Market Overview

Materion Corporation Reports Second Quarter 2018 Financial Results and Raises Full-Year 2018 Guidance

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Materion Corporation (NYSE:MTRN) today reported second quarter 2018
financial results.

  • Net sales for the second quarter 2018 were $309.1 million, compared
    to $295.8 million for the second quarter 2017.
  • Second quarter 2018 value-added sales were a record $189.9 million,
    up 8% from prior-year value-added sales of $176.1 million.
  • Second quarter 2018 net income was $0.54 per share, diluted,
    compared to $0.36 per share in the prior year.
  • Adjusted earnings of $0.54 per share were up 29% for second quarter
    2018 compared to $0.42 per share, diluted, in the second quarter 2017.
  • The Company is raising its full-year adjusted earnings guidance
    range to $2.00 to $2.15 per share, diluted.

SECOND QUARTER 2018 RESULTS

Net sales for the second quarter 2018 were $309.1 million, compared to
$295.8 million for the prior year. Value-added sales of $189.9 million
were a record for any quarter, up 8% compared to $176.1 million for the
prior year. Focus on commercial execution and new product sales, as well
as strong end market demand, led to the year-over-year improvement. New
product sales were $30.7 million in the quarter, representing 16% of
value-added sales.

Operating profit for the second quarter totaled $15.2 million compared
to $10.1 million in the prior year. Adjusted operating profit improved
26% compared to $12.1 million in 2017 due to performance improvements
and leveraging sales growth.

Second quarter 2018 net income was $11.1 million compared to $7.3
million in the prior year. On a per share basis, second quarter 2018 net
income of $0.54 per share, diluted, improved 29% versus adjusted
earnings of $0.42 in the second quarter 2017.

"This quarter represents a sales and profit milestone for us and is the
sixth consecutive quarter of both value-added sales and earnings growth.
We remain focused on executing our multi-pillar strategy in the second
half of 2018 and beyond to consistently deliver profitable growth,"
stated Jugal Vijayvargiya, President and Chief Executive Officer. "Based
on our solid first half performance and disciplined execution of our
strategy, we are raising the full-year adjusted earnings guidance to
$2.00 to $2.15 per share."

For the first six months of 2018, net sales were $612.6 million,
compared to net sales of $536.5 million for the same period last year.
Value-added sales for the first six months of 2018 were $371.2 million,
an increase of 14%, versus $325.1 million for the first six months of
2017. Excluding the Heraeus high-performance target materials business
(HTB), value-added sales have grown 10% in 2018 compared to 2017,
attributable to new product sales, commercial execution, and improved
end market demand.

Year-to-date net income was $21.7 million or $1.05 per share, diluted,
as compared to $10.4 million, or $0.51 per share, in the comparable
prior-year period. Excluding special items in both periods, earnings for
the first half of 2018 were $21.7 million, or $1.05 per share, as
compared to $14.5 million, or $0.71 per share, for the same period in
the prior year. Performance improvements across the company combined
with sales growth are contributing to the nearly 50% earnings growth.

BUSINESS SEGMENT SECOND QUARTER 2018 RESULTS

Performance Alloys and Composites

Net sales for Performance Alloys and Composites were $129.7 million for
second quarter 2018 compared to $108.5 million in the second quarter of
2017. Value-added sales were a record $110.1 million versus $92.7
million in the prior year. This significant 19% sales increase was
primarily driven by new product sales, improved product mix, and
strengthening end market demand.

Operating profit for the second quarter of 2018 was $12.3 million, or
11% of value-added sales, compared to $5.5 million in the second quarter
of 2017. Operating profit nearly doubled compared to the prior-year
adjusted operating profit of $6.2 million leveraging sales growth and
performance improvements.

Advanced Materials

Advanced Materials' net sales for the second quarter of 2018 were $150.4
million, versus $157.1 million in the prior year. Value-added sales were
$57.3 million, versus $62.0 million in the prior-year quarter, due
primarily to lower demand in the consumer electronics display market and
facility relocation in Germany as part of the previously announced HTB
acquisition.

Operating profit was $5.6 million, compared to adjusted operating profit
of $9.0 million in the prior year with softening demand in the display
market, unfavorable product mix, and planned relocation and integration
expenses.

Precision Coatings

Precision Coatings' net sales for the second quarter of 2018 were $29.0
million versus prior-year sales of $30.2 million. Value-added sales of
$23.4 million were up 4% compared to $22.6 million for the same period
of 2017. Operating profit was $2.2 million versus $2.3 million in the
prior year.

