Materion Corporation (MTRN) Q3 2015 Earnings Report, Transcript and Summary

Greetings. And welcome to the Materion Corporation’s Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Mr. Mike Hasychak. Thank you. You may begin.

Good morning. This is Mike Hasychak. With me today is Dick Hipple, President, Chairman and CEO; and Joe Kelley, Vice President of Finance and Chief Financial Officer. Our format for today's conference call is as follows. Joe Kelley will review the financial results for the quarter and the outlook. Following Joe’s -- Joe, Dick Hipple will provide his comments. Following Dick, we will open up the call for your questions. A recorded playback of this call will be available until November 13 by dialing area code 877, the number is 660-6853 or area code 201 and the number is 612-7415. The conference ID number is 13621493. The call also be archived on the company's website, materion.com. To access the replay, click on Events & 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 Joe for comments.

Thank you, Mike, and good morning to everyone joining us on the call today. During my comments, I will cover our third quarter 2015 financial results, review third quarter profitability by segment, make some brief comments on the cash flow, and finally, cover the earnings outlook for the remainder of 2015. Following my comments, Dick Hipple, Chairman and CEO, will provide comments on market conditions and the company’s key strategic initiatives. Let me start with the third quarter financial highlights. Our third quarter of 2015 financial performance was in line with our forecasted earnings range and street estimates. However, sales and profits were below our strong prior year third quarter 2014 financial performance. Value-added sales in the third quarter which excludes the impact of pass-through metal costs were $148.8 million, 10% below the prior year third quarter value-added sale of $165.6 million. The primary reason for the decline in value-added sales was the $9.1 million, or 30% decline in value-added sales into the Asian region, primarily China. Our sales into the consumer electronics and telecommunications infrastructure market in Asian region were down significantly as the economic demand in China soften and it appears customers and distributors were correcting inventory levels. The second major influence on the third quarter 2015 value-added sales was the, I am sorry, $8.1 million year-over-year decrease in sales into the oil and gas market. The year-over-year comparisons were difficult as the second half of 2014 value-added sales into the oil and gas market were at near record high levels. As the North American oil rig count has dropped approximately 60% from the prior year levels, so have our sales volumes. Our third quarter sales into oil and gas are reflective of approximately an 80% year-over-year decrease and a 40% sequential decline from second quarter 2015 levels. Our sales decreased typically exceeds the rate of the oil rig count decrease on the way down and the sales increase exceeds the rate of the increase during the recovery period as the supply chain adjust inventory levels in both directions. These two factors, the Asia slowdown and the continued deterioration in the oil and gas exploration market account for the entire decline in year-over-year third quarter value-added sales. These declines were partially offset by growth in the industrial components and defense end markets, which both realize year-over-year and sequential value-added sales growth. Foreign exchange rate fluctuations similar to the first two quarters of 2015 negatively impacted value-added sales versus the prior year quarter by approximately $2.4 million or a negative 1.4%. Value-added sales from new products defined as those introduced in the last three years grew 8% over the prior year and represented 12% of our total value-added sales in the third quarter of 2015. Our long-term strategy of driving sustained organic growth through new product and new application development continues to gain traction. Adjusted gross margin dollars decreased 19% to $44.6 million from $54.8 million in the prior year third quarter. Expressed as a percent of value-added sales, adjusted gross margins were 30.0%, a 310 basis point deterioration from the third quarter of 2014. The lower profit margins were primarily driven by lower sales volumes, unfavorable product mix and a change in foreign exchange rates. On a constant dollar basis, adjusted gross profit margins in the quarter were approximately 31.3% of value-added sales. The negative impact that foreign exchange rate has on our gross margin is partially offset by our FX hedge gains recorded in other income and expense. Selling, general and administrative expenses were $29.8 million or 14% below the prior year amount of $34.5 million. Expressed as a percentage of value-added sales, SG&A expense was 20.0%, slightly below the ratio in the prior year third quarter. The decrease was a combination of lower year-over-year incentive compensation expense and reduced