Materion Corp (MTRN) 2014 Q3 法說會逐字稿

Greetings and welcome to the Materion Corporation third-quarter 2014 earnings report. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to 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; Joe Kelley, Vice President of Finance; and Steve Shamrock, Vice President and 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 and comment on capital allocation. Following John's comments, Dick Hipple will review the current state of our key markets. Following Dick, we will open the call for your questions.

A recorded playback of this call will be available until November 7 by dialing 877-660-6853, or 201-612-7415, conference ID number 13592214. The call will also be archived on the Company's website, Materion.com. To access the replay, just 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.

I will now turn the call over to Joe Kelley.

Thank you, Mike, and good morning to everyone joining us on the call today. During my comments, I will cover our third-quarter 2014 financial highlights, review profitability by segment and make some brief comments on the balance sheet, cash flow, and modeling assumptions.

Let me start with the highlights. I am very pleased to report our third-quarter 2014 financial results as our team delivered strong topline value-added sales growth across all four of our segments, profit margin expansion and meaningful earnings growth.

In the third quarter of 2014, sales grew 6% over the prior-year third quarter to $291.6 million. Earnings per share grew from $0.24 in the third quarter of 2013 to $0.60 in the third quarter of 2014.

On an adjusted basis, third-quarter 2014 earnings grew 113% over the prior-year period to $0.51 per share. This adjusted earnings level is in line with our annual guidance and a 42% sequential improvement over second-quarter 2014 earnings.

Value-added sales, which excludes the impact of pass-through metal costs, grew 12% over the prior-year third quarter value-added sales, and 4% sequentially over the second quarter of 2014 to $165.6 million in the current year third quarter. This marks the second consecutive quarter of establishing a new record level of value-added sales as we continue to gain traction in most of our key end markets.

Value-added sales into our three largest end markets, consumer-electronics, industrial components and medical, led the growth, improving double digits year over year and more than offsetting the single-digit declines in automotive electronics and defense from the comparable prior-year period. It is very encouraging to see two consecutive quarters of record level value-added sales since we began reporting this metric in 2012.

Our commercial strategies are working, and customers are recognizing the value and differentiation of our product offering. Our new product portfolio is more robust today than it has been at any point in our recent history. Value-added sales from new products for the first nine months of 2014 represented 9% of the Company's total value-added sales. This metric should continue to improve moving forward and new product introductions will continue to play a more critical role in our growth as we move into 2015.

Gross margins in the third quarter of 2014 expanded 23% to $54.8 million from $44.5 million in the prior-year third quarter. Expressed as a percent of value-added sales, gross margins expanded 310 basis points from 30% in the third quarter of 2013 to 33.1% in the third quarter of 2014. The improved profit margins were driven by leveraging the sales volume growth, realizing the manufacturing of savings from the facility consolidation efforts initiated late in 2013, and an improved product sales mix partially driven by our growth coming from new products.

Operating profit in the third quarter of 2014 totaled $17.4 million or a $12.1 million improvement over 2013 third-quarter operating profit of $5.3 million. Included in the third quarter of 2014 operating profit is a $4 million gain from a legal settlement related to the construction of the Company's pebble plant. Excluding this gain net of related expenses and other nonrecurring items, adjusted operating profit in the third quarter of 2014 totaled $14.7 million, a $9.4 million or 176% improvement over the prior-year third-quarter operating profit. Adjusted operating profit expressed as a percent value-added sales grew to 8.9%, a 530 basis point improvement over the prior-year third-quarter margins and a 220 basis points sequential improvement over second-quarter 2014 adjusted operating profit margins.

We are leveraging our topline growth, improved manufacturing efficiencies, primarily from our rationalization efforts, and improving our sales mix with new product introductions to deliver sustainable margin improvements in our business.

Looking at the advanced materials segment, you can clearly see the benefits of lowering our manufacturing costs through facility consolidation and product line rationalization. Value-added sales grew in the third quarter of 2014 to $71.2 million, a 5% increase from 2013 third-quarter value-added sales of $67.7 million.

Operating profit expanded to $7.7 million, or 10.8% of value-added sales, a 470 basis point improvement in profitability over the prior-year third-quarter operating profit margins. These third-quarter results bring the year-to-date adjusted operating profit margins of this segment to 10.2% of value-added sales, significantly ahead of our prior-year 2013 profitability in this segment, which totaled 2.6% of value-added sales. Our efforts to right-size the manufacturing footprint and rationalize the product line are clearly delivering sustainable benefits to the profitability of this segment.

