Materion Corporation (MTRN) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the second quarter and six months ended July 2, 2021. Materion produces advanced engineered materials for semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom/data-center markets. Comparisons are with the periods ended June 26, 2020; prior-year figures were retrospectively adjusted for the company’s change from LIFO to FIFO inventory accounting.
Financial performance
| Metric | Second quarter 2021 | Six months 2021 |
|---|---|---|
| Net sales | $371.0 million, up 37% | $725.4 million, up 32% |
| Value-added sales (non-GAAP) | $207.9 million, up 31% | $406.5 million, up 30% |
| Gross margin | $69.6 million, up 48%; 33% of value-added sales versus 30% | $136.4 million, up 49%; 34% of value-added sales versus 29% |
| Operating profit | $20.7 million versus $7.6 million | $40.4 million versus $2.0 million |
| Net income | $17.9 million versus $5.8 million | $34.6 million versus $1.9 million |
| Diluted EPS | $0.87 versus $0.28 | $1.68 versus $0.09 |
Second-quarter GAAP gross margin was approximately 18.8% of net sales; first-half gross margin was approximately 18.8%. Management attributed margin improvement primarily to higher sales volumes. Sales also benefited from the Optics Balzers acquisition, completed in July 2020, and higher pass-through metal prices. Metal-price movements added $19.8 million to second-quarter net sales and $37.6 million in the first half; value-added sales exclude pass-through metal costs.
All three operating segments reported higher second-quarter sales and operating profit year over year. Advanced Materials’ second-quarter sales rose 42%, principally on higher volumes and metal prices, with growth in semiconductor demand. Performance Alloys and Composites’ sales rose 23%, supported by automotive, industrial, and a precision-clad strip project. Precision Optics’ sales rose 65%, mainly from Optics Balzers; first-half operating profit improved to $7.2 million from a $7.5 million loss, which had included $10.8 million of impairment charges.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $44.1 million, versus $36.4 million. Working-capital items used $26.2 million, chiefly from a $40.7 million inventory increase.
- Investing cash outflow was $57.1 million, including $57.7 million of capital expenditures. The company expected full-year 2021 capital expenditures of approximately $100 million.
- Cash was $24.3 million at July 2, 2021. Total debt was $59.3 million, up from $38.5 million at year-end 2020, including $56.5 million drawn on the revolving credit facility. The filing’s non-GAAP “net debt” figure was negative $34.9 million, meaning cash exceeded debt by that amount.
- Available borrowing capacity was approximately $273.0 million. The company reported compliance with debt covenants; its revolving facility matures in 2024. Cash and available borrowing capacity were considered adequate to support operations, investment, dividends, and other needs.
- Dividends paid in the first half were $4.8 million. No shares were repurchased under the public repurchase program; employee share surrenders for tax withholding are reported separately.
Changes, outlook, and risks
Performance improved substantially from the pandemic-affected 2020 comparison period. The prior-year first half included $10.8 million of impairment charges and $4.6 million of restructuring expense; 2021 included no impairment charges and a $0.4 million restructuring credit. The company said demand improved across markets as restrictions eased, while emphasizing that the pandemic’s continuing effects remain uncertain. It continued operating its production facilities with worker-safety measures.
No full-year earnings or revenue guidance is provided in the supplied filing text. The stated full-year capital-spending expectation was approximately $100 million. Management’s forward-looking risks include pandemic developments, market and customer demand, raw-material costs and pass-through timing, foreign exchange and interest rates, acquisition integration and expected benefits, capital-project execution, regulation, and litigation.
Optics Balzers’ purchase price was $136.1 million, including assumed debt; its preliminary purchase-price allocation included $70.8 million of goodwill and $49.3 million of identifiable intangible assets. The company said the acquisition’s results were not material to consolidated financial statements, but contributed to Precision Optics growth. Customer prepayments for equipment and infrastructure totaled approximately $70 million under agreements; $66.9 million was classified as unearned income at July 2, 2021. Environmental remediation reserves were $5.2 million. Two beryllium cases and a wage-and-hour class/collective action were pending; management did not expect the beryllium cases to materially affect the consolidated statements and intended to defend the wage case.
Important facts for investors to verify
- How much of sales and profit growth reflects durable volume and mix improvement versus metal-price pass-throughs and Optics Balzers acquisition effects.
- Whether working-capital investment, particularly inventory growth, converts to operating cash as volumes and planned capital spending rise.
- Progress, commercial-production timing, and customer obligations associated with the customer-prepayment-funded equipment project.
- Optics Balzers integration, the final purchase-price allocation, and whether the acquisition delivers expected strategic and financial benefits.
- Developments in pandemic-related demand, environmental remediation, and the pending beryllium and wage-and-hour claims.