Item 1. Financial Statements
Materion Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Second Quarter Ended
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Six Months Ended
|
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|
|
(Thousands, except per share amounts)
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|
June 26, 2020
|
|
June 28, 2019
|
|
June 26, 2020
|
|
June 28, 2019
|
|
Net sales
|
|
$
|
271,468
|
|
|
$
|
297,843
|
|
|
$
|
549,414
|
|
|
$
|
599,284
|
|
|
Cost of sales
|
|
223,378
|
|
|
228,249
|
|
|
455,749
|
|
|
460,378
|
|
|
Gross margin
|
|
48,090
|
|
|
69,594
|
|
|
93,665
|
|
|
138,906
|
|
|
Selling, general, and administrative expense
|
|
32,852
|
|
|
39,891
|
|
|
63,596
|
|
|
79,955
|
|
|
Research and development expense
|
|
4,502
|
|
|
4,062
|
|
|
8,687
|
|
|
7,802
|
|
|
Goodwill impairment charges
|
|
—
|
|
|
—
|
|
|
9,053
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|
|
—
|
|
|
Held for sale impairment charges
|
|
—
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|
|
—
|
|
|
1,713
|
|
|
—
|
|
|
Restructuring expense
|
|
2,387
|
|
|
—
|
|
|
4,551
|
|
|
—
|
|
|
Other—net
|
|
(357)
|
|
|
2,891
|
|
|
1,922
|
|
|
7,012
|
|
|
Operating profit
|
|
8,706
|
|
|
22,750
|
|
|
4,143
|
|
|
44,137
|
|
|
Other non-operating (income) expense—net
|
|
(851)
|
|
|
3,112
|
|
|
(1,795)
|
|
|
3,357
|
|
|
Interest expense—net
|
|
1,259
|
|
|
500
|
|
|
1,505
|
|
|
966
|
|
|
Income before income taxes
|
|
8,298
|
|
|
19,138
|
|
|
4,433
|
|
|
39,814
|
|
|
Income tax expense
|
|
1,620
|
|
|
3,598
|
|
|
858
|
|
|
7,368
|
|
|
Net income
|
|
$
|
6,678
|
|
|
$
|
15,540
|
|
|
$
|
3,575
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$
|
32,446
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|
Basic earnings per share:
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Net income per share of common stock
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$
|
0.33
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$
|
0.76
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|
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$
|
0.18
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$
|
1.60
|
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|
Diluted earnings per share:
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|
|
|
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Net income per share of common stock
|
|
$
|
0.32
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|
|
$
|
0.75
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|
|
$
|
0.17
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|
|
$
|
1.57
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|
Weighted-average number of shares of common stock outstanding:
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|
|
|
|
|
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Basic
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20,317
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20,383
|
|
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20,350
|
|
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20,326
|
|
|
Diluted
|
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20,554
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|
|
20,666
|
|
|
20,587
|
|
|
20,635
|
|
See notes to these consolidated financial statements.
Materion Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
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|
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Second Quarter Ended
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Six Months Ended
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June 26,
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June 28,
|
|
June 26,
|
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June 28,
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(Thousands)
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|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net income
|
|
$
|
6,678
|
|
|
$
|
15,540
|
|
|
$
|
3,575
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|
|
$
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32,446
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|
|
Other comprehensive (loss) income:
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|
|
|
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|
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|
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|
Foreign currency translation adjustment
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|
1,166
|
|
|
339
|
|
|
293
|
|
|
(164)
|
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|
Derivative and hedging activity, net of tax
|
|
347
|
|
|
(1,000)
|
|
|
(507)
|
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|
(73)
|
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|
Pension and post-employment benefit adjustment, net of tax
|
|
89
|
|
|
13,953
|
|
|
105
|
|
|
14,493
|
|
|
Other comprehensive income (loss)
|
|
1,602
|
|
|
13,292
|
|
|
(109)
|
|
|
14,256
|
|
|
Comprehensive income
|
|
$
|
8,280
|
|
|
$
|
28,832
|
|
|
$
|
3,466
|
|
|
$
|
46,702
|
|
See notes to these consolidated financial statements.
Materion Corporation and Subsidiaries
Consolidated Balance Sheets
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(Unaudited)
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|
June 26,
|
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Dec. 31,
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|
(Thousands)
|
|
2020
|
|
2019
|
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
265,068
|
|
|
$
|
125,007
|
|
|
Accounts receivable, net
|
|
146,527
|
|
|
154,751
|
|
|
Inventories, net
|
|
209,847
|
|
|
190,390
|
|
|
Prepaid and other current assets
|
|
29,191
|
|
|
21,839
|
|
|
Assets held for sale
|
|
5,811
|
|
|
—
|
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Total current assets
|
|
656,444
|
|
|
491,987
|
|
|
Deferred income taxes
|
|
1,669
|
|
|
1,666
|
|
|
Property, plant, and equipment
|
|
924,620
|
|
|
916,965
|
|
|
Less allowances for depreciation, depletion, and amortization
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|
(685,355)
|
|
|
(684,689)
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|
|
Property, plant, and equipment—net
|
|
239,265
|
|
|
232,276
|
|
|
Operating lease, right-of-use assets
|
|
48,942
|
|
|
23,413
|
|
|
Intangible assets
|
|
5,732
|
|
|
6,380
|
|
|
Other assets
|
|
19,169
|
|
|
17,937
|
|
|
Goodwill
|
|
70,001
|
|
|
79,011
|
|
|
Total Assets
|
|
$
|
1,041,222
|
|
|
$
|
852,670
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Short-term debt
|
|
$
|
151,731
|
|
|
$
|
868
|
|
|
Accounts payable
|
|
52,093
|
|
|
43,206
|
|
|
Salaries and wages
|
|
24,367
|
|
|
41,167
|
|
|
Other liabilities and accrued items
|
|
33,429
|
|
|
32,477
|
|
|
Income taxes
|
|
1,779
|
|
|
1,342
|
|
|
Unearned revenue
|
|
3,003
|
|
|
3,380
|
|
|
Liabilities held for sale
|
|
2,126
|
|
|
—
|
|
|
Total current liabilities
|
|
268,528
|
|
|
122,440
|
|
|
Other long-term liabilities
|
|
10,117
|
|
|
11,560
|
|
|
Operating lease liabilities
|
|
44,830
|
|
|
18,091
|
|
|
Finance lease liabilities
|
|
16,939
|
|
|
17,424
|
|
|
Retirement and post-employment benefits
|
|
32,389
|
|
|
32,466
|
|
|
Unearned income
|
|
57,799
|
|
|
32,891
|
|
|
Long-term income taxes
|
|
3,508
|
|
|
3,451
|
|
|
Deferred income taxes
|
|
2,172
|
|
|
2,410
|
|
|
Long-term debt
|
|
—
|
|
|
1,260
|
|
|
Shareholders’ equity
|
|
|
|
|
|
Serial preferred stock (no par value; 5,000 authorized shares, none issued)
|
|
—
|
|
|
—
|
|
|
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at June 26 and December 31)
|
|
256,756
|
|
|
249,674
|
|
|
Retained earnings
|
|
588,803
|
|
|
589,888
|
|
|
Common stock in treasury
|
|
(198,726)
|
|
|
(186,845)
|
|
|
Accumulated other comprehensive loss
|
|
(45,571)
|
|
|
(45,462)
|
|
|
Other equity
|
|
3,678
|
|
|
3,422
|
|
|
Total shareholders' equity
|
|
604,940
|
|
|
610,677
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
1,041,222
|
|
|
$
|
852,670
|
|
See the notes to these consolidated financial statements.
Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
3,575
|
|
|
$
|
32,446
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
23,522
|
|
|
22,607
|
|
|
Amortization of deferred financing costs in interest expense
|
|
364
|
|
|
472
|
|
|
Stock-based compensation expense (non-cash)
|
|
3,966
|
|
|
3,541
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit) expense
|
|
(234)
|
|
|
4,578
|
|
|
Net pension curtailments and settlements
|
|
94
|
|
|
3,296
|
|
|
Held for sale impairment charges
|
|
10,766
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
5,331
|
|
|
(11,778)
|
|
|
Decrease (increase) in inventory
|
|
(20,585)
|
|
|
1,306
|
|
|
Decrease (increase) in prepaid and other current assets
|
|
(7,264)
|
|
|
(588)
|
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
(7,634)
|
|
|
(18,813)
|
|
|
Increase (decrease) in unearned revenue
|
|
(257)
|
|
|
(88)
|
|
Increase (decrease) in interest and taxes payable
|
|
1,058
|
|
|
(1,130)
|
|
|
Increase (decrease) in unearned income due to customer prepayments
|
|
26,713
|
|
|
—
|
|
|
Domestic pension plan contributions
|
|
—
|
|
|
(3,000)
|
|
|
Other-net
|
|
(2,982)
|
|
|
(2,803)
|
|
|
Net cash provided by operating activities
|
|
36,433
|
|
|
30,046
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Payments for purchase of property, plant, and equipment
|
|
(32,034)
|
|
|
(13,833)
|
|
|
Payments for mine development
|
|
—
|
|
|
(1,591)
|
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant, and equipment
|
|
33
|
|
|
15
|
|
|
Net cash used in investing activities
|
|
(32,001)
|
|
|
(15,409)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt under revolving credit agreement
|
|
150,000
|
|
|
—
|
|
|
Repayment of long-term debt
|
|
(428)
|
|
|
(397)
|
|
|
Principal payments under finance lease obligations
|
|
(626)
|
|
|
(599)
|
|
|
Cash dividends paid
|
|
(4,582)
|
|
|
(4,368)
|
|
|
Repurchase of common stock
|
|
(6,766)
|
|
|
(199)
|
|
|
Payments of withholding taxes for stock-based compensation awards
|
|
(2,025)
|
|
|
(4,763)
|
|
|
Net cash provided by (used in) financing activities
|
|
135,573
|
|
|
(10,326)
|
|
|
Effects of exchange rate changes
|
|
56
|
|
|
(100)
|
|
|
Net change in cash and cash equivalents
|
|
140,061
|
|
|
4,211
|
|
|
Cash and cash equivalents at beginning of period
|
|
125,007
|
|
|
70,645
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
265,068
|
|
|
$
|
74,856
|
|
See notes to these consolidated financial statements.
