Materion Corporation

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 2011 results and the outlook and Dick Hipple will provide a market update.

Thereafter, we will open up the teleconference call for questions. A recorded playback of this call will be available until March 13 by dialing area code 877.

The number is 660-6853, account number 286 and conference ID number 388589. 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.

Thank you, Mike. Good morning, everyone, and welcome to the call.

Thanks for taking the time to join us this morning. Today's agenda is similar to that of our past calls.

As Mike indicated, I will review the results for the quarter as well as the year and then I will review the outlook for 2012. Following my comments, Dick Hipple will review the current state of our key markets and he'll provide his perspective on certain specific key new product initiatives.

And then following Dick, we will open the call for your questions.

As I normally do, I'll cover the reported sales growth isolating real or organic growth from the effect of pass-through metal prices, which as most of you know in our company can cloud real or organic growth, particularly in an environment where pass-through metal prices are moving up or down significantly. I will also review the key changes in business levels by market comparing the fourth quarter of 2011 to the fourth quarter of the prior year.

In addition, to reviewing the volume-related marketable business level factors, I will also review the other key items that drove fourth quarter earnings to the reported levels.

For the quarter and the year in the aggregate, I will summarize the impact of the 4 nonrecurring items that we've been tracking and reporting on as the year progressed. Those being the cost of the company renaming and rebranding initiative, the impact of the startup and ramp up of the new beryllium plant, the acquisition costs and the favorable discrete tax item recorded in the third quarter.

In addition, I'll review the advanced material segment fourth quarter. I will quantify the effect of pass-through precious metal prices as well as the impact of the lower fourth quarter volumes, the inventory adjustment, the acquisition, higher metal consignment fees and other costs.

Then I will follow with a brief comments on the acquisition, our cash flow and the balance sheet and then finally, review the outlook for 2012 as we see it unfolding at this time.

With that, as my introduction, let’s begin with a review of the fourth quarter. Today, we reported results for the quarter that while consistent with what we had announced earlier were significantly below what we had been experiencing throughout the earlier quarters of the year and significantly below what we currently expect looking ahead into 2012.

Sales for the fourth quarter were $334 million, down approximately 6% or $22 million compared to the fourth quarter of 2010. Higher average pass-through metal prices increased fourth quarter sales by about $25 million compared to the fourth quarter of the prior year.

Thus, excluding the impact of pass-through metal, sales were down almost $47 million or approximately 13% in the quarter when comparing to the prior year.

The reduction in the fourth quarter business levels, when compared to the prior year, was primarily due to lower demand from consumer electronics applications as customers were driving inventory levels down. Lower demand from the appliance and defense and science markets was also a factor in the fourth quarter.

The weakness in these areas was offset in part by solid ongoing growth in the energy, medical and automotive electronics markets.

Net income for the fourth quarter was $0.04 a share compared to $0.61 a share in the prior year. The net income decline was about $12 million and was driven by 5 principal factors.

In addition to the 13% lower volume and inventory adjustment acquisition costs, higher than anticipated cost in the company’s beryllium and composites segment and the non-repeat of a prior year LIFO inventory gain were factors in the year-over-year lower net income in the quarter.

The volume-related factors represented about 25% of the change. The startup and ramp up of the new beryllium plant along with higher costs in this segment also accounted for approximately 25% of the change.

The inventory adjustment and the acquisition cost, each accounted for between 10% and 15% of the change and the non-repeating prior year LIFO gain and other changes in cost accounted for the balance.

Sales for the full year set a new high at $1.527 billion, up approximately 17% or $224 million compared to the full year 2010, which was just over $1.3 billion. Higher pass-through metal prices was a predominant factor in the increase in sales, accounting for approximately 15% of the growth.

After seeing organic growth of approximately 8% through the first 3 quarters of the year, the 13% decline in the fourth quarter drove organic growth to 2% for the year.

Growth was negatively affected primarily in the fourth quarter by the weaker demand from the consumer electronics, appliance and defense and science markets. The weakness in these areas was offset by ongoing stronger demand from the medical, energy, industrial components and commercial aerospace, telecom infrastructure and automotive electronics markets.

For the year, comparing to the prior year, demand from consumer electronics was down approximately 4% in the first half of 2011 over a very strong first half of 2010. However -- I apologize it was up.

