Materion Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with FY2014. The filing also reports fourth-quarter results. Materion makes advanced engineered materials for electronics, industrial, medical, automotive, defense, energy, aerospace, and other markets. Its reportable segments are Performance Alloys and Composites, Advanced Materials, and Other.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $1,025.3 million | $1,126.9 million |
| Value-added sales, a non-GAAP measure | $617.2 million | $637.1 million |
| Gross margin | $190.8 million; 31% of value-added sales | $205.9 million; 32% of value-added sales |
| Operating profit | $45.3 million | $57.6 million |
| Net income | $32.2 million | $42.1 million |
| Diluted EPS | $1.58 | $2.02 |
| Operating cash flow | $90.2 million | $60.3 million |
| Capital expenditures and mine development | $52.1 million | $30.6 million |
Net sales fell 9%, reflecting lower pass-through metal prices (about $53.5 million impact), unfavorable foreign exchange (about $14.9 million), and lower volume. Value-added sales declined 3%, a better indicator of underlying sales because it excludes pass-through metal costs. Lower volume and foreign exchange reduced gross margin; lower incentive compensation helped limit the operating-profit decline. The 2015 effective tax rate was 24.9%, versus 23.1% in 2014.
Fourth quarter: Net sales were $214.0 million, gross margin $43.1 million, net income $6.7 million, and diluted EPS $0.33, compared with $288.4 million, $55.8 million, $12.3 million, and $0.60, respectively, in Q4 2014.
Segment results
| Segment | FY2015 value-added sales | FY2015 operating profit (loss) | Key comparison |
|---|---|---|---|
| Performance Alloys and Composites | $335.1 million | $23.6 million | Value-added sales down 7%; lower oil and gas exploration and unfavorable currency weighed on results. |
| Advanced Materials | $182.8 million | $27.8 million | Value-added sales up 1%; profit included a $6.8 million insurance recovery in 2014 that did not recur. |
| Other, including Precision Coatings and corporate costs | $99.3 million | $(6.1) million | Precision Coatings faced projector-display weakness; lower corporate costs partly offset weaker segment profit. |
Cash, debt, and liquidity
- Year-end cash was $24.2 million and total debt was $13.6 million, leaving net cash of $10.6 million; the debt-to-debt-plus-equity ratio was 3%.
- Available borrowing capacity under credit facilities was $221.8 million, after applying debt-covenant limits. The company reported compliance with its debt covenants.
- Current assets were 3.6 times current liabilities; net current assets were $249.6 million.
- Operating cash flow rose by $29.9 million, mainly due to lower inventory and receivables. The company spent $22.6 million on mine development, versus $1.2 million in 2014, principally to open a new pit.
- The amended $375 million revolving credit agreement extends to 2020. It is secured by substantially all company and direct-subsidiary assets, subject to stated exceptions. The filing identifies $8.998 million of debt due in 2016.
- Precious-metal and copper consignment arrangements had a year-end notional value of $214.7 million, an off-balance-sheet financing exposure.
Changes, outlook, and risks
- Market conditions: Management cited a slowdown in Asia, weaker U.S. manufacturing, collapsing oil prices, and a strong U.S. dollar in 2015. Consumer electronics and energy sales were pressured; defense and industrial-components sales increased.
- Outlook: Management expected early-2016 headwinds to continue, particularly in consumer electronics, industrial components, telecommunications infrastructure, and energy. It anticipated growth in value-added sales and profit in 2016, excluding non-recurring 2015 foreign-currency hedge gains. This is management’s expectation, not a quantified earnings forecast.
- Actions and investment: The company reduced global headcount by about 8% in 2015 and continued developing new products. It increased its quarterly dividend during 2015; annual dividends were $0.355 per share. It repurchased $7.1 million of shares in 2015, with $20.6 million remaining under the authorized program at year-end.
- Pension and other commitments: Management anticipated a $16.0 million domestic pension contribution in 2016. Environmental remediation reserves were $5.7 million at year-end; estimated payments and other contractual obligations are detailed in the filing.
- Key risks: Cyclical customer markets, technology changes and product substitution; raw-material costs and metal inventory valuation; currency and interest-rate movements; customer concentration in certain applications; facility, mine, and energy-supply disruptions; pension funding; and credit-facility covenant or refinancing constraints. Beryllium exposure, potential tighter safety standards, environmental regulation, and related litigation could affect costs, demand, and operations.
- Contingencies and unusual items: One beryllium case involving three plaintiffs was pending at year-end; management did not expect it to materially affect the consolidated financial statements, while noting litigation uncertainty. A 2015 stock-compensation accounting error led to revisions of prior-year figures; management said the error was not material to previously issued statements and reported remediation of the related material weakness by year-end. Auditors issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether 2016 value-added sales and profit growth materialized, and how results compare excluding 2015 hedge gains.
- Whether weakness in oil and gas, projector displays, and other exposed end markets persisted, and whether segment backlog converted to sales.
- How much of the sales decline reflects pass-through metal prices and currency versus underlying volume, mix, and pricing.
- Actual mine-development spending, pension contributions, environmental payments, and debt repayment against the disclosed plans and obligations.
- Whether internal-control remediation remained effective, and whether the stock-compensation revisions or any future beryllium, environmental, or other legal matters require further charges.