Materion Corporation — Q1 2018 Form 10-Q
Reporting period: First quarter ended March 30, 2018; comparisons are with the quarter ended March 31, 2017. Materion makes high-performance engineered materials for electronics, industrial, defense, medical, automotive, energy, and other markets. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $303.5 | $240.7 | +26% |
| Value-added sales (non-GAAP) | $181.3 | $149.0 | +22% |
| Gross margin | $58.3 | $43.2 | +35% |
| Gross margin / value-added sales | 32% | 29% | +3 percentage points |
| Operating profit | $13.3 | $3.7 | +$9.6 |
| Net income | $10.6 | $3.1 | +246% |
| Diluted EPS | $0.51 | $0.15 | +$0.36 |
| Cash flow from operations | $(8.2) | $(16.8) | $8.7 less cash used |
Value-added sales, which excludes pass-through metal costs, is a non-GAAP measure used by management; it should be considered alongside GAAP sales. Gross margin as a percentage of net sales was approximately 19.2% versus 17.9%. The effective tax rate was 12.5%, compared with a 4.2% tax benefit in the prior-year quarter.
Cash, debt, and balance sheet: Cash was $20.2 at March 30, down from $41.8 at year-end 2017. Total debt was $3.6, giving net cash of $16.6. Available borrowing capacity under credit and other secured lines was $272.9; the company reported compliance with its debt covenants. Current assets were $396.4 and current liabilities $113.8. Operating cash use reflected working-capital outflows and a $9.0 domestic pension contribution. Investing cash use was $9.5, including $7.9 of capital expenditure and $1.7 for mine development. Dividends paid were $2.0; no shares were repurchased under the announced repurchase program.
Changes and segment results
- Sales growth included $31.6 of incremental sales from the acquired Heraeus target materials business (HTB) and approximately $9.0 from higher precious-metal and copper prices. Value-added sales rose primarily on organic growth, new products, improved mix, and demand, especially in consumer electronics and industrial components; HTB contributed $12.2.
- Performance Alloys and Composites: sales $118.2 (+28%), value-added sales $100.3 (+27%), operating profit $9.9 versus $0.2. Higher volume, mix, and manufacturing performance drove the improvement.
- Advanced Materials: sales $153.5 (+34%), including HTB and metal-price effects; value-added sales $58.3 (+23%). Operating profit fell to $5.9 from $6.4, with softer consumer-electronics demand excluding HTB and unfavorable product mix.
- Precision Coatings: sales $31.7 (−5%), value-added sales $23.6 (+1%), and operating profit $3.4 versus $2.2, reflecting cost reductions, manufacturing performance, and mix.
Outlook, risks, and unusual items
- Management forecast 2018 capital spending of approximately $30–$35 for property, plant, and equipment, plus $5–$10 for mine development. The filing provides no specific full-year sales, earnings, or EPS guidance.
- Management said operating cash flow, available borrowing capacity, and cash were adequate for operating needs, capital expenditure, projected pension contributions, dividends, environmental remediation, and potential strategic acquisitions.
- Cash flows remain exposed to working-capital needs, customer demand and product mix, metal-price pass-throughs and financing capacity, foreign exchange, pension costs, and successful integration of HTB. Consigned precious metals and copper had a notional off-balance-sheet value of $376.7 at quarter-end.
- The company recorded a $1.5 income-tax expense and a 12.5% effective rate. Accounting for certain Tax Cuts and Jobs Act provisions remained provisional; a $0.9 discrete tax adjustment included a $0.6 provisional deferred-tax remeasurement adjustment. The company had not selected its GILTI accounting policy.
- Environmental remediation reserves were $6.4, undiscounted; actual long-term costs may differ. The filing also discusses ongoing legal matters, including beryllium-related claims, without providing a clear quantified estimate of potential losses.
- ASC 606 was adopted January 1, 2018, reducing opening retained earnings by $0.4 net of tax; the company reported no material impact on Q1 financial statements. Remaining performance obligations were approximately $40.0, of which $11.0 was expected to be recognized in 2018.
Key facts for investors to verify
- Whether organic value-added sales and margins sustain their improvement, particularly in consumer electronics and industrial components.
- HTB’s contribution to earnings and cash generation, and any integration or demand effects in Advanced Materials.
- How operating cash flow and working capital develop after the quarter’s cash decline and pension contribution.
- Final tax accounting for the TCJA provisions and the potential effect on the effective tax rate.
- Updates to environmental remediation costs, beryllium litigation exposure, and capacity under metal-consignment arrangements.