Materion Corp (MTRN) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Materion Corporation third-quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer question will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is my pleasure to introduce your host, Mike Hasychak. Thank you, sir, you may begin.

Good morning, this is Mike Hasychak, Vice President, Treasurer, and Secretary. 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 2013 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 November 8 by dialing area code 877-660-6853 or area code 201-612-7415, conference ID is 100466.

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 taking the time to join us this morning. As I normally do, I'll begin with a review of sales, earnings, and operating margins. That will be followed by a review of the changes in business levels by key market. Here I will compare the third quarter of 2013 to the third quarter of the prior year, as well as sequentially to the second quarter of the current year.

Then following brief comments on the balance sheet and cash flow, I will review the previously announced initiatives to reduce costs and improve margins. I will conclude with a review of the outlook for the remainder of the year. Throughout my remarks, I will reference and expand a bit further where appropriate on the conditions outlined in our October 7 release, those being the conditions that led to the weaker than initially expected third quarter.

For those on the call that are unfamiliar with our reporting, I want to bring your attention to the non-GAAP value-added sales and margin reporting by segment that is included in the press release. This is a supplement to the usual GAAP-based reporting and includes a reconciliation to GAAP.

Also included are the related comparisons to the third quarter of the prior year and the second quarter of the current year. We began providing this information with our first-quarter earnings release. The additional data and related metrics are very relevant because in our businesses, the cost of gold, silver, platinum, palladium, and copper are, for the most part, passed through to customers.

And as a result, movements in the price of these five pass-through metals can noticeably influence reported sales and margins expressed as a percentage of sales, while usually having a limited effect on margin dollars and underlying profitability.

Value-added sales deducts the cost of these five pass-through metals from sales and removes much of any potential distortion in the interpretation of changes in business levels or profit margin percentages caused by changes in the values of the metals sold.

Changes in business levels or margin percentages expressed as changes in value-added sales would therefore be primarily due to changes in the volume, pricing, or product mix. Throughout my briefing this morning, information on business level or margin changes, whether for the Company in total or by market, will be expressed in this context.

Let's begin. Sales for the third quarter were $275.4 million, down $15.2 million or about 5% from the third quarter of the prior year. As was the case with our results for the first and second quarters of this year, our third quarter provides another good example of why value-added sales reporting is so relevant.

Value-added sales for the third quarter were about $148.7 million, down $3.6 million or 2% from the third quarter of 2012. What would have appeared to be a $15.2 million or 5% decline in business levels is more accurately expressed as a decline of $3.6 million or 2%.

As we reported in our October 7 press release, the year-over-year comparison was affected by the delayed high-margin defense and nuclear science shipments. These delayed shipments totaled approximately $3.5 million in value-added sales, and affected earnings in the quarter by about $0.06 per share.

Comparing sequentially to the second quarter of the year, business levels were down $10.6 million or over 6% in value-added terms as opposed to being down 10% on a GAAP basis. The sequential decline is related to the shipment delays, seasonal factors, and weaker than expected market conditions in general. Each of those factors represents about one-third of the change. I will review these specific changes in more detail by key market a bit later.

Diluted EPS for the quarter was $0.24 per share. The difference between the reported $0.24 per share and the estimated $0.20 per share noted in the October 7 press release is primarily due to a lower effective tax rate. This $0.24 per share compares to $0.39 per share for the third quarter of the prior year and sequentially to the $0.43 per share earned in the second quarter of this year.

Earlier estimates for the quarter were in the range of $0.38 to $0.40 per share. Three factors combined to drive earnings to levels that were well below the earlier estimates. These were identified in our October 7 press release and include the weaker than expected overall market conditions, certain high market shipment delays, and weaker manufacturing performance.

The market weakness was in our industrial components, defense, and consumer-electronics markets. The shipment delays were in two areas, in beryllium-based defense and nuclear science applications and in defense optics. The impact of those factors was offset in part by continued solid business levels in medical, automotive electronics, and commercial optics.

Our ToughMet products and phosphors for LED also continued to perform well in the quarter. A lower tax rate also helped to offset some of the impact. To frame this, each of the three factors negatively affected earnings by about $0.06 per share. The discrete tax rate difference provided a $0.03 per share benefit.

