Business context and reporting period
Materion Corporation (formerly Brush Engineered Materials) filed this Form 10-Q for the second quarter and first half ended July 1, 2011. It produces engineered materials for markets including consumer electronics, automotive electronics, industrial components, aerospace, defense, energy, medical and telecommunications.
Financial performance
Amounts are in millions except per-share data. Comparisons are with the corresponding 2010 periods unless noted.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $424.7 | $325.9 | $799.5 | $621.0 |
| Gross margin | $62.7 (14.8% of sales) | $55.9 (17.1%) | $118.5 (14.8%) | $105.2 (16.9%) |
| Operating profit | $20.8 | $20.5 | $38.9 | $33.7 |
| Net income | $13.9 | $13.7 | $25.7 | $20.4 |
| Diluted EPS | $0.67 | $0.67 | $1.23 | $1.00 |
Second-quarter sales rose 30%; first-half sales rose 29%. Higher metal pass-through prices accounted for an estimated $63.0 million of Q2 and $107.5 million of first-half year-over-year sales growth. Operating profit improved only modestly in Q2 as volume and pricing gains were offset by facility start-up costs and higher expenses. First-half net income increased 26%, while gross margin as a share of sales declined.
Cash and cash equivalents were $9.5 million at July 1, down from $16.1 million at year-end 2010. First-half operating cash flow was negative $7.1 million, versus negative $20.7 million in first-half 2010; management reported $13.7 million of operating cash generated in Q2, following $20.8 million used in Q1. Working-capital investment, principally receivables and inventory, weighed on first-half cash flow. First-half capital spending was $11.1 million, with $2.6 million of government reimbursements; net spending including mine development was $8.7 million.
Total debt was $95.0 million at quarter-end ($39.3 million short-term and $55.7 million long-term), up from $86.1 million at year-end. Shareholders’ equity was $415.5 million. Unused borrowing capacity under existing credit lines was $154.7 million at quarter-end. In July, after quarter-end, Materion replaced its $240 million revolver with a five-year $325 million facility. The company reported compliance with debt and metal-consignment covenants. Its metal-consignment balance was $310.9 million, with approximately $29.1 million of unused capacity.
Material changes and segment performance
- Advanced Material Technologies: first-half sales $543.9 million, operating profit $21.4 million, versus $416.9 million and $17.7 million. Sales included substantial precious-metal pass-through; segment gross margin rate declined.
- Performance Alloys: first-half sales $181.1 million and operating profit $18.2 million, versus $141.2 million and $11.8 million. Growth and improved pricing were partly offset by lower nickel-product yields and scrap.
- Beryllium and Composites: first-half sales increased to $31.7 million from $28.8 million, but operating profit fell to $1.2 million from $4.2 million. Start-up costs at the new beryllium facility reduced gross margin by approximately $2.2 million in the half.
- Technical Materials: first-half sales rose to $42.6 million from $33.9 million, and operating profit to $4.5 million from $3.1 million.
Outlook, risks and unusual items
Management gave no quantified earnings or revenue guidance. It described backlog as healthy but reported that orders were below Q2 sales by approximately 5%, with a slowdown late in the quarter and into early Q3. Management said consumer-electronics inventory correction and seasonal factors might contribute, while noting demand remained solid overall. It expected the new beryllium facility to become operational before year-end, reducing its adverse margin impact; company-renaming costs were expected to continue in the second half at a lower level. Cost initiatives were intended to offset pension, metal-consignment and other pressures.
Key risks include demand and order trends, customer inventory corrections, metal prices and pass-through, manufacturing yields, facility start-up and project costs, foreign exchange, pension costs, credit availability, and regulatory changes. More stringent beryllium exposure standards could reduce customer use and adversely affect results, liquidity or financial condition. Management stated future beryllium litigation outcomes could affect operating results, although it did not expect known matters to materially harm financial condition or cash flow assuming insurance is collectible.
There were no pending chronic beryllium disease cases at quarter-end; a case involving three plaintiffs was settled for $43,000 and dismissed. Environmental remediation reserves were $5.1 million, undiscounted, and actual costs may differ. Two MSHA Section 104(d) citations were reported for the quarter, with no proposed assessment shown in the filing table. First-half 2010 results included a $1.4 million tax charge from legislation affecting retiree drug-benefit deductions; no material discrete tax events were recorded in first-half 2011.
Important facts for investors to verify
- Whether the order slowdown continued in Q3 and whether backlog translated into shipments, particularly in consumer electronics.
- How much sales growth reflects underlying volumes and pricing versus metal pass-through, and whether gross-margin rates recover.
- Whether the beryllium facility reached operational status on schedule and whether start-up costs and yields improved.
- Working-capital needs, cash conversion, metal-consignment capacity and borrowing under the new $325 million revolver.
- Potential effects of beryllium safety standards, litigation, environmental remediation and the reported MSHA citations.