Materion Corp (MTRN) 2014 Q2 法說會逐字稿

Good day and welcome to the Materion Corporation second quarter 2014 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)

I would now like to turn the conference over to Michael Hasychak. Thank you. You may begin.

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

Our format for today's conference call is as follows. Joe Kelley will review the financial results for the quarter. Then John Grampa will review the outlook for the remainder of 2014. Following John's comments, Dick Hipple will review the current state of our key markets and provide his perspective on certain specific key new product initiatives and other developments. Following Dick, we will open up the call for your questions.

A recorded playback of this call will be available until August 8th by dialing area code -- the number is -- 877-660-6853 or you can also dial area code -- and the number is -- 201-612-7415. The conference ID number is 1386002. 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 that was issued this morning.

And now, I'll turn the call over to Joe Kelley.

Thank you, Mike. I will cover the second quarter sales, value-added sales, profit margins, and earnings. I will review business profitability by segment. I will then review the changes in value-added sales by key and market. I will also make some brief comments on the balance sheet and cash flow.

Looking at our second quarter 2014 financial performance, sales for the quarter were $288 million, down $18.1 million, or 6%, from second quarter 2013 levels, driven primarily by changes in precious metal, market pricing, and mix of customer-supplied material. Value-added sales, which excludes pass-through metal costs for the second quarter, were $159.6 million, up 5% over the prior year second quarter value-added sales and up 10% sequentially over the first quarter 2014 levels.

The year-over-year growth in value-added sales is attributable to increased volumes into consumer electronics, primarily the semiconductor market space, and increased volumes for medical applications. Value-added sales into these end markets grew approximately 16% over prior-year second quarter levels.

The above-market growth rate in these two key industries was primarily offset by declining volumes in defense and automotive electronics. Gross margin in the second quarter was $49.8 million, up 8% from the prior year second quarter gross margin of $46 million. The gross margin expressed as a percent of value-added sales was 31% in the quarter, up 100 basis points over the prior year margins of 30%.

Improved volume leverage and manufacturing efficiencies related to the company's late 2013 facility consolidation efforts resulted in improved profit margins year over year, despite deterioration in product mix within several of our business segments.

We are clearly starting to see the financial benefits from our facility closure and product line rationalization efforts which are on track to deliver the annual benefit previously forecasted of $0.30 per share, compared to the 2013 earnings levels.

Operating profit for the second quarter of 2014 was $14.6 million, up 122%, or $8 million, over the prior year second quarter operating profit of $6.6 million. This includes a net benefit of $3.8 million, primarily related to the insurance recovery associated with the 2012 inventory theft from our Albuquerque facility, offset with recovery cost and related incentive compensation.

Excluding this net benefit, adjusted operating profit was $10.7 million, up 64%, or $4.2 million, over the prior year second quarter level. Adjusted operating profit margins expressed as a percent of value-added sales was 6.7% in the quarter, 40 basis points ahead of first quarter 2014 levels and 240 basis points over prior-year levels.

Net income for the second quarter was $10 million, or $0.47 per share, up 135% from prior year levels. Adjusted for the net benefit primarily coming from the insurance recovery, net income was $7.5 million, or $0.36 per share. This is a sequentially 24% ahead of first quarter 2014 earnings levels and 80% ahead of second quarter 2013 earnings per share.

Although improving year over year and sequentially, adjusted earnings in the second quarter were below our internal and street estimate by approximately $0.09 per share. The shortfall to expectations was driven by unexpected declines in the defense and the automotive electronics end markets. We had expected defense to be flat and automotive to be up single digits.

Despite the myths, compared to our expectations, we are improving the overall profitability of the consolidated Materion business, as profit margins expand sequentially and year-over-year. In reviewing the profitability by segment, you see more clearly the benefits of our restructuring actions and the impact of product mix shift tied largely to end market movements.