These three factors resulted in gross margin and operating profit margins for the quarter that were abnormally weak and well below historic levels.

Gross margin as a percent of sales was 16.4% in the third quarter, a 160 basis point drop when comparing to the third quarter of the prior year, and 85 basis point drop when comparing sequentially to the second quarter. While below our norms, gross margin expressed as a percent of value-added sales did remain above the 30% level at 30.3%. This compares to 34.4% in the prior year quarter and sequentially to 33.1% in the second quarter. We expect the run rate to return back to more normal levels in the fourth quarter.

Operating profit was 4% as expressed as a percent of value-added sales, also well below our norms and again, due, to the same three factors. The prior year was 8.8% and the second quarter was 8.4%. Here as well we expect to be back to the normal levels on an adjusted basis in the fourth quarter.

While operating profit as a percent of value-added sales improved slightly in the advanced materials segment when comparing to the second quarter sequentially, margins did remain under pressure and below historic levels in this segment.

There are also three primary factors that drive this. The first is a weaker mix, which was driven by lower shipments of optics into the defense market. The second is ongoing pricing pressure on precious metal products and services. The third is lower margins in our shield kit cleaning and refine operations.

In these operations we are paid for services through the retention of a portion of the metal that we recover, which is standard industry practice. The unusual and significant drop in gold prices that occurred in the second and third quarters of this year compressed the margins of this portion of our business. A less material factor was the impact of the gold price change on our metal handling fees.

The lower sequential operating profits and profit margins as a percent of sales in both the performance alloy and the beryllium composite segments were driven by lower volumes, some of which is seasonal, the specific shipment delays, and by higher costs. In performance alloys, shipments and margins were negatively affected by the lower volumes and higher costs due to an extended maintenance outage.

In beryllium and composites, higher costs were incurred earlier in the quarter due to the use of higher-priced material purchased from outside the Company to supply the production needs of the business as the new beryllium pebble plant ramps. This business was also negatively affected by lower defense demand and the extended maintenance shutdown, as well as lower yields in the quarter.

Let's now review the changes in value-added sales by market. As I noted earlier, value-added sales when compared to the prior-year levels were down approximately 2% in the quarter. Markets were mixed when comparing to the prior-year third quarter.

Shipments to the medical, automotive, and energy markets were up significantly. Medical was up 24%, automotive was up 23%, and energy was up 13%. On the other hand, shipments were lower to the telecom infrastructure and the industrial components and commercial aerospace markets. The lower business levels in these areas were not unexpected.

Telecom infrastructure was down 13%, investor components and commercial aerospace was down about 10%, primarily due to weaker conditions in industrial applications.

Business levels in our consumer electronics market and in our shield kit cleaning services businesses were below prior-year third-quarter levels as well. Consumer electronics was about 5% lower and services was 20% lower. The factors here are in part related.

Over the past several months, LED customers have been reducing the amount of gold consumed in their processes, thus reducing demand. In turn, the amount of gold we recover while servicing the customers' shields has also declined. We believe that this trend has reached a steady state and we expect the growth rates in this market segment to resume.

When comparing sequentially to the stronger second quarter of the year, value-added sales were up 30% in medical but down in all other markets. With the exception of the unexpected shipment delays, much of the sequential decline that occurred in this segment's remaining markets was expected. And it was in part due to seasonal factors and in part due to known changes that were occurring in the LED market.

Services and consumer electronics were lower by 23% and 5% respectively. Again, these are somewhat linked.

Telecom infrastructure was down 16%, and automotive electronics was down 11% sequentially from strong second-quarter levels. Note, though, that some of this is seasonal, and both were coming off of a very strong second quarter. The second- and third-quarter business levels in automotive were the strongest in the past several years.

Defense and science was down 18% due to the shipment delays, and industrial and commercial aerospace was down 11%.

Let's now turn to the balance sheet and cash flow. Both are attached to the press release. The Company began the year with a strong balance sheet. For the year to date, cash provided by operating activities has been positive, and debt has declined to the $88 million level.

In the second quarter of this year, the Company announced a 7% increase to the dividend, bringing the quarterly dividend to $0.08 cents per share. The fourth-quarter dividend was announced in this press release, and it will be paid on December 3 to shareholders of record on November 15.

