Materion Corporation
Q3 2014 Earnings Call Transcript

Published: 23 Oct 2014

[Operator:]

Greetings and welcome to the Materion Corporation Third Quarter 2014 Earnings Report. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mike Hasychak. Thank you, sir. You may begin.

[Mike 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 Steve Shamrock, Vice President and Controller. Our format for today's conference call is as follows. Joe Kelley will review the financial results for the quarter, and then John Grampa will review the outlook for the remainder of 2014 and comments on capital allocation. Following John's comments, Dick Hipple will review the current state of our key markets. Following Dick, we will open up the call for your questions. A recorded playback of this call will be available until November 7, by dialing area code 877, the number is 660-6853 or area code 201, the number is 612-7415, conference ID number 13592214. The call also be archived on the company's website, www.materion.com. To access the replay, just click on Events and Presentations on the Investor Relations page. Any forward-looking statements made in this announcement, including those in the outlook section and during the question-and-answer portion are based on current expectations. The company's actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release issued this morning. I'll now turn the call over to Joe Kelley.

[Joe Kelley:]

Thank you, Mike. And good morning to everyone joining us on a call today. During my comments, I'll cover our third quarter 2014 financial highlights, review profitability by segments and make the brief comment on the balance sheet cash flow and modeling assumptions. Let me start with the highlight. I am very pleased to report our third quarter 2014 financial results as our team deliver strong, top line value added sales growth across all four our segments. Profit margin extension and meaningful earnings growth. In the third quarter of 2014, sales grew 6% over the prior year third quarter to $291.6 million. Earnings per share grew from $0.24 in the third quarter of 2013 to $0.60 in the third quarter of 2014. On an adjusted basis third quarter of 2014 earnings grew 113% over the prior year period to $0.51 per share. This adjusted earnings level is in line with our annual guidance and 42% sequential improvement over second quarter of 2014 earnings. Value added sales which exclude the impact of pass through metal costs grew 12% over the prior year of third quarter value added sales and 4% sequentially over the second quarter of 2014 to $165.6 million in the current year of third quarter. This marks the second consecutive quarter of establishing a new record level of value added sales as we continue to gain traction in most of our key end markets. Value added sales into our three largest end markets; consumer electronics, industrial component and medical led the growth, improving double digit year-over-year. And more than offsetting the single digit decline in automotive electronics and defense from the comparable prior year period. It is a very encouraging to see two consecutive quarters of record level value added sales, since began reporting this metric in 2012. Our commercial strategies are working and customers are recognizing the value and differentiation of our product offerings. Our new product portfolio is more robust today than it has been at any point in our recent history. Value added sales from new products for the first nine months of 2014 represent a 9% of the company's total value added sales. This metric should continue to improve moving forward and new product introductions will continue to play a more critical role in our growth as we move into 2015. Gross margins in the third quarter of 2014 expanded 23% to $54.8 million from $44.5 million in the prior year third quarter. Expressed as a percent of value added sales, gross margin expanded 310 basis points from 30% in the third quarter of 2013 to 33.1% in the third quarter of 2014. The improved profit margins were driven by leveraging sales volume growth, realizing the manufacturing savings from the facility consolidation efforts initiated rate in 2013 and an improved product sales mix partially driven by our growth coming from new products. Operating profit in the third quarter of 2014 totaled $17.4 million, or $12.1million improvement over 2013 third quarter operating profit of $5.3 million. Included in the third quarter of 2014 operating profit is a $4 million gain from a legal settlement related to the construction of company's pebble plant. Excluding this gain, net of related expenses and other non-recurring items, adjusted operating profit in the third quarter of 2014 totaled $14.7 million, a $9.4 million or 176% improvement over the prior year third quarter operating profit. Adjusted operating profit expressed as a percent of value added sales grew to 8.9%, a 530 basis points improvement over the prior year third quarter margins, and 220 basis points sequential improvement over second quarter of 2014 adjusted operating profit margins. We are leveraging our top line growth, improve manufacturing efficiencies primarily from our rationalization efforts, and improving our sales mix with new product introductions to deliver sustainable margin improvement in our business. Looking at the Advanced Material segment, you can clearly see the benefits of lowering our manufacturing cost through facility consolidation and product line rationalization. Value added sales grew in the third quarter of 2014 to $71.2 million, a 5% increase from 2013 third quarter value added sales of $67.7 million. Operating profit expanded to $7.7 million or 10.8% of value added sales, a 470 basis points improvement in profitability over the prior year third