Market Overview

Materion Corporation Reports Third Quarter Earnings

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MAYFIELD HEIGHTS, Ohio--(BUSINESS WIRE)--

Materion Corporation (NYSE: MTRN) today reported results for the third quarter 2012 and revised its earnings outlook for the year.

The Company reported net income for the quarter of $8.1 million, or $0.39 per share, diluted, on sales of $290.6 million. Results for the quarter were positively affected by improved margins and negatively affected by lower sales volumes and a higher than expected tax rate.

THIRD QUARTER 2012 RESULTS

Sales for the third quarter were $290.6 million compared to the third quarter of 2011 quarterly sales of $392.8 million, a decline of approximately 26%. A higher use of customer-supplied precious metal and lower pass-through metal prices decreased sales in the third quarter of 2012 by approximately $51.4 million compared to the same period of the prior year. Other factors, including lower sales volume from silver investment bar and jewelry product applications, pricing and changes in customer mix, resulted in a decline in sales of 13%. In the quarter, demand for our materials was weaker from the defense and science, automotive electronics, telecommunications infrastructure, energy and appliance markets. Helping to offset, in part, the lower demand for our materials from these markets was improved demand from the consumer electronics, medical, industrial components and aerospace markets.

Comparing the third quarter sequentially to the second quarter of 2012, sales were down $34.5 million, or approximately 10.6%, from $325.1 million. The higher use of customer-supplied metal and changes in pass-through metal prices lowered sales in the third quarter sequentially by approximately 4% compared to the second quarter of the year. In the third quarter, comparing sequentially to the second quarter of the year, demand for our materials was weaker in automotive electronics, in consumer electronics and in energy. Helping to offset the lower demand in those two markets was improved demand in defense and science, in industrial and commercial aerospace and in telecom infrastructure.

Net income for the third quarter was $8.1 million, or $0.39 per share, diluted, compared to $13.5 million, or $0.65 per share, diluted, for the third quarter of 2011 and sequentially to $7.9 million, or $0.38 per share, diluted, for the second quarter of 2012. The reduction in net income, when compared to the same quarter of the prior year, is due primarily to the lower sales volume and a higher effective tax rate. When comparing sequentially to the second quarter, while sales were lower and the effective tax rate was higher, diluted earnings per share increased primarily due to improved margins. The effective tax rate was higher in the third quarter than the first half of the year primarily due to an increase in projected foreign losses that cannot currently be utilized, reducing earnings for the quarter by approximately $1.0 million, or $0.05 per share.

For the first nine months of 2012, sales were $969.3 million compared to sales of $1.192 billion for the same period of last year. Net income for the first nine months of the year was $22.2 million, or $1.07 per share, diluted, compared to net income of $39.2 million, or $1.89 per share, diluted, for the same period of last year. The 2012 year-to-date earnings of $1.07 includes approximately $0.20 per share of costs related to the start-up of the beryllium plant, the integration of EIS Optics Limited, which was acquired in late 2011, and the shutdown and relocation of certain of the Company's operations.

DIVIDEND

The Company announced today the declaration of its fourth quarter dividend of $0.075 per share payable on December 4, 2012 to shareholders of record on November 16, 2012. The dividend is a reflection of the Company's continued confidence in the strength of its business, its prospects for long-term growth and its ability to continue to grow the business organically, as well as through acquisitions, while returning cash to shareholders.

BUSINESS SEGMENT REPORTING

Advanced Material Technologies

The Advanced Material Technologies' segment sales for the third quarter of 2012 were $190.5 million, compared to sales of $274.6 million in the third quarter of 2011. Sales for the first nine months of 2012 were $654.2 million, compared to sales of $818.6 million for the same period last year. Pass-through metal prices were lower in the third quarter of 2012 when comparing to the third quarter of the prior year, resulting in a reduction in sales of approximately $5.4 million quarter over quarter. Pass-through metal prices were higher in the first nine months of 2012 than the same period in 2011, resulting in an increase in sales of approximately $3.1 million. The higher use of customer-supplied metal as previously noted, and weaker demand from defense, silver investment bar, jewelry and other markets offset, in part, by strength in the medical market accounted for a majority of the decline in sales in the third quarter and first nine months compared to the same periods of last year.

