Materion Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 27, 2020; comparable period ended March 29, 2019. Materion makes engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data-center markets. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $277.9 | $301.4 |
| Value-added sales (non-GAAP) | $158.7 | $187.7 |
| Gross margin | $45.6 | $69.3 |
| Gross margin / value-added sales | 29% | 37% |
| Operating profit (loss) | $(4.6) | $21.4 |
| Net income (loss) | $(3.1) | $16.9 |
| Diluted EPS | $(0.15) | $0.82 |
| Cash from (used in) operations | $9.1 | $(12.6) |
| Capital expenditures | $14.8 | $8.0 |
Sales declined 8%, while value-added sales fell 15%. The change in precious-metal and copper prices increased reported sales by $19.3 million, but did not prevent the decline in underlying value-added sales. Gross margin as a percentage of value-added sales fell to 29% from 37%; management cited unfavorable sales mix and manufacturing yields, plus a $1.3 million reserve for slow-moving and excess oil-and-gas-related inventory. SG&A declined 23% to $30.7 million, mainly due to lower variable compensation; R&D rose 12% to $4.2 million.
Operating results included $9.1 million of goodwill impairment, $1.7 million of held-for-sale impairment, and $2.2 million of restructuring expense. The tax benefit was $0.8 million; the effective tax rate was 19.7%, versus 18.2% in Q1 2019.
Segments and material changes
- Performance Alloys and Composites: Sales fell 22% to $99.1 million; value-added sales fell 24% to $83.7 million; operating profit decreased to $4.8 million from $19.0 million. Lower volumes across major markets, restructuring costs, and the inventory reserve weighed on results.
- Advanced Materials: Sales increased 11% to $160.2 million, largely reflecting higher pass-through metal prices. Value-added sales rose 3% to $59.2 million, supported by semiconductor demand; operating profit declined 32% to $4.8 million due to mix and manufacturing yields.
- Precision Coatings: Sales declined 38% to $18.7 million and value-added sales declined 25% to $17.0 million, including lower blood-glucose test-strip sales. The segment recorded a $9.6 million operating loss, including the LAC impairment charges.
By end market, semiconductor sales increased to $121.7 million from $107.2 million. Management reported declines in aerospace and defense, telecom and data center, and energy value-added sales; COVID-19 also weakened automotive and industrial demand.
Cash, debt, and liquidity
At March 27, 2020, cash was $107.6 million, total debt was $2.1 million, and net cash was $105.5 million. Available borrowing capacity under the revolving credit facility and other secured lines was $345.8 million. The company reported compliance with debt covenants. In April 2020, after quarter-end, it borrowed $150.0 million under its revolving credit facility as a precaution amid COVID-19 uncertainty.
Operating cash flow was positive $9.1 million, compared with cash use of $12.6 million a year earlier. Working capital used $18.7 million. Cash declined $17.4 million during the quarter to $107.6 million. Financing cash use included $6.8 million of share repurchases and $2.2 million of dividends. The share-buyback program was suspended late in the quarter.
Off-balance-sheet consigned precious metals and copper had a notional value of $338.5 million, up from $309.3 million at year-end 2019. Unused capacity under metal financing lines was approximately $111.5 million. These arrangements help limit working-capital needs and metal-price exposure.
Outlook, risks, and unusual items
- Management expected reduced demand to continue at least through Q2 2020, but stated that the pandemic’s extent and timing could not be reasonably estimated. Facilities were operating with essential-business approvals, and the company reported no significant supply-chain disruptions at the time of filing; temporary shutdowns remained possible.
- Management said liquidity was adequate to support operations and planned needs. For full-year 2020, it expected approximately $30 million of property, plant, and equipment spending, excluding capital expenditures related to customer prepayments, and approximately $10 million of mine-development spending.
- The company initiated closures of its Warren, Michigan and Fremont, California facilities, affecting approximately 63 employees. It expected about $6 million of additional restructuring costs during the remainder of 2020.
- Materion entered into a letter of intent to sell its Large Area Coatings reporting unit. The proposed sale was subject to a definitive agreement and customary closing conditions and was expected to close by Q3 2020. The filing recorded $9.1 million of goodwill impairment and $1.7 million of additional asset impairment.
- A customer had prepaid $11.8 million toward establishment of a manufacturing facility; the amount was recorded as unearned income, with a long-term supply agreement expected to be finalized later in 2020.
- Environmental remediation reserves were $5.8 million, undiscounted. One beryllium-related case was outstanding; the company did not expect it to materially affect the financial statements. Actual environmental costs may differ from reserves.
- COVID-19-related risks included reduced customer demand, facility or workforce disruption, supply-chain interruption, and possible limits on access to financing. The company said it could not predict the pandemic’s ultimate financial impact.
Important facts for investors to verify
- Whether COVID-19-driven demand declines persisted beyond Q2 and how they affected segment sales, margins, and cash flow.
- Whether the LAC sale closed on expected terms and whether additional impairment or transaction costs arose.
- Actual restructuring costs and savings from the Warren and Fremont closures.
- Use of the $150 million April revolver borrowing, subsequent debt and liquidity, and continued covenant compliance.
- Capital spending, customer-prepayment facility progress, and completion of the anticipated supply agreement.
- Changes in consigned-metal financing availability, environmental reserves, and the outstanding beryllium case.