However, demand began to weaken in the third quarter leading to the significantly weaker fourth quarter demand, which in turn throughout the full year in consumer electronics down by about 7%. On the positive front, for the year, energy and medical each grew by about 30%, while telecom infrastructure and automotive electronics, both grew by about 20% and industrial and commercial aerospace grew by about 15%.

Full year net income was $40 million or $1.93 a share, down by about $6 million from the $225 (sic) [$2.25] a share reported a year earlier. The lower net income was due primarily to the cost associated with the company renaming and rebranding initiatives, startup and ramp up of the company's new beryllium plant and the cost related to the previously announced acquisition.

These factors in the aggregate more than offset the impact of the real growth that we had plus the favorable effect of the lower tax rate.

Let me reconcile that a bit more for you. The nonrecurring items, those being the company renaming and rebranding initiative, the startup and ramp up of the new beryllium plant and the acquisition costs along with a discrete tax item, net to a negative impact about $0.35 a share for the year.

The discrete tax item was a favorable $0.10, while the acquisition impacted earnings by about $0.13 a share, renaming by about $0.13 a share and the beryllium plant by about $0.19 a share. That's $0.45 a share of negative impact partially offset by the $0.10 favorable tax item.

In the advanced material segment, net of pass-through metal, sales were down in the fourth quarter and full year by $38 million and $8 million, respectively. Through the first 9 months, this segment grew organically by about $30 million or 5% after growing organically by about 7% through the first 6 months.

Fourth quarter sales in this segment were negatively impacted by weaker demand from consumer electronics, telecom infrastructure, defense and science and industrial markets, partially offset by significantly stronger sales from the medical and energy markets. For the full year, improved demand from a number of applications including diabetes test strips, LEDs and precision optics, as well as growth in metal services was offset by the lower demand from the consumer electronics market, particularly in the second half of the year.

Operating profit for the fourth quarter of 2011 in this segment was approximately $12 million below that of the fourth quarter of 2010. About 45% of that change is related to the significantly lower volumes, about 30% is due to the inventory adjustment and about 15% is the impact of the acquisition of EIS Optics and the balance is due to the higher metal consignment fees and other costs we reported on earlier.

As we announced in mid-October, the company acquired EIS Optics Limited. The strategic value of that acquisition is described in the press release.

The initial cost related to this $24 million acquisition negatively impacted earnings in the fourth quarter by approximately $0.10 a share and for the full year by approximately $0.13 a share. Based on the current economic assumptions, we expect the acquisition to be slightly dilutive in early 2012 and become accretive as the year progresses.

The acquisition was funded by the company's fourth quarter cash flow from operations.

Now let’s turn to the cash flow and the balance sheet. Both the balance sheet and the statement of cash flows are attached to the press release.

The company began and ended 2011 with a very strong balance sheet. The strength of the company's balances sheet and its cash flow provided the flexibility to take advantage of the opportunity to complete the acquisition in the fourth quarter while still lowering the debt-to-cap ratio from 2010 levels maintaining an overall level below 20% or at about 17%.

Fourth quarter cash flow was very strong and debt decreased by approximately $31 million in the quarter while funding the $24 million acquisition.

I'll now turn to the outlook. After a record sales year in 2010, the company began 2011 with a healthy backlog.

The overall level of business activity in the company's key strategic markets also remained strong as evidenced by the consecutive first and second quarter 2011 record sales levels and organic growth of about 11% each quarter. Order entry in the second quarter increased over the first quarter, but did soften in the latter weeks of the second quarter.

Global economic conditions weakened further as the third quarter progressed causing lead times to shorten as customers were adjusting inventory levels to the weaker conditions.

The customary consumer electronics holiday build normally seen in the late third and early fourth quarters was weaker than expected as customers continue to drive inventories to lower levels, resulting in a much weaker than anticipated fourth quarter. While business levels fell significantly in the fourth quarter, on average to this point in 2012, order entry is at a rate that is about 15% ahead of the fourth quarter levels.

In addition, the cost experienced in 2011 related to the beryllium plant startup, the company renaming and rebranding initiative and the Optics acquisition are to a large extent behind us and not expected to repeat in 2012.

To be clear though, both the beryllium plant ramp up and the acquisition will negatively affect earnings in the earlier quarters of 2012 by approximately $0.07 to $0.10 a share in total. Coming off of the weaker fourth quarter of 2011, which had significantly lower order entry shipment rates, it is anticipated that the first quarter of 2012 will be weaker -- the weakest quarter of the year with the second and third quarters sequentially stronger.