Operating profit for the third quarter of 2012 was $9.2 million, compared to an operating profit of $11.2 million for the third quarter of 2011. Operating profit year to date was $22.0 million, compared to $32.6 million for the same period of last year. Operating profit was negatively impacted in the third quarter and year to date by the lower sales volume and a weaker product mix. In addition, costs associated with the acquisition of EIS Optics Limited and the shutdown and relocation of certain operations negatively affected operating profit for the first nine months of 2012 by $1.9 million. Operating profit as a percent of sales has improved sequentially in each quarter of 2012.

Performance Alloys

Performance Alloys' sales for the third quarter were $68.7 million, compared to the third quarter of 2011 sales of $81.7 million. Year-to-date sales were $216.4 million compared to $262.8 million for the first nine months of the prior year. Pass-through metal prices negatively affected sales by $3.1 million for the quarter and $7.6 million for the first nine months as compared to the same periods in 2011. The remainder of the decline in sales for the quarter and year to date is due primarily to lower demand from the consumer electronics, automotive electronics, telecommunications infrastructure, energy and appliance markets offset, in part, by strength from the industrial components and commercial aerospace market.

Demand for the Company's ToughMet® materials for applications in commercial aerospace, heavy equipment and plastic tooling for the third quarter and first nine months of 2012 remained solid.

Operating profit for the third quarter was $5.4 million, compared to an operating profit of $5.9 million in the third quarter of 2011. The operating profit for the first nine months of 2012 was $18.3 million, compared to an operating profit of $24.1 million for the same period of last year. The adverse impact of the lower sales volume and an unfavorable mix were partially offset by improved yields, lower expenses and improved pricing.

Beryllium and Composites

Beryllium and Composites' sales for the third quarter of 2012 were $14.4 million, compared to the third quarter 2011 sales of $15.3 million. For the first nine months of the year, sales were $43.1 million compared to $47.0 million for the same period of last year. A combination of defense push-outs and weaker commercial sales accounted for the majority of the decline in sales for the quarter and the year to date. Order entry rates have improved, and sales in the fourth quarter of the year are currently expected to be above those of the third quarter.

The operating loss for the third quarter of 2012 was $0.5 million, which compares to an operating profit of $0.4 million for the third quarter of 2011. The operating loss for the first nine months of 2012 was $3.8 million, which compares to an operating profit of $1.6 million for the same period of last year. The reduction in operating profit for the third quarter and the first nine months of 2012 is due to both the lower defense business levels and the start-up of the new beryllium pebble plant. Output from the plant continued to improve in the third quarter. Costs associated with the start-up of the plant, including the cost of higher-priced purchased beryllium, totaled approximately $0.9 million for the quarter and $3.9 million for the year to date. The start up of the new beryllium plant is progressing well and the plant is expected to fully meet projected production needs for the coming year.

Technical Materials

Technical Materials' sales for the third quarter of 2012 were $17.0 million, compared to $21.0 million for the third quarter of 2011. Sales for the first nine months of the year were $55.5 million, compared to $63.6 million for the same period of last year. Sales were negatively impacted in the third quarter and first nine months by weaker demand from the consumer electronics, automotive electronics and energy markets.

Operating profit for the third quarter of 2012 was $1.1 million, which compares to $2.4 million for the third quarter of last year. The operating profit for the first nine months of the year was $5.0 million compared to an operating profit of $6.9 million for the same period of last year. The lower operating profit is due to the lower sales volume.

OUTLOOK FOR 2012

The global macroeconomic environment remains uncertain and visibility is short. Order entry patterns have been choppy and the customary lift in order entry typically associated with consumer electronics in the third quarter occurred later in the quarter than normal.