OUTLOOK

The Company delivered favorable second quarter 2018 financial results
for both top and bottom line, led by performance improvements, increased
new product sales, and favorable end market demand. Based on these
factors and current order entry levels, we are raising full-year 2018
adjusted earnings guidance from $1.95 to $2.10 per share, diluted, to
$2.00 to $2.15 per share. The midpoint of the revised guidance
represents an approximate 21% increase from the prior year.

ADJUSTED EARNINGS GUIDANCE

It is not possible for the Company to identify the amount or
significance of future adjustments associated with potential insurance
and litigation claims, legacy environmental costs, acquisition and
integration costs, certain income tax items, or other special items that
the Company adjusts in the presentation of adjusted earnings guidance.
These items are dependent on future events that are not reasonably
estimable at this time. Accordingly, the Company is unable to reconcile
without unreasonable effort the forecasted range of adjusted earnings
guidance for the full year to a comparable GAAP range. However, items
excluded from the Company's adjusted earnings guidance include the
historical adjustments noted in Attachments 4 and 5 to this press
release.

CONFERENCE CALL

Materion Corporation will host an investor conference call with analysts
at 9:00 a.m. Eastern Time, July 26, 2018. 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 August 9,
2018 by dialing (877) 481-4010 or (919) 882-2331; please reference
replay ID number 23767. 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:

  • Actual net sales, operating rates, and margins for 2018;
  • The global economy, including the impact of tariffs as well as other
    governmental actions;
  • The impact of any U.S. Federal Government shutdowns and sequestrations;
  • The condition of the markets which we serve, whether defined
    geographically or by segment, with the major market segments being:
    consumer electronics, industrial components, medical, automotive
    electronics, defense, telecommunications infrastructure, energy,
    commercial aerospace, and science;
  • Changes in product mix and the financial condition of customers;
  • 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 identifying acquisition candidates and in acquiring and
    integrating such businesses, including our ability to effectively
    integrate the HTB acquisition;
  • The impact of the results of acquisitions on our ability to fully
    achieve the strategic and financial objectives related to these
    acquisitions;
  • Our success in implementing our strategic plans and the timely and
    successful completion and start-up of any capital projects;
  • Other financial and economic factors, including the cost and
    availability of raw materials (both base and precious metals),
    physical inventory valuations, metal financing fees, tax rates,
    exchange rates, interest rates, pension costs and required cash
    contributions and other employee benefit costs, energy costs,
    regulatory compliance costs, the cost and availability of insurance,
    credit availability, 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; and
  • The risk factors as set forth in Item 1A of our Form 10-K for the year
    ended December 31, 2017.

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.

   

Attachment 1

Materion Corporation and Subsidiaries
Consolidated Statements of Income

(Unaudited)

 
Second Quarter Ended Six Months Ended
June 29,   June 30, June 29,   June 30,
(In thousands except per share amounts) 2018 2017 2018 2017
Net sales $ 309,085 $ 295,842 $ 612,552 $ 536,511
Cost of sales 247,247 241,064 492,434 438,577
Gross margin 61,838 54,778 120,118 97,934
Selling, general, and administrative expense 38,473 37,928 76,935 71,449
Research and development expense 3,860 3,544 7,503 6,674
Other — net 4,313 3,204 7,237 6,022
Operating profit 15,192 10,102 28,443 13,789
Interest expense — net 667 695 1,397 1,188
Other non-operating expense—net 437 368 879 635
Income before income taxes 14,088 9,039 26,167 11,966
Income tax expense 2,944 1,726 4,459 1,603
Net income $ 11,144 $ 7,313 $ 21,708 $ 10,363
Basic earnings per share:
Net income per share of common stock $ 0.55 $ 0.37 $ 1.08 $ 0.52
Diluted earnings per share:
Net income per share of common stock $ 0.54 $ 0.36 $ 1.05 $ 0.51
Cash dividends per share $ 0.105 $ 0.100 $ 0.205 $ 0.195
Weighted-average number of shares of common stock outstanding:
Basic 20,221 20,012 20,178 19,991
Diluted 20,593 20,347 20,583 20,348
 
   

