Materion Corporation — Q3 2012 Form 10-Q
Business context and reporting period. Materion produces engineered materials for electronics, industrial, aerospace, defense, energy, medical and other markets. This unaudited filing covers the quarter ended September 28, 2012, and the first nine months of 2012; comparisons are with the corresponding 2011 periods. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $290.6 | $392.8 | $969.3 | $1,192.3 |
| Gross margin | $52.4 (18% of sales) | $57.4 (15%) | $154.8 (16%) | $175.8 (15%) |
| Operating profit | $13.4 | $17.2 | $35.7 | $56.1 |
| Net income | $8.1 | $13.5 | $22.2 | $39.2 |
| Diluted EPS | $0.39 | $0.65 | $1.07 | $1.89 |
| Operating cash flow | Not provided separately for Q3 in the summarized cash flow statement; MD&A reports $1.7 cash provided from operations | $(7.4) | $(11.7) |
- Q3 effective tax rate was 35.7%, versus 17.4% a year earlier; 9M rates were 33.7% and 27.5%. A higher Q3 rate reduced net income by $1.0 million, or $0.05 per diluted share, relative to the rate applicable in the first half.
- At September 28, cash was $10.9; total debt was $122.5, up $41.1 from year-end 2011. Debt-to-debt-plus-equity was 22%, versus 17% at year-end. The company reported $161.0 of available borrowing capacity and compliance with debt covenants.
- Current assets were $416.1 and current liabilities $146.6. Receivables rose $21.1 to $138.9 and inventory increased $24.2 to $211.4 from year-end. Receivables reflected slower collections, with DSO of about 43 days.
- Nine-month investing cash use was $31.5, including $25.3 of capital expenditures and $5.0 of mine development; financing provided $37.5. Cash declined $1.4 from year-end to $10.9.
- Cash dividends of $0.075 per share were paid in Q2 and Q3. Nine-month dividends paid totaled $3.1. The company repurchased 6,300 shares in Q3 for an average $18.93 per share.
Material changes versus prior periods
- Sales fell 26% in Q3 and 19% for the first nine months. Management attributed the decline to soft demand across several important markets, lower sales volume and a shift toward customer-supplied precious metal. The latter reduced reported sales by an estimated $46.1 in Q3 and $60.5 for 9M, with no material margin impact because metal is generally passed through to customers.
- Gross profit dollars and operating profit declined with lower volume, production inefficiencies and unfavorable product mix. Gross margin as a percentage of sales improved, partly because customer-supplied metal lowers reported sales without materially reducing margin.
- Q3 segment sales and operating profit (loss): Advanced Material Technologies $190.5 and $9.2; Performance Alloys $68.7 and $5.4; Beryllium and Composites $14.4 and $(0.5); Technical Materials $17.0 and $1.1. Beryllium and Composites moved from a $0.4 Q3 2011 operating profit to a loss; all four segments had lower Q3 sales.
- AMC was acquired in Q1 for $3.3 net of $1.5 cash acquired. Purchase accounting remained preliminary at quarter-end; preliminary goodwill was $1.8. Management said the acquisition’s operating results had an immaterial impact on consolidated sales and earnings.
Outlook, commentary, risks and unusual items
- Management expected Q4 2012 earnings to be similar to Q3. Order entry exceeded sales in Q3 and for 9M, but remained sluggish; Q3 order entry was lower than in the first two quarters.
- Management expected the new Elmore beryllium facility’s output and cost structure to improve in Q4, with production requirements expected to be met in 2013. The facility produced limited qualified metal in Q3 and had not yet reached full production. Government reimbursements offset related depreciation through unearned income; $1.1 was credited to cost of sales in Q3.
- Demand risks included weak consumer electronics, defense and science spending reductions and order delays, soft LED and solar applications, weaker European appliance demand, and reduced oil and gas rig counts. Medical applications and some industrial and aerospace products showed relative strength.
- Materion had an unreserved claim alleging chronic beryllium disease filed by the spouse of a former employee; the company had not been served or evaluated it by quarter-end. Environmental remediation reserves were $5.4 undiscounted, and final costs may differ. The filing also warns that stricter beryllium exposure standards or reduced customer use could materially harm results, liquidity or financial condition; the impact could not be estimated.
- The domestic defined benefit pension plan was closed to new entrants effective May 26, 2012. Contributions were $10.1 in 9M; management anticipated $1.7 in Q4 2012 and approximately $13.0 in 2013, subject to funding requirements and other factors.
- The filing says the board announced an early-Q4 dividend of $0.75 per share, although the established quarterly dividend and Q2/Q3 payments were $0.075 per share. This apparent discrepancy should be checked against the original filing or company announcement.
Important facts for investors to verify
- Confirm the early-Q4 dividend amount: the filing text states $0.75 per share, versus $0.075 for the quarterly program.
- Track order trends, especially the consumer electronics and defense and science markets, and whether order entry converts into sales.
- Monitor receivables, inventory, operating cash generation and borrowing capacity as working-capital needs have increased debt.
- Assess progress, costs and production targets at the Elmore beryllium facility, including the remaining project cost and DoD funding share.
- Review the status and potential exposure from the new beryllium-related claim, environmental remediation, pension funding and any changes in regulatory standards.
- Check completion of AMC purchase accounting and integration, alongside the planned Singapore relocation of microelectronics packaging operations.