Our advanced materials and technologies business is delivering the savings and efficiencies forecasted from the restructuring actions taken in late 2013. Adjusted operating profit margins expanded to 11% of value-added sales in the quarter, compared to the first quarter 2014 adjusted operating profit margins of 8.6% and the operating loss recorded in the prior year second quarter.

The profit margins in this business should continue to increase as we move throughout the second half of 2014, leveraging our lower cost structure and driving new product sales growth. The technical materials and business also recorded double-digit operating profit margins as a percentage of value-added sales in the second quarter of 2014. While this is a decrease from prior-year levels, it is a sequential increase from the first quarter of 2014 when the destocking of the automotive electronic supply chain significantly impacted the volumes of this business segment.

The sequential improvement in profitability delivered in the second quarter of 2014 for this business segment should continue into the second half of 2014, as the automotive inventory levels appear to have been adjusted and volume demand is picking back up.

Performance alloys operating profit margins of 8.2% of value-added sales represents a sequential improvement of 170 basis points over first quarter 2014 profit margins of 6.75%. Profit margins are recovering from the first quarter impacts of the severe weather and business interruptions. However, the margins have not yet recovered to prior-year second quarter levels.

The year-over-year deterioration in profitability of the performance alloy segment, despite value-added sales growth of 8%, is reflective primarily of a product mix shift, as volumes sold into automotive electronics and undersea telecommunications sector decreased year-over-year, altering the mix profile of this segment.

Beryllium and composites is the other segment where product mix shift in any given quarter has a meaningful impact on the segment's profit margins. This segment has many large discrete product shipments into the nuclear medicine, defense, and science end markets. The profitability of each order fluctuates widely depending on the source and grade of the material required, just to name a few of the variables. Beryllium and composites recorded an operating loss of $1.8 million in the second quarter of 2014, which compares to profits recorded in both the second quarter of 2013 and the first quarter of 2014.

The year-to-date operating loss in this segment is $700,000, which although negative represents a meaningful improvement from the 2013 annual profitability run rate of this business. We currently have orders on the books scheduled to deliver in the second half of 2014 and are forecasting to achieve the targeted $4 million to $6 million year-over-year improvement in operating profit for this segment.

Turning now to value-added sales by end market, when comparing to the prior-year levels, value-added sales were up approximately 5%, and compared sequentially to the first quarter 2014 were up 10%. From an end market, when comparing to the second quarter of the prior year, value-added sales into our largest end market, consumer electronics, was up 15%. Shipments into medical were up 14%.

However, as previously highlighted, value-added sales into defense decreased 28%. Automotive electronics decreased 26%. And telecom infrastructure decreased 4% year over year.

Comparing value-added sales in the second quarter sequentially to the first quarter of 2014, business levels were up across most of our end markets, as first quarter value-added sales were negatively impacted by the severe weather conditions which affected our operations, as well as our customers. The notable exceptions were the defense and automotive electronics end markets, which remain relatively flat sequentially quarter to quarter.

Looking at the first half 2014 value-added sales are flat year-over-year, which includes a 26% decrease in defense and a 20% decrease in automotive electronics. The defense decline is tied to specific program delays, and the automotive decline was driven by destocking of the supply chain which ended 2013 with abnormally high levels of inventory. The combination of other end markets excluding defense and automotive electronics grew 6% year over year in the first half of 2014.

Finally, let's look at the balance sheet and cash flow. The company began and ended Q2 2014 with a very strong balance sheet, ending the quarter with $18.1 million in cash and $62.3 million in net debt. The company's balance sheet and its cash flow provided the flexibility to return approximately $3 million of cash to shareholders during the quarter in the form of regularly quarterly dividends and opportunistic share repurchases, while at the same time paying down $13 million of debt.

During the first half of 2014, $3.4 million of cash was returned to shareholders in the form of dividends, and $2.7 million was returned in the form of share repurchases. A total of approximately 86,000 shares were repurchased during the first half at an average price of just above $31 per share.

The company's cash flow from operations in the first half was fairly typical due to seasonal and other operating factors. We fully anticipate meaningful positive free cash flow for operations as we move through the remainder of 2014.

