Materion Corporation — Q3 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Materion produces engineered materials for electronics, defense, industrial, automotive, telecommunications, energy, medical and other markets. Unless stated otherwise, financial amounts below are in millions of dollars.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $392.8 | $325.3 | $1,192.3 | $946.3 |
| Gross margin | $57.4 (14.6%) | $58.2 (17.9%) | $175.8 (14.7%) | $163.4 (17.3%) |
| Operating profit | $17.2 | $20.9 | $56.1 | $54.6 |
| Net income | $13.5 | $13.4 | $39.2 | $33.8 |
| Diluted EPS | $0.65 | $0.65 | $1.89 | $1.65 |
| Operating cash flow | Not separately presented | Not separately presented | $(11.7) | $14.8 |
- Quarterly sales rose 21%, but management attributed $63.4 million of the $67.5 million increase to higher metal-price pass-through. Nine-month sales increased 26%; excluding estimated metal pass-through, underlying growth was 8%.
- Quarterly gross margin dollars declined despite higher sales. For nine months, gross margin dollars increased, but margin as a percentage of sales fell. Higher metal pass-through, which generally carries little corresponding margin, also lowered the percentage.
- Cash used in operations reflected increased receivables and inventory, pension contributions, and other working-capital changes. Nine-month capital expenditure and mine-development spending was $19.0 million before $2.9 million of government-contract reimbursements.
- At September 30, cash was $9.0 million, total debt was $112.3 million ($46.7 million short-term and $65.6 million long-term), and shareholders’ equity was $428.3 million. Debt increased $26.2 million from year-end 2010; the debt-to-debt-plus-capital ratio rose to 21% from 18%.
- Current assets were $414.2 million and current liabilities $137.2 million. The company reported $225.6 million of available, unused borrowing capacity under credit lines and approximately $111.5 million of unused capacity under metal financing lines. It was in compliance with debt covenants.
Material changes and management commentary
- Quarterly operating profit fell $3.7 million year over year, while net income edged up because the effective tax rate was lower. A $2.2 million net favorable discrete tax benefit included a reduction of tax reserves; the quarterly effective rate was 17.4%, versus 33.5% a year earlier. Nine-month effective rates were 27.5% and 35.6%, respectively.
- Consumer-electronics demand weakened, and order entry softened in Q3 from the first half; total Q3 order entry was about 8% below sales. Medical, automotive-electronics and energy markets were comparatively stronger. Management described defense-program delays as push-outs related to government spending patterns, rather than lost applications.
- Start-up costs and inefficiencies at the new beryllium facility, lower yields and higher scrap on certain nickel-based products, and higher metal consignment fees weighed on margins. Beryllium and Composites’ Q3 operating profit declined to $0.4 million from $4.2 million; nine-month profit was $1.6 million versus $8.4 million.
- Domestic defined-benefit pension contributions were $18.7 million in the first nine months, including $15.1 million in Q3. Inventory increased to $193.6 million from $154.5 million at year-end; management noted slower inventory turnover after Q3 sales softened.
Outlook, risks and unusual items
- Management estimated full-year 2011 diluted EPS of $2.10–$2.20. It expected Q4 sales to be below Q3 if metal prices remained at lower levels, reflecting reduced pass-through, and expected continued negative margin effects from the beryllium-facility start-up.
- The facility was expected to produce limited pure beryllium in Q4 2011 and reach planned production levels toward the end of Q1 2012. The project’s estimated total cost was $97.0 million, with the Department of Defense expected to fund approximately 73%; final cost and funding remained subject to completion and resolution of start-up matters.
- In October 2011, after quarter-end, Materion acquired EIS Optics Limited for $23.9 million in cash, financed with internal cash and revolver borrowings. The purchase price remained subject to adjustment. Acquisition-related costs, purchase accounting and EIS operations were expected to reduce Q4 pretax earnings by approximately $2.2–$2.9 million.
- Materion renewed its revolving credit agreement in July 2011 with a five-year $325 million facility, replacing a $240 million facility. Metal prices, global economic conditions, customer demand, foreign exchange, pension costs, acquisition integration and successful start-up of the beryllium facility were cited as factors that could affect results.
- Two chronic beryllium disease cases outstanding at year-end 2010 were resolved during 2011; no cases remained at quarter-end. The environmental remediation reserve was $5.0 million, undiscounted, versus $5.2 million at year-end; actual costs may differ. The filing also warns that stricter beryllium exposure standards or reduced customer use could materially adversely affect results, liquidity or financial condition.
Important facts for investors to verify
- Whether softened Q3 order entry and consumer-electronics demand continued into Q4, and how metal-price changes affected reported sales and margins.
- Whether the beryllium facility met its revised start-up and production timetable, and whether actual project costs and DoD reimbursements matched estimates.
- Whether inventory levels and operating cash flow improved, given the Q3 slowdown and nine-month cash use.
- The final EIS purchase-price adjustment, integration performance and realized earnings impact compared with management’s Q4 estimate.
- Whether the full-year diluted EPS estimate was achieved and how subsequent tax rates, pension funding and borrowing needs affected liquidity.