Materion Corp (MTRN) 2013 Q4 法說會逐字稿

Greetings, and welcome to the Materion Corporation fourth quarter and year-end 2013 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Michael Hasychak, Vice President, Treasurer, and Secretary. 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; Joe Kelly, Vice President of Finance; and Jim Merritt, Vice President and Corporate Controller.

Our format for today's conference call is as follows. John Grampa will comment on the fourth quarter and full-year 2013 results and the outlook, and Dick Hipple will give a market update and comments. Thereafter, we will open up the teleconference call for questions.

A recorded playback of this call will be available until March 14 by dialing area code by dialing 877 -- the number is 660-6853 or by dialing area code 201 and the number is 612-7415, conference ID number 13575400. 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 his comments.

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

This morning we will deviate somewhat from our traditional agenda to allow time up front to review the events that led to yesterdays filing of the Form 8-K. That filing identifies a necessary correction to the reported results of two of the Company's earlier quarters of 2013. Of particular note is the correction to the second quarter of the year.

Following that review, I will then return to the traditional agenda and review the results of the fourth quarter, including a review of value-added sales by market, margins, and more detail on cost and benefit of the facility consolidations and product line rationalizations, our cash flow, and the stock repurchase program that we have initiated. I will also add some color on the performance of the Advanced Materials Technologies segment.

I will conclude with an update on the outlook for 2014, which, as you already know, is expected to be much stronger due to the significant progress that the Company is seeing on a number of fronts, including market improvements, new product initiatives, progress with the ramp-up of the beryllium pebble facility, and the benefit of the cost reductions and margin improvement initiatives that were undertaken in the fourth quarter of 2013.

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. There is a good bit of encouraging news on this front.

Let's begin with a review of the Form 8-K. To be clear, nothing that we say or imply during the course of today's call is to make excuses, minimize or rationalize the occurrence of the events leading to this filing. This is an unfortunate event that should not have occurred. You can be sure that we do not take this nor the circumstances that created it lightly, and that we have already taken or are in the process of taking the necessary corrective actions to prevent this from occurring again.

A procedural error in the recording of the results of the Company's regular second and third quarter 2013 physical inventory accounts has created the need to restate the financial statements for these two periods. The procedural error was identified during the year-end review and evaluation of the Company's fourth quarter physical inventory.

The error related to the use of a new report from the Company's existing enterprisewide software system. The system report was accurate. The error was in the use, a misuse of an accurate new system-generated report.

This error first occurred in the reporting of the results of the physical inventory count during the second quarter of 2013 and had gone undetected by the Company's review processes. At this time, and pending the completion of the external audit, the Company believes that the error understated the book to physical adjustment, and therefore understated cost of sales in the second and third quarters of the year.

As a result, second-quarter net income was overstated by approximately $4.8 million or $0.23 per share. Third quarter net income was overstated by approximately $100,000. Third quarter EPS remains at $0.24 per share.

While the error had a year to date impact of $7.5 million pretax as of the quarter end September 27, the full-year impact of the error was $4 million pretax. This $4 million pretax is $2.8 million after-tax or approximately $0.13 per share and is the main driver of the difference between our full-year results of $0.94 per share and our January guidance of $1.05 to $1.10 per share for the full year.

The error was identified following the guidance that we provided on January 14. And the prior quarterly impacts were only recently identified, triggering the filing. The same error, the misuse of an accurate systems report that resulted in the overstatement of our inventory in the second and third quarters, understated our preliminary fourth-quarter book to physical results, and thus the preliminary Q4 results used when providing that guidance.

Attachment 6 to the press release summarizes the restated quarterly and year to date financial information. As highlighted in that attachment, these are currently estimates on our -- and are subject to change pending the final audit.

Over the past several years, the Company has been engaged in initiatives that are significantly improving its internal practices in a number of areas. One such initiative has been the installation of a variety of systems, including enterprisewide systems. Without a doubt, the effort to utilize these systems has upgraded processes, provided better management information, lowered working capital costs, lowered costs, provided information that leads to better pricing and better procurement, and has improved cash flow.

