UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

____________________________________________ 

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2019

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number 001-15885

MATERION CORPORATION

(Exact name of Registrant as specified in charter)

Ohio	34-1919973
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6070 Parkland Blvd., Mayfield Heights, Ohio 44124

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:

(216)-486-4200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	MTRN	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ       No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  þ        No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer  ¨

Non-accelerated filer  ¨ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No  þ

Number of Shares of Common Stock, without par value, outstanding at June 28, 2019: 20,399,425.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Second Quarter Ended				Six Months Ended
(Thousands, except per share amounts)	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Net sales	$	297,843	$	309,085	$	599,284	$	612,552
Cost of sales	228,249		247,247		460,378		492,434
Gross margin	69,594		61,838		138,906		120,118
Selling, general, and administrative expense	39,891		38,473		79,955		76,935
Research and development expense	4,062		3,860		7,802		7,503
Other—net	2,891		4,313		7,012		7,237
Operating profit	22,750		15,192		44,137		28,443
Interest expense—net	500		667		966		1,397
Other non-operating expense—net	3,112		437		3,357		879
Income before income taxes	19,138		14,088		39,814		26,167
Income tax expense	3,598		2,944		7,368		4,459
Net income	$	15,540	$	11,144	$	32,446	$	21,708
Basic earnings per share:
Net income per share of common stock	$	0.76	$	0.55	$	1.60	$	1.08
Diluted earnings per share:
Net income per share of common stock	$	0.75	$	0.54	$	1.57	$	1.05
Weighted-average number of shares of common stock outstanding:
Basic	20,383		20,221		20,326		20,178
Diluted	20,666		20,593		20,635		20,583

See notes to these consolidated financial statements.

2

Materion Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Second Quarter Ended						Six Months Ended
	June 28,			June 29,			June 28,			June 29,
(Thousands)	2019			2018			2019			2018
Net income	$	15,540		$	11,144		$	32,446		$	21,708
Other comprehensive income (loss):
Foreign currency translation adjustment	339			(944		)	(164		)	169
Derivative and hedging activity, net of tax	(1,000		)	1,763			(73		)	1,088
Pension and post-employment benefit adjustment, net of tax	13,953			1,296			14,493			2,574
Other comprehensive income	13,292			2,115			14,256			3,831
Comprehensive income	$	28,832		$	13,259		$	46,702		$	25,539

See notes to these consolidated financial statements.

3

Materion Corporation and Subsidiaries

Consolidated Balance Sheets

	(Unaudited)
	June 28,			Dec. 31,
(Thousands)	2019			2018
Assets
Current assets
Cash and cash equivalents	$	74,856		$	70,645
Accounts receivable	142,327			130,538
Inventories, net	213,329			214,871
Prepaid and other current assets	23,904			23,299
Total current assets	454,416			439,353
Deferred income taxes	1,052			5,616
Property, plant, and equipment	913,325			898,251
Less allowances for depreciation, depletion, and amortization	(669,861		)	(647,233		)
Property, plant, and equipment—net	243,464			251,018
Operating lease, right-of-use asset	26,788			—
Intangible assets	5,213			6,461
Other assets	15,280			7,236
Goodwill	90,633			90,657
Total Assets	$	836,846		$	800,341
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt	$	847		$	823
Accounts payable	41,658			49,622
Salaries and wages	36,250			47,501
Other liabilities and accrued items	38,482			33,301
Income taxes	1,971			2,615
Unearned revenue	5,829			5,918
Total current liabilities	125,037			139,780
Other long-term liabilities	11,419			14,764
Operating lease liabilities	21,118			—
Finance lease liabilities	18,325			15,221
Retirement and post-employment benefits	30,663			38,853
Unearned income	30,354			32,563
Long-term income taxes	3,093			2,993
Deferred income taxes	383			195
Long-term debt	1,669			2,066
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 28 and December 31)	245,785			234,704
Retained earnings	576,211			548,374
Common stock in treasury	(187,224		)	(175,426		)
Accumulated other comprehensive loss	(43,978		)	(58,234		)
Other equity	3,991			4,488
Total shareholders' equity	594,785			553,906
Total Liabilities and Shareholders’ Equity	$	836,846		$	800,341

See the notes to these consolidated financial statements.

4

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited) 

	Six Months Ended
	June 28,			June 29,
(Thousands)	2019			2018
Cash flows from operating activities:
Net income	$	32,446		$	21,708
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, depletion, and amortization	22,607			18,349
Amortization of deferred financing costs in interest expense	472			514
Stock-based compensation expense (non-cash)	3,541			2,164
Deferred income tax expense	4,578			429
Pension curtailment charge	3,296			—
Changes in assets and liabilities:
Decrease (increase) in accounts receivable	(11,778		)	(12,060		)
Decrease (increase) in inventory	1,306			10,428
Decrease (increase) in prepaid and other current assets	(588		)	4,928
Increase (decrease) in accounts payable and accrued expenses	(18,813		)	(14,189		)
Increase (decrease) in unearned revenue	(88		)	2,132
Increase (decrease) in interest and taxes payable	(1,130		)	2,084
Domestic pension plan contributions	(3,000		)	(13,000		)
Other-net	(2,803		)	5,817
Net cash provided by operating activities	30,046			29,304
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment	(13,833		)	(17,153		)
Payments for mine development	(1,591		)	(3,425		)
Proceeds from sale of property, plant, and equipment	15			27
Net cash used in investing activities	(15,409		)	(20,551		)
Cash flows from financing activities:
Repayment of long-term debt	(397		)	(383		)
Principal payments under finance lease obligations	(599		)	(425		)
Cash dividends paid	(4,368		)	(4,137		)
Repurchase of common stock	(199		)	—
Payments of withholding taxes for stock-based compensation awards	(4,763		)	(2,765		)
Net cash used in financing activities	(10,326		)	(7,710		)
Effects of exchange rate changes	(100		)	8
Net change in cash and cash equivalents	4,211			1,051
Cash and cash equivalents at beginning of period	70,645			41,844
Cash and cash equivalents at end of period	$	74,856		$	42,895

See notes to these consolidated financial statements.

