Materion Corporation — Q3 2018 Form 10-Q
Business and period: Materion produces specialty metals and engineered materials for electronics, industrial, defense, medical, automotive, telecommunications, and energy markets. This unaudited report covers the quarter and nine months ended September 28, 2018, compared with the periods ended September 29, 2017.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $297.2M | $294.3M | $909.7M | $830.8M |
| Value-added sales | $181.9M | $171.4M | $553.2M | $496.5M |
| Gross margin | $64.9M | $55.4M | $185.1M | $153.4M |
| Operating profit | $18.7M | $12.0M | $47.1M | $25.8M |
| Net income | $20.0M | $9.3M | $41.7M | $19.7M |
| Diluted EPS | $0.97 | $0.46 | $2.02 | $0.97 |
| Operating cash flow | Not separately stated for quarter | $49.2M | $35.5M |
Value-added sales is a non-GAAP measure that excludes pass-through metal costs; it rose 6% for the quarter and 11% for the nine months. Gross margin was 36% and 33% of value-added sales, respectively, versus 32% and 31% in 2017. The filing attributes margin improvement mainly to sales growth, product mix, and manufacturing performance. Cash dividends were $0.105 per share for the quarter and $0.310 for the nine-month period.
Balance sheet and liquidity
- At September 28, cash was $53.6M and total debt was $3.3M, producing reported net cash of $50.3M, compared with $38.0M at December 31, 2017.
- Current assets were $407.3M and current liabilities $126.6M. Inventory was $199.9M, down from $220.4M at year-end.
- Available borrowing capacity was $282.5M under the revolving credit facility and other secured lines; the company reported compliance with debt covenants.
- Unused capacity under metal financing lines was approximately $132M. Consigned precious metals and copper had a notional value of $318M and are off-balance-sheet arrangements.
Changes and segment trends
- Quarterly sales increased only 1%, partly because lower precious-metal and copper prices reduced sales by $5.9M; value-added sales increased 6% on stronger commercial execution and demand, especially in energy and defense.
- For the first nine months, sales rose 10% and operating profit 83%. The comparison includes $16.7M of incremental sales from the Heraeus target-materials acquisition, completed in 2017.
- Performance Alloys and Composites led improvement: Q3 operating profit rose to $16.7M from $6.8M, with higher volume, better mix, and manufacturing improvements.
- Advanced Materials weakened: Q3 value-added sales fell 8% and operating profit fell 29%, reflecting softer consumer-electronics demand, lower volume, unfavorable mix, and costs to ramp the new Germany facility. Nine-month operating profit declined 26%.
- Precision Coatings Q3 operating profit more than doubled to $3.5M; nine-month operating profit rose 48% to $9.1M, supported by sales growth, cost actions, and improved manufacturing performance.
Cash flow, outlook, and other notable items
- Nine-month operating cash flow improved to $49.2M, despite a $38M domestic pension contribution (versus $8M in 2017). The company expected aggregate 2018 pension contributions of approximately $42M.
- Capital spending was $21.8M for property, plant, and equipment and $5.2M for mine development through September. Full-year 2018 estimates were approximately $30M and $6M, respectively.
- No specific sales or earnings guidance is provided in the supplied filing text. Management said operating cash flow, cash, and borrowing availability should support operations, capital spending, pension contributions, dividends, remediation, and strategic acquisitions.
- Q3 net income benefited from a $2.7M tax benefit and a negative 15.7% effective tax rate, including $6.1M of discrete tax benefits. Nine-month tax expense was $1.7M, or a 4.0% effective rate, with $7.1M of discrete benefits. Tax accounting under the 2017 tax law remained provisional; final measurement-period adjustments were expected in Q4 2018.
- Environmental remediation reserves were $6.5M. The company is involved in ordinary-course litigation, including beryllium-related claims; the filing does not provide a clear aggregate potential-loss estimate.
- Risks cited include tariffs and government actions, end-market demand and customer condition, raw-material prices and pass-throughs, product mix and new-product execution, acquisition integration, foreign exchange, pension costs, and litigation. Management reported no material change in market risks since its 2017 Form 10-K.
Important facts for investors to verify
- Whether Advanced Materials demand and the Germany facility ramp improve, particularly given consumer-electronics softness and the segment’s lower profit.
- How much reported earnings growth is sustainable apart from discrete tax benefits, and the final tax-law measurement adjustments.
- Whether planned pension contributions, capital spending, and working-capital needs remain consistent with liquidity expectations.
- The company’s exposure to metal consignment-line capacity, market prices, and tariff or other government actions.
- Developments in beryllium litigation and environmental remediation, including any changes to reserves or potential losses.