Materion Corporation — Form 10-Q Summary
Business context and reporting period
For the quarter and first half ended June 29, 2012, Materion reported results as an integrated producer of engineered materials serving consumer electronics, industrial, aerospace, defense, energy, medical, automotive, telecommunications, and appliance markets. Comparisons are with the quarter and first half ended July 1, 2011. Unless otherwise indicated, amounts below are in millions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Sales | $325.1 | $424.7 | $678.7 | $799.5 |
| Gross margin | $53.0 (16% of sales) | $62.7 (15%) | $102.4 (15%) | $118.5 (15%) |
| Operating profit | $12.4 | $20.8 | $22.3 | $38.9 |
| Net income | $7.9 | $13.9 | $14.0 | $25.7 |
| Diluted EPS | $0.38 | $0.67 | $0.68 | $1.23 |
- Interest expense, net, was $0.8 million in Q2 and $1.5 million for H1, up from $0.6 million and $1.2 million, respectively. Effective tax rates were 31.8% for Q2 and 32.5% for H1.
- H1 operating cash flow was negative $9.0 million, versus negative $7.1 million in H1 2011. The filing says Q2 operating cash flow was $14.0 million; working-capital growth was concentrated in Q1.
- Cash was $15.4 million at June 29, up $3.2 million from year-end. Total debt was $115.4 million, up $34.0 million from $81.4 million; the debt-to-debt-plus-equity ratio rose to 22% from 17% at year-end. Materion reported compliance with debt covenants.
- Current assets were $398.6 million and current liabilities $141.6 million. Unused borrowing capacity was $165.1 million. Precious-metal consignment obligations were $220.2 million, with $141.7 million of capacity remaining under those lines.
- H1 net capital spending was $17.8 million, after government reimbursements. Cash dividends paid were $1.6 million; the quarterly dividend was $0.075 per share.
Material changes versus prior comparable periods
- Sales declined 23% in Q2 and 15% in H1; operating profit fell 40% in Q2 and 43% in H1. Net income and diluted EPS also declined substantially.
- Management attributed weaker results principally to lower sales volumes, production inefficiencies and unfavorable product mix. Consumer electronics demand remained soft; defense and science sales weakened amid government funding constraints and program delays. Lower precious-metal prices reduced Q2 sales by an estimated $12.3 million, largely reflecting pass-through pricing rather than a comparable margin effect.
- All reportable segments had lower sales in Q2 and H1. Beryllium and Composites shifted from operating profit of $1.1 million in Q2 2011 to a $2.0 million loss in Q2 2012; H1 operating result moved from $1.2 million profit to a $3.3 million loss. Advanced Material Technologies and Performance Alloys also reported lower operating profits.
- H1 inventory rose 12% to $209.1 million, principally reflecting Performance Alloys production timing and inventory growth in Advanced Material Technologies. Slower collections increased receivables to $123.0 million; days sales outstanding were about 34, within the company’s normal range.
Outlook, commentary, risks and unusual items
- Management expected second-half 2012 sales and earnings to exceed the first half, but noted that order trends had not significantly improved and H1 orders remained below the prior year. Consumer-related demand and defense-program timing were uncertain.
- The new primary beryllium facility remained in start-up. Output and efficiency had improved, with production qualification expected in Q3 and further improvement anticipated in H2; material constraints could delay some orders. The project was estimated at $100 million, with the Department of Defense funding approximately 73%, subject to final completion and other factors.
- The company planned to relocate most microelectronic-packaging operations to Singapore before year-end 2012; Q2 relocation and severance costs were $0.6 million. The AMC acquisition cost $3.3 million net of cash acquired; purchase accounting was not final, and its operating impact was immaterial. Integration of AMC and EIS continued.
- Materion cited potential adverse effects from more stringent beryllium exposure standards, which could change customer purchasing. Other key risks include macroeconomic and end-market weakness, metal prices and pass-through, foreign exchange, acquisition integration, facility start-up, credit availability, pensions, and regulatory or litigation outcomes.
- The environmental remediation reserve was $5.4 million, undiscounted; actual long-term costs may differ. No chronic beryllium disease claims were outstanding or asserted/settled in H1 2012. The filing states that pending legal matters were not expected to materially affect financial condition, results, or liquidity.
- Materion reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether second-half sales and earnings improved as management expected, and whether order entry strengthened.
- Progress, qualification, output, costs, and funding reconciliation for the new beryllium facility.
- Inventory levels, receivable collections, operating cash flow, debt growth, and available borrowing capacity.
- Consumer electronics and defense demand, segment margins, and the effects of product mix and production utilization.
- Completion and financial impact of the Singapore relocation and the final purchase accounting and integration of AMC and EIS.
- Potential developments in beryllium exposure standards, environmental remediation estimates, and pension funding requirements.