discretionary spending. Management took actions quickly in the quarter to adjust variable costs in response to the lower sales level. In some situations there were structural reorganizations resulting in the elimination of senior level positions, while other actions were more of an overall business unit headcount reduction. Materion headcount was reduced by a total of 4% within the quarter. Research and development expense was $2.5 million in the third quarter, which represent approximately 2% of value-added sales. The quarterly R&D expense is down approximately $700,000 from the prior year third quarter as a portion of the R&D resources were allocated to production activities during the third quarter of 2015. Other net was income of $600,000 in the prior year third quarter and expense of $1.6 million in the third quarter of 2015. The prior year income amount included a $4 million gain from a legal settlement related to the pebble plant construction. The current year included a $1.3 million of foreign exchange hedge gain. On a GAAP basis the third quarter 2015 operating profit was $10.2 million, which included a $1.8 million of non-recurring cost reduction initiative. Adjusted operating profit in the quarter totaled $12 million, compared to an adjusted operating profit of $15 million in the third quarter of 2014, a 20% reduction. Third quarter 2015 adjusted operating profit expressed as a percentage of value-added sales was 8.1%, 100 basis point reduction from the prior year adjusted operating profit percentage. Net income in the third quarter of 2015 totaled $6.9 million, which reflects the 27.5% effective tax rate in the quarter. On an adjusted basis, net income totaled $8.2 million, 24% below the prior year third quarter adjusted net income. The quarterly tax rate is in line with what we have forecasted our effective tax rate to be for the year. Adjusted earnings per share were $0.40 in the third quarter of 2015, which compares to $0.52 per share of adjusted earnings recorded in the third quarter of 2014. Now let me review our 2015 Q3 performance by business. Our Performance Alloys and Composites segment sales were $93.6 million in the third quarter of 2015 compared to $114.2 million in the same quarter of the prior year. Value-added sales for this segment in the third quarter of 2015 were $79.6 million, a 16% decrease from the prior year third quarter value-added sales of $94.7 million. This segment contains 100% of the company’s direct exposure to oil and gas exploration market. They also have approximately 14% of their business in Asia and house the majority of the company’s foreign exchange rate exposure with large sales offices in Germany and Japan. The segment’s entire $15 million decrease in the third quarter 2015 value-added sales can be accounted for by lower oil and gas sales, drop-off in sales into the Asia region, primarily China and changes in foreign exchange rates. Two bright spots related to the third quarter 2015 value-added sales for the segment with a defense and the industrial components end market, both growing year-over-year and sequentially. As we commented during our second quarter call, we are starting to see new product and application wins in both of these markets with our Copper Beryllium, ToughMet and High Purity Beryllium Alloys. Operating profit in the Performance Alloys and Composites segment was $4.5 million in third quarter of 2015 compared to $10.8 million in third quarter of 2014. Expressed as a percent of value-added sales, segment operating profit was 5.7% in the third quarter of 2015 compared to 11.4% recorded in the prior year period. Management has taken several actions in the quarter to reduce segment headcount by 4%, and limit discretionary spending in response to the decreased sales demand and profit. The decline in operating profit is primarily attributed to the 16% decline in value-added sales, the negative impact of foreign exchange rates and an unfavorable product mix. On the product mix front, sales into the oil and gas exploration market are relatively high margin given the value proposition of the ToughMet material in the drilling environment while the growing sales into the industrial components market are generally lower margin product sales. Moving now to our Advanced Material segment. Value-added sales in the third quarter of 2015 were $44.5 million, which is down 3% compared to $46.1 million in the same period last year. The decline in third quarter value-added sales compared to the same period last year was driven by $1.7 million decline in sales to the Asian region. From an end market perspective, value-added sales into the consumer electronics and telecommunication infrastructure end markets combined for an 11% decrease versus the prior year third quarter. The lower third quarter 2015 value-added sales into these end markets was heavily influenced by the slowdown in the overall China market demand. Offsetting these declines was double-digit growth in energy and medical end markets. Difference from Performance Alloys and Composites, the