Materion Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands, except per share amounts)
|
Common Shares
|
|
Common Shares Held in Treasury
|
|
Common
Stock
|
|
Retained
Earnings
|
|
Common
Stock in
Treasury
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Other
Equity
|
|
Total
|
|
Balance at March 27, 2020
|
20,310
|
|
|
(6,838)
|
|
|
$
|
253,967
|
|
|
$
|
584,505
|
|
|
$
|
(198,311)
|
|
|
$
|
(47,173)
|
|
|
$
|
3,490
|
|
|
$
|
596,478
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
6,678
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,678
|
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,602
|
|
|
—
|
|
|
1,602
|
|
|
Cash dividends declared ($0.115 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,337)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,337)
|
|
|
Stock-based compensation activity
|
11
|
|
|
11
|
|
|
2,775
|
|
|
(43)
|
|
|
(259)
|
|
|
—
|
|
|
—
|
|
|
2,473
|
|
|
Payments of withholding taxes for stock-based compensation awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10)
|
|
|
—
|
|
|
—
|
|
|
(10)
|
|
|
Directors’ deferred compensation
|
1
|
|
|
1
|
|
|
14
|
|
|
—
|
|
|
(146)
|
|
|
—
|
|
|
188
|
|
|
56
|
|
|
Balance at June 26, 2020
|
20,322
|
|
|
(6,826)
|
|
|
$
|
256,756
|
|
|
$
|
588,803
|
|
|
$
|
(198,726)
|
|
|
$
|
(45,571)
|
|
|
$
|
3,678
|
|
|
$
|
604,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2019
|
20,354
|
|
|
(6,794)
|
|
|
$
|
241,480
|
|
|
$
|
562,941
|
|
|
$
|
(184,812)
|
|
|
$
|
(57,270)
|
|
|
$
|
4,538
|
|
|
$
|
566,877
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
15,540
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,540
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,996
|
|
|
—
|
|
|
9,996
|
|
|
Pension curtailment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,296
|
|
|
—
|
|
|
3,296
|
|
|
Cash dividends declared ($0.11 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,243)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,243)
|
|
|
Stock-based compensation activity
|
55
|
|
|
55
|
|
|
4,287
|
|
|
(27)
|
|
|
(2,266)
|
|
|
—
|
|
|
—
|
|
|
1,994
|
|
|
Payments of withholding taxes for stock-based compensation awards
|
(12)
|
|
|
(12)
|
|
|
—
|
|
|
—
|
|
|
(785)
|
|
|
—
|
|
|
—
|
|
|
(785)
|
|
|
Directors’ deferred compensation
|
2
|
|
|
2
|
|
|
18
|
|
|
—
|
|
|
639
|
|
|
—
|
|
|
(547)
|
|
|
110
|
|
|
Balance at June 28, 2019
|
20,399
|
|
|
(6,749)
|
|
|
$
|
245,785
|
|
|
$
|
576,211
|
|
|
$
|
(187,224)
|
|
|
$
|
(43,978)
|
|
|
$
|
3,991
|
|
|
$
|
594,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands, except per share amounts)
|
Common Shares
|
|
Common Shares Held in Treasury
|
|
Common
Stock
|
|
Retained
Earnings
|
|
Common
Stock in
Treasury
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Other
Equity
|
|
Total
|
|
Balance at December 31, 2019
|
20,404
|
|
|
(6,744)
|
|
|
$
|
249,674
|
|
|
$
|
589,888
|
|
|
$
|
(186,845)
|
|
|
$
|
(45,462)
|
|
|
$
|
3,422
|
|
|
$
|
610,677
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
3,575
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,575
|
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(109)
|
|
|
—
|
|
|
(109)
|
|
|
Cash dividends declared ($0.225 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,582)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,582)
|
|
|
Stock-based compensation activity
|
110
|
|
|
110
|
|
|
7,037
|
|
|
(78)
|
|
|
(2,902)
|
|
|
—
|
|
|
—
|
|
|
4,057
|
|
|
Payments of withholding taxes for stock-based compensation awards
|
(36)
|
|
|
(36)
|
|
|
—
|
|
|
—
|
|
|
(2,025)
|
|
|
—
|
|
|
—
|
|
|
(2,025)
|
|
|
Repurchase of shares
|
(158)
|
|
|
(158)
|
|
|
—
|
|
|
—
|
|
|
(6,766)
|
|
|
—
|
|
|
—
|
|
|
(6,766)
|
|
|
Directors’ deferred compensation
|
2
|
|
|
2
|
|
|
45
|
|
|
—
|
|
|
(188)
|
|
|
—
|
|
|
256
|
|
|
113
|
|
|
Balance at June 26, 2020
|
20,322
|
|
|
(6,826)
|
|
|
$
|
256,756
|
|
|
$
|
588,803
|
|
|
$
|
(198,726)
|
|
|
$
|
(45,571)
|
|
|
$
|
3,678
|
|
|
$
|
604,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
20,242
|
|
|
(6,906)
|
|
|
$
|
234,704
|
|
|
$
|
548,374
|
|
|
$
|
(175,426)
|
|
|
$
|
(58,234)
|
|
|
$
|
4,488
|
|
|
$
|
553,906
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
32,446
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,446
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,960
|
|
|
—
|
|
|
10,960
|
|
|
Pension curtailment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,296
|
|
|
—
|
|
|
3,296
|
|
|
Cumulative effect of accounting change
|
—
|
|
|
—
|
|
|
—
|
|
|
(179)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(179)
|
|
|
Cash dividends declared ($0.215 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,368)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,368)
|
|
|
Stock-based compensation activity
|
247
|
|
|
247
|
|
|
11,046
|
|
|
(62)
|
|
|
(7,443)
|
|
|
—
|
|
|
—
|
|
|
3,541
|
|
|
Payments of withholding taxes for stock-based compensation awards
|
(87)
|
|
|
(87)
|
|
|
—
|
|
|
—
|
|
|
(4,763)
|
|
|
—
|
|
|
—
|
|
|
(4,763)
|
|
|
Repurchase of shares
|
(5)
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
(199)
|
|
|
—
|
|
|
—
|
|
|
(199)
|
|
|
Directors’ deferred compensation
|
2
|
|
|
2
|
|
|
35
|
|
|
—
|
|
|
607
|
|
|
—
|
|
|
(497)
|
|
|
145
|
|
|
Balance at June 28, 2019
|
20,399
|
|
|
(6,749)
|
|
|
$
|
245,785
|
|
|
$
|
576,211
|
|
|
$
|
(187,224)
|
|
|
$
|
(43,978)
|
|
|
$
|
3,991
|
|
|
$
|
594,785
|
|
See notes to these consolidated financial statements.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note A — Accounting Policies
Basis of Presentation: In management’s opinion, the accompanying consolidated financial statements of Materion Corporation and its subsidiaries (referred to herein as the Company, our, we, or us) contain all of the adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. All adjustments were of a normal and recurring nature. Certain amounts in prior periods have been reclassified to conform to the 2020 consolidated financial statement presentation.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2019 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.
New Pronouncements Adopted: In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses. This ASU requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company adopted this guidance as of January 1, 2020, and the adoption did not have a material effect on the Company’s consolidated financial statements. Accounts receivable were net of an allowance for credit losses of $0.7 million and $0.4 million at June 26, 2020 and December 31, 2019, respectively. The change in the allowance for credit losses includes expense and net write-offs, none of which is significant.
No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.
Note B — Segment Reporting
The Company has the following reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Company’s reportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's chief operating decision maker, in determining how to allocate the Company’s resources and evaluate performance.
Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, beryllia ceramics, and bulk metallic glass materials.
Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.
Precision Coatings produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.
The Other reportable segment includes unallocated corporate costs and assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Performance
Alloys and
Composites
|
|
Advanced Materials
|
|
Precision Coatings
|
|
Other
|
|
Total
|
|
Second Quarter 2020
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
101,614
|
|
|
$
|
150,108
|
|
|
$
|
19,746
|
|
|
$
|
—
|
|
|
$
|
271,468
|
|
|
Intersegment sales
|
|
(213)
|
|
|
8,997
|
|
|
—
|
|
|
—
|
|
|
8,784
|
|
|
Operating profit (loss)
|
|
8,244
|
|
|
4,370
|
|
|
2,091
|
|
|
(5,999)
|
|
|
8,706
|
|
|
Second Quarter 2019
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
135,231
|
|
|
$
|
133,238
|
|
|
$
|
29,374
|
|
|
$
|
—
|
|
|
$
|
297,843
|
|
|
Intersegment sales
|
|
6
|
|
|
19,260
|
|
|
—
|
|
—
|
|
19,266
|
|
|
Operating profit (loss)
|
|
19,328
|
|
|
6,139
|
|
|
3,937
|
|
|
(6,654)
|
|
|
22,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Six Months 2020
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
200,681
|
|
|
$
|
310,273
|
|
|
$
|
38,460
|
|
|
$
|
—
|
|
|
$
|
549,414
|
|
|
Intersegment sales
|
|
2
|
|
|
18,188
|
|
|
—
|
|
|
—
|
|
|
18,190
|
|
|
Operating profit (loss)
|
|
13,035
|
|
|
9,155
|
|
|
(7,501)
|
|
|
(10,546)
|
|
|
4,143
|
|
|
First Six Months 2019
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
262,344
|
|
|
$
|
277,263
|
|
|
$
|
59,677
|
|
|
$
|
—
|
|
|
$
|
599,284
|
|
|
Intersegment sales
|
|
15
|
|
|
36,473
|
|
|
—
|
|
|
—
|
|
|
36,488
|
|
|
Operating profit (loss)
|
|
38,286
|
|
|
13,219
|
|
|
6,014
|
|
|
(13,382)
|
|
|
44,137
|
|
The following table disaggregates revenue for each segment by end market for the second quarter and first six months of 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Performance Alloys and Composites
|
|
Advanced Materials
|
|
Precision Coatings
|
|
Other
|
|
Total
|
|
Second Quarter 2020
|
|
|
|
|
|
|
|
|
|
|
|
End Market
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$
|
1,537
|
|
|
$
|
123,908
|
|
|
$
|
232
|
|
|
$
|
—
|
|
|
$
|
125,677
|
|
|
Industrial
|
|
23,831
|
|
|
8,419
|
|
|
2,574
|
|
|
—
|
|
|
34,824
|
|
|
Aerospace and Defense
|
|
17,952
|
|
|
1,650
|
|
|
4,119
|
|
|
—
|
|
|
23,721
|
|
|
Consumer Electronics
|
|
9,956
|
|
|
21
|
|
|
3,404
|
|
|
—
|
|
|
13,381
|
|
|
Automotive
|
|
16,415
|
|
|
1,186
|
|
|
7
|
|
|
—
|
|
|
17,608
|
|
|
Energy
|
|
5,590
|
|
|
9,327
|
|
|
—
|
|
|
—
|
|
|
14,917
|
|
|
Telecom and Data Center
|
|
12,586
|
|
|
788
|
|
|
—
|
|
|
—
|
|
|
13,374
|
|
|
Other
|
|
13,747
|
|
|
4,809
|
|
|
9,410
|
|
|
—
|
|
|
27,966
|
|
|
Total
|
|
$
|
101,614
|
|
|
$
|
150,108
|
|
|
$
|
19,746
|
|
|
$
|
—
|
|
|
$
|
271,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2019
|
|
|
|
|
|
|
|
|
|
|
|
End Market
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$
|
1,303
|
|
|
$
|
101,634
|
|
|
$
|
93
|
|
|
$
|
—
|
|
|
$
|
103,030
|
|
|
Industrial
|
|
28,585
|
|
|
7,704
|
|
|
3,842
|
|
|
—
|
|
|
40,131
|
|
|
Aerospace and Defense
|
|
26,046
|
|
|
1,125
|
|
|
4,750
|
|
|
—
|
|
|
31,921
|
|
|
Consumer Electronics
|
|
22,663
|
|
|
500
|
|
|
4,430
|
|
|
—
|
|
|
27,593
|
|
|
Automotive
|
|
16,564
|
|
|
1,669
|
|
|
365
|
|
|
—
|
|
|
18,598
|
|
|
Energy
|
|
11,303
|
|
|
16,027
|
|
|
—
|
|
|
—
|
|
|
27,330
|
|
|
Telecom and Data Center
|
|
18,244
|
|
|
713
|
|
|
—
|
|
|
—
|
|
|
18,957
|
|
|
Other
|
|
10,523
|
|
|
3,866
|
|
|
15,894
|
|
|
—
|
|
|
30,283
|
|
|
Total
|
|
$
|
135,231
|
|
|
$
|
133,238
|
|
|
$
|
29,374
|
|
|
$
|
—
|
|
|
$
|
297,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Performance Alloys and Composites
|
|
Advanced Materials
|
|
Precision Coatings
|
|
Other
|
|
Total
|
|
First Six Months 2020
|
|
|
|
|
|
|
|
|
|
|
|
End Market
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$
|
2,443
|
|
|
$
|
244,727
|
|
|
$
|
243
|
|
|
$
|
—
|
|
|
$
|
247,413
|
|
|
Industrial
|
|
47,171
|
|
|
16,781
|
|
|
5,671
|
|
|
—
|
|
|
69,623
|
|
|
Aerospace and Defense
|
|
32,158
|
|
|
3,077
|
|
|
9,228
|
|
|
—
|
|
|
44,463
|
|
|
Consumer Electronics
|
|
24,651
|
|
|
138
|
|
|
6,946
|
|
|
—
|
|
|
31,735
|
|
|
Automotive
|
|
34,579
|
|
|
3,266
|
|
|
24
|
|
|
—
|
|
|
37,869
|
|
|
Energy
|
|
11,019
|
|
|
32,795
|
|
|
—
|
|
|
—
|
|
|
43,814
|
|
|
Telecom and Data Center
|
|
22,575
|
|
|
1,658
|
|
|
—
|
|
|
—
|
|
|
24,233
|
|
|
Other
|
|
26,085
|
|
|
7,831
|
|
|
16,348
|
|
|
—
|
|
|
50,264
|
|
|
Total
|
|
$
|
200,681
|
|
|
$
|
310,273
|
|
|
$
|
38,460
|
|
|
$
|
—
|
|
|
$
|
549,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Six Months 2019
|
|
|
|
|
|
|
|
|
|
|
|
End Market
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$
|
3,268
|
|
|
$
|
206,725
|
|
|
$
|
205
|
|
|
$
|
—
|
|
|
$
|
210,198
|
|
|
Industrial
|
|
55,015
|
|
|
15,632
|
|
|
7,992
|
|
|
—
|
|
|
78,639
|
|
|
Aerospace and Defense
|
|
53,120
|
|
|
2,618
|
|
|
9,622
|
|
|
—
|
|
|
65,360
|
|
|
Consumer Electronics
|
|
36,218
|
|
|
705
|
|
|
7,916
|
|
|
—
|
|
|
44,839
|
|
|
Automotive
|
|
37,277
|
|
|
3,023
|
|
|
587
|
|
|
—
|
|
|
40,887
|
|
|
Energy
|
|
22,397
|
|
|
38,224
|
|
|
—
|
|
|
—
|
|
|
60,621
|
|
|
Telecom and Data Center
|
|
35,836
|
|
|
914
|
|
|
—
|
|
|
—
|
|
|
36,750
|
|
|
Other
|
|
19,213
|
|
|
9,422
|
|
|
33,355
|
|
|
—
|
|
|
61,990
|
|
|
Total
|
|
$
|
262,344
|
|
|
$
|
277,263
|
|
|
$
|
59,677
|
|
|
$
|
—
|
|
|
$
|
599,284
|
|
Intersegment sales are eliminated in consolidation.
