Materion Corporation — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. Materion produces advanced engineered materials through four reportable segments: Advanced Material Technologies, Performance Alloys, Beryllium and Composites, and Technical Materials.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $1,166.9 million | $1,273.1 million | Down 8% |
| Value-added sales | $609.1 million | $615.6 million | Down 1% |
| Gross margin | $188.0 million; 16.1% of sales | $198.8 million; 15.6% of sales | Down $10.8 million |
| Operating profit | $26.8 million | $36.8 million | Down 27% |
| Net income | $19.7 million | $24.7 million | Down 20% |
| Diluted EPS | $0.94 | $1.19 | Down 21% |
| Cash from operations | $75.9 million | $38.6 million | Up $37.3 million |
| Total debt | $64.8 million | $94.3 million | Down $29.5 million |
Lower metal-price pass-throughs accounted for an estimated $85.7 million of the sales decline; these metals’ costs are generally passed to customers. Value-added sales, a company-defined non-GAAP measure excluding pass-through metal costs, provide additional context on underlying sales activity. Operating profit was 4% of value-added sales, compared with 6% in 2012.
Cash and cash equivalents were $22.8 million at year-end, working capital was $265.5 million, and the current ratio was 3.1 to 1. Available borrowing capacity under the credit facility, after covenant limits, was $186.8 million. Net debt (debt less cash) was $42.0 million, versus $78.2 million in 2012. Capital expenditures and mine development totaled $32.6 million. Dividends paid were $6.5 million, or $0.315 per share.
Segment operating profit
| Segment | 2013 | 2012 | Key movement |
|---|---|---|---|
| Advanced Material Technologies | $4.7 million | $16.7 million | Lower value-added sales, precious-metal operating inefficiencies, inventory effects, and consolidation costs |
| Performance Alloys | $23.4 million | $24.0 million | Near flat; manufacturing issues and higher ore costs partly offset by pricing and value-added sales growth |
| Beryllium and Composites | Loss of $3.5 million | Loss of $3.9 million | Improved facility efficiency and product mix, partly offset by higher expenses |
| Technical Materials | $6.9 million | $6.6 million | Improved yields and pricing helped offset lower value-added sales |
Material changes and unusual items
- Profitability fell as lower manufacturing yields and unfavorable product mix—particularly in precious-metal operations—reduced gross margin. Elmore strip operations also experienced inefficiencies; the new beryllium facility improved during the year but had not reached designed annual output and cost levels.
- The company recorded $6.0 million of 2013 facility-consolidation costs, following $4.8 million in 2012. The program reduced the workforce by more than 200 employees; management said savings were expected to increase in 2014.
- Errors in the physical-inventory reconciliation process at one facility led to amended second- and third-quarter 2013 results. The corrections reduced second-quarter gross margin by $6.8 million and net income by $4.8 million; third-quarter gross margin fell by $0.7 million and net income by $0.1 million. The annual results presented in the filing reflect the corrected amounts.
- Separately, the company recorded a $7.4 million inventory loss in fourth-quarter 2012 at its Albuquerque facility and reported a claim concerning suspected silver theft of approximately $10 million. The insurance claim remained unresolved, and no recovery was recorded at year-end 2013.
Outlook, risks and contingencies
Management expected 2014 profitability to improve, citing anticipated growth in value-added sales, lower non-recurring consolidation costs, operational improvements at the Elmore beryllium facility, and lower pension expense. The filing gives no quantified sales, earnings, or EPS guidance. Planned 2014 capital spending was approximately $30 million.
- Controls: Management identified a material weakness in internal control over financial reporting related to review controls for physical-inventory reconciliations. Management and the auditor concluded controls were not effective at December 31, 2013; the auditor nevertheless issued an unqualified opinion on the financial statements. Remediation steps were planned for 2014.
- Markets and operations: Cyclical customer demand, weaker defense spending, rapid technology changes, product substitution, and customer inventory adjustments may affect sales. Precious-metal inventory valuation and operating yields are additional sensitivities.
- Beryllium: More stringent health and safety rules, customer substitution, and litigation could reduce demand or raise costs. Two beryllium cases were outstanding at year-end, with a recorded reserve of $0.1 million. The company stated it was uninsured for certain claims involving first exposure on or after January 1, 2008.
- Pension and liquidity: The domestic defined-benefit plan was underfunded. Materion anticipated contributing approximately $19 million in 2014; actual funding needs depend on investment returns, discount rates, and other assumptions.
- Debt and financing: The new secured revolving credit facility provides up to $375 million and matures in 2018. It contains financial and other restrictive covenants; the company reported compliance at year-end. Variable interest rates, covenant limits, and access to credit remain risks.
- Other exposures: Environmental remediation reserves were $4.8 million. The filing also identifies foreign-exchange, energy-cost, raw-material, facility-interruption, and customer-credit risks.
Important facts for investors to verify
- Progress and independent validation of remediation for the inventory-control material weakness, including the reliability of subsequent physical counts.
- Final insurance determination and any proceeds related to the Albuquerque inventory loss and alleged silver theft.
- Whether Elmore’s beryllium facility sustains the fourth-quarter 2013 production level and achieves expected cost and efficiency improvements.
- Whether value-added sales and segment margins improve as management anticipated for 2014, especially in Advanced Material Technologies.
- Actual pension contributions, plan performance, and covenant headroom under the credit facility.
- Developments in beryllium litigation, safety standards, and environmental obligations.