The performance alloys segment, which was not involved in any of the recent restructuring efforts, also delivered strong results in the third quarter, growing value-added sales 16% above prior-year third-quarter levels to $66.7 million. This growth was leveraged to expand profit margins to $6.5 million, or 9.7% of value-added sales. The growth in this segment partially comes from our ToughMet product line, which has grown steadily over the past several years as we continue to develop new alloys and new applications which allow us to penetrate new markets.

ToughMet sales grew 35% year-over-year in the third quarter of 2014, and ToughMet sales in the first nine months represent approximately 17% of the total segment's value-added sales. The future growth prospects of this product line remain very attractive.

Beryllium and composites is also having success in new product development and launches. Third-quarter 2014 sales for the segment grew 31% over the prior-year third quarter, and 8% sequentially over the second quarter to a total of $17.9 million. New product sales in the third quarter of 2014 represented 18% of the total segment sales.

The quarterly performance of this segment can be choppy given large individual order sizes and long delivery schedules and this quarter is no exception. We had two large shipments late in the quarter into nuclear medical applications which contributed to the year-over-year and sequential growth. Operating profit margins expanded to $1 million for the quarter compared to operating losses in the prior-year third quarter.

Looking at the year-to-date performance of this segment, the quarterly volatility is diluted and you can clearly see the improved profitability that we have been forecasting. We have recently communicated that this segment's profitability is forecasted to expand $5 million to $6 million over the 2013 run rate, and we are well on our way to delivering on this forecast as operating profits have improved $4.1 million in the first nine months of 2014 compared to the same period of 2013.

It is important for investors to understand that the nonrecurring legal settlement gain and related costs recorded in the current quarter had no impact on this segment's quarterly or year-to-date profitability as the entire amount was recorded centrally and not allocated to the segment. Said differently, the $4 million year-to-date improvement in profitability is all based on sales volume growth, improved mix and manufacturing efficiency.

Moving now onto our technical materials segment, similar to the other three segments, technical materials is growing value-added sales year-over-year and sequentially. Value-added sales in the third quarter of 2014 were $9.8 million, a 6% improvement over the prior-year comparable period and a 3% improvement sequentially over the second quarter of 2014. The increased third-quarter value-added sales is generating $1.4 million in operating profit, comparable to the prior-year third-quarter profit levels and 38% ahead of second-quarter 2014 profit levels. This segment continues to recover from the slow start to the year with desizing in the automotive supply chain heavily impacting the first half of 2014 volumes, and subsequently year-to-date profitability.

Turning now to the balance sheet and cash flow, the Company began and ended Q3 2014 with a very strong balance sheet, ending the quarter with $19.6 million in cash and $50.4 million in debt. Debt levels decreased during the first nine months of the year from the $64.8 million debt balance at year-end 2013. This reduction reflects the net impact of paying down approximately $30 million of a gold denominated short-term loan with the transfer of gold ounces held in inventory offsetting the reduction in the gold denominated loan with increased borrowings of approximately $15 million in the debt facility.

The Company's balance sheet and its cash flow provide the flexibility to return approximately $15 million of cash to shareholders during the third quarter of 2014 in the form of a regular quarterly dividend and share repurchases.

During the first nine months of 2014, a total of $20.8 million of cash was returned to shareholders in the form of dividends and share repurchases. A total of approximately 480,000 shares were repurchased during the first nine months at a total cost of $15.6 million.

The Company's cash flow from operations in the first nine months of the year totaled $21 million, which includes a net investment in working capital of $37 million to support the volume growth. The magnitude of this investment is largely a timing issue, and the required investment is forecasted to reduce as we move throughout the fourth quarter towards year-end.

And finally, for financial modeling purposes, assume a 29% effective tax rate going forward. Our third-quarter year-to-date effective tax rate was 27%. However, that includes several discrete items not forecasted to repeat.

Capital spending year-to-date has been approximately $20 million, excluding non-develop cost investments, and that should approximate $30 million for the full year, in line with annual depreciation expense.

This concludes the review of the third-quarter financial performance, and I would now like to turn the call over to John, who will review our capital allocation strategy and outlook for the remainder of the year.

