Materion Corporation — Q2 2013 Form 10-Q
Business context and period. Materion produces high-performance engineered materials for electronics, industrial, aerospace, defense, energy, medical, automotive and other markets. This unaudited report covers the quarter and first half ended June 28, 2013; comparisons are with periods ended June 29, 2012. Amounts below are in millions of dollars, except per-share data and percentages.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $306.1 | $325.1 | $605.3 | $678.7 |
| Gross margin | $52.8 | $53.0 | $101.2 | $102.4 |
| Gross margin as % of sales | 17% | 16% | 17% | 15% |
| Operating profit | $13.4 | $12.4 | $22.9 | $22.3 |
| Income before taxes | $12.6 | $11.6 | $21.3 | $20.8 |
| Net income | $8.9 | $7.9 | $15.7 | $14.0 |
| Diluted EPS | $0.43 | $0.38 | $0.75 | $0.68 |
| Operating cash flow | Not stated separately for Q2 | $18.1 | $(9.0) |
- Q2 sales fell 6%; first-half sales fell 11%. Lower pass-through metal prices reduced reported sales by an estimated $22.0 million in Q2 and $25.2 million in the first half. The company’s non-GAAP value-added sales, which exclude pass-through metals, rose 3% to $159.3 million in Q2 and were $310.6 million versus $312.0 million in the first half.
- Q2 operating profit rose 8%, and diluted EPS increased to $0.43 from $0.38. First-half operating profit increased 3% and diluted EPS rose to $0.75 from $0.68. First-half effective tax rate was 26.2%, versus 32.5% in 2012; the 2013 period included a $0.6 million discrete tax benefit, primarily related to the 2012 research credit.
- Q2 gross margin dollars were nearly flat despite lower sales. Management cited higher value-added sales, production volumes and manufacturing efficiencies, including improved output at the new beryllium plant, partly offset by mix and currency effects. First-half gross margin was 17% of sales versus 15%.
Segments and operating developments
- Advanced Material Technologies: Q2 sales declined 12% to $196.0 million and operating profit fell to $4.5 million from $7.5 million. First-half operating profit was $7.9 million versus $12.8 million. Lower metal pass-through values, weaker value-added sales and a $2.3 million first-quarter physical inventory loss at Albuquerque weighed on results.
- Performance Alloys: Q2 sales increased 3% to $74.3 million and operating profit was $6.9 million versus $6.7 million. Automotive electronics and strip-product shipments improved; energy-market sales remained weak year over year.
- Beryllium and Composites: Q2 sales increased 29% to $16.2 million and the segment returned to operating profit of $0.8 million from a $2.0 million loss. The first-half operating loss narrowed to $0.5 million from $3.3 million, aided by improved new-plant performance and production volumes.
- Technical Materials: Q2 sales rose 8% to $19.6 million and operating profit increased to $2.4 million from $2.0 million. First-half sales and operating profit were slightly lower year over year.
Financial position and liquidity
- At June 28, cash was $15.7 million, total debt was $96.1 million ($36.6 million short-term and $59.6 million long-term), and shareholders’ equity was $430.8 million. Debt increased $1.8 million from year-end 2012; debt-to-debt-plus-equity improved to 18% from 19% at year-end.
- Current assets were $392.7 million and current liabilities were $112.4 million. Accounts receivable was $129.8 million; inventory was $207.6 million, up $1.5 million from year-end.
- First-half operating cash flow was $18.1 million, compared with cash use of $9.0 million in the prior-year period. Investing activities used $17.3 million, including $13.0 million of capital expenditures and $4.4 million of mine development. Cash declined $0.3 million during the half.
- Materion replaced its revolving credit facility with a secured facility providing up to $375 million of capacity, $50 million more than the prior facility, with lower borrowing spreads and maturity extended to 2018. Unused borrowing capacity under existing lines was $177.1 million at quarter-end. The company reported compliance with debt covenants.
- Off-balance-sheet metal consignment balances were $196.2 million, with $175.1 million of unused consignment capacity. The company states these arrangements help reduce working-capital investment and exposure to metal-price movements.
- The quarterly dividend increased approximately 7%, from $0.075 to $0.08 per share. First-half dividends paid totaled $3.2 million.
Outlook, risks and unusual items
- Management described markets as mixed and expressed caution about overall conditions in the second half of 2013. It expected medical sales to improve in Q3 after an outside-vendor manufacturing issue was resolved, and anticipated further improvement in the new beryllium plant’s output. No quantified earnings or revenue guidance was provided.
- Management expected defense-and-science beryllium sales to be solid in the second half, while noting government spending cuts and sequestration had affected optics orders. It also said lower precious-metal prices could reduce reported sales without a comparable effect on value-added sales, assuming other factors are unchanged.
- The company expected additional facility shutdown and consolidation costs during the remainder of 2013 and anticipated program benefits would offset them. A microelectronics packaging relocation to Singapore was scheduled for completion in Q3.
- The domestic defined-benefit pension plan was underfunded. Materion anticipated approximately $13.0 million of 2013 contributions, of which $5.5 million had been made by midyear. The plan also paid approximately $14.8 million in Q2 lump sums to eligible terminated vested participants, funded from plan assets.
- One chronic beryllium disease case was outstanding; the recorded reserve was $0.1 million. Environmental remediation reserves were $5.2 million, and actual long-term remediation costs may differ. More stringent beryllium exposure standards could affect customer demand; the potential impact was not estimable.
- The Albuquerque physical inventory loss was $2.3 million in Q1. The filing also identifies uncertainties concerning a possible inventory theft at that facility in 2012, including investigation costs and potential insurance proceeds; the timing and amount of any recovery were uncertain.
Important facts for investors to verify
- Whether the improvement in operating profit and value-added sales continues despite lower reported sales and mixed end-market conditions.
- Progress and costs of the new beryllium plant, facility consolidations, and the Singapore relocation.
- Actual pension contributions, plan funding status and future benefit costs.
- Developments in government-funded optics and defense programs, beryllium regulation, and the outstanding litigation and environmental matters.
- Resolution and any insurance recovery relating to the Albuquerque inventory investigation, and the company’s exposure through metal consignment arrangements and credit facilities.