Materion Corporation (NYSE: MTRN) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are to the quarter and six months ended July 1, 2022. Amounts below are in U.S. dollars; financial amounts are shown in millions unless noted.
Business context
Materion produces advanced engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data-center markets. Its reportable segments are Performance Materials, Electronic Materials, Precision Optics, and Other. Because precious-metal costs are largely passed through to customers, management also uses non-GAAP value-added sales, which exclude those pass-through costs.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $398.6 | $445.3 | $841.1 | $894.3 |
| Value-added sales | $268.3 | $268.8 | $566.8 | $527.9 |
| Gross margin | $89.1 | $87.4 | $180.4 | $162.7 |
| Gross margin / value-added sales | 33% | 33% | 32% | 31% |
| Operating profit | $35.3 | $31.9 | $72.3 | $51.5 |
| Net income | $24.1 | $23.3 | $49.7 | $37.3 |
| Diluted EPS | $1.15 | $1.12 | $2.38 | $1.80 |
Q2 net sales fell 10%, while value-added sales were essentially flat. Higher Performance Materials sales offset weakness in Electronic Materials and Precision Optics. Operating profit rose 11% and net income rose 4%; higher interest expense partly offset operating improvement. First-half net sales declined 6%, but value-added sales rose 7%, operating profit increased 40%, and net income rose 33%.
Q2 segment EBITDA was $44.9 million in Performance Materials (up 65%), $13.4 million in Electronic Materials (down 40%), and $1.7 million in Precision Optics (down 52%); corporate costs were $7.6 million. Performance Materials benefited from the clad strip project, aerospace and defense demand, and a production tax credit. Electronic Materials results were pressured by lower semiconductor volumes; Precision Optics faced lower COVID-19 testing-related and consumer-electronics sales.
Cash flow, debt, and liquidity
- First-half operating cash flow was $70.5 million, versus $21.4 million a year earlier. Management attributed the improvement chiefly to stronger collections and inventory management.
- First-half investing cash outflow was $62.7 million, including $59.5 million of property, plant, and equipment spending and $3.6 million of mine development. Financing cash outflow was $3.8 million. Cash ended the period at $16.6 million.
- Management expected 2023 property, plant, and equipment payments of approximately $100 million.
- Balance-sheet debt was $27.5 million short-term and $412.7 million long-term, or $440.2 million in total carrying value, versus $432.0 million at year-end 2022. The revolving facility carried an average rate of 6.71%; available borrowing capacity was $168.9 million. The company reported compliance with debt covenants.
- Current assets were $697.8 million and current liabilities $233.3 million. Inventory was $455.3 million, up from $423.1 million at year-end. The filing’s liquidity table presents net debt as $(423.6) million; it defines net debt as a non-GAAP measure.
- Materion held $321.3 million of precious metals and copper on consignment off balance sheet. Unused capacity under metal consignment agreements was approximately $293.7 million.
Outlook, commentary, and notable items
- The filing does not provide formal earnings or sales guidance. Management said operating cash flow, cash, and borrowing capacity should be adequate for operating needs, capital spending, dividends, environmental work, and strategic acquisitions for at least the next 12 months.
- Materion expected at least $8 million of 2023 cash savings from the Inflation Reduction Act advanced manufacturing production credit. Eligibility, calculation, and claiming guidance remained pending; the credit benefited 2023 gross margin and is recorded as a reduction of cost of goods sold as eligible products are produced and sold.
- Restructuring charges were $1.5 million in Q2 and $2.1 million in the first half of 2023. The company attributed first-half gross-margin improvement partly to the absence of $7.5 million of HCS-Electronic Materials inventory step-up amortization recorded in Q1 2022.
- Interest expense rose 63% in Q2 and 79% in the first half, primarily due to higher interest rates. The credit agreement was amended in January 2023 to transition U.S. dollar borrowings from LIBOR to SOFR.
- One beryllium case remained at June 30, with a confidential settlement subject to court approval; the company said resolution would not materially affect its financial statements. A wage-and-hour case was finally settled in July for approximately the amount previously reserved. Environmental remediation reserves were $4.4 million; final costs may differ from estimates.
- Key risks identified include economic and market conditions, semiconductor and other end-market demand, raw-material and metal prices, interest and foreign-exchange rates, project execution, acquisitions, regulatory changes, litigation, and realization of expected tax-credit benefits.
Most important facts for investors to verify
- Whether semiconductor demand and Electronic Materials volumes recover, and whether weakness in consumer electronics and Precision Optics persists.
- How much of Performance Materials’ growth and profitability is attributable to the clad strip project, production credit, and other nonrecurring or ramp-related factors.
- Production-credit eligibility, final guidance, and realized benefit relative to management’s expectation of at least $8 million for 2023.
- Execution of the approximately $100 million capital-spending plan, working-capital trends, and cash generation relative to debt and interest costs.
- Borrowing capacity, covenant headroom, metal-consignment availability, and the risks or costs associated with these financing arrangements.
- Potential changes in environmental remediation costs and the final resolution of the beryllium matter.