Thank you, Joe, and good morning everybody. I thought it would be worthwhile to comment on our capital allocation practices as in these calls as well as in our business with shareholders, we often get questions about this. The questions usually center on our acquisition and share repurchase plans. I think it's important to reinforce what we have disclosed in the past, especially given the fact that we have been more aggressive recently with share repurchases and have not closed on any acquisitions.

During the third quarter, we repurchased approximately 400,000 shares of the Company's stock. This was under the $50 million share repurchase authorization approved by our Board of Directors and previously announced. To date in 2014, we have repurchased approximately 2.5% or 500,000 shares under that authorization at a total cost of about $16 million. And at this time, we do expect to continue to repurchase shares opportunistically and at a governed pace.

Over the past two to three years, the Company has been focused on resolving specific internal and market related issues that were affecting operating performance. In addition, we have worked at and have been successful at developing an array of new organic growth opportunities. Today, we have a very strong set of new product opportunities, the strongest that we have had in several years, and we are focused on supporting these. Acquisitions have been a low priority through this timeframe. In fact, none have been consummated in approximately three years.

While we have not closed on a transaction during this period, does that we did close on in the past have proven to be quite successful. Much of our growth, our free cash flow and our new future organic growth product opportunities have been created by those businesses we acquired over a five- to six-year period prior to 2012. Over 35% of the Company's 2014 forecasted EBITDA is being generated by these businesses, and we expect this to grow to around 40% -- 45% of the total Company EBITDA over the next three to five years.

We have the financial capacity to continue to take a balanced approach to capital allocation. Our first priority remains to use available capital to support the promising organic growth. As I mentioned a moment ago, the opportunities here today are greater than ever before.

The second priority is using capital for tuck-in acquisitions that generate attractive returns and growth opportunities. While nothing is imminent, we have an active, disciplined process for identifying and evaluating opportunities. The primary focus of any tuck-in acquisition we do in the future would be to support the key identified organic growth areas, augmenting them with products, technology, market or physical capacity.

And finally, we expect to continue to return cash to shareholders in the form of dividends and share repurchases. Our growth and cash generating capacity should provide us with the flexibility to continue this balanced approach for the use of capital in the future.

Now let's turn to the outlook. As Joe has already commented, earnings in the quarter continued to gain momentum and were well above the prior year and the first and second quarters of the current year sequentially. While our third-quarter performance was much stronger than we originally anticipated, we've left our previous guidance for the year intact in the range of $1.55 to $1.70 per share adjusted. The adjusted numbers exclude from earnings approximately $0.27 per share of favorable nonrecurring gains realized to date in the year. For clarity, the GAAP number is thus $1.82 to $1.97 per share, including those items.

Earnings for the second half of the year are up significantly from those of the first-half levels as well as comparatively for the second half of the prior year. This is due to a combination of factors that Joe discussed, including higher business levels and much stronger margins.

While current quarter entry trends remain favorable, the fourth quarter may be seasonally weaker. The seasonal weakness is normally driven by markets such as consumer electronics and automotive electronics where supply chain adjustments frequently occur. We did have approximately $0.02 to $0.03 per share of business pulled by our customers into the third quarter from the fourth quarter and have several large high-margin orders in our beryllium and composite segment scheduled for delivery late in the fourth quarter that are subject to possible delay into early 2015.

In addition, recent macroeconomic news from both Asia and Europe raises the concern that slowdowns in these regions could negatively impact our order rate through the balance of the quarter and potentially push the shipment schedule on existing orders into 2015 as well.

All in all, while we have strong a second half and we are expecting to finish the year with a solid fourth quarter, one that is well ahead of the prior year, we are cautious about the quarter, given the factors that I just described.

I will now turn the call over to Dick Hipple.

Thank you John and Joe. Obviously, I'm very pleased with our third-quarter performance. The strong 12% growth in value-added sales and operating profit margins by expanding 9% demonstrates the earnings power that we have indicated.

Our commercial execution is driving sales growth greater than our end market growth, and our value-added sales into each of our three largest end markets, consumer electronics, industrial components, and medical, grew year-over-year approximately 15%. So our differentiated product portfolio gives us the ability to grow sales by penetrating new customers and new applications.

