Materion Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 27, 2013; comparisons are to the periods ended September 28, 2012. Materion produces engineered materials for electronics, industrial, aerospace, defense, medical, energy and other markets. Reported sales include pass-through precious and base metals; management also uses non-GAAP value-added sales, which exclude those metal costs.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $275.4 million | $290.6 million | $880.7 million | $969.3 million |
| Gross margin | $45.1 million; 16% of sales | $52.4 million; 18% | $146.3 million; 17% | $154.8 million; 16% |
| Operating profit | $6.0 million | $13.4 million | $28.9 million | $35.7 million |
| Net income | $5.1 million | $8.1 million | $20.8 million | $22.2 million |
| Diluted EPS | $0.24 | $0.39 | $1.00 | $1.07 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $38.5 million | $(7.4) million |
Value-added sales were $148.7 million in Q3, down from $152.3 million, and $459.3 million for nine months, down from $464.2 million. Gross margin was 30% of value-added sales in Q3 versus 34% a year earlier; for nine months it was 32% versus 33%.
At September 27, cash was $20.2 million, current assets $401.5 million and current liabilities $118.2 million. Debt totaled $88.4 million ($36.0 million short term and $52.4 million long term), down from $94.3 million at year-end 2012. The company reported $175.1 million of available unused borrowing capacity under credit lines and $137.6 million of unused metal-consignment capacity. Capital expenditures and mine development totaled $24.2 million for the nine months; dividends paid were $4.9 million.
Changes, drivers and segment results
- Q3 sales declined 5% and nine-month sales declined 9% year over year. Lower metal prices, foreign exchange, changes in customer-supplied metal and discontinuation of a low-margin silver-bar product affected reported sales; lower value-added sales and volume were more relevant to underlying performance.
- Lower sales and margin pressure, facility consolidation costs and other factors reduced Q3 operating profit. A $2.3 million physical inventory loss at the Albuquerque facility in Q1 also weighed on nine-month margins. Management said manufacturing improvements benefited first-half margins.
- Advanced Material Technologies reported Q3 sales of $176.3 million and operating profit of $4.8 million, versus $190.5 million and $9.2 million. Performance Alloys reported $69.5 million of sales and $4.5 million of operating profit, versus $68.7 million and $5.4 million. Beryllium and Composites reported $13.7 million of sales and a $3.3 million operating loss, versus $14.4 million and a $0.5 million loss. Technical Materials reported $15.9 million of sales and $1.4 million of operating profit, versus $17.0 million and $1.1 million.
- Sales strength included automotive electronics and medical; defense and science softened amid government spending cuts and shipment delays. Consumer electronics and industrial/aerospace were mixed or weaker. Q3 sales order entry exceeded sales by about 11%, the highest quarterly total since Q2 2012.
Liquidity, outlook and risks
Management said operations, available borrowing capacity and cash were sufficient for operating needs, capital spending, pension contributions, dividends and other planned uses. It renewed metal-consignment agreements in Q3, extending maturities one to three years, increasing capacity and improving pricing. A new secured revolving credit facility entered in Q2 provides up to $375 million and matures in 2018. The company reported compliance with debt and consignment covenants.
Management expected Q4 2013 business levels to improve from Q3 based on orders and market analysis, including higher Beryllium and Composites shipments. It also anticipated cost-structure actions resulting in a Q4 charge of up to $0.15 per share, with savings expected from Q1 2014. No formal full-year earnings guidance is provided in the supplied filing text.
- The domestic defined-benefit pension plan was underfunded. Contributions were $9.2 million in the first nine months; management anticipated about $13 million for 2013.
- Risks include uncertain defense budgets and government shutdown effects, volatile metals and customer substitution, changing electronics technologies and demand, foreign exchange, execution of facility consolidations and the new beryllium plant, pension costs, and environmental and regulatory obligations.
- One chronic beryllium disease case was outstanding at quarter-end with a $0.1 million reserve; a new complaint involving three plaintiffs was filed in Arizona on October 4, 2013. Environmental remediation reserves were $5.0 million, undiscounted, versus $5.3 million at year-end; actual costs may differ.
- The Q3 tax rate was 2.7%, including $0.7 million of favorable discrete tax items and the effect of revised annual projections. For nine months, the effective rate was 21.6%. Q3 also included $0.9 million of bank fees tied to consignment-agreement renewal.
Most important facts for investors to verify
- Whether Q4 order strength translated into shipments and improved profitability, and whether the projected restructuring charge and 2014 savings materialized.
- How much of sales movement reflected metal pass-throughs versus value-added sales, volume, product mix and customer-supplied metal.
- Whether the Albuquerque inventory-loss investigation led to further charges or insurance recoveries.
- Progress in defense and science markets, consumer electronics, and the medical customer shipment that management expected to normalize.
- Pension funding needs, debt and borrowing availability, and developments in beryllium litigation, exposure standards and environmental remediation.