Attachment 2

Materion Corporation and Subsidiaries
Consolidated Balance Sheets
 
(Unaudited)  
(Thousands) June 29, 2018 December 31, 2017
Assets
Current assets
Cash and cash equivalents $ 42,895 $ 41,844
Accounts receivable 135,699 124,014
Inventories 209,204 220,352
Prepaid and other current assets 19,617   24,733  
Total current assets 407,415 410,943
Long-term deferred income taxes 16,588 17,047
Property, plant, and equipment 894,306 891,789
Less allowances for depreciation, depletion, and amortization (637,730 ) (636,211 )
Property, plant, and equipment—net 256,576 255,578
Intangible assets—net 7,899 9,847
Other assets 6,991 6,992
Goodwill 90,697   90,677  
Total Assets $ 786,166   $ 791,084  
Liabilities and Shareholders' Equity
Current liabilities
Short-term debt $ 798 $ 777
Accounts payable 46,240 49,059
Salaries and wages 32,299 42,694
Other liabilities and accrued items 27,182 28,044
Income taxes 2,994 1,084
Unearned revenue 7,576   5,451  
Total current liabilities 117,089 127,109
Other long-term liabilities 14,203 14,895
Capital lease obligations 15,896 16,072
Retirement and post-employment benefits 80,944 93,225
Unearned income 34,734 36,905
Long-term income taxes 4,896 4,857
Long-term deferred income taxes 210 213
Long-term debt 2,453 2,827
Shareholders' equity 515,741   494,981  
Total Liabilities and Shareholders' Equity $ 786,166   $ 791,084  
 

Attachment 3

Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows

(Unaudited)

 
Six Months Ended
(Thousands) June 29, 2018   June 30, 2017
Cash flows from operating activities:
Net income $ 21,708 $ 10,363
Adjustments to reconcile net income to net cash provided from (used
in) operating activities:
Depreciation, depletion, and amortization 18,349 20,725
Amortization of deferred financing costs in interest expense 514 440
Non-cash compensation expense 5,412 5,816
Deferred income tax expense 429 658
Changes in assets and liabilities net of acquired assets and
liabilities:
Decrease (increase) in accounts receivable (12,060 ) (30,882 )
Decrease (increase) in inventories 10,428 (6,498 )
Decrease (increase) in prepaid and other current assets 4,928 (9,267 )
Increase (decrease) in accounts payable and accrued expenses (14,189 ) 15,519
Increase (decrease) in unearned revenue 2,132 1,685
Increase (decrease) in interest and taxes payable 2,084 (1,115 )
Domestic pension plan contributions (13,000 ) (4,000 )
Other-net 2,569   (3,141 )
Net cash provided by operating activities 29,304 303
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment (17,153 ) (11,252 )
Payments for mine development (3,425 ) (509 )
Payments for acquisition (16,504 )
Proceeds from sale of property, plant, and equipment 27   27  
Net cash used in investing activities (20,551 ) (28,238 )
Cash flows from financing activities:
Proceeds from issuance of short-term debt 2,387
Proceeds from issuance of long-term debt 45,000
Repayment of long-term debt (383 ) (25,362 )
Principal payments under capital lease obligations (425 ) (383 )
Cash dividends paid (4,137 ) (3,899 )
Deferred financing costs (300 )
Repurchase of common stock (1,086 )
Payments of withholding taxes for stock-based compensation awards (2,765 ) (2,302 )
Net cash (used in) provided by financing activities (7,710 ) 14,055
Effects of exchange rate changes 8   913  
Net change in cash and cash equivalents 1,051 (12,967 )
Cash and cash equivalents at beginning of period 41,844   31,464  
Cash and cash equivalents at end of period $ 42,895   $ 18,497  
   

Attachment 4

Materion Corporation and Subsidiaries
Reconciliation of Non-GAAP Measure - Value-added Sales

(Unaudited)

 
Second Quarter Ended Six Months Ended
(Millions) June 29, 2018   June 30, 2017 June 29, 2018   June 30, 2017
Net Sales        
Performance Alloys and Composites $ 129.7 $ 108.5 $ 248.0 $ 201.1
Advanced Materials 150.4 157.1 303.9 271.8
Precision Coatings 29.0 30.2 60.7 63.6
Other        
Total $ 309.1 $ 295.8 $ 612.6 $ 536.5
 
Less: Pass-through Metal Cost
Performance Alloys and Composites $ 19.6 $ 15.8 $ 37.6 $ 29.2
Advanced Materials 93.1 95.1 188.3 162.5
Precision Coatings 5.6 7.6 13.7 17.7
Other 0.9   1.2   1.8   2.0  
Total $ 119.2 $ 119.7 $ 241.4 $ 211.4
 
Value-added Sales (non-GAAP)
Performance Alloys and Composites $ 110.1 $ 92.7 $ 210.4 $ 171.9
Advanced Materials 57.3 62.0 115.6 109.3
Precision Coatings 23.4 22.6 47.0 45.9
Other (0.9 ) (1.2 ) (1.8 ) (2.0 )
Total $ 189.9 $ 176.1 $ 371.2 $ 325.1
 
