Materion's (MTRN) CEO Richard Hipple on Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: Materion Corporation (MTRN)

Materion Corporation (NYSE:MTRN)

Q2 2014 Earnings Conference Call

July 24, 2014 9:00 AM ET

Executives

Michael Hasychak – VP, Treasurer and Secretary

Joe Kelley – VP, Finance

John Grampa – SVP, Finance and CFO

Richard Hipple – Chairman, President and CEO

Analysts

Avinash Kant – D.A. Davidson

Luke Folta – Jefferies

Edward Marshall – Sidoti and Company

Operator

Greetings 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) As a reminder, this conference is being recorded.

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

Michael Hasychak

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 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, we will open up the call for your questions.

A recorded playback of this call will be available until August 8, by dialing area code 877, the number is 660-6853 or you can also dial area code 201 and the number is 612-7415, the conference ID number is 13586002. 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 that was issued this morning.

And now, I’ll turn it over to Joe Kelly.

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 end market. I will also make the 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 supply 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 of 2014 levels. The year-over-year growth in value-added sales is attributable to increased volumes into consumer electronics, primarily the semiconductor market phase and the 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 margins 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 volumes 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 invest from 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 estimates by approximately $0.09 per share. The shortfall to expectations was driven by unexpected declines in the defense and the automotive electronics and markets. We had expected defense to be flat and automotive to be up single digits. Despite the myth, 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 by largely to end market movements.

Our Advanced Materials Technology 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 reported 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 business also reported 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 represent the 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 of profitability of the performance alloy segment, despite value-added sales growth of 8% is reflective primarily of our product mix shift. As volumes sold into automotive electronics and undersea telecommunications sector decreased year-over-year, altering the mixed 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 segments profit margins. This segment has many large discrete product shipments and to 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 reported 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 ordered on the book 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 markets. When comparing to the prior year levels, value-added sales were up approximately 5%, and compared sequentially to the fourth quarter of 2013 were up 10%. From an end market perspective, 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 remained relatively flat sequentially, quarter-to-quarter.

Looking at the first half 2014 value-added sales are flat year-over-year which include the 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 Q1, 2014 with a very strong balance sheet ending the quarter with $19.3 million and $73.6 million in net debt.

The company’s balance sheet and cash flow. The company began and ended Q2 2014 with a very strong balance sheet and in the quarter was $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 our regularly quarterly dividends and opportunistic share repurchases while at the same time paid down $30 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 below $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 from 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.

John Grampa

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 continue to gain momentum and we’re 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 a 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 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. As shipments to these markets have 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%, and shipments to these two markets have 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 hurts 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 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 down 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. Clinical prices [ph] 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, timings, 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 exit 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 the second half for the prior year. Order entry in the last seven weeks is up approximately 13% compared to the same seven weeks of prior year, leading to a good start to the second half. Margins are expected to expand accordingly that can enhance 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, and increase 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. And we anticipate continued quarter-over-quarter earnings improvement with earnings per share in the fourth quarter sequentially stronger than the third, and the 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.

Richard Hipple

Thank you, John. 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 the combination of new product introductions and restructuring cost savings. However, these results did fall short of our expectations – faced some unexpected and unplanned challenges in the marketplace.

In the second quarter we had planned for the defense market who have bottomed from the weak 2013 and certainly have 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 customer. This inventory adjustment affected both, our alloy and tactical 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 a beryllium composite’s 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, and our consumer electronic 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 the current workings, our energy applications in oil and gas which are focused on directional drilling and deep sea completion applications, and commercial aerospace where we have gravely 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 expectations 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 electronic sensing devices, see nice growth from our new investment in electron beam welding for product going into energy management systems in both automotive and consumer electronics. Our specialty phosphors and precious metal PVD targets used in LED lighting applications, and our service business in shale kit [ph] 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.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Avinash Kant with D.A. Davidson. Please proceed with your question.

Avinash Kant – D.A. Davidson

Good morning, everyone. I had a quick question on – 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 of the quarter?

Richard Hipple

The data is in the attachment to the press release Avinash. I think its attachment five or four of the press release, so it’s there.

