Materion's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.28.13 | About: Materion Corporation (MTRN)

Materion Corporation (NYSE:MTRN)

Q4 2012 Earnings Call

February 28, 2013 10:00 am ET

Executives

Michael C. Hasychak – Vice President, Treasurer and Secretary

Richard J. Hipple – Chairman, President and Chief Executive Officer

John D. Grampa – Senior Vice President Finance and Chief Financial Officer

Analysts

Luke Folta – Jefferies & Company

Edward Marshall – Sidoti & Company, LLC

Avinash Kant – D. A. Davidson & Co.

Marco Rodriguez – Stonegate Securities

Rob Young – William Smith

Mark Parr – KeyBanc Capital Markets

William Florida – Advisory Research

Phil Gibbs – KeyBanc Capital Markets

Operator

Greetings, and welcome to the Materion Corporation Year End 2012 Earnings Conference Call. 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.

It is now my pleasure to introduce your host, Michael Hasychak, Vice President, Treasurer, and Secretary for Materion Corporation. Thank you, you may begin.

Michael C. Hasychak

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

Our format for today’s conference call is as follows. John Grampa will comment on the fourth quarter and year 2012 results and the outlook, and Dick Hipple will give a market update. Thereafter, we will open up the teleconference call for questions. A recorded playback of this call will be available until March 15 by dialing area code 877. The number is 660-6853 or area code 201, the number is 612-7415, the conference id number is 408800. The call will also be archived on the Company’s website, materion.com. To access the replay, click on Events and Presentations on the Investor Relations page.

Any forward-looking statements made in this announcement, including those in the outlook section, and during the question-and-answer portion are based on current expectations. The company’s actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release issued this morning.

And now, I’ll turn it over to John Grampa for comments.

John D. Grampa

Thank you, Mike. Good morning everyone, and thanks for taking the time to join us this morning. Today’s agenda is similar to that of our past calls. I will review the results for the quarter, as well as review the outlook for 2013. And following my comments Dick Hipple will review the current state of our key markets, and provide his perspective on certain specific key new product initiatives. Following Dick, we will open the call for your questions.

As I normally do, I’ll cover sales, earnings and margins isolating the influence of high value pass-through metal, which as most of you know in our company can crowd real margin levels and trends in both business levels and margins particularly in an environment of pass-through metal prices or ships in metal mix or metal stores can change meaningfully from period-to-period.

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

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

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

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

Sales for the fourth quarter were about $304 million, down approximately 9% or $31 million compared to sales of about $334 million for the fourth quarter of 2011. Comparing sequentially to the third quarter of the year, fourth quarter sales were up approximately 5%.

Net of high value pass-through metal influences business levels for the quarter were actually up about 4% year-over-year. The improvement in the fourth quarter business levels when compared to the prior year levels was primarily due to higher demand for our materials from the automotive electronics, consumer electronics, medical, telecom infrastructure and industrial and commercial aerospace markets.

Automotive electronics was up approximately 26% year-over-year; consumer electronics was up approximately 16% and medical was up approximately 11%. Industrial and commercial aerospace and telecom infrastructure were up approximately 5% and 2% respectively in the fourth quarter year-over-year. The increases in these areas were partially offset in the year-over-year fourth quarter comparison by decreases of about 14% in energy, and 5% in defense and science. Comparing the fourth quarter sequentially to the third quarter of the year, business levels improved nicely in areas that had been weaker earlier in the year.

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

Improvements in business levels in these markets offset the normal seasonal decline expected in consumer electronics, which was about 8% sequentially.

For the full year, reported sales were down 17% to $1.273 billion from the 2011 level of $1.527 billion. Net of high value pass-through metal influences, business levels was down only 3% year-over-year. The principal drivers of the 3% decline in business levels were weaker market conditions, especially earlier in the year in telecom infrastructure, defense and science and energy. Weakness in these three areas was partially offset by increases in industrial and commercial aerospace, medical, consumer electronics and automotive electronics.

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

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

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

Let’s walk through the three factors in more detail. The first, the facility consolidation charge of $0.13 per share relates to our Advanced Materials segment. This includes the shutdown of five smaller facilities, and the consolidations of the business of those locations into other company operations. This was announced this past December. The costs for these were expected to be in the range of $0.20 per share in total to be incurred in both 2012 and 2013.