All four of our business segments are contributing to the year-over-year and sequential growth. Gross margins expanding to 33% of value-added sales clearly demonstrates that the topline growth we are delivering is profitable growth and we are improving the quality of earnings of our Company.

Last quarter, we indicated that our sales into the automotive electronics and telecom infrastructure end markets, while down year-over-year in the first half, were forecasted to sequentially improve. And that is in fact what happened in the third quarter.

Our sales into the automotive electronics were up quarter-to-quarter by 3% and our sales into the telecom infrastructure market were up 12% quarter-to-quarter driven by shipments for undersea cable lines in our telecom packaging business, which is benefiting from the rollout of 4G LTE in China.

The other end markets which remains down year-to-date but has shown sequential improvement as we forecasted is defense. Our defense sales increased to sequentially 12% over the second quarter of 2014.

Of note in defense was a major order we received for our ToughMet alloy for the Bradley heavy fighting vehicle. We see this as our first good penetration into the defense market for ToughMet which will open many other doors as we prove our distinct value and differentiation for solving reliability challenges. And when we get our foot in the door, good things happen. And we expect to get our foot in the door of several new markets this year.

Let me provide some more insights to the growth we are achieving in some of our other key end markets. Our sales into the energy end market grew 18% over the prior year's third quarter. We had record sales in the oil and gas market with the combined copper beryllium and ToughMet products. These record sales reflected the higher rig count as compared to a year ago and the increasing number of applications where our materials are being used in directional drilling and also battery applications.

Our growth in consumer electronics, our largest end market, was driven by our products going into the wireless applications, driven by the ramp ups that we saw in the smartphone market. This is obviously a seasonal bump.

Our growth in medical was primarily shipments of our BE product for our European nuclear research center using our product to produce medical radioisotopes. We also continue to see a good shipment level in our blood glucose test strip market as well as expanding sales of our precision coating products used in medical sensor applications. As I review the products behind the growth in these end markets, the power of our new product introductions becomes clear. Innovation and new product offerings in all of our business segments are contributing to our growth. Our new product pipeline is solid with ongoing progress from our OpEx wafer level processing, our new ToughMet product forms, dovetail connections for electric batteries and our new investment cast product for both beryllium components.

In summary, our Q3 performance reflects the earnings power of our business. We will continue to focus on the customer, commercial execution, and innovative new products to drive above market growth rates. This growth strategy, combined with operational efficiencies, will continue to deliver double-digit earnings growth in the future.

Looking forward to Q4, we expect to see a normal seasonal slowdown over the next several months in the consumer electronic space after the holiday build period. All other markets are expected to remain stable. So at this time, we are not seeing any particular instability in our markets due to global events. However, we are certainly actively monitoring slowdowns in Germany and China.

This concludes our prepared remarks and we'll now open the call for questions. Thank you.

(Operator Instructions). Avinash Kant, D.A. Davidson.

Good morning Dick, John, Joe and Steve. I had a few questions. The first one, I just wanted to clarify. I think John was talking about when you talked about Q4, you said you expected a seasonal decline sequentially, but you did expect this to be significantly better than Q4 last year?

That's correct.

Okay. And the second question was you earlier had talked about roughly a $0.25 to $0.30 improvement in calendar year 2014 just based on the cost-cutting efforts that you have done. Now, if I just look at the operating EPS, the low end of the guidance kind of is $0.20 above last year's EPS, roughly $0.21. So is it because the value-added sales will be down a little bit, or what's (multiple speakers)

The low end of our guidance for 2014 is $1.55. If you look at 2013 on an adjusted EPS basis, it was $1.10. So there's more than $0.20 improvement there.

Okay. Now, going forward, could you talk a little bit about the (technical difficulty) utilization rate right now, and how is that going to be impacting your margin, operating margin performance in the beryllium and composites segment?

As you can see, our improvement in the beryllium and composites certainly is very solid. So we continue to progress with the pebbles plant. And we did better in the third quarter than the second quarter, better than the first quarter, and we are up substantially over next year. So, we are on track with the performance there and the division, the segment continues to dramatically improve. As you recall, we had forecasted to have a lift of about $6 million of OP from both the improvement in sales and operations from that division and we are bringing that home.

So, could you comment, an explanation (technical difficulty)

We're probably in the range of 75%, 80%.