The Company now expects sales for the fourth quarter of the year to be similar to the third quarter and earnings for the full year to be in the range of $1.40 to $1.45 per share compared to the previously announced range of $1.50 to $1.60 per share. This full-year range includes up to $0.27 per share of costs related to the start-up of the pebble plant, integration of EIS Optics Limited, acquired in late 2011, and the shutdown and relocation of certain operations.

CHAIRMAN'S COMMENTS

Richard J. Hipple, Chairman, President and CEO, stated, “Over the past three quarters, we have been experiencing difficult global economic conditions. I am encouraged though, by our increasing quarter-to-quarter earnings improvement since the fourth quarter of 2011 and especially by our margin improvement. Our strong balance sheet, the benefit of our pricing and cost reduction initiatives, our diverse set of markets and our new products and technologies have helped us navigate the challenging global economic environment. We have positioned ourselves well. Important to the ongoing improvement is the continued progress with the start-up of the new beryllium pebble plant and the success of our new product, technology and cost-reduction initiatives. I am very encouraged about our future.”

CONFERENCE CALL

Materion Corporation will host a conference call with analysts at 11:00 a.m. Eastern Time, October 25, 2012. The conference call will be available via webcast through the Company's website at www.materion.com or through www.InvestorCalendar.com. By phone, please dial (877) 407-0778, callers outside the U.S. can dial (201) 689-8565. A replay of the call will be available until November 9, 2012 by dialing (877) 660-6853 or (201) 612-7415; Conference ID 401127. The call will also be archived on the Company's website.

FORWARD-LOOKING STATEMENTS

Portions of the narrative set forth in this document that are not statements of historical or current facts are forward-looking statements, in particular the outlook provided above. Our actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. These factors include, in addition to those mentioned elsewhere herein:

  • The global economy;
  • The condition of the markets which we serve, whether defined geographically or by segment, with the major market segments being: consumer electronics, industrial and commercial aerospace, defense and science, energy, medical, automotive electronics, telecommunications infrastructure and appliance;
  • Changes in product mix and the financial condition of customers;
  • Actual sales, operating rates and margins for 2012;
  • Our success in developing and introducing new products and new product ramp-up rates;
  • Our success in passing through the costs of raw materials to customers or otherwise mitigating fluctuating prices for those materials, including the impact of fluctuating prices on inventory values;
  • Our success in integrating acquired businesses, including EIS Optics Limited and Aerospace Metal Composites Limited;
  • Our success in moving the microelectronics packaging operations to Singapore;
  • Our success in implementing our strategic plans and the timely and successful completion and start-up of any capital projects, including the new primary beryllium facility in Elmore, Ohio;
  • The availability of adequate lines of credit and the associated interest rates;
  • The impact of the results of acquisitions on our ability to achieve fully the strategic and financial objectives related to these acquisitions;
  • Other financial factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, metal financing fees, tax rates, exchange rates, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, and the impact of the Company's stock price on the cost of incentive compensation plans;
  • The uncertainties related to the impact of war, terrorist activities and acts of God;
  • Changes in government regulatory requirements and the enactment of new legislation that impacts our obligations and operations;
  • The conclusion of pending litigation matters in accordance with our expectation that there will be no material adverse effects;
  • The timing and ability to achieve further efficiencies and synergies resulting from our name change and product line alignment under the Materion name and Materion brand; and
  • The risk factors set forth in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.

Materion Corporation is headquartered in Mayfield Heights, Ohio. The Company, through its wholly owned subsidiaries, supplies highly engineered advanced enabling materials to global markets. Products include precious and non-precious specialty metals, inorganic chemicals and powders, specialty coatings, specialty engineered beryllium alloys, beryllium and beryllium composites, and engineered clad and plated metal systems.