The P&L benefit in 2013, the P&L impact I should say is expected to be neutral in 2013 with some cost incurred earlier in the year being offset by benefits beginning to appear in the later quarters of the year.

The full benefit which appears in the year 2014 is expected to be greater than $0.20 a share, this program is progressing on schedule. The second factor, the fourth quarter physical inventory adjustment was announced on February 13.

In January as the year end physical inventory was being taken, the company became aware of a potential theft of precious metal from its Albuquerque, New Mexico refinery and internal investigation ensued, and an arrest was made, and a minor amount of stolen material was recovered.

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

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

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

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

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

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

In the fourth quarter, value added operating profit margins improved when comparing to the fourth quarter of the prior year, and were about equal when comparing sequentially to the third quarter level in spite of seasonal factors.

Operating profit as a percent of value added revenue was above 9% in the quarter, and increased about 200 basis points when comparing same quarter of the prior year. These percentages are adjusted to exclude the impact of the facility consolidation costs, the inventory adjustments and costs related to start up and ramp up of the new beryllium facility as well as acquisition related costs.

Now let’s turn to balance sheet and cash flow. Both the balance sheet and the statement of cash flows are attached to the press release. The company began and ended 2012 with a very strong balance sheet. The strength for the company’s balance sheet and its cash flow provided this flexibility to return cash to shareholders in the form of a regular quarterly dividend, which was initiated during 2012.

The company debt to total capital level remained at a healthy 19% in 2012. Fourth quarter cash flow was very strong, and debt net of cash decreased by approximately $33 million in the fourth quarter.

I’d like to now turn to the outlook for the year 2013. As noted in the press release as well as in the pre-release dated February 13, we currently expect earnings for 2013 to be in the range of $1.75 to $2 per share. As the company entered 2013, the near term outlook for many of the markets it serves was improving, especially in those areas that were weaker in the earlier quarters of 2012. The fourth quarter of 2012 brought sequentially higher business levels in energy, automotive electronics, medical and defense and science.

Consumer electronics was down sequentially from the third quarter of 2012 levels due primarily to seasonal factors, was up significantly from the business levels seen at the beginning of 2012.

Overall, for 2013 the company currently expects to see continued growth in certain specific key product areas. In industrial and commercial aerospace for example, sales of the company’s ToughMet products are expected to continue to grow due to both market acceptance and new product development. In medical where sales have grown in recent years, additional growth is expected in 2013 from new product introductions as well as from specific account penetration.

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

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

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

To add some specific color for your modeling purposes, we expect in 2013 that EBITDA will be in the range of $92 million to $105 million, and interest expense to be in the range of $2.5 million to $3 million.

We expect depreciation and amortization to be in the range of $38 million to $43 million, and capital spending to be at or slightly below depreciation levels, and therefore also in the range of $38 million to $43 million.

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

One final comment about the outlook before I turn the call over to Dick Hipple to provide you with more detailed market update. As you know, it is not our normal practice to provide quarterly guidance.

However, given the number of factors that I have highlighted today, many of which are difficult for sell side analysts and shareholders to model, I thought that it would be helpful to provide some insight to how we see the 2013 quarters unfolding at this time.

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

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

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

Richard J. Hipple

Thank you, John. And I must say we are happy to put 2012 behind us for lots of reasons. A tough year for us in several areas, but nothing occurred that is systemic in nature and we expect to bounce back strongly in 2013. The issues we fought through in 2012 will make us stronger going forward including areas such as our restructuring actions, resolution of equipment issues in our new pebble plant and certainly some enhancements to our security processes.

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

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

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

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

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

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

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

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

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

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

The medical market remains strong for us as we are gaining above market rate growth through new products in blood glucose test applications and our thin film coatings business. The defense market has actually picked up for us at this point and we expect the remainder of 2013 to be solid.

Should further cuts be realized in the sequestration process we would expect to begin to see an impact towards the fourth quarter of 2013. We are well positioned in critical platforms focused on in the sky intelligence, reconnaissance and surveillance optic systems. A critical part of our strength is our new array optics technology and our high BE optic structures.

