Materion Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 27, 2019; comparisons are with the quarter ended September 28, 2018. Nine-month figures compare the periods ended on those same dates. Amounts below are in millions unless stated otherwise.
Business context and results
Materion produces high-performance engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data-center markets. Management also reports value-added sales, a non-GAAP measure that excludes pass-through metal costs.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $306.0 | $297.2 | $905.3 | $909.7 |
| Value-added sales | $188.6 | $181.9 | $571.2 | $553.2 |
| Gross margin | $64.9 | $64.9 | $203.9 | $185.1 |
| Operating profit | $6.3 | $18.7 | $50.4 | $47.1 |
| Net income | $3.5 | $20.0 | $35.9 | $41.7 |
| Diluted EPS | $0.17 | $0.97 | $1.74 | $2.02 |
Financial position and cash flow
- Q3 sales rose 3%, while value-added sales rose 4%. Nine-month sales were nearly flat, but value-added sales increased 3%.
- Gross margin as a percentage of value-added sales was 34% in Q3 versus 36% a year earlier; for nine months it improved to 36% from 33%.
- Operating cash flow was $59.5 million for nine months, up from $49.2 million. Investing used $20.1 million and financing used $15.2 million. Cash increased $23.9 million to $94.5 million.
- At September 27, cash was $94.5 million, reported outstanding debt was $2.4 million, and net cash was $92.1 million. Available borrowing capacity was $368.3 million. The company also reported $19.5 million of operating lease liabilities and $17.5 million of finance lease liabilities.
- Current assets were $475.6 million and current liabilities $127.0 million. Shareholders’ equity was $597.8 million.
Material changes and segment performance
- Q3 net sales benefited by $17.4 million from changes in precious-metal and copper prices; nine-month sales benefited by $16.7 million. These pass-through price movements do not necessarily translate proportionately into profit.
- Performance Alloys and Composites increased Q3 sales 5% and operating profit 12%, supported by aerospace and defense demand, beryllium hydroxide shipments, and favorable mix. Nine-month operating profit increased 47%.
- Advanced Materials Q3 operating profit declined 10% amid unfavorable mix and manufacturing performance. Nine-month operating profit rose 6%, while sales fell 5% and value-added sales were nearly flat.
- Precision Coatings recorded a Q3 operating loss of $11.2 million versus $3.5 million profit a year earlier, and a nine-month loss of $5.2 million versus $9.1 million profit. Sales weakness included lower blood-glucose test-strip products.
Outlook, risks, and unusual items
- A decline in sales volume from a significant customer in the Large Area Coatings business prompted restructuring and an interim impairment review. Materion recorded $11.6 million of goodwill impairment and $2.6 million of other-asset impairment, both non-cash. Remaining LAC goodwill was $9.0 million; further impairment is possible.
- The company initiated cost reductions, including exiting a Windsor, Connecticut facility and reducing headcount. Q3 restructuring costs were $0.8 million; the company said it did not expect additional costs for these initiatives.
- Materion recognized a $3.3 million non-cash pension curtailment charge following a plan amendment that freezes pay and service amounts used to calculate benefits for active participants beginning January 1, 2020.
- Full-year 2019 expected spending was approximately $25 million for property, plant and equipment and $2 million for mine development. The filing provides no earnings or sales forecast.
- The company said cash, operating cash flow, and borrowing capacity should support operations, capital spending, pension contributions, dividends, repurchases, environmental work, and strategic acquisitions. It was in compliance with debt covenants. The revolving credit facility was extended to 2024.
- Risks cited include market conditions, tariffs and trade agreements, customer and product mix, raw-material prices and pass-through timing, competition and pricing pressure, and the LAC customer-volume decline. Environmental remediation reserves were $6.1 million; actual costs may differ. A new beryllium case was filed in Q3 and served in Q4; the company did not expect a material financial impact.
Investor verification priorities
- Track LAC customer volumes, restructuring execution, and whether further goodwill or asset impairments occur.
- Assess whether improved nine-month value-added sales and gross margin persist, particularly given Q3 margin compression and Advanced Materials’ manufacturing and mix pressures.
- Monitor receivables and working capital: accounts receivable increased $36.1 million in the cash-flow reconciliation, while inventory reductions provided $22.1 million of cash.
- Review the distinction between reported debt and lease obligations, along with borrowing availability, covenant capacity, and metal-consignment line limits.
- Verify environmental remediation estimates, litigation developments, and the effect of the pension plan freeze and future contributions.