The implementation of these systems is complete at the vast majority of the Company facilities. These systems were installed at the Company's Buffalo, New York facility over three years ago, back in 2010. The new report was implemented in early 2013 to replace a manual process that was historically used in a recording of the results of the physical inventories at this facility.

Again, the new report was accurate. But a procedural error, one that was clerical in nature, occurred in the use of this report, creating the issue. As a result of the error, the operating results of the Company's Buffalo-based business appeared to be in line with expectations while, in reality, out-of-tolerance yields were negatively impacting margins.

Corrective actions are in place and others are in the process of being put into place. These include adding resources to prevent such errors, additional review processes and procedures, and the installation of new capital equipment with upgraded instrumentation and control devices to better monitor purity levels and process yields on a more timely basis. Recent inventories taken at other Company facilities were all within the normal type tolerances.

I would like to now move on to the review of the quarter and the current state of our business. There are favorable developments and good momentum is building.

Reported net income for the quarter was $0.18 a share. Excluding the impact of the costs related to the facility and product line rationalizations, adjusted earnings were $0.34 per share. This was well ahead of our previously provided adjusted earnings guidance of $0.20 to $0.25 per share. As I noted earlier, the majority of the improvement from our guidance is linked better yields and higher margins that were being masked by the earlier discussed inventory count error.

For the sake of clarity, let me again reconcile to the full year guidance of $1.05 to $1.10 per share provided on January 14.

Full-year earnings were $0.94 per share. The error discussed was identified after we provided that guidance, and had a full-year impact of $0.13 per share. Excluding the identification of the error, results were in the middle of that range at $1.07 per share.

On an adjusted basis, fourth-quarter earnings were the strongest of the year and sequentially ahead of the third-quarter earnings by $0.10 per share. A key factor driving the sequential improvement was the shipment of a portion of the beryllium and composites of backlog that developed in the latter part of the third quarter of the year.

I would now like to turn to the facility consolidations and add a little additional color there. The facility consolidation and product line rationalization costs that were absorbed in the fourth quarter totaled approximately $4.9 million pretax, or $0.16 per share, which is in line with the high end of the range for these that we had previously provided.

These are detailed in the reconciliation of tax to the press release as Attachment 5, and are contained primarily within the advanced material technologies segment. The initiatives included staff reductions, facility closures, product line rationalizations, and the consolidation of manufacturing operations at multiple locations within our advanced material technologies segment.

We reduced our Albuquerque, New Mexico-based manufacturing footprint by half by exiting two facilities. We completed the transfer of the majority of the Buellton, California-based operations to our Westford, Massachusetts facility and we simplified the organizational structure throughout the business segment to better serve customers and eliminate redundancy. These initiatives are almost entirely complete and we are beginning to achieve the benefit that we expected.

The ongoing annual cost savings are approximately $9 million, about half of which is from workforce reductions and about half of which is from the facility consolidations themselves. The benefit is approximately $0.30 per share; a year-over-year swing of approximately $0.46 per share when considering the costs recorded in 2013.

I will turn the conversation now to value-added sales. Business levels improved nicely in the fourth quarter comparing to both the prior year and a sequentially to the third quarter. Value-added sales for the fourth quarter were about $157 million, up approximately 4% compared to the fourth quarter of the prior year.

Comparing sequentially to the third quarter of the year, fourth quarter value-added sales were up approximately 6%. The increase in value-added sales when comparing to the prior-year fourth quarter is primarily due to stronger business levels in the medical, consumer electronics, and energy markets.

Shipments into the medical market were up 10% year-over-year, in part due to market growth and in part due to share gain. Consumer electronics was up 12% year-over-year and shipments into energy applications were up 27% year-over-year. The stronger demand in these areas was partially offset by weaker shipments into defense and science, which was down 2% year-over-year, as softness in defense optics offset higher business levels in beryllium and composites.

Automotive and electronics was down 5% from very strong prior-year levels, primarily due to destocking. And telecom infrastructure was down about 9%. When comparing sequentially to the third quarter, about half of the 6% increase is a result of improving conditions in the consumer electronics, industrial components in commercial aerospace, telecommunications infrastructure, and energy markets, while about half of the improvement is in the Company's beryllium and composites segment, again driven by the shipment of orders delayed in the prior quarter.