Note C — Revenue Recognition
Net sales consist primarily of revenue from the sale of precious and non-precious specialty metals, beryllium and copper-based alloys, beryllium composites, and other products into numerous end markets. The Company requires an agreement with a customer that creates enforceable rights and performance obligations. The Company generally recognizes revenue, in an amount that reflects the consideration to which it expects to be entitled, upon satisfaction of a performance obligation, by transferring control over a product to the customer. Control over the product is generally transferred to the customer when the Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product.
Transaction Price Allocated to Future Performance Obligations: Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at June 26, 2020. Remaining performance obligations include non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
After considering the practical expedient at June 26, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $29.2 million.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Contract Balances: The timing of revenue recognition, billings, and cash collections resulted in the following contract assets and contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
June 26, 2020
|
|
December 31, 2019
|
|
$ change
|
|
% change
|
|
Accounts receivable, trade
|
|
$
|
141,465
|
|
|
$
|
141,168
|
|
|
$
|
297
|
|
|
—
|
%
|
|
Unbilled receivables
|
|
5,218
|
|
|
13,583
|
|
|
(8,365)
|
|
|
(62)
|
%
|
|
Unearned revenue
|
|
3,003
|
|
|
3,380
|
|
|
(377)
|
|
|
(11)
|
%
|
Accounts receivable, trade represents payments due from customers relating to the transfer of the Company’s products and services. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded. Impairment losses (bad debt) incurred relating to our receivables were immaterial during the second quarter and first six months of 2020.
Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are normally billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables.
Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately $3.1 million of the unearned amounts as revenue during the first six months of 2020.
As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component because the period between the transfer of a product or service to a customer and when the customer pays for that product or service will be one year or less. The Company does not include extended payment terms in its contracts with customers.
Note D — Other-net
Other-net for the second quarter and first six months of 2020 and 2019 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
June 26,
|
|
June 28,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Metal consignment fees
|
|
$
|
2,037
|
|
|
$
|
2,225
|
|
|
$
|
4,266
|
|
|
$
|
5,316
|
|
|
Amortization of intangible assets
|
|
106
|
|
|
368
|
|
|
294
|
|
|
758
|
|
|
Foreign currency (gain) loss
|
|
(2,486)
|
|
|
307
|
|
|
(2,548)
|
|
|
384
|
|
|
Net loss on disposal of fixed assets
|
|
9
|
|
|
118
|
|
|
55
|
|
|
142
|
|
|
Other items
|
|
(23)
|
|
|
(127)
|
|
|
(145)
|
|
|
412
|
|
|
Total
|
|
$
|
(357)
|
|
|
$
|
2,891
|
|
|
$
|
1,922
|
|
|
$
|
7,012
|
|
Note E — Restructuring
In the first half of 2020, the Company initiated a restructuring plan in its Performance Alloys and Composites (PAC) segment to close its Warren, Michigan and Fremont, California locations. Costs associated with the plan totaled $2.4 million and $4.6 million in the second quarter and first six months of 2020, respectively. In the second quarter of 2020, these costs included $0.9 million of severance associated with approximately 60 employees and $1.5 million of facility and other related costs. Included in restructuring charges for the first six months of 2020 was $1.4 million of severance associated with approximately 60 employees and $3.1 million of facility and other related costs.
Remaining severance payments of $1.2 million and facility costs of $0.4 million related to these initiatives are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets. The Company expects to incur additional costs related to these initiatives of approximately $4 million in the remainder of 2020.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note F — Income Taxes
The Company's effective tax rate for the second quarter of 2020 and 2019 was 19.5% and 18.8%, respectively, and 19.4% and 18.5% for the first six months of 2020 and 2019, respectively. The effective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion and the research and development credit. Additionally, the effective tax rate for the first six months of 2020 included a net discrete income tax expense of $0.8 million, primarily related to an impairment of goodwill. The effective tax rate for the first six months of 2019 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits from stock-based compensation awards.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. While the Company continues to examine the impacts the CARES Act may have on its business, it does not expect it will have a material impact to its consolidated financial statements.
On July 9, 2020, the U.S. Treasury Department issued final tax regulations related to the foreign-derived intangible income and global intangible low-taxed income (GILTI) provisions. Also, on July 20, 2020 the U.S. Treasury Department released final tax regulations permitting a taxpayer to elect to exclude from its GILTI inclusion items of income subject to a high effective rate of foreign tax. The Company is currently assessing the impact of the new legislation to its consolidated financial statements.
Note G — Earnings Per Share (EPS)
The following table sets forth the computation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
June 26,
|
|
June 28,
|
|
(Thousands, except per share amounts)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Numerator for basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,678
|
|
|
$
|
15,540
|
|
|
$
|
3,575
|
|
|
$
|
32,446
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS:
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
20,317
|
|
|
20,383
|
|
|
20,350
|
|
|
20,326
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Stock appreciation rights
|
|
36
|
|
|
76
|
|
|
36
|
|
|
92
|
|
|
Restricted stock units
|
|
63
|
|
|
76
|
|
|
80
|
|
|
77
|
|
|
Performance-based restricted stock units
|
|
138
|
|
|
131
|
|
|
121
|
|
|
140
|
|
|
Diluted potential common shares
|
|
237
|
|
|
283
|
|
|
237
|
|
|
309
|
|
|
Denominator for diluted EPS:
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding
|
|
20,554
|
|
|
20,666
|
|
|
20,587
|
|
|
20,635
|
|
|
Basic EPS
|
|
$
|
0.33
|
|
|
$
|
0.76
|
|
|
$
|
0.18
|
|
|
$
|
1.60
|
|
|
Diluted EPS
|
|
$
|
0.32
|
|
|
$
|
0.75
|
|
|
$
|
0.17
|
|
|
$
|
1.57
|
|
Adjusted weighted-average shares outstanding-diluted excludes securities totaling 191,500 and 84,509 for the quarters ended June 26, 2020 and June 28, 2019, respectively, and 230,893 and 144,154 for the six months ended June 26, 2020 and June 28, 2019, respectively. These securities primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices less than the average market price of the Company's common shares and were excluded from the dilution calculation as the effect would have been anti-dilutive.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note H — Inventories
Inventories on the Consolidated Balance Sheets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
December 31,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Raw materials and supplies
|
|
$
|
54,720
|
|
|
$
|
35,612
|
|
|
Work in process
|
|
172,678
|
|
|
177,780
|
|
|
Finished goods
|
|
30,304
|
|
|
25,506
|
|
|
Subtotal
|
|
$
|
257,702
|
|
|
$
|
238,898
|
|
|
Less: LIFO reserve balance
|
|
47,855
|
|
|
48,508
|
|
|
Inventories
|
|
$
|
209,847
|
|
|
$
|
190,390
|
|
The liquidation of last in, first out (LIFO) inventory layers increased cost of sales by $0.1 million in the second quarter and first six months of both 2020 and 2019.
The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was $333.9 million as of June 26, 2020 versus $309.3 million as of December 31, 2019.
Note I — Held for Sale
In the first six months of 2020, the Company committed to a plan to sell its Large Area Coatings (LAC) reporting unit within the Precision Coatings segment and determined that it met the criteria to be classified as held for sale. Therefore, its assets and liabilities have been presented as held for sale in the Consolidated Balance Sheet as of June 26, 2020. Assets and liabilities classified as held for sale are measured at the lower of carrying value or fair value less costs to sell.
Before measuring the fair value less costs to sell of the disposal group as a whole, the Company first reviewed individual assets and liabilities to determine if any fair value adjustments were required. The Company recorded a goodwill impairment charge of $9.1 million in the first half of 2020 to write-off the remaining balance of goodwill for the LAC reporting unit. The Company determined fair value based on its expected proceeds to be received, which it concluded is most representative of the value of the assets.
The Company then estimated the fair value of the disposal group as a whole, less costs to sell, and compared the fair value to the remaining carrying value. Based on this review, the Company recorded a $1.7 million asset impairment loss in the first six months of 2020. No additional impairment charges were recorded in the second quarter of 2020.