Assuming growth and no global economic setbacks during the year, the company is confirming its previously announced earnings range of $2.05 to $2.25 a year for 2012 on a sales growth of 5% to 10%.

That concludes my remarks. I'll now turn the call over to Dick Hipple.

Dick will provide you with the market update.

Thank you, John. The weak holiday season last year in the advanced electronics market was a surprise.

The global consumer was continuing to buy, while the order pattern from our customers was actually below that for the prior year. As they say, this does not shake hand.

So we believe there was an inventory liquidation that was overextended in the fourth quarter versus actual market conditions.

The 2 key markets that were particularly soft in the fourth quarter were consumer electronics and defense. I just discussed the electronics sector and the rationale for the softer defense business is pretty clear based upon the gridlock that has existed in Washington.

We expect this to be somewhat relieved through the budget release, which should at least maintain near-term defense spending.

As we wrap the year up, I'd like to express how pleased we are with the terrific financial results accomplished at the performance alloy and technical materials division. Performance alloy achieved an all-time high record of both earnings and sales and technical materials performed at sales and profitability levels last seen since the telecom boom with a much more balanced portfolio today.

As we enter 2012, we are encouraged based on several developments from the fourth quarter. Our order book has rebounded nicely in the consumer electronics, and we believe this reflects the under order pattern that we saw in the fourth quarter.

Defense bookings have increased and we expect them to stabilize. Our automotive bookings, which have been stable have also shown some additional strength.

Our medical, energy, telecom infrastructure and industrial and commercial aerospace markets were solid throughout 2011, held up nicely in the fourth quarter and are off to a good start in 2012 as well.

As we look forward to the balance of the year, we expect our consumer electronics and telecom markets to strengthen, reflecting the ongoing growth in the number of applications we serve per wireless device and the growth in the number of devices along with the need to continue to build the infrastructure behind the growth of the wireless communication demand. This also includes our undersea business, which we expect to be strong in 2012 based on numerous new line contracts.

In fact, over 15,000 miles of undersea cables we expect to be built, at least those contracts led in 2012.

The commercial aerospace market will continue to expand as the new planes are now being manufactured to an increased build level. We believe the oil and gas market will remain strong, but its growth will be slightly stunted due to a low price of natural gas and the attendance [ph] slower drilling initiatives for that sector.

Automobile sales across the world are expected to continue to grow and defense spending in our space, particularly optics and data collection, are expected to hold up. All in all, we are looking for 2012 to be a positive transition year for us as we complete the startup of our BE pebbles plant and bring on several new initiatives which expand our capabilities to serve the Asian markets more effectively.

But with regards to our new beryllium plant startup, we have put the key issues we were struggling with in the fourth quarter behind us and assuming no new big surprises, we expect to be at a production rate in the third quarter to internally produce all of our requirements and are on pace to accomplish this. As you know, the true success of our company continues to be driven by both our position in strong secular growth markets and through driving new products into these markets.

I'd like to list a few of these promising new products for you.

This year, we are introducing a new precious metal process which improves thin film deposition performance when fabricating semiconductor devices, components and LED. We are extending our capabilities in our copper-based nickel alloys for use in both the commercial aerospace and oil and gas sector.

We're extending our value-add services in the heavy equipment market to provide semi-finished components. We have new inorganic chemical materials being introduced in both the LED and OLED space to enable our customers to develop next-generation products.

We have enabling technology for selective plating that's also being designed into the newest hard disk drive technology called DSA, or dual stage activation.

We have further penetrated the thin film solar market with the development of a new rotary target for TCO layers, or transparent conductor oxide layer, that should offer our customer superior performance. New patented rotary target technology is being introduced in both the architectural glass and thin film solar coating markets.

We are also developing breakthrough technology for optics applications to enable high productivity coatings at the wafer level, which will lower the cost of production of many industrial applications in security and safety. We are also dependent upon to develop the most difficult optical coatings to overcome our latest challenges in national defense, and sometimes these demands are got to have it tomorrow.

And finally for all of you acoustic aficionados, we expect you'll be hearing more and more from our BE material being used in a broad range of high-end speakers, so the best and clearest sound is replicated, unmatched by any other material. These new product launches, some of which occurred in 2011 provide for a promising future.

