Materion Corporation — Q2 2015 Form 10-Q
Reporting period: Second quarter and six months ended July 3, 2015; comparisons are with the second quarter and six months ended June 27, 2014. Amounts below are in millions of dollars except per-share data.
Business context
Materion makes high-performance engineered materials for electronics, industrial, medical, automotive, energy, telecommunications, and defense markets. Its three reporting segments are Performance Alloys and Composites, Advanced Materials, and Other. Because many metal costs are passed through to customers, management also uses non-GAAP value-added sales, which excludes those pass-through metal costs.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $276.9 | $288.0 | $566.9 | $546.9 |
| Value-added sales | $162.4 | $159.6 | $325.0 | $304.4 |
| Gross margin | $51.3 | $49.8 | $103.7 | $95.3 |
| Operating profit | $12.8 | $14.6 | $27.0 | $25.6 |
| Net income | $8.9 | $10.0 | $18.5 | $17.3 |
| Diluted EPS | $0.43 | $0.47 | $0.90 | $0.82 |
- Q2 net sales fell 3.9%, primarily due to lower pass-through metal prices and unfavorable foreign exchange; value-added sales rose 1.8% (4% excluding currency effects). For the first half, net sales increased 3.7% and value-added sales increased 6.8%.
- Gross margin as a percentage of value-added sales improved to 31.6% from 31.2% in Q2 and to 31.9% from 31.3% for the first half. Management attributed improvement chiefly to sales leverage and product mix; LIFO liquidation benefits were $0.8 million in Q2 and $1.9 million for the first half.
- Q2 operating profit and diluted EPS declined year over year. The first-half increases in operating profit, net income, and diluted EPS were 5.5%, 6.9%, and 9.8%, respectively.
- Segment results were mixed: Performance Alloys and Composites operating profit rose to $9.3 million in Q2 from $6.3 million; Advanced Materials fell to $7.4 million from $12.5 million, partly because Q2 2014 included a $6.8 million insurance recovery. Other, including corporate costs, recorded a $3.9 million operating loss versus $4.2 million.
Cash flow, debt, and liquidity
- First-half operating cash flow was $21.0 million, versus $1.5 million used in the prior-year period, primarily reflecting lower working-capital requirements.
- Investing cash outflow was $26.6 million, including $10.1 million of mine development spending and $16.6 million for property and equipment. Financing provided $13.6 million. Cash increased $7.5 million to $20.6 million.
- Total debt was $44.6 million at quarter-end, up $20.3 million from year-end 2014, primarily to fund seasonal working capital and capital expenditures. Unused borrowing capacity was $226.4 million; the revolving credit facility matures in 2018. The company reported compliance with debt covenants.
- Current assets were $399.8 million and current liabilities $94.1 million. Shareholders’ equity was $471.5 million. Most cash was held outside the United States; repatriation could incur taxes, and the company said it did not anticipate a need to repatriate it.
- First-half dividends paid were $3.5 million. The quarterly dividend increased from $0.085 to $0.09 per share. The company repurchased 51,150 shares in Q2 for $2.0 million; $25.0 million of the authorized $50.0 million repurchase plan had been used by July 3.
Outlook, risks, and unusual items
- Management expected 2015 profitability to improve versus 2014, citing anticipated growth in value-added sales and new-product sales; it gave no numerical earnings or revenue guidance.
- Management expected weakness in energy, particularly oil and gas, to continue. It also cited the strong U.S. dollar and resulting sales, profit, and competitive-pricing pressures; volatility in global markets, including developments in Greece and an economic slowdown in China; and signs of a meaningful second-half pullback in 4G telecommunications infrastructure demand.
- Capital spending for the new Utah beryllium-ore mine pit was expected to total $20 million to $25 million in 2015.
- Other-net included $5.1 million of first-half gains from insurance settlements related to construction of the Elmore, Ohio beryllium pebble facility. Prior-year comparisons included a $6.8 million recovery on a theft claim and a $2.6 million gain on used-equipment sales. These items affect comparability.
- Two chronic beryllium disease cases were outstanding. Management did not expect their resolution to materially affect the financial statements, but noted that unfavorable litigation outcomes could materially affect future results. The environmental remediation reserve was $4.9 million; actual costs may differ from estimates.
- The company used $264.2 million of precious metals off-balance-sheet on consignment. It uses derivatives to hedge identified foreign-currency and, in limited cases, metal exposures; it reported no precious-metal hedges at quarter-end.
- Management said disclosure controls were effective as of July 3, 2015, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether value-added sales growth and margin gains persist after the Q2 LIFO benefit and currency effects.
- Whether Advanced Materials profitability stabilizes, and how ongoing energy weakness and the expected telecom demand pullback affect segment results.
- Whether the stated 2015 profitability outlook is achieved amid currency, market, and pricing pressures.
- Mine-development spending, operating cash conversion, seasonal borrowing, and remaining revolver capacity and covenant headroom.
- Developments in beryllium litigation, environmental remediation estimates, consignment arrangements, and the realization of insurance-related gains.