The assets and liabilities of the LAC reporting unit classified as held for sale at June 26, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
|
|
Accounts receivable, net
|
|
$
|
2,987
|
|
|
Inventories, net
|
|
1,305
|
|
|
Prepaid and other current assets
|
|
8
|
|
|
Property, plant, and equipment - net
|
|
2,508
|
|
|
Operating lease, right-of-use assets
|
|
716
|
|
|
Impairment on carrying value
|
|
(1,713)
|
|
|
Assets held for sale
|
|
$
|
5,811
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
870
|
|
|
Salaries and wages
|
|
245
|
|
|
Other liabilities and accrued items
|
|
228
|
|
|
Operating lease liabilities
|
|
728
|
|
|
Other long term liabilities
|
|
55
|
|
|
Liabilities held for sale
|
|
$
|
2,126
|
|
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Excluding the $9.1 million goodwill impairment charge and $1.7 million asset impairment charge recorded in the first half of 2020, the operating results of the LAC reporting unit were not material to the Company for any period presented.
Note J — Goodwill
A summary of changes in goodwill by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Performance Alloys and Composites
|
|
Advanced Materials
|
|
Precision Coatings
|
|
Total
|
|
Balance at December 31, 2019
|
|
$
|
1,899
|
|
|
$
|
50,190
|
|
|
$
|
26,922
|
|
|
$
|
79,011
|
|
|
Impairment charge
|
|
—
|
|
|
—
|
|
|
(9,053)
|
|
|
(9,053)
|
|
|
Other
|
|
—
|
|
|
43
|
|
|
—
|
|
|
43
|
|
|
Balance at June 26, 2020
|
|
$
|
1,899
|
|
|
$
|
50,233
|
|
|
$
|
17,869
|
|
|
$
|
70,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of the first day of the fourth quarter, or more frequently under certain circumstances. Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment.
Note K — Customer Prepayments
The Company entered into an investment agreement with a customer to procure equipment to manufacture product for the customer. The customer will make prepayments to the Company in the amount of approximately $70 million in the aggregate to enable the Company to purchase and install certain equipment and make necessary infrastructure improvements to supply product to the customer. The Company will own the equipment and be responsible for operating and maintenance costs. The prepayment from the customer will be applied when commercial production of the product is sold and delivered to the customer in connection with a master supply agreement. Accordingly, $31.4 million of prepayments are classified as Unearned Income in the Consolidated Balance Sheet, of which $19.6 million were received during the second quarter of 2020, and the liability is expected to be settled as commercial shipments are made.
Note L — Leases
The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with lease terms ranging up to 25 years. Several operating lease agreements contain options to extend the lease term and/or options for early termination. The lease term consists of the non-cancelable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. The weighted average remaining lease term for the Company's operating and finance leases as of June 26, 2020 was 13.57 years and 19.37 years, respectively.
The discount rate implicit within the leases is generally not determinable, and, therefore, the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for leases is determined based on the lease term in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rate used to measure the Company's operating and finance lease liabilities as of June 26, 2020 was 6.41% and 5.31%, respectively.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The components of operating and finance lease cost for the second quarter and first six months of 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
Six Months Ended
|
|
|
|
(Thousands)
|
|
June 26, 2020
|
|
June 28, 2019
|
|
June 26, 2020
|
|
June 28, 2019
|
|
Components of lease expense
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
2,274
|
|
|
$
|
2,291
|
|
|
$
|
4,532
|
|
|
$
|
5,003
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
350
|
|
|
354
|
|
|
701
|
|
|
710
|
|
|
Interest on lease liabilities
|
|
238
|
|
|
259
|
|
|
482
|
|
|
522
|
|
|
Total lease cost
|
|
$
|
2,862
|
|
|
$
|
2,904
|
|
|
$
|
5,715
|
|
|
$
|
6,235
|
|
Operating lease expense amounted to $2.3 million and $4.5 million during the second quarter and first six months of 2020, respectively, compared to $2.3 million and $5.0 million, respectively, during the same periods of 2019. The Company straight-lines its expense of fixed payments for operating leases over the lease term and expenses the variable lease payments in the period incurred. These variable lease payments are not included in the calculation of right-of-use assets or lease liabilities.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Supplemental balance sheet information related to the Company's operating and finance leases as of June 26, 2020 and December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
Dec. 31,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Supplemental balance sheet information
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
48,942
|
|
|
$
|
23,413
|
|
|
Other liabilities and accrued items
|
|
5,298
|
|
|
6,542
|
|
|
Operating lease liabilities
|
|
44,830
|
|
|
18,091
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
|
Property, plant, and equipment
|
|
$
|
26,258
|
|
|
$
|
26,069
|
|
|
Allowances for depreciation, depletion, and amortization
|
|
(4,035)
|
|
|
(3,570)
|
|
|
Finance lease assets, net
|
|
$
|
22,223
|
|
|
$
|
22,499
|
|
|
Other liabilities and accrued items
|
|
$
|
1,305
|
|
|
$
|
1,265
|
|
|
Finance lease liabilities
|
|
16,939
|
|
|
17,424
|
|
|
Total principal payable on finance leases
|
|
$
|
18,244
|
|
|
$
|
18,689
|
|
Future maturities of the Company's lease liabilities as of June 26, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
|
|
Operating
|
|
(Thousands)
|
|
Leases
|
|
Leases
|
|
2020
|
|
$
|
1,119
|
|
|
$
|
3,986
|
|
|
2021
|
|
2,238
|
|
|
7,841
|
|
|
2022
|
|
2,238
|
|
|
6,846
|
|
|
2023
|
|
1,528
|
|
|
6,548
|
|
|
2024
|
|
1,174
|
|
|
4,704
|
|
|
2025 and thereafter
|
|
21,126
|
|
|
46,967
|
|
|
Total lease payments
|
|
29,423
|
|
|
76,892
|
|
|
Less amount of lease payment representing interest
|
|
11,179
|
|
|
26,764
|
|
Total present value of lease payments
|
|
$
|
18,244
|
|
|
$
|
50,128
|
|
Supplemental cash flow information related to leases for the first six months of 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
(Thousands)
|
|
June 26, 2020
|
|
June 28, 2019
|
|
Supplemental cash flow information
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
7,275
|
|
|
$
|
7,710
|
|
|
Operating cash flows from finance leases
|
|
482
|
|
|
522
|
|
|
Financing cash flows from finance leases
|
|
626
|
|
|
599
|
|
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note M — Pensions and Other Post-employment Benefits
The following is a summary of the net periodic benefit cost for the second quarter and first six months of 2020 and 2019 for the domestic pension plans (which include the defined benefit pension plan and the supplemental retirement plans) and the domestic retiree medical plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Other Benefits
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
Second Quarter Ended
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
June 26,
|
|
June 28,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Components of net periodic benefit cost (credit)
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
1,418
|
|
|
$
|
15
|
|
|
$
|
18
|
|
|
Interest cost
|
|
1,215
|
|
|
1,347
|
|
|
53
|
|
|
99
|
|
|
Expected return on plan assets
|
|
(2,205)
|
|
|
(2,167)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service cost (benefit)
|
|
—
|
|
|
122
|
|
|
(374)
|
|
|
(375)
|
|
|
Amortization of net loss (gain)
|
|
284
|
|
|
627
|
|
|
(83)
|
|
|
(23)
|
|
|
Net periodic benefit (credit) cost
|
|
$
|
(706)
|
|
|
$
|
1,347
|
|
|
$
|
(389)
|
|
|
$
|
(281)
|
|
|
Net pension settlements/curtailments
|
|
94
|
|
|
3,296
|
|
|
—
|
|
|
—
|
|
|
Total net benefit cost
|
|
$
|
(612)
|
|
|
$
|
4,643
|
|
|
$
|
(389)
|
|
|
$
|
(281)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Other Benefits
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
June 26,
|
|
June 28,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Components of net periodic benefit cost (credit)
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
2,758
|
|
|
$
|
31
|
|
|
$
|
35
|
|
|
Interest cost
|
|
2,429
|
|
|
2,904
|
|
|
107
|
|
|
199
|
|
|
Expected return on plan assets
|
|
(4,410)
|
|
|
(4,290)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service cost (benefit)
|
|
—
|
|
|
242
|
|
|
(749)
|
|
|
(749)
|
|
|
Amortization of net loss (gain)
|
|
568
|
|
|
1,431
|
|
|
(166)
|
|
|
(46)
|
|
|
Net periodic benefit (credit) cost
|
|
$
|
(1,413)
|
|
|
$
|
3,045
|
|
|
$
|
(777)
|
|
|
$
|
(561)
|
|
|
Net pension settlements/curtailments
|
|
94
|
|
|
3,296
|
|
|
—
|
|
|
—
|
|
|
Total net benefit cost
|
|
$
|
(1,319)
|
|
|
$
|
6,341
|
|
|
$
|
(777)
|
|
|
$
|
(561)
|
|
The Company did not make any contributions to its domestic defined benefit plan in the first six months of 2020 and made contributions of $3.0 million in the first six months of 2019.
The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit cost in Other non-operating (income) expense.