Before moving on to the outlook for the balance of the year, I'd like to reiterate the cost reduction and margin improvement actions that the Company is taking. Through the course of the year, we have continued to examine our product portfolio and we are continuing to adapt to market realities. As we announced on October 7, the Company is planning to take additional facility and product line rationalization actions during the fourth quarter.

These will further reduce costs and significantly improve margins beginning in 2014. These actions will result in a charge of up to $0.15 per share in the fourth quarter, approximately 25% of which is non-cash.

These are expected to favorably impact 2014 performance by up to $0.30 per share. The $0.30 per share is approximately $9 million in cost reductions that will appear in the P&L beginning in the first quarter of 2014. These are about equally split between manufacturing costs and SG&A, and they will expand operating profit margins in the range of 150 to 200 basis points.

While we would like to be able to provide more specificity at this time, due to the sensitivity of these initiatives both inside and outside of the Company, we cannot; nor can we respond to any related questions that you might have specifically to these initiatives during the Q&A portion of this call.

I'd like to now turn to the outlook. Order entry did improve as the third quarter progressed, and orders the past 4 to 6 weeks have been well ahead of the early third-quarter levels. The delayed defense and nuclear science orders are expected to ship in the fourth quarter.

We do expect that the shipment of these orders, along with increased shipment levels in the balance of our businesses, will result in the fourth quarter being well ahead of the third quarter. Nonetheless, business levels are lower than what we had expected earlier in the year, and the risk of additional defense and science order delays continues to exist.

I think it's best to characterize our view of the fourth quarter as cautiously optimistic. Excluding costs of up to $0.15 per share related to the facility and product line rationalizations, and assuming no significant change to global economic conditions, we at this time expect earnings for the year to be in the range of $1.40 to $1.45 per share.

Since that concludes my remarks, I'll now turn the call over to Dick Hipple. Dick will provide you with the market update.

Thank you, John. We were certainly buffeted by a myriad of issues in the third quarter. And as John explained, the combination of delayed shipments, an extended summer maintenance outage and softer markets, resulted in performance well below our expectations.

As compared to last year, the markets showing strength were automotive, medical, and energy, and weaker to flat markets versus last year were industrial components, consumer electronics, defense and science, and telecom.

This year we are seeing a different seasonal sales pattern, with the fourth quarter being stronger than the third quarter. Bookings were weaker than expected at the beginning of the third quarter, and bookings improved later in the quarter setting us up for a stronger fourth quarter.

Taking a look at individual markets, there were a lot of puts and takes across different applications in our consumer electronics portfolio across divisions. But we found a truly flat market as compared to last year.

Inside this market we have seen very strong growth of our LED phosphors for lighting applications, and ongoing expansion of our applications in smartphones and tablets with our camera stabilization materials. Counterbalancing that growth are thrifting actions and lower pricing in our precious metal application in the semiconductor space. Plus a disk drive application reached end-of-life. Overall, this market was flat year to year excluding the end-of-life program, and bookings are now picking up.

The energy market was up 13% versus last year, but was down sequentially, an expected short-term seasonal pattern. Bookings are now increasing in this market.

Defense and science was down 16% versus last year, reflecting the delayed shipments. A fairer look would be a flat market eliminating delayed shipment impact. Shipments will be up next quarter as we expect the delayed shipments of the third quarter to be shipped.

The longer-term outlook depends on the upcoming actions in Washington with respect to the current sequestration and whether there will be further defense budget cuts, and what platforms may or may not be affected.

Our automotive market was up 22% versus last year, reflecting the stronger global market and growth of our new applications, particularly with the high-end models such as BMW and Mercedes. Sequentially, we were down, again, a seasonal pattern. We continue to expect good growth from the automotive area moving into 2014.

Our medical market continues to outperform. We were actually up 23% versus last year and up 30% sequentially. A portion of the strength here was due to a higher marketshare that we enjoyed, as a key competitor in the blood glucose test strip coding area had a quality problem.

Our telecom infrastructure market was down over 13% versus last year and was down sequentially. This was driven by strong customer inventory build in the second quarter to prepare for the transfer of our packaging product to Singapore, consistent with our overall strategy to expand our physical presence in the region.

