Materion Corporation — Q1 2013 Form 10-Q
Reporting period: First quarter ended March 29, 2013; comparisons are with the first quarter ended March 30, 2012. Materion produces engineered materials for electronics, industrial, aerospace, defense, medical, energy and other markets. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $299.2 | $353.6 | Down 15% |
| Value-added sales (non-GAAP) | $151.3 | $157.4 | Down 4% |
| Gross margin | $48.3; 16% of sales | $49.4; 14% of sales | Down $1.1 |
| Operating profit | $9.5; 3% of sales | $9.9; 3% of sales | Down 4% |
| Net income | $6.8 | $6.1 | Up $0.7 |
| Diluted EPS | $0.33 | $0.30 | Up $0.03 |
| Operating cash flow | $(4.8) | $(23.0) | Less cash used |
| Capital expenditures and mine development | $9.6 | $9.5 | Approximately unchanged |
Net income rose despite lower sales and operating profit, principally as the effective tax rate fell to 22.0% from 33.4%. Q1 2013 included a $0.6 million discrete tax benefit, primarily related to the 2012 research and experimentation credit. The filing reports gross margin as 16% of sales versus 14% a year earlier; gross margin was 32% of value-added sales versus 31%.
Segments and material changes
- Advanced Material Technologies: Sales fell 20% to $193.9 million; operating profit declined to $3.4 million from $5.3 million. Lower sales, product mix and a physical inventory loss weighed on results.
- Performance Alloys: Sales were $74.5 million, nearly flat; operating profit improved to $7.2 million from $6.3 million. Automotive electronics strengthened, offset by weakness in energy and other markets.
- Beryllium and Composites: Sales declined to $12.3 million from $16.1 million, largely because planned defense-related shipments were delayed into Q2. Operating loss was $1.3 million in both periods.
- Technical Materials: Sales declined 9% to $18.5 million and operating profit fell to $1.4 million from $1.9 million, reflecting lower volume and weaker product mix.
Management attributed the company-wide sales decline to softness across all four segments, lower pass-through metal prices, foreign exchange, a higher use of customer-supplied precious metals, discontinued product lines and shipments delayed by manufacturing issues. Medical and automotive electronics sales grew, but did not offset declines elsewhere. Domestic sales fell approximately 27%; international sales grew 16%. Order entry was about 4% above Q1 sales and improved against the last two quarters of 2012.
A $2.3 million unfavorable physical inventory adjustment at the Albuquerque facility was the principal cause of lower gross margin dollars. The filing also identifies uncertainty concerning the prior-year-end physical inventory and possible theft, including the investigation’s outcome and any insurance recovery.
Balance sheet, cash flow and liquidity
- Cash was $20.2 million at March 29, 2013, up from $16.1 million at year-end 2012. Operating activities used $4.8 million, as working-capital outflows—especially lower accounts payable and accrued expenses—more than offset earnings and noncash charges.
- Total debt was $113.4 million, up $19.1 million from year-end: $48.7 million short-term and $64.7 million long-term. Management said borrowing funded incentive compensation, working capital, capital spending and dividends. The debt-to-debt-plus-equity ratio rose to 21% from 19%.
- Unused borrowing capacity under credit lines was $145.9 million; additional unused capacity under precious-metal consignment lines was $149.9 million. Materion reported compliance with debt and consignment covenants.
- Inventories were $201.3 million, down from $206.1 million at year-end; accounts receivable were $129.8 million. Days sales outstanding increased to 39 from 37 days.
- Shareholders’ equity was $421.1 million. The company paid $1.5 million in dividends, or $0.075 per share.
- Management said cash from operations, available borrowing and existing cash should be adequate for operating needs, capital expenditures, pension funding, dividends, repurchases, remediation and potential acquisitions. Q1 operating cash use was described as typical of the company’s seasonal pattern.
Outlook, risks and contingencies
- Management was cautious about the economy but expected business volumes in each remaining 2013 quarter to exceed Q1 levels, based on order entry and market information. This is an expectation, not formal quantified revenue or earnings guidance.
- Management expected the effective tax rate to be 27%–30% in each remaining quarter; the Q1 discrete tax benefit was not expected to recur.
- Management expected continued productivity improvements at the new beryllium plant and anticipated that facility-consolidation benefits would offset further related costs. It expected defense and science beryllium shipments to improve over Q1, while noting sequestration could weigh more heavily on optics sales by Q4.
- Lower precious-metal prices could reduce reported sales, though management said they should not proportionately reduce value-added sales, all else equal. Key risks include market demand, product mix, raw-material prices, foreign exchange, customer inventory cycles, project execution, government spending and pension costs.
- One chronic beryllium disease case was outstanding; the recorded reserve was $0.1 million. The company also reported an unchanged $5.3 million undiscounted environmental remediation reserve and cautioned that final costs may differ.
- The company anticipated approximately $13.0 million of pension contributions in 2013, including $1.7 million contributed in Q1. Approximately $15.0 million of lump-sum pension payments to eligible terminated participants were expected in Q2, funded from plan assets without additional company contributions.
Important facts for investors to verify
- Whether the Albuquerque inventory investigation identifies further losses or results in insurance proceeds.
- Whether delayed shipments and order-entry trends translate into higher volumes in the remaining 2013 quarters.
- Whether operating cash flow improves and working-capital needs stabilize as management expected.
- Whether debt, pension contributions and planned capital spending remain within available liquidity and covenant capacity.
- Whether government spending reductions, precious-metal price movements, and beryllium safety or remediation developments materially affect results.