quarter operating profit margins. These third quarter results bring the year-to-date adjusted operating profit margins of this segment to 10.2% of value added sales, significantly ahead of our prior year 2013 profitability in the segment which totaled 2.6% of value added sales. Our efforts to right size the manufacturing footprint and rationalize the product line are clearly delivering sustainable benefits to the profitability of this segment. The Performance Alloys segment which was not involved in any of the recent restructuring efforts also delivered strong results in the third quarter, growing value added sales 16% of our prior year third quarter levels to $66.7 million. This growth was leveraged due to profit margins to $6.5 million or 9.7% of value added sales. The growth in this segment is partially comes from our ToughMet product line which has grown steadily over the past several years as we continue to develop new alloys and new applications which allow us to penetrate new markets. ToughMet sales grew 35% year-over-year in the third quarter of 2014 and ToughMet sales in the first nine months represent approximately 70% of the total segment's value added sales. The future growth prospect for this product line remains very attractive. Beryllium and Composites is also having success in new product development and launches. Third quarter 2014 sales for this segment grew 31% over the prior year third quarter and 8% sequentially over the second quarter to a total of $17.9 million. New product sales in the third quarter of 2014 represented 80% of the total segment sales. The quarterly performance of this segment can be choppy given large individual order sizes and long delivery schedules, and this quarter is no exception. We had two large shipments late in the quarter in the nuclear medical applications which contributed to the year-over-year and sequential growth. Operating profit margin expanded to $1 million for the quarter compared to operating losses in the prior year third quarter. Looking at the year-to-date performance of this segment, the quarterly volatility is diluted, and you can clearly see the improved profitability that we have been forecasting. We have frequently communicated that this segment's profitability is forecasted to expand $5 million to $6 million over the 2013 run rate. And we are well on our way to delivering on this forecast. As operating profit have improved $4.1 million in the first nine months of 2014 compared to the same period of 2013. It is important for investors to understand that the non-recurring legal settlement gain and related cost recorded in the current quarter have no impact on this segment's quarterly or year-to-date profitability as the entire amount was recorded centrally and not allocated to the segment. Said differently, the $4 million year-to-date improvement in profitability is all based on sales volume growth, improved mix and manufacturing efficiency. Moving now on to our Technical Materials segment. Similar to the other three segment, Technical Materials is growing value added sales year-over-year and sequentially. Value added sales in the third quarter of 2014 were $9.8 million, a 6% improvement over the prior year comparable period and 3% improvement sequentially over the second quarter of 2014. The increased third quarter value added sales is generating $1.4 million in operating profit comparable to the prior year third quarter profit levels and 38% ahead of second quarter 2014 profit level. This segment continue to recover from a slow start to the year with destocking in the automotive supply chain heavily impacting the first half of 2014 volume and subsequently year-to-date profitability. Turning now to the balance sheet and cash flow. The company began and ended Q3, 2014 with a very strong balance sheet ending the quarter with $19.6 million in cash $50.4 million in debt. Debt level decreased during the first nine months of the year from the $64.8 million in debt balance at year end 2013. This reduction reflect a net impact of paying down approximately $30 million of gold denominated short-term loan with transfer of gold ounces held in inventory offsetting the reduction in the gold denominated loan with increased borrowings of approximately $50 million in the debt facility. The company's balance sheet and its cash flow provide respectability to return approximately $50 million of cash to shareholders during the third quarter of 2014 in the form of regular quarterly dividend and share repurchases. During the first nine months of 2014, a total of $20.8 million of cash was returned to shareholders in the form of dividends and share repurchases. A total of approximately 480, 000 shares were repurchased during the first nine months at a total cost of $15.6 million. The company's cash flow from operations in the first nine months of the year totaled $21 million which include the net investment and working capital of $37 million to support the volume growth. The magnitude of this investment is largely a tiny issue, and the required investment is forecasted to reduce as we move throughout the fourth quarter towards yearend. And finally for financial modeling purposes. Assume a 29% effective tax rate going forward. Our third quarter year-to-date effective tax rate was 27%. However, that includes several discreet items not forecasted to repeat. Capital spending year-to-date has been approximately $20 million excluding line development cost investments and mature the product make $30 million for the full year in line with annual depreciation expense. This concludes the review of the third quarter financial performance. And I will now like to turn the call over to John, who will review our capital allocation strategy and outlook for the remainder of the year.