Sequentially, defense and science was up about 20%, again due largely to the shipments of the orders delayed in the prior quarter. Consumer electronics was up about 5%. Industrial components and in the commercial aerospace was up 4% and telecom infrastructure was up 7%, while energy was up about 30%.

For the full year, value-added sales were down about 1% from the 2012 level of $616 million. The principal driver of the 1% decline in business levels were weaker conditions, especially earlier in the year, in defense and science, which was down 6%; industrial components in commercial aerospace down 4%; telecom infrastructure down 4%; and consumer electronics down 3%. Weakness in these areas were almost entirely offset by increases in automotive, in medical, and in energy.

I would like to now spend a few minutes on margins. In the fourth quarter, operating profit was $5.4 million. Operating profit adjusted to exclude the impact of the facility consolidation and product line rationalizations was $10.4 million, sequentially almost doubled the third-quarter level.

Adjusted operating profit percent of value-added sales grew 300 basis points to 6.6% of sales in the quarter. While not yet back to the double-digit level, this was a solid improvement in the quarter.

I thought it would be useful to spend a minute on the Advanced Materials Technologies segment. The profitability of this segment has been hard hit over the past two years by a number of events, including defense sequestrations that affected demand levels in our optics business; systematic margin compression in our precious metal refine and product business, in part driven by the nearly 20% market price reduction in precious metals; customer substitution of other materials for expensive precious metals in their products in their products because of the relatively high volatility in pricing of these metals; competitive price pressures, particularly in the Asian DLP optics market and in the domestic PVD target business.

In response to these changing business conditions, we have taken a number of actions, including a number of new product initiatives to reposition the business, several of which Dick will cover. We are also investing in new refining equipment and systems to improve manufacturing yields.

We have consolidated our Newburyport manufacturing operations into our Singapore facility to better serve the Asian customer base while lowering our cost structure for these products. We have exited our Buellton, California facility and transferred production of products from this facility to our Westford, Massachusetts-based optics operation. We have consolidated our Albuquerque manufacturing operation from four buildings to two buildings by transferring some of the production to our Buffalo-based operation.

We have closed the Czech Republic shield kit cleaning operation. And, finally, we have streamlined our management structure within the business by eliminating the SBU structure and some internal complexity and consolidating back-office functions. All these actions had corresponding headcount reductions associated with them, and we have permanently lowered the cost of this business.

Heading into 2014 we anticipate $9 million in annual savings compared to the prior year, and actions associated with the restructuring that were taken in the fourth quarter. These savings, combined with the nonrecurring charges taken in the fourth quarter, along with new products and improved market conditions, should have this segment's profitability recovering to well above the $20 million per year level in 2014. Layering in some new product and some continued market growth, we anticipate this segment getting back to the profit levels seen during 2011 within the next two fiscal years.

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 2013 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 and increased in 2013.

The Company's net debt to total capital level further improved in 2013 to 8%. Fourth quarter cash flow was very strong and debt net of cash decreased by approximately $23 million in the quarter, and we do anticipate the strong cash flow to continue in 2014.

This brings me to our share repurchase authorization. In the past, we have committed to considering share repurchases as a component of our capital allocation strategy when we were confident when that the headwinds abroad on by the unique events of the past 18 to 24 months were behind us.

Earlier this year, we announced an authorization to repurchase up to $50 million of the Company's common stock. This reinforces our confidence in the Company's earnings growth, its cash-generating capacity and the outlook for 2014 and beyond.

In the current year we expect to fund our expected organic growth and pursue strategic initiatives while returning cash back to the shareholders in the form of both a dividend and stock repurchases. As noted in the press release, the Company has already initiated repurchases under this authorization and, at this time, intends to continue repurchasing shares, utilizing various methods including open market repurchases.

I would like to now turn to the outlook for 2014. As we noted in the press release, our guidance for 2014 is intact. Business levels entering 2014 are up approximately 10% when compared to the business levels that existed at the beginning of 2013. While order entry is stronger coming into the year, we do expect that earnings for the first quarter of 2014 will be negatively affected by approximately $0.10 per share, given the extreme weather.