5

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 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 (loss)	—		—		—		—			—			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		)
Repurchase of shares	—		—		—		—			—			—			—			—
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
Balance at March 30, 2018	20,191		(6,958	)	$	227,694	$	545,093		$	(171,574	)	$	(101,221	)	$	4,337		$	504,329
Net income	—		—		—		11,144			—			—			—			11,144
Other comprehensive income (loss)	—		—		—		—			—			1,540			—			1,540
Tax Cuts and Jobs Act Reclassification	—		—		—		(575		)	—			575			—			—
Cumulative effect of accounting change	—		—		—		—			—			—			—			—
Cash dividends declared ($0.105 per share)	—		—		—		(2,125		)	—			—			—			(2,125		)
Stock-based compensation activity	55		55		3,020		(14		)	(1,613		)	—			—			1,393
Payments of withholding taxes for stock-based compensation awards	(11	)	(11	)	—		—			(632		)	—			—			(632		)
Directors’ deferred compensation	1		2		49		—			(6		)	—			49			92
Balance at June 29, 2018	20,236		(6,912	)	$	230,763	$	553,523		$	(173,825	)	$	(99,106	)	$	4,386		$	515,741

6

	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, 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 (loss)	—		—		—		—			—			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
Balance at December 31, 2017	20,107		(7,042	)	$	223,484	$	536,116		$	(166,128	)	$	(102,937	)	$	4,446		$	494,981
Net income	—		—		—		21,708			—			—			—			21,708
Other comprehensive income (loss)	—		—		—		—			—			3,256			—			3,256
Tax Cuts and Jobs Act Reclassification	—		—		—		(575		)	—			575			—			—
Cumulative effect of accounting change	—		—		—		425			—			—			—			425
Cash dividends declared ($0.205 per share)	—		—		—		(4,137		)	—			—			—			(4,137		)
Stock-based compensation activity	181		181		7,220		(14		)	(5,042		)	—			—			2,164
Payments of withholding taxes for stock-based compensation awards	(53	)	(53	)	—		—			(2,765		)	—			—			(2,765		)
Directors’ deferred compensation	1		2		59		—			110			—			(60		)	109
Balance at June 29, 2018	20,236		(6,912	)	$	230,763	$	553,523		$	(173,825	)	$	(99,106	)	$	4,386		$	515,741

See notes to these consolidated financial statements.

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 2019 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 2018 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 February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 (Topic 842), Leases, which eliminates the off-balance-sheet accounting for leases. This guidance requires lessees to report their operating leases as both an asset and liability on the balance sheet and disclose key information about leasing arrangements. The Company adopted this guidance as of January 1, 2019 using the modified retrospective method and applied it retrospectively through a cumulative-effect adjustment to retained earnings. The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification, and initial direct costs of leases commencing before this ASU's effective date; however, the Company did not elect the hindsight transitional practical expedient. The Company also applied the practical expedient to not separate lease and non-lease components to new leases as well as existing leases through transition. The Company made an accounting policy election not to apply recognition requirements of the guidance to short-term leases.

Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with legacy generally accepted accounting principles.

The Company recorded a net reduction to opening retained earnings of $0.2 million as of January 1, 2019 due to the cumulative impact of adopting Topic 842, with the impact primarily related to derecognition of a built-to-suit lease. Refer to Note H for additional disclosures relating to the Company's leasing arrangements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The Company adopted this guidance as of January 1, 2019, and the adoption did not have a material effect on the Company’s consolidated financial statements.

New Pronouncements Issued: In June 2016, the FASB issued 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 will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company is currently assessing the effect that this ASU will have on its financial position, results of operations, and disclosures.

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.

7

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 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
Second Quarter 2018
Net sales	$	129,765	$	150,324	$	28,996	$	—		$	309,085
Intersegment sales	3		11,400		—		—			11,403
Operating profit (loss)	12,309		5,572		2,233		(4,922		)	15,192
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
First Six Months 2018
Net sales	$	248,001	$	303,869	$	60,682	$	—		$	612,552
Intersegment sales	31		23,052		—		—			23,083
Operating profit (loss)	22,170		11,470		5,608		(10,805		)	28,443

8

In the second quarter of 2019, the Company recategorized its end markets based on the ongoing refinement of its go-to-market strategy. The changes reflect new processes designed to enable the Company to better serve global customers and growth markets.

The following table disaggregates revenue for each segment by end market for the second quarter and first six months of 2019 and 2018, respectively:

(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total
Second Quarter 2019
End Market
Semiconductor	$	1,303	$	100,758	$	93	$	—	$	102,154
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