I am very excited about what we are doing and how we are making a difference for our customers.

Operator, we can take questions.

The first question, I -- a couple of questions on costs. You had an inventory adjustment that you reported for the fourth quarter.

Can you give us some sense of what that was? Was that a write-down and is that something that you think will be a factor in the first quarter of next year?

Sure, I'll comment on that a little bit further, Luke. As you might expect, we like other manufacturers take periodic physical inventories and in our year end physical inventories we had a short in our precious metal operations.

And given the high level of throughput in those operations and current high metal values even a small short can have a noticeable impact as you might expect. And for example, operating a refinery or cleaning shields involves estimating the quantities of metal that are ultimately confirmed and recovered, and the nature of that estimating process on what is ultimately recovered can be highly variable.

So while having a noticeable short is for us very unusual, it can happen from time to time. And it is not something that we would expect to repeat.

When this occurs, we do comprehensive post-physical diagnostics to ensure that our accounting, our systems, our procedures, our security, our operating practices, for example, are all intact and performing as intended. So to the final point of your question, we do not expect that this would be something that repeats.

It's not something that occurs frequently and it's not something that we would anticipate repeating.

Okay. And then secondly in the release sheet you talked about some cost issues -- some manufacturing cost issues in your performance alloys segment related to nickel alloys and then there was some the outside fabrication cost you cited in beryllium.

Can you give us some sense on what's going with these and how we should think about those going forward?

Well, I think in the performance alloys segment, we talked about that earlier in the year and that's really what we were referring to. There were some yield issues, and I can't remember at this point whether the second quarter or roughly the first part of the year, those were corrected.

And no, they won't affect us going forward. And what was the second part of your question?

It was on the beryllium business, you had talked about some outside fabrication cost and I just wanted to get some more color on what was going on there?

This is Jim Marrotte. That related to certain specific jobs.

Beryllium is a more of a job order type operation, and there were certain jobs that we took that unfortunately, it took a little additional costs, a little different additional effort to get the product to where we need it to be. We don't anticipate those type of costs at that level repeating as we go forward.

I think our traditional margin rates should hold as we look down the road.

Okay, that's helpful. And regarding the inventory situation for consumer electronics, what are you guys looking at or what should we look at as outsiders to gauge what these trends are doing and how we should think about your products within that channel?

And also, to the extent that, there was a reduction in inventory to a significantly low level, I was curious to know if you thought there was any potential pricing opportunity for you there now, if we enter into the new year in a tight inventory position, is that something that will allow you to raise prices and maybe you can benefit from?

No, I don't think the situation is -- usually when you're raising prices, there has to be a shortage situation and that's really very, very tight supply, that's really not the situation at this point. And to answer your question about who to monitor, I think that the good space that we're in is the overall wireless phone, smartphone, tablet type market.

So there's a whole portfolio of customers -- of our customers that you could have a look at just to see. Sometimes they steal one another's market share, so you have to look at the total grouping, but the companies like Skyworks, TriQuint, RF Micro Devices, they're all -- Avago, they're all good indicators of that general market segment.

Okay. And just last one if I could, John, are you able to give us your value-added sales by end market?

I know you guys put it in the presentation, but I was curious if you can give them now?

No, I do not have it here, but it will be out when the presentation is up in -- Mike, several days.

In a few days.

Could you talk a little bit about the EPS guidance that you have given for 2012? What kind of organic growth assumptions do you have, either you can give us some idea about revenues or at least some organic growth assumptions?

In my comments I've provided the sales level in -- for the year which obviously, as you're pointing out, is not the organic number. The range that I provided from a revenue perspective was a growth of 5% to 10% in sales.

The organic tied to that would be 3% to 6% roughly and obviously that's coming off of the weak -- very weak second half and very weak fourth quarter of 2011 levels.

So the 2012 organic growth is roughly 3% to 6%, right?

Off of the -- yes, that's correct.

Off of the organic numbers in 2011?

Yes.

Okay. And also, you talked about Q1 being the weakest quarter of the -- at least the fee that you talked about in 2012, is Q1 going to be down sequentially or up sequentially, could you give us some idea about that?

Up sequentially from the fourth quarter?

Yes.

Down or up from -- it should be up from the fourth quarter, but well below first quarter last year levels.

Okay. And then you're also talking about some negative impacts from EIS early on in the year and then some positive in the second half maybe.