energy end market exposure for the Advanced Material segment is not oil and gas exploration but rather solar and alternative energy which realize approximately $1 million in year-over-year value added sales growth with our advanced chemicals and product line. Operating profit in the third quarter of 2015 was $7 million compared to $7.8 million in the third quarter of 2014. Operating profit was 15.7% of value-added sales in the third quarter, down 128 basis points from the same period last year, primarily related to the sales volume decline. Moving now to the Precision Coatings group. This group includes the Precision Optics and Large Area Coatings businesses, which are included in the other segment along with unallocated corporate cost. Value-added sales for the Precision Coatings group were $25.7 million in the third quarter 2015, compared to $27 million in the prior year third quarter. The 5% decline in value-added sales during the third quarter of 2015 is driven by combination of two partially offsetting factors, one, the Precision Optics business and Consumer Electronics, primarily the projector display market was down significantly both year-over-year and sequentially. This decrease is being largely offset by a 2% growth in sales from our Large Area Coatings business and to the medical end market, which is our largest end market exposure for the group. This sales mix shift has a positive impact on profit margins. In addition, management actions were taken in the quarter to reduce the Precision Optics business headcount 10% primarily in China in response to the drop off in the projector display market. The combination of the favorable sales mix shift and cost reduction initiatives drove meaningful profit margin expansion in the Precision Coatings group. Operating profit for the group in the third quarter of 2015 totaled $2.3 million, up from $2.1 million recorded in the third quarter of 2014. Excluding severance and other cost reduction actions, adjusted operating profit was $3.6 million or 14% of value-added sales in the third quarter. The company’s balance sheet remains strong in the third quarter as net debt remains relatively low at $21.4 million and the company continues to have significant available liquidity to support meaningful organic growth opportunities as well as pursue strategic growth alternatives. Cash flow provided from operating activities totaled $44.8 million through the first nine months of 2015, which represented $23.8 million improvement over the prior year period. The primary driver of the improved cash flows was the liquidation of working capital. Cash used in investing activities in the first nine months of 2015 totaled $41 million, an increase of approximately $23.6 million over the first nine months of 2014. The increase was driven primarily by investment in mine development totaling $17 million related to the timing of the opening plus the prior year period included a favorable $3 million from an asset disposal in the Precision Coatings business. As we have said in our previous conference call, during 2015, the investment related to the opening of new pit is forecasted to be in the range of $20 million to $25 million in 2015. This long-term investment is required to support future demand for beryllium and beryllium alloys product. This concludes my review of the third quarter 2015 financial highlights. Although earnings were in line with guidance, it is clear that the momentum we saw in the first half of 2015 has given way to uncertainty and volatility in our end markets. That coupled with broader macroeconomic challenges has forced us reevaluate our full year guidance. From an end market perspective, our exposure to the oil and gas exploration market continues to negatively impact our value-added sales and margins in our Performance Alloys and Composites segments. The North America oil rig count is down over 60% from prior year levels, which is worse than our previous forecasts. With respect to the Asian sales and more specifically from China demand, while our forecast included the drop-off in telecommunications infrastructure sales, we did not accurately forecast the magnitude of the broader China slowdown and the impact on the consumer electronics markets more specifically, the electronic connector market where we supply our cooper beryllium products. On the macroeconomic front, the continued strength of the U.S. dollar has impacted the margins on a foreign denominated sales, as well as U.S. dollar denominated sales transactions because of increased activity from foreign competitors. As a result of these factors -- as a result with these factors in mind, the company has revised its annual 2015 adjusted earnings forecast range to a $1.55 to a $1.65 per share, diluted. Compared to our prior year 2014 adjusted earnings of a $1.65, this forecast of 2015 earnings range is flat to down 6% from the prior year earnings level. This concludes my prepared remarks. And I will now turn the call over to Dick Hipple who will review the company’s strategic initiatives.

