Materion Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Materion produces advanced engineered materials for semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and telecom/data-center markets. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1,185.4 million | $1,207.8 million | Down 1.9% |
| Value-added sales (non-GAAP) | $733.7 million | $739.0 million | Down 0.7% |
| Gross margin | $259.1 million | $251.1 million | Up 3.2% |
| Gross margin / value-added sales | 35% | 34% | Up 1 percentage point |
| Operating profit | $67.0 million | $61.5 million | Up 9.0% |
| Net income | $50.7 million | $20.8 million | Up 143% |
| Diluted EPS | $2.45 | $1.01 | Up 143% |
| Operating cash flow | $99.2 million | $76.4 million | Up $22.8 million |
Net sales included an estimated $35.4 million benefit from higher precious-metal and copper prices, which are generally passed through to customers. Underlying value-added sales declined slightly, reflecting weaker demand in automotive, telecom/data center, consumer electronics, and semiconductor markets, partly offset by aerospace and defense growth. Management attributed improved gross margin primarily to commercial and manufacturing performance improvements, and lower SG&A to reduced variable compensation-related costs. R&D increased 20% to $18.3 million.
Fourth-quarter 2019 net sales were $280.2 million, versus $298.1 million a year earlier. Gross margin declined to $55.0 million from $66.1 million, and net income was $14.8 million versus a $20.8 million loss in fourth-quarter 2018. The quarterly comparisons include unusual items in both years, particularly 2018 pension settlement charges and 2019 impairment charges.
Segments and material changes
- Performance Alloys and Composites: Sales were nearly flat at $500.2 million; value-added sales rose 1% to $428.1 million. Operating profit increased to $70.7 million from $58.8 million, supported by favorable mix and manufacturing performance.
- Advanced Materials: Sales fell 2% to $573.8 million, while value-added sales were approximately flat at $224.3 million. Operating profit rose to $24.7 million from $17.7 million, reflecting savings from prior-year restructuring, partly offset by weaker mix and yields.
- Precision Coatings: Sales decreased 8% to $111.5 million and value-added sales fell 7% to $87.3 million, mainly due to lower blood-glucose test-strip sales. The segment recorded a $3.6 million operating loss, compared with $11.5 million operating profit in 2018, including $11.6 million goodwill and $2.6 million other-asset impairment charges.
- Other/corporate: Operating loss improved to $24.8 million from $26.5 million.
Consolidated results included $14.1 million of non-cash impairment charges in 2019. By contrast, 2018 included $41.4 million of pension settlement charges and an $11.1 million tax benefit related to the Tax Cuts and Jobs Act. Accordingly, the large year-over-year increase in net income is not solely reflective of operating growth.
Cash, debt, and liquidity
- Cash and cash equivalents at year-end were $125.0 million, up from $70.6 million. Total debt was $2.2 million, giving reported net cash of $122.8 million.
- Available borrowing capacity under revolving and other secured lines was $340.9 million. The $375 million revolving credit facility was amended in September 2019; maturity was extended to 2024, with additional flexibility for strategic financing. The company reported compliance with debt covenants.
- Operating cash flow of $99.2 million benefited from a $24.0 million inventory reduction and lower domestic pension contributions ($4.5 million versus $42.0 million in 2018). Working capital overall used $18.5 million; receivables rose, and trailing days sales outstanding increased to approximately 47 from 41.
- Capital expenditures were $24.3 million and mine-development expenditures were $2.3 million. Cash dividends paid totaled $8.9 million; the annual dividend per share increased to $0.435.
- Precious metals and copper held on consignment had a notional value of $309.3 million, an off-balance-sheet financing exposure. The filing also reports $41.8 million of outstanding letters of credit.
Outlook, risks, and contingencies
The filing provides no specific 2020 revenue or earnings guidance. Management said cash from operations, borrowing capacity, and cash on hand were expected to support operating needs, investment, pension contributions, dividends, environmental work, and potential acquisitions. The company expects substantially all year-end backlog of $176.4 million to be filled within 18 months; backlog purchase orders may be terminated under certain conditions. Backlog declined from $266.0 million at year-end 2018.
- Demand is exposed to cyclical end markets, customer inventory adjustments, seasonality, tariffs and trade conditions, and changes in customer/product mix. International operations accounted for approximately 37% of 2019 sales.
- Beryllium-related worker-safety rules, customer substitution, health concerns, and litigation could reduce demand or increase costs. One beryllium case was outstanding at year-end; management did not expect its resolution to materially affect the financial statements. A separate case was settled for an immaterial amount in 2019.
- Raw-material price volatility, precious-metal inventory estimation and potential shortages, consignment fees and capacity, foreign exchange, and variable interest rates may affect earnings, cash flow, or production. A 20% increase in precious-metal prices was estimated to add about $1.7 million annually in consignment fees, assuming no pass-through to customers.
- The Large Area Coatings business faced a significant-customer volume decline, restructuring, and impairment. Its remaining goodwill was $9.1 million and may face further impairment if performance or assumptions weaken.
- Environmental remediation reserves were $5.9 million at year-end. Pension funding and expense depend on market returns, discount rates, and actuarial assumptions; the U.S. defined-benefit plan’s pay and service accruals were frozen effective January 1, 2020.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The filing notes adoption of lease-accounting guidance in 2019, which added operating lease right-of-use assets and liabilities to the balance sheet.
Investor facts to verify
- Whether value-added sales and demand recover across the weaker end markets, and whether the lower backlog signals continued softness.
- Whether Precision Coatings stabilizes after the customer-volume decline and whether further impairment or restructuring costs arise.
- How much of the 2019 earnings improvement reflects recurring operating performance versus prior-year pension and tax comparisons and current-year impairment effects.
- Whether receivables and days sales outstanding normalize and inventory reductions remain sustainable sources of cash.
- Potential effects of beryllium regulation, litigation, metal pricing and consignment capacity, pension assumptions, and environmental obligations.