Materion Corporation (NYSE: MTRN) — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Materion makes advanced engineered materials for electronics, industrial, defense, medical, energy, aerospace and other markets, across Performance Alloys and Composites, Advanced Materials, Precision Coatings, and corporate/Other.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $1,207.8 million | $1,139.4 million |
| Value-added sales (non-GAAP) | $739.0 million | $677.7 million |
| Gross margin | $251.1 million; 34% of value-added sales | $212.8 million; 31% |
| Operating profit | $61.5 million | $40.0 million |
| Net income | $20.8 million | $11.5 million |
| Diluted EPS | $1.01 | $0.56 |
| Operating cash flow | $76.4 million | $67.8 million |
| Cash and total debt at year-end | $70.6 million cash; $3.0 million debt | $41.8 million cash; $3.8 million debt |
Net sales rose 6%; value-added sales increased 9%. Gross margin improved 18%, reflecting higher volumes and commercial and manufacturing performance. The reported gross margin was 20.8% of net sales. Cash from operations increased, while investing activities used $33.8 million and financing activities used $13.6 million. Capital expenditures were $27.7 million and mine development expenditures were $6.6 million.
Liquidity included $275.5 million of available borrowing capacity under credit facilities, subject to covenants; the company reported compliance with its debt covenants. Net current assets were $299.6 million, and the current ratio was 3.1 to 1. The revolving credit agreement matures in 2020. The company also reported $133.9 million of available and unused metal-financing capacity.
Material changes and fourth-quarter results
- Performance Alloys and Composites sales grew 17% to $500.6 million, and operating profit rose to $58.8 million from $22.0 million, aided by volume, product mix and manufacturing performance.
- Advanced Materials value-added sales fell 2% to $223.7 million; excluding the acquired HTB business, they declined 7%, primarily on softer consumer-electronics demand. Segment operating profit fell to $17.7 million from $32.8 million, including unfavorable mix and HTB facility ramp-up and integration costs.
- Precision Coatings operating profit increased to $11.5 million from $8.4 million, supported by sales growth, cost reductions and manufacturing improvements.
- Fourth-quarter net sales were $298.1 million and gross margin was $66.1 million. The quarter recorded a net loss of $20.8 million, or $1.03 per diluted share, primarily reflecting $41.4 million of pension settlement charges. The full-year pension charge reduced annual income before taxes.
- The company completed a partial pension settlement by purchasing a group annuity, transferring responsibility for benefits for approximately 1,150 retirees, beneficiaries and other participants. It contributed $42.0 million to its domestic pension plan during 2018.
Outlook, risks and contingencies
- The filing gives no specific 2019 revenue or earnings guidance. Management expected 2018 restructuring actions to increase 2019 operating profit by approximately $3.0 million and said remaining severance payments were expected to be substantially paid by year-end 2019.
- Year-end backlog was $266.0 million, up from $204.0 million a year earlier; substantially all was expected to ship within 18 months. Orders may be terminable under certain conditions.
- Management stated that operating cash flow, cash and borrowing capacity were expected to support operations, capital spending, projected pension contributions, dividends, repurchases, remediation and strategic acquisitions. The quarterly dividend was increased 5% to $0.105 per share in May 2018; future dividends remain subject to the company’s financial condition and Board determination.
- Key risks include cyclical and seasonal end-market demand, customer inventory movements, technology shifts, raw-material and metal-price volatility, consignment financing costs and capacity, foreign exchange, interest rates, and international trade or tariff changes. Consumer electronics softness was already affecting Advanced Materials.
- Beryllium health and safety rules, customer substitution away from beryllium, and environmental regulation could raise costs or reduce demand. The filing identifies one outstanding beryllium case at year-end and does not expect its resolution to materially affect the consolidated statements; it notes that unfavorable litigation outcomes could nevertheless affect operating results. Environmental reserves were $6.5 million.
- Precious-metal and copper consignment arrangements had a notional value of $316.1 million. Management warned that rising metal prices could increase financing fees and pressure available consignment capacity. The 10-K also identifies pension funding and actuarial assumptions, customer credit, facility disruptions, and cybersecurity as risks.
- The 2018 effective tax rate was negative 27.6%, including an $11.1 million tax benefit from finalizing Tax Cuts and Jobs Act accounting; the unusual rate should not be assumed to recur. Adoption of the new lease standard was expected to recognize approximately $26–$28 million of operating lease assets and liabilities in 2019, without a material expected impact on earnings, cash flows or debt covenants.
Most important facts for investors to verify
- Whether Performance Alloys and Composites’ improvement can continue and whether consumer-electronics demand and Advanced Materials profitability recover.
- How much of the annual earnings comparison reflects recurring operations versus the $41.4 million pension settlement charge and tax adjustments.
- Whether the $266.0 million backlog converts to shipments and cash on schedule, given that some orders may be canceled.
- Future pension contributions, performance of pension assets, and the remaining funded status after the annuity transaction.
- Metal consignment capacity, financing fees and pass-through timing under changing metal prices; also monitor the 2020 credit-facility maturity and covenant capacity.
- Developments in beryllium regulation, litigation and environmental remediation that could affect demand, costs or liabilities.