen at the beginning of 2012. Overall, for 2013 the Company currently expects to see continued growth in certain specific key product areas.

In industrial and commercial aerospace, for example, sales of the Company's ToughMet products are expected to continue to grow due to both market acceptance and new product development. In medical, where sales have grown in recent years, additional growth is expected in 2013 from new product introductions as well as from specific account penetration.

While government defense budgets are expected to continue to be under some pressure, the Company currently anticipates that sales of beryllium products for defense and science applications will improve in 2013 due to program timing and the development of science applications.

The Company is also well positioned in the oil and gas market, and sales for applications in this area should grow as the rig count starts to climb. The growth in consumer electronics, while lower in 2012 than in recent years due to factors such as customer inventory corrections, is expected to be stronger in 2013 and as the performance characteristics of our materials continue to be mission critical in this market.

Macro conditions globally, though, remain an area of concern and do bring an air of caution to the outlook. Also, important to the success of the Company in 2013 is continued progress with start up and ramp up of the new beryllium facility and the successful implementation of the facility consolidations.

To add some specific color for your modeling purposes, we expect in 2013 that EBITDA will be in the range of $92 million to $105 million, and interest expense to be in the range of $2.5 million to $3 million. We expect depreciation and amortization to be in the range of $38 million to $43 million, and capital spending to be at or slightly below depreciation levels and therefore also in the range of $38 million to $43 million.

We anticipate a tax rate of between 29% and 30%, and cash flow is expected to result in debt reduction of from $30 million to $40 million in 2013, and on that basis debt to debt plus equity should fall to the low teens.

One final comment about the outlook before I turn the call over to Dick Hipple to provide you with more detailed market update. As you know, it is not our normal practice to provide quarterly guidance. However, given the number of factors that I have highlighted today, many of which are difficult for sale-side analysts and shareholders to model, I thought that it would be helpful to provide some insight to how we see the 2013 quarters unfolding at this time.

On top of the normal seasonal factors, quarterly earnings in 2013 will likely be affected by the ramp up of the new beryllium facility and the facility consolidation program. The timing of these is such that their impact on each quarter should be lower as the year progresses. Thus earnings levels in the earlier quarters of the year will be below the later quarters of the year.

Considering this, we at this time do expect the first quarter to be the lowest of the year, with earnings on a GAAP basis in the range of $0.33 to $0.36 per share, which is up 10% to 20% compared to the $0.30 per share of the prior year on the same basis.

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. And I must say we are happy to put 2012 behind us for lots of reasons. A tough year for us in several areas, but nothing occurred that is systemic in nature, and we expect to bounce back strongly in 2013.

The issues we fought through in 2012 will make us stronger going forward, including areas such as our restructuring actions, resolution of equipment issues in our new pebble plant, and certainly some enhancements to our security processes.

Meanwhile we make great progress on our pipeline of new products that will be gaining traction as we move forward, and several of our key markets that were softer than we expected in 2012 are now showing strength as we enter 2013.

The pebbles plant continues to run reliably and has passed some critical hurdles, such as recently passing environmental testing at high levels of production. We are on track to meet our targets for ongoing increases to production output, which is the biggest factor to bring strong profitability back to our Be and composites business.

From a market perspective we are now seeing the long awaited increase to wireless and telecom bookings. After 18 months of softer conditions, the overall semiconductor market is now forecasted to show nice growth in 2013, and our current bookings support this outlook.

Our application positions and materials for wireless power amplifiers for 3G, 4G and upcoming 5G should bode well for us. And our materials used for stabilization in portable device cameras are just a few of the examples of the solid runway of growth.

The telecom infrastructure market was also weaker in 2012, primarily driven by inventory buildup that needed balancing. It appears that we have worked through this market situation, as we see our microelectronics packaging business increasing, while our M25 wire products used in base station connectors still remain soft in volume, but I do expect this to gain strength as we move through the year.

In other consumer electronic areas such as LEDs, we have not seen a pick up here yet, although the business has been steady. The oil and gas market was weaker than expected in the second half of 2012, primarily driven by an inventory adjustment form a lower level of drilling activities in the natural gas side of the business. Although natural gas prices have remained low, there has been a higher shift to oil exploration and attendant strength from this side of the business.

