Materion Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the quarter ended April 1, 2016 unless otherwise noted. Materion produces engineered materials for markets including consumer electronics, industrial components, defense, medical, automotive electronics, energy, and aerospace.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $240.7 million | $235.5 million | Up 2% |
| Value-added sales (non-GAAP) | $149.0 million | $143.9 million | Up 4% |
| Gross margin | $43.0 million | $43.4 million | Down $0.4 million |
| Operating profit | $3.4 million | $7.5 million | Down 55% |
| Net income | $3.1 million | $5.4 million | Down 43% |
| Diluted EPS | $0.15 | $0.27 | Down $0.12 |
- Gross margin was 29% of value-added sales, versus 30% a year earlier. SG&A increased 10% to $33.6 million; R&D declined 9% to $3.1 million. Higher SG&A reflected CEO-transition stock compensation, acquisition and integration costs, cost-reduction measures, and other administrative expenses.
- Income tax was a $0.1 million benefit versus $1.7 million expense in Q1 2016. The 2017 effective rate was (4.2)%, including $0.7 million of discrete tax benefits; reported net income therefore includes a material tax benefit.
- Operating cash flow was negative $16.8 million, similar to negative $16.7 million in the prior-year quarter. Investing cash outflow was $22.7 million, including the $16.4 million Heraeus target-materials acquisition. Financing provided $23.7 million. Cash declined $15.1 million to $16.3 million.
- At March 31, total debt was $32.6 million, cash was $16.3 million, and net debt was $16.3 million, compared with net cash of $26.8 million at year-end 2016. Available borrowing capacity was $218.7 million; the debt-to-debt-plus-equity ratio was 6%. The company reported compliance with debt covenants.
- Current assets were $364.5 million and current liabilities $96.4 million. Inventory increased to $218.5 million from $200.9 million at year-end; management attributed cash use partly to inventory built for anticipated orders and demand.
Material changes and business developments
- Net sales included approximately $7.0 million from the February 28 acquisition of Heraeus’s target-materials business; acquisition value-added sales were approximately $2.9 million. The acquired business operates in Advanced Materials. The purchase-price allocation was preliminary, including $2.7 million of goodwill and $3.2 million of intangible assets.
- Higher metal prices added approximately $6.1 million to year-over-year net sales, but metal costs are generally passed through to customers. Consumer electronics and industrial components supported value-added sales; medical and defense weakness partly offset the gains.
- Advanced Materials value-added sales rose 12% and operating profit rose 24% to $6.4 million, helped by acquisition contributions, higher volume, and improved yields. Performance Alloys and Composites operating profit fell 88% to $0.2 million, primarily due to unfavorable mix and cost-reduction costs. Precision Coatings operating profit fell 46% to $2.2 million, reflecting lower medical volume and the absence of a prior-year equipment-sale gain.
- Corporate costs rose to $5.4 million from $3.3 million, largely due to CEO-transition compensation and related transition, acquisition, and restructuring expenses. The company recorded $0.6 million of restructuring costs in SG&A, including costs associated with approximately five employees.
Outlook, risks, and contingencies
- For 2017, Materion expected capital spending on property, plant, and equipment of $25–$30 million and mine-development spending below $3 million. It provided no specific earnings or revenue guidance in the supplied filing text and cautioned that interim results are not necessarily indicative of full-year results.
- Management said cash flow, borrowing availability, and cash on hand were adequate for operating needs, capital spending, pension contributions, dividends, repurchases, remediation, and strategic acquisitions. This assessment depends on operating performance, working-capital needs, debt availability, and covenant capacity.
- Key stated uncertainties include acquisition integration and realization of expected benefits, end-market demand and product mix, raw-material and metal-price pass-through, foreign exchange, pension and other costs, credit availability and interest rates, and execution of strategic and capital plans.
- One beryllium-related case involving four plaintiffs had been remanded to trial; the company did not expect it to have a material financial-statement impact, but noted litigation outcomes are uncertain and additional claims may arise. Environmental remediation reserves were $6.2 million, undiscounted; actual costs may differ.
- Precious metals and copper held on consignment had a notional value of $193.1 million, an off-balance-sheet arrangement. The company uses currency and precious-metal derivatives to hedge identified exposures and stated it does not use derivatives for speculation.
Most important facts for investors to verify
- Whether operating profit and margins recover from the sharp year-over-year decline, particularly in Performance Alloys and Composites and Precision Coatings.
- Whether increased inventory converts to sales and cash, given negative operating cash flow and the quarter’s working-capital use.
- Whether the Heraeus acquisition integrates successfully and contributes expected sales, margins, and returns; the purchase-price allocation remained preliminary.
- How debt, borrowing capacity, and covenant headroom evolve after acquisition-related borrowing, and whether planned capital spending and shareholder returns remain supportable.
- Whether the tax benefit is nonrecurring, and how beryllium litigation, environmental remediation, and consignment arrangements affect future costs and liquidity.