Materion Corporation — Q1 2019 Form 10-Q
Business context and period. Materion produces engineered materials for markets including consumer electronics, defense, medical, energy and industrial components. This unaudited quarterly report covers the three months ended March 29, 2019; comparisons are with the first quarter ended March 30, 2018. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Net sales | $301.4 | $303.5 |
| Value-added sales (non-GAAP) | $187.7 | $181.3 |
| Gross margin | $69.3; 37% of value-added sales | $58.3; 32% of value-added sales |
| Operating profit | $21.4 | $13.3 |
| Net income / diluted EPS | $16.9 / $0.82 | $10.6 / $0.51 |
| Operating cash flow | $(12.6) | $(8.2) |
| Capital spending and mine development | $9.4 | $9.5 |
| Cash and cash equivalents | $41.9 | $70.6 at Dec. 31, 2018 |
| Total outstanding debt, as reported | $2.8 | $3.0 at Dec. 31, 2018 |
| Available borrowing capacity | $294.9 | $275.5 at Dec. 31, 2018 |
Net sales declined about 1%, while value-added sales increased about 4%. Gross margin rose about 19%, operating profit 61%, and net income 60%. The effective tax rate was 18.2%, versus 12.5%; both periods included $0.9 million of discrete tax benefits. The company used $28.8 million of cash in the quarter, ending with $39.0 million of net cash as defined by management.
Current assets were $434.8 million and current liabilities $131.2 million at quarter-end. Inventory was $224.2 million, up from $214.9 million at year-end. Operating lease adoption added a $28.3 million right-of-use asset and $22.6 million operating lease liability; finance lease liabilities were $18.5 million. These lease obligations are separate from the reported debt figures.
Segment results and key changes
- Performance Alloys and Composites: sales of $127.1 million, value-added sales of $109.6 million and operating profit of $19.0 million. Value-added sales rose 9% and operating profit 92%, driven by volume, product mix and manufacturing improvements, with stronger defense, energy and telecom demand.
- Advanced Materials: sales of $144.0 million, value-added sales of $57.5 million and operating profit of $7.1 million. Sales declined 6%, primarily from lower metal prices and volume; operating profit increased 20%, reflecting savings from operational improvements and restructuring.
- Precision Coatings: sales of $30.3 million, value-added sales of $22.5 million and operating profit of $2.1 million. Operating profit declined 38%, amid lower medical and consumer electronics volume and higher precious-metal lease costs.
- Management attributed the $6.4 million unfavorable effect on net sales to precious-metal and copper price changes. Higher volume and improved sales mix supported the gross-margin improvement. SG&A rose 4% to $40.1 million, reflecting strategic initiatives and variable growth-related costs.
Cash flow, outlook and risks
Operating cash use increased year over year. Management said working capital used $40.3 million of cash, including increased receivables and inventory; inventory growth was primarily tied to Advanced Materials raw-material purchase timing. The company expects 2019 property, plant and equipment payments of approximately $30 million and mine-development spending below $5 million. No earnings or revenue guidance is provided in the filing.
Management stated that operating cash flow, cash on hand and borrowing availability should support operations, capital spending, pension contributions, dividends, repurchases, environmental projects and strategic acquisitions. The company was in compliance with debt covenants at quarter-end; its revolving credit agreement expires in 2020. Metal consignment capacity available and unused was approximately $173.7 million, with the lines expiring in September 2019. Off-balance-sheet consigned precious metals and copper had a notional value of $276.3 million.
Risks identified include economic conditions, tariffs and trade agreements, demand and customer mix, passing through raw-material costs, metal prices and financing fees, foreign exchange, execution of strategic initiatives and acquisitions, regulation, pension costs, and litigation. Environmental remediation reserves were $6.4 million; actual costs may differ. The company also faces beryllium-related claims and other ordinary-course legal proceedings. The filing does not provide a clear quantified range of potential losses for these proceedings.
Important facts for investors to verify
- Whether higher gross margin and segment operating results are sustained, particularly as demand and product mix change.
- Whether working-capital investment reverses and operating cash flow improves after the quarter’s cash use.
- Progress toward stated 2019 capital-spending expectations and the availability and terms of credit and metal consignment facilities.
- Exposure to consumer electronics and medical market weakness, metal-price pass-through timing, and precious-metal financing costs.
- Developments in environmental remediation and beryllium litigation; the filing does not quantify a clear potential loss range.
- The quarter included adoption of lease accounting Topic 842, with a $0.2 million reduction to opening retained earnings; prior-period figures were not restated.