Our materials are used in both, so we are agnostic to the longer term trends, although we can be subject to specific inventory adjustments as we saw in 2012. Though still not robust, we have seen a decent pick up from the second half of 2012, and we look forward to additional growth from the introduction of our new high toughness, ToughMet product, and industry forecast that indicates further growth in 2013.

The automotive market has remained very stable, and we are enjoying the longer term trends of the higher intensity of electronic devices contained in the automobile. A great example is the integrated telematic GPS and wireless systems that require high reliability connectors and contacts to avoid expensive warranty repairs and customer complaints.

We also continue to make traction with our innovative dovetail non-weld copper to aluminum connector focused on lithium ion batteries and other automotive applications. From a general market perspective there are certainly areas of the globe that are showing slower automotive sales, such as Europe, but overall global sales continue to climb.

The commercial aerospace market remains robust. One big caveat is how long Boeing will be impacted by the grounding of the 787. So far there has not been an impact in the build supply chain. So at the present time we are enjoying record high order entry rates in this sector.

The medical market remains strong for us as we are gaining above market rate growth through new products in blood glucose test applications in our thin film coatings business. The defense market has actually picked up for us at this point, and we expect the remainder of 2013 to be solid. Should further cuts be realized in the sequestration process, we would expect to begin to see an impact towards the fourth quarter of 2013.

We are well positioned in critical platforms, focused on in the sky intelligence, reconnaissance and surveillance optic systems. A critical part of our strength is our new array optics technology and our high Be optic structures.

Although not a large market for us, I thought it was worth mentioning that we continue to see a nice increase to our architectural glass business that goes into commercial construction buildings. We supply special precious metal coating materials that are applied to building glass for environmental control.

Another important factor for us is keeping our restructuring activities in 2013 neutral in cost while setting us up for a 2,000 -- for a $0.20 earnings per share benefit in 2014. And so far we are on track with these initiatives.

So as we move forward, our eyes remain focused on bringing new solutions to our customers with exciting differentiated products and services while driving the most efficient operating model. We will remain vigilant to the many domestic and global economic land mines that can develop, and will react quickly should they upset the fundamental improving conditions that we are seeing.

Thank you, and we will now take questions.

Thank you. We will now conduct a question-and-answer session. (Operator Instructions). Our first question comes from Luke Folta with Jefferies. Please state your question.

Hi, good morning, guys.

Good morning, Luke.

Nice detail on the outlook. It answered, actually, a lot of my questions there. But a couple ones left as it relates to the beryllium segment. With the start up of the new pebbles plant, or the ramp up I should say of that over the course of the year, can you give us some sense of what your expectations are within your $92 million to $105 million EBITDA guidance, how much of that is attributed to the beryllium segment, ballpark?

The segment EBITDA for the year?

Yes. Just trying to get a rough magnitude.

We have not disclosed EBITDAs by segment, and I don't know that we have it handy here. We do have -- it is in the $8 million to $10 million range is where it would be. EBITDA perspective.

Okay. That's helpful. And then just secondly, on the sequestration comment. So it seems like most of this year, outside maybe some of tail in the fourth quarter, appears to be the projects that you are working are the programs seem to be funded and safe. If the worst happens from a sequestration perspective, what -- can you talk about how much of your defense exposure do you think is levered to that?

I know some of the programs -- I mean, I got the sense from speaking with you that some of the programs, like some of the beryllium supply chain restock -- or defense stockpile restocking, some of that stuff isn't necessarily levered or would be impacted by the sequestration. Can you give us some sense of what the downside sensitivity could be?

Yes, in fact, on the stockpile rebuild, that is actually not even a of factor now. So that's all -- we see that as being more of an upside in 2014 and 2015. So that is actually a zero impact to us. I would say that probably the biggest program, if it were to have a significant whack to it, although it has already been planned to being down, but look for example like the F-35 Joint Strike Fighter would be an impact to us.

Is there something you can tell us that would give us some sense of what your content is on that aircraft?

Oh boy, I am going to take a flyer, but we are probably in the range of $50,000 an aircraft, something like that. Actually it might even be -- I am trying -- sometimes I get a little confused between the commercial side and the defense side, so we are probably higher on the F-35. We are probably close to $80,000, $90,000 a plane on that one.

