Materion Corporation — Q3 2023 Form 10-Q
Business context and reporting period
Materion produces advanced engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data-center markets. This unaudited quarterly report covers the three and nine months ended September 29, 2023, compared with the corresponding 2022 periods. Amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $403.1 | $428.2 | $1,244.1 | $1,322.5 |
| Value-added sales (non-GAAP) | $270.5 | $283.5 | $837.4 | $811.4 |
| Gross margin | $88.9 | $82.7 | $269.3 | $245.5 |
| Gross margin / value-added sales | 33% | 29% | 32% | 30% |
| Operating profit | $36.5 | $29.1 | $108.8 | $80.6 |
| Net income | $26.6 | $20.0 | $76.2 | $57.2 |
| Diluted EPS | $1.27 | $0.96 | $3.65 | $2.76 |
| Interest expense, net | $7.7 | $5.9 | $22.8 | $14.3 |
- Q3 net sales fell 6%, but value-added sales declined a smaller 5%; net income rose 33%. For the first nine months, net sales fell 6% while value-added sales increased 3%, and net income rose 33%.
- Q3 GAAP gross margin was about 22.1% of sales versus 19.3% a year earlier; for nine months it was about 21.6% versus 18.6%. Management cited the 2023 production tax credit as a contributor to margin improvement.
- Segment results were mixed. Q3 Performance Materials sales rose 9% and EBITDA rose 61% to $46.4 million, supported by the clad strip project, efficiencies, and production credits. Electronic Materials sales fell 17% and EBITDA fell 40% to $10.2 million, chiefly due to lower semiconductor volumes. Precision Optics sales fell 7% and EBITDA fell 8% to $3.3 million. For nine months, Performance Materials EBITDA was $134.1 million, Electronic Materials $37.5 million, and Precision Optics $7.7 million.
- Operating cash flow was $84.5 million for nine months, up from $34.2 million. Investing cash outflow was $94.2 million, including $85.3 million for property, plant and equipment and $9.3 million for mine development. Operating cash flow less these two investment outlays was approximately negative $10.1 million.
- At September 29, cash was $16.4 million. Debt carrying values were $38.6 million short term and $422.4 million long term, or $461.0 million combined; the debt note reports $464.1 million gross debt before unamortized financing fees. Revolving-credit availability was approximately $151.0 million. The revolving balance carried an average rate of 6.92%; the company reported compliance with debt covenants.
- Inventories were $452.0 million, up from $423.1 million at year-end 2022. Total assets were $1,748.6 million and shareholders’ equity was $872.0 million at quarter-end.
Material changes and management commentary
- Q3 sales weakness reflected lower volumes in semiconductor, industrial, automotive, and medical markets, partly offset by stronger aerospace and defense sales and $28.2 million of incremental clad strip project sales. For nine months, the clad strip project contributed $91.4 million. Electronic Materials’ nine-month sales declined 20%, largely from semiconductor volume weakness.
- Management attributed improved nine-month value-added sales partly to higher aerospace and defense activity and a mix shift toward higher non-precious-metal sales. The prior-year period also included $7.5 million of HCS-Electronic Materials inventory step-up amortization and acquisition costs that did not recur.
- Interest expense increased as interest rates rose. The nine-month effective tax rate was 13.5%, versus 18.0% in 2022, and included a $3.4 million discrete tax benefit. The company expected approximately $10 million of 2023 cash savings from the Inflation Reduction Act advanced manufacturing production credit; eligibility and calculation guidance remained pending.
- Management expected approximately $105 million of full-year 2023 property, plant and equipment payments. It stated that operating cash flow, available borrowing capacity, and cash on hand were adequate for operating needs, capital spending, dividends, projected pension contributions, environmental projects, and strategic acquisitions for at least the next 12 months.
- The company continued restructuring initiatives, recording $3.2 million of charges in the first nine months of 2023. It paid $7.9 million in dividends during that period and did not repurchase shares under its public repurchase program.
Risks, contingencies, and unusual items
- Forward-looking factors include economic and market conditions, inflation and recession risk, customer demand and product mix, successful product and project ramp-ups, raw-material and metal pricing, interest and exchange rates, acquisition integration, regulation, and realization of expected tax-credit benefits.
- The company uses precious-metal and copper consignment arrangements to limit working-capital needs and metal-price exposure. Off-balance-sheet consigned metals had a notional value of $344.8 million at quarter-end; management noted that business growth or higher metal prices could pressure consignment limits.
- Environmental remediation reserves were $4.4 million; actual costs may differ from estimates. There were no pending beryllium cases at September 29, 2023. A wage-and-hour class settlement for an immaterial amount was approved and paid during the quarter.
- Management reported no material change in market risks since its 2022 Form 10-K, and disclosure controls were deemed effective as of September 29, 2023.
Important facts for investors to verify
- Whether semiconductor demand and Electronic Materials volumes recover, and how that affects segment profitability.
- Clad strip project sales, capacity utilization, and the durability of Performance Materials’ margin and EBITDA gains.
- The amount and timing of the anticipated production tax credit, including the impact of pending government guidance.
- Capital spending versus operating cash generation, inventory levels, borrowing costs, and available credit capacity.
- Whether environmental remediation costs, consignment capacity, or other disclosed risks change materially.