The transfer has gone well, but additionally there has actually been some delays in our undersea sales from customers -- with approved projects -- but some delays completing their own financing for the projects to go ahead.

However, this overall telecom market due to these two special situations is now gaining strength moving into 2014.

Lastly, our industrial markets were down 11% from last year and down sequentially. The majority of this decline is driven by the downturn in the mining industry equipment sales, and to a lesser extent our sales of industrial x-ray windows.

As you can see, we had some turbulent market conditions in the third quarter with some very wide swings. However, the actions that we are completing this year including, one, significant cost reductions; two, structural facility optimizations; and three, our pebble plant running at targeted capacity, will all provide great margin improvement to our bottom line.

Additionally, we expect markets to continue to improve modestly, reinforced with our new product introductions. So as we are entering 2014, we enter it with high confidence for significantly improved earnings. We are ready for questions.

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions)

Martin Englert, Jefferies & Company.

Good morning, everyone. Do you have any other -- more thoughts on 2014, any more detail that you can provide right now?

What kind of detail specifically? We don't have a lot of detail, obviously, in front of this, but what do you have in mind?

Sure. I didn't know if you had outlined any CapEx plans yet or if you have any expectations as far as an earnings range at this point?

No. It would be a little bit premature, we think, to provide an earnings range. We do have some tailwinds developing as we noted in the discussion about the cost reductions and the impact that that will have on year-over-year comparisons, so that gives us a nice lift.

I think the largest factor relative to 2014 is really what will markets do, and economies in general do, and we will have a better sense for that as we turn the corner at year-end.

From a capital perspective, this year we are running a little lighter than target. We will be between $30 million and $35 million in CapEx versus our earlier expectations that maybe we would push closer to $40 million. But we will be between $30 million and $35 million in CapEx this year, and I think that $35 million to $40 million, or $35 million to $45 million, might be the right number to consider for 2014.

I can at least provide you that insight. Hopefully, that helps.

Sure. And as I understand it, the other consolidation, this is one other facility that you are looking at right now, correct?

I'm not sure what you're asking.

Are we looking at another facility? No, we haven't disclosed what we have in mind there, if that's what you're asking.

Okay. So the incrementals that you are expecting from the charges in the fourth quarter, that was going to be from product line rationalization as well as a facility, or is it -- you didn't break it out in any more detail than that?

No, we did not. And that's one of the things we cannot comment on at this time.

Sure. And if I could, one last question there. D&A quarter to quarter looked like it had stepped up some. What should I think of as a good run rate on a go-forward basis?

Depreciation and amortization?

Yes.

In the $40 million to $45 million annual rate.

Okay, excellent. Thank you.

Avinash Kant, D.A. Davidson.

Good morning, Dick, John, and Mike. A few questions. So, just trying to reconcile when you did your press release on October 7, you talked about Q3 EPS most likely coming in at $0.20. And you had comments related to Q4 where you said that it's going to be above the $0.43 that you had seen before.

It looks like, if I look at the full-year guidance that you have at this point based on operating basis, it looks like since that release something shifted from Q4 to Q3. Am I right in my understanding?

No, I would not assume that. I think we've got a stronger Q3 because of the effective tax rate. So maybe a couple of pennies on the tax rate did move from one quarter to the other as we identified the lower rate, but we still expect the fourth quarter to obviously be one of the strongest if not the strongest quarter of the year.

And so you can infer from the $1.40 to $1.45 versus the $1.00 year to date that we are looking at $0.40 to $.45 in the fourth quarter. And I did throw the caution -- above $0.43 would be the strongest of the year, and I did throw the caution into the conversation relative to the defense pushouts. Those could always occur.

So maybe incrementally, you are a little more cautious on the defense pushouts for the Q4?

Well, I wouldn't say incrementally. I would say that we have certainly seen that happen over and over again since sequestration began. And we don't have any confidence that that is going to end. But the defense business is lumpy orders as you well know, and high-margin, and if anything occurs -- and we do have a couple of big shipments scheduled for the fourth quarter -- if anything occurs to delay those late in the fourth quarter, if anything occurs to delay those, we would have maybe a little headache.