Okay. That helps. All right, and also then on the consumer electronics, is it seemed to be that some areas of that business are picking up, like you said, wireless and some other spots, and some aren't. Can you maybe get a little deeper in there, just kind of talk about the different buckets of business that you serve. And any sense of magnitude of the significance of the different parts on what is changing and what is picking up and what is not would be very helpful for us.

The biggest part for us is in the wireless segment, primarily driven by smartphones and tablets and the whole wireless portable device sector. And that is the one that is showing some strength at this point in time versus a pretty squishy last year. So we are seeing some pick up there.

And then the other spaces, what I call a slight dichotomy, we also supply materials in the telecom infrastructure space, and the good news there is that was pretty soft across the board last year. We are seeing about half of our business pick up and the other half is still kind of remaining stagnant. So we are kind of seeing a half lift, if you will, in the telecom infrastructure space, but to me that should flow through the entire business.

Because if you start to see a pick up there, you are not going to see a parallel with all of your products and all of your applications have a simultaneous pull. So we are seeing some strength there. I think that strength will continue on through the year to pick up some of the other products, for example the M25 product that I mentioned in the call has been very soft last year. It's still soft, but I would expect that to start to pick up as we go through the year.

So we have kind of a half loaf improvement in the telecom infrastructure space, and then on the LED space I'd still -- I'd say in that side of it it is still -- it is stable. Like to see it stronger. It hasn't had the lift that the other areas have seen. So you've got wireless up -- a half a loaf up, and telecom infrastructure and the LED spaces still kind of flatlined.

Is there anything you can say that would help us understand the size of the LED-related business versus wireless in telecom?

No I don't have that broke out. But we don't report that. But I think it is fair to say, if you want to think about our businesses, I gave them to you in the priority. The biggest segment is the wireless, the second biggest is telecom infrastructure, and then the third largest is the LED space.

All right, thank you very much.

Thank you. Our next question comes from Ed Marshall with Sidoti & Company. Please state your question.

Good morning, Mike, John and Dick.

Good morning.

It is good to see the markets are now cooperating with you because of all of the work you guys have put in the past year or so and all of the work that's slated to do in the first half of 2013. So it is good to see it all coming together.

The question -- first question I wanted to talk about was maybe the operating profit in the performance alloys. It looks like you had the best revenue for the year in that business, but it doesn't look like the volume has translated to the slightly higher margin. It looks like it was the lowest highest margin for the year despite the highest revenue.

Can you kind of talk about maybe what is flowing through that line, or why the extra cost kind of ran through that line in that business segment?

You are looking at the fourth quarter versus the first three quarters of the year?

That's correct, for performance alloys only. And I am looking at the margin relative to the return on sales.

Are you looking at the year to date September versus the fourth quarter December?

No, the cadence for the year, and I am looking on an adjusted basis. So I have 8.3%, 9.2%, 7.9%, 7.5% for the operating margins throughout the year, 7.5% being the fourth quarter.

What was the third quarter just for reference? I don't have it here in front of me.

7.9%. Yes, despite the fact that there was -- we can follow-up later if you want to get the numbers, and we can chat --.

No, there are a couple of things there, one of which is -- there are two factors that can affect those numbers significantly, and Jim Marrotte will look into this while I am talking. One is the timing of shipments to NGK, the hydroxide shipment.

A second one is swings in production. As you know, we campaign that factory. And depending upon when you campaign it, you could have impact on overhead absorption and swings in inventory changing your cost structure in a given quarter.

So I don't see anything alarming about the sequential movement from the third to the fourth quarter. Earlier in the year business levels were a little stronger. As the year progressed we had improvements in pricing to help offset some swings in production. I will let Jim comment.

Just to amplify on John's comments about the swings on production, that is particularly true with our Utah operations, with our mining, where we campaign that facility. And we are in the fourth quarter we are concentrating more on constructing a new mine, a new pit out there as opposed to running the factory and processing more hydroxide.

Earlier in the year we were running at heavier levels to build up the inventory while we shift the resources over to building a new pit at this time. I don't think there was anything fundamentally different in the alloy business itself that would cause any concern over the margin levels.

So you are saying it is more seasonal impact?

Yes, more seasonal impact, but also I would like to make a comment that overall year-over-year in that business volumes were actually down, sales were actually up year-over-year. And that is a reflection of some of the pricing benefits that we have in that business. That's an important factor for the year. We are making great progress in that business with pricing.

Sure.