Thank you, Joe. Through the first nine months of 2015, we've increased sales and earnings over 2014, along with doubling our cash flow from operations. So, I am satisfied with our year-to-date performance in a challenging environment that we find ourselves. The Materion team has responded very well in taking the necessary actions to counter some of the headwinds that we find ourselves in. As you may remember from our most recent investor call at the end of July, we commented on the building uncertainty and volatility in the end markets we serve and the persistently sluggish macroeconomic environment. These factors all piled on to provide for a challenging third quarter for Materion. As I will outline in a moment, we believe we will see the trough of this swing and demand in the second half of 2015. We are encouraged by the order entry rate pattern thus far in the fourth quarter and most importantly, our long-term strategy for sustained growth remains intact. I will also touch on some of the decisive actions we've taken to align our operations and cost structure in order to hasten the return of our momentum and earnings growth. On a quarter-to-quarter basis, our value-added sales dropped by 10%. While disappointing, it is also reflective of the markets and geographies we serve and primarily driven by lower sales in Asia and the ongoing decline in oil and gas. Sequentially, value-added sales were lower by 8% from the same drivers as the year-on-year results. Several markets did show overall growth, including industrial components, defense and medical. If you look deeper, there are three discrete factors that account for nearly all of the value-added revenue drop. First in Asia which by way of background, represented nearly 24% of our global sales in the second quarter. On the macro level, weakness emerged in China's economy in the second quarter, which has ricochet back to advanced economy. That and other slowdown throughout the emerging markets in Asia have weighed on a weak grade of global growth. For Materion, the impact reaches beyond lower demand for telecom infrastructure growth in China, which we projected for the second half but also in consumer electronic and other product supplied to general markets. For the quarter, our value-added sales in Asia were down by $9 million, accounting for roughly half of our consolidated value-added sales decline. The slowdown in China pervades all of our reportable segments. Lower demand in consumer electronics has affected sales for both Performance Alloys and Composites and Advanced Materials. While the optics business and the Precision Coatings group has been impacted by a drop-off in the projection display market. Similarly, the slowdown in the 4G telecom infrastructure build out in China, lower sales from Performance Alloys and Composites and Advanced Materials. Second is oil and gas. For the past year, depressed crude oil prices and a global glut of supply, domestic production activity has dropped to the lowest level in more than five years. Baker Hughes reported that since September 2014, the most recent highpoint for the U.S. rig count, 62% of the U.S. oil and gas rigs have been idled. Reduced oilfield demand for our materials impacted value-added sales by nearly $8 million, or roughly 5% of our consolidated value-added sales. But as we will highlight in a few minutes, Materion is also finding innovative ways to help oil companies adapt new technologies to lower production costs, which will benefit us in low or high priced energy world. The third factor is the affect of unfavorable currency translation. The dollar continued to strengthen during the quarter versus the prior year rate, impacting the margins on our foreign denominated sales but also the impact of increased activity of U.S. dollar denominated sales transactions, resulting from higher activity levels of our foreign competitors. For the quarter, FX resulted in a 1.4% decline in our value-added sales of $3.3 million. To be sure, we are operating in a tough environment. But as a global advanced materials company, we're also not alone in facing these headwinds. For our part, we are facing these challenges head-on with meaningful actions to mitigate the impact and exit the present global slowdown even stronger and more nimble than when we entered it. We’ve taken a number of actions, including reductions in force to protect and enhance our margins. Year-to-date, our global workforce is down nearly 8%. We are focused on our SG&A, which would reduce nearly 15% quarter-on-quarter and sequentially. Discretionary spending has been tightened and several executive level positions have been eliminated. While our mitigating actions are important, so to is the recognition that our fundamental strategy of driving growth remains intact. Materion is poised for sustained long-term profitable growth based on our differentiated products with leading positions and long-term global growth markets. Our robust new product pipeline is creating exciting new sales opportunities. For the third quarter of 2015, value-added sales generated from new products grew 8% over the same quarter last year. For the first nine months of this year, new product value-added sales were up 25% over to year-to-date period in 2014. And in total, new products accounted for 12% of our value-added third quarter sales and was slightly ahead of the 11% mark in the second quarter. And to cite a couple of examples. In the Performance Materials Group, we recently launched a joint marketing effort with our development partner and customer, Hess to promote our new patent-pending ToughMet coupling for oilfield production. Up to 400 of these couplings can be used to connect rod sections between the ground and the pump, 10,000 feet below the surface. Tests of these couplings by Hess in the North Dakota Bakken fields show tremendous improvements on oil production output and drastically reduced maintenance costs. Our joint demonstration at a major oil and gas trade show attracted the attention of many other major oil companies eager to government couplings can reduce savings for them too. We are also making good progress in securing long-term beryllium supply contracts reflective of the tightening supply dynamics. Our technical materials business, there is good progress on dovetail plan, our proprietary aluminum copper connector, battery connector solution for hybrid electric vehicles. Technical materials created a dedicated manufacturing cell and invested in new state-of-the-art high-efficiency equipment to support the growth of the dovetail product platform. The investment provides cost efficiencies to support the long-term cost targets of the automotive lithium-ion battery market. Technical materials successful penetration in this market continues to grow and in 2016, dovetail materials will be on automotive models in Germany, North America, Japan and China. There is some very positive momentum in the Advanced Materials Group as well. Advanced Materials is successfully leveraging its leading semiconductor capabilities and excellent customer relationships to broaden our reach and help secure our long-term future in this very large market. After our shipping our first 300-millimeter target to a Tier 1 customer earlier this year, we’ve had some terrific qualification wins for 300-millimeter gold and palladium sputtering targets with another Tier 1 global customer. In another recent development, we've begun partnering with several semiconductor equipment OEMs to develop new materials compatible with their new sputtering processes that will drive new demand for our deposition materials and favor us over less capable and less innovative target producers. Our Advanced Materials specialty chemicals product line had an outstanding quarter and is making great progress with major consumer electronic customers, with high performance chemicals for OLED applications. Our Large Area Coatings business part of the Precision Coatings Group continues to meet an unprecedented demand for their gold and platinum diabetic test strip materials, with new customer wins in 2015 and market share gains. This is a great growth platform Materion and it is gratifying to see it come together so well at this business which we acquired in 2008. Additionally, this business had a terrific quarter in its production and financial results. And in Precision Optics, also part of Precision Coatings we are continuing to match our level of technical expertise through our production capabilities in order to capitalize in the large potential sales volume in gesture control and 3-D end uses. The timing of our customers adoption of these optical filters is uncertain. However, we continue to qualify our products with multiple Tier 1 consumer electronics manufacturers. As we look forward we see the rapid the sales slowdown in China is only transitory as market inventories are adjusting to their slower growth environment. In oil and gas, there is a similar adjustment underway, but the oil and gas recovery will likely take longer if oil prices remain in the $40 to $50 per barrel range. To recap, our markets shares remain strong, our level of financial and operational discipline is solid, our innovation has never been as robust and we remain confident in our ability to capitalize on the many opportunities available to us throughout the key markets we serve. We are well positioned for a significant improvement in our financial results when end market conditions stabilize. This concludes our prepared remarks. And once again, we appreciate your interest in Materion and we will now open the line for questions.