[John Grampa:]

Thank you, Joe. And good morning, everybody. I thought it would be worthwhile to comment on our capital allocation practices. As in these calls as well as in our visits with shareholders, we often get questions about this. The question usually centered on our acquisition and share repurchase plan. I think it's important to reinforce what we have disclosed in the past especially given the fact that we have been more aggressive recently with share repurchases and have not closed on any acquisitions. During the third quarter, we repurchased approximately 400,000 shares of the company's stock. This was under the $50 million share repurchase authorization approved by our Board of Directors and previously announced. To date, in 2014 we have repurchased approximately 2.5% or 500,000 shares under that authorization at a total cost of about [$16 million]. And at this time, we do expect to continue to repurchase shares opportunistically and at a governed pace. Over the past two three years, the company has been focused on resolving specific internal and market related issues that were affecting operating performance. In addition, we've worked at and have been successful in developing an array of new organic growth opportunity. Today, we have a very strong set of new product opportunities. Strongest than we have had in several years. And we are focused on supporting these. Acquisitions have been a low priority through this timeframe. In fact, none of have been consummated in approximately three years. While we've not closed on a transaction during this period, those we did close on in the past have proven to be quite successful. Much of our growth are free cash flow and our new future organic growth product opportunities have been created by those businesses we acquired a five to six years period prior to 2012. Over 35% of the company's 2014 forecasted EBITDA is being generated by these businesses and we expect this to grow around 45% to the total company EBITDA over the next three to five years. We have the financial capacity to continue to take a balanced approach to capital allocation. Our first priority remains to use available capital to support the promising organic growth. As I mentioned a moment ago, the opportunities here today are greater than ever before. Second in priority is using capital for tuck-in acquisitions to generate attractive returns in growth opportunities. While nothing is eminent, we've an active, disciplined process to identifying and evaluating opportunities. The primary focus of any tuck-in acquisition we do in the future would be to support the key identified organic growth areas, augmenting them with products, technology, market or physical capacity. And finally we expect to continue return cash to shareholders in the form of dividends and share repurchases. Our growth and cash generating capacity should provide us with a flexibility to continue this balanced approach to the use of capital in the future. Now let's turn to the outlook. As Joe has already commented, earnings in the quarter continue to gain momentum and we are well above the prior year and the first and second quarters of the current year sequentially. While our third quarter performance was much stronger than we originally anticipated, we left our previous guidance for the year intact in the range of a $1.55 to $1.70 per share adjusted. The adjusted numbers exclude from earnings approximately $0.27 per share of favorable, non-recurring gains realized to date in the year. For clarity, the GAAP number is thus a $1.82 to $1.97 per share including those items. Earnings for the second half of the year are up significantly from those of the first half levels as well as comparatively to second half of the prior year. This is due to a combination of factors that Joe discussed including higher business levels and much stronger margins. While current order entry trends remains favorable, the fourth quarter maybe seasonally weaker. The seasonal weakness is normally driven by markets such as consumer electronics and automotive electronics where supply chain adjustments frequently occur. We did have approximately $0.02 to $0.03 per share of business pulled by our customers into the third quarter from the fourth quarter and have several larger, high margin orders in our Beryllium and Composites segment schedule for delivery late in the fourth quarter that are subject to possible delay into early 2015. In addition, recent macro economic news from both Asia and Europe raises the concern of slowdowns in these regions could negatively impact our order rate through the balance of quarter and potentially push the shipments schedule on existing orders into 2015 as well. All-in-all while we have strong second half and we are expecting to finish the year with solid fourth quarter, one is well ahead of the prior year, we are cautious about the quarter given the factors that I just described. I'll now turn the call over to Dick Hipple.