And now for modeling purposes, depreciation for 2014 should be approximately $45 million, capital spending, approximately $30 million, and the full-year tax rate of 29%. This concludes the review of our second quarter financial performance, and I would now like to turn the call over to John, who will review the outlook for the remainder of the year.

Thank you, Joe. Good morning, everybody.

First, let me reinforce a couple of the key points that were made in the press release. Earnings in the quarter continued to gain momentum and were well above both the prior year and the first quarter of the current year sequentially. Thus far in the year, adjusted earnings are 23% ahead of the prior year on what was essentially flat to value-added sales.

This excludes the favorable effects of the insurance settlement and the first quarter asset sale, which in total add a benefit of $0.17 a share to GAAP earnings. For the six months, earnings were in total about $0.05 per share below both the published street expectations and our own internal expectations. We were ahead by about $0.05 a share in the first quarter and off by about $0.09 a share in the second quarter.

While a small portion of the second quarter's shortfall can be attributed to late-developing push-out of certain specific beryllium and composites segment shipments, the principal issue that drove the second quarter and, thus, the first half below our expectations is the lower level of business in defense and automotive electronics.

In the aggregate, shipments into these two markets were over $13 million below prior year with approximately $8 million of that occurring in the second quarter. Had shipments to these markets been flat to prior year, rather than down significantly, our first half value-added sales would have grown by approximately 5% as opposed to being flat.

In the second quarter, our value-added sales growth was approximately 5%. Had shipments to these two markets been flat rather than down, our second quarter growth would have been above 10% year over year. The lower business levels in these two markets hurt our first half performance by about $0.15 per share. All other factors in total net positive by about $0.10 a share, which helped offset a portion of the impact of these two market issues.

While we are anticipating a recovery in the second half in our shipments into both of these markets, we are not at this time assuming that we will see the business levels that were included in our initial guidance for the year. In our updated guidance, in addition to considering these two market-specific factors, we've also dialed in the effect of the delay in the defense F-35 program. For us, the announced delay has pushed business into 2015 that was initially expected in the third and fourth quarters of this year.

We are also assuming, as are others, that global growth in general will be modestly weaker in the second half than initially expected. Political crises at a minimum creates an added level of uncertainty to what are already fragile global economic conditions.

While we've revised our guidance down, we do expect significant increases in value-added sales, earnings and margins in the second half when comparing to both the prior-year second half and the current year first half. We expect to be on track as we expect 2014 and move into 2015.

We expect value-added sales to improve in the range of 11% to 14% in the second half when comparing to both the first half, as well as to the second half of the prior year. Order entry the last seven weeks is up approximately 13% compared to the same seven weeks of the prior year, leading to a good start to the second half.

Margins are expected to expand accordingly. Second half operating profit margin as a percent of value-added sales is expected to improve by up to 200 basis points from first half levels. We are guiding adjusted earnings to a range for the second half of $0.90 to $1.05 per share, an increase of from 40% to 60% from first half levels, bringing the year to $1.55 to $1.70 per share. This full-year range represents an improvement of 40% to 55% over the prior year adjusted earnings of $1.10 per share.

We anticipate continued quarter-over-quarter earnings improvement with earnings per share in the fourth quarter sequentially stronger than the third, and third quarter sequentially stronger than the second. At this time, we expect third quarter earnings per share to be up from 15% to 25% from the second quarter level and in the range of $0.40 to $0.45 per share. The guidance, of course, excludes the earnings benefit of the insurance settlement and the first quarter asset sale, which as I noted earlier adds $0.17 a share to GAAP earnings.

That concludes my remarks. Dick Hipple will now provide a market update.

Thank you, John.

I'm pleased with the -- I'm pleased with the year-over-year improvement both in our earnings growth and margin expansion that we are delivering, which is coming from a combination of new product introductions and restructuring cost savings. However, these results did fall short of our expectations (inaudible) unexpected and unplanned challenges in the marketplace.