And at what level do you expect it to get or do you expect it to run at these levels at this point going forward?

We are going to be at the -- it's basically -- our targeted production rate is we actually have more capacity in that facility, so when I'm talking about those rates, it's the rates that we're all certainly targeting. But we actually have more upside capacity in that plant should volumes ever require it.

So, this is 75% to 80% of the total capacity, or 75% to 80% of what you have released thus far?

What was the question again?

The 75% to 80% utilization rate is off the total capacity?

No, no, no, that's just what we need.

Okay, got it. Thank you.

Edward Marshall, Sidoti and Company.

Hey guys. So, listen, I wanted to talk about the guidance if I could. It's a pretty wide range when you have one quarter left, and I'm wondering what are maybe the levers that kind of push you to maybe the high end and the low end of that range? What are the positive and negative takes surrounding that considering it's such a wide range?

Yes, absolutely. Thank you for asking. It is a wide range as we had indicated, and as you noted. And I think I'd start by saying that seasonal factors are a wildcard. The high end of the range we believe would result from absolutely no delay of the large high-margin beryllium and composites orders into 2015, as well as no shipment delays or order fall-off due to the macro conditions in Europe and Asia that seem to be unfolding. And I'll go as far as saying that also no supply-chain corrections in automotive or consumer electronics. If those factors occur -- if those situations don't occur, we could be -- that would drive the higher end of the range which, frankly, I don't know that we would say we expect. The low end would result should all of these conditions develop is the way I would express it to you at this point in time.

Okay. So you mentioned, by the way, consumer electronics and automotive electronics. That seems very similar to what kind we pointed out before with microchip, that microchip technology. Is that kind of what you're referring to? Have you seen any kind delays in the fourth-quarter order book or anything along those lines as of yet?

At this point, no. We have seen -- the comment you made about micro, but we've seen others go the other way. So at this point, I would say nothing significant. But that doesn't necessarily mean that we won't rapidly develop, as you point out, situations here have in the past.

Okay. And as I look at kind of the beryllium and composites segment, I guess I have two questions. One theme could -- and they're both kind of similar. I'm curious. You said you had a few orders in the quarter that were relatively large. And you also said there were some shipments for 4Q slated for late in the quarter. Could you quantify maybe the size of those particular orders that (multiple speakers) 3Q and what you expect for 4Q?

Yes, let me comment a bit about that. If I would have to frame what could be the impact of push-outs, you could easily see, in that segment, you could easily see push-outs that affect us $0.05 to $0.07 a share in a given quarter.

And the supply chain questions are -- let me take it a bit further. If you see significant change in consumer electronics and/or automotive, in that world you could also see a movement of $0.05 to $0.10 a share in a given quarter as you recall earlier this year. So that's the order of magnitude.

What was pulled into the current quarter, what was pulled into Q3 from Q4 was not business in beryllium and composites. We shipped what we thought we'd ship there. We had some customers pull some consumer-electronics business into the third quarter.

I see. Did you say $0.05 to $0.07 for the fourth-quarter shipments in beryllium and composites? What is that effectively as far as revenue roughly?

In that business those large shipments are about $2 million let's say on average as you think about those. So for instance, the two large ones that I referenced were approximately $4 million in terms of revenue.

So when you look at 4Q, the beryllium and composites segment, two large orders, relatively $4 million, and that's about $0.05 to $0.07 of impact potentially through fourth quarter? Is that what you're saying?

We are combining a couple things there, I'm sorry. The ones I referenced that are about $4 million was in Q3. I did not quantify the Q4 shipments.

Could you do that from a revenue perspective as opposed to the EPS perspective?

Yes, I guess what I'm calibrating you on is when we are talking large shipments in the beryllium business, they are averaging I should say around $2 million per shipment. And those are the ones that are subject to delays at our customers that cause push-outs and pull-ins sometimes as you go into year-end.

Okay. Asked a different way, I guess, how many large orders are kind of slated for back half of the fourth quarter?

There's about four to five large orders scheduled for the back half of the fourth quarter.

Okay. Could you just give a breakeven point? I missed it for the beryllium business?

No.

Could you provide that, kind of what is the breakeven revenue range for --?