% of % of % of % of
Gross Margin VA VA VA VA
Performance Alloys and Composites $ 31.1 28% $ 22.8 25% $ 58.9 28% $ 39.1 23%
Advanced Materials 21.3 37% 23.3 38% 42.1 36% 41.7 38%
Precision Coatings 9.1 39% 8.9 39% 19.1 41% 17.2 37%
Other 0.3   (0.2 )   (0.1 )
Total $ 61.8 33% $ 54.8 31% $ 120.1 32% $ 97.9 30%
 
% of % of % of % of
Operating Profit VA VA VA VA
Performance Alloys and Composites $ 12.3 11% $ 5.5 6% $ 22.2 11% $ 5.7 3%
Advanced Materials 5.6 10% 8.7 14% 11.5 10% 15.1 14%
Precision Coatings 2.2 9% 2.3 10% 5.6 12% 4.5 10%
Other (4.9 ) (6.4 ) (10.8 ) (11.5 )
Total $ 15.2 8% $ 10.1 6% $ 28.5 8% $ 13.8 4%
   
Second Quarter Ended   Six Months Ended
(Millions) June 29, 2018   June 30, 2017 June 29, 2018   June 30, 2017
Special Items        
Performance Alloys and Composites $ $ 0.7 $ $ 1.2
Advanced Materials 0.3 1.3
Precision Coatings
Other   1.0   0.7   3.8  
Total $ $ 2.0 $ 0.7 $ 6.3
 
% of % of % of % of

Operating Profit Excluding Special
 Items

VA VA VA VA
Performance Alloys and Composites $ 12.3 11% $ 6.2 7% $ 22.2 11% $ 6.9 4%
Advanced Materials 5.6 10% 9.0 15% 11.5 10% 16.4 15%
Precision Coatings 2.2 9% 2.3 10% 5.6 12% 4.5 10%
Other (4.9 ) (5.4 ) (10.1 ) (7.7 )
Total $ 15.2 8% $ 12.1 7% $ 29.2 8% $ 20.1 6%

The cost of gold, silver, platinum, palladium, and copper is passed
through to customers and, therefore, the trends and comparisons of net
sales are affected by movements in the market price of these metals.
Internally, management also reviews net sales on a value-added basis.
Value-added sales is a non-GAAP financial measure that deducts the value
of the pass-through metals sold from net sales. Value-added sales allows
management to assess the impact of differences in net sales between
periods or segments and analyze the resulting margins and profitability
without the distortion of the movements in pass-through metal prices.
The dollar amount of gross margin and operating profit is not affected
by the value-added sales calculation. The Company sells other metals and
materials that are not considered direct pass throughs, and these costs
are not deducted from net sales to calculate value-added sales.

The Company's pricing policy is to pass the cost of these metals on to
customers in order to mitigate the impact of price volatility on the
Company's results from operations. Value-added information is being
presented since changes in metal prices may not directly impact
profitability. It is the Company's intent to allow users of the
financial statements to review sales with and without the impact of the
pass-through metals.

   

Attachment 5

Materion Corporation and Subsidiaries
Reconciliation of Non-GAAP Measures - Profitability

(Unaudited)

 
Second Quarter Ended Six Months Ended
(Millions except per share amounts) June 29, 2018   June 30, 2017 June 29, 2018   June 30, 2017
GAAP as Reported
Net Sales $ 309.1 $ 295.8 $ 612.6 $ 536.5
Operating profit 15.2 10.1 28.5 13.8
Net income 11.1 7.3 21.7 10.4
EPS - Diluted $ 0.54 $ 0.36 $ 1.05 $ 0.51
 
Operating Profit Special Items
Cost reductions $ $ 0.7 $ $ 1.4
Legacy legal & environmental costs 0.7 0.2
CEO transition 0.9 2.6
Acquisition costs   0.4     2.1  
Total operating profit special items $   $ 2.0   $ 0.7   $ 6.3  
Operating Profit Special Items - net of tax $ $ 1.3 $ 0.6 $ 4.1
Tax Special Item $ $ $ (0.6 ) $
 
Non-GAAP Measures - Adjusted Profitability
Value-added (VA) sales $ 189.9 $ 176.1 $ 371.2 $ 325.1
Operating profit 15.2 12.1 29.2 20.1
Operating profit % of VA 8.0 % 6.9 % 7.9 % 6.2 %
Net income 11.1 8.6 21.7 14.5
EPS - Diluted $ 0.54 $ 0.42 $ 1.05 $ 0.71