In the second quarter, we had planned for the defense market to have bottomed out from a weak 2013 and certainly had looked forward to growth in our automotive business. What actually happened was a further decline of our defense orders as we received push-outs for 2015 of our F-35 business.

Our automotive business remained down from 2013 while we had planned for the business to be up. The automotive weakness was a surprise, as auto sales remained fairly solid. What we believe happened was an inventory adjustment driven by our customers. This inventory adjustment affected both our alloy and technical materials business. In fact, auto and light vehicle inventories were very high coming into the year, close to 90 days, and took over a quarter to work down to a more normalized basis of 60 days. We are now seeing strong order entry from our auto electronics customers heading into the second half.

On the other hand, we expect our beryllium and composites defense business to remain flat with the first half of 2014. And we'll see a modest increase in our optics array defense business that is now being applied to UAV applications or drones for additional information-gathering capability.

Prior to this, the array technology was used in satellites, which is a market that has fallen off. In summary, our plans were to grow our sales in the second quarter, but this was hampered based on the auto and defense markets. We did see nice growth in the second quarter across the board in our consumer electronics applications, and we see this continuing forward into the third quarter. Our optical coding technology is advancing the use of image-sensing applications in this market, and we see strong growth in our mobile device camera stabilization ToughMet strip product.

Other markets, we expect to gain speed in the second half based on current bookings, are our energy applications and oil and gas, which are focused on directional drilling and deep sea completion applications and commercial aerospace, where we have greatly expanded applications in bushings and bearings.

Our telecom infrastructure market has been a tale of two cities. Our sales to our customers in the wireless base station market have been strong across the company, and we expect this to remain strong through the balance of the year.

Our 2013 expansion of our Asian-based manufacturing operation is enabling us to more broadly participate in this market. Meanwhile, our sales into the undersea telecom market have been below expectation due to lower commitments in programs.

I'd like to spend just a few minutes discussing our new product pipeline. In the first half, 9% of our sales were from newly introduced products, up 30% as compared to last year. Key programs generating the growth were our new ToughMet strip product that goes into the smartphone supply chain for camera stabilization applications.

Our new business from our optical wafer level processing installation going to both IR and consumer electronics sensing devices. We've seen nice growth from our new investment in electron beam welding for product going into energy management systems in both automotive and consumer electronics. Our specially phosphors and precious metal PVD targets used in LED lighting applications and our service business in shield kit cleaning is gaining traction from our geographic expansion, an increase of service product offering.

So in summary, from last year's second quarter, our margins are up 240 basis points, profits are up 80%, and our new products are providing 9% of our sales. This confirms great progress from our critical initiatives. And with our solid order book and expected higher sales, we are excited to expect our earnings to be up another 40% to 60% versus the first half going into the second half.

Thank you, and we'll take questions now.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) And our first question comes from the line of [Avenish Kant] with DA Davidson. Please proceed with your question.

Good morning, everyone. Had a quick question -- and I don't know if maybe John gave this on the call -- did you guys break down the percentage of value-added sales by segment, either on a quarterly basis or on the first half basis, like consumer electronics, medical, and defense and all these? What percentage of value-added sales were these in the first half for the quarter?

The data is in the attachment to the press release, [Avenish]. I think it's attachment five or four of the press release. So it's there.

Okay. I'll take -- thank you so much. And then...

That's value-added sales by segment. Did you want it by end market, though, [Avenish]?

Yeah, I wanted end market, actually.

Oh, okay. Well, we can provide some insight to that now.

Yeah. So consumer electronics in the second quarter compromised approximately 28% of our [BA]. Industrial components was about 14%. Medical was about 11%. Automotive electronics was down to about 9%.

And do you break down defense and telecom infrastructure and all that?

Defense and telecom infrastructure combined to be slightly over 10% of our value-added sales.

Bigger than 10%, right. So consumer electronics, industrials, medical, defense, telecom, and auto electronics, right? So, of course, the defense weakness that you saw, it looks like, you know, you got some news during the quarter and F-35, do we have an idea of, you know, how much could this contribute coming back in 2015? Do you have a business level in that going forward or they've not given anything?

