Materion Corporation — Q1 2022 Form 10-Q
Reporting period: Quarter ended April 1, 2022; comparisons are with the quarter ended April 2, 2021. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $449.0 | $354.4 | +27% |
| Value-added sales | $266.8 | $198.6 | +34% |
| Gross margin | $75.3 | $66.8 | +13% |
| Operating profit | $19.6 | $19.7 | -1% |
| Net income | $14.0 | $16.8 | -16% |
| Diluted EPS | $0.68 | $0.81 | -16% |
| Operating cash flow | $(14.3) | $15.5 | $(29.8) |
| Capital expenditures | $19.0 | $31.3 | Lower by $12.3 |
Gross margin was 16.8% of sales, while management’s gross-margin measure as a share of value-added sales fell to 28% from 34%. SG&A was $41.7 million; R&D was $7.1 million. The effective tax rate was 17.7%, versus 17.1%.
Operating cash flow was reduced by working-capital cash use of $47.4 million, including higher inventory and incentive-compensation payments. Cash ended the quarter at $20.2 million, up from $14.5 million at year-end 2021.
At April 1, total debt for liquidity reporting was $495.2 million, compared with $449.7 million at December 31, 2021; reported net debt was $474.9 million. The debt note separately reports $499.7 million of debt before unamortized financing fees. Revolver borrowings were $201.4 million, with $127.4 million of available borrowing capacity; the company reported compliance with debt covenants. Shareholders’ equity was $731.0 million.
Business, segments, and material changes
Materion makes advanced engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom/data-center markets. The H.C. Starck Electronic Materials acquisition, completed in November 2021, contributed $43.1 million of Q1 2022 sales and a $1.6 million pretax loss, including inventory step-up expense.
| Segment | Sales change | EBITDA change | Reported context |
|---|---|---|---|
| Performance Materials | +31% | $24.8 million, +48% | Growth in industrial and aerospace markets and beryllium hydroxide sales; acquisition-related contribution also helped. |
| Electronic Materials | +32% | $12.1 million, +11% | Acquisition contribution and higher semiconductor, energy, and industrial volumes; acquisition and integration costs weighed on results. |
| Precision Optics | -20% | $2.2 million, -71% | Lower COVID-19 testing and consumer-electronics sales, plus a temporary COVID-related Shanghai shutdown. |
Management renamed Performance Alloys and Composites to Performance Materials and Advanced Materials to Electronic Materials. It also began using EBITDA as its principal segment performance measure, revising prior-period segment presentations for comparability. EBITDA and value-added sales are non-GAAP measures.
Net sales growth also reflected higher volume and prices in several end markets and $5.2 million of favorable metal-price effects. Value-added sales exclude pass-through metal costs. Despite sales growth, profit declined, with acquisition-related amortization and costs, higher interest expense, and weaker Precision Optics results among the reported pressures.
Outlook, risks, and contingencies
The company expects approximately $75 million of 2022 capital expenditures. Management said cash, operating cash flow, and borrowing capacity should be adequate for operating needs and other planned uses for at least the next 12 months and the foreseeable future. No earnings or revenue guidance was provided in the supplied filing text.
Management cited ongoing exposure to supply-chain disruption, inflation, plant shutdowns, labor availability and costs, COVID-19 effects, and the Russia-Ukraine conflict, among other risks. It also identified acquisition integration and realization of expected benefits, raw-material and metal-price management, interest and foreign-exchange rates, customer demand, and project execution as factors that could affect results. A $100 million interest-rate swap was entered into during the quarter to hedge rate exposure.
Q1 included $7.5 million of acquisition inventory step-up expense in cost of sales and $2.1 million of transaction and integration costs in SG&A. The company recorded $1.1 million of restructuring charges. Environmental remediation reserves were $4.4 million. Two beryllium cases were outstanding at quarter-end, with settlements reached in one; the company did not expect resolution of these matters to have a material financial impact. A wage-and-hour class/collective action remained in preliminary stages.
Important facts for investors to verify
- Whether acquisition integration and the H.C. Starck business’s reported pretax loss improve as purchase-accounting inventory step-up and integration costs subside.
- Whether value-added sales growth converts into stronger margins and earnings, particularly given the decline in gross margin as a percentage of value-added sales.
- Whether Precision Optics demand and Shanghai operations recover, and whether any further COVID-related shutdowns affect production.
- Whether working-capital investment, debt levels, interest expense, and available revolver capacity remain manageable as the business grows.
- Whether the $75 million capital-spending expectation and management’s liquidity outlook remain appropriate amid supply, inflation, and project-execution risks.
- How the remaining legal and environmental matters develop; the filing does not provide a clear quantified range of potential losses for the wage-and-hour litigation.