[Operator Instructions] Our first question comes from the line of Edward Marshall from Sidoti & Company. Please proceed with your question.

Good morning, everyone.

Good morning.

Good morning.

So we just thought that the impact in China would have been felt in the AMT business, I think it’s a little bit more electronics related and it looks like it held up pretty well in the quarter. And most of the charges that you took were in Precision Coatings, even though it looks like you had a pretty good quarter. So is that something that your premium that it’s going to deteriorate as we move forward or I mean because on the sequential basis I think that it actually improved?

Yeah, I think the restructuring that we took was in our China operations, which is the overall Precision Coatings includes our diabetic test strip market, which is where you see the big improvement. The restructuring occurred in the China operations where we did have a pretty big downturn in the use of our color roll product for the DLP applications. So it was a very application focused over in China versus the overall business that you see. And we have improved that business significantly year-to-year which is at break, but we still have to manage on the subset basis there depending on the product line fits within that business.

Got it. And as it relates to China, I know you mentioned the inventory issue, but I am curious is it also an FX issue, I mean are you getting priced out of the market due to kind of some of the price competition that might be?

The good point that you pick up between the Advanced Materials business and the alloy business, the Performance Alloys and Composites business, that was very perceptive. And in the case of the Advanced Materials business, the biggest output there is really going to be into the wireless sector and then subsector that would be the telecom infrastructure which we talked about. The wireless sector hasn’t been that bad. There has been some slowdown a bit, maybe it’s not quite as strong, but it hasn’t really seen the dramatic decline in overall China, whereas the Performance Alloys and Composites business, their sales into China are more impacted by the general China environment. for example I think roughly speaking there is a lot of our product goes through the distribution there, but about maybe only 20% of our product goes into the wireless sector from that business unit and the balance is going into automotive appliance and those sort of connector applications. And so when you think about China where their automotive sales are down 17%, obviously there is going to be hell of an issue in some of those markets there. So what we’ve seen is a much greater decline in our alloy business than our advanced materials business as a function of a market that they’re playing in China. And to your question on within China with the exchange rate, part of our Performance Alloys and Composites declined in China, I think most of it’s driven by the actual macroeconomic slowdown in China, but we have probably lost a bit o share due to pricing because one of our key competitors in that region of the world is yen based. And so you are certainly familiar with what’s happening between the dollar and yen. So we have a bit of a battle going on there.