And we also saw some good yield improvements on the shop floor at in our Elmore operations in that business in 2012. That has become institutionalized, and those yield improvements carry forward.

Yes, we had record yields in several areas.

Maybe just ask the question another way. You talked pretty well about the ToughMet growth rates, and I think that runs through that business segment. There is nothing funky with the margin on the ToughMet material that would be -- would it be a higher margin product for you?

Well, it is a higher margin product, sure.

Okay.

[So you see] it's got all of the unique characteristics, and we price it accordingly. So, yes, it is a good margin product.

Okay. And just -- can you talk about maybe the growth rates? I know it has been growing pretty well for you guys, and it has been one of the -- it's been a good story for you. Can you talk about what maybe you expect for that -- I mean, it is not going to obviously continue to double, although I'm sure you would like it to.

It will increase at 25% a year forever. At least that's what I told the President today. He's up for that.

I think we are on recorded line by the way.

That's okay. What the heck. You can't have fun, what the heck, so -- but anyway, it is amazing. We have been growing that product at about that rate now for quite a long time. We have reached the capacity of that facility, and I think a call or two ago back we talked about we are expanding its capacity, and it will have -- that capital is being put in now as we speak, and we'll be bringing that facility up in line the middle of this year.

So we are getting prepared for this to continue to grow beyond the capacity of the current facility. So we are making that investment accordingly. And there are still runways of growth for that product that we see that gets beyond what I call the current market space. So it is exciting.

That product has grown into actually into some unexpected areas. It has grown into the consumer electronic space. It has basically been our horse for aerospace and oil and gas. Now it is in electronics. In fact, it is the product that goes into the camera stabilization for iPhones and iPads and other devices.

We are developing a new product to hopefully dramatically expand its use in the bushing area. It is a big bushing product used in, again, heavy mining equipment, aerospace and oil and gas, and we have come up with a new product that dramatically lowers its cost for some higher volume, let's say, on the road-type applications. And if we are able to successfully push that through, then it just gives us a whole new leg of growth.

So right now we are going to keep pushing this product. It is growing, and I would expect it to continue to grow at that kind of a rate for the next couple of years. But there is going to reach a point here where you can't say that anymore.

I am curious, and I think that you have had pretty much success has been one of the only ones been able to produce this material. Has anyone else been able to duplicate it yet? I know you are still the only sole producer of this material.

I would say effectively we are the only producer. There are -- there is probably one other producer, but very limited amount of capacity and does not have the capability to make it in all of the forms that we make it in.

In other words, there is a producer of some strip product in Japan, but they don't make the rod, wire, plate, and basic -- that's where our highest volume is in the areas --. And we have taken this product from a product development standpoint far beyond any competitor. So it is very minimal competition at this point in time.

John, just one quick question on the charges in the quarter, the $0.38 that's allocated to the Advanced Materials. Could you give me the pretax charges so I can reconcile the margin in the quarter on a pro forma basis?

The inventory was $7.4 million. Facility consolidation charges were $3.8 million.

Yes, $3.8 million to $3.9 million.

$3.8 million to $3.9 million.

And then for Q1, just out of curiosity, that's $0.10 of charges that you anticipate on the $0.33 to $0.36 GAAP number, so effectively the pro forma number is $0.43 to $0.46, is that right? In Q1 of 2013.

In Q1 of 2013? The $0.33 to $0.36? No, it does not have $0.10 in it. The $0.33 to $0.36, the timing of those charges, the $0.10 that we will see in 2013, about $0.06 of it is in the first quarter. $0.05 to $0.06 in the first quarter, and there may be $0.01 or so in -- by the time we get to the third quarter, but we should start seeing benefits that kind of offset the second half.

Okay, perfect. Thank you very much.

Thanks. Our next question comes from Avinash Kant with D.A. Davidson & Company. Please state your question.

Good morning, Dick, John and Mike.

Good morning. Thank you for calling.

A few questions. So maybe John can give that to me. Could you give us that total impact of facility-related charges in 2012, and how much do you expect from that in 2013?

If I understood your question, of the $0.20 we recorded $0.13 in 2012. We've got another $0.10 coming in 2013, $0.06 in the first quarter in 2013, and the benefit of $0.20 comes in 2014.

So you'll have -- you had a $0.13 in 2012, and you will have $0.10 -- you'll have basically a net net zero impact in 2013, right?

