Materion Corporation — Q1 2016 Form 10-Q
Business context and period: Materion produces engineered materials for electronics, industrial, medical, automotive, defense, energy, aerospace, and other markets. This unaudited report covers the quarter ended April 1, 2016; comparisons are with the quarter ended April 3, 2015. Financial statement amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $235.5 | $290.0 | Down 19% |
| Value-added sales | $143.9 | $162.6 | Down 12% |
| Gross margin | $43.4 | $52.4 | Down 17% |
| Gross margin / value-added sales | 30% | 32% | Down 2 percentage points |
| Operating profit | $7.5 | $13.2 | Down 43% |
| Net income | $5.4 | $9.0 | Down 40% |
| Diluted EPS | $0.27 | $0.44 | Down $0.17 |
| Net cash used in operating activities | $17.4 | $4.1 | Use increased $13.4 |
Management uses value-added sales, a non-GAAP measure that excludes pass-through metal costs, to assess sales trends without the effect of metal-price movements. Lower metal prices reduced reported net sales by approximately $8.4 million year over year.
Cash, debt, and liquidity
- Cash was $18.9 million at April 1, 2016, down from $24.2 million at year-end 2015. The company reported a $5.4 million net decrease in cash during the quarter.
- Total debt was $37.2 million, compared with $13.3 million at December 31, 2015. Net debt was $18.3 million, versus net cash of $11.0 million at year-end. Debt-to-debt-plus-equity was 7%, compared with 3%.
- Available borrowing capacity under the revolving credit facility and other secured lines was $185.7 million, down from $221.8 million; management attributed the decline primarily to the facility’s earnings-based borrowing covenant. Materion stated it was in compliance with debt covenants.
- Operating cash use reflected lower earnings and working-capital timing, including accounts receivable and unearned-revenue movements. Investing cash use was $9.7 million, including $5.7 million for property, plant, and equipment and $4.8 million for mine development.
- The company reported approximately $222 million of unused capacity under metal financing lines. The notional value of off-balance-sheet consigned precious metals and copper was $227.9 million.
Material changes and segment performance
- Management cited lower volumes and lower pass-through metal prices as drivers of the sales decline. Demand was weaker in oil and gas, consumer electronics, industrial components, and automotive electronics; beryllium hydroxide shipments also declined.
- Performance Alloys and Composites: Value-added sales declined 9% to $78.2 million; operating profit fell to $1.5 million from $6.8 million. Lower volume and unfavorable foreign exchange effects contributed.
- Advanced Materials: Value-added sales declined 19% to $42.1 million; operating profit fell to $5.2 million from $8.9 million. Lower consumer-electronics and industrial-component demand and weaker precious-metal refining yields were cited.
- Other: Value-added sales were $23.6 million versus $25.3 million. The segment, including corporate costs, recorded operating profit of $0.8 million compared with a $2.5 million loss. Precision Coatings operating profit improved to $4.1 million from $1.7 million, reflecting mix, cost reductions, and an equipment-sale gain.
- Other-net shifted to $1.9 million expense from $2.2 million income. The prior-year period included a $3.8 million insurance settlement and $1.6 million in foreign-exchange gains. Q1 2016 included a $0.7 million gain on equipment disposal.
Outlook, risks, and unusual items
- Management described continuing headwinds from the slowdown in Asia, weakness in U.S. manufacturing, lower oil prices and energy exploration, and a strong U.S. dollar. It warned that macroeconomic uncertainty could further pressure sales and profits.
- Management emphasized new product and technology development as a growth strategy and expressed confidence in the company’s longer-term ability to outperform GDP growth as end-market demand strengthens. The filing provides no specific revenue or earnings guidance.
- For full-year 2016, expected spending was $25–$30 million for property, plant, and equipment and $5–$10 million for mine development.
- The LIFO inventory-layer liquidation reduced cost of sales by $2.7 million, compared with $1.1 million in Q1 2015. The company also recorded a $1.1 million credit to cost of sales from amortization of prior Department of Defense equipment reimbursements.
- One beryllium-related case involving three plaintiffs remained outstanding and one appeal involving four plaintiffs/appellants was pending. Management did not expect these matters to have a material financial impact, but noted that an unfavorable litigation outcome could materially affect future results. Environmental remediation reserves were $5.7 million; actual costs may differ.
- Foreign-currency and metal-price exposures are managed with hedges and consignment arrangements. The filing notes that hedges may limit benefits from favorable currency movements and that consignment capacity can be pressured by higher metal prices or business volumes.
Most important facts for investors to verify
- Whether sales and operating performance stabilize in consumer electronics, industrial components, automotive electronics, and energy markets, and whether new products offset weaker demand.
- Whether refining yields and gross margin recover, and how much reported earnings are affected by LIFO liquidations and other non-recurring items.
- Whether operating cash flow and working capital improve, and whether borrowing capacity remains adequate under earnings-based covenants.
- Progress against the 2016 capital-spending ranges, debt levels, dividend and repurchase plans, and the company’s ability to maintain covenant compliance.
- Developments in beryllium litigation and environmental remediation, including potential exposure beyond recorded reserves.