Got it.

Hopefully I have answered, give you a little color on that.

Absolutely. And I am curious on that point. Is there a need to, you probably have done this, so but I know you cut 4% of the workforce, is that enough, I mean, is this, I mean…

We cut 8%.

Oh, right.

And so, yeah, we have been pretty aggressive here.

Yeah. I mean, it just look like the business deteriorated quite a bit in the third quarter, both sequentially and year-over-year. So, I mean, I guess, there more to come or is that just…

Well, we’re going to have to -- we’re always are going to be adjusting based on volume, so that’s our DNA and we’re going to do whatever is appropriate. But then at the same time we also -- I just say, there is a few words here that we’re start to see the order book pickup again. So you don’t want to be adjusting for what’s happened in the real view mirror, you want to also be analyzing what’s going on in the order book.

Got it. And I guess, and moving into kind of the fourth quarter period here and that generally is a -- I don’t know, we’re almost a month through and I don’t know if you have kind of insight. But looking at some of the consumer electronics and maybe the holiday build, I mean, the quarter itself was down 17%. Does that -- you talk about orders level now, I’m curious if you have any insight whatsoever on the holiday build so far this year, I would have assumed you’ve already seen it at this point?

Yeah. Another words there and that’s reflect in our forecast, it was softer than expected.

For the holiday build in the Q4.

Yeah.

Great. Okay. Thanks, guys.

Our next question comes from the line of Marco Rodriguez from Stonegate Capital Markets. Please proceed with your question.

Hi. Good morning, guys. Thank you for taking my questions. I apologize. I had to jump on the call a little bit late, if you review this or answer these questions, let me know, I can follow-up you guys after the call?

Okay.

I wanted to drill down a little bit more in terms of the restructuring on the last question there, you’ve mentioned that you cut 8% of the workforce and you’re always looking to reduce additional cost or to streamline costs? But kind you kind of give me a sense as far as how much more you can actually kind of cut before you kind of cut into the bone if you will?

Yeah. I guess, let me take that. This is Joe. A little bit, I’ll break it down for you, because on the call the reduction in the headcount in the quarter was 4% for the company. And if you look at our Precision Coatings group and particularly our Precision Optics business, but at the Precision Coatings group the headcount reduction was 10% in the quarter. And so we were more aggressive there and that was primarily in our China operation, we saw the volume impact. I would say the majority of that headcount was direct labor. There was also some engineering resources and R&D included. And so we are still very functional there and haven’t cut down pass the bone I guess as you would say. In the Performance Alloys and Composites business the quarterly headcount reduction there has been about 4% as well, that headcount comes out without -- you just see in our restructuring charge. And so for instance, we do have temporary workforce that we can reduce and retirements and not filling open positions. And so we’re little bit more flexible there without taking the restructuring charge. And so that’s the business that I think when you listen to our comments we see mainly a lot of the volume drop there is perhaps associated with de-stocking. And as we see a recent up-tick from the top levels in the order entry, we haven’t yet gone further, but it is available to go further if the volumes continue to decline. However, we seen a recent uptick so at this point in time there is no plan to go further in that business.

Got you. And then in terms of the slowdown in the businesses that you’re seen obviously in Asia-Pacific, China, and oil and gas business, too fairly I guess, well known events, you’ve talked about them a little bit in last quarter? I’m just trying to kind of figure out what changed between Q2 and Q3 that cause the additional decline in your or rather in the adjustment of your forecast for earnings for fiscal ’15. And then if maybe you can talk a little bit about your confidence level of where you’re guidance is now?