Zero net impact 2013, and a benefit of $0.20 in 2014.

Okay. And could you talk a little about metal price pass through? Like, is it all pass through right now? How much of your copper is pass through? How much of the rest of the material is pass through?

All pass through.

All pass through?

All pass through.

Okay. And the timing of the pebbles plant in terms of -- I believe this is expected to have some impact from margins. Which way, positive or negative, in the first half and the second half?

Well, the second half will be stronger than the first half, in margins in that segment.

But we'll see -- even in the first half will be better than last year, because it continues to ramp up.

Okay. So basically we can expect margins to continue to grow through the rest of the year as this plant comes online.

That is correct.

Okay. And of course, ToughMet, we have talked a lot about this one, and this has been a growing product. Can you give us some idea about how big it is right now?

How big ToughMet is?

Yes.

It is probably in the range of about $40 million in sales.

How much?

It is probably around $40 million in sales.

On an annual basis?

Yes.

40 million?

Yes. And that was roughly what it was last year, so it will grow again this year.

Perfect. Thank you so much.

Thank you. Our next question comes from Marco Rodriguez with Stonegate Securities. Please state your question.

Good morning, guys, thanks for taking my questions. Just wanted to -- most of my questions have actually been asked and answered already, but I just wanted to follow back up with one of the previous questions on the defense and science segment. You guys are obviously indicating a stronger 2013. Can you maybe just provide a little bit more color why your confidence is there despite the sequestration? And I understand that the pebble -- or the rebuild is obviously not going to be affected.

Well there is a couple things. Again, if you think about where we are playing, and where we are playing is really not what I call on the ground military. We are playing in the space, in space for optical devices for where you need to collect information, targeting reconnaissance, surveillance. So that's where we are right now.

Those programs are still being funded. They were funded well toward the second half of last year, so if you have kind of a program that is already well funded, well underway, it is unlikely to have an impact on a near term sequestration. It certainly could have an impact by the fourth quarter.

Now in addition to that -- so again, our materials are in pretty much all the flying devices that are around with the drones and any kind of military aircraft on optical devices. We've also developed a new technology that greatly enhances the capability of -- of optical capability on numerous devices. And we uniquely have that technology, and that will be growing next year. Period.

Got it.

Because of the demand for it.

Got it, okay. That's helpful. And then in terms of the charges, the dollar amounts, I am assuming those were all in cost of goods?

Actually, no. The inventory charge certainly was. The consolidation charges was the facilities, a large portion of that was down in the other net line, associated with equipment write offs, et cetera. And then there were smaller dollars in the SG&A line as well related to severance.

Can you give us a sense of the dollar amounts that were in SG&A?

It was a little over $1 million, $1.5 million I believe in SG&A.

Okay. And then real quickly, last question I have, on the EPS range for fiscal year 2013, can you kind of, just high level, give us what the major assumptions that drive the bottom part and then the high part of that range?

I think the real difference there would be the level of -- are you talking about the quarter or the year?

The year.

The year. It is really centered on the level of business, the -- we are assuming that the execution of our programs on both ends of that are successful. So what drives the low and high end is nothing more than business level.

Got it. Great, thanks a lot, guys.

Thank you. Our next question comes from Rob Young calling from William Smith. Please state your question.

Good morning, guys.

Good morning.

I just have a couple of quick questions. Will the facility consolidation charge affect sales efficiency at all or sales to foreign entities?

Actually, if anything, once consolidated, will be a lot more effective in being able to support customer demand from the consolidated facilities, perhaps even on a more timely basis. So no, I wouldn't -- certainly there will not be any negative impact. We would have to manage through that, because we are consolidating, as you well point out, but we don't anticipate any negative impact from that.

Okay, so that entire $0.20 benefit that you see in 2014, I think is what you said, that should essentially all flow to the bottom line with no top line impact?

That's right.

Okay. What's the beryllium breakeven point on a segment basis? I mean, is this -- is the $17 million quarterly run rate, is that kind of a rough breakeven going forward for 2013 and beyond, or is it something a little bit higher or lower than that?

It is going to -- the breakeven point will come down as that plant ramps up and we get more production through the facility.

Yes, it should be significantly less than that.

It should be significantly less? Okay. And then just lastly, John, do you have the D&A in CapEx for the fourth quarter? I'm not sure if I missed it or --?