In May 2019, the Company's Board of Directors approved changes to the U.S. defined benefit pension plan. The Company froze the pay and service amounts used to calculate pension benefits for active participants in the pension plan as of January 1, 2020.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note N — Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the second quarter and first six months of 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and Losses on Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Foreign Currency
|
|
Precious Metals
|
|
Copper
|
|
Total
|
|
Pension and Post-Employment Benefits
|
|
Foreign Currency Translation
|
|
Total
|
|
Balance at March 27, 2020
|
|
$
|
1,214
|
|
|
$
|
(841)
|
|
|
$
|
(330)
|
|
|
$
|
43
|
|
|
$
|
(41,330)
|
|
|
$
|
(5,886)
|
|
|
$
|
(47,173)
|
|
|
Other comprehensive (loss) income before reclassifications
|
|
(201)
|
|
|
(411)
|
|
|
426
|
|
|
(186)
|
|
|
—
|
|
|
1,166
|
|
|
980
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
8
|
|
|
491
|
|
|
132
|
|
|
631
|
|
|
70
|
|
|
—
|
|
|
701
|
|
|
Net current period other comprehensive income (loss) before tax
|
|
(193)
|
|
|
80
|
|
|
558
|
|
|
445
|
|
|
70
|
|
|
1,166
|
|
|
1,681
|
|
|
Deferred taxes
|
|
(44)
|
|
|
18
|
|
|
124
|
|
|
98
|
|
|
(19)
|
|
|
—
|
|
|
79
|
|
|
Net current period other comprehensive income (loss) after tax
|
|
(149)
|
|
|
62
|
|
|
434
|
|
|
347
|
|
|
89
|
|
|
1,166
|
|
|
1,602
|
|
|
Balance at June 26, 2020
|
|
$
|
1,065
|
|
|
$
|
(779)
|
|
|
$
|
104
|
|
|
$
|
390
|
|
|
$
|
(41,241)
|
|
|
$
|
(4,720)
|
|
|
$
|
(45,571)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2019
|
|
$
|
1,663
|
|
|
$
|
(24)
|
|
|
$
|
189
|
|
|
$
|
1,828
|
|
|
$
|
(54,003)
|
|
|
$
|
(5,095)
|
|
|
$
|
(57,270)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(269)
|
|
|
(563)
|
|
|
(580)
|
|
|
(1,412)
|
|
|
14,224
|
|
|
339
|
|
|
13,151
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
(46)
|
|
|
(1)
|
|
|
163
|
|
|
116
|
|
|
3,781
|
|
|
—
|
|
|
3,897
|
|
|
Net current period other comprehensive income (loss) before tax
|
|
(315)
|
|
|
(564)
|
|
|
(417)
|
|
|
(1,296)
|
|
|
18,005
|
|
|
339
|
|
|
17,048
|
|
|
Deferred taxes
|
|
(72)
|
|
|
(130)
|
|
|
(94)
|
|
|
(296)
|
|
|
4,052
|
|
|
—
|
|
|
3,756
|
|
|
Net current period other comprehensive income (loss) after tax
|
|
(243)
|
|
|
(434)
|
|
|
(323)
|
|
|
(1,000)
|
|
|
13,953
|
|
|
339
|
|
|
13,292
|
|
|
Balance at June 28, 2019
|
|
$
|
1,420
|
|
|
$
|
(458)
|
|
|
$
|
(134)
|
|
|
$
|
828
|
|
|
$
|
(40,050)
|
|
|
$
|
(4,756)
|
|
|
$
|
(43,978)
|
|
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and Losses on Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Foreign Currency
|
|
Precious Metals
|
|
Copper
|
|
Total
|
|
Pension and Post-Employment Benefits
|
|
Foreign Currency Translation
|
|
Total
|
|
Balance at December 31, 2019
|
|
$
|
1,324
|
|
|
$
|
(452)
|
|
|
$
|
25
|
|
|
$
|
897
|
|
|
$
|
(41,346)
|
|
|
$
|
(5,013)
|
|
|
$
|
(45,462)
|
|
|
Other comprehensive (loss) income before reclassifications
|
|
(343)
|
|
|
(1,234)
|
|
|
(352)
|
|
|
(1,929)
|
|
|
—
|
|
|
293
|
|
|
(1,636)
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
7
|
|
|
809
|
|
|
453
|
|
|
1,269
|
|
|
46
|
|
|
—
|
|
|
1,315
|
|
|
Net current period other comprehensive income (loss) before tax
|
|
(336)
|
|
|
(425)
|
|
|
101
|
|
|
(660)
|
|
|
46
|
|
|
293
|
|
|
(321)
|
|
|
Deferred taxes
|
|
(77)
|
|
|
(98)
|
|
|
22
|
|
|
(153)
|
|
|
(59)
|
|
|
—
|
|
|
(212)
|
|
|
Net current period other comprehensive income (loss) after tax
|
|
(259)
|
|
|
(327)
|
|
|
79
|
|
|
(507)
|
|
|
105
|
|
|
293
|
|
|
(109)
|
|
|
Balance at June 26, 2020
|
|
$
|
1,065
|
|
|
$
|
(779)
|
|
|
$
|
104
|
|
|
$
|
390
|
|
|
$
|
(41,241)
|
|
|
$
|
(4,720)
|
|
|
$
|
(45,571)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
1,263
|
|
|
$
|
79
|
|
|
$
|
(441)
|
|
|
$
|
901
|
|
|
$
|
(54,543)
|
|
|
$
|
(4,592)
|
|
|
$
|
(58,234)
|
|
|
Other comprehensive (loss) income before reclassifications
|
|
248
|
|
|
(636)
|
|
|
304
|
|
|
(84)
|
|
|
14,224
|
|
|
(164)
|
|
|
13,976
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
(44)
|
|
|
(62)
|
|
|
92
|
|
|
(14)
|
|
|
4,441
|
|
|
—
|
|
|
4,427
|
|
|
Net current period other comprehensive income (loss) before tax
|
|
204
|
|
|
(698)
|
|
|
396
|
|
|
(98)
|
|
|
18,665
|
|
|
(164)
|
|
|
18,403
|
|
|
Deferred taxes
|
|
47
|
|
|
(161)
|
|
|
89
|
|
|
(25)
|
|
|
4,172
|
|
|
—
|
|
|
4,147
|
|
|
Net current period other comprehensive income (loss) after tax
|
|
157
|
|
|
(537)
|
|
|
307
|
|
|
(73)
|
|
|
14,493
|
|
|
(164)
|
|
|
14,256
|
|
|
Balance at June 28, 2019
|
|
$
|
1,420
|
|
|
$
|
(458)
|
|
|
$
|
(134)
|
|
|
$
|
828
|
|
|
$
|
(40,050)
|
|
|
$
|
(4,756)
|
|
|
$
|
(43,978)
|
|
Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Net sales in the Consolidated Statements of Income. Reclassifications from accumulated other comprehensive income of gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note Q for additional details on cash flow hedges.
Reclassifications from accumulated other comprehensive income for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note M for additional details on pension and post-employment expenses.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note O — Stock-based Compensation Expense
Stock-based compensation expense, which includes awards settled in shares and in cash, was $3.1 million and $4.1 million in the second quarter and first six months of 2020, respectively, compared to $3.5 million and $6.2 million, respectively, in the same periods of 2019.
The Company granted 64,636 stock appreciation rights (SARs) to certain employees during the first six months of 2020. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the six months ended June 26, 2020 were $50.95 and $13.67, respectively. The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
1.41
|
%
|
|
Dividend yield
|
|
0.9
|
%
|
|
Volatility
|
|
31.8
|
%
|
|
Expected term (in years)
|
|
4.8
|
The Company granted 62,841 stock-settled restricted stock units (RSUs) to certain employees and 15,976 to non-employee directors during the first six months of 2020. The Company measures the fair value of stock-settled RSUs based on the closing market price of a share of Materion common stock on the date of the grant. The weighted-average fair value per share was $49.34 and $48.42 for stock-settled RSUs granted to employees and non-employee directors, respectively, during the six months ended June 26, 2020. RSUs are expensed over the vesting period of three years for employees and one year for non-employee directors.
The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first six months of 2020. The weighted-average fair value of the stock-settled PRSUs was $57.65 per share and will be expensed over the vesting period of three years. The final payout to the employees for all PRSUs will be based upon the Company’s return on invested capital and the total return to shareholders over the vesting period relative to a peer group’s performance over the same period.
At June 26, 2020, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately $12.6 million, and is expected to be recognized over the remaining vesting period of the respective grants.
Note P — Fair Value of Financial Instruments
The Company measures and records financial instruments at fair value. A hierarchy is used for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 — Quoted market prices in active markets for identical assets and liabilities;
Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect
those that a market participant would use.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of June 26, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Total Carrying Value in the Consolidated Balance Sheets
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation investments
|
|
$
|
2,625
|
|
|
$
|
3,391
|
|
|
$
|
2,625
|
|
|
$
|
3,391
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts
|
|
2,220
|
|
|
188
|
|
|
—
|
|
|
—
|
|
|
2,220
|
|
|
188
|
|
|
—
|
|
|
—
|
|
|
Precious metal swaps
|
|
—
|
|
|
35
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
—
|
|
|
Copper swaps
|
|
137
|
|
|
61
|
|
|
—
|
|
|
—
|
|
|
137
|
|
|
61
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
4,982
|
|
|
$
|
3,675
|
|
|
$
|
2,625
|
|
|
$
|
3,391
|
|
|
$
|
2,357
|
|
|
$
|
284
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation liability
|
|
$
|
2,625
|
|
|
$
|
3,391
|
|
|
$
|
2,625
|
|
|
$
|
3,391
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts
|
|
523
|
|
|
211
|
|
|
—
|
|
|
—
|
|
|
523
|
|
|
211
|
|
|
—
|
|
|
—
|
|
|
Precious metal swaps
|
|
1,013
|
|
|
623
|
|
|
—
|
|
|
—
|
|
|
1,013
|
|
|
623
|
|
|
—
|
|
|
—
|
|
|
Copper swaps
|
|
3
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
4,164
|
|
|
$
|
4,253
|
|
|
$
|
2,625
|
|
|
$
|
3,391
|
|
|
$
|
1,539
|
|
|
$
|
862
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals. The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of June 26, 2020 and December 31, 2019. The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities.
Note Q — Derivative Instruments and Hedging Activity
The Company uses derivative contracts to hedge portions of its foreign currency exposures and uses derivatives to hedge a portion of its precious metal and copper exposures. The objectives and strategies for using derivatives in these areas are as follows:
Foreign Currency. The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar.
The use of forward contracts locks in a firm rate and eliminates any downside from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options, known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.
The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and instruments to use to hedge exposures. Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed. Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market rate movements.
Precious Metals. The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price. The price paid by the Company forms the basis for the price charged to the customer. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutions that charge the Company a financing fee based upon the current value of the metal on hand.
In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced.
The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be purchased, thereby reducing the exposure to adverse movements in the price of the metal. The Company may also enter into hedges to mitigate the risk relating to the prices of the metals which we process or refine.
In certain circumstances, the Company also refines metal from the customer and may retain a portion of the refined metal as payment. The Company may elect to enter into a forward contract to sell precious metal to reduce the Company's price exposure.
The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.
Copper. The Company also uses copper in its production processes. When possible, fluctuations in the purchase price of copper are passed on to customers in the form of price adders or reductions. While over time the Company's price exposure to copper is generally in balance, there can be a lag between the change in the Company's cost and the pass-through to its customers, resulting in higher or lower margins in a given period. To mitigate this impact, the Company hedges a portion of this pricing risk.
The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
All derivatives are recorded on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) until the hedged item is recognized in earnings. The ineffective portion of a derivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and balance sheet classification as of June 26, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2020
|
|
|
|
December 31, 2019
|
|
|
|
(Thousands)
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
|
Foreign currency forward contracts
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
152,803
|
|
|
$
|
2,198
|
|
|
$
|
13,734
|
|
|
$
|
95
|
|
|
Other liabilities and accrued items
|
|
9,786
|
|
|
63
|
|
|
5,757
|
|
|
16
|
|
These outstanding foreign currency derivatives were related to balance sheet hedges, intercompany loans, and a foreign currency hedge for the purchase of Optics Balzers AG (Optics Balzers), which the Company agreed to buy in June 2020. See Note T for additional information. Other-net included $1.7 million and $2.3 million of foreign currency gains relating to these derivatives during the second quarter and first six months of 2020, respectively.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of June 26, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2020
|
|
|
|
December 31, 2019
|
|
|
|
(Thousands)
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
|
Prepaid expenses
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - yen
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,025
|
|
|
$
|
10
|
|
|
Foreign currency forward contracts - euro
|
|
5,084
|
|
|
22
|
|
|
3,466
|
|
|
83
|
|
|
Precious metal swaps
|
|
—
|
|
|
—
|
|
|
1,116
|
|
|
34
|
|
|
Copper swaps
|
|
2,235
|
|
|
137
|
|
|
1,951
|
|
|
61
|
|
|
Total
|
|
7,319
|
|
|
159
|
|
|
7,558
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
Precious metal swaps
|
|
—
|
|
|
—
|
|
|
157
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities and accrued items
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - yen
|
|
2,031
|
|
|
25
|
|
|
2,355
|
|
|
12
|
|
|
Foreign currency forward contracts - euro
|
|
11,974
|
|
|
420
|
|
|
15,686
|
|
|
183
|
|
|
Precious metal swaps
|
|
5,910
|
|
|
1,004
|
|
|
7,034
|
|
|
618
|
|
|
Copper swaps
|
|
293
|
|
|
3
|
|
|
1,266
|
|
|
28
|
|
|
Total
|
|
20,208
|
|
|
1,452
|
|
|
26,341
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - yen
|
|
112
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Foreign currency forward contracts - euro
|
|
553
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
Precious metal swaps
|
|
172
|
|
|
9
|
|
|
149
|
|
|
5
|
|
|
Total
|
|
837
|
|
|
24
|
|
|
149
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,364
|
|
|
$
|
1,317
|
|
|
$
|
34,205
|
|
|
$
|
657
|
|
All of these contracts were designated and effective as cash flow hedges. The Company expects to relieve substantially the entire balance in OCI as of June 26, 2020 to the Consolidated Statements of Income within the next 15-month period. Refer to Note N for additional OCI details.