[Dick Hipple:]

Thank you, John and Joe. Obviously, I am very pleased with our third quarter performance. The strong 12% growth and value added sales and operating profit margins, expanding 9% demonstrates the earnings power that we have indicated. Our commercial execution is driving sales growth greater than our end market growth, and our value added sales at each of our three largest end markets, consumer electronics, industrial components and medical grew year-over-year approximately 15%. So differentiated product portfolio gives us the ability to grow sales by penetrating new customers and new applications. All four of our business segments are contributing to the year-over-year and sequential growth. Gross margins are expanding to 33% to value added sales clearly demonstrates that the top line growth we are delivering this profitable growth and we are improving the quality of our earnings of our company. Last quarter, we indicated that our sales into the automotive electronics and telecom infrastructure end markets fell, while down year-over-year in the first half, were forecasted to sequentially improve. And that is in fact what happened in the third quarter. Our sales into the automotive electronics were up quarter-to-quarter by 3% and our sales into telecom infrastructure market were up 12% quarter-to-quarter driven by shipments for undersea cable line in our telecom packaging business which is benefiting from the rollout of 4G LTE in China. The other end market which remained down year-to-date but is showing sequential improvement as we forecasted is defense. Our defense sales increased sequentially 12% over the second quarter of 2014. Of note in defense was a major order we received for our ToughMet alloy for the Bradley heavy training vehicle. We see this as a first good penetration into the defense market for ToughMet which will open many other doors as we prove our distinct value in differentiation for solving reliability challenges. And when we get our foot in the door, good things happen. And we expect to get our foot in the door at several new markets this year. Let me provide some more insights to the growth we are achieving in some of our other key end markets. Our sales into the energy end market grew 18% over the prior year's third quarter. We have record sales into oil and gas market with the combined copper Beryllium and ToughMet products. These record sales reflected the higher risk count as compared to a year ago and the increasing number of applications where our materials are being used in directional drilling and also battery allocations. Our growth in consumer electronics, our largest end market was driven by our products going into the wireless applications, driven by the ramp up that we saw in the smartphone market. This is obviously a seasonal bump. Our growth in medical was primarily shipments of our BE product for our European nuclear research center using our product to produce medical Radioisotopes. We also continue to see a good shipment level in a blood glucose test strip market as well as expanding sales of our precision coding products used in medical sensor applications. As I review the product, the highly growth in these end markets, the power of new product introduction become clear. Innovation and new products offerings in all of our business segments are contributing to our growth. Our new product pipeline is solid with ongoing progress from optics wafer level processing, our new ToughMet product forums, [dead] cell connection to electro batteries and our new investment cash product for both Beryllium and components. In summary, our Q3 performance reflexes the earnings power of our business. We will continue to focus on a customer, commercial execution and innovative new products to drive above market growth rate. This growth strategy combined with operational efficiencies will continue to deliver double digital earnings growth in the future. Looking forward to Q4, we expect to see a normal seasonal slowdown over the next several months in the consumer electronics phase after the holiday low period. All other markets are expected to remain stable. So at this time, we are not seeing any particular instability in our markets due to global events. However, we are certainly actively monitoring slowdowns in Germany and China. So this concludes our prepared remarks. We will now open the call for questions. Thank you.