Avinash Kant – D.A. Davidson

Okay, thank you so much. And then…

John Grampa

The value-added sales by segment, did you wanted by end market though, Avinash?

Avinash Kant – D.A. Davidson

Yes, I wanted end market actually.

Richard Hipple

Okay, well we can provide some insights to that now.

John Grampa

So consumer electronics in the second quarter – account comprised approximately 28% of our BA, industrial components was about 14%, medical was about 11%, automotive electronics was down to about 9%.

Avinash Kant – D.A. Davidson

And do you breakdown defense and telecom infrastructure and all that?

John Grampa

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

Avinash Kant – D.A. Davidson

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

Richard Hipple

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

John Grampa

Roughly $0.05 a share.

Avinash Kant – D.A. Davidson

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

Richard Hipple

Our content has not changed, in fact, it’s gone up a little bit, we do know the program has not been cancelled.

John Grampa

It’s a push out.

Avinash Kant – D.A. Davidson

Okay. And also for the second half, of course you are talking about improved margins. If you look at full year though, it looks like we would hardly have any revenue growth in 2014 but if 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?

John Grampa

Avinash, 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 above margin expansion in the second half being approximately 200 basis points above first half levels. So given that kind of growth, we are – given the growth that we expect in the second half we do expect margin expansion.

Avinash Kant – D.A. Davidson

Okay. Thank you so much.

John Grampa

You’re welcome.

Operator

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

Luke Folta – Jefferies

Good morning, gentlemen.

Richard Hipple

Good morning, Luke.

Luke Folta – Jefferies

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

Richard Hipple

No because what’s interesting or what’s not very interesting to me at all quite frankly but it was really across the board in both of our business units, almost identical numbers, and they are totally different application customers, it was not a market share loss. And the other thing is, it’s always easier when you look backwards. Look backwards we have very heavy sales in our automotive – I had said it late in third quarter, really fourth quarter last year, probably heavier than it should have been, if you know what I mean. So there was an inventory build and the cards build up and then just in our supply chain we saw a much larger adjustments than we would have expected. We see – it was shocking to us quite frankly that there where the automotive market, in fact we saw some weakness in the first quarter and we expected that to be flushed out in second but it didn’t happen and now we’re seeing it. So it’s just – really difficult sometimes to predict how those inventory cycles work. But as we all know, I mean fundamentally, car sales have been good. So I’m not concerned at all about the market itself, we haven’t lost share that we’re aware off, 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 that kind of a swing in our forecast was pretty big, so we kind of lost that traction. In fact, if the automotive market had been where we thought it should be, 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 will certainly say, Materion coped up [ph] for our forecast here and what happened in the automotive business, certainly it’s a surprise to me.

Luke Folta – Jefferies

Okay. What’s your – can you give us some sense with the geographic distribution of auto sales are, I mean, just U.S. versus non-U.S.? I need any color that would help.

Richard Hipple

I think in total we’ll probably close – probably 60% U.S. and 40% overseas between Europe and Asia.

Luke Folta – Jefferies

Okay. Alright, and then – I think it was said that overall activity on the whole was up about 13% over the last seven weeks or so year-over-year. Can you talk about exactly which markets are driving that?

Richard Hipple

Let me add 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 first half that’s higher. So it will be about the same if not higher than we had in medical in the second half of last year. We’re seeing some lift in telecommunications infrastructure and we’re seeing – probably defense is flat and some lift in automotive finally.

Luke Folta – Jefferies

Okay. And then on the Beryllium and Composites business, I think you might have said that – there was a lot of net business there, almost $2 million this quarter. How do we think about that in terms of – is that mostly the F-35 push out impacting that business? Can you maybe just give us some sense of what drilled the loss there? And then an update on the pebble’s plant ramp up would be helpful as well.

Richard Hipple

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 choppy or can be lumpy and I think we talked about that a little bit in the – in those discussions this morning. We – the shipments are large and they carry high margin. And that’s really the nature of this business, large shipments – these shipments can move a few days or even weeks for a variety of reasons. Sometimes customers are not ready for delivery, sometimes the on-site inspection hazards been – a pre-shipment inspection hazards been completed by the customer in time or 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 that he is matching the expensive material to aren’t ready at his shop but cancellations are rare. So cancellations are rare but delays are not. Year-over-year we think that – we’re forecasting a $4 million to $6 million year-over-year improvement in this business.