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

Another important factor for us is keeping our restructuring activities in 2013 neutral in cost while setting us up for $0.20 earnings per share benefit in 2014. And so far we are on track with these initiatives. So as we move forward our eyes remain focused on brining new solutions to our customers with exciting differentiated products and services while driving the most efficient operating model. We will remain vigilant to the many domestic and global economic landmines that can develop. And we’ll react quickly should they upset the fundamental improving conditions that we are seeing.

Thank you. And we will now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Luke Folta with Jefferies. Please state your question.

Luke Folta – Jefferies & Company

Hi, good morning guys.

Richard J. Hipple

Good morning.

John D. Grampa

Good morning, Luke.

Luke Folta – Jefferies & Company

A nice detail on the outlook and it answered actually a lot of my questions there, but couple ones left as it relates to Beryllium segment, with the start up of the new pebbles plants or the ramp up I should say of that over the course of the year. Can you give us some sense of what your expectations are within your, 92 to 105 EBITDA guidance, how much of that is attributed to the Beryllium segment ballpark?

Richard J. Hipple

The segment EBITDA for the year?

Luke Folta – Jefferies & Company

Yeah, just trying to get – just some rough magnitude?

Richard J. Hipple

We have not disclosed the EBITDA by segment and I don’t know that we have it handy here we do have. It’s in the $8 million to $10 million.

Luke Folta – Jefferies & Company

Yes certainly $8 million to $10 million.

Richard J. Hipple

Range it would be

Luke Folta – Jefferies & Company

Okay.

Richard J. Hipple

EBITDA perspective.

Luke Folta – Jefferies & Company

Okay.

Richard J. Hipple

Okay.

Luke Folta – Jefferies & Company

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

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

Richard J. Hipple

In fact on the stockpile we build that’s actually not even a factor now so that’s all, we see that as being more of a upside in 2014 and 2015 so that’s actually a zero impact to us. And I would say that probably the biggest program if it were to have a significant whack to although its already been planned to be down would be look for the example like the F35 Joint Strike Fighter would be an impact to us.

Luke Folta – Jefferies & Company

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

Richard J. Hipple

Oh boy, I’m going to take a flier but we’re probably in the range of like 50,000 an aircraft something like that.

Luke Folta – Jefferies & Company

Okay, thank you.

Richard J. Hipple

Actually might even be lower sometimes I get a little confused between the commercial side and defense side so we’re probably higher on the F35 we’re probably close to $80,000, $90,000 a plane on that one.

Luke Folta – Jefferies & Company

Okay, that helps thanks. Right, and then also on the consumer electronics it seems to be that some areas of that business are picking up like you said wireless and some other spots and some aren’t. Can you may be dig a little deeper in there and just kind of talk about the different buckets that, of business that you serve and any sense of magnitude of the significant of different parts and what’s changing and what’s picking up and what’s not would be a very helpful for us?

Richard J. Hipple

Well the biggest part for us is in the wireless segment primarily driven by smartphones and tablets and the whole wireless portable device sector. And that’s the one that is showing some strength at this point in time versus a pretty squishy last year.

So we’re seeing some pick up there and then the other space what I call slight dichotomy were we also supply materials in the telecom infrastructure space. And the good news there is that was pretty soft across the board last year we’re seeing about a half of our business pick up in the other half its still kind of remaining stagnant.

So we’re kind of seeing a half lift if you will on the telecom infrastructure space, but to me that should kind of flow through the entire business, because if you start to see a pick up there and you’re not going to see a parallel with all of your products and all of your applications you have a simultaneous pull. So we’re seeing some strength there I think that strength will continue on through the year to pick up some of the other products.

For example the M25 product that I mentioned and the calls have been very soft last year, it’s still soft but I would expect that to start to pick up as we go through the year. So we had kind of half lowest improvement in the telecom infrastructure space. And then on the LED space – I’d say in that side of it, it still its stable like to see it stronger it hasn’t has a list of the other areas I’ve seen.

Luke Folta – Jefferies & Company

Okay.

Richard J. Hipple

So you got wireless up, half lope up and telecom infrastructure and the LED space is still kind of flat line.

Luke Folta – Jefferies & Company

Is there anything you could say to help us understand that the size of the LEDs related business versus wireless in telecom?

Richard J. Hipple

No I don’t have that broke out but we don’t report that.