Could you talk about the breakeven levels of EIS at this point?

Well, I think the comment that we made -- that I made was $0.07 to $0.10 a share for those 2 items, the beryllium plant ramp up and the EIS acquisition, those costs $0.07 to $0.10 a share for both through the earlier quarters of the year. I would suggest that, that is probably 60% to 70% of that is first quarter and the remaining portion is second quarter.

So we would anticipate being accretive in the third quarter on the acquisition. And again, that's a very small acquisition.

So we're talking about de minimis impact, we're talking about pennies per share.

Because the $0.07 to $0.10 was for the full year, right?

No, that was for the first 2 quarters of the year.

First 2 quarters, okay, about 60% to 70% of that in Q1 and then the rest in Q2?

Right, and the majority of that is -- I can also comment that 80% of that -- 70% to 80% of that's in beryllium plant.

Okay. And could you give us some idea about -- as we talk about beryllium plant, what kind of capacity do you have at the beryllium plant or how much will be the capacity utilization when you talk about Q3, you'll be able to get all the...

Avinash, this is Dick Hipple. How we're defining that is basically all of the market needs of the plant will be provided from the plant.

Its capacity is actually significantly higher than that. So we do have the -- in the other words if -- the plant was designed with significant upside capacity at the time that the government may want to pull a lot more material for special reasons that we might have on a national security basis.

So the plant is designed -- it's not designed for ongoing business levels, but we have significant upturn in that plant, should it ever be required, so that -- based on current business level conditions we'll be supplying -- certainly have all the capability to supply that.

Right, but with -- so you'll be talking about -- you're talking about your internal needs and external too, right?

Oh, yes, yes, yes, total needs -- total market needs is what I'm talking about.

Right, so if you were to supply the total market needs by Q3, what percentage of the capacity would you be needing?

Oh probably in the range of 60%.

So you’ll be 30-ish% to 40-ish% underutilized in the plant despite meeting all the needs?

Right, theoretically, that's accurate, but the plant is designed for that and we're designed to operate at much lower level.

Right, right, right. And also, maybe John can answer this one, so your inventories did come down in the current quarter.

Going forward, do you expect the inventories to come down further in Q1?

That's a tough one. It depends on demand levels and what we anticipate occurring in subsequent quarters.

Inventory came down in the fourth quarter because of demand levels. I would anticipate flat to maybe up slightly in the first quarter.

Would you go into further detail concerning the problems at the new beryllium plant?

Yes, there were 2 key ones that we struggled with in the fourth quarter. One in particular was the plant is fully automated, and so it was just getting the entire plant to -- we had flushed down all the unit processes in the plant and they were working well and then you have to get everything working uniformly and with that there was issues in getting it all to work together and so it's programming and those kind of issues and we pretty much have that behind us.

So that was one of the key areas. And then we also had some ventilation issues in the fourth quarter and we also were able to overcome those.

Okay, fine. Based on your outlook for 2012 and the fact that the first half of 2011 was a record half, would it be reasonable to expect first half 2012 earnings to be down year-to-year and second half earnings to be up year-to-year?

Of course, yes.

I had a question on the comments you made regarding order momentum, and Dick, I was wondering if you could talk about orders relative to where you were in the first half of '11 and how that might be unfolding for you thus far?

So first quarter of 2011 versus first quarter of 2012 order entry path, is that the question?

Yes, sir.

Okay, I would say -- Jim, do you have that?

I don't have it broken out by that.

We don't have a data broken out, but both were up by roughly the same percentages on a value-add basis in looking at the first quarter comparing sequentially to the fourth. Both years were up -- both up roughly the same amount.

With the fourth quarter of '11 being lower than the fourth quarter of '10, is that fair?

That's correct, so we're seeing the same pattern, the same -- roughly the same upward swing.

Okay, so on a year-over-year basis 1Q order momentum is still down?

Right, that's right. And probably the largest single factor, Mark, is that when you come into -- when we were coming into 2011, you had, let's say, a lift coming in consumer electronics off that fourth quarter.

And this year, fourth quarter consumer electronics was considerably weaker.

Okay, any -- as you look at the composition of the order book, have you seen anything that would suggest that there may be replenishment of the consumer electronics inventory supply chain?

I think that the answer to that generally is yes. There is some lift there.

