Materion Corporation — Q1 2015 Form 10-Q
Reporting period: First quarter ended April 3, 2015; compared with the first quarter ended March 28, 2014. Balance-sheet comparisons are with December 31, 2014. Materion produces advanced engineered materials for electronics, industrial, medical, automotive, energy, defense, aerospace, and other markets.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $290.0 million | $258.9 million | +12.0% |
| Value-added sales (non-GAAP) | $162.6 million | $144.9 million | +12.2% |
| Gross margin | $52.4 million | $45.5 million | +14.9% |
| Gross margin as % of value-added sales | 32.2% | 31.4% | +0.8 percentage points |
| Operating profit | $14.2 million | $11.1 million | +27.9% |
| Net income | $9.6 million | $7.3 million | +31.5% |
| Diluted EPS | $0.47 | $0.35 | +34.3% |
Higher volumes and improved product mix supported growth. Lower pass-through metal prices reduced reported sales by about $9.9 million year over year, while the stronger U.S. dollar reduced sales by about $4.0 million. Management uses value-added sales to assess performance excluding pass-through metal costs.
- Segments: Advanced Materials’ sales rose 16% and value-added sales 24%; operating profit increased to $8.9 million from $5.1 million. Performance Alloys and Composites sales rose 6% and operating profit increased to $6.8 million from $6.2 million. Other reported a $1.5 million operating loss versus a $0.2 million loss, including corporate costs.
- Cash flow: Operating activities used $4.1 million, improved from $23.2 million used a year earlier, mainly reflecting working-capital needs. Investing activities used $10.9 million, including $3.7 million for mine development. Financing activities provided $24.5 million. Cash increased $8.8 million to $21.9 million.
- Liquidity and debt: Current assets were $406.6 million and current liabilities $94.5 million at quarter-end. Debt totaled $51.5 million, up from $24.3 million at year-end, primarily to fund working capital and capital expenditures. Unused borrowing capacity under credit lines was $210.9 million; the revolver matures in 2018. The company reported compliance with debt covenants.
- Capital returns: Dividends paid were $1.7 million; the quarterly dividend was $0.085 per share. Materion repurchased 20,725 shares for $0.8 million during the quarter, with $26.9 million remaining under its $50 million authorization.
Material changes and unusual items
- Operating profit benefited from a $3.8 million insurance settlement related to construction of the Elmore, Ohio beryllium pebble facility. The cash was received after quarter-end.
- Gross margin included a $1.1 million LIFO liquidation benefit associated with forecast lower year-end copper inventory.
- Other-net included $1.8 million of foreign-currency gains, partly offsetting currency-related pressure on sales and margins. Q1 2014 other-net included a $2.6 million gain on sale of used equipment.
- Capital spending included opening a new beryllium-ore pit in Utah; expected 2015 spending on this project was $20–$25 million.
Outlook, risks, and contingencies
Management remained optimistic about key markets and new products and expected 2015 profitability to improve versus 2014, citing expected growth in value-added sales and new-product sales. No numerical revenue or earnings guidance was provided. Management expected energy-market sales weakness to continue, cited a negative impact from dollar strength, and remained cautious about future defense spending.
- Key risks include end-market demand and product mix, foreign exchange and metal prices, customer demand and inventory levels, new-product execution, and capital-project delivery.
- One beryllium-related case involving three plaintiffs was outstanding; management did not expect it to materially affect the consolidated financial statements. The company cautioned that future litigation outcomes could affect results.
- Environmental remediation reserves were $5.0 million, undiscounted; actual costs may differ from estimates.
- Off-balance-sheet consigned precious metals had a notional value of $330.0 million. The company reported $142.8 million of available capacity under consignment lines.
- Most cash was held outside the United States; repatriation could incur taxes, though the company said it did not expect to need repatriation. Disclosure controls were reported effective, with no material internal-control changes during the quarter.
Important facts for investors to verify
- How much reported earnings growth depended on the insurance settlement, LIFO benefit, and currency-hedge gains, and whether these items recur.
- Whether value-added sales growth and margin improvements persist across the consumer electronics, industrial, and medical markets.
- Working-capital trends and the effect of higher inventory, mine-development spending, and increased debt on future cash generation.
- Exposure to a stronger U.S. dollar, continued energy-market weakness, and uncertain defense spending.
- Progress and final cost of the Utah mine project, along with any changes in environmental reserves or beryllium litigation exposure.