Luke Folta – Jefferies & Company

Okay. All right.

Richard J. Hipple

I think it is fair to say if you want to think about our businesses I gave and them three end of priorities. The biggest segment is the wireless, second biggest segment is the telecom infrastructure and then the third largest is the LED space.

Luke Folta – Jefferies & Company

All right. Thank you very much.

Operator

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

Edward Marshall – Sidoti & Company, LLC

Good morning Mike, John and Dick.

Richard J. Hipple

Good morning.

John D. Grampa

Good morning.

Edward Marshall – Sidoti & Company, LLC

Its good to see the markets are now cooperating with you because of all the work you’ve guys put in the past year or so all the market are slated to do in the first half of 2013 so its good to see it all coming together. The question the first question I wanted to talk about was may be the operating profit and the Performance Alloys it looks like you had the best revenue for the year in that business, but it doesn’t look like the volume is translated to the slightly higher margin it looks like it was the lowest margin for the year despite the highest revenue. Can you kind of talk about may be what’s going through that line or why the extra cost kind of ran through that line in that business segment?

John D. Grampa

Looking at the fourth quarter versus the first three quarters of the year?

Edward Marshall – Sidoti & Company, LLC

That’s correct for Performance Alloys only. I’m looking at the margin relative to the returns on sales?

John D. Grampa

And you’re looking at year to date September versus this fourth quarter December?

Edward Marshall – Sidoti & Company, LLC

Another cadence for the year and I’m looking on an adjusted basis so I have 8.3%, 9.2%, 7.9%, 7.5% for the operating margin throughout the year 7.5 being the fourth quarter?

John D. Grampa

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

Edward Marshall – Sidoti & Company, LLC

7.9%. Despite the fact there is we could follow up later if you want to get the numbers and we can change that?

John D. Grampa

There are a couple things there one of which is there are two factors that can affect those numbers significantly and Jim Marrotte will look into this while I’m talking. One is the signing a shipment to NGK the hydroxide shipment. A second one is swings in production with as you know we can’t paint that factory and depending upon when you paint it, you could have impact on overhead absorption and swings in inventory changing your costs structure in a given quarter. So I don’t see any alarming about the sequential movement from third to fourth quarter earlier in the year business levels were a little stronger as the year progressed we had improvement in pricing to help offset the swings in production I’ll let Jim comment.

Richard J. Hipple

Yes just to amplify in the John’s comment about the clinical production that’s particularly true with our Utah operations with our mine where we campaign that facility. And we’re in the fourth quarter we’re concentrating more on constructing a new mine a new pit out there as opposed to running a factory and processing more hydroxide. But earlier in the year we were running at heavier levels to build up that inventory why we shifted resources over to – building a new pit at this time. I don’t think it was anything fundamentally different in the alloy business itself that would cause any concern over the margin levels.

Edward Marshall – Sidoti & Company, LLC

So you’re saying just more seasonal impact?

Richard J. Hipple

Yes. More seasonal impact but also I’d like to make a comment with overall year over year in that business volumes were actually down sales were actually up year over year. And that’s a reflection of some of the pricing and benefits that we have in that business. That’s an important factor for the year we’re making great progress in that business with pricing.

Edward Marshall – Sidoti & Company, LLC

Sure.

Richard J. Hipple

Then we also saw some good yield improvements on the shaft floor at our Elmore operations in that business in the 2012 that’s become institutionalized and those yields we’re looking carry forward.

John D. Grampa

In several areas yes.

Edward Marshall – Sidoti & Company, LLC

May be just to ask a question in other way and you talked a pretty well about the ToughMet growth rate. And I think that runs through that business segment. There is nothing funky with the margin on the ToughMet material it would be a higher margin product for you?

John D. Grampa

Well it is a higher margin product, sure.

Edward Marshall – Sidoti & Company, LLC

Okay.

Richard J. Hipple

But all the unique characteristics and we price accordingly so yeah it’s a good margin product.

Edward Marshall – Sidoti & Company, LLC

Okay. And just can you talk about may be the growth rates I know it’s been growing pretty well for you guys and it’s been one of the, it’s been a good source for you. Can you talk about what may be you expect for that I mean its not going to obviously continue to double though I’m sure you’d like it to?

