Materion Corporation — Q3 2022 Form 10-Q
Business context and reporting period. Materion produces advanced engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom/data-center markets. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $428.2 million | $388.0 million | $1,322.5 million | $1,113.4 million |
| Gross margin | $82.7 million | $74.3 million | $245.5 million | $210.7 million |
| Operating profit | $29.1 million | $21.2 million | $80.6 million | $61.6 million |
| Net income | $20.0 million | $18.2 million | $57.2 million | $52.8 million |
| Diluted EPS | $0.96 | $0.88 | $2.76 | $2.56 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $34.2 million | $40.5 million |
- Q3 net sales rose 10%; value-added sales, a company-defined non-GAAP measure excluding pass-through metal costs, rose 35% to $290.4 million. Nine-month net sales increased 19% and value-added sales increased 34% to $834.4 million.
- Gross margin as a percentage of value-added sales was 28% in Q3 and 29% for the first nine months, down from 34% in both 2021 comparison periods. GAAP gross margin as a percentage of net sales was approximately 19.3% for Q3 2022 versus 19.2% a year earlier.
- Q3 operating profit increased 38%, while net income rose 10%. Nine-month operating profit increased 31% and net income 8%. Higher interest expense materially tempered earnings growth: $5.9 million in Q3 versus $0.9 million, and $14.3 million for nine months versus $2.5 million.
- Effective tax rates were 18.2% for Q3 and 18.0% for nine months, compared with 15.9% and 16.1%, respectively, in 2021.
- Cash and equivalents were $20.7 million at September 30, 2022. Inventory was $420.3 million, up from $361.1 million at year-end 2021. Nine-month operating cash flow declined $6.3 million, principally because of working-capital investment and higher incentive compensation payments.
- Capital spending was $54.2 million for nine months. Management expected full-year 2022 property, plant, and equipment payments of approximately $90 million.
- Debt at September 30 included $201.4 million under the revolving credit facility, $288.8 million under the term loan, and $7.9 million of foreign debt. The balance sheet reports short- and long-term debt totaling $494.0 million net of financing fees; the debt note reports gross debt of $498.1 million. Revolver availability was $127.2 million, and the company reported compliance with debt covenants.
Material changes and segment results
- The November 2021 H.C. Starck Electronic Materials acquisition contributed $49.2 million of Q3 sales and $135.7 million of nine-month sales in 2022. Acquisition-related inventory step-up expense was $7.5 million for the first nine months; transaction and integration costs were $3.3 million.
- Performance Materials: Q3 sales rose 24% to $169.4 million, but EBITDA was essentially flat at $28.9 million. Nine-month sales rose 26% and EBITDA 19% to $80.9 million. Management cited facility start-up costs, resource costs, scrap, and manufacturing inefficiencies.
- Electronic Materials: Q3 sales increased 5% to $230.8 million and EBITDA rose 49% to $16.9 million. Nine-month sales increased 19% and EBITDA 57% to $51.3 million, primarily reflecting the acquisition and higher sales volumes.
- Precision Optics: Q3 sales fell 10% to $28.0 million and EBITDA fell 43% to $3.5 million. Nine-month sales declined 13% and EBITDA 52% to $9.3 million, affected by lower volumes, the Shanghai facility shutdown in the first half, foreign-exchange headwinds, and discontinued product activity.
- The semiconductor end market accounted for $188.8 million of Q3 sales and $624.6 million for nine months. The company changed the names of two segments in 2022 to Performance Materials and Electronic Materials; it reported no corresponding change in segment composition.
Outlook, commentary, and risks
- Management stated that operating cash flow, available borrowing capacity, and cash on hand should support operating needs, capital spending, projected pension contributions, dividends, environmental projects, and strategic acquisitions for at least the next 12 months. No specific earnings or revenue guidance was provided in the filing.
- Management cited inflation, supply-chain pressures, temporary plant shutdowns, labor availability and cost, and foreign-currency headwinds. Q3 margin pressures included product mix, wide-area clad facility ramp-up costs, and slower Precision Optics recovery.
- The company uses derivatives to hedge interest-rate, foreign-currency, and metal-price exposures and states it does not use derivatives for speculation. A $100 million interest-rate swap was entered into in March 2022. Most precious metals and some copper are held on consignment; their off-balance-sheet notional value was $354.2 million at quarter-end.
- Management identified risks including the macroeconomic outlook, acquisition integration and synergies, raw-material and energy costs, interest and exchange rates, customer demand and product mix, capital-project execution, COVID-related disruption, and pending litigation.
- Contingencies include one outstanding beryllium case, which the company does not expect to materially affect its financial statements, and a wage-and-hour class action conditionally certified for employees at the Elmore facility only. Environmental remediation reserves were $4.3 million, undiscounted. The company intends to defend the matters; outcomes remain uncertain.
- Other unusual or notable items: Q3 restructuring expense was $0.5 million; nine-month restructuring expense was $1.6 million. The company recorded $6.1 million of other comprehensive loss for the first nine months, including foreign-currency translation losses. The filing said the CHIPS Act and Inflation Reduction Act were not expected to materially affect 2022 financial statements, while impacts in later years remained under review.
Most important facts for investors to verify
- How rapidly margins recover as the new clad facility ramps and Precision Optics addresses lower volumes and disruption.
- The acquired H.C. Starck business’s ongoing contribution, integration progress, and remaining purchase-price allocation adjustments.
- Working-capital and inventory trends, cash conversion, and execution against the approximately $90 million full-year capital-spending expectation.
- Debt servicing costs, refinancing or rate exposure, and borrowing capacity; reconcile gross debt of $498.1 million in the debt note with $494.0 million of balance-sheet carrying debt in the liquidity table.
- Developments in the wage-and-hour case, the beryllium matter, environmental remediation estimates, and the associated potential financial exposure.