[Operator:]

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

[Avinash Kant:]

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

[John Grampa:]

That's correct.

[Avinash Kant:]

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

[John Grampa:]

Avinash, the low end of our guidance for 2014 is a $1.55. If you look at 2013 on an adjusted EPS base it was $1.10. So that is more than $0.20 improvement there.

[Avinash Kant:]

Now moving forward, could you talk a little about the pebble plant utilization rate right now? And how is that going to be impacting your margins, operating margin performance in the Beryllium and Composites segment?

[Dick Hipple:]

Well, as you can see our improvement in the Beryllium and Composites segment is very solid. So we continue to progress with the pebble's plant. And we did better in the third quarter and second quarter, better than the first quarter and we are up substantially over next year. So we are on track with the performance there and the division the segment, they are continuous to dramatically improve as you recall we had forecasted to have lift of about $6 million of OP from the both improvement sales and operations from that division, and we are bringing that home.

[Avinash Kant:]

So could you comment on utilization rate, Dick? What's the utilization rate there?

[Dick Hipple:]

We are probably in the range of 75% -80%

[Avinash Kant:]

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

[Dick Hipple:]

Well, we are going to be at the -- it is basically our targeted production rate is --we actually have more capacity at that facility. So when I am talking about those rates it's the rate that we are ultimately targeting but we actually have more upside capacity at that plant should volumes ever required.

[Avinash Kant:]

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

[Dick Hipple:]

What was the question again?

[Avinash Kant:]

75% to 80% utilization rate is of the total capacity.

[Dick Hipple:]

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

[Operator:]

Thank you. Our next question comes from Edward Marshall with Sidoti & Company. You may proceed with your question.

[Edward Marshall:]

Hey, guys. How are you guys? So I wanted to talk about the guidance if I could. I mean it's pretty wide range when you have one quarter left and I am wondering what are maybe the levers that kind of push you to maybe the high end and the low end of that range? What are the positives and negatives take surrounding that considering such a wide range?

[John Grampa:]

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

[Edward Marshall:]

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

[John Grampa:]

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

[Edward Marshall:]

Okay. And as I look at kind of the Beryllium and Composites segment, I guess I have two questions. One's being could and both kind of similar, I am curious, you said you had a few orders in the quarter that were relatively large. And you also said there were some shipments for 4Q slated for late in the quarter. Could you quantify maybe the size of those particular orders that kind of sure -- 3Q and what do you expect for 4Q?

[John Grampa:]

Let me comment it a bit about it. If I would have to frame what could be the impact, a push out, you could easily see in that segment, you could easily see push out that affect us $0.05 to $0.07 a share in a given quarter. And the supply chain question, let me take it a bit further. If you see significant change in consumer electronics and/ or automotive in that world, you could also see movement apply to $0.10 a share any given quarter as you recall earlier of this year. So that's the order of magnitude. What was pulled into the current quarter, what was pulled into Q3 from Q4, was not business in Beryllium and Composites. We shipped what we got shipped there. We had some customers, also consumer electronics business into the third quarter.

[Edward Marshall:]

Okay. Did you say $0.05 to $0.07 for the fourth quarter shipments in Beryllium and Composites? What is that - what is that effectively as far as revenue?

[John Grampa:]

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

[Edward Marshall:]

So when you look at 4Q, the Beryllium and Composites segment, two large orders relatively $4 million and that's $0.05 to $0.07 impact potentially to fourth quarter? Is that what you are saying?

[John Grampa:]

We are combing the couple of things there, I am sorry. The ones I referenced that above $4 million was in Q3. I did not quantify the Q4 shipment.

[Edward Marshall:]

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

[John Grampa:]

Yes. I think, well, I guess what I am calibrating you on is, when we are talking large shipments in the Beryllium business, they are averaging much to say around $2 million per shipments. And those are the ones that are subject to delays that our customers, they caused push up wholly in the sometime as you go into year end.