The following table summarizes the amounts reclassified from accumulated other comprehensive income relating to the hedging relationship of the Company’s outstanding derivatives designated as cash flow hedges and income statement classification as of the second quarter and first six months of 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
Second Quarter Ended
|
|
(Thousands)
|
|
|
|
June 26, 2020
|
|
June 28, 2019
|
|
Hedging relationship
|
|
Line item
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Net sales
|
|
$
|
8
|
|
|
$
|
(46)
|
|
|
Precious metal swaps
|
|
Cost of sales
|
|
491
|
|
|
(1)
|
|
|
Copper swaps
|
|
Cost of sales
|
|
132
|
|
|
163
|
|
|
Total
|
|
|
|
$
|
631
|
|
|
$
|
116
|
|
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Six Months Ended
|
|
(Thousands)
|
|
|
|
June 26, 2020
|
|
June 28, 2019
|
|
Hedging relationship
|
|
Line item
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Net sales
|
|
$
|
7
|
|
|
$
|
(44)
|
|
|
Precious metal swaps
|
|
Cost of sales
|
|
809
|
|
|
(62)
|
|
|
Copper swaps
|
|
Cost of sales
|
|
453
|
|
|
92
|
|
|
Total
|
|
|
|
$
|
1,269
|
|
|
$
|
(14)
|
|
Note R — Contingencies
Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note R ("Contingencies and Commitments") in the Company's 2019 Annual Report on Form 10-K.
Two beryllium cases were outstanding as of June 26, 2020. The Company does not expect the resolution of this matter to have a material impact on the consolidated financial statements.
Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matters. To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
Environmental Proceedings. The Company has an active environmental compliance program and records reserves for the probable cost of identified environmental remediation projects. The reserves are established based upon analyses conducted by the Company’s engineers and outside consultants and are adjusted from time to time based upon ongoing studies, the difference between actual and estimated costs, and other factors. The reserves may also be affected by rulings and negotiations with regulatory agencies. The undiscounted reserve balance was $6.0 million and $5.9 million at June 26, 2020 and December 31, 2019, respectively. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.
Note S — Debt
In the second quarter of 2020, the Company borrowed $150.0 million under its revolving credit facility, and the remaining borrowing capacity as of June 26, 2020 was $179.1 million. The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2024.
Note T — Subsequent Event
In July 2020, the Company completed the acquisition of Optics Balzers, an industry leader in thin film optical coatings, with a final transaction value of approximately $160 million, including the assumption of debt. The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility in the second quarter of 2020.
|
|
|
|
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
OVERVIEW
We are an integrated producer of high-performance advanced engineered materials used in a variety of electrical, electronic, thermal, and structural applications. Our products are sold into numerous end markets, including semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data center.
Coronavirus (COVID-19) Second Quarter 2020 Update
The significant macroeconomic impact of the ongoing COVID-19 pandemic impacted several of the Company’s end markets beginning in the first half of 2020 primarily in the form of reduced demand, particularly in the consumer electronics, automotive, energy, aerospace and defense, and industrial end markets. In the first six months of 2020, the Company recorded additional reserves for slow-moving and excess inventory of approximately $1.3 million related to the collapse in demand in the oil and gas industry. The Company also reviewed for any other potential impairment indicators and did not identify any. We may temporarily shut down our facilities in response to reduced demand, due to employees being impacted by COVID-19, or changes in government policy. The Company is not experiencing any significant supply chain disruptions. We expect reduced demand to continue at least through the remainder of 2020, but the extent and timing cannot be reasonably estimated due to the evolving nature of this pandemic.
In the second quarter of 2020, the Company incurred $2.7 million of expense related to COVID-19. These costs were primarily related to premium pay for production workers who were deemed essential to work onsite during the pandemic.
The impact of the COVID-19 pandemic is fluid and continues to evolve, and, therefore, we cannot predict the extent to which our business, results of operations, financial condition, or cash flows will ultimately be impacted.
The Company suspended its share buyback program in the first quarter of 2020. In addition, the Company is currently evaluating the impact of the CARES Act. See Note F to the Consolidated Financial Statements for additional discussion.
From a liquidity perspective, we believe we are well positioned to manage through this global crisis. In order to ensure we have more than adequate liquidity, we borrowed $150.0 million under the revolving credit facility in April 2020. We ended the second quarter with total cash of $265.1 million and $151.8 million of total debt, or in a net cash position of $113.3 million. In addition, we had $179.1 million of available borrowings under our revolving credit facility as of the end of the second quarter.
Additionally, in July 2020, we completed the acquisition of Optics Balzers for a total transaction value of approximately $160 million, including the assumption of debt. The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility in the second quarter of 2020.
RESULTS OF OPERATIONS
Second Quarter
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
(Thousands, except per share data)
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
271,468
|
|
|
$
|
297,843
|
|
|
$
|
(26,375)
|
|
|
(9)
|
%
|
|
|
|
|
|
|
|
|
|
Value-added sales
|
|
161,569
|
|
|
194,896
|
|
|
(33,327)
|
|
|
(17)
|
%
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
48,090
|
|
|
69,594
|
|
|
(21,504)
|
|
|
(31)
|
%
|
|
|
|
|
|
|
|
|
|
Gross margin as a % of value-added sales
|
|
30
|
%
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative (SG&A) expense
|
|
32,852
|
|
|
39,891
|
|
|
(7,039)
|
|
|
(18)
|
%
|
|
|
|
|
|
|
|
|
|
SG&A expense as a % of value-added sales
|
|
20
|
%
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (R&D) expense
|
|
4,502
|
|
|
4,062
|
|
|
440
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
R&D expense as a % of value-added sales
|
|
3
|
%
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expense
|
|
2,387
|
|
|
—
|
|
|
2,387
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Other—net
|
|
(357)
|
|
|
2,891
|
|
|
(3,248)
|
|
|
(112)
|
%
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
8,706
|
|
|
22,750
|
|
|
(14,044)
|
|
|
(62)
|
%
|
|
|
|
|
|
|
|
|
|
Other non-operating (income) expense—net
|
|
(851)
|
|
|
3,112
|
|
|
(3,963)
|
|
|
(127)
|
%
|
|
|
|
|
|
|
|
|
|
Interest expense—net
|
|
1,259
|
|
|
500
|
|
|
759
|
|
|
152
|
%
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
8,298
|
|
|
19,138
|
|
|
(10,840)
|
|
|
(57)
|
%
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
1,620
|
|
|
3,598
|
|
|
(1,978)
|
|
|
(55)
|
%
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,678
|
|
|
$
|
15,540
|
|
|
$
|
(8,862)
|
|
|
(57)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.32
|
|
|
$
|
0.75
|
|
|
$
|
(0.43)
|
|
|
(57)
|
%
|
|
|
|
|
|
|
|
|
N/A = Not Applicable
Net sales of $271.5 million in the second quarter of 2020 decreased $26.3 million from $297.8 million in the second quarter of 2019. Net sales growth in our Advanced Materials segment was more than offset by decreased net sales in our Performance Alloys and Composites and Precision Coatings segments driven by lower sales volumes. The change in precious metal and copper prices favorably impacted net sales during the second quarter of 2020 by $19.3 million.
Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices and changes in mix due to customer-supplied material. Internally, we manage our business on this basis, and a reconciliation of net sales, the most directly comparable GAAP financial measure, to value-added sales is included herein. Value-added sales of $161.6 million in the second quarter of 2020 decreased $33.3 million, or 17%, compared to the second quarter of 2019. The increase in semiconductor end market sales was more than offset by the decrease in value-added sales due to reduced demand in the consumer electronics, aerospace and defense, energy, industrial, and telecom and data center end markets.
Gross margin in the second quarter of 2020 was $48.1 million, which was down 31% compared to the second quarter of 2019. Gross margin expressed as a percentage of value-added sales decreased to 30% in the second quarter of 2020 from 36% in the second quarter of 2019. The decrease was primarily driven by lower volumes.
SG&A expense was $32.9 million in the second quarter of 2020, compared to $39.9 million in the second quarter of 2019. The decrease in SG&A expense for the second quarter of 2020 was primarily driven by lower variable compensation expense and cost management actions. Expressed as a percentage of value-added sales, SG&A expense was 20% in the second quarters of both 2020 and 2019.
R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications. R&D expense accounted for 3% and 2% of value-added sales in the second quarter of 2020 and 2019, respectively. The increase reflects additional investment in new product and application development.
Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the second quarter of 2020, we recorded $2.4 million of restructuring charges in our Performance Alloys and Composites segment
related to the closure of our Warren, Michigan and Fremont, California facilities. Refer to Note E to the Consolidated Financial Statements for additional discussion.
Other-net was $0.4 million of income in the second quarter of 2020, or a $3.2 million decrease from the second quarter of 2019, which was primarily driven by a $2.2 million foreign currency hedge gain realized in the second quarter of 2020. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.
Other non-operating (income) expense-net includes components of pension and post-retirement expense other than service costs and a non-cash pre-tax pension curtailment charge of $3.3 million associated with the pension plan amendment to freeze the pay and service amounts used to calculate pension benefits during the second quarter of 2019. Refer to Note M to the Consolidated Financial Statements for details of the components.
Interest expense-net was $1.3 million and $0.5 million in the second quarter of 2020 and 2019, respectively. The increase in interest expense is primarily due to higher borrowings under our revolving credit facility.
Income tax expense for the second quarter of 2020 was $1.6 million compared to $3.6 million in the second quarter of 2019. The effective tax rate for the second quarter of 2020 was 19.5% compared to 18.8% in the prior-year period. The effective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion and the research and development credit. Refer to Note F to the Consolidated Financial Statements for further details on income taxes.