Materion Corporation

Digest of Earnings

September 28, 2012

     
2012 2011
 
Second Quarter
 
Net Sales $290,601,000 $392,794,000
 
Net Income $8,114,000 $13,527,000
 
Share Earnings - Basic $0.40 $0.66
 
Average Shares - Basic 20,432,000 20,377,000
 
Share Earnings - Diluted $0.39 $0.65
 
Average Shares - Diluted 20,697,000 20,749,000
 
 
Year-to-date
 
Net Sales $969,319,000 $1,192,309,000
 
Net Income $22,161,000 $39,217,000
 
Share Earnings - Basic $1.08 $1.92
 
Average Shares - Basic 20,434,000 20,385,000
 
Share Earnings - Diluted $1.07 $1.89
 
Average Shares - Diluted 20,639,000 20,792,000
 
Materion Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
       
Third Quarter Ended Nine Months Ended
(Thousands, except per share amounts) Sept. 28,
2012
  Sept. 30,
2011
Sept. 28,
2012
  Sept. 30,
2011
 
Net sales $ 290,601 $ 392,794 $ 969,319 $ 1,192,309
Cost of sales   238,232   335,444   814,507   1,016,487
Gross margin 52,369 57,350 154,812 175,822
Selling, general and administrative expense 32,832 32,322 98,938 98,012
Research and development expense 3,019 2,821 9,309 7,946
Other - net   3,129   5,016   10,846   13,752
Operating profit 13,389 17,191 35,718 56,112
Interest expense-net   779   807   2,297   2,005
Income before income taxes 12,610 16,384 33,421 54,107
 
Income tax expense   4,496   2,857   11,260   14,890
 
Net income $ 8,114 $ 13,527 $ 22,161 $ 39,217
 
Basic earnings per share:
Net income per share of common stock $ 0.40 $ 0.66 $ 1.08 $ 1.92
 
Diluted earnings per share:
Net income per share of common stock $ 0.39 $ 0.65 $ 1.07 $ 1.89
 
Cash dividends per share $ 0.075 $ 0.00 $ 0.15 $ 0.00
 
 
Weighted-average number of shares of common stock outstanding
Basic 20,432 20,377 20,434 20,385
Diluted 20,697 20,749 20,639 20,792
 
See Notes to Consolidated Financial Statements.
 
Materion Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
       
Third Quarter Ended Nine Months Ended
(Thousands) Sept. 28,
2012
  Sept. 30,
2011
Sept. 28,
2012
  Sept. 30,
2011
 
 
Net income $ 8,114   $ 13,527   $ 22,161   $ 39,217
Other comprehensive income:
Foreign currency translation adjustment 1,271 (224 ) 449 1,845
Derivative and hedging activity, net of tax (521 ) 1,332 (858 ) 921
Pension and post employment benefit adjustment, net of tax   835     343     2,504     1,463
Net change in accumulated other comprehensive income   1,585     1,451     2,095     4,229
 
Comprehensive income $ 9,699   $ 14,978   $ 24,256   $ 43,446
 
See Notes to Consolidated Financial Statements.
 
Materion Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
   
(Thousands) Sept. 28,
2012
Dec. 31,
2011
Assets
Current assets
Cash and cash equivalents $ 10,894 $ 12,255
Accounts receivable 138,877 117,761
Other receivables 209 4,602
Inventories 211,443 187,176
Prepaid expenses

44,610

39,739
Deferred income taxes   10,099     9,368  
Total current assets 416,132 370,901
 
Related-party notes receivable 51 73
Long-term deferred income taxes 11,627 11,627
Property, plant and equipment - cost 769,985 753,326

Less allowances for depreciation, depletion and amortization

  (501,382 )   (489,513 )
Property, plant and equipment - net 268,603 263,813
Intangible assets 30,131 34,580
Other assets 5,348 7,073
Goodwill   86,467     84,036  
Total assets $ 818,359   $ 772,103  
 
 
Liabilities and shareholders' equity
Current liabilities
Short-term debt $ 57,455 $ 40,944
Accounts payable 31,831 39,385
Other liabilities and accrued items 55,581 56,309
Unearned revenue   1,717     3,033  
Total current liabilities 146,584 139,671
 
Other long-term liabilities 16,762 16,488
Retirement and post-employment benefits 98,421 105,115
Unearned income 57,859 62,540
Long-term income taxes 1,385 1,793
Deferred income taxes 2,193 51
Long-term debt 65,028 40,463
Shareholders' equity   430,127     405,982  
Total liabilities and shareholders' equity $ 818,359   $ 772,103  
 
See Notes to Consolidated Financial Statements.
 
Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
  Nine Months Ended
(Thousands) Sept. 28,
2012
  Sept. 30,
2011
 
Cash flows from operating activities:
Net income $ 22,161 $ 39,217
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation, depletion and amortization 28,923 32,355
Amortization of deferred financing costs in interest expense 487 341
Stock-based compensation expense 4,343 3,593
Changes in assets and liabilities net of acquired assets and liabilities:
Decrease (increase) in accounts receivable (20,451 ) (16,337 )
Decrease (increase) in other receivables 4,393 1,500
Decrease (increase) in inventory (23,795 ) (38,291 )
Decrease (increase) in prepaid and other current assets (4,852 ) (10,633 )
Decrease (increase) in deferred income taxes (812 ) (40 )
Increase (decrease) in accounts payable and accrued expenses (12,805 ) (4,825 )
Increase (decrease) in unearned revenue (1,316 ) (363 )
Increase (decrease) in interest and taxes payable (577 ) (4,185 )
Increase (decrease) in long-term liabilities (3,618 ) (10,916 )
Other-net   545     (3,134 )
Net cash used in operating activities (7,374 ) (11,718 )
 
Cash flows from investing activities:
Payments for purchase of property, plant and equipment (25,335 ) (18,722 )
Payments for mine development (4,992 ) (302 )
Reimbursements for capital equipment under government contracts 991 2,917
Payments for purchase of business net of cash received (3,894 ) -
Proceeds from sale of property, plant and equipment - 33
Other investments-net   1,742     13  
Net cash used in investing activities (31,488 ) (16,061 )
 
Cash flows from financing activities:
Proceeds from issuance (repayments) of short-term debt 16,505 (1,240 )
Proceeds from issuance of long-term debt 32,305 92,510
Repayment of long-term debt (7,740 ) (65,175 )
Debt issuance costs - (2,554 )
Principal payments under capital lease obligations (580 ) (547 )
Repurchase of common stock (119 ) (3,776 )
Cash dividends paid (3,083 ) -
Issuance of common stock under stock option plans 144 720
Tax benefit from stock compensation realization   77     389  
Net cash provided from financing activities 37,509 20,327
Effects of exchange rate changes   (8 )   313  
Net change in cash and cash equivalents (1,361 ) (7,139 )
Cash and cash equivalents at beginning of period   12,255     16,104  
Cash and cash equivalents at end of period $ 10,894   $ 8,965  
 
See Notes to Consolidated Financial Statements.
 
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
   
Note A - Accounting Policies
 

In management's opinion, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position as of September 28, 2012 and December 31, 2011 and the results of operations for the third quarter and nine months ended September 28, 2012 and September 30, 2011. All adjustments were of a normal and recurring nature.

 
Note B - Inventories
   
Inventories on the Consolidated Balance Sheets are summarized as follows:
 
(Thousands)   Sept. 28,
2012
  Dec. 31,
2011
 
Principally average cost:
Raw materials and supplies $ 48,680 $ 42,969
Work in process 200,599 179,445
Finished goods   57,131   57,645
Gross inventories 306,410 280,059
 
Excess of average cost over LIFO inventory value   94,967   92,883
Net inventories $ 211,443 $ 187,176
 
Notes to Consolidated Financial Statements
(Unaudited)
   
Note C - Pensions and Other Post-employment Benefits
 

The following is a summary of the third quarter and first nine months 2012 and 2011 net periodic benefit cost for the domestic defined benefit pension plans and supplemental retirement plans and the domestic retiree medical plan.