However, it's not identical to the lift that we saw back in the first part of actually 2010 whenever you had a major inventory build going into that chain.

I think what we're going to see -- what we're hearing primarily from our customers at this point is that they expect the second half to start to really see -- late in the second quarter, third and fourth. That's what we're getting from some customers.

That really may be reflects the more classical, seasonal build on the electronics sector. And again, we're seeing the lift now, but it's -- I would say the lift that we're seeing now is higher than what we normally see seasonally at this time, but that's to be counterbalanced against how weak it was in the fourth quarter, so that'll make sense.

And so what our customers are saying is that they expect the additional pull coming in the second half of the year for the seasonal build. And I think, again, I think that the fourth quarter was particularly impacted last year because of the concern in Europe and everybody was just keeping their cards pretty close to the vest here.

Okay, all right. That's helpful.

I had another question if I could, just about -- I think, Dick, I think you made a comment about some investments that you wanted to make to improve growth out of the Asian markets? Is that something -- would it be a good use of time to give a little more color on that?

Well, I can just give you a quick recap. Obviously, there -- our acquisition in Asia is one major one that will be helpful there, the EIS acquisition.

But also, from an organic standpoint, we have an operation in Singapore which we're expanding our capabilities in our microelectronics sector. We're also going to begin to be able to produce and sell precious metal from that location.

Currently, we only do that in the United States so that's going to give us a lot more effective customer service and production quick delivery from Asia on precious metal. And then we're also expanding our operations in Suzhou for our capabilities in supplying the optics market.

So we've got initiatives going on to expand our footprint, and then we have some other -- actually, some of these other applications I had mentioned, mentioned on some of our new products and if they takeoff we'll probably be scaling those up in Asia because that's really where the markets are being served.

Okay, I appreciate that, Dick. Phil Gibbs has got a couple of questions here, if you don't mind if we stay on for just a little longer?

Sure. I did want to correct the comment, I think if Mr.

Sorrentino is still out there, I think I had mentioned, you had asked the 2 questions on the beryllium public plant startup. I gave you the one on the automation.

The other one was, I think I mentioned, ventilation that was -- although there was an issue there that's the second major one that we worked our way through was in the final filtration system in the plant was really getting plugged up and that was the key design issue that we worked our ways through in the fourth quarter. So I just didn't want to -- correct that comment that I gave you earlier.

Dick, on the new product opportunities that you had mention for '12, which one of them you believe is going to have the most impact near term?

Oh boy, that was a lot that I gave you there. Which one is the most impactful.

Oh, that's a good question. I tell you what, let me -- I would -- certainly our -- the commercial aerospace market and the oil and gas were the tough nut.

We have some opportunities particularly in the OLED space, which could be quite interesting, and then the dual stage acquisition -- activation. There's a lot of -- the reason why I kind of went through that list is we're not counting on anything on a singular basis for a breakthrough, we've actually got some really nice multiple platforms that I would say if we get a 50% hit rate, we're going to be very happy campers.

But I would say that probably some of our rotary target technology in thin film solar, the oil and gas and possibly the OLED applications could be the most interesting runners for us.

Okay. And then lastly here, John, your operating profit as a percentage of your value-added revenue.

I know it wasn't very much because it was only a $1 million of profitability in the quarter, but can you give us a number there?

Well, we don't get specific, Phil, as you know about the numbers, but you could -- it's still double digits and if you think in terms of where it's headed, I think that by the time we get through the weaker first quarter into the second quarter and we get some of the volume influences behind us, we'll be back to the low teens in OP percent of VA and above 40 in GP percent of VA, which as you know fundamentally is about where we operate on a fairly consistent basis. So yes, we were below both those numbers in the fourth quarter, and we will climb back up through there.

There's nothing happening with pricing or share or anything else that would suggest that margins have deteriorated to levels that we will -- that will be sustained to lower level. We'll be back to the pre-fourth quarter numbers within due course.

Okay. And then on the book-to-bill in the fourth quarter, what should we think about that as -- that level at?

That was slightly unfavorable in the fourth quarter.

Yes, that would make sense.

I was wondering if you could comment on the trajectory of your operating expenses going forward.

Well, the -- as we make these investments that Dick referenced, operating expenses will climb netting out to the non-repeats from 2011 to 2012. But historically, our operating expense levels have grown at less than half the organic sales growth rate, and I don't see the future being any different than the past.