The movement of the F-35 program represents approximately 20% of the falloff in the second half profitability, and about -- about 20% of the -- of the change in the guidance.

Okay.

So roughly $0.05 a share.

but what I'm trying to understand is that, you know, this business that is being pushed out, do you know that this will remain at the same level when it comes back? Or you know that your content or your contribution will go down...

Our content has not changed. In fact, it's gone up a little bit. We do know the program has not been canceled. This is a push-out, push-out of deliveries.

Okay. Okay. And also, for the second half, of course, you are talking about improved margins. If you look at the full year, though, you know, it looks like, you know, it would hardly have any revenue growth in 2014. But you're sticking with the $0.30 benefit in EPS, given the cost cutting you had done. How should we think of margin leverage as we grow revenue?

[Avenish], that's not quite correct. The forecast for the second half revenue growth will bring the year to a value-added growth of a little bit north of 6%, even -- despite the first half being flat. And I commented about margin expansion in the second half being approximately 200 basis points above first half levels. So given that kind of growth, we -- given the growth that we expect in the second half, we do expect margin expansion.

Okay, thank you so much.

You're welcome.

Thank you. And our next question comes from the line of [Luke Falto] with Jefferies. Please proceed with your question.

Morning, gentlemen.

Morning.

Morning.

I guess just to talk on auto, that was -- I was a bit surprised by -- by the magnitude of weakness that you saw. And I guess, just thinking through it, I mean, how -- are you certain that it's -- I mean, like, it sounds like mostly an inventory issue, but is there any -- you know, do you think that there's any change in share this year or anything else going on besides just supply?

No, because what's interesting -- well, it's not very interesting to me at all, quite frankly -- but it was really across the board in both our business units, almost identical numbers. And, you know, they're totally different applications customers. It was not a market share loss.

And the other thing is, it's always easier when you look backwards. But when you look backwards, we had very heavy sales in our automotive -- you know, I'd say late in the third quarter, early fourth quarter last year, probably heavier than it should have been, if you know what I mean. So there was an inventory bill and the cards built up, and then just in our supply chain, we saw a much larger adjustment than we would have expected. It was shocking to us, quite frankly, where the automotive market -- in fact, we saw some weakness in the first quarter and we expected that to be flushed out in the second. It didn't happen, and now we're seeing it.

So it's just -- it's very difficult sometimes to predict, you know, how those inventory cycles work. But as we all know, I mean, fundamentally car sales have been good. So, you know, I'm not concerned at all about the market itself. We haven't lost share that we're aware of. It's just that we got smacked by an inventory cycle here that was worse than certainly we would have forecasted, because as I mentioned, as I was discussing in my comments, that we had fundamentally forecasted the automotive market to be up in the first half, and it was down.

So, you know, that kind of a swing in our forecast is pretty big. So we kind of lost that traction. In fact, if the automotive market had been, you know, where we thought it should be, you know, our earnings in the first half probably would have exceeded the street. I mean, that's the kind of quiver we get here.

But, anyway, the automotive market is back. Our bookings are up quite strong. But I'll certainly say mea culpa for our forecast here and what happened in the automotive business. It's certainly a surprise to me.

Okay. And what's your -- can you give us some sense what the geographic distribution of your auto sales are? I mean, just U.S. versus non-U.S. or -- you know, any color there would help.

I think in -- in total, we'll probably close to probably 60% U.S. and 40% overseas because Europe and Asia.

Okay. All right. And then I think -- I think it was said that ore activity on the whole was up about 13% over the last, you know, seven weeks or so year on year. Can you talk about exactly which markets are driving that? Or (inaudible)

Yeah, let me add' a little color to that. Clearly, consumer electronics is continuing strong, which puts it at stronger than prior year. Medical, which was already stronger than prior year, has lifted for us over the last few weeks, so we anticipate medical to be even stronger in the second half than it was in the first. Although we had a strong medical performance last year in the second half, we're seeing an order level now off the first half that's higher.