Many of our factories are in the Midwest and Northeast and have been shut down for several days already due to the weather. In addition to the related added costs, there are fewer shipping days in the quarter.

The facility and product line rationalization initiatives taken during 2013 are expected to provide up to $0.30 per share benefit in 2014. The full impact on earnings from these initiatives is expected to be visible in the earnings by the second quarter. The beryllium plant, which endured significant startup and ramp-up issues throughout the prior year, is continuing to ramp up at a pace to meet production requirements to support increased business levels in 2014.

These factors, plus the benefit from our new product pipeline, should result in a sequentially stronger second quarter 2014 when comparing to the first quarter and a stronger second half. Earnings for the full year are expected to be well above 2013 and in the range of $1.75 to $1.95 per share, consistent with previous guidance.

To add some additional color, we expect value-added sales growth in 2014 to be in the range of 5% to 7%. We also expect solid profitability improvement. Our operating profit as a percent of value-added sales should grow to the 9% to 10% range with about half of that improvement coming from the cost reduction actions taken in 2013, and about half from the growth in the business overall.

EBITDA in 2014 would be in the range of $95 million to $105 million. We expect depreciation and amortization to be in the range of $40 million to $45 million and capital spending is expected to continue to be well below depreciation, in the range of $30 million to $35 million.

At this time, we see a tax rate of approximately 30%. And, finally, we expect free cash flow to be in the range of $50 million for the year.

One final comment before I turn the call over to Dick Hipple to review the current state of our key markets. 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 sell side analysts and shareholders to model, I thought it would be helpful to provide some insight to how we see the 2014 quarters unfolding at this time.

On top of the normal seasonal factors, quarterly earnings in 2014 will be affected by the timing of the benefits of the facility consolidation and the benefits of the ongoing ramp-up of the new beryllium facility, both of which will lead to stronger earnings in the related second, third, and fourth quarters of the year.

The timing of these are such that their impact on each quarter will be greater as the year progresses, and thus earnings levels in the earlier quarters of the year will be below the later quarters. Considering this, and the first quarter weather-related factors, 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 $0.20 to $.25 per share, approximately $0.10 per share below the guidance provided earlier due to the weather-related factors.

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

Thank you, John. First of all, allow me to begin by expressing my disappointment in the events that John described that led to the need to restate the second and third quarters. As John said, we have not taken this lightly and corrective actions are in place to ensure that something of this nature does not occur again.

On the business front, I am encouraged by the increase in sales in the fourth quarter versus last year and our sequential growth for the third quarter. And with 10% stronger bookings versus last year at this time, we are off to a good start this year toward our objective of at least 6% organic growth in 2014.

Of note, as we finish this year, is another record year in our ToughMet sales, being 17% over 2012. The majority of our markets are now gaining strength. A few are seeing some inventory adjustments in the first quarter, such as automotive and medical, after very strong years in 2013. But these are not seen as systemic issues going forward.

Our consumer electronics bookings are holding up in the first quarter, which is actually not what is normally seen at this time of the year. I am also very encouraged that we are putting behind us several operating challenges that have held our performance and margins back during the last six months. Our beryllium pebbles plant continues to ramp and should be reaching over 75% of our targeted production rate in the first quarter, heading towards 90% in the second quarter.

Also, we have struggled with some production yield issues in our performance alloy division. The root causes have been identified and resolved, setting us up for good performance in the second quarter.

As John mentioned, our numerous restructuring actions were essentially completed last quarter and we will now see the margin benefits as we move through 2014. Several weeks ago we announced our introduction of numerous alloys to support the amorphous alloy or liquid metal market. This market and application base is expected to grow over the next several years as the supply chain, and technology to support it, is becoming more robust. And we plan to play an integral role as the alloy supplier to this market.

Other factors that will be giving us tailwinds is our relocated packaging production in Singapore, focused on the telecom infrastructure market. The facility is seeing increasing strength in the order book. Our inorganic chemical business continues to see increased demands from our new LED phosphorus product and we will be considering capacity expansion in Asia as our next step.

