Materion Corporation (MTRN) — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 28, 2019; comparisons are with the quarter ended June 29, 2018. Six-month figures compare the first halves of 2019 and 2018. Amounts below are in millions unless stated otherwise. The company produces engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data-center markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $297.8 | $309.1 | $599.3 | $612.6 |
| Value-added sales (non-GAAP) | $194.9 | $189.9 | $382.6 | $371.2 |
| Gross margin | $69.6 | $61.8 | $138.9 | $120.1 |
| Operating profit | $22.8 | $15.2 | $44.1 | $28.4 |
| Net income | $15.5 | $11.1 | $32.4 | $21.7 |
| Diluted EPS | $0.75 | $0.54 | $1.57 | $1.05 |
- Q2 net sales fell 4%, while value-added sales rose 3%; first-half net sales fell 2%, while value-added sales rose 3%. Value-added sales exclude pass-through metal costs and are a non-GAAP measure.
- Gross margin increased 13% in Q2 and 16% in the first half. Gross margin as a share of value-added sales improved to 36% from 33% in Q2 and to 36% from 32% in the first half. Management attributed the improvement to sales mix, volume and manufacturing performance.
- Operating profit rose 50% in Q2 and 55% in the first half; net income rose 39% and 49%, respectively. Q2 other non-operating expense included a $3.3 million non-cash pension curtailment charge related to a plan amendment.
- Segment results: Performance Alloys and Composites operating profit increased to $19.3 million in Q2 from $12.3 million, supported by mix and manufacturing improvements. Advanced Materials profit rose to $6.1 million from $5.6 million despite lower net sales, with restructuring savings partly offset by reduced yields. Precision Coatings profit increased to $3.9 million from $2.2 million. Corporate costs rose to $6.7 million from $4.9 million.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $30.0 million, versus $29.3 million. Investing cash outflow was $15.4 million, versus $20.6 million; financing cash outflow was $10.3 million, versus $7.7 million. Cash increased $4.2 million to $74.9 million.
- At June 28, 2019, total debt was $2.6 million and net cash was $72.2 million. Available borrowing capacity was $316.8 million; the company reported compliance with debt covenants. Its revolving credit agreement expires in 2020.
- Current assets were $454.4 million and current liabilities $125.0 million. Operating lease liabilities of $21.1 million and finance lease liabilities of $18.3 million were reported separately from debt.
- Capital spending was $15.4 million in the first half. Management expected 2019 property, plant and equipment payments of approximately $30 million and mine development spending below $5 million.
- The company paid $4.4 million in dividends in the first half and reported an ongoing intention to pay quarterly dividends, subject to the board’s determination. It repurchased $0.2 million of shares in the first half; no shares were repurchased under the public program in Q2.
Changes, outlook and risks
- Lower sales reflected reduced precious-metal product mix and greater customer-supplied material, particularly in Advanced Materials. Metal-price changes reduced reported net sales by $0.8 million in Q2 and $5.0 million in the first half; management said these pass-through effects do not necessarily move profitability proportionately.
- Management cited stronger demand in selected end markets and commercial-excellence initiatives. Semiconductor demand was softer, and Advanced Materials’ semiconductor value-added sales declined. The filing provides no explicit full-year revenue, earnings or EPS guidance; management cautions that interim results are not necessarily indicative of full-year results.
- The company adopted lease accounting Topic 842 on January 1, 2019, recording operating lease assets and liabilities and a $0.2 million reduction to opening retained earnings. The 2018 comparative balance sheet was not restated.
- A U.S. defined-benefit pension plan amendment freezes pay and service amounts used to calculate benefits for active participants from January 1, 2020. The related Q2 curtailment charge was $3.3 million.
- Goodwill impairment risk was identified for the Large Area Coatings reporting unit, where palladium-price volatility and competitive pricing could pressure customer demand. The 2018 valuation showed fair value approximately 50% above carrying value; the company said future impairment could be material if sales weaken and are not replaced.
- Environmental remediation reserves were $6.2 million, undiscounted. The company also disclosed ongoing litigation, including beryllium-related claims, and noted actual remediation costs may differ from estimates. Off-balance-sheet consigned precious metals and copper had a notional value of $295.7 million.
- Other stated risks include global economic conditions, tariffs and trade agreements, end-market demand, raw-material costs and pass-through timing, foreign exchange, customer and product mix, pension costs, and execution of strategic plans. The company reported no material change in market risks since its 2018 Form 10-K.
Key investor checks
- Verify whether value-added sales growth and margin improvements persist, particularly as semiconductor demand and Advanced Materials yields develop.
- Track the effects of metal-price movements, customer-supplied material, and consignment-line availability on reported sales, working capital and margins.
- Monitor the Large Area Coatings goodwill impairment indicators and the effects of palladium pricing on demand and competitive position.
- Assess cash conversion and capital spending against management’s 2019 expectations, alongside pension contributions and the 2020 credit-agreement maturity.
- Review the progress and potential cost of environmental remediation and beryllium-related litigation; the filing does not provide a clear quantified range for potential litigation losses.