Now, one other question, so all the cost-cutting initiatives that you have taken with you have taken, where you had an earlier effort where it was going to add roughly $0.20 to earnings and now the new one most likely around $0.30. So we are looking at kind of $0.50 in earnings growth just from cost-cutting initiatives in 2014.

What kind of revenue levels or business levels do you need to be at to realize those benefits?

Let me just clarify something. The $0.20 from what we discussed a year ago, we anticipated a push this year, $0.10 of cost and $0.10 of benefit. As this year, 2013, has unfolded, the cost was a little bit lower than what we had estimated then. So we actually had a benefit in the 2013 numbers from those initiatives that we took a year ago.

The costs were a little bit lower and the benefits did begin. So year over year the number isn't $0.50; year over year the number is closer to $0.40 from all of those initiatives. Okay?

Now, relative to demand levels, the way I would think about it is we are going to realize those even at current demand levels -- that's additive -- to current demand levels. So if business grows significantly, we pick up additional leverage even further from a margin perspective.

But if the business were to be down, you may not realize this $0.40, right?

If the business were to be down, there may be lower margins. I mean, that $0.40 might be there because those costs are gone, but --.

On a relative basis (multiple speakers.

-- on a relative basis, we'll be better.

Yes, it'll be better, exactly. (multiple speakers).

That was the whole idea, to make the Company more efficient.

Right, right. Also, if you could give us a little bit of an idea about the value-added sales in some of the key segments like consumer electronics in the quarter; what percentage of sales was that? Maybe you can break down maybe the top three or so segments; in consumer electronics, industrial components, and automotive. (multiple speakers)

As a percent of our total value-added sales?

Value-added sales in the quarter, yes. If you had all, that would be great, but where you can.

Yes, we can give you that roughly. As you know, it will be in the next update that we put out on the web, which will happen in the next few days. But we can give you a rough estimate on that. I think you're going to see there's not significant change there.

Consumer electronics value-added sales were about 28% of our total in the quarter. That's been fairly consistent over the last year and a half or so. Industrial components and commercial aerospace is our second-biggest market at around 17%. And then you are looking at automotive, medical, and defense are all around in the 10%, 11% type range.

Okay. Perfect. Just finally, I want to make sure I checked this -- you said the value-added operating margins in the quarter were 4%?

Yes.

And the gross margin was 30.3%?

Yes.

Thank you so much.

Ed Marshall, Sidoti.

Good morning. So the first question is, I don't know if I missed it, but the book to bill on AMT; and I'm particularly interested in the consumer electronics piece of the business.

We do not have that information available, Ed, and particularly by market.

Okay. Did you see a pickup like you normally would in the September timeframe for the December build, for the holiday build?

For consumer electronics in general, yes.

You did.

Yes.

Was it on par with say last year, or was it stronger?

No, actually, that's a great question. In general terms, the order book lifted the last six weeks about the same percentage as it lifted a year ago, and in this case about 18% to 20% lift in the last six weeks compared to the first four and five weeks of the quarter.

Now that's again coming off of a low base. Last year the base wasn't quite that low, so I'd say in general terms compared to a year ago, although we have the lift, I would say in general that the market conditions aren't as strong.

Are not as strong. Okay.

Are not as strong. And I think if you looked at some of the news releases coming out from the semiconductor guys and the supply chain that feeds into consumer electronics -- the TriQuints, the Skyworks of the world -- they are all lowering estimates for their fourth quarter from where they had them just three months ago.

And sometimes we're a little bit of a leading indicator there and we saw some falloff in that order rate, and signaled it obviously on October 7. So I think what we are seeing, we are confident that we've got the business that will help get us to our fourth-quarter numbers. But they, I think, are signaling weaker markets.

And then, you talked about shipment delays surrounding defense and nuclear markets, and I think you quantified it as saying 40% of the falloff.

It's about $3.5 million of value added sales, and about $0.06 a share was the impact.

But it looks like, you said on the delta change, from the sequential change was about 40% was attributable to the shipment delays. That's about $12.5 million, and I guess conceivably, though, that would be running through both AMT and beryllium segments?

Yes.

And I guess that $3.5 million, is that the beryllium piece and the remaining piece is the AMT?

That $3.5 million is the value add. The sales piece would be much higher than that.