Product expansion on our ToughMet alloys should continue to support further record growth next year across several markets: commercial aerospace, oil and gas, other industrial applications, and now into consumer electronics.

And after struggling with the loss of our defense business and our optics business during the last several years, we have now repositioned the business for growth and we expect to see the results this year from several initiatives. The key ones are from our investment in leading technology for wafer-level processing for optical devices, and from developing the capability to produce gesture-control optics, which are currently used for gaming devices, with growth of other applications expected.

So overall, we are very encouraged about the current market dynamics, our new products and initiatives that we have taken to deliver the stronger performance that we shared with you in our outlook. The headwinds of the past 18 to 24 months are behind us. And, while weather-related factors seem to be tempering our Q1 performance, I am confident that we will be back on track in delivering solid results by quarter end.

Operator, we will now take questions.

(Operator Instructions) Martin Engler, Jefferies.

Regarding the first-quarter earnings guidance of $0.20 to $0.25 per share on a GAAP basis, outside of the weather impact, are there any other extraordinary items or costs that you are expecting in those numbers?

No. There is only actually $0.01 to $0.02 per share associated with a carryover cost of the fourth quarter restructuring activities. So there may be up to $0.02 in that number for some of those carryover costs. But, other than that, there is nothing extraordinary.

Okay. And that would be something that you would call out as you typically do in the release?

Well, I think we could do that if it turns out to be that significant. Yes, of course.

Okay. And then, regarding the weather-related impact there, can you talk about the facilities? Or maybe what would be more helpful, the segments -- which ones you expect to be most impacted due to the facility shutdowns?

Yes. That is a fair question. The largest impact will be on the performance alloys business. It has a very large facility near Toledo, Ohio that has been dramatically affected through the course of the past few weeks. That, as well as the beryllium and composites segment, both of those were in the same facility.

The remaining activity is all associated with the facilities of the Northeast, and those are bridged to the Advanced Materials Technologies segment. So I would say, if you wanted to model, maybe 70% to 75% of the impact would be on the performance alloys and beryllium composites segment and the balance would be in Advanced Materials Technologies.

You think about the other facilities, it is just kind of unbelievable where they are. We have the ones that John just mentioned and then we have Buffalo, New York, and Boston and Providence, Rhode Island seem to be epicenters for where the snow has come. So that is where our facilities are.

Typically what happens is, we have had incidences where we actually have entire factories shut down for multiple days because people literally can't get to work. So those are higher costs. But -- and you have less shipping days ago on, but on the shipping side, you do suffer the cost when the plants aren't running.

But then from the shipments, we should be getting those back. Those should not be lost shipments and we should start to see that in second quarter, anything that hadn't been [lost here]. But you have other supply chain issues going on, and even from our suppliers not being able to get materials. It goes on and on. So there was certainly an impact in the first quarter for manufacturers in certain areas of the country.

Thanks. That's helpful. And then, regarding the value-added sales forecasted growth that was 5% to 7%, is that correct for 2014?

That's correct. That's correct.

Can you talk about major end markets, maybe top two or three that you expect to contribute to that growth and roughly about what portion?

I think the -- overall, our assumptions for this year is we expect very slow, modest GDP type growth. So let's call that at 2.5% -- and, again, globally, and this is not United States -- 2.5% to 3%. And then the balance, which would be double the rate of GDP, we are looking for -- to see the higher levels of growth would be in commercial aerospace.

We would see it in our optics business because we have a lot of new product ramps. We will see it in some of our niches on the electronics business with phosphorus and the LEDs. Those would be examples.

And we do expect also that the oil and gas market is going to see some higher than GDP growth this year, too. So I think commercial aerospace, oil and gas, certain niches in the electronics area, is where we are going to see the more significant growth, and our specific niche launches in the optics business.

Okay. And nothing that you are seeing at this point with those three buckets as far as inventory issues or potential for destocking, at least on the horizon?

