Materion Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY 2016. Materion is an integrated producer of advanced engineered materials, reporting Performance Alloys and Composites (PAC), Advanced Materials, Precision Coatings, and Other (corporate costs). Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Net sales | $1,139.4 | $969.2 | Up 18%; includes $119.7 of HTB acquired-business sales and favorable metal-price pass-throughs. |
| Value-added sales | $677.7 | $599.9 | Up 13%; non-GAAP measure excluding pass-through metal costs. |
| Gross margin | $211.5 | $183.5 | Up 15%; 18.6% of net sales and 31% of value-added sales in both years. |
| Operating profit | $38.6 | $27.1 | Up 42%; approximately 3.4% of net sales. |
| Net income | $11.5 | $25.7 | Down 56%; FY 2017 includes $17.1 of tax expense related to the Tax Cuts and Jobs Act (TCJA). |
| Diluted EPS | $0.56 | $1.27 | FY 2017 includes the TCJA tax impact. |
| Operating cash flow | $67.8 | $68.2 | Nearly flat year over year. |
| Capital and mine-development spending | $29.1 | $37.0 | Includes $27.5 of capital expenditures and $1.6 of mine development. |
| Cash / total debt | $41.8 / $3.8 | $31.5 / $4.6 | Net cash was $38.0 at year-end 2017. |
| Current assets / current liabilities | $410.9 / $127.1 | $345.3 / $90.4 | Current ratio was 3.2 to 1, versus 3.8 to 1. |
Segments
- PAC: Sales $429.4, up 11%; operating profit $22.0 versus $6.6. Higher volume, mix, productivity, and a $1.4 gain on a Japanese service-center sale helped results.
- Advanced Materials: Sales $590.8, up 35%; operating profit $32.8 versus $26.3. HTB contributed $119.7 of sales and $36.5 of value-added sales; profit increased mainly on higher volume.
- Precision Coatings: Sales $119.2, down 17%; operating profit $8.4 versus $11.6. Lower medical-market volume, particularly blood-glucose test-strip applications, weighed on results.
- Other: Corporate operating loss was $24.6 versus $17.4, reflecting $4.1 of CEO transition costs and higher variable compensation, among other items.
Material changes and unusual items
- The February 2017 acquisition of Heraeus Group’s target materials business (HTB) for $16.5 expanded Advanced Materials. The acquired business’s results are included from the acquisition date.
- Revenue growth also reflected stronger consumer-electronics and industrial-components demand and higher beryllium-hydroxide shipments. Lower medical sales partly offset growth.
- The TCJA drove a $17.1 FY 2017 tax charge, including provisional amounts for deferred-tax remeasurement and the transition tax on foreign earnings. The company stated that accounting was incomplete and amounts could be revised.
- Fourth-quarter 2017 net loss was $8.2, compared with net income of $6.8 in Q4 2016; Q4 2017 diluted loss per share was $0.41. The filing attributes the annual earnings decline substantially to the TCJA charge.
- Other-net expense was $12.8 versus $13.9. FY 2017 included a $1.4 gain on the Fukaya service-center sale; FY 2016 included a $2.6 impairment charge related to its closure.
- Backlog rose to $204.0 at year-end 2017 from $175.5 a year earlier. The company expected substantially all year-end backlog to be filled within 18 months; orders may be terminated under certain conditions.
Cash, debt, outlook, and risks
- Management said operating cash flow, cash on hand, and borrowing capacity were adequate for operating needs, capital spending, anticipated pension contributions, dividends, environmental projects, and strategic acquisitions. Available borrowing capacity was $254.8; unused metal-financing capacity was approximately $130.0.
- The revolving credit agreement matures in 2020. Materion reported compliance with debt covenants at year-end. Credit facilities have restrictive covenants, and a material breach could affect borrowing access or accelerate debt.
- Management gave no specific numerical 2018 revenue or earnings guidance in the supplied filing text. It identified actual sales, operating rates, and margins for 2018 as uncertain and cited market demand, product mix, raw-material costs, acquisition integration, foreign exchange, interest rates, pensions, and project execution as factors.
- Materion anticipated a $21.0 domestic defined-benefit pension contribution in 2018, above mandatory levels. The domestic pension plan was underfunded; total pension and other post-employment benefit obligations exceeded plan assets.
- Key risks include cyclical end markets and customer inventory adjustments; dependence on successful new-product development; volatile metals, consignment fees, and refinery inventory estimates; international and currency exposure; and operational concentration and facility disruption.
- Beryllium health and safety rules, customer substitution, litigation, and environmental regulation could affect demand, costs, or operations. OSHA issued a more stringent workplace standard in 2017. One beryllium case involving four plaintiffs was outstanding; management did not expect a material financial-statement impact, though adverse litigation outcomes could affect operating results.
- Environmental remediation reserves were $6.5 at year-end. Management did not expect known environmental matters to materially affect financial condition or liquidity, but future costs could change as investigations and projects progress.
- Ernst & Young issued unqualified opinions on the financial statements and internal controls. The internal-control evaluation excluded HTB, which represented 2.7% of year-end assets and 10.5% of FY 2017 revenue.
Most important facts for investors to verify
- Whether underlying growth and profitability persist after separating HTB contributions, metal-price pass-throughs, and the one-time TCJA tax effects.
- Whether the provisional TCJA tax accounting, including the transition-tax estimate and deferred-tax remeasurement, is finalized without material further adjustments.
- Whether the elevated backlog converts to shipments and cash as expected, given cancellation provisions and variable market demand.
- Whether Precision Coatings’ medical-market weakness continues and whether growth in consumer electronics and industrial components offsets it.
- Whether pension funding, environmental spending, metal-financing availability, and covenant headroom remain manageable as business volumes and metal prices change.
- Whether beryllium-related regulation, customer adoption decisions, and litigation create costs or demand impacts beyond management’s current estimates.