I guess if you look at our year-to-date results, we are delivering $300,000 of operating profit on $50 million in value-added sales. So, a lot of the improvement here is driven by the topline growth. Our year-to-date sales are up approximately 19%, and our gross margins are expanding. It's a combination of leveraging the volume growth plus, as Dick mentioned, some of the improvement in the pebble plant production.

Is the pebble plant improvements kind of behind you at this point? Is there any more incremental impact aside from let's say additional revenue take that you can kind of see or are you kind of at that level now?

I would think that the improvements -- our run rate in 2014 are reflective -- there will be small incremental improvements as the volumes perhaps increase in the pebble plant, but we are pretty much at that run rate here as we look at Q3 performance of the pebble plant.

Okay. The last question I'm curious on, the discrete tax items that you kind of broke out for Q3, Q4 -- Q2, Q3 and then I guess are no longer going to be a concern going forward, but were they broken out in the press releases?

Were they broken --

Yes, as discrete items or one-time in nature? Because I mean --

No, the discrete items, it brought our effective tax rate out. I referenced those going from 29% as a go forward down to 27%. So those weren't carved out in the press release.

And why was the tax rate 23% in the quarter. Is that what you're referring to on an adjusted basis?

Yes. So our tax rate in the quarter from our statutory rate is mainly affecting that as the depletion credit. And then also if you look at the prior-year period, we had a large R&D credit as that law was passed, and then we had some discrete items as several FIN 48 reserves expired.

Okay, great. Thanks guys.

Luke Folta, Jefferies.

Good morning guys. Just a couple. You talked about some of the swing factors in the guidance. You didn't really say much about the energy market in terms of outlook there. Oil has pulled back a lot here. Can you give us an update on what you're hearing from your customers in terms of what their thoughts are with spending and sort of drilling levels going forward? Any color you can provide there will be very helpful.

That's an area that, with the rapid movement, is a tough one to call. And I would say -- I would think that if we keep the oil price, if it remains above $80, I think we should be steady as she goes. But I think obviously if the oil would drop down below that point, I would think that we would start to see some adjustment into that order book. So we'll have to watch that very carefully going forward.

And I have reviewed some other, quickly, some other actually latest earnings releases by companies like Schlumberger. If you dig through those, you'll find they're kind about at the same place there, that they are saying it's going to be steady as you go. But a big caveat, obviously if we see something that really drops substantially below that $80, it's going to be -- people are going to be wringing their hands here on their drilling activities.

Okay. And then your sales to oil and gas I think were up pretty substantially. Really cost of metals space, everyone who sells in that market has seen very nice growth this year. Do you have a sense of where inventory levels are in the channel? I've got to imagine there had to have been some restock in oil and gas just after the weakness in second half 2012, 2013 so far this year. Do you think that's something that has had an impact on your business?

Of course. And it's always a tough one to read of how much is the in-pull and how much is the inventory build. And that's why we do see swings from time to time. You have inventory adjustments but the market may continue to be growing. So it's one that we will see that in oil and gas. We'll see that in the consumer electronics area. We'll see it in the telecom infrastructure. We'll see it in all these markets.

And you have to be very careful when you have very, very strong shipments into a market over a six- to nine-month period of time. You can see some softness over a four-month, say, five-month period of time after that because of those kind of adjustments. So, it's an area that we are certainly watching very carefully.

Okay. And then in terms of the share buyback plan, I think John went through a fair amount of detail on your capital allocation. You brought a lot of color. But to the extent you continue to buy back shares, any sense of what sort of magnitude you might be thinking into next year?

I'm sorry, over the next year?

Yes, for the next 12 months, what do you think are the goal posts in terms of what the share buybacks could be just for the month?

Yes, I don't want to really project numbers at this point. I think it's important to recall that we believe it's an approach that is any different than a balanced approach to the use of our capital would be very limiting to our flexibility. We want the Company to always be in a position to support the organic growth opportunities we have, which as I mentioned earlier are greater today than they've been in quite some time. We wouldn't want to compromise that, especially if any of these should launch faster than we expect.

We also want to be in a position to be able to take advantage of any attractive augmentation opportunities that surface that support the key growth initiatives. Maintaining flexibility I think is a basic tenet of the approach that we would take. Having said that, I also commented earlier that we would govern our buybacks, so let me extend that by saying we govern the allocation of our capital as quarters unfold, as weeks, days, and months unfold. Hopefully, that's helpful. I'm not going to project a future number.