The one that I had mentioned earlier on -- the one that surprised me a bit, was the softness that we have seen in automotive late 2013 and into this first quarter. But, again, if you look at the big picture, I just think there is just an inventory adjustment that is going on.

We had a booming year last year in automotive. We were up 12%, 15% in automotive. So you're going to have some adjustments expected in that. So I expect automotive to be back more as a steady player here in the second quarter.

Okay. And, if I could, one last question on the share repurchase quarter to date. Do you have an estimate about how many shares you repurchased thus far?

We repurchased less than 100,000 shares at this point.

Okay. Thank you very much.

Edward Marshall, Sidoti and Company.

Where do I start here? If I could just follow up on that repurchase question that was just asked, what was the share count at the -- at December 31? I am presuming that you bought shares back throughout the quarter. I know it was modest, but the share count was up in the fourth quarter so I just was curious to get the end of the year share count.

Year-end diluted shares were 20.9 million.

Okay. So the ERP system was installed in 2010. You changed, I guess, the report that came out of it. When did that audit -- the audit took place in the fourth quarter. When did the actual change take place that (multiple speakers)?

Yes. Sure. Let me add a little more to that for you, Ed. I thought I was clear, but perhaps I was not.

This was a new report put in place in early 2013 to replace a manual portion of the reconciliation process in the physical inventory itself. So there was a manual process that we were using. The new report was put into place to replace that, and it was an extracted data from our systems into this new report, and as it turned out, the report was accurate. It was just misused.

So it is an error that is clerical in nature. Using the report properly will prevent -- should prevent this problem from occurring again. Does that help?

Yes. So you took measures to remedy it. Was this in the -- this is in the Buffalo facility, you said. Wasn't that the same facility you had the theft, and is that related to anything that was (multiple speakers)?

No, no, no. It was not the facility that incurred the theft a year ago. That facility was Albuquerque, New Mexico. It was a different metal. It was silver and not gold, gold platinum or palladium, which is generally quite what is -- which is what is processed in Buffalo. And the facility -- and this was not theft. The theft was Albuquerque-related one year ago.

Okay. And then, so if I -- you caught the error. You restated the earnings. Is there risk to any future -- prior quarters? I am assuming there is not. As you kind of continue with this audit, are there risks to any of the other quarters than what was stated in the release?

We do not believe so at this time.

Okay. And if I look at last quarter, there is a $3.5 million revenue and roughly $0.06 a share from the beryllium facility on the missed shipment. Was that shipped in Q4? It looks like it was.

We had demand levels improved in the fourth quarter. There were three shipments that were delayed -- three or four shipments that were delayed at the end of the third quarter. Two of those have already shipped. One -- three of them have already shipped; two in the fourth quarter, one in the first quarter. And the remaining one is yet to ship.

Okay. Now, as I look at where your guidance is placed for 2014, and I went back and I looked at the 2013 guidance given on the fourth quarter call, it is roughly the same. I guess at the high end, you are down roughly $0.05. I think the guidance range was $1.70 to $2. Now it is $1.75 to $1.95.

But you have roughly $0.30 of restructuring benefits in that number. It looks like the pebble plant as well is going to give you kind of a tailwind there. By my own math, it looks like about $0.30.

So we starting 2014 materially from a demand perspective, an end market perspective, outside of your own control, much worse than what 2013 looked like? Or what is the differential (multiple speakers)?

Well, actually not. Actually, the opposite. 2013, when we came into the year, we had demand levels that were higher than what they turned out to be very quickly in the year. Across a number of markets, demand levels fell off. Coming into 2014, and looking at demand levels versus the same period of a year ago, were up about 10%. So it is just opposite.

Okay. So you were just aggressive, you are saying, last year in the guidance.

Last year, it turned out to be that we were aggressive.

Okay.

Markets fell off significantly quicker.

When I think about the fourth -- you talked about the fourth -- you said that closed the gap, the $4.3 million and kind of the audit change to the second quarter results was the difference between the gap between reported earnings and your guidance. As I kind of think about that, would you be double-counting that loss?