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
(Thousands, except per share data)
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
549,414
|
|
|
$
|
599,284
|
|
|
$
|
(49,870)
|
|
|
(8)
|
%
|
|
Value-added sales
|
|
320,235
|
|
|
382,577
|
|
|
(62,342)
|
|
|
(16)
|
%
|
|
Gross margin
|
|
93,665
|
|
|
138,906
|
|
|
(45,241)
|
|
|
(33)
|
%
|
|
Gross margin as a % of value-added sales
|
|
29
|
%
|
|
36
|
%
|
|
|
|
|
|
SG&A expense
|
|
63,596
|
|
|
79,955
|
|
|
(16,359)
|
|
|
(20)
|
%
|
|
SG&A expense as a % of value-added sales
|
|
20
|
%
|
|
21
|
%
|
|
|
|
|
|
R&D expense
|
|
8,687
|
|
|
7,802
|
|
|
885
|
|
|
11
|
%
|
|
R&D expense as a % of value-added sales
|
|
3
|
%
|
|
2
|
%
|
|
|
|
|
|
Goodwill impairment charges
|
|
9,053
|
|
|
—
|
|
|
9,053
|
|
|
N/A
|
|
Held for sale impairment charges
|
|
1,713
|
|
|
—
|
|
|
1,713
|
|
|
N/A
|
|
Restructuring expense
|
|
4,551
|
|
|
—
|
|
|
4,551
|
|
|
N/A
|
|
Other—net
|
|
1,922
|
|
|
7,012
|
|
|
(5,090)
|
|
|
(73)
|
%
|
|
Operating profit
|
|
4,143
|
|
|
44,137
|
|
|
(39,994)
|
|
|
(91)
|
%
|
|
Other non-operating (income) expense—net
|
|
(1,795)
|
|
|
3,357
|
|
|
(5,152)
|
|
|
(153)
|
%
|
|
Interest expense—net
|
|
1,505
|
|
|
966
|
|
|
539
|
|
|
56
|
%
|
|
Income before income taxes
|
|
4,433
|
|
|
39,814
|
|
|
(35,381)
|
|
|
(89)
|
%
|
|
Income tax expense
|
|
858
|
|
|
7,368
|
|
|
(6,510)
|
|
|
(88)
|
%
|
|
Net income
|
|
$
|
3,575
|
|
|
$
|
32,446
|
|
|
$
|
(28,871)
|
|
|
(89)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.17
|
|
|
$
|
1.57
|
|
|
$
|
(1.40)
|
|
|
(89)
|
%
|
N/A = Not Applicable
Net sales of $549.4 million in the first six months of 2020 decreased $49.9 million from $599.3 million in the first six months of 2019. Net sales growth in our Advanced Materials segment was more than offset by decreased net sales in our Performance Alloys and Composites and Precision Coatings segments driven by lower sales volumes. The change in precious metal and copper prices favorably impacted net sales during the first six months of 2020 by $39.2 million.
Value-added sales of $320.2 million in the first six months of 2020 decreased $62.3 million, or 16%, compared to the first six months of 2019. The increase in semiconductor end market sales was more than offset by the decrease in value-added sales due to reduced demand in the aerospace and defense, energy, telecom and data center, and industrial end markets.
Gross margin in the first half of 2020 was $93.7 million, which was down 33% compared to the first six months of 2019. Gross margin expressed as a percentage of value-added sales decreased to 29% in the first half of 2020 from 36% in the first half of 2019. The decrease was primarily driven by lower volumes, as well as a $1.3 million charge to reserve for slow moving and excess inventory related to the collapse in demand in the oil and gas industry.
SG&A expense was $63.6 million in the first six months of 2020, compared to $80.0 million in the first six months of 2019. The decrease in SG&A expense for the first half of 2020 was primarily driven by lower variable compensation expense and cost management actions. Expressed as a percentage of value-added sales, SG&A expense was 20% and 21% in the first six months of 2020 and 2019, respectively.
R&D expense accounted for 3% and 2% of value-added sales in the first six months of 2020 and 2019, respectively. The increase reflects additional investment in new product and application development.
Goodwill and Held for sale impairment charges includes non-recurring charges relating to goodwill and other assets in our Precision Coatings segment. Refer to Notes I and J to the Consolidated Financial Statements for additional discussion.
Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first six months of 2020, we recorded $4.6 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities. Refer to Note E to the Consolidated Financial Statements for additional discussion.
Other-net was $1.9 million of expense in the first six months of 2020, or a $5.1 million decrease from the first six months of 2019. The decrease in Other-net was primarily driven by a $2.2 million foreign exchange hedge gain realized in the second quarter of 2020, as well as reduced metal consignment fees in the first half of 2020 compared to the first half of 2019. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.
Other non-operating (income) expense-net includes components of pension and post-retirement expense other than service costs and a non-cash pre-tax pension curtailment charge of $3.3 million associated with the pension plan amendment to freeze the pay and service amounts used to calculate pension benefits during the second quarter of 2019. Refer to Note M to the Consolidated Financial Statements for details of the components.
Interest expense-net was $1.5 million and $1.0 million in the first six months of 2020 and 2019, respectively. The increase is primarily due to higher borrowings under our revolving credit facility.
Income tax expense for the first six months of 2020 was $0.9 million compared to $7.4 million in the first six months of 2019. The effective tax rate for the first six months of 2020 was 19.4% compared to 18.5% in the prior-year period. The effective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion and the research and development credit. Additionally, the effective tax rate for the first six months of 2020 included a net discrete income tax expense of $0.8 million primarily related to an impairment of goodwill. The effective tax rate for the first six months of 2019 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits from stock-based compensation awards. Refer to Note F to the Consolidated Financial Statements for further details on income taxes.
Value-Added Sales - Reconciliation of Non-GAAP Financial Measure
A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the second quarter and first six months of 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
June 26,
|
|
June 28,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
Performance Alloys and Composites
|
|
$
|
101,614
|
|
|
$
|
135,231
|
|
|
$
|
200,681
|
|
|
$
|
262,344
|
|
|
Advanced Materials
|
|
150,108
|
|
|
133,238
|
|
|
310,273
|
|
|
277,263
|
|
|
Precision Coatings
|
|
19,746
|
|
|
29,374
|
|
|
38,460
|
|
|
59,677
|
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
271,468
|
|
|
$
|
297,843
|
|
|
$
|
549,414
|
|
|
$
|
599,284
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: pass-through metal costs
|
|
|
|
|
|
|
|
|
|
Performance Alloys and Composites
|
|
$
|
11,858
|
|
|
$
|
19,988
|
|
|
$
|
27,210
|
|
|
$
|
37,500
|
|
|
Advanced Materials
|
|
95,443
|
|
|
74,931
|
|
|
196,420
|
|
|
161,449
|
|
|
Precision Coatings
|
|
1,968
|
|
|
6,285
|
|
|
3,693
|
|
|
14,051
|
|
|
Other
|
|
630
|
|
|
1,743
|
|
|
1,856
|
|
|
3,707
|
|
|
Total
|
|
$
|
109,899
|
|
|
$
|
102,947
|
|
|
$
|
229,179
|
|
|
$
|
216,707
|
|
|
|
|
|
|
|
|
|
|
|
|
Value-added sales
|
|
|
|
|
|
|
|
|
|
Performance Alloys and Composites
|
|
$
|
89,756
|
|
|
$
|
115,243
|
|
|
$
|
173,471
|
|
|
$
|
224,844
|
|
|
Advanced Materials
|
|
54,665
|
|
|
58,307
|
|
|
113,853
|
|
|
115,814
|
|
|
Precision Coatings
|
|
17,778
|
|
|
23,089
|
|
|
34,767
|
|
|
45,626
|
|
|
Other
|
|
(630)
|
|
|
(1,743)
|
|
|
(1,856)
|
|
|
(3,707)
|
|
|
Total
|
|
$
|
161,569
|
|
|
$
|
194,896
|
|
|
$
|
320,235
|
|
|
$
|
382,577
|
|
The cost of gold, silver, platinum, palladium, and copper can be quite volatile. Our pricing policy is to directly pass the cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations. Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability.
Internally, management 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 metal costs from net sales. Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted from net sales when calculating value-added sales. Non-GAAP financial measures, such as value-added sales, have inherent limitations and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal.
By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review our net sales with and without the impact of the pass-through metals.
Segment Results
The Company consists of four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Other reportable segment includes unallocated corporate costs.
Performance Alloys and Composites
Second Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
|
|
|
|
Net sales
|
|
$
|
101,614
|
|
|
$
|
135,231
|
|
|
$
|
(33,617)
|
|
|
(25)
|
%
|
|
|
|
|
|
Value-added sales
|
|
89,756
|
|
|
115,243
|
|
|
(25,487)
|
|
|
(22)
|
%
|
|
|
|
|
|
Operating profit
|
|
8,244
|
|
|
19,328
|
|
|
(11,084)
|
|
|
(57)
|
%
|
|
|
|
|
Net sales from the Performance Alloys and Composites segment of $101.6 million in the second quarter of 2020 were 25% lower than net sales of $135.2 million in the second quarter of 2019. The decrease was due to reduced sales into all major end markets, with the largest declines in aerospace and defense, consumer electronics, and telecom and data center.
Value-added sales of $89.8 million in the second quarter of 2020 were 22% lower than value-added sales of $115.2 million in the second quarter of 2019. The decrease in value-added sales was due to the same factors driving the decrease in net sales.
Performance Alloys and Composites generated operating profit of $8.2 million in the second quarter of 2020 compared to $19.3 million in the second quarter of 2019. The decrease in operating profit was primarily due to reduced sales volumes as well as restructuring charges of $2.4 million in the second quarter of 2020 related to the closure of our Warren, Michigan and Fremont, California facilities.
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
|
|
|
|
Net sales
|
|
$
|
200,681
|
|
|
$
|
262,344
|
|
|
$
|
(61,663)
|
|
|
(24)
|
%
|
|
|
|
|
|
Value-added sales
|
|
173,471
|
|
|
224,844
|
|
|
(51,373)
|
|
|
(23)
|
%
|
|
|
|
|
|
Operating profit
|
|
13,035
|
|
|
38,286
|
|
|
(25,251)
|
|
|
(66)
|
%
|
|
|
|
|
Net sales from the Performance Alloys and Composites segment of $200.7 million in the first six months of 2020 were 24% lower than net sales of $262.3 million in the first six months of 2019. The decrease was due to reduced sales into all major end markets, with the largest declines in aerospace and defense, telecom and data center, and energy.
Value-added sales of $173.5 million in the first six months of 2020 were 23% lower than value-added sales of $224.8 million in the first six months of 2019. The decrease in value-added sales was due to the same factors driving the decrease in net sales.
Performance Alloys and Composites generated operating profit of $13.0 million in the first half of 2020 compared to $38.3 million in the first half of 2019. The decrease in operating profit was primarily due to reduced sales volumes as well as restructuring charges of $4.6 million in the first half of 2020 related to the closure of our Warren, Michigan and Fremont, California facilities. In addition, we recorded $1.3 million of additional reserves for slow-moving and excess inventory related to the collapse in demand in the oil and gas industry.
Advanced Materials
Second Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
|
|
|
|
Net sales
|
|
$
|
150,108
|
|
|
$
|
133,238
|
|
|
16,870
|
|
|
13
|
%
|
|
|
|
|
|
Value-added sales
|
|
54,665
|
|
|
58,307
|
|
|
(3,642)
|
|
|
(6)
|
%
|
|
|
|
|
|
Operating profit
|
|
4,370
|
|
|
6,139
|
|
|
(1,769)
|
|
|
(29)
|
%
|
|
|
|
|
Net sales from the Advanced Materials segment of $150.1 million in the second quarter of 2020 were 13% higher than net sales of $133.2 million in the second quarter of 2019. The increase in net sales was primarily due to the impact of higher pass-through metal prices of $19.8 million, partially offset by a lower mix of precious metal-containing products and the mix of customer-supplied material.
Value-added sales of $54.7 million in the second quarter of 2020 decreased 6% compared to value-added sales of $58.3 million in the second quarter of 2019. Higher semiconductor end market sales were more than offset by decreased value-added sales into the energy and industrial markets.