So we see positive operating profits in the second half obviously, and we have the orders as Joe has mentioned, in house, that gives us the confidence that we’ll be able to deliver on that kind of year-over-year performance improvement. These pebble’s plant improved in the second quarter and is forecasted to continue to sequentially improve productive output, and that will favorably impact the cost and therefore margins as we move through the balance of the year and it’s the 2015 in this segment. Hopefully that covers your questions.

Luke Folta – Jefferies

Yes, I have it in my notes but you guys might be running that plant full out by the end of the year, is that right, how you’re thinking about it?

Richard Hipple

Yes, that’s correct. And we’re on-track to do that.

Luke Folta – Jefferies

Okay. And then just last one, as we think about cash flow you talked about D&A in CapEx, can you – I mean, I guess mutualising working capital, it looks like we’re – maybe still low to $50 million in entry cash this year. I guess, can you talk about working capital expectations in the year than anything else you think has a meaningful impact on the cash flow that we haven’t discussed?

John Grampa

Luke, you are correct. And 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 in assuming about it’s approximately $50 million free cash flow for the full year. So as we go through the second half of 2014 our working capital, we’ll start to liquidate that.

Luke Folta – Jefferies

Thanks a lot.

Operator

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

Edward Marshall – Sidoti and Company

Good morning guys.

Richard Hipple

Good morning.

Edward Marshall – Sidoti and Company

So let me just 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 that’s specific to maybe what your forecast and your guidance was, or your expectations for the year?

Richard Hipple

Yes, we had planned for this – 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, it’s very application specific. All particular applications are centered around what’s known as the E-OS 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 – they are transferring the technology into an investment casting technology which is a new technology and that’s what we’re shapening [ph] them. But I think that they are going through some gyrations, probably from an engineering standpoint as they change the design. So there might have been a little sub-category that has 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 year as it used to be that we would ship blocks of material and then we shipped what’s known as near net casting material saves a lot of material and less machining. And now we’ve shifted this technology to what’s known as investment cash which you really get almost pretty much the final shape with very modest machining required. So the efficiency is really going up with the kind of product and lowering our cost to ultimately expand the application base that we have. So this was a big cost saving part of the F-35 and I think just because of the opportunities here we may have seen some delays just – because of the totally different manufacturing process for them, and they have been working very hard with us to make this transition and it just maybe that this particular unit has been pushed back.

Edward Marshall – Sidoti and Company

Is there something that they can’t build the plane without or how…

Richard Hipple

Correct, that’s correct.

Edward Marshall – Sidoti and Company

Well, is it that they have shipped too much already and they are just kind of catching out or is it…

Richard Hipple

No, no. If you just listen to what I said, it was – it’s a new designed part that goes in there. So they have changed their engineering approach for this E-OS program that uses our materials from – frankly, 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 – quite frankly, just – probably they’ve began some push outs on the F-35.

Edward Marshall – Sidoti and Company

Yes, I mean – I’m reviewing their call as we kind of – we’re progressing to this one and I didn’t see any mentions of any delays or any 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 trying to back into maybe what was potentially going on there. We could 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 leasing the beryllium and composites business. Are you lowering that number? Was it $6 million I think on the last conference call, and now are you looking for a lower profit run rate out of that business now or are you just giving a broader range?

Richard Hipple

No, actually not, that’s the same number.

Edward Marshall – Sidoti and Company

Okay.

Richard Hipple

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

Edward Marshall – Sidoti and Company

Okay. And so, I mean on the low end of the range you’re basically just profitable I guess by roughly $1 million or so?

Richard Hipple

Correct.

Edward Marshall – Sidoti and Company

So for $0.5 million is that the way to think about them?

Richard Hipple

Yes.

Edward Marshall – Sidoti and Company

Okay. Inventory was significantly higher…

Richard Hipple

Let me just share the interesting point, I just want to – I don’t think we picked up on this in the call but if I were you I’d be asking the question how the heck you’re 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 and forecast as in the non-defense area, and this is really to our nuclear business – for our 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 that even in spite of the defense coming down in the second half. So that’s really good news.