Because I assume you pick it up throughout the third and the fourth quarter as that starts to realize and you kind of adjust the cost going forward. Wouldn't you pick that $4.3 million back up in the fourth -- third and fourth quarter as well? Start matching cost to kind of revenue.

In the third and fourth quarter of 2014?

2013.

I am not understanding your question.

Maybe we can follow up on that later. Okay. Thank you.

Avinash Kant, DA Davidson.

So, a question on the liquid metal market that you put out some press release about recently. What kind of opportunity are we looking at and what kind of profitability profile on that business?

That is a great question, Avinash, because it is a tough -- we are at the very beginning of a market. What is interesting is liquid metal has been out there for quite a while. It hasn't really gone anywhere.

And I think the fundamental reason is that there hasn't been a robust supply chain, meaning that, to make the product you need reliable high-volume die-casting technology is really what is required. And that is the -- we have developed alloys to support this die-casting technology, which actually, alloy development is very critical to help the reliability and the production of high volumes.

So what is happening is, I think, with our technology advancements, in combination with technology advancement in the die-casting, we are now set up in a total supply chain that we can actually develop these markets more robustly. So I think, from a near-term perspective over the next couple of years, this market could be in that $5 million to $10 million range. It has to evolve the normal cycles of qualifications, people try it. It always takes a little bit longer up front.

And then you can start to play mental games with yourselves, so it could be much larger because depending on where the product ultimately goes, it can go in some very high-volume type applications and the metal is very attractive. It has forming characteristics that require minimizing or eliminating machining, and it has strength and stiffness ratios that are out of this world.

So you can start to be silly with yourself at how big it can get. I would rather not do that. I would rather say that, in the near term, I feel comfortable that the supply chain is coming around right now, that we can support an early market development of this product.

And I see a long-term horizon is pretty exciting, but in the short-term, I would say that over the next several years we could develop a market in the $5 million to $10 million range. And then beyond that it could be much more exciting than that. And I think that is (multiple speakers) (technical difficulty).

If I remember the history of this one, there were lots of packets that were bought by Apple actually from Liquidmetal. Now, would you be making the material for Apple or not at this point?

Well, it would depend on Apple's decision-making process.

That is not final yet, right?

It would depend on Apple's decision-making process.

Okay. I understand. Okay. So the next question, turning onto the pebble plant, you did say that you expect to get to 75% by Q1. Could you give us -- what percentage utilization did you exit the year at?

We exited the year probably closer to 60%, 65%.

60%, 65%. So -- and maybe John can talk a little bit about this one. So what kind of margin improvement this could result to if -- when we get to 90% utilization that you are talking about, right, Q3 at least?

You are not so much thinking about margin improvement as you are year-over-year change in profit in that segment?

Yes.

The year-over-year change in profit in that segment that we have consistently discussed was up to $5 million year-over-year. And that range, up to $5 million, would still be an accurate range.

I was trying to figure out just the utilization rate going up alone could add how much, like if you went from 60% to 90%?

Yes. $2 million to $3 million of that would be the range. I don't have the precision around it in here front of me, but $2 million to $3 million.

That is a good range.

$2 million to $3 million on a quarterly basis?

No, no, no, no. The year-over-year impact, $2 million to $3 million.

Year -- so, okay. So the thing is that, when we get to 90% utilization here in pebble plant, the year ago would have been something different. So what I am trying to figure out is that, for a 50% improvement in utilization, what kind of margin impact there is or something like that. Do you see what I'm saying?

I think I have answered that. $2 million to $3 million would be that number.

Okay.

In terms of -- do you want to translate it into basis points? It would be maybe 200 or 300 basis points in that segment. And I don't have that data front of me either, but --.

Right. Right. Okay. Okay. Okay. That gives us a good idea. Okay. And then, in the 2014 guidance, I think you talked a little bit about, what is the expectation in the electronics side? What kind of growth are you expecting on the consumer electronics market in 2014?

Well, I think the reports that I see from a general industry standpoint, I would say it appears that the electronics market should be around a growth of about 4% to 5% next year. It has not been growing. So at this point in time versus last year it is -- should be in that range.

Perfect. Thank you so much.

Mark Rodriguez, Stonegate Securities.