The Advanced Materials segment generated operating profit of $4.4 million in the second quarter of 2020 compared to $6.1 million in the second quarter of 2019. Decreased operating profit in the second quarter of 2020, compared to the second quarter of 2019, was the result of lower sales volumes and reduced manufacturing yields.
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
|
|
|
|
Net sales
|
|
$
|
310,273
|
|
|
$
|
277,263
|
|
|
33,010
|
|
|
12
|
%
|
|
|
|
|
|
Value-added sales
|
|
113,853
|
|
|
115,814
|
|
|
(1,961)
|
|
|
(2)
|
%
|
|
|
|
|
|
Operating profit
|
|
9,155
|
|
|
13,219
|
|
|
(4,064)
|
|
|
(31)
|
%
|
|
|
|
|
Net sales from the Advanced Materials segment of $310.3 million in the first six months of 2020 were 12% higher than net sales of $277.3 million in the first six months of 2019. The increase in net sales was primarily due to the impact of higher pass-through metal prices of $39.1 million, partially offset by a lower mix of precious metal-containing products and the mix of customer-supplied material.
Value-added sales of $113.9 million in the first six months of 2020 were down 2% compared to value-added sales of $115.8 million in the first six months of 2019. Higher semiconductor end market sales were more than offset by decreased value-added sales into the energy and industrial markets.
The Advanced Materials segment generated operating profit of $9.2 million in the first six months of 2020 compared to $13.2 million in the first six months of 2019. Decreased operating profit in the first half of 2020, compared to the first half of 2019, was the result of unfavorable sales mix and reduced manufacturing yields primarily related to new product introductions.
Precision Coatings
Second Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Second Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
|
|
|
|
Net sales
|
|
$
|
19,746
|
|
|
$
|
29,374
|
|
|
(9,628)
|
|
|
(33)
|
%
|
|
|
|
|
|
Value-added sales
|
|
17,778
|
|
|
23,089
|
|
|
(5,311)
|
|
|
(23)
|
%
|
|
|
|
|
|
Operating profit
|
|
2,091
|
|
|
3,937
|
|
|
(1,846)
|
|
|
(47)
|
%
|
|
|
|
|
Net sales from the Precision Coatings segment of $19.7 million in the second quarter of 2020 decreased 33% compared to net sales of $29.4 million in the second quarter of 2019 primarily due to reduced sales volumes and lower mix of precious metal-containing products.
Value-added sales of $17.8 million in the second quarter of 2020 decreased 23% compared to value-added sales of $23.1 million in the second quarter of 2019. Growth in optical filters was more than offset by a reduction in value-added sales related to blood glucose test strip products.
The Precision Coatings segment generated an operating profit of $2.1 million in the second quarter of 2020, compared to $3.9 million in the second quarter of 2019. The decrease in operating profit was driven by lower sales of blood glucose test strip products.
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
|
|
|
|
Net sales
|
|
$
|
38,460
|
|
|
$
|
59,677
|
|
|
(21,217)
|
|
|
(36)
|
%
|
|
|
|
|
|
Value-added sales
|
|
34,767
|
|
|
45,626
|
|
|
(10,859)
|
|
|
(24)
|
%
|
|
|
|
|
|
Operating (loss) profit
|
|
(7,501)
|
|
|
6,014
|
|
|
(13,515)
|
|
|
(225)
|
%
|
|
|
|
|
Net sales from the Precision Coatings segment of $38.5 million in the first half of 2020 decreased 36% compared to net sales of $59.7 million in the first half of 2019 primarily due to reduced sales volumes and lower mix of precious metal-containing products.
Value-added sales of $34.8 million in the first half of 2020 decreased 24% compared to value-added sales of $45.6 million in the first half of 2019. The decrease is primarily due to a reduction in value-added sales related to blood glucose test strip products.
The Precision Coatings segment generated an operating loss of $7.5 million in the first half of 2020, compared to operating profit of $6.0 million in the first half of 2019. The operating loss was driven by a goodwill impairment charge of $9.1 million and a held-for-sale impairment charge of $1.7 million related to our LAC reporting unit, which met the criteria to be classified as held for sale as of March 27, 2020.
Other
Second Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Second Quarter Ended
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
%
|
|
Value-added sales
|
|
(630)
|
|
|
(1,743)
|
|
|
1,113
|
|
|
(64)
|
%
|
|
Operating loss
|
|
(5,999)
|
|
|
(6,654)
|
|
|
655
|
|
|
(10)
|
%
|
The Other reportable segment in total includes unallocated corporate costs.
Corporate costs of $6.0 million in the second quarter of 2020 decreased $0.7 million as compared to $6.7 million in the second quarter of 2019. Corporate costs accounted for 4% and 3% of Company-wide value-added sales in the second quarters of 2020 and 2019, respectively. The decrease in corporate costs in the second quarter of 2020 compared to the second quarter of 2019 is primarily related to lower variable compensation expense and cost management actions.
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
%
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
%
|
|
Value-added sales
|
|
(1,856)
|
|
|
(3,707)
|
|
|
1,851
|
|
|
(50)
|
%
|
|
Operating loss
|
|
(10,546)
|
|
|
(13,382)
|
|
|
2,836
|
|
|
(21)
|
%
|
Corporate costs of $10.5 million in the first half of 2020 decreased $2.8 million as compared to $13.4 million in the first half of 2019. Corporate costs accounted for 3% of Company-wide value-added sales in the first half of both 2020 and 2019. The decrease in corporate costs in the first half of 2020 compared to the first half of 2019 is primarily related to lower variable compensation expense and cost management actions.
FINANCIAL POSITION
Cash Flow
A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
June 28,
|
|
$
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Change
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
36,433
|
|
|
$
|
30,046
|
|
|
$
|
6,387
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(32,001)
|
|
|
(15,409)
|
|
|
(16,592)
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
135,573
|
|
|
(10,326)
|
|
|
145,899
|
|
|
|
|
|
|
Effects of exchange rate changes
|
|
56
|
|
|
(100)
|
|
|
156
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
140,061
|
|
|
$
|
4,211
|
|
|
$
|
135,850
|
|
|
|
|
|
Net cash provided by operating activities totaled $36.4 million in the first six months of 2020 versus $30.0 million in the prior-year period. Working capital requirements used cash of $22.9 million and $29.3 million during the first six months of 2020 and 2019, respectively. Cash flows provided by accounts receivable were $17.1 million higher than the prior-year period. Three-month trailing days sales outstanding was approximately 45 days at June 26, 2020 and 47 days at December 31, 2019. Cash flows used for inventory were $20.6 million in the first six months of 2020, compared to providing $1.3 million of cash in the prior-year period primarily in our Performance Alloys and Composites and Advanced Materials segments. Cash flows used for accounts payable and accrued expenses were $7.6 million compared to the prior-year period use of cash of $18.8 million due to higher accounts payable balances related to increased inventory levels.
Net cash used in investing activities was $32.0 million in the first six months of 2020 compared to $15.4 million in the prior-year period due to increased levels of capital spending. The increase in capital expenditures was due to investments in new equipment funded by customer prepayments. See Note K to the Consolidated Financial Statements for additional discussion.
Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year 2020, the Company expects payments for property, plant, and equipment to be approximately $30.0 million, excluding any capital expenditures related to customer prepayments, and mine development expenditures to be approximately $14.0 million.
Net cash provided by financing activities totaled $135.6 million in the first six months of 2020 versus $10.3 million used in financing activities in the comparable prior-year period. The increase is primarily due to the borrowing of $150.0 million under our revolving credit facility in the second quarter of 2020, partially offset by an increase in shares repurchased under our share repurchase program.
Liquidity
We believe cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, and the current dividend program, environmental remediation projects, and strategic acquisitions. At June 26, 2020, cash and cash equivalents held by our foreign operations totaled $21.2 million. We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition, or results of operations for the foreseeable future.
A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of June 26, 2020 and December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
December 31,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
265,068
|
|
|
$
|
125,007
|
|
|
Total outstanding debt
|
|
151,790
|
|
|
2,218
|
|
|
Net cash
|
|
$
|
113,278
|
|
|
$
|
122,789
|
|
|
Available borrowing capacity
|
|
$
|
179,137
|
|
|
$
|
340,906
|
|
Net cash is a non-GAAP financial measure. We are providing this information because we believe it is more indicative of our overall financial position. It is also a measure our management uses to assess financing and other decisions. We believe that based on our typical cash flow generated from operations, we can support a higher leverage ratio in future periods.
The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each period depicted. The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.
In 2019, we amended and restated the agreement governing our $375.0 million revolving credit facility (Credit Agreement). The maturity date of the Credit Agreement was extended from 2020 to 2024, and the Credit Agreement provides more favorable interest rates under certain circumstances. In addition, the Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives. Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property and certain other assets.
The Credit Agreement allows the Company to borrow money at a premium over LIBOR or a prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions available under the agreement. The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of June 26, 2020. Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.
During the second quarter of 2020, we borrowed $150.0 million under our Credit Agreement as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic.
In July 2020, we completed the acquisition of Optics Balzers. The final acquisition value was approximately $160 million, including the assumption of debt. The all-cash transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility in the second quarter of 2020.
Portions of our business utilize off-balance sheet consignment arrangements to finance metal requirements. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. In 2019, we entered into a precious metals consignment agreement, maturing on August 27, 2022, which replaced the consignment agreement that would have matured on September 30, 2019. The available and unused capacity under the metal financing lines expiring in August 2022 totaled approximately $116.1 million as of June 26, 2020, compared to $140.7 million as of December 31, 2019. The availability is determined by Board approved levels and actual line capacity.
In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given year, and the repurchases may be discontinued at any time. We did not repurchase any shares under this program in the second quarter of 2020. In the first six months of 2020, we repurchased 158,000 shares of our common stock for $6.8 million. Since the approval of the repurchase plan, we have purchased 1,254,264 shares at a total cost of $41.7 million. Due to the COVID-19 pandemic, we have temporarily suspended our share repurchase program.
We paid cash dividends of $2.3 million and $4.6 million on our common stock in the second quarter and first six months of 2020, respectively. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We maintain the majority of the precious metals and portions of the copper we use in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was $333.9 million as of June 26, 2020, versus $309.3 million as of December 31, 2019. We were in compliance with all of the covenants contained in the consignment agreements as of June 26, 2020 and December 31, 2019. For additional information on our contractual obligations, refer to our 2019 Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the inherent use of estimates and management’s judgment in establishing those estimates. For additional information regarding critical accounting policies, please refer to our 2019 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarterly period ended March 27, 2020.
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. 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 2020;
▪Our ability to achieve the strategic and other objectives related to the proposed acquisition of Optics Balzers, including any expected synergies;
▪Our ability to successfully integrate the Optics Balzers business and achieve the expected results of the acquisition, including, without limitation, the acquisition being accretive in the expected timeframe or at all;
▪The global economy, including the impact of tariffs and trade agreements;
▪The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and liquidity;
▪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: semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and telecom and data center;
▪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;
▪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;
▪Our ability to successfully complete the disposition of our LAC business;
▪The disruptions on operations from, and other effects of, catastrophic and other extraordinary events including the COVID-19 pandemic; and
•The risk factors set forth in Part 1, Item 1A of our 2019 Annual Report on Form 10-K.