The $12.5 million is what the Delta comes out to, so you're saying --.

I don't have the sales number in front of me, but I think the majority of it would be that.

And that $3.5 million would run through both businesses; and do you know the split between the two?

It's roughly, one-third, two-thirds.

One-third AMT, two-thirds beryllium?

No, the other way around; one-third beryllium, two-thirds AMT.

Okay. So about $1.2 million pushout on the beryllium piece.

Yes, maybe a little bit higher. It's roughly those numbers, roughly that kind of percentage; 40%/60%, one-third, two-thirds, in that range.

And how long was the shutdown versus expectation?

Historically, we have shut down in the summer for a longer period of time scheduled, a longer period of time. We had planned to be down for about a week for some maintenance in August, and that extended for a couple of weeks.

We got into a maintenance situation where the repairs grew as we opened up the equipment versus expectations. So it took a couple of extra weeks to get that up and running.

And given the lower demand levels, we took the opportunity to do some other things while we were down for maintenance.

Okay. The pushouts, as we look kind of to the September quarter, and that's usually when the Defense Department has its big-budget flush. And it seemed as though some suppliers had some big orders in the September, the fourth quarter of the US fiscal year.

Does it concern you at all that you had pushouts? What's really happening there? Is it more of just a timing delay, or is it something more that we should be paying attention to? It looks like the normal budget flush did happen this year.

Yes, I would say there's nothing at this point in time that I would call in the near term giving me any concerns. In other words, that you might have things floating between quarters but they'll ship. I'm not worried about anything that we have in our book getting canceled, if you will, which is the most important issue at this point.

How long does that book run to? It's a pretty short lead time, right, a couple quarters?

Well, our longest leadtimes are in our beryllium and composites business for defense, so that we have a pretty good outlook. I'd give it 6 to 9 months we have a pretty good view of that.

So as we look kind of fourth quarter, even if you add that $1.5 million in sales back, or even if it's slightly more than that for beryllium and composites, what does the operating margin look like in that business? Because even with that full $3.5 million, it doesn't look like you would make up -- kind of get to where you were in Q2. But then I guess some of that was the slowdown on the maintenance as well in the quarter?

You had -- go ahead.

When we look at the business, I think the guidance for -- the longer-term guidance was $6 million in operating income, going to $8 million in operating income over time. And the run rate would be there in Q4 for that $6 million.

Do you kind of still hold to that expectation for both the fourth quarter and even to 2014, or has that changed slightly based on what's going on in that business?

I think that the $6 million to $8 million is a swing number, and that's back when we had the non-sequestration kind of levels forecasted in the business.

If you look at the near term, the second quarter was abnormally high compared to the first quarter of this year due to some of the pushouts that occurred in the first quarter making it into the second-quarter shipment schedule. The third quarter was affected by the falloff in the demand, the pushouts, the higher costs that we talked about from the use of purchased materials, which in effect also affected the yields.

So we threw off that loss that you see in the third quarter. Coming ahead to the fourth quarter, those factors should be behind us and we should be back to breakeven level at a minimum in that business. Again, pushouts become a question for us that we should be back to where that business is not the kind of bleed that it was the past six to seven quarters.

Looking into 2014 and beyond, yes, we think -- again, we believe and expect, fully expect with business levels returning, we will start to see some historic profit levels in that unit.

The question really becomes, Ed, as you know, when do we get the volume now because we are passing through the point where production capacity and the quality of the output is not the drag on the earnings; it's the volume.

And you mentioned in a previous question about the D&A costs, I think it was $2 million layered in sequentially, and I guess that's a $0.07 drag to earnings. Is that a portion of the beryllium business coming online? And as you ramp up that business, that new D&A kind of layers in, or where is that coming from?

Conceivably, I would assume if you are cutting fixed costs or facility costs, that D&A should be dropping off.

That additional D&A was actually mine amortization, and that's the timing coming through when we are pulling ore out of the ground at our Utah mine. It's unrelated to the beryllium plant. The depreciation and all the other fixed costs associated with running the pebble plant have been in our P&L since the fourth quarter of last year.

So it's the drawdown of say useful life on the mine, is what you're saying?

It's the cost of the ore that we are pulling out of the ground.