[Edward Marshall:]

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

[John Grampa:]

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

[Edward Marshall:]

Okay. Did you just give a breakeven point and I missed for the Beryllium business?

[John Grampa:]

No.

[Edward Marshall:]

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

[John Grampa:]

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

[Edward Marshall:]

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

[John Grampa:]

Yes. I would think that the improvements, I mean our run rate in 2014 are reflective, well; there will be smaller incremental improvement as volumes perhaps increase in the pebble plant. But we are pretty much have that run rate here as we look at Q3 performance in the pebble plant.

[Edward Marshall:]

Okay. And the last question. I am curious on that the discreet tax items that you kind of broke up for Q3, Q4 -- Q2, Q3 and then I guess are no longer going to be a concern going forward but were they broken on the press releases as --?

[John Grampa:]

Were they broken --

[Edward Marshall:]

Yes. Discreet items or one time in nature or -- does that mean that--

[John Grampa:]

No. The discreet items I mean it brought our effective tax rate, I referenced those going from 29 as they go for down to 27, so those were core of doubt in the press release.

[Edward Marshall:]

And why was the tax rate 23 in the quarter, is that what you are referring too? I mean on adjusted basis?

[John Grampa:]

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

[Operator:]

Thank you. Our next question comes from Luke Folta with Jefferies. You may proceed with your question.

[Luke Folta:]

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

[Dick Hipple:]

Yes, thank you. That obviously that scenario that with the rapid movement is a tough one to call. And I would say, I would think that if we keep the oil price, if it remains above 80 bucks I think we should be steady as you go. But I think obviously if the oil would drop down below that point, I would think that we would start to see some adjustment in that order book. So perhaps to watch it very carefully going forward and I review some other quickly some other, actually latest earnings releases by companies like Schlumberger, and if you kind of dig through those, you will find they are bit kind of out of the same place there, that they are saying it's going to be steady as you go but every big caveat obviously we see something that really drops substantially below that 80 bucks, it's going be -- 50 going to be, we are looking at hands here on the drilling activities.

[Luke Folta:]

Okay. And then your sales to oil and gas I think were up pretty substantially, we are seeing really across the metal space, everyone is telling that market has seen very nice growth this year. I mean do you have a sense where inventory levels are in the channel? I mean I got to imagine that there had to have been some restock in oil and gas just after the weakness in second half 2012 -2013, so far this year, do you that something had an impact on your business?

[Dick Hipple:]

Yes, of course. And it's always a tough one to read of how much is the end full and how much is the inventory built, and that's why we do see swings from time to time. You have inventory adjustments but the market may continue to be growing. So it's one that we hopeful see that in oil and gas, we will see that in the consumer electronics area. We will see that in telecom infrastructure. We will see in all these markets. And you have to be very careful when you have very, very strong shipments in the market over six to nine month period of time. You can see some softness over four months, say five months period of time after that because of those kind of adjustments. So it's an area that we are certainly watching very carefully.

[Luke Folta:]

Okay. And then in terms of the share buyback plan, Hey, John, went through a fair amount of detail on your capital allocation, stock prices and all that. But could you accept you continue to buyback shares, any sense of what sort of magnitude you might be thinking in the next year?

[John Grampa:]

I am sorry. Is it over the next year?

[Luke Folta:]

Yes. I mean just taking through the next 12 months. What's the -- what do you think of the goal post in terms of how many-- what the share buyback could be? Just for the month.

[John Grampa:]

Yes. I don't want to really project numbers at this point. I think it's important to recall that we believe that an approach that it is any different than a balanced approach to use of our capital would be very limiting to our flexibility. We want the company to always be in a position to support the organic growth opportunities we have which I mentioned earlier, greater than they had been in quite some time. We wouldn't want to compromise that especially if any of these should launch faster than we expect. And then we also want to be in a position to be able to take advantage of any attractive augmentation opportunities that surface that supports the key growth initiatives. Maintaining flexibility I think is a basic tenace of the approach that we would take. And having said that I also commented earlier that we would govern our buybacks. So let me extend that by saying we govern the allocation of our capital as quarters unfold, right, as weeks, days and month unfold. Hopefully that's helpful, I am not going to project a future number.

