Materion Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter ended October 1, 2021; nine-month results are also presented. Comparative 2020 figures were retrospectively adjusted for the company’s change from LIFO to FIFO inventory accounting. Dollar figures below are in millions unless otherwise stated.
Business context and results
Materion makes advanced engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data-center markets. Results strengthened as demand and volumes recovered from pandemic-related weakness; the Optics Balzers acquisition also contributed to comparisons.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $388.0 | $287.2 | $1,113.4 | $836.6 |
| Value-added sales | $215.8 | $164.9 | $622.3 | $477.9 |
| Gross margin | $74.3 | $45.3 | $210.7 | $136.8 |
| Gross margin / value-added sales | 34% | 27% | 34% | 29% |
| Operating profit (loss) | $21.2 | $(0.6) | $61.6 | $1.4 |
| Net income | $18.2 | $5.5 | $52.8 | $7.4 |
| Diluted EPS | $0.88 | $0.27 | $2.56 | $0.36 |
Q3 net sales rose 35% and value-added sales rose 31% year over year; nine-month increases were 33% and 30%, respectively. Value-added sales excludes pass-through metal costs. Management attributed growth mainly to higher volumes, notably in semiconductors, industrial and automotive markets, and to Optics Balzers. Nine-month reported sales also benefited by $42.2 million from higher precious-metal and copper prices.
Cash flow, balance sheet and liquidity
- Cash flow: Nine-month operating cash flow was $40.5 million, down from $79.4 million. Working-capital movements used $73.5 million of cash, versus providing $13.8 million in the prior-year period, primarily from higher receivables and inventory. Investing cash outflow was $77.0 million, including $77.6 million of capital expenditures; financing provided $28.8 million. Cash declined to $18.0 million from $25.9 million at year-end 2020.
- Debt and liquidity: Debt was $79.6 million at October 1, versus $38.5 million at December 31, 2020; cash was $18.0 million. Revolver availability was $319.4 million. The company reported compliance with debt covenants. The revolving facility was subsequently amended and extended in connection with the H.C. Starck acquisition.
- Working capital and other obligations: Inventory was $311.7 million, up from $250.8 million at year-end. Customer prepayments of $67.9 million were recorded as unearned income. Off-balance-sheet consigned precious metals and copper had a notional value of $452.9 million.
- Capital spending and shareholder returns: Management expected full-year 2021 property, plant and equipment payments of approximately $100 million. Dividends paid in the first nine months were $7.2 million; no shares were repurchased under the buyback program.
Material changes, outlook and risks
- All three operating segments increased Q3 sales. Performance Alloys and Composites operating profit improved to $20.9 million from a $0.4 million loss; Advanced Materials profit rose to $9.3 million from $5.7 million; Precision Optics profit rose to $3.3 million from $1.4 million. Corporate costs increased to $12.4 million from $7.3 million.
- Margin improvement reflected higher volumes and the absence of 2020 mine-development costs; the nine-month comparison also benefited from the absence of a 2020 inventory reserve charge. Nine-month 2020 results included $10.8 million of impairment charges and $7.1 million of restructuring expense. The 2020 tax comparison was also distorted by valuation-allowance releases; the 2021 nine-month effective tax rate was 16.1%.
- H.C. Starck acquisition: Materion completed the acquisition of the electronic materials business on November 1, 2021, after quarter-end, for approximately $380 million cash, subject to customary adjustment. It was financed with a $300 million five-year term loan and $103 million of revolver borrowings. Q3 included $5.3 million of related transaction and integration costs in SG&A. Acquisition performance, integration, leverage and financing costs are important forward-looking considerations.
- Management said operating cash flow, available borrowing capacity and cash were adequate for operating needs, capital spending, dividends, environmental projects and strategic acquisitions. No earnings or revenue guidance was provided in the filing.
- Management described pandemic impacts as fluid and difficult to predict. Other stated risks include demand and product mix, raw-material availability and pass-through timing, metal prices, foreign exchange and interest rates, project execution, acquisition integration and expected synergies, and litigation and environmental matters.
- Two beryllium cases and a wage-and-hour collective/class action were pending; the company said it intended to defend the wage-and-hour suit and did not expect the beryllium cases to have a material financial impact. Environmental reserves were $4.9 million, and actual remediation costs may differ from estimates.
Important facts for investors to verify
- Whether volume growth and the 34% gross-margin-to-value-added-sales rate are sustainable as markets, mix and metal prices change.
- Cash conversion and inventory growth, including whether working-capital investment reverses in subsequent periods.
- The post-acquisition debt balance, interest expense, covenant headroom and H.C. Starck’s contribution to earnings and cash flow.
- Whether the company’s $100 million 2021 capital-spending expectation and customer-funded equipment investments were achieved.
- Developments in the German deferred-tax valuation allowance, pending legal matters and environmental remediation estimates.