Edward Marshall – Sidoti and Company

And on the inventory levels being significantly higher, and even on uncharacteristically from a seasonal pattern in years passed, is there anything in particular going on there?

Richard Hipple

There is the typical build in advance of some of the planned shutdowns in schedule 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, it’s was about $20 million. That is simply a balance sheet reclass, it had nothing to do with the cash flow, and the classification of the hedge associated with our goal denominated loan [ph]. Depending on exactly what number you’re looking at that may have an impact on that.

Edward Marshall – Sidoti and Company

You talked about building orders, do you know that – do you have the book-to-bill for Q2 and maybe where it stands post Q2?

Richard Hipple

No, we don’t have that.

Edward Marshall – Sidoti and Company

You don’t have the book-to-bill number, I know you provided on prior calls.

Richard Hipple

No, we do not have it here in front of us.

Edward Marshall – Sidoti and Company

Okay.

Richard Hipple

It is up as I mentioned to you – 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.

Edward Marshall – Sidoti and Company

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, the last month or last two months of 2Q versus kind of the way we’re over the last seven weeks?

Richard Hipple

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…

Edward Marshall – Sidoti and Company

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

Richard Hipple

Yes, your memory is correct depending on the business you’re talking about but sequentially, our Q2 – our order entry is up about 10%.

Edward Marshall – Sidoti and Company

That’s great, thanks guys.

Operator

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

Unidentified Analyst

Hi, this is actually Dan Treng [ph] sitting in for Marco Rodriguez. I’m wondering if you could talk about the capital allocation of your projected free cash flow for the remainder of 2014.

John Grampa

Yes, as you – I guess when you look at our capital allocation we have first of all our regular lease schedule quarterly dividend which actually we recently increased. And then secondly, as you are aware we have an authorization for share repurchases which we have been actively pursuing in the first half of the year and we’ll continue to offer domestically pursuing share repurchases. As you have your CapEx which I gave guidance on, it’s about $30 million. But then the other remaining cash flow, we are looking at and investigating strategic built on acquisitions to deploy that capital.

Unidentified Analyst

Okay. Any color for 2015 – color as into the capital allocation for 2015?

John Grampa

Yes, 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 look at strategic acquisitions.

Unidentified Analyst

What are you seeing on the competitive landscape in the pricing environment?

Richard Hipple

Well I think that in our businesses 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 – we have the discipline all the time and try to get even better at it as we move forward, it’s really extracting the value for 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 is 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, it would be our – in our chemicals business in our Fosters area where it’s very, very high volume business in the LEDs where we introduced 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, we – you just have to time that. So I’m not saying that it’s not that our pricing are going down but sometime strategically that’s the right thing to do. And if you can 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 the pricing pressure overtime but typically, at least in our case, we’re able to keep our margins as we drive options [ph]. So it’s that balance but in general, I would say we’re under pricing pressure where we have higher volume type opportunities as the way I would describe it.

Unidentified Analyst

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

Richard Hipple

I think that you’re certainly aware that acquisitions at this point in time, the multiples have been climbing so you do have to be pretty careful. Money is cheap, then the multiples go up. So we surely won’t be doing anything stupid but – 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 couple of years because of the fixing that we need to do and the focus of the restructuring activities that we have plus the pebble’s 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’re – we are actually working on rebuilding this pipeline for acquisitions and try to do it very smartly. Sometimes – since we normally have been dealing in a world of acquisitions [ph], you have – I think I have more opportunity to get things at lower multiples because typically you’re many times buying from privately held companies and there is 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 intelligent basis over the next six to nine months.

Unidentified Analyst

Alright, thank you.

Operator

Thank you. And it seems that we have no further questions at this time. I would like to turn the floor back to management for closing comments.

Michael Hasychak

This is Mike Hasychak. We’d like to thank all of you for participating on the call this morning. I’ll be around for the remainder of the day to answer any further questions. My direct dialing number is area code, 216, 3836823. Thank you very much.

Operator

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

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