Materion Corporation — Q1 2012 Form 10-Q
Business and period: Materion produces engineered materials for electronics, industrial, aerospace, defense, energy, medical, automotive and other markets. This unaudited quarter ended March 30, 2012, compared with the quarter ended April 1, 2011; balance-sheet comparisons are with December 31, 2011. Amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $353.6 million | $374.8 million |
| Gross margin | $49.4 million; 14% of sales | $55.8 million; 15% of sales |
| Operating profit | $9.9 million; 3% of sales | $18.1 million; 5% of sales |
| Income before taxes | $9.2 million | $17.5 million |
| Net income | $6.1 million | $11.8 million |
| Diluted EPS | $0.30 | $0.57 |
| Operating cash flow | $(23.0) million | $(20.8) million |
Sales fell 6%; net income and diluted EPS each declined about 48%. Lower volume, unfavorable product mix and higher SG&A contributed to weaker profit. Metal price pass-through increased reported sales by an estimated $16.3 million year over year. Interest expense was $0.7 million versus $0.6 million; the effective tax rate was 33.4% versus 32.4%.
Cash was $15.1 million at quarter-end. Current assets were $395.6 million and current liabilities $138.6 million. Total debt rose $37.0 million to $118.4 million ($58.1 million short-term and $60.3 million long-term); the debt-to-debt-plus-equity ratio increased to 22% from 17% at year-end. The company reported compliance with debt covenants, $208.9 million of available unused credit capacity, and $119.9 million of unused precious-metal consignment capacity. Consigned metals outstanding, an off-balance-sheet arrangement, totaled $240.6 million.
Operating cash use reflected increased receivables and payment of prior-year incentive compensation, among other working-capital movements. Investing cash use was $11.1 million, including $9.3 million of property and equipment purchases and the AMC acquisition; financing provided $37.0 million. Net capital spending after government reimbursements was $8.9 million.
Segments and material changes
- Advanced Material Technologies: sales declined 6% to $241.8 million; operating profit fell to $5.3 million from $10.7 million. Weaker consumer-electronics demand was a principal factor.
- Performance Alloys: sales declined 11% to $75.2 million; operating profit fell to $6.3 million from $8.8 million. Consumer-electronics and appliance weakness was partly offset by growth in heavy-equipment and oil-and-gas applications.
- Beryllium and Composites: sales increased 15% to $16.1 million, but the segment moved from $0.1 million operating profit to a $1.3 million loss, reflecting mix, input costs, lower production and facility start-up costs.
- Technical Materials: sales increased 4% to $20.4 million; operating profit declined to $1.9 million from $2.2 million.
In March, Materion acquired Aerospace Metal Composites Limited (AMC), a UK manufacturer of metal-matrix composites, for $4.8 million cash, including $1.5 million of cash acquired; the financial-statement note describes the net cost as $3.3 million. Purchase-price accounting remained preliminary, and AMC’s quarter impact was described as negligible. Materion also recorded a $0.6 million goodwill adjustment related to its earlier EIS acquisition.
Outlook, risks and contingencies
Management described market signals entering Q2 as mixed. It expected improvement in some consumer-electronics and other markets during the remainder of 2012, with most strengthening in the second half. Industrial/aerospace and medical demand appeared solid or stronger; defense demand was uncertain amid potential government spending cuts. Margins remained pressured by product mix and lower volumes.
The new primary beryllium facility in Elmore had produced limited metal output; management expected production to reach needed levels and additional start-up costs to diminish during 2012. In early Q2, the company announced closure of its Newburyport, Massachusetts microelectronic-packages facility, with most equipment planned for transfer to Singapore. Management cautioned about high gold, silver, copper and other raw-material costs and their effects on business levels, margins and financing.
- More stringent beryllium exposure standards or reduced customer use of beryllium products could materially harm results, liquidity or financial condition; the potential impact was not estimable.
- Environmental remediation reserves were $5.4 million, undiscounted, versus $5.3 million at year-end; actual long-term remediation costs may differ.
- No chronic beryllium disease claims were outstanding or asserted in Q1. The company stated that pending lawsuits and claims were not expected to have a material adverse effect.
- Other stated uncertainties include global and end-market demand, customer/product mix, raw-material prices and pass-through, acquisitions, facility start-up and relocation execution, credit availability, pension costs, regulation and litigation.
Management said funds from operations, cash and available borrowing capacity were adequate for operating needs, capital spending, projected pension contributions, acquisitions and environmental projects. Q1 cash use was described as typical seasonal behavior. No formal earnings or revenue guidance was provided in the filing.
Important facts for investors to verify
- Whether order growth and the anticipated second-half demand recovery materialize, particularly in consumer electronics and other weaker markets.
- Whether the Elmore beryllium facility reaches required output and start-up costs subside, and whether the Newburyport-to-Singapore transfer proceeds as planned.
- Receivables, collections, inventory and operating cash flow, alongside the increase in debt and the availability and terms of borrowing capacity.
- AMC integration and final purchase-price allocation, as well as the contribution and integration of EIS.
- Exposure to consigned metals, raw-material price movements, beryllium regulation, environmental remediation and any changes in litigation or contingent liabilities.