Yeah. So our visibility goes out depending on the product line and depending on the business, let just say, eight to 10 weeks. And so if you want to know specifically, I think, I covered in my comments, but what changed from when we gave our guidance last quarter to now as it relates specifically to Q4 was the oil and gas rig count and that pull back have sequentially declined 40% for us. The rig count went from being down 50% to being down over 60% and so that was work then we have forecasted. We have forecasted it would be down but not down that much. As it relates to the Asia telecom, you are correct, we did have visibility to that and we did accurately forecast that. What we fail to accurately forecast as it relates to China was the broader slowdown in overall China market demand and the impact specifically that it had on our copper beryllium product line that goes mainly into electronic connector material in a very broad base of the China market. And so what was worst and what we saw just a quarter ago in terms of our older rate was mainly on the Performance Alloys and Composites side associated with the China and they drop off in the connector market.

Got you. Understand. And then last quick question, I’ll jump back in the queue. Even what you know now and given what you might be thinking about for fiscal’15, maybe you can kind of just give us a little bit of some directional ideas as far as how you’re feeling about fiscal ’16? How we should be thinking about movements in value-added sales and the expense items as well, just kind of a broad high level picture if you will, not asking for a specific guidance?

Yeah. So, I guess, I’ll led Dick to comment more detail, but my initial comment was we feel very confident in our new product portfolio and when you look at where we are doing our qualifications with new customers on the new products, its actually been more successful I would tell you than what we have forecasted just six months ago. That being said, customer acceptance and the timing of that is always uncertain, but it has slight encouraged. As it related to the economic environment, the slowdown in China and that impact while we view it as transitory ran into what level that comes back is at this time uncertain, as is the forecast for the recovery in the oil and gas. While we feel we’re through the trop based on our current order entry rate, it’s not like it has recovered back to second half 2014, early 2015 level. So at this point we have some positives and some uncertainty as we look at 2016.

It was interesting. I was on my way to work this morning, listening to the radio and this whole China creates quite a dilemma when it starts to see some of these numbers of pretty dramatic declines in some of their markets. And they just indicated PMI index at 47 or auto sales 17% down. They have lowered their interest rates six time during the year. Then Premier came out this morning and he said that they are going to eliminate the one child policy and they plan to eliminate poverty by 20-20. So all that tells me is those fellows over there, they’re going to have to do lot of stimulus to play a lot thick to get Chinese economy rolling again. So we’ll see if that happens but obviously, if they’re going to press really hard to get them out of the trop here right now, I expect they’re going to be pushing pretty hard which would be certainly good news for us.

Got you. Thanks a lot of guys. Appreciate it.

Thank you.

Our next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Please proceed with your question.

Good morning, John.

Good morning, Phil.

Question on oil and gas and beryllium, do you have any further line of sight into the customer inventories or what are they telling you there? And then secondarily, if you could update us on the beryllium negotiations you tagged in your press release this morning.

Yeah. The inventories in oil and gas, they give you a feel that you’ve got drilling rates down 60%. And our sales were down in that market about 80%, I mean, it’s just breath taking. That’s not going to continue on forever. We’ve been at these pretty low rates. I think the drilling guys, we starting to see the big cut back in the second quarter. So my guess is that usually it takes two to three quarters to flush out inventory when you had that kind of a dramatic decline. So my expectation is that even if the market doesn’t improve, our order book will be improving, certainly start to see some higher sales in the first quarter. That how typically how these things work. So, we can actually -- as Joe mentioned earlier we get these crazy swing on inventory adjustment. So markets can remain flat but our sales will start to come up because we over adjusted on the downside for the inventory adjustment. So that’s my personal view. Just right now, is that we’ll actually start to see an order book pick up in oil and gas even if we are saying in that 40 to 50 range. This is going to be record levels like we had in fourth quarter 2014, but it certainly going to be better what is right now. What was the other question?

Yeah. The beryllium negotiation

Yeah. The beryllium negotiation, I guess, I don’t want to name names. But we expect to have our first kind of contract sign before the end of the year reflecting that situation. And it probably appropriate time we can announce.

Sure.

Joe, I would add to that. Just on the inventory level U.S. specifically about oil and gas. But we also see similar when we look at our customer that our distributor in Asia. They appear to have adjusted their inventory levels based on the slower growth and see a little bit of picket up in strip order there and some strip product, so, within Performance Alloys. So some more comment where we believe, based on our view of the order entry rate that they being our customers and distributors in oil and gas in Asia have been through the inventory adjustment period. And that’s going to take 8 to 10 weeks for the flush to our financial. But that’s what we’re seeing in the most recent order entry.