And then finally, what was the discrete item in the quarter? You said in the tax rate; could you quantify that?

We quantified the discrete items at about three cents per share. Jim, do you want to comment on specifics?

Yes, there were actually several items. Probably the biggest two were we finalized our 2012 federal tax return at a liability lower than what we had estimated in the last year, based on some of the work we had done during the current year.

There was also an adjustment to our tax reserves that we had put in place through the expiration of the statute of limitations.

Okay. Thanks.

Marco Rodriguez, Stonegate Securities.

Good morning, guys. Thank you for taking my questions. Most of my questions have actually been asked and answered, but just a couple of follow-ups here.

Just to make sure I understood some of your answers to a previous question in regard to the benefit of EPS; it was about a $.50 benefit to EPS in 2014, but did I hear you correctly that $0.10 of a previous loan was recognized in 2013. So it's going to be just a $0.40 increase in 2014 versus 2013?

Yes. We are saying the tailwind year over year would now be $0.40 as we've seen lower costs and more benefit in 2013 than we originally anticipated.

Got it. In regard to the restructuring efforts you are taking here, I believe also you had implemented a procurement strategy that you are going to be implementing across the Company.

Is that part of all this benefit, or would that be something incremental once it's complete?

Well, that's ongoing and has been for a year and a half, and it's incremental quarter after quarter as we progress. It is not part of the $0.40.

Got it. Okay. Then in terms of the timing, if I heard you correctly, again in Q1 2014, we should see that full benefit of the $0.40; is that correct?

It will ramp. It will largely be there in the first quarter.

I think we will see full impact in the second. The first quarter will be transition.

Okay. And then in regards to the weak macroeconomic conditions, has that brought any other interesting M&A candidates to you guys? Can you talk a little bit about that?

I'm not sure I understood the question. Can you try again?

Sure. Given the weak economic conditions, I'm just wondering if there's some competitors out there that are struggling a little bit more than usual, and hence might be a little bit more open to being acquired.

Well, I don't know the specific answer to that question. Sort of the flow of opportunities, which is as you know has been a primary focus of ours to grow our EPS organically, as well as through acquisitions. I think the opportunities are there. They're as strong as they've ever been. But I don't foresee anything right now that is imminent, but the flow is good.

Okay. And lastly here, just wanted to make sure I understood on the beryllium plant. It sounds like given all the issues that are surrounding the federal government, that $6 million to $8 million operating income run rate that you guys were expecting in Q4 kind of sounds like that might be a little bit in question now, just obviously given what's going on with the government. Did I understand you guys correctly?

I mean, it's all going to be -- yes, obviously it's all going to be a function of what the volume going through that plant is going to be, and so that's still yet to be determined.

But from where we are, we will have a significant improvement just simply for the fact of the fundamentals that are operations and lower costs that we have from the facility.

Got it. And last quick question, just kind of a housekeeping item here. If I wrote this down correctly, it looked like on the operating expense side sequentially, the other expenses kind of picked up pretty significant from the $3 million level to the $4 million level. What was driving that?

The main item there was that we renewed our consigned metal agreements, and we obviously had bank fees associated with that, with renewing those agreements out for three years. So there was close to $0.75 million of bank fees associated with that renewal.

One-time.

One-time, got it. Thanks a lot, guys.

(Operator Instructions) Brad Evans, Heartland.

Gentlemen, good morning. You all know, we're the large shoulders of the Company. We have a great deal of confidence in the team. That's the first point I want to make. And the second point I want to make is that we have a great deal of confidence in the business over the long-term, notwithstanding short-term volatility, within the business that either be company specific or macro driven. So I want to put that on the table.

So we are definitely on the same team and we've got a lot of confidence where the Company is headed. But just listening to this conference call, it just drives home the point that make Materion is an incredibly volatile and difficult business to understand. Whether the market conditions be favorable or hostile, the level of complexity in the business is never going to change.

It's hard to understand. I mean, my God, in some instances you have correlation to gold, gold mining stocks. That just tells you how the market has a hard time understanding exactly how you create value for shareholders.

So we understand the market's been turbulent. Some of the opacity and difficulty in understanding the business is somewhat self-induced. We have to be clear about that. And that's because of the rebranding, and we are now into another restructuring program. So the market has a hard time digesting that and understanding what exactly is happening underneath the surface when you conduct multiple restructuring programs.