  Pension Benefits   Other Benefits
Third Quarter Ended Third Quarter Ended
(Thousands)   Sept. 28,
2012
  Sept. 30,
2011
Sept. 28,
2012
  Sept. 30,
2011
   
Components of net periodic benefit cost
 
Service cost $ 1,932 $ 1,516 $ 71 $ 71
Interest cost 2,336 2,309 360 399
Expected return on plan assets (2,926 ) (2,685 ) - -
Amortization of prior service cost (benefit) (84 ) (118 ) 22 (9 )
Amortization of net loss   1,402     982     -   -  
Net periodic benefit cost $ 2,660   $ 2,004   $ 453 $ 461  
 
 
Pension Benefits Other Benefits
Nine Months Ended Nine Months Ended
(Thousands)   Sept. 28,
2012
  Sept. 30,
2011
Sept. 28,
2012
  Sept. 30,
2011
 
Components of net periodic benefit cost
 
Service cost $ 5,796 $ 4,549 $ 213 $ 213
Interest cost 7,008 6,927 1,080 1,197
Expected return on plan assets (8,777 ) (8,056 ) - -
Amortization of prior service cost (benefit) (251 ) (354 ) 65 (27 )
Amortization of net loss   4,206     2,945     -   -  
Net periodic benefit cost $ 7,982   $ 6,011   $ 1,358 $ 1,383  

The Company made contributions to the domestic defined benefit pension plan of $10.1 million in the first nine months of 2012.

 

The Company closed the domestic defined benefit pension plan to new entrants as of May 26, 2012.
Employees currently eligible under the domestic defined benefit pension plan will continue to accrue benefits under existing formulas. Employees not eligible for the domestic defined benefit pension plan will receive additional contributions under the defined contribution plan.

 
Notes to Consolidated Financial Statements
(Unaudited)
             
Note D - Segment Reporting
 
(Thousands) Advanced
Material
Technologies
  Performance
Alloys
  Beryllium and
Composites
  Technical
Materials
  Subtotal   All
Other
  Total

 Third Quarter 2012 

Sales to external customers $ 190,508 $ 68,700 $ 14,418 $ 16,975 $ 290,601 $ - $ 290,601
 
Intersegment sales 520 599 245 119 1,483 - 1,483
 
Operating profit (loss) 9,212 5,404 (515 ) 1,135 15,236 (1,847 ) 13,389
 
 

 Third Quarter 2011 

Sales to external customers $ 274,640 $ 81,739 $ 15,340 $ 20,983 $ 392,702 $ 92 $ 392,794
 
Intersegment sales 679 838 96 789 2,402 - 2,402
 
Operating profit (loss) 11,177 5,907 364 2,393 19,841 (2,650 ) 17,191
 
 

 First Nine Months 2012 

Sales to external customers $ 654,245 $ 216,434 $ 43,102 $ 55,459 $ 969,240 $ 79 $ 969,319
 
Intersegment sales 1,691 1,968 574 590 4,823 - 4,823
 
Operating profit (loss) 22,011 18,349 (3,823 ) 4,995 41,532 (5,814 ) 35,718
 
Assets 366,190 257,825 134,787 23,094 781,896 36,463 818,359
 
 

 First Nine Months 2011

Sales to external customers $ 818,565 $ 262,824 $ 47,027 $ 63,598 $ 1,192,014 $ 295 $ 1,192,309
 
Intersegment sales 2,203 2,741 318 1,494 6,756 - 6,756
 
Operating profit (loss) 32,550 24,125 1,556 6,916 65,147 (9,035 ) 56,112
 
Assets 344,577 252,157 129,520 25,110 751,364 36,968 788,332

Materion Corporation
Investor Contact:
Michael C. Hasychak, 216-383-6823
mike.hasychak@materion.com
or
Media Contact:
Patrick S. Carpenter, 216-383-6835
patrick.carpenter@materion.com
or
http://www.materion.com
Mayfield Hts-g

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