No, I commented only on the year. I would think that you are not going to see significant swings quarter to quarter in that number. Maybe $1 million or so one way or the another on the CapEx. Maybe we start out a little lighter, but not significantly different, no.

Sorry, I was referring to the quarter of Q4 2012.

Do I have in front of me the fourth quarter 2012 D&A and CapEx?

Yes.

No, we don't have that.

I'm sorry we don't have that, but we have the annual figures there. We would have to squeeze that out.

I don't have it [around].

Okay. All right, great, that's all I have. I appreciate it. Thanks.

Sure.

Our next question comes from Mark Parr with KeyBanc Capital Markets. Please state your question.

Thanks a lot. Good morning.

Good morning, Mark, how are you?

I'm doing fair. It is still raining.

Cleveland, man.

I know, it's the best. It is always the best. I just -- one question related to the value add revenue for the year. I believe in your first three quarterly commentaries, the numbers I think were first quarter were minus 10, second quarter minus 21, the third quarter minus 26, and then the fourth quarter came in at plus 4. I'm just looking for some help trying to reconcile that is coming up with minus 3% for the year.

You are talking about sequential? Over prior years, or you're talking sequential?

I believe it is prior -- it is year-over-year. Because the minus 3 was a full year versus the full year, right?

That's right.

And I think -- these other numbers I think were year-over-year for the quarters, and I am just -- at least -- I'm sure that there is -- there may be a difference, and it may be in the way that you came up with the number, but I am just trying to reconcile. Do you -- ? --

Yes, I don't have it here, Mark, but certainly you can't really take those minuses and throw them altogether that way. And you just hit the nail on the head really as to why. You do get significant changes in metal from period to period, metal in sales and metal mix. And you also get significant changes in period to period with metal source, the source of metal in those numbers.

So without trying to break it out here since I don't have it in front of me, I really can't answer the question directly except to say that that's probably the cause.

All right. I'm just -- those are just numbers that came out of your commentary that were net of pass through metal prices, which I think was another way of sharing the value add.

Right

Another question I had on the CapEx for this year, can you give us some idea of how much the ToughMet expansion is, or how much of that is maintenance as opposed to growth CapEx?

Well, the ToughMet expansion is only -- I think it is about $2.5 million. So that's all that is. We actually -- for that expansion we actually -- when the facility was first built, it was built with expansion in mind, so, actually the foundations and structure was already there. We just had to pop in the equipment. It was good thinking people 10 years or 15 years ago.

And then we have several other growth initiatives that the capital is supporting this year, including a very unique technology in our optics division. It is called wafer level production, which gets into -- we are kind of the leaders in that space right now. So we are pretty excited about that.

We are just bringing up a new plant in our -- new facility, production facility for a really new smart technology for meters, and it is a facility in our technical materials division in Rhode Island. So we have some pretty unique capital being spent this year to help some very specific growth initiatives and some product lines. So I would have to say that we probably have a split, something in the range of -- probably half of our capital is in for growth and the other half is for maintenance and environmental.

Okay. And then if I could just ask one more, please, could you give us an update on book to bill for the fourth quarter and how you are seeing that unfold for 1Q thus far?

Let's -- we'll dig into it --.

Well, book to bill is about flat in the fourth quarter.

So it was one?

Yes, that's it.

In the fourth quarter it was one.

You think it has gotten any better than that here as you moved into 1Q?

Yes.

And that's due to prior -- is that more due to prior year slow down, or is that due to a sequential uptrend in what you have been seeing here?

Sequential uptrend, from the third to the fourth to the first.

Terrific. Thanks, guys. Good luck with the first quarter, and I'll -- we can talk -- John, we can talk later about that reconciling those other numbers. Thanks.

Sure, that works.

(Operator Instructions). Our next question comes from William Florida with Advisory Research. Please state your question.

I apologize for coming late to the call. I heard you talk about CapEx, and if this was already covered, I apologize. Did you talk about generally free cash flow for the coming year? Whether the -- how much cash the business will generate?

Yes, the comment that I had made was we would expect debt to drop between $30 million and $40 million in 2013.

Thank you.

Thank you. Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please state your question.

I am all set, guys. Thank you.

There are no further questions at this time. I will turn the call back over to management for closing remarks. Thank you.

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.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.