So we appreciate your efforts to cut costs, but you have to understand that does create concern with the street, generally speaking.

And then the last thing I will just tell you is the M&A that you've transacted several years ago, those transactions still I don't think are being reflected in the value of the Company. So Materion is a 12-cylinder engine that is running on two or three cylinders today.

There's a lot of upside from an earnings perspective. You guys are a cash flow machine, which we absolutely love. Your cash flows are great. The earnings have been volatile. There is a lot of upside in earnings. We see it, we know it's there. And for that reason we just urge you to continue on your path of maintaining a fiscally responsible balance sheet with low debt.

We applaud you for your balance sheet. We applaud you for the dividend. But we think right now the best use of free cash flow, gentlemen, is for you to be buying back stock and perhaps doing it aggressively.

The market is having a hard time understanding your business. It's not valued relative to its intrinsic value. M&A activity is going off at extremely high multiples. You are very depressed at 6.5 times next year's EBITDA. We urge you to buy back stock. I think it's the best thing you could do for your long-term shareholders. And that's really all I had.

Okay. Well, Brad, thanks for your comments, and we appreciate your comments. And you have been open about them on a regular basis and we respect that.

As you know, capital deployment options are reviewed with our board on a regular basis, and we have openly shared our view and the position of our board on the choices in the past as you have expressed your views.

As the Company's transformed and grown over time, we have pretty much, as you indicate, we have grown our cash flow. And as our gas flow has developed, our first priority was to create and maintain that strong balance sheet that we do have, and we do continue to focus on just that.

Our second priority has always been to deploy our capital to support the growth and to generate the additional EPS that we have generated from operating sources principally. This would include investing in accretive augmentations of our technologies and our markets to add to the product portfolio and the basket of technologies that we today have, which in the end has validated less volatility and not necessarily more as time has gone on.

And those do remain our priorities. We believe that deploying capital for operating EPS growth is the best over the long haul. And our success over time has allowed us to take that one additional step that you've also advocated, and that is distributing cash to the shareholders in the form of a regular healthy quarterly dividend that hopefully we can continue to increase on an annual basis. We added a dividend just six quarters ago and we've increased it once since.

As you know, we are not debt free. We do have $88 million of debt, and we do not have excess cash to deploy at this time, nor do we believe it's appropriate to lever up to buy back shares aggressively at this time.

Our primary focus continues to be to grow the EPS organically and through acquisitions. The opportunities in both areas are as strong today as they've ever been, and at least for the near term I don't foresee any change in the strategy in the Company.

We appreciate your comments about the things that we have done, and we're going to continue to work hard to move that multiple up and to return to the shareholders what they deserve for their investment.

Yes, I think just to be clear, we would not advocate you not invest in the business organically to drive future growth. And I think tuck-in acquisitions over time make a lot of sense, but the payoff of past acquisitions is not reflected in your earnings today, nor is the underlying earnings power of the business.

So we would argue that for you right now to be looking at acquisitions on a large scale is probably potentially shareholder value destructive. And the opportunity for you to just grow, to leverage the earnings part of your existing assets will drive significant shareholder value.

And if you can meaningfully move the denominator in that earnings-per-share calculation, meaning shrink the share count with free cash flow, sweat your assets and have them be very mindful on how you deploy capital on a CapEx basis, you can drive a lot of shareholder value.

So I do -- our opinion has not changed. I think a buyback of some magnitude makes a lot of sense for long-term shareholders. So we will agree to disagree here, but you have a lot of opportunity to grow shareholder value if you deployed capital appropriately. Thanks a lot.

Okay. Thank you.

Rob Ammann, RK Capital.

Yes, just curious what the estimated tax rate will be on a full-year basis? Will it be around this kind of 22% level we've seen year to date?

The rate in the fourth quarter will be 24% to 25%, and then I think for now for planning purposes I would suggest the rate in 2014 might be 29% to 30%.

Great. Thank you.

Okay, and it seems we have no further questions at this time. I'd like to turn the floor back over for any closing comments.

Sure, 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 area code 216, the number is 383-6823. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. You make disconnect your lines at this time, and thank you for your participation.