So we'll be about the same, if not higher than we had medical in the second half of last year. We're seeing some lift in telecommunications infrastructure, and we're all -- we're seeing probably defense flat and some lift -- some lift in automotive finally.

Okay. And then on the beryllium and composites business, I think you might have said this. But so there was a loss in that business of almost $2 million bucks this quarter. How do we think about that in terms of -- is that mostly the F-35 push-out and impacting that business? Can you maybe just give us some sense of what drove the loss there and then an update on the Pebbles Plant ramp-up would be helpful, as well?

Sure, let me give you some insight to that business. I think you know, [Luke], that we've mentioned quite often that this business can be chunky or can be lumpy, and I think we talked about that a little bit in the (inaudible) [Joe's] discussions this morning.

We -- shipments are large and they carry high margins. And that's really the nature of this business, large shipments and high margins. And shipments can move a few days or even a few weeks for a variety of reasons. Sometimes customers are not ready for delivery. Sometimes the on-site inspection hasn't been -- or pre-shipment inspection hasn't been completed by the customer in time for usually customer reasons and not ours.

And from time to time, programs get pushed, the customer simply doesn't want the delivery as soon as he had initially suggested, usually because other parts of these match in the expensive material up to -- aren't ready in his shop.

But cancellations are rare. So cancellations are rare, but delays are not. The -- the year-over-year, we think that -- the -- we're forecasting a $4 million to $6 million year-over-year improvement in this business. So the (inaudible) positive operating profits in the second half, obviously, and we have the orders, as [Joe] had mentioned, in house that gives us the confidence that we'll be able to deliver on that kind of a year-over-year performance improvement.

The Pebbles Plant improved in the second quarter and is forecasted to continue to sequentially improve in productive output. And that will, again, favorably impact costs and, therefore, margins as we move through the balance of the year and if the 2015 in this segment.

And hopefully that covers your questions.

Yeah, I have it in my notes that you guys might be running that -- the plant full out by the end of the year. Is that right? Is that how you're thinking about it?

Yeah, that's correct. And we're on track to do that.

Okay. And then just last one, as we think about free cash flow, you talked about, you know, [DNA] and CAPEX. Can you -- I mean, I guess neutralizing working capital, it looks like we're, you know, maybe still north of $50 million bucks in free cash this year.

What -- I guess can you talk about working capital expectations for the year and then anything else you think has had a meaningful impact on cash flow that we haven't discussed?

Yeah, [Luke], you are correct. You know, in our business, typically in the first half of the year, we invest in working capital and then, when you're planning for Q3 maintenance downtime, and then going into Q4, our working capital, we tend to liquidate that. So you are correct consuming about approximately $50 million free cash flow for the full year. So as we go through the second half of 2014, our working capital will start to liquidate that.

Okay. All right. Thanks a lot.

And our next question comes from the line of [Ed Marshall] with Sidoti & Company. Please proceed with your question.

Morning, guys.

Good morning.

So I wanted to start -- maybe I missed it -- I was kind of hopping around -- but the F-35 delays, what -- is it specific to you that there are delays in the program? Or is it something specific to maybe what your forecasts or your guidance was or your expectations for the year?

Well, yeah, we had planned for -- you know, this -- you know, our F-35 orders to be shipped this year. And they moved our programs back into 2015. I think that there has been some push-outs in the F-35 program. You know, it's very application-specific.

Our particular applications are centered around what's known as the [EOTS] program, which is the optical targeting guidance optic systems. And in that case, they have pushed that program back. I think some of it has to do with, you know, they're transferring the technology into an investment cast, a casting technology, which is a new technology, and that's what we're shipping them. But I think that they're going through some gyrations probably from an engineering standpoint as they change the design, so they might have been a little sub-category that's affected us due to the type of material that we're shipping.

