Materion Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended October 2, 2015; comparisons are with the three and nine months ended September 26, 2014. Materion produces engineered materials for electronics, industrial, medical, automotive, energy, telecommunications, and defense markets.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Net sales | $244.4 | $291.6 | $811.2 | $838.5 |
| Value-added sales, non-GAAP | $148.8 | $165.6 | $473.8 | $470.1 |
| Gross margin | $44.0 | $54.8 | $147.7 | $150.1 |
| Operating profit | $10.2 | $17.7 | $37.2 | $43.2 |
| Net income | $6.9 | $12.6 | $25.4 | $29.9 |
| Diluted EPS | $0.34 | $0.61 | $1.24 | $1.42 |
- Q3 net sales fell 16%, operating profit 42%, and net income 45% year over year. Nine-month net sales declined 3%, operating profit 14%, and net income 15%.
- Gross margin as a percentage of value-added sales was 29.6% in Q3 versus 33.1% a year earlier, and 31.2% year to date versus 31.9%.
- Q3 value-added sales fell 10%; nine-month value-added sales increased 1%. Lower precious-metal and copper pass-through prices and currency translation reduced reported sales, without equivalent direct impact on profitability.
- Cash dividends were $0.09 per share in Q3 and $0.265 per share year to date. Basic EPS was $0.35 for Q3 and $1.26 year to date.
Cash flow, debt and liquidity
- Nine-month cash from operations was $44.8, versus $21.0 in 2014, primarily reflecting lower working-capital requirements. Investing cash outflow was $41.0, versus $17.4, including $17.0 for mine development and $24.1 for property, plant and equipment.
- Cash increased $11.7 to $24.8. Financing activities provided $8.8, including $14.2 net proceeds from short-term debt, $53.99 of long-term debt issuance and $46.28 of long-term debt repayments.
- Debt was $46.3 at October 2, up $22.0 from year-end 2014; cash was $24.8. Unused borrowing capacity under credit lines was $319.8, subject to debt covenants. The revolving facility matures in 2018, and the company reported compliance with covenants.
- Current assets were $389.2 and current liabilities $101.4. Inventory was $221.5, down from $232.4 at year-end. The company had $222.6 of available capacity under consignment lines and authorized limits.
- Capital spending on the new Utah beryllium-ore pit was expected to total $20–$25 in 2015. The company repurchased $7.1 of shares and paid $5.3 of dividends in the first nine months.
Material changes and business drivers
- Q3 weakness reflected lower volumes, unfavorable product mix, and foreign exchange. Management cited weaker demand in Asian markets and oil and gas, plus lower sales in consumer electronics and medical markets. Q3 net sales were also reduced by approximately $17.6 from lower pass-through metal prices and $3.9 from currency effects.
- For the first nine months, value-added sales grew in industrial components and defense, but declined in energy and consumer electronics. Foreign exchange reduced value-added sales by $8.2 for the period.
- Performance Alloys and Composites Q3 operating profit was $4.5 versus $10.8; Advanced Materials was $7.0 versus $7.8; and Other, including corporate costs, recorded an operating loss of $1.3 versus $1.0. Year-to-date operating profit declined in all three reported groupings.
- Q3 SG&A fell $4.8, primarily due to lower incentive compensation and selling expenses. R&D was $2.5 in Q3 and $9.4 year to date.
Outlook, risks and unusual items
- Management expected energy, especially oil and gas exploration, to remain weak for the rest of 2015. It also expected the slowdown in demand associated with the 4G telecommunications infrastructure build-out to continue through year-end.
- Management cited the strong U.S. dollar, competitive pricing pressure, volatile global financial markets, and China’s economic slowdown as headwinds. It emphasized new products and development programs as important to sustaining growth. No numerical earnings or revenue guidance was provided.
- The company recorded $1.8 of Q3 realignment charges, primarily severance for approximately 30 employees, including $0.6 in cost of sales and $1.2 in SG&A. It also recorded LIFO liquidation benefits of $0.5 in Q3 and $2.4 year to date.
- Other-net included $1.6 of expense in Q3, versus $0.6 of income a year earlier; the comparison was affected by a $4.0 legal settlement gain recorded in Q3 2014. Year-to-date other-net income was $0.5, including $5.6 of insurance and legal settlement gains and $4.6 of foreign-exchange gains.
- The company revised prior-period statements after finding a stock-compensation accounting error involving retirement-eligible employees. It said the error was not material to previously issued periods, but its cumulative effect was material to Q3 and expected full-year 2015 results. Year-end 2014 retained earnings were reduced by $1.6, net of tax; reported comparative 2014 results were revised.
- Management concluded disclosure controls were not effective at October 2 because of a material weakness in review controls over stock-compensation amortization. Remediation actions were planned for Q4 2015. Management stated the financial information in this filing was materially correct and GAAP-compliant.
- One chronic beryllium disease case remained outstanding; the company did not expect it to have a material financial impact, while noting litigation outcomes are uncertain. Environmental remediation reserves were $5.0, and actual costs may differ from estimates.
- Most cash was held outside the United States; repatriation could result in taxes, though the company said it did not intend or foresee a need to repatriate it. The $63.5 of prior Department of Defense equipment reimbursements is being recognized as a cost-of-sales credit over the equipment’s useful life.
Important facts for investors to verify
- Whether weaker oil and gas, consumer electronics, and 4G infrastructure demand persisted beyond 2015, and whether the U.S. dollar continued to pressure sales and margins.
- Progress and effectiveness of remediation for the material weakness, and the ongoing effects of the stock-compensation correction on reported results.
- Execution, costs, and expected returns of the Utah mine project, alongside the increase in debt and capital spending.
- Whether operating cash flow remains supported by working-capital improvements, and the availability of credit capacity under applicable covenants.
- Resolution of the outstanding beryllium case, environmental remediation estimates, and the sustainability of gains or benefits from settlements, LIFO liquidation, and other unusual items.