Materion Corporation (NYSE: MTRN) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2022; comparative periods ended July 2, 2021. Amounts below are in millions of dollars unless stated otherwise. Materion produces advanced engineered materials serving semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom/data-center markets.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First six months 2022 | First six months 2021 |
|---|---|---|---|---|
| Net sales | $445.3 | $371.0 | $894.3 | $725.4 |
| Gross margin | $87.4 | $69.6 | $162.7 | $136.4 |
| Operating profit | $31.9 | $20.7 | $51.5 | $40.4 |
| Net income | $23.3 | $17.9 | $37.3 | $34.6 |
| Diluted EPS | $1.12 | $0.87 | $1.80 | $1.68 |
| Operating cash flow | Not separately reported | Not separately reported | $21.4 | $44.1 |
- Q2 sales rose 20%, operating profit 54%, net income 30%, and diluted EPS 29% year over year. For the first half, sales rose 23%, operating profit 27%, net income 8%, and diluted EPS 7%.
- Value-added sales, a company-defined non-GAAP measure excluding pass-through metal costs, increased 33% in Q2 to $277.2 million and 34% in the first half to $544.0 million.
- Gross margin as a percentage of value-added sales was 32% in Q2 versus 33% a year earlier, and 30% for the first half versus 34%. Management cited supply-chain costs, wide-area-clad facility start-up expenses, and $7.5 million of acquisition inventory step-up charges in the first half.
- Q2 effective tax rate was 17.9% (15.5% in 2021); first-half rate was 17.8% (16.3% in 2021).
Segments and material changes
- Electronic Materials: Q2 sales increased 22% to $261.0 million and EBITDA rose to $22.3 million from $10.4 million. First-half sales increased 27% to $531.8 million and EBITDA rose to $34.5 million from $21.3 million. Growth reflected the H.C. Starck electronic materials acquisition and higher organic demand, particularly in semiconductors.
- Performance Materials: Q2 sales increased 24% to $154.9 million and EBITDA increased 22% to $27.2 million. First-half sales increased 27% to $304.5 million and EBITDA increased 33% to $52.0 million. Start-up costs and manufacturing inefficiencies at a new facility partly offset growth.
- Precision Optics: Q2 sales fell 10% to $29.4 million and EBITDA fell 36% to $3.5 million. First-half sales declined 15% to $58.0 million and EBITDA declined 56% to $5.7 million. Drivers included lower COVID-19 testing and consumer electronics demand, foreign-exchange headwinds, and a temporary Shanghai shutdown.
- H.C. Starck contributed $43.6 million of Q2 revenue and $86.9 million of first-half revenue. Acquisition-related costs included $7.5 million of inventory step-up expense and $2.6 million of transaction and integration costs in the first half.
Cash flow, debt, and liquidity
- First-half operating cash flow was $21.4 million, down from $44.1 million, principally due to higher inventory and incentive compensation payments; customer prepayments provided a partial offset. Investing cash outflow was $40.6 million, including $37.7 million of capital expenditures and a roughly $3.0 million acquisition working-capital true-up. Financing cash inflow was $38.4 million, mainly reflecting revolving-credit borrowings.
- Cash was $32.2 million at July 1, 2022, compared with $14.5 million at year-end 2021. Inventory increased to $422.4 million from $361.1 million.
- The debt note reports total debt outstanding of $501.6 million, including $205.1 million under the revolving facility and $292.5 million under the term loan. The revolving facility had $124.0 million of available capacity; the company reported compliance with debt covenants. The MD&A liquidity table separately reports total outstanding debt of $497.3 million; investors should reconcile this difference.
- Management said cash, operating cash flow, and borrowing capacity were adequate for at least the next twelve months. Unused precious-metal consignment capacity was approximately $200 million. The company paid $5.1 million in first-half dividends and reported no repurchases under its share-repurchase program.
Outlook, risks, and unusual items
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management expects approximately $100 million of 2022 capital expenditures.
- Management cited ongoing supply-chain pressures, inflation, labor availability and costs, and temporary plant shutdowns. Forward-looking risks include COVID-19 impacts, recessionary and geopolitical conditions, raw-material and energy costs, interest and foreign-exchange rates, acquisition integration, and execution of capital projects.
- One beryllium-related case remained outstanding; the company did not expect it to materially affect the financial statements. A wage-and-hour collective/class action was pending, with a certification motion awaiting court decision. Environmental remediation reserves were $4.3 million, undiscounted.
- Customer prepayments included $84.6 million classified as unearned income at July 1. The company also disclosed $76.3 million in remaining performance obligations after applying stated practical expedients.
- The company uses derivatives to hedge interest-rate, currency, and metal exposures and states that it does not use them for speculative purposes. A $100 million interest-rate swap was entered into in March 2022.
Most important facts for investors to verify
- Reconcile the $501.6 million total debt in the debt note with the $497.3 million figure in the MD&A liquidity table, and assess borrowing costs and covenant headroom.
- Track whether organic growth and margins can offset acquisition-related costs, facility start-up inefficiencies, and continued supply-chain pressures.
- Monitor inventory and working-capital needs, operating cash conversion, and the planned $100 million capital-spending level.
- Assess recovery in Precision Optics, including the effects of Shanghai operations and demand in testing and consumer electronics.
- Review completion of the preliminary H.C. Starck purchase-price allocation and the acquisition’s integration and expected benefits.