John D. Grampa

It will increase say 25% a year forever. At least that’s what I told the President he is up for that.

Edward Marshall – Sidoti & Company, LLC

I think we’re on recorded mine by the way?

John D. Grampa

Okay. What the heck. You can have fun what the heck. But anyway yes it’s amazing we have been growing our product at about that rate now for quite a long time. We have reached the capacity of that facility and I think a call or two ago back we talked about we are expanding its capacity and it will have, that capital is being put in now as we speak.

And we’ll be bringing that facility up in line in the middle of this year. So we’re getting prepared for this, we’ll continue to grow beyond the capacity of the current facility. So we’re making that investment accordingly and there are still runways of growth for that product that we see. Because beyond what I call the current market space. And so it’s exciting that product has grown into actually into some unexpected areas it’s grown into the consumer electronics space.

Basically it’s been our horse for aerospace and oil and gas, now it’s in electronics in fact it’s the products that goes into the camera stabilization for iPhones and iPads and other devices. We’re developing a new product to hopefully dramatically expand its use in bushing area, it’s a big bushing product we used in, again heavy mining equipment, aerospace and oil and gas.

And we’ve come up with a new product that dramatically lowers its cost for some higher volume let’s say on the road type applications. And if we’re able to successfully push that through then and it just gives us a whole new leg of growth. So right now we’re going to keep pushing this product, it’s growing and I would expect that to continue to grow at that kind of a rate for the next couple of years but there is going to reach a point here where you can’t say that anymore.

Edward Marshall – Sidoti & Company, LLC

I’m curious and I think that you’ve had a pretty much success as being one of the only ones been able to produce this material. Has anyone else been able to duplicate it yet? I know you are still the only sole producer of this material.

Richard J. Hipple

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

Edward Marshall – Sidoti & Company, LLC

Okay.

Richard J. Hipple

In other words there is a producer of some strip products in Japan, but they don’t make the rods, wire, plates and basically that’s where our highest volume is.

Edward Marshall – Sidoti & Company, LLC

Sure.

Richard J. Hipple

It is in the areas and we’ve taken this product from a product development standpoint far beyond any competitor. So, it’s very minimal competition at this point in time.

Edward Marshall – Sidoti & Company, LLC

Okay. John just one quick question on the charges in the quarter $0.38 it’s allocated to the Advanced Materials. Could you give me the pre-tax charges, so I can reconcile the margin in the quarter on a pro forma basis?

John D. Grampa

Yes, the inventory was $7.4 million.

Edward Marshall – Sidoti & Company, LLC

Okay.

John D. Grampa

Facility consolidation charges were $3.8 million.

Richard J. Hipple

$3.8 million, $3.9 million.

John D. Grampa

$3.8 million to $3.9 million okay.

Edward Marshall – Sidoti & Company, LLC

And then for Q1, just out of curiosity it’s $0.10 of charges that you anticipate on the 33 to 36 GAAP numbers so effectively the pro forma numbers 43 to 46 is that right in Q1 of 2013?

John D. Grampa

In Q1 of 2013.

Edward Marshall – Sidoti & Company, LLC

Right.

John D. Grampa

33 to 36 no, does not have a dime in it. The 33 to 36 is the timing of those charges the $0.10 that we’ll see in 2013 about $0.06 of it’s in the first quarter, $0.05 to $0.06 in the first quarter and maybe $0.01 or so by the time we get to the third quarter we should start seeing benefits to kind of offset in the second half.

Edward Marshall – Sidoti & Company, LLC

Okay perfect, thank you very much.

Operator

Thanks and our next question comes from Avinash Kant with D. A. Davidson & Co. Please state your question.

Avinash Kant – D. A. Davidson & Co.

Good morning Dick, John and Mike.

John D. Grampa

Good morning. Thank you for calling.

Avinash Kant – D. A. Davidson & Co.

Few questions so maybe John can give that to me. Could you give us that total impact of the facility related charges in 2012 and how much do you expect from that in 2013?

John D. Grampa

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

Avinash Kant – D. A. Davidson & Co.

So, you had a $0.13 in 2012 and you will have $0.10, but you will have basically zero impact in 2013, right?

John D. Grampa

Zero impact 2013 and benefit of $0.20 in 2014.

Avinash Kant – D. A. Davidson & Co.