It's really good news in the long term, because as we've shifted our technology in the beryllium and composites over the years, it used to be that we would ship blocks of material and then we shipped what's known as near-net casting material, which saves a lot of material and less machining, and now we've shifted the technology to what's known as investment cast, which you really get almost the -- pretty much the final shape with maybe very modest machining required.

So the efficiency is really going up with a kind of product and lowering our cost to ultimately expand the application base that we have. So this is a big cost savings program for the F-35. And I think just because of the opportunities here, we may have seen some delays just because it's a totally different manufacturing process for them and they've been working very hard with us to make this transition, and it just may be that this particular unit has been pushed back.

Is this something that they can't build the plane without? Or how...

Correct. That's correct.

... because -- yeah, well, is it that you've shipped too much already and they're just kind of catching up? Or is it...

No, no. If you just listen to what I said, it was -- it's a new design part that goes in there, so they have changed their engineering approach for this [EOTS] program that uses our materials from the way we used to make it to a new way we make it. And I'm just speculating that maybe that was a part of the delay, but, you know, quite frankly, it just be probably they've got some push-outs on the F-35.

Yeah, I mean, I'm just-- I'm reviewing their call, as we kind of ripped -- we're progressing through this one, and it -- I didn't see any mentions of any delays or change in the production schedule. So I know there was a grounding recently, and maybe it's related to that, but I'm just kind of -- I'm just kind of trying to back into maybe what was potentially going on there. We can -- we can do more work and I'll follow up with you later on that.

As far as -- it sounds like -- and I'm not sure, but it sounds like there was -- I think the guidance that you just mentioned was $4 million to $6 million in the Pebble Plant for the year or at least in the beryllium and composites business. Are you lowering that number? Was it $6 million, I think, on the last conference call? And are now -- are you looking for a lower profit run rate out of that business now or are you just giving a broader range?

No, no, absolutely not. That's the same. That's the same number.

Okay.

$4 million to $6 million year-over-year swing is the range.

Okay. And so, I mean, on the low end of the range, you'll basically -- just profitable, I guess, roughly $1 million or so? Is that...

Correct.

... $500,000? Is that the way to think about them? Okay.

Yes.

Okay. Inventory was significantly higher...

Let me...

Yeah.

Just, you know (inaudible) interesting point. I just want to -- because I don't think we picked up on this in a call, but, you know, if I were you, I'd be asking a question, well, how the heck are you going to do that if you've got the F-35 push back on you? Well, what's happening in that business is we're actually seeing stronger growth in forecast in the non-defense area, and this is really through our -- our nuclear business for nuclear medicine diagnosis materials. And that business is quite hot right now.

So it's actually a medical business that's driving our forecast for us to maintain it, even in spite of the defense coming down in the second half. So that's really good news.

And on the inventory levels being significantly higher in -- even, you know, even uncharacteristically from a seasonal pattern in -- you know, in years past? Is there in particular going back -- going on there?

You know, there's -- the typical build in advance of some of the plant shutdowns scheduled for July, which is normal, but if you're looking at our financial statements and the inventory, there was a reclass from prepaid to inventory in terms of classification of about $20 million. That is simply a balance sheet reclass that had nothing to do with the cash flow and the classification of the hedge associated with our gold denominated loan, depending on exactly what number you're looking at that may have an impact on that.

Did -- you talked about building orders. Do you know -- do you have the book to bill for Q2 and maybe where it stands post-Q2?

No, we don't have that.

You don't? You don't have the book to bill number? I know you've provided it in prior calls.

Not available. Yeah, we do not have it here in front of us.

Okay.

It is up. As I mentioned to you, our -- as I mentioned in my commentary, our order rate is up the last seven weeks, 13% ahead of where it was last year, and not much of that was shipped.

13% where it was last year. And what is it on a sequential basis? Is there a way to look at it from, maybe, say, you know, the last month or last two months of 2Q versus kind of where you were over the last seven weeks?