In addition to presenting financial statements prepared in accordance
with U.S. generally accepted accounting principles (GAAP), this earnings
release contains financial measures, including operating profit, segment
operating profit, net income, and earnings per share, on a non-GAAP
basis. As detailed in the above reconciliation and Attachment 4, we have
adjusted the results for certain special items such as CEO transition
costs, cost reduction initiatives (i.e., asset impairment charges and
severance), legacy legal and environmental costs, merger and acquisition
costs, and certain income tax items from the applicable GAAP financial
measure. Internally, management reviews the results of operations
without the impact of these costs in order to assess the profitability
from ongoing activities. We are providing this information because we
believe it will assist investors in analyzing our financial results and,
when viewed in conjunction with the GAAP results, provide a more
comprehensive understanding of the factors and trends affecting our
operations.

       

Attachment 6

Materion Corporation and Subsidiaries
Value-added sales by Market

(Unaudited)

 
Second Quarter Ended Six Months Ended
June 29,   June 30, June 29,   June 30,
(Millions) 2018 2017 % Change 2018 2017 % Change
Materion Corporation
Consumer Electronics $ 57.3 $ 54.2 5.7 % $ 110.9 $ 100.3 10.6 %
Industrial Components 28.9 28.1 2.8 % 61.0 51.7 18.0 %
Defense 21.4 12.0 78.3 % 33.7 23.9 41.0 %
Energy 16.3 13.1 24.4 % 33.7 22.0 53.2 %
Automotive Electronics 14.7 13.3 10.5 % 29.5 25.8 14.3 %
Medical 13.4 15.0 (10.7 )% 28.9 31.1 (7.1

)%

Telecom Infrastructure 11.0 8.7 26.4 % 19.7 15.4 27.9 %
Other 26.9   31.7   (15.1 )% 53.8   54.9   (2.0 )%
Total $ 189.9 $ 176.1 7.8 % $ 371.2 $ 325.1 14.2 %
Performance Alloy and Composites
Consumer Electronics $ 21.1 $ 18.2 15.9 % $ 41.1 $ 34.7 18.4 %
Industrial Components 22.9 21.0 9.0 % 48.7 38.6 26.2 %
Defense 14.9 6.6 125.8 % 21.5 14.0 53.6 %
Energy 8.6 4.6 87.0 % 15.0 9.6 56.3 %
Automotive Electronics 14.3 13.0 10.0 % 28.9 25.1 15.1 %
Medical 1.8 1.8 % 3.4 3.8 (10.5 )%
Telecom Infrastructure 9.5 6.6 43.9 % 16.6 11.7 41.9 %
Other 17.0   20.9   (18.7 )% 35.2   34.4   2.3 %
Total $ 110.1 $ 92.7 18.8 % $ 210.4 $ 171.9 22.4 %
Advanced Materials
Consumer Electronics $ 31.2 $ 32.0 (2.5 )% $ 60.5 $ 58.1 4.1 %
Industrial Components 3.1 3.7 (16.2 )% 6.9 6.8 1.5 %
Defense 1.6 1.7 (5.9 )% 3.0 2.9 3.4 %
Energy 7.7 8.5 (9.4 )% 18.7 12.4 50.8 %
Automotive Electronics % %
Medical 2.7 3.2 (15.6 )% 5.6 5.6 %
Telecom Infrastructure 1.5 2.2 (31.8 )% 3.0 3.8 (21.1 )%
Other 9.5   10.7   (11.2 )% 17.9   19.7   (9.1 )%
Total $ 57.3 $ 62.0 (7.6 )% $ 115.6 $ 109.3 5.8 %
Precision Coatings
Consumer Electronics $ 5.0 $ 4.0 25.0 % $ 9.3 $ 7.5 24.0 %
Industrial Components 2.9 3.5 (17.1 )% 5.4 6.4 (15.6 )%
Defense 4.9 3.8 28.9 % 9.2 7.1 29.6 %
Energy % %
Automotive Electronics 0.5 0.3 66.7 % 0.7 0.7 %
Medical 9.0 10.0 (10.0 )% 20.0 21.7 (7.8 )%
Telecom Infrastructure % 0.1 %
Other 1.1   1.0   10.0 % 2.3   2.5   (8.0 )%
Total $ 23.4 $ 22.6 3.5 % $ 47.0 $ 45.9 2.4 %
 
Eliminations $ (0.9 ) $ (1.2 ) $ (1.8 ) $ (2.0 )

Prior year numbers have been restated to conform to the current year
presentation.

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