I was wondering if you could talk a little bit more about your fiscal 2014 guidance. I know you provided some general color in that you obviously have the restructuring initiatives. They are going to give you positive impact, market improvements, beryllium ramp up, and new product initiatives.

I was wondering if you could put maybe some more color on the market, the beryllium, and new products, and how you see those making up the difference between that 30% -- that $0.30 and the remaining implied EPS that is in your guidance for fiscal 2014.

I think you had two questions there. One was what percentage of the growth might be new products of versus market in general?

Yes. I'm just trying to get a sense of -- because we obviously can do the math here on that $0.30 for what you have given us, but then there is an additional $0.35 to $0.55 implied in your guidance as coming from those other areas, like the market, beryllium. So just any kind of color that you can put around that would be helpful.

Yes. Let me rec out the year a little bit for you -- for all of you, because there are a couple of things that may not be quite so obvious. First of all, the tax rate difference between the two years is probably worth about maybe $0.15 a share if you look at 30%, the number I provided for 2014, and then some of the discrete items and other benefits that we had in 2013. So you have a negative impact year-over-year on tax.

You also have a negative impact year-over-year in the variety of incentive compensation plans because of -- the assumption that we have in our guidance is that we will make plan in 2014. We obviously did not in 2013.

If you begin with the one-offs that we have already acknowledged and then try to bridge from there, you have the pebbles plant benefit. We have some benefit from the savings that we have already -- from the restructurings that we had already indicated. And then the rest of the difference, if you will, is a combination of the growth in the Company. About -- and that is only worth about $0.30. About half of that or less -- slightly less than half is the new products and then the remainder would be market growth in general. Does that help you?

Yes. That's helpful. Okay. And then, Dick, maybe from a larger viewpoint, perhaps you can talk a little bit about what are your top strategic focal points for fiscal 2014? And then also, if you could talk what the about top risks are that you are kind of watching out for?

Well, that is pretty simple. The top priorities are really two. One is to make absolutely sure we drive and accomplish and get the $0.30, all the restructuring activities, and that is well executed and all that is brought to the bottom line. That is priority one.

And then priority two is to make sure we are back on a greater than GDP growth platform at this point in time, driving with the new products that we have. Those are the two top priorities.

And then once you go beyond that, we have got a lot of blocking and tackling in the Company of driving other cost out with Lean Sigma initiatives and procurement initiatives to get our margins up. So it is the combination of the efficiency of the Company and getting some of these new products into market as fast as we can from the growth side of it.

Got it. And the new product launches, is there anything special that you are doing from a marketing standpoint? Or is this just kind of a bigger focus on the blocking and tackling, if you will?

It is -- each one is unique with which customer you are working with, and it is really how fast you support the customers with what I call turnaround cycles on the development side. That is the key.

And so what we have done in the last couple of years has been to invest in some improved infrastructure in the Company to be a lot more responsive on the product development side of -- you know, it is one thing to come up with a new idea and a new product and you develop it. But typically when you do that, there is always going to be ten variations before you get to the end line with a customer.

So it is that ability to take the idea, take the concept, and then being able to drive it quickly with variations until you get it finally to a point that really drives home accessibility with the customer. So it is -- to that side that we found that that is where it's [secret] to help accelerate the product introductions.

Got it. Thanks. At last quick question here, kind of a housekeeping item. Do you by chance have the gross margins by segment for Q4 2013?

Yes we do. The -- for Advanced Materials, if we are looking at gross margin as a percent of value-add -- Advanced Materials was around 36%. Performance alloys is around 27%. The beryllium group was 23% and Technical Materials was a shade over 40%.

Over 40%?

Yes.

Okay. And then, with the restatement for Q2 and Q3, is that all in the Advanced Materials? So if I wanted to kind of go back and back into what would be the restated gross margin there, would I be doing the math correctly there or are there different numbers?

Yes. It was all in Advanced Materials segment.

Got it. Thanks a lot.

This is Mike Hasychak. We are out of time for questions. I am going to be around for the rest of the day to answer any of your questions. My direct line is 216-383-6823, and we thank all of you for participating today.

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