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

John D. Grampa

All pass-through.

Avinash Kant – D. A. Davidson & Co.

All pass-through. Okay

John D. Grampa

All pass-through.

Avinash Kant – D. A. Davidson & Co.

Okay. Okay and then the timing of the pebble plant and in terms of, I believe this is expected to have some impact on margins, which way positive or negative in the first half and the second half?

John D. Grampa

Well second half will be stronger than the first half margins in that segment, but we are still even in the first half, will be better than last year.

Richard J. Hipple

Then last year.

John D. Grampa

Because it continues to ramp up.

Avinash Kant – D. A. Davidson & Co.

Okay. So basically we can expect margins to continue to grow, through the rest of the year as this trend comes on line?

Richard J. Hipple

That is correct.

Avinash Kant – D. A. Davidson & Co.

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

Richard J. Hipple

How big ToughMet is?

Avinash Kant – D. A. Davidson & Co.

Yes.

Richard J. Hipple

It’s probably in range of about 40 million in sales.

Avinash Kant – D. A. Davidson & Co.

How much?

Richard J. Hipple

It’s probably about 40 million in sales.

Avinash Kant – D. A. Davidson & Co.

On an annual basis?

Richard J. Hipple

Yes.

Avinash Kant – D. A. Davidson & Co.

40 million?

Richard J. Hipple

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

Avinash Kant – D. A. Davidson & Co.

Okay, thank you so much.

Operator

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

Marco Rodriguez – Stonegate Securities

Good morning guys. Thanks for taking my questions. I just wanted to, most of my questions have actually been asked and answered already, but I just wanted to kind of follow backup with one of the previous questions on the defense and science segments, I mean you guys are obviously indicating a stronger 2013. Can you maybe just provide a little bit more color why your confidence is there despite the sequestration and I understand that the pebble rebuild is obviously not going to be effected?

John D. Grampa

Well there is a couple of things. Again if you think about where we’re playing and where we’re playing is really not what I call on the ground military. We’re playing in the space, in space for optical devices for where you need to collect information, targeting reconnaissance, surveillance so that’s where we are right now and those programs are still being funded. They were funded well towards the second half of last year.

So, if you have a kind of a program that’s already well funded well underway it’s unlikely to have an impact on a near-term sequestration, surely it could have an impact by the fourth quarter. In addition to that so again our materials are in pretty much all the [slime] devices that are around with the drones and any kind of military aircraft on optical devices. We’ve also developed a new technology that greatly enhances the capability of optical capability on numerous devices and we uniquely have that technology and that will be growing next year.

Marco Rodriguez – Stonegate Securities

Got it.

John D. Grampa

That’s the demand for it.

Marco Rodriguez – Stonegate Securities

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

John D. Grampa

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

Marco Rodriguez – Stonegate Securities

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

John D. Grampa

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

Marco Rodriguez – Stonegate Securities

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

John D. Grampa

Well I think the real difference there would be the level of business, you’re talking about quarter or the year?

Marco Rodriguez – Stonegate Securities

The year?

John D. Grampa

The year. It’s really centered on the level of business. We’re assuming that the execution of our programs on both ends of that are successful so what drives the low line end is nothing more than business level.

Marco Rodriguez – Stonegate Securities

Got it. Great, thanks a lot guys.

Operator

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

Rob Young – William Smith

Hey, good morning, guys.

Richard J. Hipple

Good morning.

Rob Young – William Smith

I just have couple of quick questions, will the facility consolidation charge effect the sales efficiency at all or sales foreign entities.

Richard J. Hipple

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

Rob Young – William Smith

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

Richard J. Hipple

That’s right.

Rob Young – William Smith

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

Richard J. Hipple

The break-even point will come down as that plant ramps up and we get more production through that facility.

Richard J. Hipple

It should be significantly less.

Rob Young – William Smith

It should be significantly less.

Richard J. Hipple

Yeah.

Rob Young – William Smith

Okay, and then just lastly, John do you have the D&A and CapEx for the quarter, I am not sure if I missed it or…

John D. Grampa

Yeah I commented only on the year, I would think that, you’re not going to see significant swings quarter-to-quarter in that number, maybe a million or so one way or the other on the CapEx maybe we start out a little later, but not significantly different.