Okay. Perfect. And then on the side of the margin in the coatings business, I realize margins can bounce around pretty aggressively but was this an extraordinary quarter in terms of your operating margin or is the something that is likely to continue at this levels?

Yeah. Again, that within our Precision Coatings group, we have different product line and the advancement in our medical product line is actually what’s driving a lot of this improvement in profitability. And that’s a new product wins that they’ve had in blood glucose test strip and some market share gain there. When we look into Q4, I think and -- you look at our long-term this group should maintain double-digit OP as a percentage of VA. So we’ve done some restructuring in China business, some market share wins and improvement in the profitability of the Large Area Coding business which serves medical and market. Such that we think we should be running around double-digit OP as a percentage of VA there. So it is a little bit high because there were some big wins in the medical this quarter but on a go forward rate, Phil, I would -- we would like to see that in double-digits.

Okay. That’s very helpful. And then just lastly I think $600,000 you called out as a non-repeatable item in the gross margin hit that you outlined in your new release. What is the flow through, which segment?

Precision Coating segment.

Okay. That would have been like a severance charge or something?

Correct. That’s a severance associated with direct labor.

Okay. Terrific. Thanks a lot guys.

Thank you, Phil.

Our next question comes from the line of Edward Marshall from Sidoti and Company. Please proceed with your question.

The guidance range for Q4 is $0.30 to $0.40 based on adjustment numbers I think. Well, I think about you have the wide range and I think that there is couple extra days maybe even whole week in the fourth quarter. Is that what kind of the range kind of implies, I mean is that what you are trying to capture there being so wide or is there something else?

Yes. So the range you are correct, it’s $0.31 to $0.41 what the range implies. And as you’re aware, we do have some products particularly in our beryllium business that can get pushed out or pulled in. And also, there is some volatility in the market, so we’d like to keep it within range. So we have scenarios where we are on the high side and we have scenarios where we are on the low side, but we have a degree of confidence that we will be within that range.

And I guess circling back to the extra days. Do you anticipate especially on the automotive world maybe do you anticipate that?

There is no extra day in the fourth quarter. To remind you, we are on the 544, so we have 15 weeks in everyone of our quarters and actually when you actually look at Q4, you’ve got Thanksgiving and Christmas in there. So I want fewer as extra days.

Got it. Okay. In the automotive suppliers, I think they said all the last year what’s your fall process there? I mean what is the commentary then to you? Is it work through the holiday season in some cases and maybe not another, what so properly?

I don’t know for sure. But my guess is it would be no this year, because I think if you take a look at some of the macroeconomic data that is out there, the inventories are climbing on automotive.

All right. Is what the customer of yours, big customers?

We don’t go -- typically we go through like a delta.

Okay.

So that two would be going through.

Okay. And then lastly did you refer to shares in the quarter, did you tell us how many shares do you repurchase?

In the quarter we’ve repurchased, I mean just said -- that number I lost is a 140, 000 shares.

140, 000 shares and was that -- that was done evenly throughout the quarter or is the…?

Average price is $31.23.

Got it. Thanks very much.

You bet.

The next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Please proceed with your question.

Thanks again. Just a clarification, could you say that your oil and gas related sales were down 80% or your orders were down80%?

Sales.

Okay.

Value-added sales.

Got it. But do you have other clue?

That’s kind of rough taking. Isn’t it?

Yeah, extreme highs and extreme low, that is the pleasure of being in a cyclical sector.

I think what I’ve been with my directors at the beginning of the year, I don’t think they would accept it at 80% down forecast, they would say I was just…

Yeah. Well, it’s surprised everybody. It will surprise everybody when it comes back too.

Yeah. It’s day that what’s interesting about that 80% is that -- and I made this comment a prior year Q3 and Q4 are oil and gas sales were new record high. And so in the industry they were I guess they didn’t see a comment so they built their inventories and I think that’s what why we’re seeing it down so month.

Okay. Management, it appears there is no further question at this time. So let’s make any closing remarks.

Sure. This is Mike Hasychak. We would like to thank all of you for participating on the call this morning. I will be around the rest of the morning as well as this afternoon to answer any further questions. My direct line is 216- 383-6823. Thank you very much.

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.