So having said that, if organically we're growing -- if sales are growing organically 3% to 6%, then operating expenses would grow at the lower end of those numbers.

Okay. Just for reference, I don't know if you said this and if you have I apologize, but what was the value added in the quarter as opposed to the pass-through of metal portion of revenue?

Well, we did say it. Well, the -- let me find the specific data point and I'll repeat it.

Sales were down 6% in the quarter, but average pass-through metal prices did increase sales by about $25 million. So net of that, sales were down 13% in the quarter.

That's Heartland Funds. Just what are you using for tax rate for 2012?

The tax rate in 2012 is somewhere between 30% and 32%.

Okay. And John, do you have a CapEx budget preliminarily for 2012?

Sure. I can give you a range of $33 million to $37 million.

Okay. And can you just look at that fourth quarter D&A rate and just annualize that, so you're running closer to $45 million or $$46 million now?

Actually, depreciation and amortization will vary a little bit for us due to my amortization. I would assume $40 million to $45 million is a fair rate for 2012.

Okay. And stock-based comp shouldn't move much off that $5 million number, so plus or minus a little bit depending upon how you perform I assume?

I'm sorry, I missed your last point. There was some line noise, what was your...

Sorry, I was just -- stock-based compensation should not -- should be fairly close to 2011 levels?

Well actually, we're hoping it's higher than 2011 levels. We obviously didn't accomplish what we thought we had accomplished in 2011.

So I would hope in 2012 we deliver results and that the stock-based compensation is a little different. So I think the answer to your question is no, it should be up.

Okay, good. Well, let's hope that's the case.

It looks like just kind of building the mosaic here, the midpoint of your earnings guidance would get you to $115 million of EBITDA including the stock-based comp, is that about right?

If you're adding back the stock-based, yes.

If you're adding back the stock-based comp, yes.

Okay. And it looks like if you hold working capital constant and hopefully it's a use which would portend much stronger sales.

But if you were to assume a neutral outcome on working capital then we're looking at, call it, $60 million to $70 million in free cash flow?

Well, I think that's the assumption that probably can't be made, Brad, and that is, if we do grow the business, we liquidated some inventory and we saw receivables come down in the fourth quarter, that will go back in. So I don't think we can see those kind of numbers, I think the numbers will be well below that -- assuming again some inventory receivables to support the growth.

Right, but still very strong free cash flow.

Yes, I would think.

So here's the dilemma I guess you all have is, you've done a really nice job of diversifying the business and attaching yourselves to some very attractive secular trends and I think there's still a perception out there that you're a commodity metals company. And let's face it -- let's be realistic, I mean obviously you can't escape the cyclicality of your end markets and we saw that this quarter, although I mean the cash flows were remarkably strong and you did a great job of deleveraging the balance sheet even after the acquisition.

So I just wonder whether there's an opportunity to try to maybe reset expectations with the street in terms of the long-term secular dynamics of your business and sustainability of your earnings and cash flows and maybe put a small dividend in place reflecting the more stable outlook of your business over long term. Any thoughts there?

Well, I think that, Brad, that there's always alternative uses of the cash flow on our mind and certainly it's something that we do give and we'll give fair consideration to. I think the earlier point that you made though is the one that's really relevant and that is when you consider the secular growth, we've taken this company from a step function perspective, we've taken this company up twice now in the last 6 years to a different level of performance and albeit you hit the cyclicality, as you point out, of the consumer electronics market especially seems some time to take us to a level 2 years in a row that's now between $2.25 a share.

Let's say for the sake of argument, taking out the non-repeat factors, maybe 3 years in a row at that level from levels well below that previously. So I think really for us it's putting the capital to use to take it to that next level and to get it to that next level on sustainable basis pretty quickly.

And I think as we move along that path, we'll give consideration to alternative strategies for the use of the cash that we generate and what we do with our balance sheet.

Well, I think it's great. You've done a great job managing through a difficult environment and your balance sheet reflects the strength of your cash flows to both organically invest through CapEx the benefit of acquisitions that position the business for a longer-term growth and your balance sheet reflects the strength of that cash flows.

And I think you benefit from a small dividend in attracting longer-term shareholders who could see the longer-term outlook of your business. So congrats on managing through a difficult environment and let's hope '12 is a better year for you.

This is Mike 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 number is (216) 383-6823.

Thank you very much.