Materion Corporation (MTRN) — Q1 2021 Form 10-Q
Business context and reporting period: The filing covers the quarter ended April 2, 2021; comparisons are with the quarter ended March 27, 2020. Materion makes advanced engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data-center markets. Unless noted, figures below are in millions of dollars. The comparative 2020 figures were retrospectively adjusted for the company’s change from LIFO to FIFO inventory accounting.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Net sales | $354.4 | $277.9 | Up 28%; includes an $18.6 favorable impact from precious-metal and copper prices. |
| Value-added sales | $198.6 | $154.0 | Up 29%; non-GAAP measure excluding pass-through metal costs. |
| Gross margin | $66.8 | $44.6 | Up 50%; 18.8% of net sales versus 16.0%. |
| Gross margin / value-added sales | 34% | 29% | Management attributed the improvement primarily to higher sales volumes. |
| Operating profit (loss) | $19.7 | $(5.6) | Improved by $25.3; prior-year quarter included $10.8 of impairment charges. |
| Net income (loss) | $16.8 | $(3.9) | Diluted EPS was $0.81 versus $(0.19). |
| Operating cash flow | $15.5 | $9.1 | Working capital used $19.7 in cash in Q1 2021. |
| Capital expenditures | $31.3 | $14.8 | Primarily equipment investments, partly funded by customer prepayments. |
Segments: Performance Alloys and Composites sales were $114.1 million (up 15%) and operating profit was $13.5 million (up from $3.5 million). Advanced Materials sales were $204.6 million (up 28%) and operating profit was $8.9 million (up from $5.1 million). Precision Optics sales were $35.6 million (up 90%) and operating profit was $4.6 million, compared with a $9.6 million loss. The Optics Balzers acquisition contributed to Precision Optics growth; the segment’s 2020 loss included impairment charges. Corporate costs rose to $7.3 million from $4.5 million.
Financial position and liquidity
- At April 2, cash and cash equivalents were $18.9 million, down from $25.9 million at year-end 2020. Total debt was approximately $53.0 million, up from approximately $38.5 million; net debt was approximately $34.0 million.
- Available borrowing capacity under the revolving facility was $250.4 million. The company reported compliance with debt covenants. The facility matures in 2024; $49.0 million was outstanding at an average interest rate of 1.88%.
- Cash declined by $6.9 million during the quarter. Operating cash flow did not cover investing outflows; financing included $15.0 million of net revolving-credit borrowings. The filing reports expected 2021 capital expenditures of approximately $100 million.
- Inventory was $272.8 million, up from $250.8 million at year-end; accounts receivable was $180.5 million, up from $166.4 million. Precious metals and copper held off balance sheet on consignment had a notional value of $411.9 million.
Outlook, risks, and unusual items
- Management said demand began improving in Q1 as restrictions eased and vaccination programs advanced, while cautioning that the pandemic’s effects remain uncertain. The filing provides no specific revenue or earnings guidance.
- Customer prepayments for equipment and infrastructure totaled approximately $70 million under supply agreements; $64.7 million was recorded as unearned income at quarter-end. Remaining performance obligations were approximately $81.9 million, subject to stated disclosure practical expedients.
- The Optics Balzers acquisition closed in July 2020 for $136.1 million, including assumed debt. Its purchase-price allocation remained preliminary as of quarter-end; the filing said its results were not material to consolidated financial statements.
- The closure of the Large Area Coatings business was substantially completed in Q1; the company recorded $0.4 million of restructuring income from lower-than-estimated closure costs. Other-net expense rose to $4.5 million, including $1.2 million of foreign-currency losses and $1.2 million of intangible amortization.
- Risks identified include pandemic and end-market uncertainty, raw-material availability and prices, ability to pass costs through, acquisition integration, capital-project execution, foreign exchange, and litigation. Two beryllium cases remained outstanding; the company did not expect them to materially affect its financial statements. A wage-and-hour collective/class action was in preliminary stages. Environmental remediation reserves were $5.4 million, undiscounted.
Most important facts for investors to verify
- Whether Q1’s volume-driven sales and margin improvement persists, especially in semiconductor, aerospace and defense, and automotive markets.
- Progress against the approximately $100 million 2021 capital-spending expectation and the related funding, including customer prepayments and debt capacity.
- Working-capital requirements, particularly rising inventory and receivables, and the availability of metal consignment capacity.
- Optics Balzers integration and completion of its preliminary purchase-price allocation.
- Developments in COVID-19 impacts, litigation, environmental remediation, and other risks identified in the filing.