[Operator:]

Thank you. Our next question comes from the line of Mark Rodriguez with Stonegate Securities You may proceed with your question.

[Mark Rodriguez:]

Good morning, guys. Thanks for taking my questions. Bunch of my questions have been asked and answered here already. But a couple extra just kind of follow up. On the debt side, your debt level is dropped sequentially, pretty substantial level. Can you talk a little bit about what your expectations are there? What sort of kind of debt levels you are guys targeting?

[John Grampa:]

Yes. I mean our long-term capital allocation strategy is -- we would like about 30% debt to cap, but if you think about what the reduction was in the quarter, it was mainly driven by the payback of the gold denominated loan.

[Mark Rodriguez:]

Got you, okay. And then from your cash flow, from operations perspective, just kind of trying to get a little bit better rough feel and coming here in the Q4, are you expecting somewhat a similar level that you saw here in Q3 or a large improvement?

[John Grampa:]

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

[Mark Rodriguez:]

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

[John Grampa:]

Approach a 2013, I am sorry I don't have --

[Mark Rodriguez:]

The fiscal 2013, is it about $75 million, $76 million in cash flow from op?

[John Grampa:]

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

[Mark Rodriguez:]

Got you, and last quick question. Just kind of surfing back around on the acquisitions. Understand that you had other priorities the last couple of years, it kind of sounds like maybe you are giving the team up a little bit more to be little more active here, am I kind of reading too much into that?

[John Grampa:]

No. You are not. We are starting to build a pipeline and taking look at building out our three strong platform. So you are actually very correctly.

[Mark Rodriguez:]

Got you. And was that team umpire, would do they just some allocated elsewhere and doing other types of activity or they still kind of looking around oil and gas?

[John Grampa:]

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

[Operator:]

Thank you. Our next question comes from the line of Tyler Kenyon with Keybanc Capital Markets. You may proceed with your question.

[Tyler Kenyon:]

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

[John Grampa:]

The capital-- our depreciation rate, it is running about $40 million including amortization. And our capital will probably creep a little bit not above depreciation but maybe I could see it had been $5 million $7 million higher than what we've seen last couple of years. And it's simply because we have some pretty nice organic growth opportunities here that we will be investing in. So we are pretty excited about that. That's obviously very healthy growth when you have those kind of opportunities.

[Tyler Kenyon:]

Sure, appreciate that. And I guess I appreciate your comment but just kind of in light of a potential weakness that you kind of highlighting as far as some of the melodious we have seen in Europe and Asia recently. Can you remind us of your exposure there and kind of one which end markets would you see most at risk at this particular point and then also which segments do you see most at risk as well should you begin to see some fallout in order trend?

[John Grampa:]

The actual foreign shipment that we have, it is about 37% of the company's sale. But we are actually even more global than that because a lot of our shipments let say would go direct to United States or going to companies, pick it a Boeing, Schlumberger RF Micro Devices, their shipments are gone all over the world. So I would think we are 50% to 55% globally depended than just the 37% of direct sales that we talk about. So I would say that if you think about slowdowns in Germany and slowdown or-- I wouldn't say Germany, I would say Europe. And slowdowns in China, you certainly be talking about markets like automotive and you be talking about markets being in electronic area will certainly be probably the most sensitive in our sales and then as we talked about earlier, you got to kind of different factor in the oil and gas for some reasons we saw something really decline in the oil and gas area. So those would be three, I would say automotive, oil and gas and consumer electronics.

[Operator:]

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

[Mike Hasychak:]

We would like to thank all of you for participating on the call this morning. I will be around for the remainder of the day to answer any questions. My direct dial number is area code 216- 3836823. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for your participation. You may disconnect your line.