Materion Corporation — Q2 2018 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 29, 2018; comparisons are with the corresponding 2017 periods. Materion makes engineered materials for electronics, industrial, defense, medical, automotive, telecommunications, and energy markets. Amounts below are in millions unless noted. “Value-added sales” is a company-defined non-GAAP measure that excludes pass-through metal costs.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $309.1 | $295.8 | $612.6 | $536.5 |
| Value-added sales | $189.9 | $176.1 | $371.2 | $325.1 |
| Gross margin | $61.8 | $54.8 | $120.1 | $97.9 |
| Gross margin / value-added sales | 33% | 31% | 32% | 30% |
| Operating profit | $15.2 | $10.1 | $28.4 | $13.8 |
| Net income | $11.1 | $7.3 | $21.7 | $10.4 |
| Diluted EPS | $0.54 | $0.36 | $1.05 | $0.51 |
- Q2 net sales increased 4%, while value-added sales rose 8%; management attributed growth principally to new products, improved mix, and stronger demand, with higher precious-metal and copper prices adding $6.0 million to sales.
- First-half net sales and value-added sales each increased 14%. The Heraeus target-materials business contributed $30.3 million of net sales and $13.5 million of value-added sales in the first half; higher metal prices added $15.7 million to net sales.
- Q2 SG&A was $38.5 million, up 1%; R&D was $3.9 million, up 9%. First-half SG&A rose 8% to $76.9 million and R&D rose 12% to $7.5 million. SG&A declined as a share of value-added sales to 20% for Q2 and 21% for the half, from 22% in each prior-year period.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $29.3 million, compared with $0.3 million in 2017. Higher earnings and working-capital changes contributed; domestic pension contributions used $13.0 million, versus $4.0 million in the prior-year half.
- Investing cash outflow was $20.6 million, including $17.2 million for property, plant, and equipment and $3.4 million for mine development. Financing cash outflow was $7.7 million. Cash increased $1.1 million to $42.9 million.
- At June 29, cash was $42.9 million and total debt was $3.4 million, producing reported net cash of $39.5 million. Available borrowing capacity was $279.1 million; the company reported compliance with debt covenants.
- Current assets were $407.4 million and current liabilities $117.1 million. Equity was $515.7 million. The filing reports $12.1 million of cash held by foreign operations.
- Quarterly cash dividends were $0.105 per share. No shares were repurchased under the public repurchase program during the quarter; $15.7 million remained authorized for repurchases.
Material changes and segment results
- Performance Alloys and Composites: Q2 sales rose 20% to $129.8 million and operating profit more than doubled to $12.3 million, driven by volume, mix, and manufacturing performance. First-half operating profit was $22.2 million versus $5.7 million.
- Advanced Materials: Q2 sales fell 4% to $150.3 million, value-added sales fell 8%, and operating profit declined 36% to $5.6 million. Management cited softer consumer-electronics demand, unfavorable mix, and costs related to relocating the HTB operation in Germany. First-half operating profit fell 24% to $11.5 million despite acquisition-driven sales growth.
- Precision Coatings: Q2 sales fell 4% to $29.0 million, but value-added sales rose 3%; operating profit was $2.2 million. First-half operating profit increased 24% to $5.6 million, attributed to sales growth, cost reductions, and better manufacturing performance.
- Corporate operating loss improved to $4.9 million in Q2 from $6.4 million, partly because prior-year CEO transition costs did not recur.
- Other-net expense rose to $4.3 million in Q2 and $7.2 million for the first half, largely reflecting foreign-exchange losses and metal consignment fees. The first-half effective tax rate was 17.0%, versus 13.4%; Q2 rates were 20.9% and 19.1%, respectively.
Outlook, risks, and notable items
- The filing provides no specific earnings or sales guidance. Management estimated 2018 spending of $30–$35 million for property, plant, and equipment and $5–$10 million for mine development.
- Management said operating cash flow, cash, and borrowing capacity should support operating needs, capital spending, pension contributions, dividends, environmental work, and strategic acquisitions. The company expects to continue quarterly dividends, subject to review.
- Key stated uncertainties include tariffs and other government actions; end-market demand and customer condition; product mix and new-product ramp-up; raw-material prices and pass-through success; foreign exchange; acquisition integration and capital-project execution; pension costs and contributions; and litigation and regulatory matters.
- HTB integration included a move to a new target-manufacturing facility in Germany. The company’s ASC 606 adoption reduced opening retained earnings by $0.4 million, net of tax, and did not materially affect reported results. Certain Tax Cuts and Jobs Act tax estimates remained provisional; the company was still evaluating its GILTI accounting policy.
- Environmental remediation reserves were $6.4 million undiscounted at June 29, 2018; actual long-term remediation costs may differ. The filing also references beryllium-related claims and other proceedings but does not provide a clear aggregate potential-loss estimate.
Important facts for investors to verify
- Whether Performance Alloys and Composites’ strong profit growth can persist and whether Advanced Materials demand, mix, and HTB integration costs improve.
- How much of reported sales growth reflects underlying volumes and mix versus metal-price pass-through and the HTB acquisition; value-added sales is non-GAAP.
- Whether operating cash conversion and working capital remain favorable, especially given trailing DSO of approximately 41 days versus 37 days at year-end 2017.
- Final tax effects from the TCJA and GILTI, along with the timing and cost of the German facility transition and planned capital spending.
- Potential exposure from environmental remediation and beryllium-related and other litigation; the filing does not state a clear total potential-loss value.