Materion Corporation — FY2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012. Materion produces advanced engineered materials through four segments: Advanced Material Technologies, Performance Alloys, Beryllium and Composites, and Technical Materials. It serves markets including consumer electronics, industrial and aerospace, defense and science, medical, energy, automotive electronics, and telecommunications.
Key financial results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $1,273.1 million | $1,526.7 million |
| Gross margin | $198.8 million; 15.6% of sales | $215.3 million; 14.1% of sales |
| Operating profit | $36.8 million | $57.1 million |
| Net income | $24.7 million | $40.0 million |
| Diluted EPS | $1.19 | $1.93 |
| Cash from operations | $38.6 million | $56.8 million |
| Capital expenditures and mine development | $44.7 million | $28.8 million |
- Sales fell 17%, reflecting lower metal-price pass-through, more customer-supplied metal, the exit from silver investment bars, and mixed demand. The silver-bar exit reduced sales by about $44.6 million, with immaterial profit impact.
- Gross margin dollars declined, but the gross margin rate improved. Lower volume and a $7.4 million fourth-quarter inventory loss weighed on margin; favorable mix, pricing, and nickel-product yields partly offset the pressure.
- Operating profit fell about 36%; management attributed the decrease to lower gross margin, facility-consolidation charges, and higher expenses.
- Operating cash flow remained positive but declined year over year. Year-end cash was $16.1 million; working capital was $251.9 million and the current ratio was 2.7 to 1.
- Total debt was $94.3 million, up from $81.4 million; debt net of cash was $78.2 million. Available borrowing capacity was reported as $181.4 million, and the company was in compliance with debt covenants at year-end. The revolving credit agreement matures in 2016.
- The company began paying dividends in 2012: $0.225 per share for the year, or $4.6 million in cash. Future payments remain subject to board approval and credit-agreement restrictions.
Segments and material changes
- Advanced Material Technologies: Sales declined 19% to $847.8 million; operating profit fell to $16.7 million from $33.5 million. Results included the $7.4 million inventory loss. Medical and some consumer-electronics activity improved, while LED-related and defense optics demand weakened.
- Performance Alloys: Sales declined 13% to $292.4 million; operating profit was $24.0 million versus $27.2 million. Weaker strip-product, appliance, and oil-and-gas demand was partly offset by industrial, aerospace, and automotive growth.
- Beryllium and Composites: Sales were $60.0 million; the operating loss widened to $3.9 million from $0.8 million. Start-up costs and inefficiencies at the new primary beryllium facility reduced 2012 gross margin by an estimated $5.2 million.
- Technical Materials: Sales declined 8% to $72.7 million; operating profit was $6.6 million versus $7.3 million.
Outlook, risks, and unusual items
- Management estimated 2013 sales growth of 3% to 5% over 2012 and expected capital spending of approximately $40 million. It anticipated continued growth in medical, industrial/aerospace, and certain defense and science applications.
- Management said improved output, efficiency, and cost performance at the new beryllium facility would be important to 2013 profitability. Further consolidation costs were expected in 2013, with savings anticipated in 2014.
- In December 2012, the company identified a potential precious-metal theft at its Albuquerque facility. A fourth-quarter physical inventory produced a $7.4 million pre-tax loss; investigations were ongoing, and no insurance recovery was recorded because the amount and likelihood were not yet determinable.
- The inventory issue led the company to identify an interim material weakness in inventory-existence controls at that facility. It reported implementing additional controls by year-end and stated that the weakness was remediated. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2012.
- Other key risks include cyclical and uncertain end markets, precious-metal prices and consignment capacity, customer inventory swings, foreign exchange and variable interest rates, pension funding, and the ramp-up of the beryllium facility. More stringent beryllium health and safety standards could affect costs and demand; the magnitude could not be estimated.
- The company reported one pending beryllium-related case at year-end, with a reserve of about $0.1 million. Environmental remediation reserves were $5.3 million.
Important facts for investors to verify
- Final investigation findings for the Albuquerque inventory short, including the amount attributable to theft and any insurance recovery.
- Progress and costs in reaching planned production levels at the new beryllium facility.
- Whether forecast 2013 sales growth and expected consolidation savings were achieved.
- Cash conversion, inventory levels, and borrowing capacity, particularly given rising debt and the pension contribution outlook.
- Developments in beryllium regulation, litigation, and customer demand for beryllium-containing products.