There is a way, [Ed], but, unfortunately, I don't have that information in front of me. We can try to dig it out here (inaudible)

Because if I remember correctly, second half kind of slowed significantly in the back half of the year last year. Is that -- is that -- is my memory correct?

Your memory is correct, depending on the business you're talking about, but sequentially over Q2, our order entry is up about 10%.

Okay, great, thanks, guys.

Thank you. And our next question comes from the line of Marco Rodriguez with Stonegate. Please proceed with your question.

Hi, this is actually Dan Trang sitting in for Marco Rodriguez. Wondering if you could talk about the capital allocation of your projected free cash flow for the remainder of 2014?

Yes, as you -- I guess when you look at our capital allocation, we have, first of all, our regularly scheduled quarterly dividend, which actually we recently increased. And then, secondly, as you're aware, we have an authorization for share repurchases which we have been actively pursuing in the first half of the year and will continue to opportunistically pursue share repurchases.

Then you have your CAPEX, which I gave guidance on. It's about $30 million. But then, you know, the other -- remaining cash flow, we are looking at and investigating, you know, strategic bolt-on acquisitions to deploy that capital.

Okay. Any color for 2015?

(inaudible) into the capital allocation for 2015?

Uh-huh. Uh-huh.

Yeah, I would anticipate that we would maintain that course of returning cash to shareholders both in the form of share repurchases, as well as dividends and also continue to, you know, look at strategic acquisitions.

Okay. What are you seeing on the competitive landscape and the pricing environment?

Well, I think that, in our -- in our businesses, you know, you always have pricing pressure, but we do have higher-end products, so that I would say that our pricing pressure is a little bit less, because of the uniqueness of our products, so that, you know, what -- we have the discipline all the time in trying to get even better at it as we move forward is really extracting the value for our products to make sure that we're getting the pricing moving up versus going down, which is where we try to push all the time as really the prices up versus down.

But we do have some products where, as you introduce new products, and I'll give you an example of this would be -- in our chemicals business, in our phosphors area, where it's -- you know, very, very high volume business and in the LEDs, where we'll introduce a product early on with very, very high pricing, and then we drive that pricing down as the volume goes up, but then we don't sacrifice our margins, because as we scale up our volume and lower our cost, you know, we -- you just kind of have to time that. So I'm not saying that none of our pricing are going down, but sometimes strategically that's the right thing to do.

And if you're able to maintain your margins, that's the key, and that's where we try to play it. So where we do have new applications that are in areas where you have highly ramping volumes, you typically will get pricing pressure over time, but typically -- at least in our case, we're able to, you know, keep our margins as we drive up and reduce our costs.

So it's that balance, but in general, I would say we're under pricing pressure where we have higher volume-type opportunities, is the way I would describe it.

Okay. And lastly, can you provide an update on the acquisition landscape?

Well, I think that you're certainly aware that acquisitions at this point in time, you know, the multiples have been climbing, so you do have to be pretty careful. Money is cheap, and then the multiples go up, so that we certainly won't be doing anything stupid, but -- you know, we're trying to -- quite frankly, we're trying to rebuild our pipeline. I think that's the best way to honestly put it. And we took a pause for a couple of years because of the fixing that we needed to do and the focus of the restructuring activities that we had, plus the Pebbles Plant. We've been really focusing on extracting the value that we had to get from those activities.

And we pretty much have those things behind us, nice cash flow, and we are actually working on rebuilding this pipeline for acquisitions and try to do it very smartly. Sometimes that -- you know, since we've normally been dealing in the world of tuck-in acquisitions, you have, I think, a little bit more opportunity to get things at lower multiples, because typically you're many times buying from, you know, private -- privately held companies. And there's a little bit more flexibility when you're dealing in that area.

So, anyway, I think the answer to your question is, we're rebuilding strategically the acquisition pipeline as we speak. And I would certainly see us moving forward on an intelligent basis over the next six to nine months.

All right. All right. Thank you.

Thank you. And it seems that we have no further questions at this time. I'd like to turn the flow back over to management for closing remarks.

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

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