Okay. Yes, that's helpful. Thank you very much.

Marco Rodriguez, Stonegate Securities.

Good morning guys. Thanks for taking my questions. A bunch of my questions have been asked and answered here already, but a couple extra just kind of follow-ups. On the debt side, your debt level dropped sequentially on a pretty substantial level. Can you talk a little bit about what your expectations are there and what sort of kind of debt level you guys are targeting?

Our long-term capital allocation strategy is we'd like about 30% debt to cap. But if you think about what the reduction was in the quarter, it was mainly driven by the payback of the gold denominated loan.

Got you, okay. And then from your cash flow from operations perspective, I'm trying to get a little bit better of a feel. Coming here into Q4, are you expecting somewhat of a similar level that you saw here in Q3, or a large improvement?

Yes. Typically in Q4, you see an improvement in our working capital efficiency, not so much the efficiency but just due to the seasons of timing, we liquidate a lot of working capital in the fourth quarter, which increases our free cash flow. And so as you see, year-to-date, we have invested approximately $37 million in working capital. We will liquidate a lot of that working capital here in the fourth quarter, so the fourth quarter cash flow, free cash flow, will be much better than the third quarter and our year-to-date actual free cash flow.

Got you. And you mentioned in the prepared remarks that you were going to start to I guess reduce a bit of the working capital investments. I'm just trying to get a feel again, and also into 2015, are you expecting levels that might approach the 2013 for the full year or improvements?

Approach 2013, I'm sorry, I don't --

Fiscal 2013, you did about $75 million, $76 million in cash flow from ops.

Yes, I think we should be in the range of approximately $50 million of free cash flow, so from a cash flow from ops, I would anticipate to be in the range of around $70 million to $75 million.

Got you. Last quick question, just kind of circling back around on the acquisitions, I understand you had other priorities the last couple of years. It kind of sounds like maybe you're gearing the team up a little bit more to be a little more active here. Am I kind of reading too much into that?

No you're not. We are starting to build our pipeline and taking a look at building out our three strong platforms. So you actually read it correctly.

Got you. And was that team prior to -- were they just allocated elsewhere, doing other types of activities, or were they still kind of looking around the landscape?

Actually, the organization has changed over the last couple of years and we actually have some new people in the organization that have had some really nice backgrounds in this area. So, we actually think we have a stronger team today than we did several years ago.

Perfect. Thanks a lot guys.

Tyler Kenyon, KeyBanc Capital Markets.

Hey gentlemen. Good morning. I just was wondering if you could provide us some color just on your CapEx priorities moving forward, and just kind of how we should be thinking about D&A as well.

The capital -- our depreciation rate is running about $40 million --

-- including mine amortization.

And our capital will probably creep up a little bit, not above depreciation, but maybe I could see it being $5 million-$7 million higher than what we've seen last couple of years. It's simply because we have some pretty nice organic growth opportunities here that we will be investing in. So, we are pretty excited about that. That's obviously very healthy growth when you have those kind of opportunities.

Sure, appreciate that. And I guess I appreciate the earlier comments, but just kind of in light of the potential weakness that you're kind of highlighting as far as some of the malaise we've seen in Europe and Asia recently, can you remind us of your exposure there, and kind of, one, which end markets would you see most at risk at this particular point? And then also which segments do you see most at risk as well? Should you begin to see some fallout in order trends?

The actual foreign shipments that we have, it's about 37% of the Company's sales. But we are actually even more global than that, because a lot of our shipments let's say would go direct to the United States or go into companies picking up a Boeing or a Schlumberger or a RF Micro Devices. Their shipments are going all over the world. So I would say we are more 50% to 55% globally dependent than just the 37% of direct sales that we talk about.

So I would say if you think about slowdowns in Germany and slowdowns -- or I wouldn't say Germany, I would say Europe, and slowdowns in China, you'd certainly be talking about markets like automotive and you'd be talking about markets -- the electronics area would certainly be probably the most sensitive in our sales. As then we talked about earlier, you've got a different factor on the oil and gas if for some reason we saw something really decline in the oil and gas area. Those would be the three; I would say automotive, oil and gas and consumer electronics.

Thanks. Appreciate it.

Thank you ladies and gentlemen. There are no further questions at this time. I would now like to turn the floor back over to Mike Hasychak.

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