Rob Young – William Smith

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

Richard J. Hipple

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

Rob Young – William Smith

Yes.

Richard J. Hipple

We don’t have.

John D. Grampa

Sorry, we don’t have that, we have the annual figures there, we’d have to ...

Richard J. Hipple

We don’t have [that].

Rob Young – William Smith

Okay, okay all right, good that’s all I have I appreciate it. Thanks.

Richard J. Hipple

Sure.

Operator

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

Mark Parr – KeyBanc Capital Markets

Hey thanks a lot, good morning.

Richard J. Hipple

Good morning Mark, how are you?

Mark Parr – KeyBanc Capital Markets

Yeah I am doing fair, (inaudible).

Richard J. Hipple

Hey Cleveland Mark.

Mark Parr – KeyBanc Capital Markets

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

Richard J. Hipple

You’re talking about sequential? Over prior years or you’re talking sequential?

Mark Parr – KeyBanc Capital Markets

I believe it is prior, it’s year-over-year, because the minus 3 was a full year versus the full year right?

Richard J. Hipple

That’s right.

Mark Parr – KeyBanc Capital Markets

And I think these other numbers I think were year-over-year for the quarters and I’m just at least I’m sure that there may be a difference and may be in the way that you came up with a number or but I’m just trying to reconcile the …

Richard J. Hipple

Yeah I don’t have it here Mark, but certainly you can’t really take those minuses and throw them all together in that way and you just have to nail on the head really as to why you do get significant changes in metal from period to period metal in sales in metal mix and you also get significant changes in period-to-period with metal source. The source of metal in those numbers. So, without trying to break it out here since I don’t have it in front of me, I really can’t answer the question directly and say that’s probably the cost.

Mark Parr – KeyBanc Capital Markets

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

Richard J. Hipple

Right.

Mark Parr – KeyBanc Capital Markets

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

Richard J. Hipple

Well the ToughMet expansion is, I think it’s about $2.5 million. So that’s all that is. For that expansion we actually, when the facility was first built it was built with expansion in mind. So actually the foundation of the structure was already there we just had to pop in the equipment.

So it was good thinking people 10 years or 15 years ago. And then we have several other growth initiatives that the capital supporting this year, including a very unique technology in our optics division so wafer level production, which gets into kind of the leaders in that space right now. So we’re pretty excited about that. We’re just bringing up the new plant in our new facility, production facility for, really new smart technology for meters and let’s say facility on (inaudible) technical materials division in Rhode Island.

So, we have some pretty unique capital being spent this year. It helps some very specific growth initiatives and some product lines. So, I would have to say that we probably have a split something in the range of probably half of our capital is in for growth and the other half is for maintenance and environmental.

Mark Parr – KeyBanc Capital Markets

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

Richard J. Hipple

But we’ll dig into it.

John D. Grampa

Book-to-bill, were flat in the fourth quarter.

Richard J. Hipple

In fourth quarter.

Mark Parr – KeyBanc Capital Markets

So its one?

John D. Grampa

Yeah.

Richard J. Hipple

The fourth quarter was one.

Mark Parr – KeyBanc Capital Markets

Okay. Do you think it’s gotten any better than that here as you moved into 1Q?

Richard J. Hipple

Yeah.

Mark Parr – KeyBanc Capital Markets

And that’s due to – is that more due to prior year’s slowdown, or is that due to sequential up trend in what you’ve been seeing here?

Richard J. Hipple

Sequential up trend from the third, to the fourth, to the first.

Mark Parr – KeyBanc Capital Markets

Okay terrific, thanks guys good luck with the first quarter. And we could talk, John we could talk later about reconciling those other numbers, thanks.

John D. Grampa

Sure that’s works.

Operator

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

William Florida – Advisory Research

Yes, apologies for coming late to the call, I heard you talk about CapEx and if this is already covered, I apologize, did you talk about generating free cash flow for the coming year whether how much cash the business will generate?

Richard J. Hipple

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

William Florida – Advisory Research

Thank you.

Operator

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

Phil Gibbs – KeyBanc Capital Markets

I am all set guys, thank you.

Operator

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

Michael C. Hasychak

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

Operator

Thank you. This concludes today’s teleconference. All parties may disconnect. Have a great day.

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